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

Good day, and thank you for standing by. Welcome to the CTT First Quarter 2021 Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your presenter today, João Bento, CEO. Please go ahead.

Good morning, everybody. Welcome to our first quarter results presentation, 2021. It's been a good quarter with the record revenues growth for the quarter. Actually, we just noticed that it is the highest revenues in the first quarter since CTT started reporting quarterly back in 2014. Revenues grew 14.1% in the quarter and drove a substantial expansion in EBIT. This behavior in revenues is mostly driven by record revenues in Express & Parcels, both in Portugal and in Spain, with a 70% growth sustained by a strong boost from e-commerce. But not only Parcels performed extremely well, we've also been able to sustain a resilient behavior in the bank. And the same applies to Mail, although with a decline in volumes with the strong mix and pricing effects, mostly mix and pricing in higher-value Mail. And, finally, we also have -- although in relative terms, it might seem otherwise, a very good performance on Financial Services & Retail in the quarter with a very strong placement for the quarter. Moving to Slide 2. It's -- well, we see a bunch of KPIs with significant performance on, as I said, Express & Parcels and the bank, but also with the growth in recurring EBIT for Mail, given the mix effects that I referred to. And therefore, with aggregate numbers with a significant positive performance. With revenues growing 14%, as I said; and EBITDA, 22%; and recurring EBIT, more than 60%. I will then move to Slide 3, just to refer to, well, the most significant highlights for the quarter. Starting with the concession. The government promised by the beginning of the quarter to establish a working group to analyze the Postal Act and Universal Service requirements for the forthcoming concession. It did so -- actually, the working group hearings have already been concluded and a report is being prepared, and we look forward with significant expectations for that outcome. CTT was also elected once more as Trusted Brand by the Portuguese people, achieving the first place, as one could expect, in recognition for Mail and Logistics services. We have reopened a few of the remaining 33 stores in municipalities that lost CTT post office, reinforcing the proximity to the population and our capillarity. This is a very -- sometimes understated movement, but impressive -- with impressive in terms of stakeholder management. So we are very proud of that, and we shall open the remaining 4 sooner than later. We have also launched a so-called the Savings Line, online, a new direct contact channel for serving solutions, support and service. This was very timely in the sense that with lockdown restrictions and lack of mobility, it was one of the levers to allow significant placements in public debt. It was also a quarter with the most significant news for the bank with the partnership with Sonae. There's a slide on that. So I won't -- I will skip that for the moment. And finally, 2 notes on new things. One, the partnership with the Institute of Records and Notary through which we have concluded the delivery of the backlog that was -- that the confinement in 2020 produced for citizen card renewals. We have -- in the end, we have done the full -- the full backlog. And more important than that, it's been now in April announced that this will be the new way for renewal of citizen cards. So we are very proud of this, because it's a new kind of combination of delivery services that promises to somehow sustainable volumes. And I would conclude with the note on Dott. The marketplace reached 270,000 registered users, with a 35% increase versus December, 1,600 vendors and 4.5 million products available with a GMV growth of more than 120%. A final word on highlights to enhance the Universo credit card partnership. Universo is now more than 850,000 clients, market share above 13%. It closed more than 1 billion transactions last year. It starts with a relevant EUR 150 million of credit, but we expect the credit book to grow to over EUR 300 million in the first 12 months. And so we project relevant returns, and it's, in fact, a new lever and avenue for growth for the bank. And with this, we would move to more detailed description and notes on each of the businesses, and I will hand over to Guy, our CFO.

Good morning. Thank you, João. So moving to the operational highlights on Page 8. We can see here a record performance by Express & Parcels division, where market share gains, e-commerce adoption and also the lockdown restrictions are driving growth -- a sustainable growth. That compares even favorably with the fourth quarter last year, in a business that, you know, has a very seasonal fourth quarter. So strong growth in Portugal, 62.3% and 137%, very, very strong growth in Spain. On the next page, we can see the Banco highlights. So our Banco CTT activity remained resilient despite the lockdown restrictions. It was the -- our division was factored by the lockdown were credit production and payment services had declined vis-à-vis last year, driven by the restrictions on people movements. Although recovering since March to more normal levels since then. The customer deposits also benefiting from the increased saving that Portuguese population is during the lockdown. So we have very significant growth during the first quarter. On the next page, we can see Mail. Mail had a very strong mix effect, as João already mentioned, offsetting mostly the entirely high-volume decline, that still remained very high. It's important to notice that last year, we still had to 2 months before the pandemic crisis. So it's pre-pandemic level, so a difficult comparable. And that affected a lot the letter mail. In terms of higher-value mail, as you know, this is driven by e-commerce trends and benefits from those trends. So strong growth and especially mix effects that basically enable us to almost offset the volume declines in letter mails, so strong or resilient revenues in Mail. Also a very solid performance in financial and retail, considering the challenging environment in high-street retail. Lessons learned from the last -- or the first lockdown last year and the initiatives that were taken to contract those effects with good results. We had a very difficult comparable in January, because we benefited last year of EUR 1.5 billion maturing stock that we tried to highlight with that 52% decline in January '21. But since then, resilient volumes and also benefiting from the savings that we saw in the customer deposits on the bank. Also here, driving a very sound and resilient placements of debt. Also retail services with the interesting results given the lockdown context. Moving to the financial section, starting on Page 13. We can see a robust revenue growth driven by Express & Parcels that led to a substantial improvement in EBITDA and EBIT and also net profit, not aligned when compared with first quarter that was -- of '20. That was already marked by COVID-19, but also some growth versus 2019, that was the last year, without pandemic effect. Although, Portugal was under a severe lockdown since 14th of January, our business has showed resilience, namely in Mail and in Financial Services that are the areas more affected by this effect. And of course, Express & Parcel growth on the back of this effects and also market share gains and underlying change of habits that we are seeing in Portugal where e-commerce adoption keeps rising. Our revenues grew 14%. Year-on-year. Our recurring EBIT reaching EUR 15 million, and our net profit, EUR 8.7 million, with a very significant growth. And also, our cash flow grew to EUR 9.9 million in the first quarter of '21. Going to our revenues. Our revenues in the first quarter, as I said, grew 14.7% (sic) [ 14.1% ], driven by Express & Parcels and Banco. In the first quarter, Express & Parcels continued to accelerate growth from the 50% last -- last quarter last year, a 70.1% this quarter and EUR 26.1 million growth in year-on-year with strong volumes. In Portugal, a part of the positive lockdown effects, we continuing to see growth coming from the adoption of e-commerce, market share gains, especially in the SME market, where we are growing almost 70%. Our volumes in Portugal grew for 50.9%, and our revenue is 43.8%. In Spain, an excellent growth, 137% in volumes and 127% in revenues, leveraging on the acquisition of big accounts that drove market share gains, both in the local, national markets and the cross border volumes. Banco CTT growing 8.7% in the first quarter, although, as I already mentioned, the lockdown effect affected the payments on auto loan, credit production, especially in January and February. Although, March already returning to some kind of normality. Mail volume still under pressure because of the lockdown effects and difficult comparable versus 2020. Nevertheless, resilient revenues, with a strong contribution from higher-value mail, especially international registered mail, but followed the same strengths of e-commerce growth. Financial Services & Retail, with a good and resilient performance despite the restrictions to people movements, although public debt placements declined 12.1% year-on-year. It was a very strong quarter. If we take in account that last -- January last year, we benefit from that EUR 1.5 billion of maturities. The increase in savings and measures taken to continue to operate during the lockdown enabled us to continue with a very high level of daily placements. In the next page, we can see of our OpEx, Page 15. OpEx growing 12.9%, basically driven by Express & Parcels. The OpEx in Express & Parcels grew [ 49.5% ], but driven by a much higher volume growth of 87.2%. In Portugal Express & Parcels, we continue to see unit cost decline despite lockdown, driving additional costs slightly up because of the lower number of parcels per stop, but scale, efficiency initiatives and the investments that we have been implementing continued to show results. And in Spain, we are achieving a strong progress in gross margins and unit cost decline, but we are still investing in a growing infrastructure to support a much higher scale of that company that we are creating a strong platform in that geography. Banco CTT growing 5.4% OpEx in the quarter, basically reflecting a higher use of the CTT retail network and also some IT increased costs. Mail OpEx flat, and that is basically due to a higher increase in our transportation costs. That during the pandemic, we saw a significant lack of supply of our airfreight. And as such, the prices are increasing significantly. Financial Services OpEx will continue flat in the quarter. Our recurring EBIT on the next page, we can see a very strong growth of 62.2% to EUR 15 million and basically reflecting the strong performance of Express & Parcels and growth in Banco CTT. The Express & Parcels EBITDA improving $6.9 million versus last year from negative $1.6 million in the first quarter of '20 million to positive EUR 5.3 million this year. EUR 3.8 million of that improvement comes from Portugal and $3.1 million from the Spanish operations. Portugal continues to show margin improvement and Spain EBITDA in the quarter was still negative $200,000, but in a clear path to the breakeven during this year as we promised. Mail declining EUR 1.2 million, reflecting the small revenue decline and higher direct costs. Financial Services declining also EUR 1.1 million, reflecting the lower placements, but still a very good underlying performance. On our cash flow in Slide 17, our operational cash flow reached EUR 12.8 million in the quarter. EUR 1 million higher than last year, still affected by working capital, negative $6.1 million, reflecting the fourth quarter CapEx payments. And lower collection from international operators, but this year has been delayed for the next quarter. Free cash flow of EUR 9.9 million and a net financial debt of EUR 63.4 million, improving since December. And that concludes all my slides. I'll pass you over to João. Thank you.

Thank you, Guy. Well, I would close with the final note, including an outlook. But basically, once more, it's been a great quarter with a higher contribution from both growth areas, Express & Parcels and the bank that will keep fueling revenues growth, and that will certainly keep translating into improved profitability. We believe we have a substantially strong levers to sustain in Portugal and Spain, growth and profitability increase in Express & Parcels. And also the same applies for the bank that is finding new avenues for growth, like the one that happened during the quarter with the partnership for the Universo card. A continued acceleration of our digital initiatives will further strengthen our competitive position. This is mostly important for Portugal, because we are grabbing a very substantial market share in Parcels, and therefore we need to make the market growth. In Spain, the market is already very large, and our market share is not that important. But we believe that this is one of the reasons why things will remain in the same path. And obviously, the COVID-19 related uncertainty is gradually fading away. And, therefore, that should bring also, we hope, positive news. Given the above-mentioned dynamics, we now expect to achieve around EUR 60 million of EBIT for this year in which represent a very significant guidance update. And with this, I will close the presentation. And myself and the team will remain available for your questions.

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

I have 3 questions, if I may. The first one regarding the outlook. As you mentioned, you are improving your EBIT guidance, but you did not mention any of the remaining targets. I'm still wondering if you still expect high single-digit revenue grow at group level and Mail volume drop between 8% and 10%. And also, if this revised EBITDA guidance include any kind of one-off or nonrecurring impact, namely from the potential real estate deal? Second question is regarding this real estate deal. And if you can give us an update on potential deal? And last one on the Mail contract. If you know when it should be concluded, the working group assessment, because as far as I understood the 60 days initially set had already expired. And also, if you can comment on the recent decision from ANACOM to keep the quality KPIs and increase the maximum penalization to 3% from the current 1%.

Thank you, Filipe. So regarding the outlook, just confirming that, that is recurring EBIT. So no one-offs expected to contribute to that guidance. In Mail volumes, we'll stick to the guidance interval, although for now, things are directing to the lower end of the interval in terms of decline, and I think it's it. And regarding [ legal ], we are in the final stages of -- Sorry, regarding the real estate, we are in the final stages of submitting our operation to do relevant regulators. So in the end, although we still have some stakeholder management to do before we submit that process. Regarding the last question, João?

Yes. Thank you, Filipe. Well, when the working group is about to conclude, our expectation is that, that should be happening at any time now. It is, in fact -- it was, in fact -- the 60 days were, in fact, exhausted on the last, I think, the 19th of April. But we've been -- the hearings phase took longer than expected. We were ourselves involved with interaction with working group after that date and our expectation is that it should close all at any time. We -- regarding the ANACOM decision, I prefer answering that in a different way. What is relevant now for obvious reasons, is the result of the working group, because that is -- well, the decisions on how the concession should follow our governmental decisions. And therefore, we are very -- in a very serene stance, awaiting for that because that is what really matters.

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

I've got 2 questions. The first one is, if you are able to disclose at this point in time already what are the growth rates in April given that, clearly sort of lockdown effects analyzed in April, so it would be interesting to -- yes, to have an review of those trends for Parcel in Portugal, Spain and letters as well. And my second question is actually a follow-up to a previous question. So can you just clarify a little bit what happens when the working group disclose with you what are the conclusions from their review? What comes next? Like, are you going to seat together at the same table and negotiating with them the license? Or -- yes, it would be just great to have a little bit more understanding of what's the full process after the governmental working group.

Okay. Thank you, Marco. I will start with the last one, because I closed the previous set with that. So what's going to happen? I can only disclose what is my expectation and also what was our proposal. But I would sustain that on a fact. The fact is that we are now in May. And actually, since -- in the last days of 2020, the government decided to expand the concession for another year. It became clear there then, and we have discussed that openly that there was no longer time for a normal international tender according to the new rules. So as from then, late last year, and the more time it goes, the more it becomes obvious. The only way is to have a direct negotiation. And there is in the Portuguese public procurement legislation room for that. So our expectation is not when working group concludes, there will be a set of guidelines for what's next. Some of those guidelines may will certainly deal with the most relevant things, meaning density, quality, criteria and pricing, and then there will be some kind of formal negotiation process. Similar to that kind of processes that in many countries, including Portugal, do exist, even for normal tendering processes for awarding of concessions. And with that, we feel reasonably comfortable with the timeline we have between now and the end of the year. But of course, it's up to the government to handle that. Going back to the first question, we are -- as you might understand, not disclosing figures on April. The rates -- the type of growth that we are facing with easing of the lockdown seems to be interesting regarding Mail. And of course, we are expecting not very significant, I would say, smooth or light change of behavior in Parcels, because now retail is opening. Opening retail also improves our B2B volumes. And apparently, we don't see any significant changes. That's why I've mentioned in my final remarks that we feel that we have -- for different reasons in Portugal and in Spain, very good reasons to sustain very significant levels of growth.

And the last question for the moment comes from António Seladas from AS Independent Research.

I've 2 questions related with the bank. The first one, if you can explain, as far as I understood, the equity of the bank went up by around EUR 9 million or EUR 10 million quarter-on-quarter. So if you can explain what were the reasons? And second question is related also with the bank. Moratorium credit also went up by about EUR 2 million from EUR 40 million to EUR 42 million sequentially. So if you can explain what were the reasons?

Okay. I'll ask Guy to handle those ones, António, thank you.

So regarding the first question, we already have a program, a small-cap increase in the bank. We contributed with additional EUR 10 million in January to the bank, and that is the reason why you see the capital of the bank increasing. Regarding moratoria, as you know, it's not fully closed, so we continue to see some small movements of moratoria going -- getting in, and that's why it went a small number during the quarter. But basically flattish. We now have an exposure of EUR 42.4 million, representing 3.7% of the total growth credit. And our 769 moratoria requests that we still have. The -- as far we can monitor everything, we continue fairly optimistic around the performance of those credits, although evolution of the economy on the next month is -- will, obviously, have the impact according to the scenario that that can improve or not.

Just to make sure that the equity thing is clear. Those EUR 10 million were announced a long time ago, because this was one of the conditions to the acquisition of 321. So it was planned a long time ago.

[Operator Instructions] We have a follow-up question from the line from Filipe Leite from CaixaBank.

I had just one final question regarding your [ business losses ]. And if you can confirm that Banco CTT is interested in the deal? And how could it be refinanced?

Well, Banco CTT and CTT are always interested in looking at market dynamics, and we've been looking to that and to many other things. If that somehow would be an option, of course, we would have also solutions to -- for that. But it's something that we don't want to disclose anything more than that has been disclosed.

And there are no further question. So I will hand back to our CEO, João Bento. Please go ahead.

Well, thank you for coming. Thank you for your questions. As always, we remain available through the IR team. And obviously, all of the executive team for further questions. And we're looking forward to -- well, the forthcoming interactions. Thank you again, and good morning.

And that does conclude the conference for today. Thank you all for participating. You may now disconnect.