Posti Group Oyj (POSTI) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to this Posti Group quarterly webcast. And indeed, this is the first one for us as a listed company. We'll go through the results and our highlights together with our CFO, Timo Karppinen. And as a headline for the quarter, operational efficiency initiatives in Posti Group delivered a resilient adjusted EBIT margin in a continuously challenging market. Just as a reminder, Posti Group geographic and business group portfolio, Postal Services in this quarter 3 were 34% of our net sales; eCommerce and Delivery Services slightly up in the weight, 46% of group sales; and Fulfillment and Logistics Services stable at 20% of net sales. And if we go to the quarter highlights, the group's net sales did decrease. However, the EBITDA -- adjusted EBITDA and adjusted operating result were at the highest level during this year. Our operating environment was shaped in Q3 as in the earlier part of the year by low consumer confidence as well as weak business environment. Logistics demand remained soft, and there's also the earlier mentioned warehouse overcapacity in Sweden. As in the Finnish economy and in our markets, this has been the situation. We have taken action during the year, throughout the year and also in Q3, we have implemented several measures to mitigate the impact of this challenging market environment, both on the cost efficiency side and in commercial measures, including price increases. So as a result, our operational efficiency has continued to strengthen, leading to improved profitability and especially in Postal Services in this quarter. If we look at the quarterly development during this year, Timo will continue with more details, but we expect to have a more normal seasonal pattern during this year. And as you see, the comparable quarters in first half were very high in '24. So the gap in sales compared to last year has been decreasing as the year has progressed and it was minus 3.9% in Q3, mostly driven by Postal Services decline where we have the discontinuation of unaddressed services as the big impact as well. And the adjusted EBITDA, in absolute terms and in margin-wise, percentage-wise, has been sequentially improving during the year. And now we reached 14% adjusted EBIT margin in Q3. The group portfolio continues to evolve to the direction it has been evolving earlier. The relative share of Postal Services sales slightly decreased from last year, now at 34%. And then the growth market businesses, Fulfillment and Logistics services and the eCommerce and Delivery Services, their combined share reached now 66% of group's net sales. In the parcel volumes, there's a positive development in the overall parcel volumes. We have the consumer side and especially the e-commerce market, i.e., the secondhand trade amongst consumers has been growing. This has boosted the consumer parcel market and the overall parcel market where the average growth now was 8%. This is up from 6% in Q2. The B2B side of parcel business has remained soft. On the Postal Services side, the addressed letter volumes continued to decrease in Q3, minus 18%, and this is driven by the increased digitalization. However, as mentioned, the operational efficiency and cost efficiency in Postal Services has also progressed very well. We have accelerated many actions there. And as you see in the report, the profitability of Postal Services actually increased year-on-year in Q3. At this point, I'll invite Timo Karppinen here to elaborate more on our financials.

Great. Thank you, Antti. And welcome on my behalf as well. So let's start. In the Posti Group Q3, there's some net sales decrease. It is largely and actually mostly doing -- coming from the Postal Services where we have had this unaddressed mail discontinuation of business as the main impact of that. And then the other segments, the sales was more or less flat, where the sales was kind of negatively impacted by the B2B market and the macro environment, but all in all, the sales developed as we have been estimated throughout the year. The sales decline, as you can see, sort of quarterly has narrowed down, and we expect this to sort of improve towards the end of the year. Then in terms of the profitability, our adjusted EBITDA margin has been improving quarter-by-quarter. And now in third quarter, we reached the highest EBITDA margin of the year, 14%. And this is all due to our kind of improved operational efficiency all in all, in all businesses, but especially in Postal Services, where when you look at the EBITDA contribution during the quarter by different segments, it was the Postal Services that improved on absolute value, the EBITDA, and it was quite significant result given that there was a sales decline of almost EUR 15 million, but then being able to do an absolute growth was remarkable kind of achievement. All in all, like I said, adjusted EBITDA margin of 14% is one of the highest or in par what we have been able to do in quarter 3 results over the last few years. Then in terms of the adjusted EBIT margin and development, extremely pleased that we now been able to reach the 5% level. And as you can see, this is then the highest kind of EBIT margin that we've been doing over the year in any quarter. And there has been kind of significant improvement in overall EBIT margin level improvement starting from the Q1, close to 2% increase in overall margin level by Q3. And again, the same sort of pattern from different segments. So the Postal Services was the one that improved the absolute levels. And then the other segments were more or less flat compared to the previous year. But all in all, again, this is very much on how we have been estimated this quarter and the year to develop and extremely pleased on the margin level itself. Then on the investments and our leverage. So our operative investments and payments to lease liabilities remain in the stable level. We continue to invest into digital services, this parcel locker network and all in all in the operations development across different businesses. Quarter 3, and this is cumulative there, we are now in -- all in all, it is EUR 150 million roughly level in this cash flow-based investment levels. And we are clearly seeing that we should be landing the year in this similar level as we were last year. And these operative investments and strategic -- the lease liabilities investment should remain in this EUR 120 million level that we have been forecasted along the years. Then in terms of the leverage, so we are now close to our long-term target. So now leverage is 2.6 net debt to adjusted EBITDA, minor increase coming to the financial net debt, now 1.3, and that's rise a bit because of the last payment of the ordinary dividend in Q3. Then looking into the segment levels in the eCommerce and Delivery Services, net sales grew in the third quarter. This increase is now coming from the high increase in the parcel volume, 8% in third quarter. And then there, the main driver is coming from the recommerce volumes that are now growing in big steps in -- throughout the year, but especially -- and that was visible in Q3. Then on what's limiting the parcel growth is the B2B market and there the B2B parcel volumes and as well the freight services remains stagnant in this quarter, which is coming from the macro environment, which has continued to be challenging. And then as well this increased volumes in recommerce and then decrease in the B2B volumes is the one that has impacted in the product mix, which kind of is limiting the net sales growth currently. But here, we are extremely pleased on the fact that this -- the growth in the parcel volumes, as we've been saying, continue to improve the overall profitability level. Now the third quarter, the EBITDA margin was 12.4%, which is an increase from the year-to-date levels of 10.9% and similar level in adjusted EBIT margin of close to 5% there, which is improvement of more than 1.5% compared to year-to-date levels what we've been achieving. And this is then kind of confirming our -- the fact that what we have been talking about that is when the parcel volumes grow, we are able to then generate larger amount of profits as we -- with the help of that. Then in Fulfillment and Logistics Services side, similar impact. So the B2B market and the macro environment is continuing to be challenging. And then that is impacting the customer demand, which remained weak. And here, these volumes were kind of low in the warehouses because of this macro environment sort of situation. But in Sweden, positive signs, we are now starting to see the increase in net sales, where we clearly see improvement in the demand in the warehousing activities despite the fact that the market demand is weak overall in Sweden. But this warehouse consolidation, resource optimization and our cost discipline have started to improve the overall profitability in this segment. In third quarter, the adjusted EBITDA margin improved to 14% from kind of year-to-date level of this 11.3%. So there's an improvement there as well in an adjusted EBIT margin improvement. And this is, again, confirming our long-term line that our commitment here is and focus is to start improving the profitability in this segment. And now we clearly see the signs of that starting to emerge in Q3. Then on the Postal Services side, there's a really significant improvement in the profitability. In adjusted EBITDA in absolute terms improved by EUR 3 million and the EBITDA margin reached this 16.4%, which is this 4% improvement to the -- what it was a year ago. And same with adjusted EBIT margin of more than 9%, again 4% improvement to the year ago level. And clearly, we see this kind of focus in the operational efficiencies and the changes that we have made in the delivery model and this optimization of resources start to positively impact the profitability. And now we see kind of the full impact of this discontinuation of unaddressed marketing services coming into full effect on the cost reduction of those and then allowing us to do savings all in all in the deliveries in the Postal Services side. That gives us the confidence of where we are heading in Q4 and next year in the Postal Services kind of operation. The net sales was -- the reduction was coming from this discontinuation of unaddressed marketing services part mostly. But here, again, the net sales declines only 10% in Q3 is kind of improvement to the level of what we had in the beginning of the year, almost 13%, minus 13%. Then in terms of the guidance, our guidance for the whole year is unchanged. We announced this new level of -- a new way of giving the guidance for the year and giving the ranges of -- for the sales and adjusted EBITDA and EBIT, and we can confirm now at the end of Q3 that those guidance levels will remain the same, and there's no need to change them. And now we actually with the help of this Q3 sort of strong improvement, give us the confidence that the Q4 will be able to grow and meet these targets that what we have set. Then just finally, just a few words about the midterm targets. So we -- during the IPO and listing process, we announced the new financial targets for our midterm. And again, we want to go through this and say that the kind of targets that we have are growth based. The average organic net sales growth of at least 2% in the group level and at least 5% in the -- outside the postal services is a key factor here. And then this average adjusted operating result growth of more than 5% per year -- on average per year in this midterm time horizon of 3 to 5 years. And then the leverage of net debt to adjusted EBITDA of less than 2.5. And then this financial target will lead into the fact that we are -- our dividend policy is such that we are targeting to pay continuously increasing ordinary dividends and payout -- with the payout ratio of at least 60% of net income. Now I thank you all for this part. And here, we would have some time for questions, if there are any.

Yes. Good morning from the chat side. Your chat host today is [ Matti Vaananen-Perera ] from Posti Communications. So let's go straight to the questions. We have a few of them here. First question regarding Postal Services. There are 2 questions that are quite related, so I'll tell them both to you. So how much sales did unaddressed marketing services account for in Q3 last year? And a question related to that, how big of a business was the unaddressed marketing services for Posti in 2024?

Yes. We can start with that. So in last year, the overall sales level of that service was EUR 26 million. And that all is sort of can be taken out in comparable terms from this year. We don't give the split of each quarters, but they're quite evenly split. So quite a sizable business that is now discontinued.

Okay. So then a question regarding ECD. Why did margin decrease more in Q3 year-on-year than in H1 despite sales mix being equally weak?

Well, I would say that the sales mix has changed. The quarters are not entirely comparable. So the sales mix continues to evolve from year-to-year and during the quarters as well. And our growth has really been focused on this recommerce and ECD side. And as said, the B2B markets have been weak. So these small changes may be impacting the quarters from a sequential point of view as well.

The key thing here is like we went through is the -- as you can see, the quarterly development that starting from the Q1 where we ended up in the Q3 was kind of significant improvement in overall profit level. And the key driver there is actually the volumes that are now growing more than has been in throughout the year or even last year.

Then a question regarding FLS. Can you comment on how margins developed in Finland and Sweden separately?

We don't give the separate profit levels or margin development in each of the countries, but give the split in sales. So they are -- we can all say that they are going to -- will be in a similar level as in sometime in the future. Now Sweden is a little bit lower than the [ Finland ], but there are these fundamental things that we are now fixing, which then will start to correct that.

Okay. Then a question here. How much was B2B parcel volumes down year-on-year in Q3 and year-to-date?

Well, I don't think we give the exact number on that, but what we have commented also earlier that it's in the B2B year-to-date is in a negative territory. It's a single-digit negative territory. And then the -- all the growth comes from the consumer side. And then the average is the plus 8%. In the comparables, as we have disclosed earlier, the quarters and the comparable quarters may also be different as in the -- towards the -- during the second half and towards the Q4 of last year, as you remember, the B2B markets were weak also in the end of last year, so that may influence the comparables.

Then a question regarding Postal Services, were there any specific drivers behind the 18% decline in mail volumes in addition -- sorry, I repeat that again. So in Postal Services, were there any specific drivers behind the 18% decline in mail volumes in addition to increased digitalization?

No, nothing unusual. It's more about the seasonality here that's impacting the result. Q3 is about the summertime and summer vacation and the typical mail, especially the corporate mail volumes remain on a low level. Now it just happened to be a bit more higher in decrease than what we have usually had in Q3, but not I would say that related to digital trend or anything like that.

The digitalization trend, of course, is driving postal volumes down, but that is something that has happened in the previous quarters and years as well.

Can you please quantify how much of the sales decline in Postal Services came from unaddressed mail in Q3?