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

Hello, and welcome to the CTT Full Year 2022 Results Conference. My name is George. I will be your coordinator for today's event. Please note, this conference is being recorded. [Operator Instructions] I would like to hand the call over to your host, Mr. João Bento, CEO; and Mr. Guy Pacheco, CFO, to begin today's conference. Please go ahead, gentlemen.

Good morning, everyone. Welcome to our 2022 final year results presentation. I would invite you to follow me through the presentation, so if we start on Slide #4. So our main highlights for this, of course, that we have been able to meet the guidance in a quite challenging macro environment. Looking at the left bottom -- sorry, top bottom left corner, starting with Parcels in Portugal. We've observed a recovery of volumes along the year, starting from a decline of 7% in the first quarter to an improvement of 12% in fourth, a steady monotonic improvement. While in Spain, deliveries were slightly different because volumes were lower. In fact, the whole of the Spanish e-commerce market became, well, depressed last year, but our focus on revenue per item growth and scale drove profitability. On Mail, we still felt the impact of de minimis cancellation and the elections of the previous year. But apart from those effects, there was a mild traffic decline, which also -- which is also a consequence of a very solid commercial performance and significant retain of large clients. And we've observed a positive contribution from business solutions to this million dollars business area. Moving to our retail network and mostly on public debt. we have observed record levels of demand of debt certificates. We've been able to beat records in October, November and December consecutively. And so a significant revenue growth on Financial Services and Retail, given the favorable interest rate environment that, as you are aware of, persist. We are also repositioning the retail network towards a service network to drive future growth, as announced during the Capital Markets Day, with a slight impact on the product numbers as you're going to see later on. Finally, moving to the bank. It has delivered growth, interesting growth, both on volume and profitability, remaining with a prudent balance sheet leverage with the new -- by the new interest rate environment, which provides an interesting outlook. This is what was a very important year for the bank given the deal that we've stroke with Generali, and therefore, bancassurance is new growth avenue that should grab relevance starting this year. On Financials, on the right side of the slide, so the main highlight is the fact that revenues grew 7% -- 6.9%, more exactly year-on-year with a positive revenue trend across all business areas in the quarter, especially in financial year -- in Financial Services and the Bank. And with that, again, we've been able to meet the guidance with a recurring EBIT of EUR 64.5 million or EUR 65 million representing a 7.4% growth year-on-year. Strong performance in terms of cash flow generation amongst other things, because of improved collections. And against the backdrop of share buyback and dividends paid, we have consolidated net debt and with Banco CTT equity accounted, the numbers stay at EUR 29.8 million and EUR 192.6 million, respectively. Finally, given the fact that we have this new interest rate environment, the reduction in net employee benefits reduced significantly EUR 54 million to roughly EUR 150 million. So with this, I invite you to move to Slide #5, which provides us a bit more detail on the quarter financials and in the year-end. And again, with a positive contribution from the financial area of the business portfolio, outpacing and more than offsetting the slight decrease in the logistics part of it, a significant improvement on the recurring EBIT in the quarter, 26.3%, and this is the composition of business profile and figures that enable us to reach the final numbers of EUR 906.6 million of revenue and EUR 64.5 million recurring EBIT that I have already stated. Moving to Slide #6 and getting into the details of the business areas, starting with Parcels in Portugal. Again, as I said, the steady recovery in volumes and revenues, but profitability pressured by inflation, mainly labor, fuel inflation and also investment in capacity that we've done before and now starts to be present in our cost structure. If we look at the chart in the left, it is a very interesting graphic depiction of the steady growth in volumes, as I mentioned earlier in the call from minus 7.2% to plus 11.6%, and volume growth remains and the inflation effect once -- well, we are able to pass most of them to the customers, will also improve significantly our profitability profile. Again, on Slide #7, as stated before, in Spain, things were a bit different in the sense that the market context has placed significant pressure on volumes, but we've been able to grow average revenue per item and also improve further efficiency on the cost side and this drove profitability in a way where we've been able to offset the decline of around 11% in volumes to, well, a flattish revenue performance in the quarter. And looking at the right-hand side and because we've stated from the beginning of this management team addressing Spain, that EBITDA was the metric in which we were trying to well, monitor improvement. We observed a very significant profitability of almost 30% in the year. Moving to Mail on Slide #8. Again, a bit more detail on top of what I've said before, a stronger average revenue per item, especially on back of Premium Mail that will adjust mail revenues and also significant fact that we would like to highlight, which is a softer volumes as opposed to mild decline. And looking at the right-hand side chart, without last year's election effect, we observed a very mild decline of 3.5% on Mail, which is a decline rate that we didn't observe for quite some time. This is also visible on Slide #9, which is -- which shows that, again, elections apart, the decline was interesting, both in volumes and in revenues. On the bottom part of the slide, there is a [ quarrel ] about the inbound mail and de minimis impact. It's now starting to flatten, but it was in absolute terms still relevant. We believe that this is, in fact, probably the last time it happened since it's now starting to improve, and we observed that even in the beginning of this year. So all in all, a low decline, especially without the elections, both on volumes and on revenue that is explicitly shown on the right-hand side of the chart. And I will now invite Guy to guide us through the financial part of the portfolio, and I'll be with you later in the call.

Thank you, João, and good morning to you all. Starting on Slide 10 with some highlights on the Financial Services and Retail, where we are focusing in transforming CTT retail network in a powerhouse of services to the citizen. We have been developed -- developing the distribution of public debt in this new interest rate environment. . We've been able, as announced, to renew the distribution agreement with the IGCP, where the key commercial conditions were maintained, and the novelty is that we include -- this new contract includes the ability to distribute debt through the online channels that we think it's key to ensure the future of this business line. Despite of the dramatic increase in demand, we were able to keep the market share of distribution vis-a-vis the direct channel that IGCP still maintains. So good progress on that front. And on the right side of the chart, you can see the citizen services that are mainly around the new distribution agreement with Generali, where we'll be distributing non-life insurance products to the CTT side of things. This distribution already started the pilot in March, and we expect when the rollout until the end of the second quarter. The bank distribution will -- is still pending regulatory approvals, and that will follow suit after those. We'll be maintaining the existing services to the citizen, and we continue to evaluate new distribution agreements for other services to leverage our retail capabilities. On the next slide, we can see the fantastic performance of Public debt. [ Treasure ] certificates remain very competitive vis-a-vis other saving alternatives, and we placed almost EUR 4.3 billion in the quarter, a very similar number with last year. So that shows our strong [indiscernible] placements in the fourth quarter. Retail products and services declined both by the factor of increased demand of Financial Services, but also because we are discontinuing some retail activities to focus on services providing. On the -- on Page 12, we can see Banco CTT's strong performance. Our credit book is now around EUR 1.8 billion with strong progress in all lines. Auto loans grew 17.2%; mortgage, 10%; and the credit cards, 21.1%. The customer resources, even despite this competition from the state, still growing 12.1%. And now return on tangible equity with a solid progress clearly in line to meet our midterm targets and close this year with 5.5% return on tangible equity. On Slide 15, we highlight these two key events that happened on the -- related with the bank. The first is the end of the agreement with Universo. The partnership will be closing in the end of this year. The net exposure of the bank will gradually decrease during 2023 and the book will end in the end of the year. We put some key indicators to let the financial community [ read ] around the effects of this. And the second is the partnership we signed with Generali that will bring EUR 25 million of additional capital in exchange of 8.71% stake and this capital corresponds to 210 basis points on our CET1 ratio. Banco CTT will gain with this -- after these two events, of strategic options in the management of its portfolio by releasing liquidity and capital that will strengthen its balance sheet and profitable growth. In the ESG, Slide 14, we can see a solid progress, especially on the environment front, where we doubled our green fleet clearly in line with the target of reaching 50% in 2025. We also almost doubled the reusable packaging. In gender parity already with a strong starting point, we will be converging to the 45% of top and mid-management gender parity. And on social, we already met the target of contribution to social impact initiatives. Now moving on to the financial section -- financial review section, starting on Page 16, where we can see our key financial indicators where we see a strong fourth quarter with growth in revenues, recurring EBIT and cash flow, also a similar pattern in the full year. In the quarter, we grew 3.8% in revenue with the exception of Mail, all other business units contributing positively. Our recurring EBIT increasing 26.3% in the quarter. And in the full year, our net profit reaching EUR 36.4 million with a small decline of 5.2%, and our cash flow reached EUR 67.4 million, growing 48% in the full year. On Slide 17, we can see the detailed revenue [ contribution ], with revenues growing, as I already mentioned, with the biggest contribution coming from Banco CTT and Financial Services. On the fourth quarter, Express and Parcels grew 2.8% or EUR 1.9 million. In Portugal, volumes with a sustained recovery and growing [ 11.6% ] in the quarter and revenue is growing 5.1%. In Spain, quite different performance, volume still declining 11.2%, which we think with this information we have, this is in line with the market performance, but continues to be pressured, especially on e-commerce where we have the biggest exposure, but higher average revenue per parcel, enabling us to sustain decline and revenues are declining slightly 0.4% in the quarter. Mail and other, declining EUR 10.1 million, low performance in 2021 was impacted by general election as João already mentioned that accounts for EUR 5.9 million. If we exclude that effect, revenues would have declined 3.5% due to stronger volume declines that were partially offset by a stronger price effect of 6.3%. Financial Services also growing 59%, with that extraordinary performance in placements with EUR 4.3 billion that I mentioned before. Banco CTT also growing at 34.3%, mainly through the net interest margin expansion that stood at 2.6% in the quarter. Our OpEx, in Page 18, grew 1.6%, driven by Parcels and Banco. In Express & Parcels, we saw OpEx increasing 5.5% in the quarter, that is mainly due to the inflation impacting unit costs and investment -- putting pressure investments in capacity putting pressure on margin, and this is especially an effect seen in portfolio. Now another declining EUR 8.1 million, out of which a EUR 4.1 million of direct costs associated with general election, that one-off that we mentioned on revenues as well. The remainder of the EUR 4 million resulting of lower revenues and the efficiency measures that we are putting in place and that we announced in the second quarter last year, that we continue to have good progress on that front. Financial Services, growing EUR 1.3 million linked with increased activity. Banco CTT increasing EUR 6.7 million, EUR 4 million of which related with cost of risk. In the 4Q 2022, our cost of risk stood at 1.7%, that is an increase of over 1.1% seen in the last quarter of 2021. In Slide 19, our [ EBIT ] evolution, where we [ moved ] EUR 5.4 million in the quarter with Mail, with Financial Services and Banco CTT contributing positively. Express & Parcels declining EUR 1.6 million, essentially due to the Portuguese performance. Mail and another declining EUR 2 million. But if we adjust for the positive impact of the election last year, it will be almost flat. Financial Service is growing [ EUR 6.5 million ] and Banco CTT growing EUR 2.5 million [indiscernible]. In Slide 20, we can see our cash flow evolution, strong cash performance with EUR 99.6 million of operating cash flow, the improvement in working capital management through this last part of the year helping on this front. Our CapEx totaled EUR 37 million, below our initial guidance and our free cash flow reached EUR 67.4 million, which drove our net debt position to stands now at EUR 29.8 million in the end of the year. And with that, I'll pass you to João, again, for his final remarks.

Thank you, Guy. If you join me on Slide 22, we are [ proposing ] and the Board is [ approving as of ] today to generating an increase in recurring dividends repay at [ EUR 0.125 ] per share. It compares with dividend policy that we stated in capital markets day. And let me recall those main principles, the [ activity to share ] remuneration while maintaining financial factors will be subject to, one, investing in -- keeping the ability to invest in business growth, to implement an attractive remuneration policy, and finally, the combined -- while this kind of recurring dividend-based remuneration with opportunistic shareholder [ relation ] based on share buyback. This [ EUR 0.125 ] do represent a payout ratio of 47.7%. Therefore, within our stated policy, which is, I recall, between 35% and 50%. And it represents a dividend yield of 4.1%. And moving to the final page, Page 23. Well, the main message I would like to convey is that we continue to grow and do transform the company. And we did that in 2022 notwithstanding a very challenging environment. I recall that this [indiscernible] thinking that this would be [indiscernible] of this management team a rather normal year because COVID seems to be phasing out. Actually, January was the worst COVID month for CTT in terms of affected people could not come to work and then on February the war in Europe exploded. But despite that, we continue to grow and transform the company. The guidance is if you follow me on the left side of this chart, mid-single-digit decline in Mail volumes. So we foresee a mild decline in Mail volumes. Low to mid-single-digit growth in Portugal for parcels with improved revenue per item on parcels. We'll be working on pricing, on cost structure and also on the commercial front to improve volumes. We want to resume double-digit volume growth in Spain. In Spain, the -- well, the Mail volume is growth in volumes. A robust growth envisaged for Financial Services for reasons that we don't need to comment further. For Banco CTT, we are expecting an improved return on tangible equity further to what happened this year and we drove this mid-single-digit revenue growth, then derives into our guidance statement of recurring EBIT in 2023 expected to grow at least 10%. CTT remains growing and that's growing increase because 10% is more than we had last year. That can be observed on the right-hand side, a trend that let me state is quite unique in the sector. We have announced a growing guidance for last year. We met that guidance and we are announcing a further growth regarding this year and last year. Well, there are also risks. We highlight the high political -- geopolitical uncertainty and the macro risks that we will continue to be relevant and persistent inflation in cost of energy and raw materials regarding -- and certainly, this is a week where you have a few very exciting examples that things are not always as to [indiscernible] as possible. But my -- I would like to close this presentation before moving to Q&A as I start in my last slide. This has been a great year. We continue to be grow and transform the company in a challenging environment and we are adding further growth for the year. Thank you.

[Operator Instructions] Our first question is come from Mr. Filipe Leite calling from CaixaBank.

I have three questions, if I may. First one at Express & Parcels. And if you can explain the different trends in terms of revenue per item that we saw in Portugal and Spain. What is so different between these two markets that will justify the different performance of Portugal, which is decreasing; and in Spain, which is increasing. I don't know if the competitive landscape, the mix between B2B or B2C or if there is any other explanations for these different performance? And also, why are you targeting volume growing in Portugal below the double digit that you expect for Spain? Second question regarding outlook. And if you can provide us more granularity regarding each area and specifically what should be the recurring EBIT growth implicit in your guidance for Mail and Express & Parcels, I mean, excluding Financial Services, what should be the growth of recurring EBIT implicit in your guidance? And last one, on working capital, and if you can elaborate a little bit more on the [ regions ] that saw strong performance in fourth quarter and expectations for this year.

Starting with the revenue per item difference between the two countries. You are mostly right, in Portugal, we have a lot of B2B or much higher percentage of B2B than in Spain, in Spain is a almost e-commerce dedicated company. We are seeing a trend of growth still in Portugal much higher in e-commerce that is driving mix downwards. In Spain, although the trends are the same, we have been working in terms of gaining market share in smaller customers and moving away of these big e-commerce retailers or not depending, as mentioned, the e-commerce retailers, and that is driving the average unit revenue upwards. In terms of volume performance expected for 2023, we continue to see both countries growing, although with the macro environment that is affecting both countries, we continue to -- we are seeing smaller growth performance in Portugal, given that we don't have the market share [indiscernible]. And in Spain, we continue to have that ability and that we think giving a more stable performance of the [ big ] retailer accounts, it's possible to continue to grow with a visible contribution to grow on the smaller accounts. In terms of guidance, we are expecting -- we are working towards having all business units growing EBIT. Of course, the inflation is still there and affecting more the logistics side of our business. We have in - we launched a number of initiatives that we think will help us contracting most of those effects, and such, we think we could grow in all business areas. Of course, that growth this year will be slightly geared more to the financial business units with Financial Services for the bank, but we expect to business units growing. In our working capital performance, it's -- we've been doubling down our efforts to be more efficient on the collection front. We were able to collect a number of backlogs. It's -- so we think that improvement is sustainable, but on the -- in a way, it's a one-off that went weaker this year, but we don't see a part of the normal seasonality of working capital, but normally in the first quarter is slightly more challenging. We don't see any reversal of that working capital performance. And I think I covered all your questions.

We'll now move to Mr. Joao Safara from Banco Santander.

I have a few, but I just wanted to start with Financial Services. You recently signed -- well, the exclusivity agreement for another 3 years. My question here is, I mean, we've also seen some comments from the IGSP saying that, obviously, it's not the optimal solution to have just one provider of -- well, one distributor for this kind of product. So what is your take on that? I mean, obviously, for the next 3 years, it seems that you -- I mean the agreement is done, but I would like to have a bit of your view on that on any potential risk that could be of having competition on the placement of the financial on the savings certificates and public placements. And then also regarding with this is we had a spectacular month of January in terms of subscriptions. And I understand it's very difficult to have really visibility on this, but I mean, if things continue as we've seen in January, it should be even a better year than in 2022 and Guy has just confirmed that you see growth in all the EBIT lines. Is there anything that -- I mean, is there any specific indicator that you're seeing that collaborate this in terms of ongoing strong momentum of public placements, obviously, other than the fact that your [indiscernible] rates are higher. And then just last one related to this and to the deposits, how much -- so what is your strategy in terms of the deposit remuneration for 2023? And are you seeing more competition in the market on gaining these deposits and potentially also in having a lower growth for your deposit base? And I think that's it.

So starting with [indiscernible] this time. A couple of points here. First [indiscernible] sorry first, we have -- well, this is a relation that has been studied and preserved in market conditions -- under market conditions. We have an exclusivity agreement in terms of the placing in the retail network. So competition there is not an issue for these 3 years. And we have something which is new, and we have highlighted when we syndicated it to the market, which is that now as we trust, we are able to develop also placements through a digital channel. Our strategy here is that -- and it's always been like that, and we have steadily progressing on that line, is that the partnership and the dependency, let's call it, I mean, the partnership between CTT and IGCP shall rely on better user experiences and on the unique position of [indiscernible]. There is no other alternative with another -- with this kind of capillarity and spread throughout the country. So we are very positive and cool on the fact that this is a growing partnership that is mutually interesting. Moving to the spectacular performance of deposit debt in January. Well, what I'd like to say here is that I would reassure what he said about our guidance. We have this guidance based on an assumption that all business is going to grow. And of course, if the Financial Service performance is well, throughout the year is well above expectations than what you should expect and the market should expect is that the EBIT performance will be better than we have guided. That's why we have an open an open-ended on the right-hand side of the interval by saying that it's mid-10%. So there is -- I would say, there is a positive outlook risk here. We -- regarding the question -- or a question about the trend. If something is to be projected in the future, the trend is that we've been growing month by month, the ability to place. Banks have started to react with alternative products but we see that for a long period, it's going to be very difficult to match the competitiveness of treasury certificates. So the trend now is not yet of stability. It has been of growth. And therefore, we are quite positive on that. For the question about the remuneration of deposits in the bank policy, I will hand over to Guy.

So on deposits, we expect, as João already mentioned increasing competition in the [ sector ]. The retail banking for some competition from the government side, and we see rates starting to increase as we are a retail bank will also gradually increase our remuneration through the year, and that's embedded in our guidance. Of course, but CTT continues to grow. We are in our focuses in new clients and attracting new money from those and from the existing customers. So we expect the market remuneration to increase, we'll be acting accordingly to the market dilution.

[Operator Instructions] Our next question is coming from Mr. António Seladas calling from AS Independent Research.

I have two questions. One, is related to the bank and second one related with parcels in Spain. Maybe starting by parcel in Spain. So you mentioned that growth should resume in this year. And I just want to know if there's already a sign that growth is already improving. And because my sense is that the weakness in parcels in Spain last year was related with the general trend of weakness on parcels. So my question is if there are heavy signals that this weakness on parcel and e-commerce that we saw last year is reversing . And second question is relative to the bank. Bank will have a capital increase and probably at some time or maybe by the end of the year. So not very different in terms of time, we will sell the portfolio of credit cards. So will be overcapitalized -- well, will be well capitalized. So my question is, if you would like to share with us where you -- where the bank plans to grow?

On the weakness on parcels in Spain, as you know, we started last year with a big concentration on the big customers in Spain. That was the way we structure the strategy for the turnaround to acquire fast volumes to be at the scale we needed and we successfully did that -- those big accounts with the macro context and e-commerce trend in Spain were heavily pressured on volumes. We see that stabilizing since the end of last year and beginning of this year that will enable ours already in place strategy to grow on smaller accounts that have been growing, but that growth is being [ over-shown ] by the decline on those customers. As these big accounts start to stabilize trends, we are forecasting that the growth we are obtaining in smaller accounts to start to show. And as far as such, we will be driving the growth we are giving you on the guidance. . On the capital, João.

Let me just add something on Spain to what you already mentioned. In fact, our expectation is the market in Spain is not going to reverse, coming to your point. It's basically our ability to grow market share, as we said, especially through this lower-sized customers where there is a huge opportunity to grow. On the bank, there's short term and medium long term, obviously, that in the short term, the environment is now very favorable, and therefore, the bank should take advantage of additional liquidity. But the additional capital, as I said, not excessive as guided the bank towards revising that was midterm business plan and that we shall come to the market later on in the year -- sooner than later with what would be the new outcome of the planning process that is now taking place. But in any case, a more favorable environment in terms of financial margins and interest rates goes well with additional liquidity and additional capital.

Okay. Should we expect that by the second or the third quarter, you mentioned something about the bank? Yes. I understood well.

That's right. You understood well.

[Operator Instructions] We'll now go to Marco Limite calling from Barclays.

Can you please update us on what we should expect in terms of price increases in Portugal for parcels? I understand there is a bit of mix shift from a softer B2B and stronger B2C, but what are you expecting in terms of price increases, especially in B2C volumes? Similar question, price increases for the Mail volumes, given that you are entering into a 3-year kind of framework in 2023. So what is the expectation there? Third, quick question, what we should expect in terms of wage increases if you are -- if there are discussions going on with unions. And fourth question, what's the latest update on the real estate project?

On price increase in parcels in Portugal, so there is B2C and B2B. On B2C, we have already increased prices on the first of March, and this is in line with inflation so [indiscernible], and that is already -- it's done. Then for B2B, we have, again, different segments for very large clients and for midsized clients, we are basically trying to offset the cost of inflation and we are segmenting that and we've started already increasing prices, but one should expect that the compound increase in price between the smaller companies and the large companies doesn't match inflation. And then, João, you have to add something? No? Then on my price expectation, well, it's pretty stable for now on. As you know, we have this new tariff agreement in place. We have agreed the price increase for this year, while the agreement comes strictly in line with our expectation and claim. It offsets decline our volumes and inflation with an additional demand on productivity. And so we should expect prices increase in line with volume and inflation and -- or slightly below that, which is our responsibility for improving profitability. And it's basically -- it covers 86%, if I'm not wrong, of decline and inflation. And therefore, we feel very relaxed and it's very easy to predict what's going to happen from now on. On the wage increase and the relation of the unions, we cannot be absolutely -- I mean, objective here. But I should say that the negotiations that started early this year are going well in the sense that the expectation is that we will be able to grab to strike a deal within our budget assumptions. And it's always a bit unpredictable, but so far, the move is positive and our expectation, again, is that it's going to be within budget or even below budget. On the real estate, well, this is a very complex project, that's why it's taking so long and we keep working on details and the tax issues and administrative issues, licensing. There's been progress on potential investors that are now looking at the final terms that have been agreed. And well, we should keep the market informed if something relevant happens and when it happens.

Ladies and gentlemen, as we do not have any further questions at this time. I'd like to turn the call back over to your host for any additional or closing remarks.

Well, thank you for your questions. Thank you for coming. I'd like to close, as we started. It's been a tough year. We feel -- we take pride of how we've managed to, well, surface the year with the difficult beginning, first half, a significant recovery, and it provides a good basis for 2023, which is reflected in the positive way in which we have stated the guidance of at least 10% and with improvements in -- across all business areas. And therefore, well, again, thank you for coming, and let's keep in touch. Thank you.

Ladies and gentlemen, that will conclude today's conference. Thank you very much for your attendance. You may now disconnect.