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

Good morning, and welcome to CTT's First Half 2024 Results Conference Call. Please note that this conference is being recorded. [Operator Instructions] I will now turn the call over to Mr. João Bento, CEO.

Thank you, Ishmael. Good morning, everybody. Welcome to our second quarter results presentation. So if we move to slide -- the first slide, which is Slide #4. We had a very strong execution in Express & Parcels, which drove the revenue growth. Indeed, we actually are with the volumes close to those in our last peak season, having delivered more than 63 million objects in the first half. And since the second half of the year, it should be stronger. This compares extremely well with the 100 million parcels we delivered last year. We've started now a common segmentation of larger accounts and the unique pricing system for Iberia, so no longer Portugal and Spain. And all these, including these very high volumes, drove us to record high margins in the second quarter. On Mail & Others, we had a slight increase in addressed mail revenues, and we are using business solutions as a lever to enhance the commercial relationship with our customers and, therefore, trying to improve the situation also through business solutions in Mail & Others. Moving to the gray part of the slide, talking about Bank & Financial Services. We have notwithstanding increasing sequentially, the placement of public debt. It's still not normal. So it's taking a little bit more than we thought to normalize, although we are, as I said, growing again. We have launched the online public debt placement in the CTT app recently. And we also have heard several statements, and we believe that improvement in the products and in the cap should happen sooner than later. With strong commercial activity, we are building up our insurance and health care plans book. The bank saw another 20,000 accounts opened in the first half, so in line to, again, around 40,000 to 45,000 accounts in the year, with continuous focus on client engagement, supporting growth in business resources. We had a very significant increase in profit before tax of 45% in the quarter. So if we move now to the next slide. We see in both charts that we have a very, very impressive growth, not only resilient, but also very high in Spain. We are growing 69% on top of a 37% growth in the similar quarter last year. And also in Portugal with good growth, 9% growth comparing with the highest quarter that we had last year, which was exactly the second quarter. So Express & Parcels on path for another record year, which is not strange since we are the fastest-growing parcel company in Iberia, indeed in Europe. Moving to next slide. We see that these volumes also brought record recurring EBIT margin in the quarter with 42% growth in revenues and with an average of 526,000 parcels per day. We see a very significant growth in margin, more than 54% in -- quarter-on-quarter comparing to last year. With this, we see growth in volumes and that, in fact, is driving operational leverage, as we always said. We built -- we had built capacity ready for significant growth, and the growth is now driving us to significant margin increase. And with this, I would move the floor -- I will pass the floor to Joao Sousa to talk -- to guide us through mail and public debt. Up to you, Joao.

Good morning, everyone. Thank you very much, Joao. As you can see on Slide 7, mail price increase and mix are partially offsetting the falling volumes. Saying this, we know that some public entities have postponed some volumes for the coming quarters. Even so, the addressed mail volumes decreased 10.9% year-on-year. And -- but at the same time, we are seeing the average revenue per item increasing 10.2%. That's why we say this mail price increase are partially offsetting the falling volumes. In that way, we can see that addressed mail volumes increasing in this first half of the year, 2.1% against last year. So that way, we reached EUR 189.9 million on revenues on addressed mail revenues. We still -- like we said in the last quarter, we are still implementing cost-cut programs that will supporting the progressing the margins. And as we're going to see in the coming slide, I just want to also to highlight in this slide that we are still developing digital solutions like ViaCTT for the coming months to help us to address these customers when even they want to go for more digital than for physical in mail. If you go for Slide 8, as you can see, the costs in Mail & Others have reached EUR 235.6 million, an increasing of 10.5% comparing with last year. But this comes for election, inflation and also lower financial services activity that drove expense higher on this first half of the year in this year because if you're assuming a normalized placement activity, in fact, the recurring EBIT in Mail & Others will be EUR 2 million higher. Same this, we are -- like I told you in the last slide, we are still implementing cost-efficient programs that we're going to -- we expect to see results in 2024. We are working on this progression in price that's going to help us stabilize the margins. And we also see for the coming months a normalization in public debt that allow us also to recovering these fixed costs. On Slide 9 and coming for the public debt placements, we are seeing sequentially subscriptions increasing. As you can see, in the second quarter, we increased 10.7% against the first quarter. We are doing a lot of actions to increase and to see a better path for the coming quarters. We launched a margin campaign in the second quarter that we see a huge, good feedback from the market. So in that way, we are designing more campaigns for the coming months. We also launched last week the online platform for subscription in public debt that it's early days, but we like the early numbers we are seeing right now after 1 week of using this app. This allows, just for you to understand, that typical more young subscribers that likes more digital to use right now this app. Also it's more easier in the customer experience for the customer who wants to do savings in a daily basis or on a weekly basis to have this online platform and don't need to go to our store. And also that we are seeing in the news public information that suggests that the conditions of debt certificates could be reassessed in the coming weeks. That will also give us a better view for the coming months, for the coming quarters in public debt placements. And after this, I pass the word to my colleague, Guy Pacheco, our CFO.

Thank you, Joao. Good morning, everyone. So starting in Slide 10, where we can see the bank KPIs where we see business resources growing pretty much everywhere due to improved client engagement, namely on customer deposits. You could see on the left part of the chart, our customer deposits grew 58%. We continue to gain share. The public numbers show that the banking industry grew deposits 6.7% on the same period. And as you can see, we are gaining significant share on this metric. On loans, growing 10%, double digit, leading now to -- or in mortgage. And as previously commented, we continue to invest in improving our client engagement, be it revamping our digital platforms or physical channel, reinforcing our commercial capabilities in our retail network. On the next slide, we can see the main financials on the first half. Revenues are growing 2.6%. And I would like to remind that we exit the partnership with Universo, and that is waiting on the revenue evolution. If we account for that exit, we should be growing almost 16%. And as you all know, net interest margin is being slightly compressed on this period apart from the interest rate environment and apart from the exit of the Universo coming down from 2.9% to 2.3%. Nevertheless, in profitability and thus cost of risk improved in the period. Following the same movement, we should see a very strong progress in profit before taxes. That is growing 45%. And our return on tangible equity normalized. It's on 8.8% coming from 7.1% in the last year. Moving on to our financial review on Page 13. We can see our key financial indicators. As Joao mentioned, it was a good quarter in terms of revenue, 9.3% growth, although our EBIT was still heavily affected by the strong comparable performance in '23 of the Financial Service business units. Nevertheless, our recurring EBIT reached EUR 18.1 million in the second quarter, declining 20.1%. Net income growing 24.9% to reaching EUR 12.4 million, and our free cash flow was EUR 6.7 million in the second quarter. The next slide, we can see the detailed revenue evolution where we see the strong contribution from Express & Parcels. Express & Parcels was growing 42% in the quarter, EUR 32.3 million, with Portuguese and Spanish operation continue to perform, especially the Spanish division with a fantastic level of growth of 68%. Portuguese operation is also growing 9% on revenue. We continue to sustainably gaining market share, and we are seeing price per unit starting to stabilize. That is also good news. We had another EUR 1.9 million growth coming most of it from Business Solutions that continues to gain traction in the market and proved that to diversification strategy in the B2B market is paying off. Mail revenues were slightly declining, almost flattish with price increase enabling us to contain revenues, despite the volume declines being 10.9% in the quarter. Financial Services declined EUR 11.8 million, with placements reaching EUR 356 million, but the difficult comparison with '23, where we placed EUR 3.8 billion in the same quarter last year. We continue to see the volume cap introduced by the Portuguese government and the current lack of competitiveness of the product, vis-a-vis the saving alternatives, namely term deposits as being impairing the normalization of this line. Although we remain confident that normalization will occur, it's taking a little bit longer than we initially expected. But we remain confident that normalization will happen. Banco CTT revenue is flat with the reduction of net interest margin following the end of Universo partnership. If we exclude for that effect in the quarter, we'll be growing more than 12%. Next slide, we can see our OpEx. Our OpEx increased 12.4% in the quarter, driven by Express & Parcels and Mail, Express & Parcels increasing 41.2% or EUR 29.5 million. This is driven by volume growth -- strong volume growth in both geographies, but mainly in Spain, with unit cost improving sequentially as we continue to invest to improve capacity and deploy more efficiency measures. That will continue to drove -- drive our margin, that continues to grow as we will. Mail & Other increasing 4.7% or EUR 3.5 million in the quarter. This is following the wage inflation, after the wage increase of about 4%, that was agreed with the unions. The additional costs of lower use of the retail network by Financial Services, and that's been partially offset by the efficiency measures that we are putting in place, be it on headcount reductions with -- and other efficiency in the corporate structure. Financial Services declining EUR 4.7 million in OpEx. This is mainly linked with decreased activity, and Banco CTT also decreasing EUR 1.4 million. Several effects here, but the main one is the cost of risk that declined to 0.7% in the second quarter from 1.3% last year. In the next slide, we can see that -- our EBIT generation. But as we mentioned before, it will be skewed in the -- for the second half. The -- our EBIT declined 20% in the quarter with the Express & Parcels and the Bank being the -- contributing to the growth with EUR 4.1 million. Mail with higher volume decline, but also higher cost due to inflation. And the lower use of the retail network by Financial Services is still impacting the performance. Financial service is also declining, as we mentioned, with the effect of lower demand this year, although expected, but the normalization is taking longer. Although we remain very confident that, that will happen in the next quarters. In the next slide, we can see our cash flow evolution. The operating cash flow for the first half stood in EUR 20 million with the big impact of working capital. Several effects here. We have EUR 6 million -- EUR 6.3 million coming from government receivables that are taking longer to collect associated with the mobility subsidy. We also have EUR 6 million coming from the new environment of revenues that are basically linked with outside of Europe or intra-European Union transactions. And as such, we don't collect VAT on those invoices. Although we continue to have the ability to deduct that VAT, but as a working capital impact by that effect and some payments regarding our clients in our -- sorry, the -- there are -- settlement for some clients that was done in this quarter, also impacting in EUR 5.9 million. Most of these effects will be reverted into the next quarter, except the VAT, as we continue to assume the same kind of revenues on these regions and going forward. Free cash flow in reaching EUR 10.6 million, our net financial debt is actually a cash position in terms of consolidated, EUR 25.3 million. If we account the bank as a net equity accounting, it will be EUR 160 million of net debt. And as such, I will pass to João Bento for the outlook and final remarks.

Thank you, Guy. So if you join me on Slide #19. The most relevant aspect that I'd like to highlight is the very solid growth of our businesses, excluding Financial Services, moving from EUR 51 million to hopefully EUR 70 million as we guide, which represents a 36% improvement. Therefore, if Financial Services recovered significantly in the second half of the year, given the, well, expectation we have on changes in the cap and eventually after the summer, even in the conditions of remuneration, we could grab another 10 -- between EUR 10 million and EUR 20 million of EBIT associated with the Financial Services, which leaves us in line with -- in an interval between EUR 80 million and EUR 90 million of recurring EBIT, in line to our targets to 2025 that we have announced back in the Capital Markets Day of 2021. And finally, moving to our last slide, where we call the attention of us being growing like no one in Iberian Express & Parcels. In fact, we are beating records on volumes and on margin, and we see the outlook going along these lines for the second half. On Mail & Others, we have stabilized revenues through price increase and mix, and we are now moving to operating efficiency and cost to drive improvement in Mail & Other. On Financial Services, we are fully prepared for improved conditions on public debt. The fact that we are now able to place online, very soon, we'll be able to -- also to open accounts online in our app. And the changing conditions provide also a better outlook for the second half. And in the Bank, we continue profitable growth in -- very much along all business areas. And with this, we believe that our final year '24 recurring EBIT guidance, excluding Financial Services, could represent, as I said, a 36% growth versus last year. If placements levels remain secure, recurring EBIT in Financial Services will be around 10%, instead of the normalized 20%. Although we expect, as I said and repeatedly said, that these conditions shall improve. And therefore, the same should happen to this Financial Services related EBIT. So against the current backdrop of public debt placements, we set the guidance range between EUR 80 million and EUR 90 million for consolidated EBIT recurring. Reminding that with our initial guidance was EUR 88 million provided that we'll be able to place EUR 3 billion. Let's hope the conditions change now, and we have a better second half. Reinforcing focus on cost and profitability with some new measures coming on the second half, and results for sure will be there as well. Stepping up the investment on Express & Parcels in Iberia to keep improving our competitive position, namely in terms of increasing capacity. Since that we are -- we feel that we are now able to grab even higher volumes, provided we have the right capacity. And our balance sheet leverage offers organic and inorganic growth optionality. And we keep very much -- this very much in mind. We have also announced recently a new share buyback of EUR 25 million, which is now under execution equivalent to about 40% of our market cap. And with this, we close our results presentation and rest available for you for the Q&A. Thank you.

[Operator Instructions] We will take our first question from Joao Safara from Santander.

Can you hear me? Sorry.

Yes. Go ahead.

Okay. It's just I wasn't sure. Okay. So two questions from my side. The first one, and sorry to be so repetitive with this question on the Banco CTT approval. We've seen yesterday, I think it was yesterday or the day before, in the press saying that it was likely that this transaction would be approved by October. And so I just wanted to have some update from your part. And also on -- and on the terms of the transaction, the news mentioned the -- that one of the conditions was a veto right by Generali that it seems now it has -- it's not going to be applied if the transaction is going through. So just wondering if that has any implications in terms of the price that it was settled, the transaction in the beginning. And that's my first question. The second one, it was more to try to get an idea of -- or a guidance from you in terms of free cash flow generation. I understand the -- what you mentioned in terms of working capital and taxes, but it would be useful to have an idea how much should we expect these figures to be in the second half of the year and if you can give us any idea or any range in terms of the free cash flow generation expected for 2024, even if -- even not taking into account the operating performance, but just based on these 2 drivers, which seem to be more difficult, at least from my front, to estimate.

Thank you, Joao. Hopefully, you can hear me. So on the Banco CTT approval, what we saw yesterday is a piece of journalism. What we have to say, actually, we were quoted on that, is that we believe that all the questions by the Bank of Portugal have been not only answered, but also attended. And our expectation that the approval should happen, well, at any time. Typically, there is -- there are interactions between the Bank of Portugal, Generali, Banco CTT and ourselves. At this stage, there's nothing from the bidder side, neither from Generali, neither from the bank, CTT, neither from CTT, and the Bank of Portugal is processing. So we are very relaxed, and the authorization should come at any time. October, of course, is within that expectation, but my personal expectation is that it should happen earlier than that. The fact that there were references to some of the changes that have been required, we are not commenting on that. We are just saying that we are very happy with where we've came amongst ourselves, the Bank of Portugal, Generali and ourselves. And of course, there is no price implication whatsoever. I will ask Guy to address the free cash flow generation question. Thank you.

Thank you, João. Let's see. I won't provide guidance on free cash flow, but let me at least address what I think are the most difficult part. So CapEx, we guided the market for a slight increase this year given the investment -- the renewed investment in capacity in Parcels and the investments on digital channels of the bank. So you should expect CapEx to grow year-on-year. And on the working capital, as I mentioned, there is some effects that will remain this year because of the change of the mix of the revenues related with the -- with extra commentary flows or intra-commentary flows. But we -- you should expect, and we are expecting this working capital to reverse at least more than half. And with your expectations on EBITDA, you should be able to do your estimates. Thank you.

We will now take our next question from Filipe Leite from CaixaBank BPI. Maybe while Filipe is trying to connect, we can pass on to António Seladas from A|S Independent Research.

The first question is related with Parcels in Portugal performance, about 3% or 3.2% year-on-year growth. So I think it was below the market. So maybe you can confirm it and if you are losing market share. The strategy seems completely different from the strategy that you are applying in Spain. The second question is related -- second and third question are related with the bank nonperforming exposure remains above my expectations, and it's difficult for me to understand that because the economy is doing well. Unemployment is low. So everything seems more or less okay. And the last question is related also with the bank and the rights issue that basically for the new partner that basically confirmed that should occur in the coming months. So my question is the bank is overcapitalized -- or well, it's overcapitalized. And so what do you think -- what are the strategies to grow? Because up to now, well, it's true that in the second quarter, it is quite that assets increased, so are now increasing and in line with probably we will expect. Nevertheless, the bank remains overcapitalized, and we don't know exactly where the bank would like to grow. And with more capital, maybe you can provide more color on what we should expect on the bank. Hello?

Yes, António. We are just preparing the answer and the...

Okay. Sorry, sorry. I was worried that it was not working.

Thank you. Antonio, can you hear me?

Yes, yes.

We're bit puzzled here with the button. So Joao Sousa will address the Parcels in Portugal. We believe we are -- your statement is not right. And Guy will address the nonperforming exposure. Coming back to the overcapitalization of the bank, as you claim, just a reminder that, first, the bank is growing extremely well on deposits, very much above the market. And therefore, the leverage ratio, which also accounts for capital is getting higher. So that sense of overcapitalization could not be as expressive, as you mentioned. On the other hand, the bank has been declared a resolution bank because of the number of clients. And because -- and for that, there will be MREL requirements that we have already mentioned before. So that sense of overcapitalization is indeed not very, very significant. And with this, I will ask is Joao Sousa to address the -- even the question.

Antonio, thank you for your question. We don't see this feedback that you have about market share. In fact, we are seeing the opposite. We are growing in the customers we had, and we are grabbing even because that was important for us from the competition. So what we are seeing is the opposite. So we are -- we don't lose any customer. We are growing the customer that we are sharing with the other ones with the big customers. And even, we are winning 2 or 3 big customers this last quarter. So we feel that we are increasing market share and not decreasing this market share.

But -- sorry. But the second quarter, the volumes in Portugal went up by 3.2% year-on-year, I think. Am I right on the figures? So do you think that the market just grew by 3.2% year-on-year on the second quarter?

You are talking about the B2C or the global market of Parcels?

Well, I was talking about -- well, about the figures that you provide. Yes, maybe it's all the figures, yes.

Yes, yes. What happened is, as you know, the Express & Parcels are large services. So where we are very focused on is in the B2C and the B2B, in fact. And when we are seeing the market growing is more in the B2C. And all of this, what we are talking about is the B2C path, okay?