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

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.

Thank you operator. Good morning, everyone. Thank you for joining us unscheduled call as we published 2 press releases this morning. The first one about the preliminary fourth quarter and full year results 2021 as well as the announcement of the share buyback program that will start at the end of February. We're here virtually together with Pim Berendsen, our CFO. He will do a quick introduction in a moment, after which you have the opportunity to ask a number of questions. Pim, over to you, please.

Thank you Jochem, and good morning to everyone. Today, we released our preliminary Q4 and full year 2021 results and we've announced the launch of a share buyback program. Clearly 2021 qualifies as an exceptional year impacted by the pandemic. Thanks to our people, the resilience of our business, we've shown strong results driven by solid performance at Parcels and a strong result at Mail in the Netherlands. Cash flow performance was very strong in the full year and exceeded our expectations, which then, of course, further strengthens our financial position balance sheet. In line with our capital allocation framework that we discussed a couple of times during this year, we are now well positioned to launch a share buyback program. Confidence in our successful execution of our strategy gives us comfort around our longer-term business performance and cash generation perspectives. We'll continue to focus on value creation for all stakeholders through growth opportunities, cost-saving initiatives, acceleration of our digitalization programs and our environmental and social initiatives. Since the start of the pandemic, early 2020, we've recognized the efforts and hard work of our people, partners and retailers, and we will continue to take our responsibility as a company and deliver special moments. If we then now look into a little bit more detail on the financials, Q4 was a busy quarter with a very strong performance in the first 3 quarters of the year. Strong performance also particularly in the last weeks of the year, driven by Mail in the Netherlands through a very good Christmas and New Year's campaign. On the financials, revenue is expected to be close to EUR 3.5 billion, up 6.5% in comparison to last year. Normalized EBIT expected to come in at EUR 308 million with an outlook of EUR 280 million to EUR 310 million. So clearly, at the high end of the range and margin at a very solid 8.9% for the year. EUR 80 million, I would say, around EUR 80 million of the EUR 308 million is qualified as nonrecurring and related to COVID-19. Free cash flow came in at EUR 288 million, which clearly exceeds our outlook of EUR 250 million to EUR 280 million. And in comparison to 2020, it was a free cash flow with more than EUR 100 million more than 2020. Obviously, the high end of the normalized EBIT range also results in a higher-than-expected normalized comprehensive income of 277 -- EUR 277 million, which is the basis of our dividend policy. Return on invested capital around 16% to 17%, more than 2x higher than the [ WACC ]. If we then look into a few of the elements of full year performance on the next slide, we clearly see the EUR 308 million as a normalized EBIT, then EUR 80 million of nonrecurring profit and roughly speaking, 50-50 split between Parcels and Mail segments, which basically makes the normalized EBIT adjusted for nonrecurring profit at around EUR 228 million. That's driven by a 14% growth of parcels volume in 2021 and EUR 2.363 billion revenue at Parcels and normalized EBIT of EUR 229 million at the parcel segment, of which, as said, EUR 40 million is nonrecurring. Mail in the Netherlands, 2 billion mail items delivered in 2021, only a volume decline of 0.3%, which is really special. Underlying substitution was around 5% revenue at EUR 1.683 million. Normalized EBIT at EUR 160 million, which is really a very strong performance of the Mail business, of which EUR 40 million is nonrecurring and related to COVID. Going forward to 2022. Clearly, we'll provide a detailed outlook both in terms of EBIT and free cash flow guidance as per the 28th of February, but on this slide, you'll find some indications already. As said, we take out the EUR 80 million of nonrecurring profit, and then we assume a normalized EBIT that will be broadly in line with the adjusted 2021 number. Better performance at Parcels, partially offset by lower results in Mail in the Netherlands. Clearly we see some additional inflation cost pressures on costs like energy, transportation. We have not assumed any significant impact of COVID-19 in 2022. We'll start up new facilities and accelerate our digital transformation programs, and we will see higher IFRS-related pension expenses. And what we've seen also on the fourth quarter is that the recovery of fourth quarter has not materialized in the fourth quarter of 2021, and we do not expect it to improve in the short term, particularly driven by global supply chain issues and increasing freight costs, particularly steeply increased freight costs in the fourth quarter that just makes the Asian web shops less competitive towards domestic retailers and e-tailers. Our free cash flow will be below 2021. As discussed before, we will be robust enough to fund the dividend -- the cash dividends from our free cash flow in 2022. There will be step-up of investments, and we do expect a negative working capital because of higher settlements [indiscernible]. Again, that is what we've expected. And also, clearly, in our journey towards 2024, we've always indicated that 2022 will be the lower year. Certainly, there are still uncertainties around COVID-19 and developments around us in global markets as well as on cross-border, as I discussed. Then on the next slide, and I must say, for the company, for ourselves, it's a very important step to be able to announce a share buyback program. For us, it's really the function of the transformation that we've made over the last years. If you just look back in time, the ability to do the acquisition of Sandd, the pension agreement reached, multiple divestures [indiscernible] and most importantly rigorous focus on disciplined capital allocation and performance management has brought us to a position where we have a very strong, robust balance sheet. A good and solid strategy that now allows us to launch a share buyback program of EUR 250 million. As promised, we've rolled out the steps of our capital allocation framework discipline. And after announcing the plans to invest in our business, the acceleration of our digital transformation, the normal dividends that follow business performance, it is now time to use the excess cash that we have to launch a share buyback program of EUR 250 million. That will be split in 2 tranches, the first tranche will commence at the 28th of February, EUR 160 million to EUR 170 million and it resembles of the assumed share dividends for the book years 2021 and 2022 that we will take out straight away. And the second tranche of the remainder of the program will be launched in 2023 to offset the assumed dilutive impact of the 2023 share dividends. And that is the purpose obviously of this program is to make the balance sheet more efficient and to neutralize the diluted impact for share dividends based on the assumed split of 40:60 of share versus cash. Clearly, this program will have a positive impact on earnings per share and dividend per share up to EUR 0.03 to EUR 0.05 based on the current assumptions. And we'll use the cash of our balance sheet. It's really the first time that PostNL can do this. We are very, very confident and happy that we are able to announce this, and in fact it is a function of a very disciplined approach over the last couple of years that really strengthens the business and that brings us to this announcement today. And with those words, I'll hand it back to Jochem, who will certainly then open up for questions.

Thank you Pim, and I will hand it back to the operator to see whether there are any questions at this moment.

[Operator Instructions] And the first question is from Mr. David Kerstens, Jefferies.

A couple of questions, please. First of all, you highlighted some final nonrecurring effects related to COVID in Q4. Can you give the nonrecurring parcel volumes and letter volumes that you had? I think you currently gave the EBIT impact in the press release. And then, maybe looking at the 2022 guidance, I think it implies that profitability is not falling back to 2019 levels, pre-COVID. And what will -- can you explain why that would be -- why you would be at a structurally higher level in terms of EBIT margin? You highlighted 8.9% for 2021. That will obviously come down somewhat, but well above 2019. And then, you mentioned the underlying substitution rate only 5% in 2021, 9% in Q4. What should we assume for run rate into 2022? Is that more like the 9% you had in the fourth quarter? And maybe, another question on the expectation of higher IFRS pension expenses. Why would you expect higher expenses in an increasing rate environment? Is that because the rate year-on-year is still higher when you compare January with January last year? And then, maybe finally, on the inflationary costs, you highlighted Energy & Transportation. But have you also already incorporated potentially higher labor costs following the conclusion of your labor negotiations? Thank you very much.

David, thanks for your questions. Please remind me if I missed them -- missed some of them. First question was related to the volumes. Well, a lot of more detail will be presented, let's say, at the end of February. Clearly, the vast majority of the nonrecurring COVID impact in the fourth quarter was in the Mail business. So not so much in the Parcels business, let's say, and all in all, there's not much more than EUR 1 million to EUR 2 million of nonrecurring [indiscernible] volume in the Parcels segment. And clearly, on the Mail side, we've seen benefits of, for instance, booster campaigns that have an impact on the volume in the mail business. You're absolutely right. On the margin, we do not expect it to fall back to 2019 numbers, and that's clearly also what I've said quarter-on-quarter as a function of the improvement measures that we've taken. And so on the parcel side, the introduction of different pricing strategies, the operational metrics that we've introduced in our Capital Markets Day campaign will all benefit to that margin profile. And that's indeed what we've talked about before. If you talk about the substitution rate being around 5% for 2021, and indeed, let's say, the higher number around 9% in the fourth quarter has not yet changed our perspective of the volume development into 2022. Originally, that was 8% to 10%. We've clearly indicated at Q3 that we do expect a slight improvement on the substitution rate, so we would expect to be below the 8% volume decline expectations for 2022. The higher pension expense, you could say, how can that be given the fact that interest rates are moving up. From an IFRS point of view, you fix your pension expense as a interest rate date on the end of the year, so the 31st of December 2021. And that is indeed in connection with interest rate and other pension parameters leading to pension expense, which obviously will not lead to a higher pension cash out. And as a consequence, we see a bigger delta coming back at other comprehensive income in 2022. But pension expense from an IFRS point of view will increase in comparison to the full year 2021 pension expense. We've taken into account our latest expectations on also wage increases that are part of the indication that are on the slide. Negotiations on collective labor agreement for postal deliverers is ongoing. But our expectations are part of the indications that are given for 2022.

Great. And at this stage, can you already say how much the pension expense in the P&L will increase, given your fixed fee rates already.

An indication, certainly, you'll get the right number exactly as part of the outlook, but take into account EUR 5 million to EUR 10 million.

And then, if interest rates continue to rise this year, then next year, that will come down again. Is that the right way to look at that?

Exactly. Exactly. So during the year, the pension expense will not change, but if you -- if we were to end up at the end of this year with significant or higher interest rates and in comparison, potentially significantly, relatively speaking, higher interest rates then indeed, for the year thereafter, that would lead to an improvement of the pension expense in comparison to 2021.

Yes. That's clear. Thank you very much, Pim.

What we'll do by the Q4 report, we'll indicate the Delta and also the impact that Delta has on EBIT to debt EBIT, cash EBITDA. So to make explicitly clear how pension expense leads to pension cash out and what the implications are for EBITDA if you want to compare that with peers in terms of valuation metrics.

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

A couple of questions. First of all, on Mail NL. You had a very strong EBIT margin, even if you exclude the COVID support in Q4. Can you give a bit of an explanation why that margin is so high despite that you actually, in terms of mail volume declines, are close to the 9%? And connected to that, do we maybe have an issue if you look to the EBIT margin for the full year of the Mail division, do we have an issue with the threshold that's in the USO in terms of cap? That's the first question. My second question is on the outlook for '22. It's not completely clear to me if there's any COVID support in that number. Because obviously, also in January, we still have some support in Mail from the Booster letters. And in Parcels, probably a few weeks of lockdown. Is there anything from those 2 elements included in the outlook? Or is that more like the room you have taken to have at least a bit of leeway on the outlook? Then my question on the dividend. We provided the comprehensive net income. We know the policy is 70% to 90%. But if you're at the low end, you're just below the EUR 0.40 that was once mentioned last year as being sort of the difference we should expect out of '21. Is it therefore to be assumed that the payout ratio is at least 75% to just come to the EUR 0.40 per share? And how should we look to 2022? I know it's early, but we have an outlook. And of course, we have COVID support in '21, which will hopefully not be the case in '22. But would that then imply that your dividend would come down because of the policy on the payout ratio to a level more closer to the EUR 0.30? Or would you say I have enough room in my cash flows to exempt from the 70% to 90% that still haven't sustained and later on growing dividend. Because in adjacent to your excess cash, you have more excess cash than the EUR 250 million in your share buyback. So would you be able to use that to give at least a sort of over bridge in 2022 on the dividend to keep it on a certain level and then grow again? And then lastly, parcel volumes in January. Could you give us a bit of an indication how the year started out because you have a very tough comp with last year. But yes, we had some lockdown in January. Hopefully, by tonight, it's over. But can you give a bit of an indication where you start on the year. That's it.

Thank you, Marc. First question was related to the margin about Mail and whether or not that would be an issue in terms of our usual margin levels. Well, clearly, the Mail in the Netherlands business for the whole year has gotten a margin around about 9%, 9.5%. That is for Mail in the Netherlands. You know that the threshold for USO is specifically related to USO and we do not expect an issue there. Margin in the quarter is obviously influenced by the product mix in the fourth quarter, where a comparison to all the quarters, there is significantly more single items in it. So all in all, very good margin at Mail and no issue expected on the USO threshold. Then on the outlook of...

One second. On the margin, because I'm excluding the high-margin booster mail and vaccination, what have you business. But even if you strip it out, the margin is still very high. Is that a mix of Christmas cards or is it something else?

It's, to a large extent, Christmas cards. The fourth quarter margin is always high, driven by Christmas cards and those Christmas cards and the development of those Christmas card is not necessarily excluded as nonrecurring profit. So -- that is the key driver there.

Okay. Clear.

You asked questions on outlook. Well, clearly, I've not presented an outlook yet, given an indication on some of the components. You also -- there's also COVID support in it. There is still a little bit of lockdown. At the same time, you know that we've also communicated and are compensating our retailers with additional compensation to ensure that they keep their stores open. Clearly, that's a cost and additional cost and that additional cost offsets kind of the additional volume that might be there. So in terms of volume, you're right that in January, there might be a little bit more volume on the mail side, predominantly related to booster mailings, but we do not include financially speaking, a significant material impact on the '22 numbers driven by COVID-19. Then your question was related to the dividend policy. Having mentioned the normalized comprehensive income. I think, you said low end of dividend, that's not what is on the slide nor in the press release. What we said is to the lower end of the bandwidth, and certainly, I clearly remember what I've said about the EUR 0.40. So you should not expect a dividend below that EUR 0.40. And going forward, knowing that the dividend over 2021 will be influenced also by the nonrecurring results that we don't take out of the normalized comprehensive income, clearly, dividend will go down a little bit. I don't think that they will go down to the level of the EUR 0.30 that you talked about. And it's, again, a function of a choice in payout ratio so that we want to apply on the 2022 results, which is not up for debate today. But clearly, we do understand that dividend and dividend return is a key component of our equity story. And on January, I think it's a bit too early to be very specific. Other than that, let's say, we see no change in patterns from December into early January.

But what was December then?

December was, let's say, you've seen in Q4, a good result in underlying growth rate, excluding parcels, excluding nonrecurring growth and cross border, a significant growth of 14%, and we also expect growth to continue from December to January. But indeed, without taking out the nonrecurring profits, it will be difficult comparisons. And again, that's also nothing new. That is what we've shared a few weeks before.

It's very clear thank you very much Pim.

[Operator Instructions] The next question is from the line of Marco Limite, Barclays.

So my first question is on parcel volumes in Q4. If I'm not wrong, I think in the past, the guidance was more -- the guidance was more flattish volumes in Q4. So I'm wondering if you're seeing anything in particular that can explain the minus 5% on a reported basis, maybe October was lower, maybe Christmas was lower. And following up on this question, may I ask if -- What's the assumption for volume growth for your 2022 outlook? You gave a broad indication for letter volume decline for next year and will be quite useful to have a broad idea of what you're expecting for next year? And then my second question is about the share buyback. So you were clearly saying that the share buyback program aims at neutralizing the share -- the new shares issued related to the dividend payment. But let's assume that maybe the traditional 40% to 50% of dividend payout with shares actually is paid in cash. Does your share buyback of EUR 160 million, EUR 170 million for next year change this or not? Does that mean that you are paying more cash to shareholders in case that 40% actually will be lower?

Thank you, Marco. Clear questions. First one relates to the parcel volumes in Q4. You say assumed flattish in Q4 and now, minus. I think the biggest component that is in between those is actually the development of cross-border volumes. And that cross-border volume actually turned out into a significant minus that basically has caused the minus 5% that you referred to. So at the domestic level, it is more or less flattish. And it is really a big step down on cross-border volumes in comparison to Q4 last year driven by a steep increase in freight cost as of October that together with delay in the recovery of that cross-border volume and basically makes Chinese web shops less competitive, both in terms of price points and in transit times compared to just going to a physical retail store or just ordering it from a Dutch or Mainland Europe web shop. So that is the explanation behind the volume development. So predominantly driven by cross-border developments, which I think you can also see back at some of our peers. Assumptions on 2022 on parcels. I think it's a bit too early to say, there will be growth. That is clearly also what we indicate. And on February 28, we'll substantiate the components of the bridge that you're used to, but not for today. On the share buyback program, we came to the number based on an assumed split, but it's a fixed amount. So the amount won't change, irrespective of whether or not shareholders select a different split between share and cash dividends. So EUR 160 million, EUR 170 million and another EUR 80 million to EUR 90 million in 2023, which is fixed.

Okay. And a quick follow-up question. Earlier, you mentioned that you expect a few cents of EPS accretion from the buyback. But can you clarify that point? Let's assume your base scenario, where with the buyback, you are going to neutralize the new shares issued related to the dividend payment. And therefore, you will be issuing your shares, but you will be buying back those new shares. And I'm really missing where those few cents of EPS accretion are coming from?

Well, let's say -- the way we talked about the developments of earnings and dividend per share before already included the dilutionary effect of our dividend policy, given the fact that kind of the selection, the election our shareholders make was roughly speaking, 40-60 anyway. So we've calculated the dividends per share on the back of the assumption that year-over-year, we'll add more shares. Now, we launched a program that is going to take out a significant part of the outstanding shares and first tranche that obviously takes out more and only the share dividend on the book year 2021, but already takes out the shares on a potential 2020 share dividend. And again, in 2023, and basically, those combined will have a positive impact on earnings per share.

Okay. That's clear.

And of course, yes, let's say it's a function of the share price against which we buy them back. But let's say, on the share price of yesterday, you could expect to take out, roughly speaking, EUR 50 million of shares, that will then have a positive impact on earnings per share, dividend per share.

The next question is from Mr. David Kerstens, Jefferies.

Just 2 follow-up questions, please. In the cash flow guidance for 2022, you talked about the step-up in investments, and I think we had some components of potential CapEx for 2022 and beyond. Can you clarify what level of CapEx you do expect? I understand it's roughly EUR 120 million plus EUR 100 million, so in excess of EUR 200 million. Is that correct? And then secondly, how do you feel now about the 2024 ambition with the lower end of the range, I think, implying at least EUR 100 million step-up in normalized EBIT over a 2-year period. What will be the key drivers to achieve that number of EUR 330 million as a lower end of that range?

Thank you, David. Well, I think on the cash flow and on the cash flow rate, you'll have to wait until the end of February. We indicated a step-up of Investments clearly halfway through 2021. And that's the combination of increases of CapEx and increases of lease payments on the back of leases that we'll take. And I would say, together, that's definitely not the size of EUR 100 million step-up, but significantly less. How much exactly, we'll let you know by the end of February. And as I said, also take note of the fact that there will be an investment in working capital in 2022 on the back of settlement of terminal [indiscernible] positions. We've not said anything about 2024, and we've not changed our perspective on 2024. That is the answer I can give you there.

But what will be the key drivers? How important, for example, is a reduction of pension interest cost in that step-up in EBIT of EUR 100 million?

Because we've calculated that on the back of -- at that time, the pension expenses. So drivers are related to the continuous growth of Parcels, keeping as a key element of our strategy at the Mail business more or less stable at a profit and cash flow level that it's fit for that part of the business, the contribution of our Digital Next programs, which we said will be accretive as of 2023, second part of 2023, those elements together will lead to the step-up of performance towards 2024.

Sorry, you said you expect to keep Mail EBIT stable?

That's what we've shared. Clearly, not on the level of 2021, but on the level that we've indicated before, because 2021 also on the Mail side is influenced by, as said, around EUR 40 million of nonrecurring COVID effect.

This was the last question for today. I would like to close the question and answer session and give the floor back to Mr. Jochem van de Laarschot. Go ahead, please.

Thank you, operator, and thank you all for joining us today. We will be back on Monday, the 20th of February with full details of Q4 full year performance. And at that moment, we will also look forward to '22 and beyond what we have said today. If you have any further questions for us, you know where to get through to the IR team. Thanks again and hope to see you soon. Thank you, bye-bye.

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