Österreichische Post AG (POST) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. I'm Haley, your Chorus Call operator. Welcome, and thank you for joining Austrian Post results for the first 3 quarters. [Operator Instructions] The presentation will be followed by a question-and-answer session. [Operator Instructions] And I would now like to turn the conference over to Harald Hagenauer, Head of Investor Relations. Please go ahead.

Good afternoon, ladies and gentlemen. Welcome to this conference call of Austrian Post, where we would like to discuss the facts and figures about the third quarter and the 9-month figures. The presentation will be done by Walter Oblin, our CFO. And I would like to hand over to you, Walter, please.

Good afternoon, ladies and gentlemen. Thank you for the opportunity to present to you our Q3 results. We see overall is a summary upfront. After a very turbulent Q2, Q3 has been a quarter of recovery and coming back to stable operations. And as a result, I think also the financial results for this Q3 has been respectable and satisfying. Let me start on Page 3, giving you -- or reminding you of the new segment structure in which we report our results. As of Q1 this year, we report in 3 operational segments: Mail; Parcel & Logistics; and Retail & Bank. Mail, our core incumbent postal Letter Mail and Direct Mail business, currently roughly 60%, 62% of revenues, roughly 60% of revenues; Parcel & Logistics, our growing parcel business, comprising the portfolio of our Austrian parcel network and in the meantime 9 other geographies; roughly 38% of revenues in Retail & Bank, including our start-up bank, roughly 3% of revenues in total. As I said, Q2, probably not only for Austrian Post, but for the whole world, was a very turbulent quarter in which our business faced significant headwinds and also a parcel storm where we were having difficulties handling it. After that, Q3 was a quarter where things stabilized and where we saw a recovery of volumes on the Letter Mail and Direct Mail side. Parcel volumes came down a little bit, but there is still substantial growth momentum ongoing in parcels, both in Austria as well as abroad in Eastern Europe and now also in Turkey, where as of end of August, we are 80% shareholder of Aras Kargo. And in our logistics infrastructure, I think we also stabilized, I think have learned how to operate in the midst of a pandemic. And as a result, also costs were better under control than in Q2. As a result, Page 5, we can report today I think, quite positive financials for Q3 and, given the pandemic, also for the first 9 months in total. Revenues year-to-date, up 2.4%. That includes about 1.5% growth coming from the consolidation of Aras Kargo. We think that those revenues, parcel grew at 30 -- almost 32%. Mail was down by about 9%. Earnings for the first 9 months for the group down around 37%. This is the combination of EBIT of our logistics business down 10% and on top of that, the ramp-up losses for our new bank, bank99. Our investment program continues to run at full speed. And there were 2 important elements of our enhanced logistics infrastructure that came online in the last months, a large sorting center in the southeast of Austria and a large postal base in the middle of Austria. And to also summarize our outlook, I think the message here is we confirm the outlook that we gave in August with a good revenue growth. Now we put a number behind it, revenue growth we expect for the full year, including Aras Kargo, above 3%. EBIT-wise, we communicate here a guidance of EBIT of the logistics business around EUR 170 million, minus the ramp-up loss of our bank. As said previously, we expect this ramp-up loss to be in the order of magnitude EUR 40 million. Given -- and I want to already say this at this point in time, and I will later come back to it in the end. While we speak, there is discussion ongoing in Austria about additional measures to contain the growth of infections in Austria. And there is discussion of a quite severe lockdown, which could start pretty much as of next week. These new developments are not yet factored into this guidance, given that we have only 6 or 7 weeks to go until Christmas. Of course, the impact will be limited, but still, it could have an impact. Let me continue on Page 6, summarizing the revenue development. As I already said, group revenues up 2.4% with a substantial shift between segments. Mail down almost EUR 87 million or 9%, but the loss of revenues slowing and partly recovering. In Q3 was -- in Q3 alone, minus 5.6% revenue decline. In Parcel & Logistics, continued growth, continued record growth. 32% for year-to-date. Q3 alone, 35.4%. This is a combination of organic growth at double-digit rates. The additional impact of the DHL cooperation for 7 months compared to previous year. This started August 1 last year. And as of August 25, we fully consolidate Aras Kargo in our group financials and Aras Kargo had a revenue contribution in that, pretty much in that 1 month of almost EUR 24 million. Retail & Bank revenue is down 28%. Last year, we still had revenues from the cooperation with our former bank partner, and our new bank was only launched in April this year. Page 7 summarizes our EBIT development. Group EBIT year-to-date down 37.4%. This was 55% after 2 quarters, so we recovered and partly catched up to some extent. Q3 alone, up almost 50%. But last year, we had a negative one-off with a provision for a data protection issue of almost EUR 25 million. So that has to be adjusted, if you want to compare operational results. Within those 37.4%, the core logistics business, so Mail and Parcel, down 10%. Also, this decline was bigger after 6 months. So we also recovered there, with Mail down EUR 22 million, parcel up EUR 11 million, most of that coming from Q3. So I think in Q3, we showed that with stable operations, we can capture profit from the volume growth we have in parcels, [ corporate ] pretty much flat in Retail & Bank with negative change versus previous year of around EUR 37 million, mostly coming from the ramp-up losses of our new bank. Let me continue with an update on our strategy. And before I go into the details on Page 9, you see a new strategy framework over the last months. We've reviewed our strategy. We confirmed many elements, in particular the focus on defending market leadership and profitability in our core business, meaning Mail and Parcel in Austria. We also confirmed the target to grow profitably in adjacent, near markets. Near markets, meaning near both in terms of geography as well as adjacent in terms of value chain. This includes our parcel network in Eastern Europe. This includes our activities to provide e-commerce solutions around the delivery of parcels and business solutions around the delivery of mail. At the same time, we also would like to highlight 2 enhanced priorities. I would not say new priorities because these things have been part of our activities also for the last years already, but we want to highlight that we want to put even more emphasis on these 2 areas. One is the third element of our strategy to focus even more on the consumer and business models for private customers and SMEs. This includes, in particular, our new bank activity as well as our online marketplace, but also solutions to provide convenient pickup delivery and other solutions around delivery of mail and parcel in Austria. And the second newly-highlighted priority is the topic of sustainability, diversity and customer orientation. Austrian Post for almost 10 years has been, I would say, among the frontrunners in our industry when it comes to sustainable logistics. In 2011, we introduced a target of CO2-neutral last-mile delivery, which has now been in place for 10 years, including compensation. We want -- we are aware that we have a large CO2 footprint, given our logistics business, and want to take responsibility also in climate protection. And I will later share with you ambitious targets that we want to commit ourselves also in this area. So this will, as of now, be also the framework in which we give an update on the development of our core businesses and the strategic initiatives within them. Let me proceed with the first topic of our core Austrian Mail and Parcel business. Letter Mail, as already mentioned, with an accelerated decline due to the pandemic and due to the lockdown in Q2 in particular. You see here that in Q3, volumes have recovered probably in June and July. We also saw some volumes that were more or less left behind on the side of our customers in April and May, authorities that sent out things like tax decisions and other public institution mail. At the same time, in August and September, we probably saw that the new normal, at least for this year is above the 5%. And for the full year, we do expect mail to decline in high single-digit numbers. Page 11, our second core business within Mail is the Direct Mail business, traditionally a stronghold of Austrian Post in the Austrian market, declining but at a moderate pace in recent years. This was hit hardest during the lockdown in Q2. You also see here that this has recovered -- almost recovered to pre-crisis levels as the unaddressed mail business so the delivery of leaflets for our Austrian retailers, whereas the addressed Direct Mail business is still substantially below pre-crisis levels and probably will continue to suffer also in the next weeks and months given that the Austrian retailers are severely hit by the pandemic. Page 12. The growing part of our core business remains parcel this year with record growth rates due to, one, strong organic growth; and second, the cooperation with DHL Group that started August 1 last year; and third, of course, the back wind that a -- the tailwind that this business got from corona. You see here also that the peak volumes that we saw in April and May came down, but still a good double-digit organic growth in August and September. To cope with those volumes, we are investing substantially in the expansion of our parcel network. Two important achievements over the last months were a new -- the opening up of a new logistics center in Styria based in Kalsdorf with a substantial capacity; and a smaller center, a large postal base in Thalgau pretty much in the center of Austria, both projects in time and budget and providing relief to our operations. For the full year, we do expect to have a substantial CapEx spending with around EUR 70 million, a little bit above that, maintenance CapEx, around EUR 20 million in land acquisition CapEx and above EUR 50 million for expanding our logistics infrastructure, what we call growth CapEx. Page 14 shows you that after these 2 projects, there are further large projects in the pipeline. Two projects in the west of Austria, Vorarlberg and Tyrol, coming next, and then a large expansion project for one of our biggest logistics centers in Upper Austria, where construction should start next year. Page 15 gives you an update on the transformation of our staff structure. Given the large volumes, the 30%-plus growth in parcels, we have increased staff we have hired during the crisis. At the same time, the transformation from expensive civil servant contracts and all collective wage agreement contracts to the new collective wage agreement is continuing at quite significant steps and will continue also over the next months and years. Moving now to our -- to the growth element in our strategy, to the growth in the near markets, as we call it, this is most importantly about our international activities. We -- one important focus area is parcel in CEE. This has benefited from COVID-19. All subsidiaries growing substantially, contributing profits. 24% volume growth in Eastern Europe, and we have seen good growth also until recently, until today, and do expect a strong holiday season or a strong November and December. We're benefiting here also from the new cooperation with Deutsche Post DHL Group in Slovakia, where we deliver DHL parcels and Czech Republic where they deliver our parcels. The big event of Q3 was the acquisition and the closing of this transaction of 55% of the shares of Aras Kargo, moving our shareholding to 80%. So we are now the controlling shareholder and have started to fully consolidate Aras Kargo as of end of August. I turn to that on the next page. And also the other elements of our international activities, but also the solutions businesses in Austria have seen decent development in the last 3 quarters. Our pharmaceutical wholesale joint venture in Germany is still growing at double-digit numbers. Our international Mail business in Germany has seen good growth, also benefiting from increasing e-commerce volumes that run through a subsidiary and also e-commerce solutions that we offer in Austria have good [indiscernible], good growth. Next page provides you a little bit more detail on our new consolidated subsidiary, Aras Kargo. As I think most of you are aware, #2 in the Turkish parcel market. We have owned 25% of this company since 2013 and have been in long negotiations with the family, which we closed with an agreement to acquire an additional 55% of shares. Aras Kargo has seen very good development over the last year, with record growth. As you can see here on this page, we expect around 200 million parcels record number. And again, around 30%-plus growth compared to last year. Also here, a tailwind from corona. And also profitability-wise, Aras Kargo is contributing good results, and you'll see that later on in our financials. Moving to the third cornerstone in our strategy, retail and consumer-focused business models here. The biggest venture is our new bank, bank99, which we successfully launched during the lockdown out of the home office on April 1. Since then, we have 54,000 customers, most of them current account customers, paying current account customers. Our strategy is not to offer free current accounts, but paid current accounts with good service, also including our retail network. Of course, COVID-19 has not helped this bank in multiple ways, interest rate environment, lower frequency in our branch offices, reduced use of ATMs and payment slips. As a result, ramp up losses will be higher than originally planned but in line with the expectation that we already communicated in August, around EUR 40 million of ramp up losses. Target is to break even in '23, and this is '24, contribute substantially to the bottom line of Austrian Post Group. Page 19 gives you an overview of the product road map. So in addition to the payment products, current account, savings products that are already in place, we will complement the product offering with additional products, in particular, credit products and new savings and funds-based products in the next year. We will continue to focus on a provision-based, low-risk business model. Focusing on the consumer means also to expand our self-service solutions. Here you see continued growth in installed solutions and also in the usage rates, very good acceptance, very important element to differentiate us in the Austrian parcel marketplace. And final word on consumer focus, our Austrian marketplace shopping.at, the Austrian marketplace for Austrian producers and retailers delivering to Austrian consumers or for Austrian shoppers that want to shop with Austrian retailers and producers. The marketplace has seen quadrupled numbers in terms of customers, accesses per day and also parcel volumes. We do expect a strong Christmas seasons and are optimistic that also this business model will soon reach breakeven. Yes. Moving to this also enhanced focus in our strategy, the issue of sustainability, including diversity and also customer orientation of [indiscernible], as I said, has always had a strong focus on sustainable logistics solutions. I talked about the theme and program of CO2-neutral delivery that we introduced in 2011, and which was well received both with our business customers as well as with the Austrian consumers. We want to accelerate our activities in this field and have committed us, and this is the first time I think we communicate those targets, ambitious targets for 2030. Three targets: 40% reduction of carbon emissions in absolute terms from 2020 to 2030; 70% decrease in specific carbon emissions in the time frame from 2009 to 2030; and the target of emission-free last mile delivery by 2030. So emission-free contract -- in contract with CO2-neutral, CO2-free means that we will either deliver -- that there will be only 3 ways to deliver mail, either pedestrian, [ activity ], bikes or e-mobility. We do already today operate, by far, the largest electric fleet in Austria with more than 2,000 vehicles. We are piloting parcel vans that are electrically driven and have committed ourselves to the target of costs not using combustion-driven vehicles anymore by 2030. This program, these targets have been backed up with a very comprehensive program with multiple activities in many areas, and we will continue to report about that in the coming quarters. Let me share with you now a few more details on our financials. I think the highlights are already summarized upfront, page 25. Revenue up 2.4%. EBIT margins down. Yes, we are suffering from the pandemic, but Q3 showed some recovery also of margins and absolute figures. Earnings per share, EUR 1.03 for the first 3 quarters. We have shown that we continue to be cash generative even in a very severe crisis, with a cash flow of almost EUR 95 million operating free cash flow. We continue to operate a solid balance sheet. This reduction in equity ratio is pretty much only due to a balance sheet extension due to bank99 and Aras Kargo. The absolute level of equity has been very stable over the last years. Yes. Let me move directly into the segment. I speak here of the group P&L. Happy to answer any questions that you may have later. Page 27, Mail division here. Our Letter Mail product segment down 6.3% with, you see here, quarterly development. So a recovery to a certain extent in Q3, with revenues down "only" 5.4%. Still, of course, structural decline and to some history -- to some extent, an accelerated electronic substitution that we have observed. Same dynamic on Direct Mail, also substantial reduced volume loss after the minus 25% in Q2, but still 6% revenue decline in the third quarter. Given these trends, also, EBIT is down in the Mail segment and margins are down. Still, with EUR 107 million EBIT contribution, the Mail segment remains profitable and remains -- continues to contribute the largest share of profits. Parcel & Logistics division, up 32%. This growth both coming from Austria as well as from abroad. Austria, up 28% with 7 months, DHL. We expect in the remaining 2 months organic growth in double-digit numbers. Eastern Europe, this includes EUR 28 million of Aras Kargo revenues for 1 month, pretty much 1 month, but also the rest shows good double-digit growth in our remaining CEE portfolio. Segment P&L on Page 30, revenues up 32% and translating into an EBIT of EUR 32.6 million compared to EUR 21 million last year. I think if you look at the Q3 stand-alone, then good growth compared to last year, benefiting here from the organic growth in Austria but also from the impact of the new consolidated subsidiary, Aras Kargo. And I think margin-wise, you also see that -- you see here that potential of our Parcel & Logistics business when we operate in a stable environment. Branch Services, Page 31. Revenue down 28% given the loss of revenues from our -- from the cooperation with our former bank partner. Page 32, EBIT. Pretty much heavily dependent on the -- or heavily determined by the ramp-up losses of our bank operations. Year-to-date EBIT, [ minus ] EUR 37 million. But here also, we expect that the worst quarter is behind us and that the big ramp-up costs that we incurred last year and in Q1 and Q2 are behind us. Page 33 shows you a very healthy, conservative balance sheet that we continue to operate. A substantial extension of the balance sheet due to the ramp-up of our bank operations, banking clients deposits of almost EUR 400 million that are, for the most part, being -- that are aligned with OeNB or the Austrian National Bank. Apart from that, a stable equity position after paying a dividend. To remind you, we paid out EUR 140 million, sticking with our dividend proposition for this year of EUR 2.08. For 2019, we paid this out early June. So this in part explains the reduction in equity and apart from that, I think, a very conservative balance sheet. Page 34, cash flow. We adjust here for the cash flow coming from the core banking assets. So the customer deposits, operating free cash flow of around EUR 94 million. As I said, I think, confirms the ability of our business to also generate cash in a crisis environment, and I think is one of the areas where I think we can say we are also on a good way to paying out another attractive dividend, of course, reflecting the reduced earnings due to the pandemic. Let me close on Page 36 with the outlook. Pretty much we confirm the outlook that we have seen after Q2. The market environment remains characterized by all the impacts that the pandemic has. We do expect Letter Mail and Direct Mail to continue to suffer, depending how the pandemic and the government restrictions continue. We do expect parcel to benefit in terms of volumes. In particular, we expect a very challenging Christmas season with high volumes. Revenue-wise, we expect a revenue growth for 2020 of about 3%, including Aras Kargo. I already summarized our CapEx guidance and in terms of earnings, we confirm the outlook of an EBIT for the logistics business of around EUR 170 million minus the negative impact from Bank99. I already mentioned the order of magnitude of EUR 40 million. I have to again here highlight that there is an uncertainty, which emerged from the developments over the last hours and days. We're currently in Austria, another severe lockdown that could start very immediately is discussed and where details will be communicated tomorrow. One of the measures that is being considered is the closure of all nonfood retail in Austria for some weeks. This, of course, would have a negative impact on our -- in particular, on our Direct Mail business, positive impact on parcel volumes. We see in Q2 that net of these 2 effects typically is negative. As I said, there are only 6 weeks to go until Christmas, so most of the year is already behind us, but an important part of the year is ahead of us. So there is this uncertainty and we'll see over the next days and weeks how this will develop. Overall, let me close with a comment on the dividend. We remain committed to our dividend policy, paying -- to pay out at least 75% of net earnings. Over the last year, we paid out close to 100% of net earnings. And with those 2, I would say, guidelines in place, we do, as management, are committed to also propose an attractive dividend for 2020, once we know the full results for the full year. So thank you very much for your attention, and I'm happy to take questions now.

[Operator Instructions] The first question comes from the line of El Kassir Najet of Bank of America.

Just in terms of the trends that you're seeing in mail volume decline in October and November, any color you can share with us on that? Also in terms of -- if I look at the underlying trends in parcel, was it 10% growth in the third quarter? What trends are you seeing in October and November? And in terms of -- would it be helpful to understand a bit of the driver of the strong margin at Aras Kargo given at the time of the transaction, it was mentioned that we're generating around 2% EBIT margin. Is the 10% EBIT margin sustainable going forward?

Yes. Thank you for your questions. On the trends in the most recent and in the current month, I think we can say that we see mail, and this is mostly now before additional measures that are currently being discussed, that we have seen mail volumes normalize. However it's probably somewhere between 1.5% and 3% above the levels we've seen prior to corona. So before, we had around 5%. Now we are probably talking about 2% to 3% on top of that, but it's still a quite volatile development where one month shows numbers above what we would have expected and the next month is a bit down again. We also have had a regional election in September and October, which has contributed, municipal elections in Vienna. But this is kind of -- so we have seen additional 2 to 3 percentage points of decline after the work now. On the parcel side, we have seen still double-digit growth numbers. I would say, on average, around probably 12% to 15% in volume terms. Again, here is some volatility. And with the soft lock down that is in place, we'll probably get additional momentum on the parcel side, and if retail were to close, as I said, this could go up again. On Aras Kargo, yes. Aras Kargo has shown very good margins in the recent months, reaching double-digit margins. To what extent this is sustainable, we'll see over the next months. Our target when -- our target when we did this transaction and the business plans that we based our decision to go forward with this acquisition on always at a target margin slightly above 5% in the plans, and so what we see now is an upside for those plans. What the company is clearly benefiting also are record volumes, given the pandemic also in Turkey and capacity constraints in the whole industry. And I think for the near future, we do not see substantial additional capacity beyond the growth that is there coming online. So the environment should be good for above-average margins to continue at least for a while.

Just maybe if I can follow-up on the benefit from the election. Could you please quantify the impact on the EBIT that you got?

We're talking about roughly order of magnitude, EUR 5 million revenues, because a municipal election is roughly less than 2 million inhabitants, but a record turnout as you've seen in the U.S., most recently, a record turnout of May voting. But let me remind you that last year, also in early fall, we had a nationwide parliamentary election, which contributed roughly double that what we've seen this year.

The next question is from Marco Limite of Barclays.

Thank you for your presentation. So you're basically now guiding for mail volume to decline above the 5% for a few quarters. But can we assume that, that is becoming the kind of new normal? So the medium-term guidance of 5%, basically, it doesn't apply anymore. And also [indiscernible] mail volumes, do you think that this higher mail decline is linked just to lower economic activity? Or you think that there is an underlying higher e-substitution from higher digitalization of processes and things like that? And my second question is on your guidance for 2021, where you guide for EBIT growth in all the divisions. And I'm just wondering what are your assumptions specifically for the Mail Division in the guidance? And thirdly, just a small one. You have got like a pharmaceutical logistics business in Germany. And if you think that we could expect a substantial improvement in the performances of that business from the distribution of the vaccine in 2021?

Yes. Thank you, Marco, for your questions. I'm not aware that our wholesale distribution business will play any role in the distribution of the vaccine. Let me remind you of the business model. This is a kind of a low-cost discount business model where pharmaceutical products are shipped from one central warehouse in Germany via the pass route to pharmacies. There is no logistics chain in place for, as I understand, minus 80-degree Celsius logistics chain. So I would -- I do not expect any substantial role of our company, of our subsidiary, in the vaccine development, yes. Then on the question of mail decline going forward. I think the honest answer, it's very difficult to give you a clear answer on that. The minus 8 -- or the minus 7%, 8% that we have seen in the recent months or actually in Q3, it has been 6 months -- 6%. So let's say, the 6% to 8% which we've seen is definitely a combination of various factors. One is reduced business activity. I mean tourism in Austria is very subdued. Many, many -- there is 1 million Austrians, which is either unemployed or in furlough schemes. And of course, that contributes to reduced mail volumes. At the same time, there definitely -- we have seen a digitization push of people, SMEs who were -- staff in the home office has found that you can also send an invoice via e-mail that was printed out and sent by a mail before, and probably we'll stick with that habit. To what extent, this is a onetime loss of mail, which would mean that we come back to the around 5% that we've seen or whether there is a share of -- whether there is a phenomenon of accelerated distribution -- accelerated decline and accelerated electronic substitution, I think it's too early to tell. And in our plans, at least before we got to the second wave that is hitting us, and not only us, we had rather optimistic assumption that we would go back to the 5%, yes. But we see over the next months, which scenario is more likely and we'll have a better answer on this question next time. On the guidance for 2011, I think we would see mail probably flat to slightly increasing. The target is to come out better than this year, given that this year, we had 6 weeks of full lockdown in the numbers. But the probability of full lockdowns also next year has increased somewhat in recent weeks. On parcel, we do expect a substantial improvement given that, again, here, we had a very difficult Q2 with unsatisfying profitability in the 2020 figures that Aras Kargo should contribute substantial profit also next year. And also on the bank, we do expect a substantial improvement next year.

Okay. So in the Mail division, in your current 2021 guidance, you are not considering any kind of further lockdown or pressure from COVID right?

No, we do not include -- until a few days ago, this was not really one of the very likely scenarios in Austria, but this has also surprised us. But again, let's see where we start next year. I think also the impact of the full lockdown now will be different than it was in Q2. I think many of our clients that pretty much closed down their businesses, including the public sector, have at least learned also to work -- how to work from the home office. So we do expect a little bit less of negative impact on mail volumes. On the Direct Mail side, it's pretty black and white. When the retailers have to close, they don't send out direct mail, but we would expect that the government will absolutely try to minimize closures, in particular, for longer.

[Operator Instructions] And the next question comes from the line of Bernd Maurer.