Poste Italiane S.p.A. (PST) Earnings Call Transcript & Summary

Good afternoon. Welcome and thank you for joining Poste Italiane: Consolidating the Italian Mail Market Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Matteo Del Fante, Chief Executive Officer and General Manager of Poste Italiane. Please go ahead, sir.

Good afternoon and thanks for joining us. Here with me, the CFO, Guido Nola; the Head of the Logistic Massimo Rosini; and Massimiliano Riggi, Investor Relations. As you know, last week we published our third quarter and we confirmed mail declined as a trend. Indeed, the trend is more pressing in Italy where e-substitution has been faster than other countries in Europe, and the lockdown made it even heavier. Today, we're pleased to announce a transaction that aims to tackle the trend and to ensure the long-term sustainability of the national postal service in Italy. Yesterday night, we signed a preliminary agreement to acquire Nexive, the second postal operator in Italy. The acquisition is in line with what experience in other countries in Europe, which really see the presence of strong national mail champions dominating on their own -- their markets. The acquisition of Nexive would enable Poste to benefit from economies of scale, guaranteeing the service to all customers across Italy while preserving workforce levels. The transaction falls under Article 75 of Law Decree No. 104 of last summer. Signing and closing are expected by the end of January next year, subject to potential specific measures that the national antitrust authority may prescribe within 30 days authorization period, also taking into account the overall sustainability of the transaction for Poste Italiane. Slide #3 provides an overview of the law provision, which allows the acquisition. In particular according to Article 75, the acquisition of Nexive is a concentration responding to relevant general interest of the national economy involving companies operating in markets characterized by labor-intensive services or of general economic interest, which suffered losses for the last 3 financial years and that could create and cease their activity, also as a result of the health emergency. In light of the above, the acquisition of Nexive is considered automatically authorized with prior notification to the Italian antitrust of measures to prevent the risk of burdensome effects on final users. Again, the authority then has 30 days to possibly request further additional measures, also taking into account the overall sustainability of the transaction for Poste Italiane. Let's move to Slide #4 where we can see the acquisition rationale and the main advantages for all stakeholders. As most countries in Europe have already experienced, a consolidation in the mail market appears the only viable option to preserve the continuity and overall sustainability of the postal service. With that in mind, Poste Italiane appears the sole systemic player in Europe capable to carry out such consolidation, obviously in the interest of all stakeholders, with the purpose of ensuring reliable postal services across the country. It can indeed capitalize upon economies of scale and leverage on distinctive joint delivery model. It is also the only player, and we are only player, that has resources needed to effectively invest in innovation. As mentioned before, this transaction is in the interest of all stakeholders. It guarantees the provision of reliable postal service across Italy. It creates a sustainable value and it preserve workforce levels. On Slide #5, we focus on specific features of the Italian mail market, namely its high fragmentation with some 3,000 operators across the country and the extremely low-leverage volumes sent. The sustainability of the sector is further undermined by the lower penetration of mail compared to other countries. In 2019 in Italy, each resident received less than 1 mail item per person in a week. Looking at mail per capita, in fact, Italy displayed less than 50 items per year compared to Germany with 171 and U.K. with 153, more than 3x Italy. Poste Italiane has a market share of 82% in terms of volumes, whilst all other European incumbents have a much higher market share, among all Royal Mail 99% and French La Poste 97%. In addition, please bear in mind that Italy has a complex geography and population distribution compared to other countries, which impact the logistic chain, increasing overall cost. On Slide 6, the structural contraction of the mail business is evident and known to you. As anticipated, the decline in mail volume has been particularly steep in Italy. As shown in the bar chart on the top, the Italian mail market shrunk on average by 8 percentage point a year from 2013 to 2018, twice as fast as other countries on average. In the same period in Germany, the trend was flat, while Spain and U.K. recorded a decline of 4%, and France posted a reduction of 6%. On the lower chart, we focus on the acceleration of e-substitution as a result of restrictive measures adopted by European government facing the COVID-19 emergency. After several years of structural decline around 5% on average, 2020 is expected to be materially impacted by approximately an additional 15% reduction in mail volumes. In other words, this means the mail decline has been accelerated by around 3 years. In this scenario, bear in mind that Poste Italiane, one single business mail item sent is worth only EUR 0.30 on average in terms of revenues when you look at no registered mail. This is what we get to collect, sort, move, sort again and deliver an item across the country. This is definitely not sustainable in the long term. Here we have summarized on Page 7 the key figures of the transaction. In 2019, Nexive revenues were approximately EUR 200 million compared to Poste Italiane EUR 3.5 billion. In the same period, Poste delivered some -- Poste Italiane, 2.7 billion items with a market share of 82% compared to Nexive, 350 million items equivalent to a 12% market share. Finally, transaction overview. The time line starts with yesterday signature of the heads of agreement and the consequent filing of Poste undertaking under Article 75. As mentioned, the concentration is considered automatically authorized. The Italian antitrust authority has then 30 days to potentially require further measures, also taking into account the overall sustainability of the transaction. Provided that the condition of the transaction are met, we expect the signing and closing by the end of January 2021. In the preliminary agreement signed yesterday, the parties agreed on an Nexive enterprise value of EUR 60 million, whilst the final price will be determined upon completion of the due diligent process. Poste intends to fund the acquisition entirely by cash with 0 impact on its dividend policy, given the size of transaction and group's strong cash profile. To conclude, this acquisition would allow Poste to benefit from significant economies of scale. The deal will be key to shorten the timing to reach breakeven in the Mail, Parcel & Distribution segment, which has been delayed by the impacts of lockdown. Thank you for joining us, and now we will open to some questions. Thank you.

[Operator Instructions] The first question is from Manuela Meroni with Intesa Sanpaolo.

Thank you for the presentation. I would like to know if you can share with us some more details about Nexive. You said the revenues of EUR 200 million. Can you please split it between mail and parcel? And then looking at the mail number, it looked to me that the price per unit of Nexive is lower compared to your price per unit. So I'm wondering if you also expect to have some revenue synergies together with the cost synergies that I think could be linked to the -- sharing of the same infrastructure and network.

Sorry, taking my mask off. This is Guido Nola. Yes, you're completely right on the first point. They have a lower price per item because they are much more focused on unregistered mail. That's the bulk of their business, and hence the price per unit is -- it is lower. On revenue synergies, I think it's a bit early to say. As the CEO said today in the press release, we are about to start the second phase of due diligence, which is about to start, given that we just filed today. And we're supposed to start with the signature preliminary agreements, so that will form part of our next work for the next 30 days.

Yes. And just to add that the valuation we performed to get the formal approval from our Board of Directors was based purely on sharing with the seller cost synergies, because this is what at this point we're talking about. And we wanted to take this as a conservative stance because everything that can come from the revenue side of the picture, it would be basically on the top.