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

Good day, and welcome to the CTT 9 Months 2022 Results Conference Call with João Bento, CEO; and Guy Pacheco, CFO. Today's call is being recorded. I will now hand the call over to João Bento, CEO. Please go ahead, sir.

Thank you, Diane. Good morning, everyone. Welcome to our third quarter webcast. I believe we have set of good news today. Starting with slide -- the first slide, which is Slide #4 with the key takeaways from the quarter. As you've seen, we have a positive revenue trend across all business areas in this quarter with the financial components performing better than we planned, Financial Services & Retail and the bank performing very well. And this positive revenue trend occurs in a challenging economic context, reason why we value that even more. And the result is that we have a third quarter recurring EBIT of just over EUR 20 million, a significant year-on-year performance growth versus last year. As for the cash flow, we also -- we have also exhibited a strong operating cash flow generation in this quarter of EUR 40 million versus EUR 3.5 million (sic) [ EUR 13.5 million ] in the equivalent quarter last year on the back of efficient working capital management, in particular, with improved collections from important clients. Then moving to parcels, we have positive news for different reasons in Portugal and Spain. While in Portugal, the volumes grew 5.8% in the quarter, so resuming a growth path. In Spain, it was the revenue per parcel, so pricing dynamics that resulted in growth, while the volumes remain relatively flat. Then we had an outstanding performance in the public debt placement in the sense that with the existing context for interest rates, the offer we can -- and is becoming very interesting, and therefore, an outstanding performance from Financial Services business area. And finally, for the bank, volume growth across all business segments in the bank resulting in both revenue growth and a very significant expansion on return of tangible equities. That is benefiting from repricing of short-term interest rates. So a business portfolio that is hedging itself very well and providing a very good performance in the quarter. Moving to slide #5, which is second slide. While the parcel sale is most important to obtain solid operational and financial performance in the quarter as anticipated. Revenue growth for the year is now -- for the quarter was in line with the figures for the year with an 8.1% growth in revenues and an outstanding growth in terms of the recurring EBIT, which -- with EUR 20.1 million in the quarter. As I said, this was mostly driven by the financial -- the component Financial Service and the bank with significant growth in revenues, but mostly on recurring EBIT. The numbers talk by themselves. Revenue growth across all areas and a very significant contributions in recurring EBIT in all the areas Express & Parcels. Moving to EBITDA in Slide #6 regarding E&P Portugal. As previously referred, upturn in the volumes, while EBITDA was penalized by operational constraints and inflation, which are pressuring operational costs and also suffering from operational constraints regarding hiring of people for the Mail during the summer. In any case, we've seen volume growth resuming. And the chart in the left-hand side is quite representative of the new trend. Its generating, therefore, a slight growth in revenues for the quarter. Moving to slide #7. We have, as we said, a good performance of parcels in Spain for different reasons. So despite the evolution of the average revenue per item drove inside significant profitability, on the left-hand side we see a flattish volume performance and -- which in itself, it's significant because e-commerce in Spain is declining in absolute terms. And with this revenue per item improvement revenue evolved very positively, 12.5% to EUR 31 million in the quarter, which then leads to an impressive evolution of EBITDA of above 300% versus the year-on-year -- similar quarter last year. Moving to Mail in slide #8, where we see stable trends in addressed Mail volumes, which is in percent, while inbound continues under pressure now with the decline which is lower in relative terms, but still considerable. So we can see on the right-hand side on the addressed Mail volumes chart declining starts stabilizing at around 4%, so slightly lower -- or significantly lower this decline than before and the current is steady. On the left-hand side, we see inbound, although at lower level than before, still declining quite significantly. As we've seen this before, this is very much associated to the fact that e-commerce parcels are no longer using the Mail networks, well, globally. Moving to slide #9, an increased detail on behavior of Mail. We have regulated price increase affecting almost 60% of revenues, while competitive segments that is Mail where we have competition showing volume and revenue growth. So these are both good news since for the regulated pricing, we have now a price increase that somehow provides for a different, more positive behavior than before. And in public competitive Mail, we've been able to grow on revenues. And then we have this already mentioned impact on inbound Mail that is now starting to decline. And with this, I will pass the floor to Guy to guide us through the financial aspects of the business in the quarter.

Thank you, João. So starting -- Good morning, starting on Slide 10, where we can see our Financial Services & Retail that have a strong revenue growth driven by a very strong performance in public debt placement that grew 40.5% and a similar growth in Financial Services revenue. This is on the back of the increased attractiveness of our short-term product, [indiscernible] that's right now have very interest rate and assets are driving and increased demand. Strong demand that we still see during this month. On retail and product services, also a small growth of 1.7%, where we continue to have the impact of the renewed commercial dynamics on that segment. On the next page, we can see the Banco numbers. Banco CTT have a revenue growth and return on tangible equity expansion driven by growth in volumes. In fact, we had the double-digit growth in every credit line. So on auto loans 18.2%, on mortgage 11.3% and on credit cards under the Sonae partnership with 41.1%. Our customer resources also increasing 20.9%, both on deposits and both on balance sheet -- off-balance sheet saving. Our return on tangible equity now stands in 4.7%, clearly in-line to the past with the double digits that we aim in the medium-term. On Slide 12, on ESG, we choose to show the breakdown of our carbon footprint to see the challenges that we have ahead of us in the path to be carbon neutral in 2030. Of course, being a logistic company, our challenges is within the fleet emissions that account for 72% with our own fleet or subcontractors. And that's what we are doing on -- we are moving aggressively to green vehicles. On the next page we see our ESG long-term commitment. So on environmental, it's net zero by 2030. On social, having gender parity in '25. On top and mid-management -- and try to have a positive impact on our local communities, dedicating 1% of our EBIT to attend. And on governance, having incentives linked to ESG, at least 50% of our top and mid-management. In terms of highlights, we -- of 2022, we stated a few. How are we going to focus on the 5 electric -- 100% electric cuts on the country. We increased 90% with electrical vehicles. And we just launched this partnership with EDP, where we're being building 40 solar energy communities that will enable us not only to reduce our carbon footprint, increase our own production, but will stand at almost 20% of our electric bill and also providing real benefits for the local communities that can benefit on their energy bills. We also are in line with the commitment to the invest 1% of EBIT with already EUR 0.6 million invested in social initiatives. Then moving on to the financial review. I'm starting on Slide 15 where we have our key financial indicators. We can see what we consider a very strong quarter with growth in revenues, EBIT and cash flow, and healthy growth in revenues of 8% with all business units contributing positively. Our EBIT increasing 82.7%. And in the quarter, our net profit reached EUR 13.8 million, growing 50% year-on-year. And our cash flow reaching EUR 28.1 million in the third quarter. On Slide 16, we can see the detailed revenue evolution. As I mentioned, a growth of 8.1% with the biggest contribution coming from Express & Parcels and Banco CTT. In the third quarter, Express & Parcels growing 7.6% in revenues and 2.6% in volumes. In Portugal, volumes recovering to growing 5.8% and our SAP revenues grew by 4%. In Spain, the volumes remained flat, although with a sequential improvement in the volume trend with our Chinese customers, improving the overall number of volumes, although our big accounts still facing some pressure on volumes. Higher price of parcel is supporting the revenue growth with 12.5%. Mail & Other growing 2.4%, positively impacted by the consolidation of NewSpring and growth in Business Solutions that contributed with EUR 4.3 million of growth. Revenues on Mail declining 1.7% or 1.8% -- sorry, EUR 1.7 million or 1.8%, mostly coming from inbound revenues. We continue to see stabilizing trends as João shared with you on the back of Mail pricing with -- in the regulated parts and win backs on the competitive Mail. Financial Services also growing 29.1%, with extraordinary performance of public debt services. As I mentioned, we will increase 40% in placement. Banco CTT continuing the strong parcel growth, so also growing 21.5% with expanding net interest margin and commissions on the back of the increased monetization of the bank customer base. Slide 17 shows us our OpEx that grew 3.8%, mostly driven by parcels and Banco. In Express & Parcels, we increased 5.1% or -- sorry, EUR 5.1 million or 8.7% especially in Portugal dual inflation impacting unit costs and the constraints on the base network of hiring people to face holidays during the summer presented us to use the base network as much as we normally do in order to have increase efficiencies by synergies between the network. We also had additional investments in capacity as what were our previous plans, and that are still impacting OpEx. In Spain, productivity gains offsetting the inflation impacts and as such, a good performance there. Mail & Other declining EUR 3.8 million despite of having EUR 3.9 million increase on Business Solutions, but coming from the NewSpring consolidation. The remainder of the business unit declining EUR 7.8 million in OpEx, mainly due to the change of our headquarters in Lisbon. Financial Service growing EUR 0.9 million, basically linked with the increased activity, and Banco with an increase of EUR 4.9 million out of which EUR 3.1 billion are related with cost of risk in the third quarter '22 our cost of risk, excluding 1.5%, and increasing from 1.1% in the third quarter last year. The cost of risk remains volatile, namely on the credit cards. We have implemented measures to improve our collection process with already some benefits in the quarter, and we expect those benefits to continue to show in the coming quarters. On Slide 18, we have the evolution of our EBIT that will grow EUR 9.1 million with Mail and Financial Services and Banco CTT contributing positively. In the quarter, Express & Parcels declining EUR 0.6 million due to Portugal performance with inflation and investments in capacity and lower price per item impacting margins. In Spain, good performance and price per object, coupled with higher efficiencies and driving margin improvement. And in Mail & Other improving EUR 6.4 million due to the cost reductions, especially the impact on the change of quarters - our headquarters in Lisbon. Financial Services growing EUR 2.6 million on the back of the extraordinary performance on placements and Banco CTT growing EUR 0.7 million due to strong growth in banking products, although still impacted by higher cost of risk in the third quarter. In Page 19, we can see our cash flow evolution. We have a very good quarter in cash flow. Our operating cash flow reaching in the 9 months EUR 59 million, with working capital management improving during this last quarter. Our CapEx is standing now at EUR 19.9 million, growing EUR 1.5 million versus last year. And the free cash flow in the 9 months is reaching EUR 31.9 million. Our net debt now stands at EUR 63.2 million. And with that, I'll hand it over to João to -- for his final remark.

Thank you, Guy. Well, in page 20, we resume what our final remarks regarding guidance. The economic context remains not only volatile, but very challenging in -- particularly for CTT in demand and inflation being very significant. This was already flagged by us and all our industry players. Nonetheless, the quarter and the cumulative results in the first 9 months confirm the anticipated recovery trend that we have announced and presented during the Capital Markets Day that are anchored on the measures that we have announced and are implementing. And therefore, we remain committed to continue to undertake all the necessary initiatives to deliver on the guidance that have been identified and that will be executed. But it depends -- the outcome depends very strongly on economic conditions in Iberia that are not evolving in the best sense.. And with this, we would be open for Q&A. Thank you.

[Operator Instructions] We will take the first question from Marco Limite with Barclays.

My first question is on the exit trades and October rate for parcel volume growth both in Portugal and in Spain, given that you have mentioned macro somehow softening. Have you seen -- yes, what can you tell us about October's rate for parcels growth? Second question is about your medium-term EBIT guidance of EUR 100 million to EUR 120 million by 2025. So just wondering if over the kind of macro conditions or the macro drivers you were baking in that guidance and if that macro conditions have kind of deteriorated compared to your assumptions? And third question is a bit slightly more technical. When I look at the Mail P&L for Q2 results, clearly, EBITDA was strong, thanks to some cost savings you achieved from your headquarters cost savings. But I also see a special item below the EBIT line. So I was just wondering if we should read that as a one-off cost sort of -- yes one-off costs in order to achieve those cost savings, which are structural.

Thank you Marco. I was also muted. So concerning the first question, growth in Portugal and Spain parcels in October, we are observing a similar trend as we are. So I wouldn't provide any additional color on that. As for the mid-term EBITDA and the macro assumptions, it is obvious that well, they have been worsening. But let me recall that we had an interval. So you should probably start looking -- using that interval in an environment where the macro guidance have been -- are not evolving in the better direction. As for the cost savings, I will pass the floor to Guy.

Yes. So on the cost saving, we -- so we -- on the third quarter we book a saving related with the movement -- of moving our headquarters to a different and smaller place. That has a cash saving -- part of that booking is the cash saving that we have this year that will recur next year fully cash during -- not in -- so concentrated, but linearly distributed through the year with an equivalent amount. And on the specific items, you are right. It's the extraordinary expenses that we had to move between headquarters that will not recur. And as such, we book that as a specific item.

And we will take the next question from Filipe Leite with CaixaBank.

I have 3 questions, if I may. The first one is actually a clarification regarding the potential agreement at Banco CTT and the expected financial product distribution agreement. Just to clarify, if it will include or not the public debt during -- being sold by CCT. I mean you will continue to sell [indiscernible] despite this agreement or not? Second question, regarding E&P in Portugal, and reason why -- if you can explain to us the reason why EBITDA dropped so significantly in this quarter despite top line increase? And what should we expect for this quarter, fourth quarter and next year in terms of EBITDA margin for this Portuguese E&P operations? And last one, considering your stable balance sheet position and the completion of share buyback, if you are considering further share buybacks for this year or for the next one?

Thank you. Well, concerning the potential agreement with the bank, we've made an announcement tonight. So we don't intend to detail anything else prior to a final communication. But regarding the specific question you have, I can be absolutely clear on that. So the placement of public debt is something that will remain within the CTT network, and it's not -- it was not and will not be a matter for CTT and this is an important fundamental pillar, I'd say, with our partnership with CTT. So regardless of what's going to happen soon about this agreement that we've mentioned, it has no relation with the public debt. On the EBIT decline in E&P, there are at least 3 fundamental aspects we can modelize. One is that inflation is very strong on the cost side, in particular for land hauls because of the -- because not only of wages, but also on -- of petrol costs. Then we've been investing in capacity. And we have now, in fact, suffering a little bit that we need to improve volumes to be able to regain part of those margins. And there is this very specific thing that happened throughout the summer, which -- well, Guy already alluded and myself, that is we have a strong need for holiday replacements during the summer. Regardless of the management we do, try to spread holidays in the distribution network across the year, but there's always a significant concentration during the summer. And in this particular year, with basically full employment, it was very difficult for us to replace. At some stage during August and September, we had close to 200 positions to fulfill. And with that, we could not use as much as we would prefer and predicted the base network to distribute parcels and which is a very significant impact on costs and therefore, has a affected the margin. And with this I will pass the floor to Guy again.

Yes, just complementing so -- beyond those effects we still have also some pressure on average revenue per item that is pressuring margins. Going forward, we have a number of initiatives to correct things and we see margins in -- EBIT margins in Portugal resuming levels close to high single-digit. On share buybacks, that was your last question. We remain vigilant. We have a strong balance sheet. We continue to see our opportunities mainly between having additional shareholder remuneration and building on strengthening our competitive positioning. As we mentioned on our Capital Markets Day, we continue to invest on reinforcing our competitive stance in Iberia. If there is opportunities that we can fill or pursue in order to reinforce mainly on Express & Parcels, our competitive positioning. But we remain vigilant vis-a-vis what is the share price, maybe we can announce another share buyback in the near future, but no commitment at this stage.

[Operator Instructions] We will take the next question from Artur Amaro with CaixaBank Investments.

Just one question. If you can give a little color, some detail on -- to explain what the better operational performance of the Mail business in this quarter. So there is a 70% increase in terms of EBITDA in this business, if you can give some explanation on this matter, please.

Thank you, Artur. So there are basically 3 fundamental reasons. The first is reminder that the third quarter last year was the first quarter we had a full impact on inbound mail decline that was heavier than we expected. And as such, since then, we have been redimensioning our network to accommodate the new reality. And at the same time this year, we have better performance in terms of volumes that are stabilizing and price lever there to help us on the revenue side. On this quarter, we started to see the effects of the measures of cost cutting that we announced during the second quarter flowing through the P&L. The most emblematic of those is the change of our headquarters that contributed with EUR 3.4 million on the quarter. So if the comparison with last year, because last year, we're still very depressed by the effect of -- the new effect of inbound and no time to react to that new reality, it's stronger performance on revenue and the cost savings that are -- we are being -- we are implementing.

[Operator Instructions] We'll now take the next question from António Seladas with A|S Research.

They are both related to the bank. First one is related with the cost of risk. You already mentioned that is related to the problem with collections to some high -- credit cards portfolio. I don't know if you can provide more color because it was 1.1% or 1% 1 year ago, 1.3% at the end of the second half and now 1.5%. There's any idea what will be the top of the level or it's 1.5% it's a figure that you believe is sustainable in the medium term? And second question is related with net interest margin that according to your slide was flat year-on-year year-to-date, which is interesting because interest rates have been increasing, and so banks are benefiting. So I was expecting a slight improvement of net interest margins. So I don't know if you can explain why it's not improving the net interest margin?

Thank you, António. I'll be starting for your last question -- with your last question. You are right, but please take in consideration 2 things. First, that it will take time for the repricing on our -- mainly on our mortgage credits to kick in fully, and there will be -- as it is -- or rather 12 months, the repricing will still take time to kick in. Nevertheless, the underlying net interest margin is increasing, but we have the dilutive effect to account on this quarter of the securitization we did in June. As you know, the securitization has some dilutive effects from our net interest margin. But the underlying is increasing. It will take time to show, especially because of the securitization as repricing of the -- mainly of the mortgage credit kicks in. On cost of risk, it's something that we already mentioned last quarter. We had an increased cost of risk, namely on the credit cards versus the discrete quarter last quarter, we had a special improvement was 1.7%, now stands at 1.5%. We see those measures continue to -- that we are implementing to improve. And we see between -- during next year, a cost of risk between 1 -- around 1.3%, 1.4%, it's where we see cost of risk moving. So decreasing from the current levels as the corrective measures that we are putting on the collection processes take full benefit.

Can I ask you, if it's like the new portfolio or is the portfolio that you -- with portfolio that you both -- or its -- or at both portfolios?

It's within the universal partnership. So it's -- because it's on collection, it's on all, of course, the new credit cards are more exposed.

And there are no further questions. So I will turn the call back to the speakers for closing remarks.

Okay. Once again, thank you all for coming. I believe we've shown a very good quarter. We remain attentive with the concern and declining economic outlook. And as we said -- as I've said before, we are going to do all it takes to try to execute all the measures we have to fulfill the guidance. Thank you for coming, and good morning.

Thank you for joining today's call. You may now disconnect.