PostNL N.V. (PNL) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for holding, and welcome to the PostNL update. [Operator Instructions] I would like to hand over the conference to Mr. Jochem van de Laarschot. Go ahead, please, sir.

Thank you, operator, and thank you to all for joining us this morning. We have issued a press release with our preliminary results for the fourth quarter and the full year 2020, and we thought it was a good idea to offer you the opportunity to listen to a short presentation by our Board of Management and with the opportunity to ask some questions. With me in the room, Herna Verhagen, our CEO; and Pim Berendsen, our CFO. Now handing over to Herna for the presentation.

Thanks, Jochem, and welcome all in the call. We want to give you an update on an exceptional year in, of course, unprecedented circumstances and give you a view on 2021. I think if we look back to 2020, it has been a special year in many ways and in very difficult circumstances. If you think about the results we delivered and we announced today, it's also thanks to the hard work of our people and the resilience of the network. And that gave us the opportunity and possibility to play a vital role in society. Because of that and because of the strong Q4 results, and especially in the month of December after the full lockdown in the Netherlands, we will, of course, also give our people a performance-related compensation to reward them for the hard work. And that's what we also will do for our sorting and delivery partners of parcels in the Netherlands. This is above, of course, the payment we also communicated when we did our trading update in October. The cost for both of those performance-related compensations are part of 2020. We're happy that with all the measures we've taken to keep our people healthy and safe, we are able and still are able to do the work we want to do and we have to do. With all the uncertainty going forward, health and safety remains to be our key priority. If you then look into the results of 2020, we delivered a significant outperformance of our earnings and also of our cash flow guidance. It was an extremely busy Q4, which accelerated the already strong performance of the first 3 quarters. Exceptional results were delivered by Mail in the Netherlands. And what we did see is that because of the full lockdown, much more Christmas cards were, of course, posted and via us distributed than we had expected. And that was, of course, distributed in a very efficient way leading to an exceptional performance. The growth in Parcels continued and also did show a peak after full lockdown, which started mid-December. That has led to, in our view, what's extraordinary figures and numbers. If you think about the key financial metrics we did set for 2020, we over-performed. Our revenue is to be expected around EUR 3.25 billion, which is 14% up compared to 2019. Our normalized EBIT will be around EUR 240 million, of which EUR 55 million is qualified as exceptional driven by COVID, that is partly in Parcels for EUR 40 million and partly in Mail for EUR 15 million. And while we go through a few of the financial details, Pim will give you some more highlights around these exceptional EUR 55 million. Of course, when we think about our extraordinary performance, it's also translated in our free cash flow, which will come in at around EUR 185 million. Lots of work have been put into these results. And that's, of course, next to our extraordinary business performance, also, for example, sale and leaseback and pension settlement and strong working capital measures. And last but not least, our normalized comprehensive income is around EUR 195 million, which is the basis for dividends. And as we have stated in our press release, this will allow us to reinstate dividends for 2020. As you do know, payout ratio of our dividend is between 70% and 90% and we expect to be a little bit at the bottom of the range in our payout ratio, which we, of course -- for which we will, of course, ask approval of our shareholders. It was a very strong operational year, which in the end did lead to a very strong financial year which will allow us to reinstate dividends over 2020. Let's give you some highlights on the financial of 2020 and also important, our expectation when it comes to 2021. Pim, please take over.

Yes. Thank you, Herna. I'll move to Slide 5. And just a point to start off with, we talk about the preliminary results. Obviously, we're still in the process of finalizing our full year-end close in conjunction with our auditors. But the normalized EBIT number as it stands is around EUR 240 million for full year 2020. And that includes EUR 55 million of what we consider to be nonrecurring COVID-19 implications, and those are split between Mail and Parcels, EUR 40 million of Parcels and EUR 15 million of normalized EBIT contribution in Mail in the Netherlands. And to start off with the first one, at Parcels, year-to-date Q3, we've indicated to you that on the back of the first lockdown in Q2 and including Q3, we had 10 million to 15 million of volume that we deem to be nonrecurring. That number has increased in the fourth quarter, predominantly by the step-up that we saw in volumes since the second lockdown. And all in all, we expect around 25 million of the 337 million parcels to be nonrecurring. Next to that, we've reported throughout the quarters and that remains to be the case in the fourth quarter, positive price/mix developments that are also partially nonrecurring, given the fact that smaller clients have used more single items, which had a positive impact on price/mix. What it also shows is the robustness of our network. Being able to scale up and scale up even more than initially expected in the fourth quarter has led to almost equally spread flows over the days of 2 weeks that actually give you a very good utilization of your capacity, and as such, also high margins. On the Mail side, the over-performance and the nonrecurring component of that performance of EUR 15 million is completely driven by period 12, so in December, where we've seen a huge improvement on the greeting cards and single items obviously resulting in a favorable price/mix effect and turning into these very strong profit numbers. Of course, Herna already told you that we've decided to increase the variable component of pay towards our people and the people working for our sorting and delivery partners, and those costs are included in the EUR 240 million for the year. If we then move to the free cash flow performance, then the free cash flow for 2020 is around 150 -- EUR 185 million and there's obviously 2 big components in the cash flow statement that are easy to recognize for you guys. Sale-leaseback transaction brought in EUR 145 million and there is a cash out on the traditional pension plans of EUR 200 million. And the free cash flow corrected for these one-off items would be around EUR 240 million. If you look at our cash flow and if you look at our initial thoughts in the beginning of 2020, you see a huge, huge improvement, obviously on the back of that sale-leaseback transaction, on the back of a pension agreement that turned out to be more favorable on cash terms of EUR 100 million, of which EUR 85 million is postponed in 5 equal installments for the next years, but also strict working capital management allowed us to turn a bigger cash conversion out of the profits. And next to that, I think we've made very good and strong straps in derisking our portfolio through several divestitures -- Nexive, PCS, Spotta and Adeptiv -- which also has supported the balance sheet being as strong as it currently is. From there, I think it's good to think a little bit about how should we look at that 2020 performance in light of the 2021 year that obviously has already started. And there, I think important to know that we'll be with you with an outlook for 2021 on March 1. Key assumptions that we currently make for '21: obviously, there remains a certain amount of unclarity, lack of visibility on what the consequences of COVID-19 are going to be in 2021; what we've assumed and what we currently still notice, obviously, high volumes into early 2021 for at least the first 2 or 3 months as a consequence of lockdown that we currently see. But over time, when lockdown alleviates and retail stores will open again, we expect volume to go down and the trend line of growth to go down a bit. But you have to recognize that, particularly in the beginning of 2021, we do incur significant additional costs, for instance, in relation to the retail stores that we compensate for the fact that it can only be open for our services and those costs are obviously also taken into account in the initial view on 2021. If you then look at the bridge that is presented on Slide 7, we start with the EUR 240 million normalized EBIT full year. We deduct the EUR 55 million of COVID-19 incidental nonrecurring impacts. And the baseline to start thinking about 2021 for us is around EUR 185 million. Then we do expect Parcels to continue to grow and also to benefit from some nonrecurring Q1 additional volumes in 2021. And as such, they will grow their profit numbers in 2021. But at the same time, 2 important cost elements that we need to take into account is, pension expenses are increasing as a consequence of the reduction of interest rates, and an increase in indexation rates as a consequence of good results on investments of the pension fund. The pension expense for 2021 is expected to be EUR 18 million higher. And as such, the result, EUR 18 million lower as a consequence of that in '21 in comparison to 2020. So please take that into account when defining your 2021 expectations. Next to that, we will open up new facilities in this year to be able to grow the Parcels business. And in relation to particularly the opening up of our small parcel sorting center, we do expect around about EUR 10 million to EUR 15 million additional costs because we'll not be able to utilize fully as of day 1 those facilities. And those 2 elements relate to the minus EUR 30 million there. That, all in all, will bring us to a normalized EBIT level of 2021, which is going to be higher than the EUR 185 million baseline from 2021 that we've talked about. Important to note that we'll continue to invest in our network and we'll continue to invest in the digitalization of our activity. So the step-up on investments that we talked about before from roughly the EUR 90 million mark in 2020 towards EUR 130 million to EUR 150 million is taken into account. And what we said is on March 1, we'll get back to an acceleration of our Digital Next program and the financial implications of that program will be shared with you at that moment in time. So at Q4, 1st of March, we'll give you all the details about 2020, more details about the Digital Next program in terms of what is our strategic objective and what are the financial consequences of that, and that will all be captured in the outlook 2021. We'll share it with you at that moment in time. So that brings us to the close of the presentation. Jochem, maybe quickly back to you.

Thank you. Operator, maybe you can open up for questions. Operator? I think we have a couple of questions waiting for us.

[Operator Instructions] The first question is from Mr. Frank Claassen, Degroof Petercam.

Two questions, please. First of all, on your Mail volume decline, only minus 0.2% in Q4. Well, that's really strong. Was there a catch-up effect of the direct mail campaigns or is it purely driven by the season greetings cards? So some color on that, please? And then, yes, secondly, to come back on your guidance, yes, it looks as if you fully exclude the COVID impact in 2021. So don't you expect any positive impact from COVID in 2021? Some words on that, please.

I think when it comes to the Mail volumes, it was a strong quarter. For the full year, we still see, of course, a very strong decline in Mail. Part of that catch-up is direct mail. Part of it is greeting cards and those Christmas card or greeting cards, of course, are the biggest influencer or impactor of the good price/mix effect for Mail in the Netherlands in December 2020. And on exact expectations on volume decline going forward and what the improvement of direct mail in the fourth quarter means for 2021, that's what we will do on March 1.

On your second point, what I've tried to highlight is that in 2020 numbers, the 337 million parcels, they have around about 25 million of nonrecurring volumes that, in our minds, are driven by specific lockdown effects or incidental buys as a consequence of people working from home. That's the original 10 million to 15 million that we talked about before. Obviously, we do see a structural trend of an increase of underlying e-commerce spend. Online has gained market share from off-line, which in itself will lead to a step-up of the growth expectations. And those are part of our assumptions for 2021. So part is structural; that is what we've baked into our assumptions, but also part of 2020 is nonrecurring incidental as a consequence of lockdown, which we do not expect to continue for the full year 2021. Let's hope so that is indeed the case.

And that's also the reason why we say in the press release that improvement of business performance mainly at Parcels. So that is your clue that, of course, part of the lockdown or part of the effect on Parcels of the lockdown is a structural effect and will be taken into account into 2021.

The next question is from Mr. Marc Zwartsenburg, ING.

Yes. A couple of questions. First of all, on the -- also coming back on the one-off EUR 55 million and in terms of euros and then the 25 million volumes in parcels. What is exactly designed as a one-off? That's my first question. Can you give a bit more color on what you basically now exclude from the 2021?

Yes. If you -- and I'm only talking about Parcels at the moment, Marc. So the 10 million to 15 million, we explained as an incidental volume as a consequence of people starting to work from home as of March 2020 throughout the second quarter. So buying stuff to work from home, some equipment to facilitate all of that and some additional health-driven products that we deem to be incidental. Those will not recur. If you bought yourself a new headset to be able to work from home, you will not buy one again next year. That is one element to it. The other element is that we've followed the growth lines, the structural trend lines, month-over-month, and what we disregard is a specific step-up that we can see as a consequence of the lockdown effect. So if you look at a trend line and you see a steep step-up because of the mayors of the bigger cities saying don't come into the city center, buy online, and the effect of the lockdown, those elements together are considered to be above and beyond the structural online growth levels. That is taken into account in the 25 million parcel volume -- around 25 million that we exclude. Now that 25 million against the average margin plus the favorable price/mix effect together lead to EUR 40 million of profit relating to that nonrecurring part of business.

Okay. That was clear. And that is on the EUR 49 million for the Parcels?

40. 4-0. Just EUR 15 million for Mail in the Netherlands and EUR 40 million, 4-0, for Parcels.

Yes. Of course, of course. And I'm sorry, need to come back on Frank Claassen's question. What did you take into account for the EUR 185 million, was that then the floor for 2021? Did you assume in these additional positives like a step-up that you saw -- the EUR 10 million step-up that you saw when things were really closed down for January and February, for instance? Is that already included or is that because of the low visibility and we're still already in January?

No. That is included. We know what we carry each and every day. So the additional volume in January/February, as a consequence of lockdown still being there is included in this higher-than-EUR 185 million.

And I think -- and what we also did say in the press release, we do not expect that level to continue for the full year. So we did take into account a certain step-back of, of course, volumes we see today because of lockdown.

Okay. Yes. That's fair. And then I had a question on the investments for 2021, maybe the EUR 10 million to EUR 15 million extra costs. Are these fully [indiscernible] and these 2 additional [indiscernible], is that correct? Or does it also already include some of the digital investments?

What it does, the EUR 10 million that I explicitly mentioned as part of the minus EUR 30 million in the bridge relate to temporarily underutilization of your new facilities. They will not operate at max capacity and will take some time to get to the productivity levels. That is the EUR 10 million we talked about. The costs, depreciation and other costs, in relation to the step-up of investments from around about EUR 90 million to EUR 130 million to EUR 150 million that we talked about before are obviously part of this. So what is not part of that, that we're considering to accelerate even beyond that point of investments are digital capabilities and potential investments in relation to that, but also, obviously, attractive returns that relate to that are not part of these numbers. And that we'll share in more details, both in terms of ambition levels as well as financial consequences, with you on March 1.

Yes. And just to be sure that we get the statement right. Is that the digital investments that might already kick in this year will not lower that floor. That floor is there. And…

No. That's not what we say. Let's say -- what we say is that the Digital Next consequences on short and longer term will be shared with you on March 1. So they could have impact on the overall assumed normalized EBIT levels that we now assume for 2021.

Together with, and that's, I think, as stated by Pim and important, is that when we do, of course, investment, there needs to be a certain return to it. So it's always a combination of the 2.

Yes, correct. So for the longer term, that will be a plus. But the thing is, I just want to know whether the EUR 185 million is a bit of a floor once you put it out there. Do they not, at 1st of March, bring it down again? That's…

No, Marc. If you look at the slide, Marc, it starts with around EUR 185 million. What it says is, let's say, normalized EBIT will be higher than normalized corrected for. The orange bar is a little bit higher as it currently stands. And let's wait until we're able to share our Digital Next program. And I think where you can rely on is that particularly if you talk about digital, we'll only consider investments that truly bring additional value that we can capture and of which returns will be significantly higher than our existing return on invested capital. So they will be definitely very accretive to value creation. Otherwise, we'll not consider them.

Yes, that's true. The last one, can you share just the price/mix impact in Parcels in Q4? Was it positive in March?

It is definitely positive, but exactly how much, you need to wait for that until March 1. But it is positive and it's actually positive, obviously, for the entire year. That's also why I make that point that part of that is not recurring.

The next question is from Mr. Henk Slotboom, The Idea.

I have a couple of questions. First of all, on the free cash flow, that was, I think, the most positive surprise we saw this morning. You guided for EUR 60 million -- or at least EUR 60 million. And surprise, surprise, we saw a figure, which was a multiple of that. Now obviously, part of that relates to the higher-than-expected EBIT. But then there are a couple of other moving parts. Am I right to assume that the biggest impact there was in the working capital? If I understand it correctly, Mail saw a positive momentum in Christmas cards. That's all upfront money. If you refer to a positive mix effect in Parcels, then I can assume that SMEs pay upfront or at least part of SMEs pay upfront as well. So that has impacted your cash flow positively. Perhaps you can give some color on that? I understand you can't get into the full figures, the full rundown, but would help to understand a little bit more of that. The second question I had relates to the dividend. You already said we will probably pay a dividend which is at the lower end of the 70% to 90% range. Now I check the annual report, do you still plan to give the shareholders the alternative between cash and a stock dividend? And if you pay stock dividends, have you saw -- do you have any ideas whether or not you're going to neutralize the effects that we've seen a lot of dilution in the past of the stock dividend? Well, at least when I look at the guidance for this year, the cash flow remains very strong. So there should be no hurdle in that respect. And the last question I had is I look at the sorting capacity, you already alluded about the small parcel center, which is -- which will come onstream this year, the expansion in Waalwijk, I believe you're opening a first facility in Belgium and one in, I believe, it's [indiscernible]. Your competitors have been investing heavily in it as well. DHL has invested in Zaltbommel in Utrecht. DPD recently opened a center in Amsterdam. How do you look at this? Is this an overkill? Is this something that is easily absorbable by the market if you look at 2021? Those are my questions.

All right. And shall I take the first one?

Yes, yes, yes. That's okay. Yes, please.

So on the cash, Henk, yes, higher than EUR 60 million in comparison to what it turns out to be. I think there's a few contributors to it. And obviously, the step-up in results is the biggest contributor there. Then there are slightly lower CapEx and slightly better working capital, not necessarily because -- if I follow your argumentation, yes, it's true that the Christmas card and single items quite often turn to cash straight away. But parcel growth also on SMEs is normally based on contracts and contract payment terms. So those, let's say, receivable positions do not turn into cash in the same month normally. But all in all, also an improvement on working capital, partially through good management, but also partially through mix. There is clearly a different spread between import and export volumes. I've talked about that element before. That also has continued into the fourth quarter with some positive working capital elements to it. So those 3 elements together -- and the full rundown of that bridge you will certainly get on March 1 -- drive the improvement on cash flow. If you talk about dividends, we indicate what the normalized comprehensive income is for 2020, but also give some insights as what we do expect for 2021. Basically comparable to the EUR 195 million of 2020, and indeed, given the fact that we're very, very happy that we're able to return to dividends, but also recognizing 2020 as an exceptional year we'll be at the low end of that payout ratio range. But still, I would say, a very attractive dividend per share. If you then look at our policy rule, as we say, we'll stick to the policy, which is a choice of cash and scrip dividend for our shareholders to determine. And as part of our overall outlook, in March 1 we'll also give some more guidance as how we look at capital allocation through the investments in business, investments in digital, potential bolt-on acquisitions if they contribute and potentially other ways to return money to our shareholders. But that is something for March 1.

And the latter with a clear priority in what we would like to do first. I think when it comes to sorting capacity, our competitors did add sorting capacity or capacity in the market in 2020. We will do so in 2021 which gives us, in our view, also an advantage because we expect growth to continue as we already highlighted when we talked about 2021. So in my view, if you think about the market in the Netherlands and the growth expected in parcel market, I do think there is a need for capacity and especially need for capacity on our side because we expect growth to continue. As said, we worked on the max of our capacity in December so I don't-- I do not see it as a disadvantage; I see it as a big advantage, and happy to be able to open some of our -- of course, some of our sourcing locations as of this summer.

May I add a small one if I can, Herna?

Yes.

If you look at the fourth quarter, where was the biggest bottleneck? Was that in the sorting capacity? Or was that in the, call it, the last-mile, the deliverers?

In my view, if you -- it's -- I would not talk about bottlenecks, to be honest, because if you think that the system, as it currently is, is able to do 1.7 million parcels a day, then you use everything to -- you use everything to the max capacity. And in the end, if you want to add capacity, you have to add sorting capacity and you have to add distribution capacity. That's what we did in 2020. So in 2020, we did add almost 1,000 parcel deliverers and we added capacity by, for example, working 24/7. So we took quite some measures in our current sorting organization to make sure that we take out the max of it. But it's not one or the other. You have to do both.

Okay. I will no longer talk about bottlenecks. I won't call it a challenge, if that's okay with you.

The next question is from Ms. Najet El Kassir, Bank of America.

You mentioned you had a slightly lower CapEx benefit in the free cash flow in Q4. Could you please let us know if we should expect that CapEx to be spent into 2021? And also, if you could provide the split of CapEx in terms of network CapEx, other CapEx and financial leases for 2021, that would be very helpful.

Okay. Well, on the CapEx side, it's only a little bit lower than the original or the latest view I've shared with you when talking about the Q3 cash flow bridge. So you talk about a couple of million, EUR 5 million to EUR 10 million less. And I've not changed the expectation for full year 2021, if it talks about the level of investments that we'll do. And the step-up from around about the EUR 80 million to EUR 90 million mark to EUR 130 million to EUR 150 million is driven by 2 main elements: the increase in capacity, so the 2 depots as well as the small parcel sorting center contribute to that step-up; and we already include investments in IT and IT capacity, given the fact that data flows and parcel flows require us also to step up in our IT environment. So those elements are already part of the EUR 130 million to EUR 150 million and those are not changed because of the fact that we spent a little bit less CapEx in 2020.

Maybe if I can just add on the Parcel volume growth, what are you seeing and currently and if you are still operating at 24/7 given the current lockdown?

What you do see is because full lockdown continued in the Netherlands and will continue at least till February 9, we are still working at a very high capacity. It's a little bit less than, of course, in December because we do not have all Christmas parcels. But still very high levels at this moment in time.

The next question is from Mr. Andre Mulder, Kepler Cheuvreux.

Two questions. Firstly, coming back on the EUR 40 million that you mentioned, as nonstructural in Parcels, is that simply an income item or have you also taken into account the extra cost that you plan to pay to staff? And can you give any indication of that little item, what's included in the 2020 numbers already? Second question is on -- a question to provide a bit of a bridge between your expectations that EBIT will go up, but the net income will be stable. What are the elements that we have to take into account there?

On the EUR 40 million, Andre, that is the EBIT impact of the -- what we call nonrecurring COVID-19 developments. And those EUR 40 million you need to split in, let's say, a part that relates to the additional volume times the contribution of that volume. And separately from that, there is a positive price/mix effect that will not continue into 2021 . And just to give you a bit of an idea and don't make it too exact, but roughly 3/4 of that EUR 40 million is the volume times average contribution, and 1/4 is the nonrecurring price/mix effect. But that's roughly speaking, so don't get back to me if there's a few million that move between those buckets, but that is roughly how you should look at it.

It seems that this is -- these are, I would say, income items. Did you also take into account these extra costs that you pay to stock? I would also say that…

Yes, yes. That's what I said. It's the overall EBIT contribution. So costs relating to those additional volumes are taken into account, definitely.

Can you give any indication for what you plan to pay extra to staff?

What we are paying extra to staff is cost in 2020. So the performance-related compensation in October and the one we announced today is still cost 2020.

Can you offer any indication how much that has been?

It's around EUR 17 million in total, the 2 together.

Yes. So the additional one, around about EUR 8 million and the -- around EUR 240 million above and beyond what we already accounted for at Q3.

Yes. Okay. Then the bridge between a higher EBIT and stable comprehensive income?

That is because of the fact that the normalized EBIT is negatively impacted by higher pension expense, and that a higher pension expense does not lead to a higher pension cash-out. And the reverse of that element you see back in other comprehensive income, because of the fact that the higher pension expense does not lead to a higher cash-out. Today, you see an improvement of the other comprehensive income line that brings the normalized comprehensive income for 2021 to approximately the same level as 2020.

Any changes we should expect in, let's say, net interest or tax?

Well, they are all included in this around about the 2020 marker that I've given you.

The last question is from Mr. Marco Limite, Barclays.

Most of my questions have been already asked, so really just one left. Just if you can give actually a bit of color on how you sort of give a number around the one-off volumes. So like, yes, what was the method that you used to understand what were just COVID-related one-off volumes?

I think the -- we, of course, presented for the first time those one-off volumes when we did Q3 and now we said it's EUR 10 million to EUR 15 million within Parcels. And how did we measure that? You should think about things people order because they have to work at home. So think about desks, chairs; think about printers, computers; think about home health material, et cetera, et cetera. So we looked quite specifically around what is ordered in certain categories, what are normal trends and what would -- what do we see as peaks because of people starting to work from home. What is added to that is what we did see happening in the Netherlands after the full lockdown, which started mid-December, and at that time and just before that also a few of the mayors in the Netherlands who did say do not come to our cities to start buying. Those quotes, together with, of course, the closedown of the nonessential stores also gives certain peaks, which we do not expect to come back in 2021. So that's how we came to the number.

Okay. That's clear. And one additional very quick question. Can you confirm that the EUR 195 million of comprehensive income doesn't include the capital gain on the sale-leaseback and exceptional write-off in Q1 for Sandd assets?

It is -- let's say, as we announced at sale-leaseback, the profit from the sale-leaseback is not included in this normalized comprehensive income. As we said, we wouldn't include it. So it's not. This is really the baseline based on which you can quite easily now calculate the dividend expectations given the fact that I pointed towards the low end -- lowest end of the range.

That concludes this session. Thank you for joining us. We will be in touch with you if you're an analyst, shortly to collect new estimates also based on the information of today. And of course, we will be back on March 1 with the full annual results. See you then. Thank you. Bye-bye.

Ladies and gentlemen, this concludes the PostNL update. Thank you for attending. You may now disconnect your lines. Have a nice day.