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

Good day, and thank you for standing by. Welcome to the CTT First Half 2021 Results Call hosted by Mr. Joao Bento, CEO; and by Mr. Guy de Pacheco, CFO. [Operator Instructions] I must advise you that this conference is being recorded today on Friday, the 6th of August 2021. And I would now like to hand the conference over to your speaker today, Mr. Joao Bento. Please go ahead.

Thank you. Good morning, and welcome to our results webcast. Well, following the presentation on Slide #4, which is actually the first slide. Well, with the key takeaways, we believe in the quarter that keeps CCT aligned with the transformation part that we have devised with solid revenue growth and improved profitability on back of, well, the initiatives that we have launched quite some time ago, including [indiscernible]. Investment in digital transformation and e-commerce have proven to enable to drive the growth of the e-commerce ecosystem, and therefore, Express & Parcels in Portugal follow this trend. In Spain, a significant growth on Express & Parcels increased the weight of the Spanish operation to roughly almost 60% of our segment in the first quarter or 8 percentage points increase on year-on-year. And more important than that, reaching the EBITDA breakeven and recurring EBIT in the second quarter. This is, let me call that substantially better than the initial plan that was across the breakeven, the EBITDA breakeven in detail. So we are now much ahead of that in Spain. Well, moving to BPO, and our business solutions offer recent partnerships and the acquisition of NewSpring strengthens our offering, both for the corporate and the SME segments. So a relevant contribution during the quarter. Whereas in Retail & Financial Services, commercial initiatives that have been targeted to improve customer experience and also some widening of the portfolio that drove the cross-selling and distribution of financial products with a very interesting behavior as well. The bank was on itself ahead on itself, very important, delivering profitable growth while offering balance sheet optimization and optionality. And we did all this with, again, in reinforcement of our ESG commitments, namely to attain the Sustainable Development Goals of UN in the context of our subscription of the UN Global Contract. Moving to Slide 5. Slide on revenues. Again, a quarter, about EUR 200 million of revenues with a 22.6% growth, enabling a very significant improvement on growth on revenues for the semester. If we look at each of the business lines, I'd like to highlight that now, well, we have basically a 30% growth on all business lines with the exception of Mail, but even Mail with a very significant 16% growth. So very good behavior across the whole portfolio. With Mail approaching now 50% of revenues, meaning that non-Mail revenues approaching 50% of the total revenues. And Express & Parcels already clearly above 50% of Mail. Just to give you a sign of the road importance that Express & Parcels is taking in our activity. Moving to Slide 6. Similar comments related to EBIT. So revenue is -- the most direct impact on revenue growth is also EBIT expansion with, well, extremely high-growth quarter on -- year-on-year in the quarter, which adds to a good first quarter, and therefore, we reached EUR 29 million of EBIT, which is almost half of EUR 60 million that -- meaning, that we have including in the previous guidance. So it's almost 50% of the target. It's, again, an extremely good behavior across the whole business unit. But the comment I made on the relative representation of E&P in revenues vis-a-vis Mail, it's even more impressive with EUR 2.9 million comparing to EUR 4.7 million -- EUR 2.9 million in Express & Parcels comparing to EUR 4.7 million on the Mail. So a significant contribution to EBIT formation from E&P. And I could also add a similar comment on the relative performance of Mail, which is now roughly 1/3 of total EBIT. Moving to now a set of slides, starting on Slide #7, with a deeper dive on strategy with more emphasis this quarter on Express & Parcels. This is a very interesting slide. We leveraged in the sense that it shows an offer that is really surely unique, in the sense that we cover the whole e-commerce value chain in a unified and modular offer, going from marketing, advertising, both physical and digital to the actual construction of the stores. Payments, of course, well, delivery, which is, in fact, the beginning, all this thing, dispatching, reception, but also handling of returns. So this is -- we do this. We do know our own ecosystem of partnerships and internal capabilities. And this is, in fact, what has driven significant growth on parcels in Portugal because we -- through this, we are enabling the growth of e-commerce in itself. Moving to Slide #8. We have a bunch of figures on the expectations and performance of the Portuguese market with 40% to 60% estimated growth according to different [indiscernible] during 2020 for e-commerce with an increase on the number of e-buyers on the -- on value of recurrent shopping and on the average ticket. So all growth, significant figures showing a significant growth. But also good expectations for 2021, according to which we believe that it's inquiring our e-sellers the average growth for the year to be between 30% and 40%. So significant growth in the recent past and good expectations for the next future. Moving to Slide #9, with some more insight on situation in Portugal. We've observed a consistent growth leveraged by commerce, as we've noted. With -- now we are comparing this second quarter with the second quarter last year where we have already a significant growth and activity on e-commerce, as you might recall, but we have built 20% -- 19.2% on top of that in terms of volume growth and slightly build up 16.8% on revenues. So not only volumes keep growing consistently, but also we have been able to turn this into revenue growth. Moving to Slide #10, about Spain. This is, in fact, one of the most significant performances in the quarter. E&P in Spain basically is turning around, driven by both market share gains and scale and operational efficiency, resulting on a sustained growth. And as I said earlier, EBITDA breakeven in the quarter. And in fact, EBITDA breakeven for the year. This is based on -- this is, of course, much better than predicted in the sense that breakeven was achieved ahead of plan. And this, in fact, a combination of growth, where we've been able to capture and increase the share of wallet in large global retailers, for example, Amazon and some of the Chinese players, but also on efficiency in the sense that we have now a very solid shift from franchise to own operations for B2C. B2C, as you know, requires, well, additional specification and technology to produce interesting results and to enable efficiency. So that kind of shift from franchise model to own operations on B2C, but also on the enabling of capacity. And therefore, the importance that we attribute to the investment in new sorter between August last year and early this year, which is actually a trend to somehow continue. Moving to Slide #11. We -- I'd like to stress 2 important aspects: one is that quality of service and profitability come together in the sense that for these large sellers, quality is the main selling point. And therefore, it is of utmost importance to be able to do that. And we can only add quality element other requirements, if we are able to sustain the need to cope with increased capacity. That's why in this time line, you see starting last year and going forward, new sort of facilities in Barcelona and Madrid, 26 new distribution centers, new sorting facility in Valencia, extension of the sorter that is planned -- in Madrid, that is planned for this month, a new -- 4 new sorting facilities between now and the first quarter of next year. It's almost most important. And this has enabled 157.9% growth from 2019 to the first half of this year, which is, in fact, extremely impressive. But not only capacity was enabled these investments, both on technology and capacity was enabled, these investments both on technology and capacity on harbor and on real estate have enabled the unit costs to steadily improve. And if you look at the chart on the right of the slide, you see both linehaul handling and last mile unit costs steadily declining, and therefore, they're raising what we have called in the title, increased profitability. So good news on Spain. In fact, moving to Slide 12. The last one on this big dive on Express & parcels. The strategy -- and the commercial strategy aims at the balance growth between scale and diversification of customers that driven profitability. On the left, you can see that the consistent improvement in quality and investments on capacity have enabled an impressive growth of -- well, signing of large e-tailers and therefore, volumes. And on the right, we see that there is a significant improvement above 23% on B2B. B2B customers are also very important in the sense that we have a premium around B2B. Margins are obviously more interesting on B2B than on B2C. Moving to Slide #13, about Mail. We have a quarter with a strong mix effect resulting on higher-value mail and also good comparison effect driving growth because the quarter last year was rather poor. All in all, a 16% growth on revenues, a combination of value-added mail services benefiting from innovative solutions and some commercial productivity with more sophisticated ways of bundling. And with a significant contribution, for example, of the distribution of ID cards, [indiscernible] citizen cards, which is a new product -- mail product that was developed during the crisis, as an example. But also the fact that the pandemic has accelerated lower-value mail decline, which now accounts for more than 45.1% of mail revenues. And that combination has produced a significant growth on revenues year-on-year for this quarter. Moving to Slide #14. We've decided to provide some additional light on the acquisition of NewSpring, which is about to be closed, most likely during this month. We have already given permission by the competition authority. And NewSpring will reinforce our business services solution beyond Mail. The rationale is based on 3 main pillars. It contributes to our ability to grow and diversify our offer, somehow associated with our initial service of Mail -- related to the Mail. Then it strengthens our skills and capacities in terms of BPO and other support services, reducing our dependency on partnerships. This is not that we are going to abandon those partnerships, but it brings us additional capacity to grow our offer and to strengthen that. And finally, because it allows optimization of our own operations, in the sense that we can reduce some external supplies by internalizing some of the activities that NewSpring is excelled at doing. At present, NewSpring has 9 BPO clients and 7 contact center clients. Revenues are slipping reasonably equal parts between contact center and BPO. And the main figures are EUR 21.1 million of revenues and EUR 2.4 million of EBITDA. In 2020, we expect the year to be significantly solid on top of the performance of last year. So a new addition to our ability on the area of what we call Business Solutions. Moving to Slide 15. A word on Financial Services & Retail. While the revenue has been underpinned by commercial productivity, as I mentioned before, while benefiting from the opening of the economy and increased savings from the propensity. So not only people go more to the shops and have more normal life, but the propensity for savings in general has increased amongst the Portuguese population. And therefore, we've been able -- on the Financial Services side to place an impressive EUR 1.1 billion in the quarter, above our quarterly average, almost 100% more than in the equivalent quarter last year, producing also a significant growth on revenues, 24.1% of growth. But not only on Financial Services, also on retail, private and services, we have been able to increase the average tickets significantly. And therefore, revenues grew almost 2/3, 66.7%. So we have a good performance on the Retail & Financial Services front as well. A final word on a couple of slides for the bank. It starts -- starting on Slide 16. The bank continues to grow in the retail segment credit. In the quarter, of course, with the significant introduction of the credit card business of Sonae as an additional growth lever, but also on savings offer. And if we look for each of these 4 areas of the bank. In auto loans, I would stress that while production has increased almost EUR 12 million or 30% versus the second quarter of last year with a 6.4% with an interesting average yield. So good performance on auto loans, keeping roughly the same trend of a higher number of deals of a smaller value. Then on credit cards and Sonae, I would probably highlight the fact that we aim at reaching EUR 300 million of credit volume in the first 12 months, and we keep a good trend. Well, the improvement here is almost 80%. And the onboarding of clients is, in fact, ahead of schedule. Looking at customer deposits and off-balance sheet savings. The customer funds capture remained very strong with a renewed focus on off-balance sheet savings. And again, likewise, in the CTT branches offer, we have widened the offer of our off-balance sheet savings, therefore, capturing this new propensity for savings. And with a very, very low deposit cost of 0.02%. Finally, on mortgage. As announced before, we have actively declined the production due to a change in focus to other credit products, so that we can maximize risk-adjusted returns. We have here a much lower yield, average yield, but even so with a significant growth of 7.5% in the quarter. Moving to our final slide on the business units. Again, in the bank consumer lending with a robust performance. And here, we want to highlight the -- well, the room that we have growth to grow that if comparing to a more normal year of 2019. So we still have a 30% room to grow in auto loans. We are now with a very interesting market share of slightly over 10%, but plenty of room to keep growing. So we have recovered significantly from last year, but there is room for more, and we hope to capture that. And the same applies almost with the same figures to credit cards, in the sense that we are not yet in the levels prior to the 2020 crisis. A final word on -- before moving to financials on our ESG performance. We are aligning our own performance with UN Sustainable Development Goals. We have chosen the SDGs with special reference for CTT, as you can see in the slide 3, 4, 7, 8 and 11, 12, 13 and 15. We have during this quarter, a few good examples that we'd like to highlight. We've been awarded the National Sustainability Award. Honorable mention actually on our "A tree for the forest" project. We have now more than 100,000 trees planted. This is a partnership with the significant NGO, and it's a very interesting project. We have launched an eco-reusable package, which is a very interesting [ highlight ] on circular economy, whereby users -- we are testing this with e-sellers whereby users can choose to have their parcels delivered in a package that is reusable, reusable at least 50x. So very interesting pilot. We plan to scale this hub in a very significant way. Then we have -- we kept and increased our green deliveries option with electric vehicles -- 100% eco delivery with electric vehicles. We have actually acquired a new 73 vehicles this quarter, electric vehicles for the distribution fleet. And we have also a very interesting pilot on the area of proximity and social support on teleconsultations in post offices with the major healthcare provider, in this case CUF. So a number of initiatives that are very much in line with our stance in terms of ESG. I would now invite to listen to Guy, our CFO, on financials on the quarter. Guy, up to you.

Thank you, Joao, and Good morning. So starting on Page 20, where we can see our key financial indicators. There we can see that it was a good quarter with strong growth in all KPIs with on the quarter -- on the first half. Nevertheless, we should take in consideration that the second quarter '20 was the most affected by the pandemic. In the second quarter, we saw our revenues accelerated to 22.6% growth on the back of strong dynamics in Express & Parcels and in the bank, and with Mail also recovering from a difficult second quarter in 2020. In the first half of -- our revenues stood at 14 -- EUR 412.8 million with 18.2% growth year-on-year. As a result, our EBITDA more than doubled in the second quarter, and our recurring EBIT reached EUR 13.6 million. In the first half, we are EUR 28.7 million of recurring EBIT that is more or less half of our commitment -- to our commitment for the full year guidance. In the quarter, a net profit of EUR 8.5 million. And in the first half, our net profit now stands at EUR 17.2 million. We had a good quarter of cash flow generation with EUR 21.4 million in cash flow. And for the first half, EUR 31.3 million for cumulative free cash flow. In the next page, we can see the details of our revenue evolution. Once again, a strong quarter with 22.6% growth in all business units with significant growth in Express & Parcels. And of course, the Mail recovering has to also help in the dynamics of the quarter. In parcels, we saw resilience in the volume growth in the second quarter after the end of the performance, both in Portugal and in Spain. The business unit grew 30.5% in revenues. In Portugal, volumes continued to grow 13.7% in this quarter, driven by e-commerce, leading to a 16.8% revenue growth In Spain, the quarter -- volumes in the quarter -- volumes grew 48.4%. And also supported by commerce trends, but also by market share gains with these e-tailer accounts, leading to a revenue growth of 49.1% revenue in the quarter. Mail also growing in this quarter with volumes partially recovering from the strong decline in second quarter last year, growing 6.5% year-on-year. In the first 6 months of the year, addressed mail revenues for working days have been quite stable, as shown by the stability on revenues on quarter-on-quarter, also benefiting from higher contribution from higher value mail, contributing to the mix effect. That has enabled us to offset the small volume decline. Bank CTT growing 29.5%, a sequential improvement on the back of the new partnership of the Sonae financial services and improved performance in auto loan and payments that were quite affected in the first quarter due to the COVID-19 restrictions. Financial Services & Retail also with a strong quarter. Commercially, with more than [ 1 point billion ] in public [ replacement ] that will coupled with revenue growth in retail. That allows the division to grow 36.1% in the second quarter. In our -- in Page 22, we have a reach of our OpEx that grew 21 -- sorry, 12.1% in the quarter. It's potentially driven by increased activity across all business units, experts in [ passing ] the most significant one, where the -- our cost increased EUR 12.2 million or 25.9%, but below the overall volume growth in Iberia that grew 31.5% in the period. In Portugal, we saw, unfortunately, a small unit cost increase in the quarter due to lower volumes versus what we observed in the first quarter this year with given to the need to scale down the Portuguese operational network. In Spain, as Joao already shared, we continue to see unit cost declines with the increase in scale and investments made in automation and technology. Mail growing the OpEx EUR 6.2 million or 6.3% in the quarter due to the increase in staff costs, driven by growth of volumes and increase of direct cost in terminal dues with other postal operations. This in line with higher outbound mail revenues. And unfortunately, higher airplane price as a result of lack of supply that we continue to see in these routes. Banco CTT with growth on staff costs and direct cost to our activity, namely with the new credit card operation that will partially offset by lower impairments this quarter as we booked last year a significant provision for the forward-looking effects on the economy. Financial Services & Retail growing EUR 1.3 million or 25% indirect costs, but as a result of the increase in retail revenues. In next Page 23, we can see our recurring EBIT that is growing EUR 17.3 million in the quarter, with also -- as revenues with all business units improving and EUR 23 million in the first half, with a margin of 7%. In the quarter, Express & Parcels growing 2.3%, with Spain already with positive numbers with the successful implementation of the strategy that we have outlined for these assets in the third quarter of 2019, despite the difficult third quarter. Due to seasonal effects, we continue to see strong growth in Spain and a clear path to profitability. Mail benefiting from the recovery in volumes, growing maybe in EUR 8.8 million in the quarter. Banco CTT also growing EUR 4.3 million to the growth in revenues on the back of the new partnership for techno universe and the improved dynamics in auto loans and payments, also benefiting from lower impairments versus last year. Financial Services also deducting from the top line performance with some strong global [ debt ] placements and with electivity contributing EUR 1.8 million in the quarter. Page 24, we can see our cash flow evolution. In the first 6 months at CTT's operating cash flow stood at EUR 37.8 million after a second good quarter in terms of cash generation, benefiting also from specific items contribution of EUR 2.3 million. In this EUR 2.3 million is including a EUR 14.4 million of capital gain with the sale of part of the bank's sovereign portfolio. And this capital use is partially offset by EUR 8 million of a noncash restructuring provision and other cash costs. The free cash flow stood at EUR 31.3 million, and our net debt is now EUR 61.7 million cumulated in 30 of June. Now I will pass to -- back to Joao for his closing remarks.

Thank you, Guy. Well, the outlook benefits from what has been able to do in this transformation path. A word on the contribution of Express & Parcels and the bank, our main growth areas that will -- it will keep fueling revenues growth, translating that into improved profitability, very much like it happened in the quarter. Then a continued acceleration of digital initiatives, some of them being expanded just fine will further strengthen our competitive position. We also remain cautious on the COVID-19 related impacts. And therefore, some uncertainty remains present. And we need to take that into account. And all in all, we believe we should expect to achieve above EUR 60 million in EBIT by the end of this year. The final word on the concession. Given that progress on that process allow us for reaffirmed confidence in the formalization of a sustainable new contract within the term of current extension, thus enabling a new contract starting on the 1st of January next year. So a very good quarter, a positive outlook. Thank you for joining us. We may now open the whole executive team for Q&A.

[Operator Instructions] The first question comes from the line from Filipe Leite from Caixa Bank.

I have 3 questions, if I may. The first one, if you can elaborate on what were the progress on the mail concession process that gives you the confidence that the new contractual resigned, namely if you already had access to the conclusions of the government working group? And also when do you expect the announcement of the contract conditions? Second question, on the real estate deal. An update on when do you expect to be able to announce something on that subject? And last plan regarding the end of the VAT extension of some online orders outside the EU. And if you expect a positive impact for CTT group since it will increase the custom clearance process, sorry, which I believe in Portugal are performing only by CTT or if you expect any negative impact in terms of volumes of these small parcels? And consequently, also a negative impact for you in terms of volumes, but also in terms of meet so basically to understand your view regarding this change in the VAT of these small parcels?

Thank you, Filipe. Well, on the concession, we've been participating in the preparation works. We had meetings in the firm across the working group appointed by the government. We have exchanged ideas and concerns. We have exchanged data. We have exchanged documentation. We have responded to periods related with the objections that we've made public to the extension namely and to the present regulatory framework. And well, the feedback that we had is one, and especially given the timing that makes us believe that things will be ready on time. That's why that way have decided to include these on the outline -- sorry, on the final outlook notes. Real estate, we are fully ready with fingering our trigger -- in the trigger. We have decided not to restart the concession process with this item. And therefore, everything has been brought to a point where whenever we want, we are going to do it. I will ask Guy to take the question on the end of the VAT, de minimis provision.

Let's see. The early days, it was -- we felt some decrease in flows. I think everyone was trying to prepare themselves to this new reality and some caution in volumes. Cross-border volumes was felt. We are now with some attrition on the operational process. And so we are seeing an accumulation of packets, in a way, if you can call it under processing, both here in Portugal where we have responsibility to implement this process. But we can also see that in Spain for our Express & Parcels operations. So it's something that is occurring everywhere. But we expect that now with things normalizing this flow to start coming across. Of course, we expect a positive effect from having additional some the custom clearance fees. Still to be assessed impact on the demand side of having a more complex process for customs and for customers in the demand of parcels coming from outside the European Union. So we think it will be mostly positive, but still to reassess the elasticity on demand of this more complex process.

The next question comes from the line from Antonio Seladas from A|S Independent Research.