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

Good day, and thank you for standing by. Welcome to the CTT 2021 Annual Results Conference Call hosted by Mr. Joao Bento, CEO; and by Mr. Guy Pacheco, CFO. [Operator Instructions] I must advise that this conference is being recorded today on Thursday, 17 March, 2022. I would now like to hand the conference over to your speaker today, Mr. Joao Bento.

Thank you very much. Good morning, everyone. Welcome to our webcast presentation of results. Well, 2021 was another transformation year. And indeed, so after the quarter, also very strong on transformation with new business outpacing the steady decline in [ Mail ]. So if you follow me on the first slide, Page 4, starting with Mail, of course, the most relevant event during the quarter was the signing of the new concession contract, whose framework improves predictability and allows for some parcel compensation of previous years, although the relevant compensation questions are being handled on an independent arbitration process. It goes also with this concession contract that because the first year, as you'll see, is a transition year, we have established the new products of 6.8% for this year. Again, on the Mail or reporting with mail business services, which remain -- with a good performance, which remains driving revenue lever and strengthening our commercial activity. So good behavior in terms of revenues from there. Moving to Parcels. The most relevant aspect we'd like to highlight is the behavior in Spain, which continues to drive growth in the Express & Parcels business area. And in particular, in the case of Spain, it significantly anticipated the turnaround plan with a yearly positive EBITDA for 2021, which is well ahead of expectations. On transformation operations, we see a positive impact in the cost structure, which is now showing up in a consistent manner. Also very good news on the bank, which continues its growth path on the back of consumer credit, more and more in a digital way. And a final word on remuneration. The proposal for the general meeting is a dividend to be paid in May 2022, if approved, of EUR 0.12 per share, but also a share buyback program of EUR 18 million, which is equivalent to just below 3% of market cap. And we reiterate our commitment to shareholder remuneration with significance. Moving to next slide, Page 5, a note on revenue. We see an improvement in the revenue mix, reflecting a further exposure to e-commerce growth in Iberia, but also growth in the bank and in the business solutions area. One of the most significant aspects that you might see on the pie chart on the left is that for the first time in our history, we closed the year with revenues in Mail below 50% of the whole lot. And looking to the right, in which we see the relative contribution of Mail, both in revenues and in operating profit from '19 to '20, that is a very sound, very graphic image of the transformation path that we are performing with Mail contributing less and less, but on a history of revenue growth which is, in fact, a very good testimony of the transformation path that we are following. Moving to Page 3 and some numbers on revenue and profitability. So we just mentioned driving a consistent revenue growth. So that is the most relevant aspect with revenues moving from EUR 745 million to almost EUR 850 million in the year. So while affirming what is clearly a growth path and history. And with very relevant contributions even in terms of profitability, not only revenues of the various business areas. And I would probably highlight the 21% of the EBIT generated by the parcels business in the year. And with that, if we move to Page 7 with further detail on parcels. We see a continued growth of the business driving improvement in profitability, of course, with a significant contribution also from Spain and very relevant growth year-on-year in the quarter with both in volumes and in revenues. Likewise, for the year in which we have observed a 38.4% growth in volumes to which we -- from which we have driven 32.5% growth in revenue. And I would say, allow me, an impressive recurring EBIT in the quarter that provides for a very interesting -- well, reaching almost 5% recurring EBIT margin in the year, if you consider Portugal and Spain together. But moving to Slide 8, we can zoom in in Portugal, where e-commerce trends reflect transformation in consumer habits. Volume growth despite slowdown in multichannel e-tailers, we've observed with easy of the -- easing of the lockdown retails, physical retail grabbing some share, but with significant improvements in the first and second lockdown -- sorry, a significant boost we have grown significantly parcels in Portugal. If we look at the behavior of cargo on the right, just note to highlight that it's the only decline we observed, but that's somehow good news because this is due to churn of unprofitable clients given the new operating model that we have established and is now successful being pursued. Moving to Spain. Finally, EBITDA, as we've seen of EUR 4.3 million, so we achieved breakeven well ahead of plan, the most significant achievement with almost 34% of volume growth in the quarter, which contributes to a similar almost 35% growth in revenues. And with this, we have this huge landmark of a quarter with positive EBIT of EUR 1 million. And therefore, we see spend with a consistent growth, translating into -- volume growth translating into revenue growth, but also on profitability and with a positive contribution for the business area. Moving to Page 10, more details and hopefully final review on the concession contract for the moment. It has been signed in the last days of the year. It's a concession contract for 7 years, as you know. We consider this to be a [ remarkable ] achievement for the quarter and for the year. And the main highlights already thoroughly disclosed that I will review some of the most relevant ones. Of this 7-year term, we have this proper 2022 year as a transition 1 and then 2 3 year terms and we have seen a change in the postal law that introduces a significant number of checks and balances, namely regarding price and quality. Now from now on, price from next year onwards, price is going to be set up through a negotiation process between CEP, ANACOM, the regulator and also the consumer director general for the period, for the first period of 3 years and again for the second period when time comes. And for quality, it's now government, the grantor who approves the terms and then a proposal from ANACOM, but following the European best practices with a bit more detail. So on top of a 6.8% increase for this year, which considers the decline in volumes not for last year, but for the first 3 quarters because when we signed, we were still in the fourth quarter. And also the contribution of the inflation index for transport. This, we hope will work as a proxy for the years to come. So a much more predictable and stable pricing scheme. And the set of principles that gear the price setting towards concepts such as efficient operation, economic and financial sustainability of the U.S. provider -- USO provider and so on. Moving to quality. Also, quite a few new attributes. One of the most relevant is that, well, for this year, if any penalty would be due, it would be translated into investment obligations. And our proposal that needs, of course, to be approved and the new quality parameters for the future, they should ensure high service levels, so significant quality to remain aligned with and I'm quoting "best practices in European Union," considering the average standards of the European Union countries applicable to each indicators. So we believe this to be -- and this is very objective, quite a significant achievement. And the price that we have to pay to accept these terms is that, well, given the change in the law, it would be very difficult for the grantor to ease the parameters in the first year. A final word on density, just to say that things remain roughly the same with this new condition of CTT store in each municipality, which is something that we have voluntarily performed before. And actually, we believed that it was a significant lever to change the way -- well, the society, the grantor and everyone looked at our stance in general. And with this word on the concession, I will hand over the floor to Guy to guide us through the transformation path and also the remaining business areas, and I'll get back to you for the final comments.

Thank you, Joao, and good morning. So starting on Page 11, where we show the transformation in the Mail revenue profile that we are implementing. We see legacy Mail revenues in this quarter continued to suffer from inbound and the ordinary mail declines that were partially offset by elections and the transformation revenues where we are leveraging the -- our existing customer relationships to sell BPO and other services. This business line continues to grow significantly, and that's what drove our decision to buy NewSpring in order to reinforce our competencies in these services. Going forward, the new concession contract that Joao outlined for you and the Business Solutions growth should support a stable and growing revenues on this business unit. On the next slide, we continue to double down our effort in interest forming operations and cost initiatives. We have been implementing new mail routes model, the shamrock that we shared a couple of quarters ago where we reached 60% of new mail routes optimized. And we are fully implementing a system that enables us to optimize the sorting of packets and delivered by mailmen with optimal size and weight to increase their productivity. We continue to negotiate suspension agreements with redundant employees. We closed 135 suspension agreements in the full year of 2021. And these measures are already showing to the staff costs. At the same time, we are implementing a work-life balance personal and professional development and the quality of opportunity initiatives within a familiar responsible entity certification process. Then on Slide 13, we can see our financial service retail with our retail network engagement fruitful commercial activity. Public debt placements increased 15.5% in the year. And our retail product services continued to grow also, with [indiscernible] growing 35.2% in the year. On Slide 14, we can see another solid quarter of growth on the bank. All credit areas with significant progress in 2021, mortgage loans growing 13.4% in the year. Auto loans 15.8% and our credit cards, the Sonae partnership reaching EUR 292 million, clearly ahead of our 12-months target of reaching 30 million and EUR 300 million. In customer resources, also a good year. I would highlight that off balance sheet savings grew 65% to EUR 709 million. A word on ESG on Slide 15. We continue to focus on ESG measures and alignment with the UN sustainability development goals. We once again achieved leadership in the carbon disclosure project. We increased 57% on our kilometers done through alternative vehicles and reached 80% in recyclable packaging and also a word on social, we donated more than EUR 0.5 million to social cause. Our carbon emissions declined 18.7% versus our science-based target of 2013. Now moving to our financial performance. And on Slide 17, we have our key financial indicators, where we can see the fourth quarter was a strong quarter in business performance with double-digit growth in revenues and a strong quarter in profitability with the highest quarter and EBIT margin in 2021, although declining 7.9% in absolute terms. In the fourth quarter, we saw our revenues grew 11.4% with all business areas growing, mainly driven by Express & Parcels and Banco CTT. And in the full year, we grew 13.8%. Our EBIT reached EUR 20.4 million in the quarter, a decline of 7.9% versus last year due to the decline in profitability of Banco CTT and Mail. In the quarter, a net profit of EUR 12.1 million and EUR 38.4 million in the full year, more than doubling 2020 results and our cash flow in 2021 at EUR 45.3 million. In the next page, we can see the detailed evolution of our revenues. As already mentioned, revenue is growing 11.4%, which reflects the consistent business transformation, reducing the dependency of legacy business and benefiting from increased exposure to Express & Parcels, Banco CTT and Business Solutions. In the fourth quarter, Express & Parcels continued to reach a new revenue record, driven by the performance in Iberia, Spain growing 34% in volumes and revenues in the quarter on the back of market share gains and e-commerce development, Portugal growing 7.5% in volumes and 1.9% in CEP with the market showing a slowdown in growth of all. Mail and other business growing 8.8% or EUR 10.2 million driven by the development of Business Solutions, including the acquisition of new spring services. Business Solutions increased EUR 12.8 million in the quarter and mail and sensible structure declined EUR 2.6 million with general elections partially offsetting the decline in inbound national mail. Financial Services improved its commercial dynamics, both in savings and retail sales growing 13.1%. Banco CTT growing 19.7%, expanding net interest margin driven by consumer credit and commissions as we continue to monetize our bank customer base. On Slide 19, we can see the evolution of OpEx that grew 13.6% in the quarter, driven essentially by increased activity and Express & Parcels, a growth of EUR 6.4 million or 11% as a result of volume in Iberia expanding 17.2%. In Spain, gross margins continue to expand with gain in scale and investments in automation. In Portugal, a slight decline in margin as a result of lower-than-expected volumes and investments in additional capacity. At the same time, this additional capacity enables us to improve significantly our quality of services that we think it will be important for market share gains in the future. Mail and other OpEx growing EUR 11.9 million or 11%, EUR 12.8 million coming from Business Solutions, a combination of the new spring consolidation, growth in that business line and mainly a big deal with the indication of education ministry for the sale of computers that is mainly top line and low margin due. Financial Services and Retail growing EUR 1.1 million related with cost, direct cost increase in line with the increase of retail sales. Banco CTT with an increase of EUR 6.4 million, EUR 3.2 million coming from impairments that imply 1.1% of cost of risk, EUR 1.2 million higher in auto credit versus last year fourth quarter, which was a very good quarter in terms of cost risk in that business line and due to the introduction of [ Universe ] credit cards partners. We also have an increase of EUR 1.2 million related with commercial and retail activity that resumed after last year lockdown after the effects of the pandemic. In Slide 20, we can see the evolution of our EBIT despite being the strongest quarter in 2021, fourth quarter. In the fourth quarter, our recurring EBIT declined to EUR 20.4 million due to the Mail division and Banco CTT performance with growth in Express & Parcels and Financial Services. In the quarter, Express & Parcels growing EUR 1.5 million, reflecting the signage operational improvement on the back of some growth. And we bid in that region, reaching EUR 2 million improvement. Portugal declining EUR 0.5 million, as already mentioned by lower-than-expected volumes and the investments we've done in capacity. Mail and other, despite strong growth in Business Solutions was not sufficient to accept the decline on national inbound email, which have, as you know, a very high incremental margin that was not upside. Financial Service is also benefiting from revenue growth following a strong public placements and retail activity, growing EUR 0.4 million in the quarter. Banco CTT declining EUR 1.9 million, EUR 1.2 million due to the higher cost of risk of auto loans versus the quarter where they benefited from a very low cost of risk last year and the costs related with retail and commercial activity after lockdown. In the year, we reached EUR 60.1 million, in line with our guidance. In Page 24, we can see the cash flow evolution. In the full year, CTT operating cash flow stood at EUR 61.8 million, growing EUR 18.8 million, in line with operational performance. CapEx stood at EUR 36.1 million and increased EUR 2.7 million due to a higher investment in Express & Parcels where we continue to expand capacity and technology and automation. Free cash flows stood at EUR 45.3 million, our net debt is now EUR 58.9 million at year-end. And I now pass you back to Joao.

Thank you, Guy. So moving to Slide 22. The main highlights for the days ahead. And we believe business transformation and operations optimization, clearly, the main pillars for this year. And how is that going to happen in parcels by expanding the integrated Iberian footprint. We believe it will enable grabbing the full potential of e-commerce, the convergency between Portugal and Spain, reminding that in Spain, there's a lot of market share to grow. And in Portugal, we have already significant market share. Therefore, we need to make the market grow itself. Then by continuing to implement transformation initiatives that may drive revenue sustainability by keeping -- reducing the dependency on traditional mail services as -- very much along the lines that we've exhibited for 2021, and on the Mail, by improving structurally its profitability given a more balanced and sustainable concession contract. And indeed, the price increase that we have already achieved this year and hopefully, it will be higher in the years going forward. Also, by propelling the bank's growth, underpinned by balance sheet optionality and by potential equity and industry partnerships. We've been using the industry partnerships in a very interesting way, and we believe there is no time for more of that and also equity partnerships. And we also hope to compensate the pressure in email in the Mail generated by the revenues generated by Mail through the implementation of profitability and efficiency initiatives, which now are starting to become visible and also consistent. And a final note on the exploitation of inorganic expansion opportunities in logistics and in performance segments in Iberia that we will follow with attention. Moving to Page 23 and a note on shareholder remuneration. We hope to improve shareholder remuneration, and we are indeed doing so while maintaining financial flexibility. So this is the equilibrium we want to generate following easy key principles. The first one, by stating an ambition to implement an attractive shareholder remuneration policy, constituting an adequate source of income for the shareholders, of course, which will -- but one that will enable CTT to continue to pursue its objective of investing in business growth in transformation and diversification and to be a reference player in Iberia for logistics and e-commerce. And we hope to do so by combining, well, a portion of recurrent dividend base that should be exactly that, recurrent and steady with an opportunistic shareholder remuneration on share buyback and subsequent cancellation of shares, depending on specific market conditions. And with that in mind, we are proposing to the general meeting, as I said in my earlier words, a dividend of EUR 0.12 per share to be payable in May. And also, we are announcing also -- or we have announced also a share buyback of 18 million shares (sic) [ EUR 18 million shares ], equivalent to 2.7% of market share at the existing value and to be implementing along this year. And with this, I invite you to move to Slide 24 for a final word on guidance. Well, we are basing our guidance on a high single-digit decline in low volumes. On a low double-digit growth in Iberian Parcels volumes, well, subject to normalization of supply chains, they are already significantly disturbed namely with source in Asia. On a mid- to high single-digit revenue growth, that should therefore derive recurring EBIT for the year expected to be in the range between EUR 65 million and EUR 75 million. The EBIT generation is to be more geared towards the end of the year, the second half because the de minimis impact is phasing out in the first semester. The annual price increase already started just now on the last week, on the 7th of March, and the parcels are exhibiting more demand in comparable first quarter due to the lockdown period we had last year. And all this with a significant risk outlook, and I would like to be clear on this. We have identified the most relevant ones, macro risks are relevant and that seem to be some of them at least persistent. Obviously, geopolitical uncertainty, that's the matter of the day, inflation and in particular, cost of energy and of raw materials and also the impact of the de minimis and inbound. Then the COVID-19 pandemic, we were hoping to get rid of this one, but it's now, as you are -- might be aware, it's now emerging again. So it represents and remains a relevant risk factor. And also, other severe risks in the functioning of logistics chains, as I said, mainly originated in Asia, since most of these chains are for the moment extremely disturbed. But with this in mind, we think that we will be able to continue growth and transformation. This is -- these are the main attributes of our equity -- sorry, growth and transformation, notwithstanding a challenging environment. And with this, myself and the team and Guy and the team are ready for answering to your questions. Thank you.

[Operator Instructions] The first question comes from the line of Marco Limite from Barclays.

My first question is on your capital return policy. And can you just give a bit of color why you decided to split the total cash return to shareholders, broadly 50% via dividend and 50% via buyback? And if we can expect this policy also going forward? So if we can expect buyback also in '23, 2023 and 2024 and going forward? And my second question is on the outlook. So can you provide a bit of color on what we should expect in terms of outlook by division? Is a fair assumption to assume main profitability now kind of stable, thanks to the letter price increase and some of more cost savings coming through and be more growth from the other divisions? And the third question is, if you can provide a bit of guidance also on CapEx for next year?

So why we decided to split, we would like to make it clear that the recurrent remuneration is going to be through dividend. And we are also trying to combine that interesting remuneration, as I said, with the need for us to keep growing and grabbing opportunities. So this needs to be a balance between both point of view. The reason why we decided to do this is that we have no obstacles related with cancellation of shares. And so we thought that we should sign that this is an option we have to deliver we have for remuneration. But we'd like to make it clear that it's going to depend on availability, excessive cash or opportunities. And we believe that we are in that condition and we wanted to do something that would be, well, meaningful without being extremely significant. So it's a way of sharing alternatives. As for your question should you expect this in the future on a recurrent basis, no, the idea is that share buyback is going to be done eventually on an opportunistic manner. And for the outlook by division and the guidance on CapEx, I will move the floor to Guy.

On guidance by division, starting by the bank, you should expect a similar growth profile in profitability this year as we saw last year. Financial Services with a low single-digit growth. On the other divisions that are more linked to the uncertainty of the context, be it on the logistics and the cost inflation pressures. We continue to see strong growth on Express & Parcels geared to the second half due to a difficult comparable this year versus last year and coming with the meaning from Spain and the profitability profile that we are seeing in Spain. On Mail, it's where we -- it's -- it depends more on the context in terms mainly of cost pressures and inbound evolution. It will depend very much all those conditions, if we can get an improving profitability on that division or a more flattish, slightly declining profitability, but that is where the uncertainty is higher at this moment. On CapEx, we are seeing the CapEx around EUR 40 million that includes EUR 2 million for the low-cost JV and some increase on the investments in automation and Express & Parcels.

The next question comes from Lane of Filipe Leite from CaixaBank.

I have 3 questions, if I may. The first one is related with the increase in energy costs and oil prices. And how do you see your pricing power on Express & Parcels segment, do you believe that it will be possible to make some kind of pass-through at least partial of this energy cost increase or do you consider that the market is highly fragmented and highly competitive. And for that reason, it will not be possible to dispatch through of energy cost price increase with an obvious consequence in your margin? And second, on real estate, and if you can give us an update on your intention to sell at least part of your portfolio. And when do you expect to announce something on that front? And last one is about related with quality KPIs on Mail. I understood that this year you will not be penalized in Mail price for not comply with quality KPIs. Instead, you can have some kind of additional CapEx obligation. My question is to understand and if you can provide us, what could be the maximum additional CapEx if you fail all the quality KPIs that are currently set?

On energy costs, and this Guy is complementing my answer. But first of all, we are hedged until the end of this year, and we are also speeding up some of -- so we are also speeding up alternative sources of energy, but give you a complement on this. Given your question regarding, well, how can we handle this vis-a-vis our customers. We have roughly 1/3 of our revenue already hedged by contractual terms. With the negotiations for the price increase, normal negotiations on price increase, we are also structurally changing that for another 60%. And then there is a remainder part, a smaller part of large customers with whom we are now discussing a temporary overtax given the extraordinary situation. So these are the plans. Part of the revenue is protected another part will be protected and for good with a structural change similar to the one we have already and then this temporary thing with the large customers. But we will complement on the energy costs and also, we'll give you a word on real estate. Moving to the quality KPIs. There is a cap of 3%. But what we are expecting is that no additional CapEx would be required because there is a significant CapEx, let's call it, recurrent on -- that we can well turn eligible for this purpose. So our expectation is that if some of these would occur, it would generate no additional CapEx needs. And with this, I will ask Guy to complement on the cost and real estate.

Yes, complementing on energy costs. So we -- on electricity, we are hedged until the end of the year, so no issue on that. On that side, on fuel, of course, it's not the case. There, as Joao mentioned, we have 1/3 of clients already with fuel index tariffs. We are looking to index as part of our normal price -- yearly pricing negotiations another 1/3 and the remainder 1/3 that are the big customers that you can imagine who they are, where we are trying to negotiate a temporary tariff, extra tariff to face these current effects. Let's see how we can -- what is the percentage, which is the percentage of cost that we can offset without a renegotiation. On real estate, we are resuming the project after closing the concessions last month and we are expecting to give news on this during this first half of the year.

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

Is just one. So regarding the bank, you mentioned that event should continue to grow, I think has been growing. I guess that we'll ask for more capital to keep the core equity Tier 1 close to 15%. So I'm thinking well or do you believe that the bank will be able to grow without new capital increase?

Of course, the bank will need more capital to grow. But as we mentioned before, we think that we are organic -- we have organic ways of optimizing the bank balance sheet to account for the growth we are planning. In other words, we are -- we'll need to increase the cost that one of the bank, but won't be through additional capital injections from CTT.

The next question comes from the line of Artur Amaro from CaixaBI.

Just one question, if I may. I see on the outlook for Express & Parcels that you are anticipating low double-digit growth in terms of revenues. You've reached the positive EBITDA, the breakeven of Express & Parcels before expectation -- before expected. What can this mean in terms of EBITDA for next year, if you could give us some color on that?

We -- as I already mentioned, so we continue to see the low double-digit growth in volumes as it stated on the presentation. And we continue to see significant progress in -- at the profitability level. We give guidance and EBIT. We are seeing significant growth still this year on that front. And I think we can -- you can assume the same trend in EBITDA.

[Operator Instructions] There are no further questions. I would like to hand over back to our speakers for closing remarks.

Thank you, Nadia. Well, I'm reminded that I eventually mentioned 18 million shares in the buyback. It's in fact EUR 18 million, as you might have read. And with that clarification, I will thank you again for attending and for your questions. And as always, we remain and our IR team remain available for you in the forthcoming days. So again, thank you for coming, and have a good day.

That does conclude our conference for today. Thank you for participating. You may all disconnect. Have a nice day.