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

Ladies and gentlemen, thank you for standing by, and welcome to the CTT Third Quarter 2020 Results Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today, on the 5th of November 2020. I would now like to hand the conference over to your first speaker today, Professor João Bento. Please go ahead, sir.

Good morning, everybody. Thank you for coming. So moving to Slide #4. The quarter was marked by a strong growth in Parcels, strong and sustained, but also a slow recovery on Mail volumes. Revenues have returned to growth despite the challenging comparison effect because we have, in this quarter, last year, the effect -- one-off effect of the elections. But still even with that, revenues returned to growth. Addressed mail volumes declined 14.2%, which is a speeding of decline resulting from the pandemic. But we had also a very strong boost from e-commerce that led to increase in Express & Parcels volume of 35.8%. And with an associated significant market share, gain and the momentum keeps aligned with this. The bank returned to positive net profit in the quarter with a strong and robust growth on revenues in spite of stricter lending standards for obvious reasons. And Retail remains with a steady recovery, given that the accumulated debt placements for this year exceeds last year's already very strong performance. So it's basically 2 main aspects: strong growth in Parcels in the bank, slow recovery of Mail volumes, but still with revenues growing. If we move to Slide 5. This double-digit revenues increase and the path to solid profitability in the growth levers is, as you can see in the numbers, not counteracting fully to the declines in the legacy business. But I would like to highlight some of the things that we are doing in each of the main business lines. Starting with Mail, with a decline of 8% in revenues, with a stronger decline in EBITDA and EBIT, I would probably highlight the partnership with the Portuguese Institute of Records and Notary to deliver the citizen cards that have been updated online. Because this is the first visible case of new forms of mail that we are devising and setting up, and one of many to come, in which we are in fact using the digitalization of the economy to increase mail volumes. So it's counterintuitive aspect. So we value immense this first effort, and we see a lot of opportunities here. Moving to Express & Parcels. The revenue figure is already quite impressive. It's almost half of the revenues generated in Mail. And we are doing this by improving market share, but also creating better margin opportunities. And the 2 cases that we highlighted in the presentation, Green delivery partnership with Nespresso and the speed up of the Department of Lockers 24 offer, 2 very interesting cases, one associated with top line, the other one with the costs or efficiency that are, in fact, contributing to not only expand the business but also expand profitability. For the bank, we have chosen to highlight the 2 aspects, which are the partnership with BNP Paribas for factoring solutions for SMEs. This is a very interesting case because it's a great way to enter the business of credit for SMEs with basically no capital requirements, no investment and taking advantage of an extreme complementarity between the offer of the partner and our ability to place this kind of product. And also the example of Payshop digital wallet and offer to municipalities, which, in fact, expand the frontiers of payment -- of the Payments business, and levers on -- leverages on a relationship with municipalities, which is bringing quite substantial new business to the portfolio. So good news from the bank. In Financial Services and Retail, well, early results of the launch of the new concept store are very promising. This is a store that in our daily ranking of revenues and profitability jumps hundreds of places from the earlier start. And we are now perfecting and taking advantage of the [indiscernible] case to turn that into additional revenue and profitability for the new ones that we are going to open. We have also reopened 7 post offices in the third quarter, reinforcing our proximity to the population and the commitment to public service. This is very important. And this keeps paying given the reputation effect on our progressive business levels with municipalities, but also it's been a very significant lever for negotiations of our forthcoming service -- public service obligations. Moving to Slide 6. So let's zoom in the numbers in the business lines. Lower-than-expected Mail recovery, as I said, given the freight and lockdown restrictions -- sorry, after the lockdown restrictions were lifted and still recovering, but slow. While Business solutions revenues are growing rapidly and start to represent a significant contribution, it's, in fact, a very fast-growing activity within the company. We have lower-than-expected ordinary Mail recovery. We're also pressured by reduced activity of some of contractual clients, mainly the big clients, insurance companies, telecommunications, utility and public administration. On the other hand, inbound mail revenues grew on the quarter, as freight activity, it's becoming slightly more normal. International's bound mail in the quarter the comparison is impacted by the one-off effect that I've mentioned earlier of last year's election, but still an interesting behavior of International mail. And as I said, Business Solutions' revenue is growing rapidly in the quarter as a result of the intense commercial drive, that has been introduced in the segment and achieved through several partnerships. Partnerships here is key because it's a way to bring in -- not only widen the offer, speed up, reduce investment and also bringing with these new partners additional capability to expand, not only the offer but also the client base. I'd like to spend a little bit more on Mail, just on a couple of notes, 2 notes actually. One related with top line. Well, the decline in volumes, we need to counteract that with better and more imaginative offers, and we are working very actively on that. But the end of the concession, by the end of the year, opens room for a better usage of the price level. We've been very restrained with that. And of course, things need to be different from the beginning of next year. On the other hand, by reaching lower levels of mail, we are also coming to the point that allows for significant or deeper restructuring of the distribution model, and both effects should start to be visible by the beginning of next year. With that, I would move to Slide 7, to talk a little bit on Parcels. The build-up of the Iberian platform continues. And the Iberian attribute is more and more important. Some of the most interesting contracts that we have grabbed in this quarter are associated with that fact, that we have an Iberian offer. And we have, in fact, consolidated the market leadership position in Portugal and increased scale in Spain. We are continuing investments in the infrastructure, namely in Lisbon and Oporto, Barcelona and Valencia because we need to be able to deploy our offer with quality because this is a business where quality brings margin and brings pricing. We have increased our processing capacity and dynamic routing abilities, mainly with the new equipment in Madrid and Barcelona, which now allow us to serve up to 15,000 parcels per hour. And we have launched the new cross-border Iberian linehauls D+1 offer. This is unique. We believe it positions CTT -- Express and CTT Express, the CTT brand in a very privileged position for Parcels in Iberia, and this is revealing to be actually paying the effort. We are widening the product portfolio in Portugal, launching a premium international offer, 2-man deliveries, same-day delivery, evening delivery, Saturday delivery, and we are also -- we have decided, as you know, to remain with the cargo offer so that we can have a full-fledged offer. In cargo, we are transforming ourselves with a -- through a partnership, basically working from next year onwards on a full flexible cost basis. And so we are -- we feel very strong with our position in Portugal, and we have also been able to show profitability at levels that we've never seen in this company. Moving to Spain. We are aligning capabilities with clients' needs in Spain. The most relevant result of this is the fact that we have acquired large retailers, such as Amazon and AliExpress, with expected 60,000 parcels per day on top of what we have. We have increased our own sales and distribution versus the franchise model to 70% -- 52% and 70%, respectively in the quarter. This is extremely important for the major e-client -- sorry, e-commerce clients needs. And because of that, we have also to anticipate part of the plan that we have for next year in terms of own distribution, but that's also why we were able to grab these levels of orders from Amazon. Unit costs have already begun to decline since September, and we expect them to continue the downward trajectory through the quarter and across next year. Also because the newly acquired clients, we can -- with increase in network scale, we improved the share of our own sales and distribution and boost our own operational leverage. In fact, we can almost start to choose to leave some of our less profitable customers. So we had, in our plan, 2 major levers to deploy what we promised last year. One, a substantial improvement in revenues. And the other one, an ability to bring unit costs and quality to different levels, that's requiring CapEx and technology improvement, and we are doing exactly that in spite of a very different path because, of course, the pandemic changed some of the assumptions. We keep extremely confident that the main target of the strategics on first line, which is to cross operational breakeven across next year, is going to be here. Moving to Slide 8, just looking at the final look at the numbers. Stellar growth in Parcel volume continues. Our investment in e-commerce and the ability to meet client needs is paying the efforts. And in Portugal, we are actually expanding the market by leading the change to e-commerce and through digitalization of commerce, namely in SMEs. And in Spain, we are basically grabbing a better and also a larger portion of the market. And the recapture of Amazon is obviously the most important aspect. We are now, at the end of the third quarter, with 35% of volume increase in Portugal and 44% in Spain, which are very, very interesting figures. And they are clearly robust and figures that we see as sustainable. Moving to Slide 9, and the bank. Well, the credit activity remained resilient, especially in autos, despite stricter lending standards. The auto loan production was impacted in the first period by the closure of the auto dealerships because, as you might remember, during the lockdown, nonessential businesses had to close. It recovered strongly in the third quarter, as demand for used cars remained robust. This is a trend that is coming globally. We have now -- people are trying to move away from traffic -- from transit, from public transportation and requiring cars. So the new business profile also changed to -- we have now more events of credit of slower -- of smaller tickets. But 321 credit is doing very well. Mortgage production declined because also the change in focus. We are moving a bit away from mortgage to auto credit, in order to maximize risk-adjusted return on capital, but still with very interesting numbers in the quarter. And customer deposits continue to grow despite the introduction of new cards -- debit card commissions earlier in the second quarter, which is also sharing interesting results in the accounts. And finally, in Slide 10, the growth of financial service volumes, despite the challenging operational environment, it reflects our proximity to the population and the trust that we generate. We are a very interesting anchor for savings amongst the general population. And the fact that we have -- that we continue committed to the public service also improves this line of business. Gradual recovery in the placements continued with about EUR 14 million a day during the quarter, and exceeding the -- well, last year's performance, which was already very interesting. We have also decided to give some visibility to a partnership we had with government to distribute the stabilization supplement to 75,000 workers, just as an example of some good news that results from the pandemic. It's not only partners. And with this, I would move to -- I would pass the word to Guy, our CFO.

Good morning. Thank you, João. So starting on Slide 12, we can see our revenue evolution. Our revenues were down 1% in the 9 months, but growing 0.3% in the quarter on the back of a strong Express & Parcels growth, good performance in Banco CTT and the lower decline in Mail volumes, although higher than we previously expected. So Mail volumes with this kind of performance, declining 15.3% in the quarter, or 14.2%, if we exclude the general elections effect that we had last year. Financial sector and utilities continue to aggressively digitize process, and this is impacting, of course, Mail volumes. Revenues declining 8% in the quarter, reflecting the evolution of volumes and the absence of the pricing levers this year under the current regulatory framework that was partially compensated by a good evolution in inbound Mail revenues and Business Solutions. That grew 17.9% and [ 80% ] in the quarter, respectively. In the 9 months, Mail revenues still declining 12%, in what has been a very typical year for Mail volumes as a result of the current pandemic. In the third quarter, Express & Parcels continued to show significant growth, both in Portugal and Spain, growing 19.5% and 36.7%, respectively. In Portugal, we continue to gain market share with strong growth in corporates and SMEs, that are now going digital, faster than before. And some of them with turnkey solutions that are provided by CTT. In Spain, we continue to see the opportunities created by the current context to accelerate growth and gain scale. We acquired, as João already shared, 2 important customers in September, which are expected to bring significant volumes starting already in the fourth quarter. In the 9 months, Express & Parcels business unit growing 19.5%. Bank CTT continues to post significant growth, growing 10.4% in the quarter, that is mainly driven by 321 Crédito that is growing 15.3%. And by the introduction of commissions in debit cards, that more than compensated the decline of -- in the Payments area that still is slightly impacted by a restriction on people movement. In the 9 months, growing 39.3%, Bank CTT. Financial Services continue to recover -- steadily recover after the confinements, but still declining 11% in the third quarter, with Retail revenues recovering faster than public debt. We continue to see this steady recovery already in October. We are moving to single digit numbers of decline. So things are continuing to converge. In the 9 months, declining 3.3% on the back of a very strong third quarter. On the next slide, we can see our OpEx, that is growing 2% in the quarter and 2.2% in the 9 months due to increase in the -- in -- especially in growth levers, so Express & Parcels and Banco. In the quarter, Mail and Financial Services OpEx declined 4.3% or EUR 4.5 million. Mail OpEx declining 3.8%, both in the quarter and in 9 months. It's important to note that quality levels return to the target levels during this quarter, what obviously puts pressure on our ability to adjust labor costs under the current distribution model that we have. Express & Parcels OpEx growing 19.2% in the quarter and 19 -- 16.8% in the 9 months, and this is driven mainly by the growth of volumes that is growing in excess of 34% in the 2 periods. In Portugal, we continue to see unit costs declining due to higher volumes and efficiency initiatives and investments that we are being -- we are implementing during this month. And in Spain, we saw a temporary increase in unit costs versus what we saw in the second quarter. Two effects, first is change of mix that went for smaller parcels to bigger parcels, and an increase of own distribution that now stands at 70%. We're continuing to invest to capture volumes to increase scale, underline our profit capabilities with new e-commerce clients. Banco CTT OpEx growing 1.8% in the quarter, what is the first quarter that we don't see the impact of the consolidation of 321 and lower marketing expenses. In the 9 months, growing 10.7%. Financial Services OpEx declining, pretty much in line with the evolution of revenues in the quarter. In the Slide 14, we can see our EBIT evolution. Our EBIT is heavily impacted by the operational evolution of the Mail division. Mail evolution continues to put pressure in the EBITDA of this division. Because under the current operating model and universal service obligations without any effective price lever, like our peers there, it's very difficult to compensate the volumes loss that we have been showing. In the quarter, EBITDA of Mail declined 31.8% and 53% in the 9 months. Express & Parcels EBITDA growing EUR 2.7 million in the 9 months, still negatively impacted by the Spanish division. Portugal growing EUR 4.3 million on the back of strong volumes and margin improvement. And in Spain, we continue our transformation process. We are in the most difficult part of this process where we are increasing the own distribution to prepare for the next level of growth. But still we did necessary scale to dilute what is the higher percentage of fixed costs. Nevertheless, as João said, we remain very committed to achieve targets that we shared with you in the past. Banco CTT growing EUR 12.3 million, EUR 7.8 million coming from 321 Crédito, and it's strongly maintaining the path to profitability. Financial Services remain flat. Restructuring costs down EUR 13.9 million because we -- the negotiation of exits access of people this year are significantly lower. Impairments increasing EUR 9.2 million, EUR 6.7 million coming from Banco CTT, EUR 3.1 million from that forward-looking effect provision that we booked on the second quarter and the impact of consolidation of 321 Crédito. So that is a business with higher impairments on this business model. As a result, our EBIT reached EUR 17.3 million in the 9 months. On Page 15, we can see the net income that now stands at EUR 4.3 million, reflecting the EUR 17 million decline in EBIT. As we've already seen, it's mainly driven by Mail volumes in that division. Tax increasing EUR 1 million due to the comparison effect of the one-off tax gain we had last year. That was associated with a favorable decision on the tax deduction -- the tax loss deduction of the sale of Tourline by CTT Expresso. On Slide 16, we can see our operational cash flow that reached EUR 16 million in the 9 months, still reflecting a high working impact -- working capital impact of EUR 21.3 million. EUR 16 million of this is coming from the high CapEx than in the end of 2019 and EUR 5 million coming from accounts receivable. We had some issues collecting from the Portuguese government during this quarter, things that are moving on the right direction now. Free cash flow of 0. Our net cash position remains stable versus last quarter, EUR 23 million, and a financial debt of EUR 72.8 million. That reflects some increase in lease liabilities in this quarter, due to the investment in the logistics platform that we are doing in Portugal and Spain. And now I hand you over to João. Thank you.

Thank you, Guy. Well, in Slide 18, our last slide, we have a word on guidance. So the business outlook for Mail is clear. It's declining on the mid-teens. Revenues benefiting from the seasonally strong fourth quarter.and from the growth of Business Solutions promises, I would say, significantly better fourth quarter. Express & Parcels volumes expected to accelerate further in the quarter, for obvious reasons. This is the season for E&P with Singles Day, Black Friday, Christmas and the momentum that has been created and somehow also created by us in Portugal and the opportunities in Spain. So we expect a strong quarter for Parcels -- Express & Parcels. The same with -- goes along with the solid contribution from Banco CTT and its 321 subsidiary in terms of progress on the profitability target. And we are also expecting placements of public debt within, I would say, a small distance of the very, very robust levels we had in the quarter -- in this quarter last year despite a challenging retail and macro environment. Of course, the most important aspect here is that these are expectations under the assumption that no material impact from the announced lockdowns in Portugal and Spain will have. We see -- we are now in the second day of the new lockdown in Portugal. We see some, I would say, mild reduction in activity. And so we believe it's reasonable to assume that these impacts will be very, very, very far away from what we had. And then with that assumption in mind, the ambition is to obtain low single-digit growth in full year revenues, and the commitment to achieve EUR 30 million of EBIT, as we said and also EUR 90 million of EBITDA. So bear in mind that this is under this assumption. It's still early days, but we think this is going to happen or it could happen. And with that, we will close the presentation and open for Q&A.

[Operator Instructions] The first question comes from the line of Filipe Leite from CaixaBank.

I have 3 questions, if I may. The first one is related with the potential extension of the current universal postal service concession. Because it seems that the regulator and the government intention is to keep the same 24 Quality KPIs, and the regulator is also pushing for a price increase of CPI plus 1 in this extension. But the regulator is also pushing for the approval of a maximum penalty of 3% of point for not complying with those KPIs. So basically, meaning that, in theory, the Mail price could decrease 2 percentage points below CPI, if you miss all the quality KPIs in last year. Can you tell us if you agree with this terms? And if the government and the regulator can unilaterally impose such conditions in the contract expansion? And second question is related with real estate, the deal that you mentioned in previous calls, if you still are working on it? And if you believe that deal could reach the EUR 200 million, you mentioned? And when do you expect to have it completed, before or after the award of the new universal service postal contract, considering that the deal will impact your regulated business? And last one on your EBIT target or guidance for this year. If it includes any impact of the presidential election, or if it should impact only the next year results?

I will grab 1 and 3, and will ask Guy to give you an update on [indiscernible]. So extension of concession and pricing restriction, penalties and everything you mentioned, well, even if that would apply, in fact, the penalty of 2% was not [indiscernible] on top of the other one. In any case, I need to be slightly prudent here as it has been made public, we are now discussing with government the terms of what should happen in the 1st of January. There is a significant agreement in -- which are the obstacles to allow us to be on some kind of temporary reality before the new construction contract is in place. And because of that, I will not be very -- I will be not very explicit on how we are. In any case I can be very explicit in saying that the existing terms are terms that we can't accept as they are. I've mentioned this several times publicly. And to the breadth, we are very committed to be and -- to remain the service -- universal service provider, better condition of it to become sustainable and in which terms that we feel [indiscernible]. So we shall have more news on that. There are important meetings organized, taking place now. And so it's something that we need to come back [indiscernible]. But to come back to what I said, when I refer to Mail, we have a price lever that needs to be activated. And we have a very good list of the European benchmark with substantial price increases and that is something that needs to be handled. Moving to the detailed question on the EBITDA guidance. It doesn't take into account the presidential election. Also -- but also next year, it won't be present in the sense that the presidential election is not going to have mail votes. And it's not because mail votes in presidential election is [indiscernible] because actually the law -- the electoral laws for presidential elections doesn't have a provision for that. So we have this guidance that we are now committing to is a guidance without that contribution. And with that, I will pass the floor to Guy.

On real estate, 2 things are impacting the time table. First, we encountered more issues on the fiscal front that we are tackling and the pandemic, obviously, introduced here a disruption in the project. We continue to -- we remain committed to do something in the beginning of next year that we don't see necessarily aligned with the concession, but obviously has some impact on it, as you mentioned.

Just a follow-up on the first one regarding the universal postal service. And despite these agreements in terms of the conditions of the contract, can the government unilaterally impose the conditions of the contract extension or it should be negotiated with CTT?

No, there is a provision in contracts. The only provision in contract that allows is an agreed extension. On the other hand, on the public procurement legal framework in Portugal, there is also a possibility for extension because of exceptional conditions. But in both cases, it needs to be an agreed extension. What -- all the signs and modern signs of the -- well, the framework that has been present in discussions that we've had at the highest level is that we need to agree on how to gap bridge between the end of the concession and the concession. So -- but first of all, repeating explicitly the answer, it needs to be agreed, it cannot be unilateral. And also, we didn't have any signs so far that in any stage that could be a possibility.

The next question comes from the line of Marco Limite from Barclays.

So just to go back quickly on the postal license renewal. What do you think is the kind of most likely timing? Is there going to be, for the future, postal license renewal, is there going to be January, is that going to be March? And my second question is about the Spanish division. So you're saying that the new volumes from Amazon and AliExpress are about 60,000 parcel per working day. And if I multiply that for 90 days or 80 days, whatever, you get to about 4 million, 5 million of volumes, which seems just doubling basically the Spanish volumes that you have got already for each quarter on average. So I'm just wondering if -- is that correct, first of all? And the second, we should expect revenues as well to kind of double once these volumes will be in your network? And of course, if you can give us also a bit of timing around that, when these clients are going to be in your network? So is that going to be first quarter 2021 or second half?

I will have to ask you to repeat the second part of the question, if you don't mind.

Just about the timing of the onboarding of these clients, first half or second half of next year?

Okay. So the 60,000 parcels coming from these customers is the aggregate. I mean with their contribution, this is the addition to what we have. In fact, they have been both -- they are already on board, and we have commitments with them because these are the most sophisticated clients we have. These are commitments. We are committing to them almost on a monthly basis, sometimes on a monthly basis. So there is a buildup that we cannot disclose for commercial [indiscernible] reasons. But in fact, we feel reasonably confident with our installed capacity and the level of objects that we are committing with them. In the case of Amazon, there is even a provision that with a very significant advanced notice, we can increase even more or significantly more. So there's no major concern we have now with capacity, and the numbers that we have for these 2 particular clients are planned from now to the end of the year. And if I understood the onboarding, it's already done because we are already delivering for them quite successfully. And coming to the first question. The timing -- well, something needs to be decided and announced before year-end because the contract ends on the 31st of December. And so something is going to be known and value for that. But then let's wait and see how things progress.

[Operator Instructions] The next question comes from the line of António Seladas from A|S Research.