CTT - Correios De Portugal, S.A. (CTT) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the CTT Second Quarter 2020 Results Call. [Operator Instructions] I must advise you that this conference is being recorded today. And I would now like to hand the conference over to your first speaker to CEO, Mr. João Bento. Thank you. Please go ahead.

Thank you. Good morning, everyone. Welcome to our first semester webcast. I'm going to take you through the first part of the presentation and then hand over to our CFO, Guy Pacheco. So main takeaways, we have -- and obviously, it's a very challenging second quarter in which the company's 6-pillar response to the crisis has been proven, in our opinion, rather effective, namely, in which refers to keeping employee and customer safety and ensuring, thus, business continuity; but also in what were our efforts in terms of investing in new B2B and B2C client relationships, namely, in what refers e-commerce, BPO and business solutions, which enabled, in our view, a more dynamic and growth-oriented business for the future. The company has chosen not to participate in government layoff schemes despite the extra costs incurred with excess capacity, but that was precisely what enabled us to ensure business continuity. And we focused instead in providing a lifeline to communities and to the economy, demonstrating our commitment to a sustainable universal postal service since this is a very critical period because we are now in the process of renewing the concession. A strong performance on our growth levers, mostly propelled by record quarterly growth in Parcels, not only growth in revenues, but also with improved profitability despite the testing shift in mix between B2B and B2C, B2B declining, B2C growing very steadily. The outcome of this quarter increased our confidence that the performance of the Spanish parcels operation is aligned with the communicated plan, which, as you might recall, establishes breakeven for next year based on the performance of the local management team on market share gains and also on favorable trends in terms of outlook for e-commerce. Moving to the bank, we have adopted what we consider conservative provisioning policy in order to prepare it to face potentially challenging macroeconomic scenarios for the second semester. And throughout the pandemic crisis, we have been able to preserve a very solid balance sheet with interesting cash generation, ample liquidity, and therefore, maintaining a low level of net financial debt. Looking at margin and cost, we will be -- we will remain very focused throughout the remainder of the year with various operational improvement initiatives being launched both in Portugal and in Spain. What we consider a notable recovery towards the end of the quarter, and as we are going to see June was a very promising month, it provides a stepping stone for the remainder of the year. And as a result of sales countermeasures to cope with the sudden decline in Mail and the new, more dynamic growth-oriented business that we are looking at, we expect to achieve by year-end growth in revenues, driven mostly by Parcels, more than EUR 90 million of EBITDA and more than EUR 30 million in EBIT for the full year. Moving to the main highlights for the quarter. So as I said, a notable recovery on the quarter benefiting from the easing of lockdown restrictions by the end of the quarter and the gradual return to normal life and normal business activity for individuals and also for cargo. Addressed mail volumes were affected by delayed or canceled campaigns in a number of clients, mail campaigns, and also very substantially on air freight disruptions, especially for international mail. And therefore, addressed mail volumes declined by 24.5% as a combination of, I would say, rather normal month of June with just below 7% decline, with a steep decline in April of 28%, which produced a 19.3% decrease in Mail revenues for the quarter. On the other hand, Parcels behaved extremely well with volumes growing in Portugal at 37% and in Spain almost doubling, 91.5%, which gave rise to a record EUR 11.7 million increase in revenues. But as I said before, not only revenues improved, margins improved as well despite a number of one-off initial investments in e-commerce -- in the e-commerce ecosystem. And for the first time for quite some time, the combination of Portugal and Spain produced a positive EBIT for the quarter. Moving to the bank. Well, the bank was obviously not immune to the pandemic, mostly because of reduced hours of operation in the Retail Network, but also because people kept reasonably restricted and also because of the partial closure auto dealerships, which has an important -- which is an important placement network for auto loans. However, EBITDA benefited from growth in net interest and also from commissions income and the strict cost control. So all in all, it was a positive quarter for the bank as well. Public debt certificate placements amounted to EUR 1.9 billion, 11% higher than the first quarter, despite -- sorry, in the first quarter (sic) [ first half ] despite a 31% decline in the second quarter. The activity, which went down by 50% at peak of the crisis, again, because those people would not -- people would not move, were very strict, but also the retail stores were working on a very reduced timing. But it has since been steadily recovering actually with very nice numbers in June and even better in July, as we are going to see. Moving into a bit more detail for Mail -- for the Mail business area. It was severely impacted by the global restrictions on movement and operation of individuals and businesses and cargo in April and May and performed a meaningful recovery in June. We have decided to exhibit the evolution throughout the 3 months of the quarter precisely because it is a very good graphical depiction of what happened. The lockdown restrictions and the reduced Retail Network hours of operation impacted individuals and SMEs because SMEs also uses a lot of the Retail Network and led to diminished demand by large customers such as banking and telecoms and utilities, resulting in a total atypical mail volumes decline for these 2 months of 25%, 32%, which is obviously not very common. And as we've seen, for ordinary priority and green mail, a 9.7% decline in June, which is a bit more normal. A much better performance in registered mail, which was affected also by delays in the issuance of statements by government entities and the administration such as, for example, tax notices and court notifications, but this has mostly delayed mail and -- revenues that will be recovered throughout the year. And as a proof of that, we've moved from a 51.5% decline in April and 43.5% in May to a mere 2.1% decline in June, but still providing a combined very serious decline in registered mail for the quarter. International mail is the one which is still suffering from a lack of return to normality because, as you all know, postal cargo flows mostly through passenger flights and it's still -- that is still very, very abnormal, and therefore, although we have seen June with an interesting recovery, also because some of this inbound is now arriving by land, but even with a decent recovery in June, it still provides a combination which is very, very abnormal. So all in all, a very abnormal decline, but with what I would call an also very promising month of June. Moving to Parcels and Financial Services. We had a record quarterly growth in Parcels both in Portugal and Spain, partly because our initiatives to foster development of e-commerce are starting to bear fruit in Portugal. And as a result of that, we have seen an almost 50% growth in Parcels revenues in Portugal and an almost twofold growth in Spain. In Portugal, we've seen the population finally embracing at the highest speed online shopping. It's becoming a reality. And our investments during this period were able to meet this client habits change with, for example, more than 300 SMEs out of now 1,100 contracted have their online shops within our platform made operational to date. And for example, in Dott, our marketplace, it reached 1,000 online vendors and now more than 150,000 registered users in June. So very good dynamics with some investment, but also producing very good results. The capture of new global B2C e-tailer clients in Spain enabled us to grab a very interesting market share. And albeit at lower margins because of the combination of more B2C and less B2B, it more than compensated the decline in B2B volumes. So all in all, very good performance for Parcels during the quarter both in terms of quantity and in terms of margin. Public debt placements, as I referred, benefited from the lifting of restrictions by the end of the quarter. Movement of people and resumption of normal retail activity produced interesting results and placements almost doubled from EUR 6.1 million per day -- per workday in April to EUR 11.5 million per workday in June and is improving actually with a higher average placement already in July. And we see this progressing because the trend towards private savings is very positive these days. A more detailed word on the bank. Banco CTT's customers' flight to safety was quite evident in the renewed strong capture of deposits, and credit activity is now gradually recovering under stricter lending standards, both for individuals and for auto loans and mortgages. Auto loan production was impacted by the closure of the auto dealers, as I mentioned, because nonessential businesses were compelled to close during the lockdown. And recovery has been very strong during the month of June with an interesting market share progression and now a higher number of placements of slightly lower credits. But looking at numbers, we moved from a 50% reduction in April to a 21% reduction in May to a 16% growth in June. And therefore, the quarter was not that bad, and we see this trend now being reinforced. Mortgage production remained very resilient, but also because there is a very time -- a very large time lag and the pipeline was strong. Therefore, April was a very good month with 35.1% growth in placements. But in June, we have asymmetrical figure exactly because during the pandemic crisis confinement, there was no formation of pipeline. And therefore, mortgages have an almost 0 growth -- or 2% growth during the quarter, but things now getting back to normal are also enabling the formation of the new pipeline. Looking at customer deposits. The capture recovered strongly, evidencing the bank's excellent standing among the population despite the introduction of new debit card commissions in the quarter. This is a very important single event. The bank was launching its growth and success in the early days was on top of no frills, no commissions, and so this kind of behavior in the quarter with the crisis and the introduction of commissions is very interesting. June has seen a 50% increase in deposits, but Portugal is now going through a high -- all-time record of -- in terms of deposits. Having said so, I will hand over the words to Guy Pacheco, our CFO, for the figures.

Thank you, João. So good morning. Starting on Page 10, we can see all detailed figures for the first half. It was obviously a very challenging second quarter with the pandemic situation at its peak during April and May with unprecedented business interruption in Mail. And as a result, our revenues were negatively affected in this context in all business units except Express & Parcels that benefited from the accelerated e-commerce growth that we saw during this period. Nevertheless, our revenues declined 5% in the quarter, heavily affected by the Mail division and the loss of volumes; and Financial Services with lower public debt placements, especially throughout April and May. EBITDA declining 48.2%, reflecting the devolution on these 2 divisions. Impairments and provisions reaching EUR 8.2 million, EUR 5.8 million of which coming from Banco CTT and EUR 2.3 million in Mail division. In Banco CTT, we have EUR 3.1 million of extra provisioning for forward-looking effect for the -- to account for the expected losses from the projected economic downturn. Net income, with the decline in EBITDA and increase in impairments, was negative EUR 5.7 million in the quarter and bringing the first half to a negative EUR 2 million, but with the same recovering trend as we saw in the EBITDA chart that João shared with you. Moving to revenues on Page 11. Revenue declining 1.6% with a very strong performance in Express & Parcels and Banco CTT. That unfortunately was not enough to compensate the effect of the pandemic in Mail. Express & Parcels especially strong in the second quarter, that accounted for EUR 11.7 million out of the EUR 12.3 million that we achieved in the first half on the back of a strong volume growth in Spain and Portugal. Since the beginning of the confinement, e-commerce growth has been driving the growth of this business area. And this is -- since then, it means sustained growth. Banco CTT, excluding the 321 Crédito, growing 62.6%. And 321 Crédito, in a comparable basis, is growing 18%, although we cannot capture that because of the consolidation effect since April last year. The restrictions on people movements have affected the payment area and mortgage and auto credit. In June, auto loans recovered fast, but mortgages still need to reconstruct the pipeline as real estate transaction resume. But here, the recovery will be slower because we need to reconstruct that pipeline. Financial Services were also heavily affected by the restriction on people movement until the end of May. That affected public debt subscription. Since then, we've been in recovery. But despite this recovery in June, revenue still declining 1.4% in the second quarter and still benefiting from a very strong first quarter in revenues that enables us to still grow EUR 200,000 in the first half. As João mentioned, savings for the Portuguese people are at record-high level, that should help this business going forward and we continue to see sustained sequential improvement on that placement for June and July. Mail volumes were heavily affected by the impact of the lockdown with volume declining 24.5% in the quarter and 18% in the first half. As a result, revenue declined 14% or EUR 33.2 million. 2/3 of this decline coming from B2B clients, mainly Portuguese states' financial sector and telecoms. The other 1/3 is half coming from retail and half coming from inbound revenues. Volumes recovered throughout June, although still below January and February levels. Additionally, the diversifying strategy to find alternative revenue streams in these divisions start to show some progress with Business Solutions growing 49.8% or EUR 2.8 million in the first half. Our operating costs, on Page 12, are growing 2.3%, driven by Parcels -- Express & Parcels and the incorporation of 321 Crédito. Mail and other declining 7.4%, EUR 1.8 million related with lower health care costs and EUR 5.6 million related with lower activity and savings from the ongoing efforts to reduce costs on this division. Express & Parcels growing EUR 11.4 million, EUR 9.6 million in the second quarter as a result of [ 6 6 6 ] volume increase in this business unit. Despite this increase we saw in the second quarter, unit cost per parcel declined significantly both in Portugal and Spain due to higher volumes and efficiency measures that are being implemented. Further progress should be made, especially in Spain, with initiatives, with new dynamic tracking systems and new sorting centers that are being implemented in the second half. Banco CTT growing mainly reflect -- the growth mainly reflects being incorporation of 321 Crédito. Excluding 321 Crédito, Banco CTT declining costs in the second quarter mainly due to lower marketing activity. Financial Services declining EUR 1.1 million with lower direct costs from retail and lower activity in the stores and some cost-efficiency measures. Our EBITDA in Page 13. As revenues was also heavily impacted by mail volumes between March and May in the first half and especially in April and May in the second quarter, that resulted in a decline of 28%. Mail with minus EUR 25.9 million, EUR 17 million of which in the second quarter. The strong revenue decline was not offset by the cost savings. CTT chose not to participate in layoff schemes and incurred some extra costs with excess capacity, but focused in providing a lifeline to the communities and its commitment with the universal services, as João already mentioned, in this special year. During the end of May -- of April and May, we kept the operation running while keeping 15% of operational workforce safe at home as a backup for -- in the case of mass infections affecting the workforce in the field. And as such, we have some excess capacity in the network. Express & Parcels with a strong performance in the second quarter. EBITDA increased EUR 2.1 million mainly in Portugal. In the first half, this performance is still overshadowed by the Spanish division. In Portugal, we continued to decrease costs significant -- unit costs with some meaning, which drove our EBITDA margin to double-digit in the quarter. In Spain, we also saw significant progress in the unit costs. That improved margins, but that they are still negative. The second quarter performance nevertheless showed us that we can grow volumes and market share in Spain with some meaning and unit costs are progressing in the right direction. Unit costs should continue to improve as the turnaround plan continues to be implemented at a good pace. Banco CTT growing EUR 10.6 million, EUR 7 million coming from 321 Crédito, but the underlying trends in the business showing resilience during this period. Financial Services growing EUR 1.4 million in the first half, although public debt subscriptions and retail suffering with restriction on people movements in the second quarter. And as a result, EBITDA declined 22.3% in this quarter. EBIT declining, in the next page, Page 14, 75.3% due to the decline in EBITDA driven by Mail and with the increase on impairments and provisions. Impairments and provisions increased EUR 8.7 million, EUR 6.7 million out of which coming from the bank. Out of this EUR 6.7 million, we have that EUR 3.1 million additional provision for the forward-looking effect that is on expected lower GDP growth and higher unemployment in the second half. The remaining EUR 3.6 million reflects the impact of consolidation of 321 Crédito for the first month of the year, although with growth in the impairments due to higher cost of risk on this quarter. Specific items decreased EUR 10.9 million due to lower indemnities and lower expenses with the operation's automation plan that is coming to its end. And D&A increased EUR 3.3 million due to higher CapEx in these last 2 years, investments that we made in automation both in Postal and in Parcels and new IT network architecture. Going to the cash flow in Page 16. Our operating cash flow in the first half reached EUR 3.9 million, heavily affected by the performance of EBITDA minus CapEx and by working capital evolution. Our working capital was negative EUR 17.8 million, EUR 15 million coming from higher amount of CapEx, namely, in machines in Postal and Parcels done in December last year that were paid throughout this year, and EUR 2.8 million essentially from accounts receivable. Our free cash flow after taxes and employee benefits was negative EUR 0.6 million in the first half. Our own cash now stands EUR 114.1 million and our net debt at EUR 65 million if we include the lease liabilities. Without them, we should have a net cash position of EUR 23 million. And now I'll hand you over to João Bento.

Thank you, Guy. Well, we'd like to close with a few notes on the outlook. And assuming a gradual recovery of the economy and continued improvement of the pandemic situation, the company expects that the positive dynamics that have been built throughout the crisis and its growth levers will endure. A negative note on Mail. Significant reductions in letter -- in statements and advertising mail are expected to lead to double-digit addressed mail volumes decline for the year, which is obviously a very abnormal year. But then a number of positive notes. Express & Parcels will continue to be the main growth engine, spurred by fast e-commerce adoption and continued market share gains and margin improvements both in Portugal and in Spain. Bank CTT is currently well provisioned and duly capitalized to face potential challenges in the second semester, assuming a gradual recovery of the economy. And the Portuguese population's propensity to save has been steadily increasing and remains so after the pandemic, which bodes well for a very strong placement of public debt. So all in all, we'd like to leave you with an outlook with the 3 main points. We expect to achieve growth in revenues for the year, driven mostly by Parcels but also Business Solutions; more than EUR 90 million of EBITDA; and more than EUR 30 million in EBIT. And this is the outlook. And we would close the presentation and remain available for the Q&A.

[Operator Instructions] And our first question comes from the line of Filipe Leite from CaixaBank BPI.

I have 3 questions, if I may. The first one on Universal Service contract and if you can give us an update on the process and when do you expect to reach a final agreement, if you still believe that it's possible to have a new contract this year -- signed this year to be implemented in January of next year. Second question, if you can tell us what were your main assumptions in terms of GDP growth and unemployment rates that lead to the extra provision made in Banco CTT. And final one on dividend. And if with this new guidance that you provide, you expect to be able to resume dividend payment next year on this year's results. And if this dividend could be at the level of the initial dividend proposal for this year that was, in the meantime, canceled? Or if it could be lower, considering that your expectations on EBITDA for this year are lower than previous one.

Thank you, Filipe. Well, regarding the first question on -- update on the process, as you are aware, there's no formal process still going on, which, in a way, provides an answer for the second part of your question, which is, if we believe there still will be -- it will still be possible for us to have a new contract in place for the 1st of January. My very prudent statement is that it is -- it's becoming more and more unlikely that we will be ready for the 1st of January. But as it's been very public in the past weeks, the tension between the regulator and government is increasing and has been increased mostly because of 5G matters. And I think that it has somehow postponed -- complicated -- those more complicated relations have somehow postponed priority that was being awarded by government to this situation. So having said so, we keep discussing with government, which is the grantor of the concession, what are our preferences and concerns for the forthcoming concession contract. Relations are very good. And despite the holiday periods, we've been maintaining contact, which we hope will resume more steadily as soon as government is able to progress with the 5G matters and therefore, concentrate on Postal. I will leave the numbers with the main assumptions for Guy. Regarding the last question on guidance, I'd like to recall that we have decided to have an explicit dividend policy some time ago, even before I was CEO of the company. And any change needs to be a change in policy. And so it's obviously too early to consider changing policy. If policy remains, obviously, dividend would be a lower one. But it's too early, so I will not commit to any new statement on that matter for the moment, which I think it's early days.

On the question on the macro scenario, we based -- as you know, it's a weighted average modeling with some scenarios. But the base case -- it's the base case of Bank of Portugal of June that states that, for the full year, a GDP decline of 9.5% and an unemployment rate above 10%, 10.1% of unemployment rate.

Okay. Just a follow-up on the dividends. Can you recall what are your current dividend policy in place?

It's a dividend in line with net profit.

We will now take our next question. It comes from the line of Marco Limite from Barclays.

Sorry. I was on mute, sorry. Thanks for the presentation. I've got 3 questions. The first one is in the Parcel division. So just wondering if you can actually give a little bit of color on what's actually happening in Spain and how the turnaround is going and if you are still reiterating the previous target of -- for the Spanish business. And also, in the Portuguese business, you were saying that you were gaining some kind of market share and if you can quantify that? My second question is about the USO and if you can kind of expect the USO business to be profit-making for the full year. And thirdly, if you can give a little bit of color on the July exit rate.

And we will now take our next question that comes from the line Artur Amaro from Caixa BI.

I'm sorry. I'm sorry.

I think you need to answer first.

Yes. Marco, would you please repeat your second question?

Can you hear me?

Yes. Now we can.

Okay. Sorry. Something going on. I was just asking if you expect the USO business to be EBIT positive in 2020.

Excuse me. It seems that the line of Mr. Marco got disconnected.

Okay. So Marco, if I understand the first question on color on Spain, turnaround and target. So what we have in Spain is a huge improvement in revenues, almost doubling revenues, but with a very different mix with especially a lot of e-commerce with new customers at a much lower price. And so a mix, which is not as interesting as before, but the quantity has been able to offset all that. We -- as a result of that, also because the turnaround plan was founded also on substantial growth in revenues and in volumes, we are now -- we remain confident, not to say that we are even more confident than before, that we should be able to stick with the turnaround plan whose target is to cross operational breakeven during 2021. And so to be clear, yes, we remain solid on that. For market share in Portugal, we don't have any very robust third-party data provider. But according to our model expectation and market intelligence, we have now reached 43% of market share for domestic flows, 7% for Iberian flows and 6% for international flows, which is a growth -- roughly growth on aggregate terms of 4 basis -- sorry, 4 percentage points. Moving to the USO, we -- what we are now considering and given the outlook and the performance on the first semester is that my outlook will be we'll have a positive EBIT across the year. As for July, we have basically mail in the Retail Network with a very good performance. Actually, on a workday basis, we are seeing July at higher values than we have forecasted. But B2B is not very good. So all in all, for Mail, we are basically with mixed feelings between what happened in July and -- sorry, in June and July. And it should remain, as we speak, stable. We have this split between 3 parts of lost mail, mail that is lost forever because it's a consequence of faster digitalization. Mail that was lost for the year but is going to resume next year, for example, I'd like to use this example, speed ticket or parking tickets penalties that we process. Of course, next year, people will be driving their cars and therefore being fined again. So that is mail that we lost for the year, but it's coming again next year. And it's, of course, coming to normal also for the remainder of the year. And then there is the third part, which is the most interesting one, that is mail that was postponed. And for example, we were expecting a much stronger mail outflow from the tax authorities in July. That is not coming. So this is why we, I would say, we remain neutral on behavior of Mail. It should be something probably not as good as in June, but certainly much better than before. Moving to Parcels. Parcels in Portugal is developing to a very good rhythm. We, of course, are coming slightly lower volume than at the peak of the crisis. So if the pandemic doesn't progress, it should be -- we should sustain very high growth most likely aligned with what we had in June. As for Financial Services and the public debt placements, July, as I said, was already substantially higher than June per workday. Actually, I can disclose the figure. We had a placement of EUR 13.5 million, which is clearly above what we had in June. It might sustain a strong behavior and we are forecasting a very good year for Financial Services as well. I think there was the third question -- sorry, a third question on the -- sorry, this was the third question.

And your next question comes from the line Artur Amaro from Caixa BI.

I just have a quick question, it's more like a confirmation. Your new guidance assumes that EBITDA should be above EUR 90 million, but then you have a note saying that it’s EBITDA excluding the D&A, the special items and IFRS. Just to confirm where these figures stood in the second half of the year. Is it EUR 46.7 million? Are we talking about the same metric is my question.

The -- in Page 13, you can see the metrics is the EUR 33.4 million that is the EBITDA that we normally...

Okay. The EUR 33.4 million. Okay.

Yes.

A very significant recovery in the second half of the year, that's what, again, we...

Yes. We are assuming growth year-on-year on the second half of the year.

Okay. And just a follow-up, if I may. And what will be the -- if you can disclose, of course, what will be the main lever of growth of this EBITDA in the second half of the year? Will be cost-cutting? Will be recovery at Mail? If you can give some color on that.

Of course, we -- so pretty much we see for the second half of the year, rest of the year, that is pretty much aligned what was our previous expectations before COVID except in Parcels where we are seeing much more growth since the pandemic and that is better than we initially expected. So Parcels and the continued growth of Banco CTT will continue to compensate a Mail evolution that is softer than we initially expected. Financial Services will recover throughout the year. But still not enough to post growth because last year we had a very strong second half with the maturities of public debts. And those are the main levers of Express & Parcels, both in Portugal continuing to grow with improved margins and Spain improving losses during the second half and still strong dynamics from Banco CTT, and Mail, of course, recovering from -- to what was near the normality we had before, although volumes should remain a little bit more pressured than we saw in January and February.

And your next question comes from the line of Filipe Leite from CaixaBank BPI.

I have just one additional question in terms of guidance, if you are still guiding for a EUR 30 million CapEx for this year?

Yes. In that region, it should be between EUR 30 million to EUR 32 million, yes.

Maybe slip just a very short note here. Part of the improvement in margins is improvement in capacity for Parcels and that is associated with CapEx that has been committed a long time ago, but it's now being performed. So it's very important CapEx.

There are no further question at this time. Please continue.

Okay. So with no further questions, let me thank you again for attending our webcast. And keep in touch with us and -- through Peter for the follow-up discussions. Thank you for coming. Good morning.

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect. Speakers, please stand by.