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Edited Transcript of BPOST.BR earnings conference call or presentation 7-Nov-19 9:00am GMT

Q3 2019 Bpost SA Earnings Call

Bruxelles Nov 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Bpost SA earnings conference call or presentation Thursday, November 7, 2019 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Koen Van Gerven

bpost SA/NV - CEO & Director

* Leen Geirnaerdt

bpost SA/NV - CFO

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Conference Call Participants

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* David Kerstens

Jefferies LLC, Research Division - Equity Analyst

* Henk Slotboom

The Idea-Driven Equities Analyses Company - Research Analyst

* Mark John McVicar

Barclays Bank PLC, Research Division - Head of European Transportation Research

* Ruben Devos

KBC Securities NV, Research Division - Senior Financial Analyst

* Sumit Mehrotra

Societe Generale Cross Asset Research - Equity Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for holding, and welcome to the bpost Third Quarter 2019 Results. (Operator Instructions)

I would like to hand over the conference to Mr. Koen Van Gerven, CEO; and Ms. Leen Geirnaerdt, CFO. Go ahead, please.

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Koen Van Gerven, bpost SA/NV - CEO & Director [2]

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Thank you, and good morning, ladies and gentlemen, and welcome to our Third Quarter 2019 Results Call. And thank you for joining us.

And indeed with me, I have Leen Geirnaerdt, our CFO; as well as Saskia and Stéphanie from Investor Relations.

Before we start the call, you've all received yesterday's announcement regarding my successor. I'm satisfied. It's a good thing for bpost that the Board appointed a strong new CEO, and this, within reasonable timing following a comprehensive selection process. Jean-Paul Van Avermaet, with the management team, can now build further on the confirmed strategic plan of becoming a global e-commerce logistics player anchored in Belgium, and this, while remaining an efficient mail provider in the home markets. We won't answer any questions about the new CEO. Jean-Paul will do this for himself during the next analyst call.

Getting back to our third quarter results, I assume you already had the opportunity to read through the material which we posted as usual on the website last night. We will summarize the key messages so as to move Q&A quickly.

I'm on Page 3. And there, you see our third quarter results are overall in line with expectations, and the full year guidance we communicated at the beginning of the year.

Total revenue stood at EUR 880 million, up by 0 point percent -- 0.8% year-on-year, and normalized EBIT came in at EUR 38.3 million.

Looking at the operating segments. We can see that the domestic mail was still heavily impacted by e-substitution. The underlying volume decline for the quarter was at 7.8% and was partly compensated by pricing. Normalized EBIT for Mail & Retail stood at EUR 38.4 million, reflecting e-substitution and rising costs. These relate mainly to wage indexation and CLA as well as costs linked to the prep work on our new distribution model. This is also a seasonally low-margin quarter, as you know.

The normalized EBIT of Parcels & Logistics Europe and Asia came in at EUR 10.4 million, a significant improvement versus the same quarter last year. And this is due to a solid top line development primarily driven by good volume growth at 20.3%. And the normalized EBIT increase was also driven by the runoff of some nonperforming businesses, and EUR 1.7 million earnout reversal at DynaGroup.

Parcels & Logistics North America was, as anticipated, still impacted by the 2018 customer churn at Radial as well as repricing on a number of contracts. This was partly compensated by new business and a favorable FX evolution, which is neutral at EBIT level. Q3 '19 also saw some start-up costs related to the onboarding of new clients, leading to a normalized EBIT for the segment of minus EUR 5.3 million, in line with expectations, taking seasonality into account.

We continued our commercial progress at Radial, although deliberately at a slower pace than in the first half of the year. Our full focus is now on the 22 new clients that we have onboarded this quarter.

First 9 months of 2019 provide us comfort towards achieving our group full year guidance of normalized EBIT above EUR 300 million.

On Page 4, you can see that Q3 normalized EBIT of EUR 38.3 million was EUR 8.4 million below last year. This is mainly driven by domestic mail volume decline and wage drift both impacting the Mail & Retail segment, where normalized EBIT declined by EUR 13.8 million. Corporate segment also saw a negative year-on-year normalized EBIT evolution because of slightly less real estate disposals and higher project-related costs at group level.

These elements were partly compensated by a strong performance of the Parcels & Logistics Eurasia business unit where the positive top line development, driven by volume, the runoff of nonperforming businesses and activities, and a EUR 1.7 million earnout reversal of DynaGroup led to a EUR 6.6 million normalized EBIT improvement versus last year.

Parcels & Logistics North America also showed a slightly positive evolution thanks to the strengthened cost control and productivity improvements, partly offset by start-up costs for the onboarding of new clients in the 3 new facilities.

And before handing over to Leen, let me give an update on several topics.

We are fully focused for the moment on the implementation of our alternating distribution model which is critical in the current context of acceleration of mail volume decline. I can say that the prep work is on track. We have pilots running in 7 cities so far, and we are ready for the operational switch as of mid-March 2020 as it was planned.

Pricing is also an important part of our strategy and essential to make the alternating distribution model success. Our proposals for 2020 have been accepted by the regulator at the end of September. The new prices represent a 5.1% increase on average, with the widening gap between prior and nonprior products. For the small use of basket, we are still below the price gap.

There were a few changes in management. In U.S., Pierre Winand has announced his willingness to come back to Europe for personal reasons. Although we sincerely regret his decision, we fully understand it and wish Pierre all the best in his future endeavors. Over the last 2 years, Pierre worked very hard to put Radial on the right course, amongst other, by setting up a strong and highly committed executive leadership team. To safeguard continuity, Pierre will remain on board until after the peak periods.

Henri de Romrée, our current CEO of Mail & Retail will replace him from the 1st of December this year. Luc Cloet, currently CEO of Parcel Logistic Eurasia, will take over Henri's role as head of Mail & Retail. And himself will be replaced by Kathleen Van Beveren, who is currently Senior Vice President of Parcels BeNe, and she will become the CEO of that division.

And now, I would like to hand over to Leen for more details on the financials.

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Leen Geirnaerdt, bpost SA/NV - CFO [3]

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Okay. Thank you, Koen.

Now on Slide 5, where you'll find an overview of our key financials. At group level, with an operating income that was up by 0.8%, mainly driven by evolutions in PaLo, Europe and Asia, and partly offset by negative evolution in domestic mail. Here, you see that on the operating income, we normalized for the profit on the disposal of Alvadis. Normalized EBITDA is up by EUR 19 million as there is indeed a shift of EUR 27.5 million positive impact from the application of IFRS 16. Normalized EBIT, down by EUR 8.4 million.

EBIT, as you know, normalized for noncash amortization charges on several intangible assets that were recognized following the purchase price allocation of a couple of acquisitions, for instance, Radial, Ubiway, DynaGroup, Active Ants. These charges also positively impacted the reported net income. And that effect has been normalized as well.

Looking at the net financial results. It's the higher cost of EUR 12.4 million and it decreased by EUR 6.3 million versus last year, mainly due to the increase of noncash financial charges relating to IAS19 employee benefits. And this, as a result of the decrease in discount. And also here, we have again the first application of IFRS 16.

Normalized income tax is slightly increased compared to last year. As in the third quarter '18, we benefited from the retroactive application of what is called innovation income tax deduction for the fiscal year '17. This basically relates to a tax deduction, a possibility which is offered by the Belgian tax authorities on income resulting from innovative projects.

The normalized free cash flow increased, mainly driven by the initial application of IFRS 16 with the lease cost moving to the financing activities.

Then the BGAAP net profit. It's the net profit of the mother company, and it amounts to EUR 18 million, which is 38.5% below last year's figure. And when we compare that to IFRS EBIT, that decreased by 18.1%. The rule of thumb on BGAAP net profit, moving percentage-wise in line with IFRS normalized EBIT and then excluding the headquarter profit on disposal, does not necessarily hold on a quarterly basis. This is explained by timing differences in dividends from subsidiaries and in parent. However, for the year, it is still a pretty accurate guideline that you can follow.

Moving to Page 6, where we can have a look at the different operating segments. On Page 6, you will find the result of segments in which you can see the contribution per business unit for the third quarter.

As you see, in the third quarter, Mail is actually contributing 100%; PaLo Eurasia, 27% of the EBIT; whereas PaLo North America and Corporate are having negative contributions.

If we would look year-to-date, which is not on the slide, Mail & Retail generated a normalized EBIT of EUR 205.9 million out of EUR 241.6 million. So that's 85%.

PaLo Europe and Asia. They contributed 21.5%. PaLo North America is at minus 5.7%, and Corporate is very slightly negative at minus 1%. Just to indicate that the quarter gives a different view as to contribution than our performance in the year-to-date.

So we can move to Page 7, which shows the external revenue bridge of Mail & Retail. Mail & Retail external revenues, they declined by EUR 12 million to EUR 444.5 million mainly impacted by EUR 10.6 million revenue loss in the domestic mail. This was driven by an underlying mail volume decline of minus 7.8% in the quarter, partly compensated by a positive price/mix effect. The mail volume decline for the first 9 months of the year stands at minus 8.8% as the second quarter '19 was impacted, as you know, by a tough comparison base relating to MiFID II and GDPR mailings that took place in the second quarter of '18.

In Transactional Mail, the volume decline stood at minus 9.2% resulting from continued e-substitution by big senders but also by SMEs as well as a further digitization of the communication from consumers to businesses, namely through smartphone applications.

Advertising mail volume decline stood at minus 6.5% driven on the one hand by a positive development in unaddressed, resulting from a commercial push that we could do, and on the other hand, phasing effects between the quarters, which are actually still negatively impacting on direct mail.

As in the first quarter, the press volume, at minus 3.4%, showed some improvement versus the trend in the first half-year, reflecting an easier comparison base. The underlying e-substitution trends, however, does remain.

Revenues from proximity and convenience retail network. They decreased by EUR 1.6 million mainly driven by the deconsolidation of Alvadis, which is a prepaid products distributor which we sold to Conway at the end of August. Excluding this, we record a positive top line development. Value-added services, we see a small increase mainly driven by higher revenues from fines management and partly offset by lower revenues in some other solutions.

Looking at EBIT on Slide 8 for Mail & Retail. Its normalized EBIT, it amounted EUR 38.4 million with a margin of 7.9%. This is a net decrease of 13.8%, explained by EUR 8.4 million in total revenues, like we just explained, and EUR 5.3 million increase in the operating costs and D&A. The OpEx increase was mainly driven by higher payroll and interim costs, reflecting the impact of the new collective labor agreement in October 2018 and -- sorry, and the October 2018 salary indexation. In addition, we did record higher costs relating to the development of our new distribution model, as announced earlier. These effects were only partly compensated by a favorable evolution of the FTE mix. The deconsolidation of Alvadis that I just referred to had no impact.

Let me move to Parcels & Logistics Eurasia. We recorded there an external revenue growth of EUR 18.9 million. This is mainly driven by EUR 14.9 million revenue increase of Parcels BeNe. Organic volume growth was solid at 20.3% for the quarter, with a good performance at DynaLogic. As in the past quarters, we did record a negative price/mix effect which is fully mix-driven.

As far as DynaGroup is concerned, there is a significant year-over-year improvement. However, it does lack our initial plans for the year. And that's also why there are EUR 1.7 million of earnouts that was reversed and also booked within the external revenues of Parcels BeNe. This now fully settles the earnout mechanism that was in place.

E-commerce logistics revenues increased by EUR 3.6 million thanks to organic growth at Active Ants and at Radial Europe, driven by new client wins.

Cross-border increased by EUR 0.5 million to EUR 68.4 million, which is a combination of a couple of factors, primarily is driven by inbound with a better price mix and additional sales volumes in U.K., offset by lower revenues from Asia and from the rest of Europe.

On Slide 10, the EBIT for PaLo Eurasia, it increased by EUR 6.6 million to EUR 10.4 million, with a margin of 5.2%. This is related to the top line increase of EUR 11.5 million or 6.1% and a far lower increase in operating expenses of EUR 4.9 million or only 2.7% when we exclude IFRS 16 impacts. The run-off of some nonperforming activities and also the DynaGroup earnout reversal, of course, also had the positive impact on the EBIT.

PaLo North America. The external operating income of our e-commerce logistics within PaLo North America was, as anticipated, impacted by Radial's client churn as well as repricing on a number of contracts. This was more than compensated by new business and also the favorable foreign exchange evolution. The same goes for international mail, where slightly lower volumes were compensated by foreign exchange.

Overall, external revenues were up EUR 1.3 million for the segment.

Commercial progress continued in the third quarter, although deliberately at a slower pace than in the first half of the year, the focus being now, as Koen said, on the onboarding of the new clients and the setup of the additional fulfillment centers.

On Slide 12, we have the normalized EBIT for PaLo North America, which improved slightly by EUR 0.5 million, and it's negative at EUR 5.3 million in the quarter. Excluding foreign exchange, excluding IFRS impact, the total OpEx decreased thanks to, on the one hand, productivity improvements in fulfillment, lower payroll and medical expenses, and also reduced payment, tax and fraud-prevention chargebacks. These efforts were more than offset by the lower revenues stemming from client exits and repricing. As well, we do see some additional costs relating to the onboarding of new customers.

Note that when looking at the evolution of the KPI of Radial North America in U.S. dollar, you can see it at the bottom of the slide, it's in the quarter, minus 6% top line evolution. And that compares, just for remembrance, to minus 17.1% in the first quarter of the year and minus 10.2% in the second quarter of the year. This indeed shows that actually the negative effect of customer churn and repricing is bit by bit leveling off as the year progresses, and we are starting to see the positive effects of the commercial efforts and the TCV materializing in our figures.

Overall, PaLo North America's results, they are in line with our expectations, taking into account the seasonality of Radial's business and the startup costs for the new customers.

The CapEx, it increased to EUR 22.7 million, which we announced. It's like we explained, is driven by the setup of the 3 new fulfillment centers as a result of the commercial opportunity.

Then moving to our corporate segment on Page 13. There you will see that the external operating income was slightly lower compared to the same period last year, which is due to lower building sales and also that normalized EBIT was impacted by higher costs relating to some group projects, such as revamping of our communication department. We have some initiatives in procurement. And as you know, we sold the building we are currently in. And we're also looking into the setup of our new headquarters.

Moving to the cash flow. Reported operating cash flow stood at EUR 31.8 million, which is an increase of EUR 61.9 million, of which EUR 37.7 million is again the shift of lease-related cash flows from operating to financing activities following the application of IFRS 16. The remainder is driven by lower tax prepayments, partly offset by lower cash flow from operating activities following the lower operating results.

Cash flow from investing activities, it decreased by EUR 24.4 million, of course, driven by higher capital expenditures versus last year, lower building sales and a higher outflow related to M&A activities. The latter is combining proceeds from the sale of Alvadis, the payment of a last contingent consideration to DynaGroup and the acquisition of MCS Fulfillment by Active Ants in the Netherlands.

As you remember, last quarter we raised our full year CapEx guidance to range between EUR 150 million to EUR 185 million largely due to PaLo North America. This is already visible partly in the third quarter figures, and we will continue seeing that effect in the fourth quarter of the year.

Then the free cash flow. In this quarter, we recorded a nearly stable free cash flow being negative versus last year at minus EUR 53.5 million, excluding the positive impact of IFRS '16. When we look at year-to-date, the free cash flow is a positive of EUR 88 million, which is significantly above the EUR 19.4 million at the end of September 2018.

Cash flow is minus EUR 46.8 million in the third quarter, which is explained by EUR 8.1 million interest on the bonds and EUR 37.7 million shift of lease obligations to financing activities.

I'm now handing over to Koen again for some closing remarks.

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Koen Van Gerven, bpost SA/NV - CEO & Director [4]

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Thank you, Leen, and let's go to our chargeback outlook on Page 15.

Overall, we are very satisfied with these results, which provide us comfort towards achieving our group full year guidance of a normalized EBIT above EUR 300 million. The group guidance remains indeed well on track, but after 9 months of actuals, of course, we can slightly refine the EBIT breakdown per business unit.

And if we look to Mail & Retail, we still plan on a mail volume decline up to 9% for the full year, leading to a low single-digit decline in total operating income, with normalized EBIT margin still expected between 11% and 13%.

Parcels & Logistics Eurasia. Top line is now expected to grow by a mid- single-digit percentage driven by the runoff of some nonperforming businesses and less profitable or not-sufficiently-profitable activities. This in turn is directly accretive to EBIT, and thus, leads us towards the high end of our 6% to 8% normalized EBIT margin range.

We are running ahead of that range in the year-to-date figures explained by positive one-offs related to this quarter's DynaGroup earnout reversal. And as you will remember, last quarter, terminal dues settlements. We indicated that both terminal dues settlements and earnout reversal will have a negative year-over-year impact in the fourth quarter since Q4 '18 was positively impacted by earnout reversals for EUR 18.2 million.

Parcels BeNe will also see higher costs related to peak staffing and channel mix with higher use of subcontractors. E-commerce logistics, we will see a negative consolidation effect from Active Ants as 4 months were booked in the fourth quarter last year versus 3 months this year.

In Parcels & Logistics North America, normalized EBIT will be impacted by advanced onboarding costs of the new clients following the strong commercial success of the previous 3 quarters, and therefore, the division might end up slightly below breakeven.

In the Corporate division, the building sales are running slower, and the division will bear higher costs related to projects at group level, as Leen already indicated them. We now expect a normalized EBIT to be high single-digit negative.

We are running below full year guidance with regard to CapEx, but there is a high seasonality in CapEx, and there is also a big part of the investments related to the new fulfillment centers in the U.S. that will be spent in the fourth quarter, so this quarter.

For dividend, we still expect to pay at least 85% of the BGAAP net profit. As indicated, we expect percentage evolution of IFRS normalized EBIT, excluding the gain of disposal on the HQ building, but it will be similar to the percentage decrease of the GAAP net profit. And the interim dividend, as you know, will be based on BGAAP net profits of the first 10 months of the year.

And with this, ladies and gentlemen, we're happy to answer your questions. So operator, please open the lines.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Mr. Ruben Devos, KBC Securities.

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Ruben Devos, KBC Securities NV, Research Division - Senior Financial Analyst [2]

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I've got 3 questions basically all related to PaLo Eurasia. So you've seen strong volume growth this past quarter of 20% above the trend in the first half year. Just curious whether you could elaborate on what has been some of the drivers in achieving that growth, whether you know much of it is related to strong dynamics in the market or rather related to some of the changes you might have made from a commercial strategic standpoint. Also we've heard some -- and that's the second question.

Also, we've heard some commentary from one of your competitors that web shops are more looking at the costs, packing multiple orders in one box, taking measures to have less returns and so on. It will be interesting to hear whether you've seen similar trends as well within your customer base. Or are there other elements you'd like to highlight?

And then thirdly, with respect to the margins, I think so far you're well on track. You're now also guiding for a higher end of the range. I believe you had some tailwinds throughout the year. So therefore, I was curious whether you could give any indication whether the good results you've realized so far is sustainable if we look at next year's forecast and beyond.

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Koen Van Gerven, bpost SA/NV - CEO & Director [3]

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Thank you, Ruben. Let's take it one by one.

As far as, indeed, the strong growth is concerned, then we're very happy on this 20% increase. In my opinion, there is -- there are no big changes as from what we observed recently, and what we, in my opinion, we'll continue to see in the quarters to come.

So it has to do with the dynamics of the market. As you know, and this is not a new narrative. Belgium was somewhat lacking in e-commerce but is catching up. And that's what we see in a couple of indicators. So the number of parcels per household, percentage of consumption over the net of retail spend are things that tend to creep in the right direction but remain below the figures and the indicators that you see in other countries like Germany, the Netherlands and certainly the U.K.

So I'm not sure that we can take the same explanation as some competitors indicate for seeing a change in those figures. But of course, what they observe in terms of customer behavior I'm sure that those things we live, too, but it's, for us, in our situation at least in the current state, less visible.

As far as the margin on PaLo Eurasia is concerned, indeed we feel comfortable to indicate now that we will end at the upper side of the range. And as we mentioned already in our previous quarter and this quarter, a couple of events like the terminals dues in the second quarter settlements and the reversal in -- of Dyna, the final reversal of Dyna earnout do help. But I draw already the attention that it will go in the other direction in the fourth quarter because terminal dues is a game that you have settlements in one quarter, and then it will go in the other direction another quarter. And the last quarter of last year, we had, of course, a couple of important reversals in Euro Asia.

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Leen Geirnaerdt, bpost SA/NV - CFO [4]

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And perhaps, if I may add to that, if you look year-to-date, positively impacted by the things that Koen has said. So terminal dues, it was EUR 4.1 million. Dyna earnout, EUR 1.7 million. If you exclude this in the year-to-date numbers, then your normalized EBIT could be at EUR 46.1 million or 7.8% margin, to your question what would it look like going forward. So that's fully within the guidance -- guided range.

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Ruben Devos, KBC Securities NV, Research Division - Senior Financial Analyst [5]

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Okay. And then just a small follow-up, specifically for Q4. It looks like you're a bit on the safe side in terms of preparing for the hectic end-of-year period. Just curious, going into that period, it would be great to hear your thoughts on where you see most challenges or where you'd see potentially opportunities to do better than the guidance.

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Leen Geirnaerdt, bpost SA/NV - CFO [6]

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In any case, the fourth quarter, like you indicated, it's the peak. We have there profits to make, on the one hand, and also a reputation to make. So quality is extremely important. So what typically we see is that we have the peak staffing in the fourth quarter, and also the channel mix, which is impacted because we have higher volume. So the channel mix is also -- we will have higher volumes treated outside of the regular mail rounds, which implies a high use of subcontractors.

So that is indeed -- are we on the safe side? We think we are on the good side to manage that peak carefully. So our guidance does not take into account that we see specific big opportunities, and I think we stick to the guidance that we have put on the slide.

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Operator [7]

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The next question is from Mr. Mark McVicar, Barclays.

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Mark John McVicar, Barclays Bank PLC, Research Division - Head of European Transportation Research [8]

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I've got 2 questions. First one is on the new -- the distribution operating model, what sort of KPIs are you monitoring? And what will give you real confidence that you can roll this out across the country in Q1 next year? It's the first question.

And the second question is when do you think you're going to be giving us guidance for 2020 and beyond? I thought you -- I think you said earlier in the year that it'd probably come up somewhere around the end of this year.

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Koen Van Gerven, bpost SA/NV - CEO & Director [9]

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Mark, on your first question, there are a couple, of course, important indicators that we should be able to tick the box. First of all, it has to do with, of course, the product portfolio that had to be reviewed completely because products have to be positioned differently because things like day-certain, we don't have anymore. We have to move to beginning of the week/end of the week. The portfolio is clear, and we finalized already a couple of very important discussions with very important customers. So that they feel at peace as far as the offering is concerned.

The second, and as I mentioned in my introductory remarks. So we got approval on the pricing, the new pricing, which is, of course, the new pricing system with-prior non-prior. So that was very important, too.

Thirdly, of course, we have to flesh it out from operational perspective. And there, there was work to do. We have a clear view. And important is that the clear view and that the operating model -- and I'm not going to go into detail in this call. The operating model that we will apply shows a couple of points of stability for the postmen, which is very important in order to get it accepted.

So -- but with this fleshed out now, we are in a piloting phase in a number of places in Belgium, urban, less urban and so on. And the acceptance, we are in the period where we explained to the people what's going to happen and so on. We take the feedback, integrate it, and that goes very smoothly. So smoothly that we feel very comfortable that we can make the switch-over in one go operationally somewhere in March. There is a long weekend, I guess, somewhere in March where we will do that. And then we can start doing the reorganizations office by office. And this is something that we did in the past, too. And all of this gives us comfort that we will be able to make that switch.

So this is as far as the new operating model is concerned, and I feel much more comfortable than I felt, let's say, a year ago.

As far as 2020 is concerned, nothing is going to change. So we will come back in March with the figures on the year of 2019. And as always, at that occasion, we will provide the outlook for 2020. As far as beyond is concerned, you know that we did a lot of work on the new long-term plan. I think that we made good progress. It's a bottom-up exercise as well top-down exercise. The work is still ongoing. And I think that I will hand it over. It's a work that of course is done with the full management team. And I will give it to the new CEO and the management team. And together, they have to finalize the work, and then it has to be presented to the Board before we can share that with the market.

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Mark John McVicar, Barclays Bank PLC, Research Division - Head of European Transportation Research [10]

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Okay. Can I ask one quick supplementary question?

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Koen Van Gerven, bpost SA/NV - CEO & Director [11]

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Yes.

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Mark John McVicar, Barclays Bank PLC, Research Division - Head of European Transportation Research [12]

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With the trials that you're running at the moment on the distribution model, what sort of -- I know you're not splitting them out, but what sort of incremental costs are you incurring? Is it sort of just low single-digit millions or is it having a bigger impact on that also back of the envelope?

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Koen Van Gerven, bpost SA/NV - CEO & Director [13]

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Well, probably we remember before basically preparing this new operating model, and this, indeed related on one hand to the prepping of it in terms of designing and consulting. We estimated EUR 10 million to EUR 15 million in the course of this year, and we are fully on track. And well, it's going to be in that range in terms of spending. So that's what we have in our plan.

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Operator [14]

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

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David Kerstens, Jefferies LLC, Research Division - Equity Analyst [15]

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I've got 3 questions, please. First, on the earnings momentum in the fourth quarter, what will be the headwind from last year's labor agreement in your -- particularly, I think, in your Mail & Retail division that could lead to a much lower result than what we're seen last year?

The second question is on Radial. You now slightly lowered the guidance for PaLo North America due to onboarding costs at Radial. Are you still confident that these 22 new customers will also start to contribute to profitability in 2020? And what is the level of revenue associated with these 22 new customers? Is that the EUR 300 million in sales that you had targeted for the full year?

Now our final question is on PaLo Europe and Asia. The 20% volume growth, a follow-up on the earlier question, are you gaining market share in Belgium with that type of growth? Is it -- can you share any comment on how shares have moved recently with that -- the 20% volume growth?

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Leen Geirnaerdt, bpost SA/NV - CFO [16]

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Okay. I think the question on the earnings momentum fourth quarter, especially for the Mail & Retail, which you indicated, we guided earlier, indeed, salary indexation would be about EUR 16 million; collective labor agreement, about EUR 20 million.

We're rather good on track. If we look at the collective labor agreement, there is something that we will see in the fourth quarter, indeed, since besides regular impacts on purchasing power and additional holiday, an integral part of the agreement was additional FTEs to tackle the workloads with the year-end peak.

So that's completely correct that we will see in the fourth quarter. As to salary indexation, the indexation started on October 1 in 2018. So that is behind us comparative-wise.

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Koen Van Gerven, bpost SA/NV - CEO & Director [17]

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Okay. As far as the second question is concerned, so indeed, the arrival of the new customers, which is good news in the United States, will help us certainly to grow top line and profitability next year. We make the distinction between set-up costs, and those are the things that we have to do in those new distribution centers. A couple of investments in terms of conveyor belts, racking and so on.

On the other hand, we have a couple of what we call onboarding costs, which are the costs and spending that we have to do now in order to get them onboard and to get them up and running. Because a couple of them are already in business. So I'm very satisfied on what we see. They will contribute to the top line. And certainly, I'm satisfied on the margins that we have on those contracts that they will contribute positively as from next year.

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David Kerstens, Jefferies LLC, Research Division - Equity Analyst [18]

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Is it the total value the $300 million that you targeted contractually?

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Koen Van Gerven, bpost SA/NV - CEO & Director [19]

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What we have as an indicator to measure our commercial performance is what we call TCV. That is the contract value over a period of 3 years. So you can't simply translate the EUR 300 million that we sold in terms of contracts in the top line that it will generate.

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David Kerstens, Jefferies LLC, Research Division - Equity Analyst [20]

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Understood, yes.

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Koen Van Gerven, bpost SA/NV - CEO & Director [21]

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Because the growth is, of course, with existing customers and so on. So it's -- translating it simply to the growth -- the TCV into growth in top line would be a little bit too straightforward and too simple.

And as far as the market share situation in Belgium is concerned, it's very difficult to measure the evolution of market share on B2C parcels because nobody is measuring it anymore. That's why we try to monitor closely what goes on, on the market and what are the movements of our most important competitors. And we feel comfortable on the position that we have. Especially if we look to other indicators like Net Promoter Score, which is, to be fair, fairly high, and we get a lot of very good comments and reactions of customers, both end customers as, of course, e-tailers. And I think we did a lot of development and investments in making the customer experience with apps and with tracking. We did make a lot of investment in that area which are very well appreciated.

Looking to competitors, I think in the northern part of the country,

(technical difficulty)

of course, we have our Dutch friends present there. We do have DPD, and to a certain extent, we think that GLS is less explicit present in this B2C market as they declared themselves a while ago.

There are a couple of other phenomena, but they are still very limited. So we have some consolidators on that market, too. We have Vinted. We have Mondial Relay working with Vinted, which is a secondhand platform over the Internet. But as far as market share is concerned, we think that we are in a good situation.

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Operator [22]

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(Operator Instructions) And there's a question from Mr. Henk Slotboom, The Idea.

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Henk Slotboom, The Idea-Driven Equities Analyses Company - Research Analyst [23]

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Koen, I am very well aware that you don't want to comment on the new CEO. But one question, of course, is very important, I think, for us all. Is he committed to the...

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Koen Van Gerven, bpost SA/NV - CEO & Director [24]

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Henk, Henk, Henk, your line is a little bit coming in pieces. So could you restart?

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Henk Slotboom, The Idea-Driven Equities Analyses Company - Research Analyst [25]

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Okay. Hopefully, this is better.

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Koen Van Gerven, bpost SA/NV - CEO & Director [26]

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This is better, Henk.

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Henk Slotboom, The Idea-Driven Equities Analyses Company - Research Analyst [27]

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Okay. In the introduction, you said you won't make any comments on the new CEO, but let me ask you an indirect question. Was the search your bosses did for a new CEO, was that on the condition that somebody -- that they would find a person who would fully endorse the strategy as it is right now?

The second question I had is basically a follow-up to David's question. Am I right to assume that the total contract value is the sales value over 3 years or what it could be in 3 years' time?

And the last question I had is simply a question on the payments made by Radial, the payments for tax and fraud prevention. In the past, you always revealed a number there. Could you provide some more color on that, please?

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Koen Van Gerven, bpost SA/NV - CEO & Director [28]

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I'm not sure on the third question, if I understand it well, the figure you were looking at.

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Henk Slotboom, The Idea-Driven Equities Analyses Company - Research Analyst [29]

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I believe the last one...

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Koen Van Gerven, bpost SA/NV - CEO & Director [30]

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Probably that's to do with the chargebacks.

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Henk Slotboom, The Idea-Driven Equities Analyses Company - Research Analyst [31]

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Yes. The last time it was EUR 14 million-or-so, okay.

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Koen Van Gerven, bpost SA/NV - CEO & Director [32]

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Yes, I will comment on that. So on the first question, so I think it's important that we had a comprehensive process and the discussions because I didn't conduct the discussions myself during the search process. But it's clear and it was confirmed yesterday on the press conference by Jean-Paul that he fully endorse -- he knows the strategy, he fully endorses the strategy, and he knows that it's now execution that is high on the agenda. So -- but I consider it as a direct question that you have to address to him, but I feel very comfortable on that he's going to pursue with the strategy that is laid out for the company.

As far as the TCV is concerned, indeed, it is the expected value over the length of the contracts, which is typically 2 or 3 years. So -- and of course, reality is always different. It can be higher, it can be lower, but that's the best approximation that we have and that we take into account to size capacity questions and things like that. So -- and my understanding is that this is not specifically for Radial, but this is how those things of challenges and KPIs are used in the industry.

Then the third question, I think it is -- on the chargeback that we have to do in our PTF activity, Payment, Tax and Fraud. And where we were challenged at the moment of takeover by a higher figure. And that had to do with a couple of evolutions in the American credit card markets where they were shifting from -- shifting to the chip. And the chip makes it more difficult for fraudsters in the shop business. So -- and they were switching then their activities more to the online business. And at that moment, we were hit somewhat. And the chargebacks, of course, we commit to the

(technical difficulty)

The good news is that for a couple of quarters already, we are back to a much lower and a normal figure.

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Leen Geirnaerdt, bpost SA/NV - CFO [33]

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And we don't disclose.

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Koen Van Gerven, bpost SA/NV - CEO & Director [34]

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And that figure, of course, we don't disclose.

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Operator [35]

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The next question is from Mr. Sumit Mehrotra, Societe Generale.

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Sumit Mehrotra, Societe Generale Cross Asset Research - Equity Analyst [36]

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I'll try to squeeze in a couple. I'd like to go back to your Slide 7, which is basically giving us the new definition of Mail & Retail. So Mail & Retail, I see 13.5% EBIT margin YTD. And out of these 5 different lines, I would like to have a broad understanding that how do you -- how should we think about the margins between, say, proximity retail and value-added services bit of the business and the traditional mail business. So that's one.

Secondly, about the new distribution model. I would like to get to what you feel about the acceptance of this change by the postmen, by the unions. You mentioned that the pilots are ongoing, they feel comfortable about it, and you will go about the reorganization later. So can we also know about what challenges you face operationally there?

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Koen Van Gerven, bpost SA/NV - CEO & Director [37]

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Okay, thank you. As far as the first question is concerned...

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Leen Geirnaerdt, bpost SA/NV - CFO [38]

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We don't disclose the margins.

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Koen Van Gerven, bpost SA/NV - CEO & Director [39]

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We don't disclose the margins of the different parts on this Slide 7 as far as that is concerned.

On your second question, in terms of acceptance, and indeed, it's, of course -- it's a very relevant point, and it's very important to us and we spend a lot of energy and -- in terms of acceptance. And that starts with the customer, and that's why we did extensive market research before deciding to go in this direction. And there, it was overwhelmingly clear that a customer is not too concerned on switching to a prior, non-prior solution because urgent messages more and more go over other platforms like WhatsApp and Twitter and so on.

As far as the postman and the union is concerned, it was very high in our agenda because we know it is sensible. And that's why I'm so happy on the solution that we found, which keeps in the way they work and the things they know in terms of mail rounds, there is a lot of stability in it. So they will keep their mail rounds. It's going to be organized in another way. But something that is very important for them is their mail round and they keep the mail round. So tick the box.

And of course, there is a lot of communication in the direction that we have, but today, it is clear that they understand that we have to change. It is clear that we have buy-in in the model that we put forward, and that will help. And of course, the pilots and the trials that we run do help, too, because then they start feeling it in real.

As far as the organization's reorganizations, I was making reference to that we will start doing afterwards on their rounds, and that is absolutely nothing new. That's something that we do on a regular basis every, let's say, 18 to 24 months. And that we do already since 10 years. And the reorganizations measure the impact -- the negative one of the mail decline and the positive one of parcel growth. So this is something that -- and I'm not going to say that they like it, these reorganizations, but it's something that they knew -- that they know, and that is not something completely new that comes out from nowhere. So -- and I think that's very positive.

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Operator [40]

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(Operator Instructions) No further questions at the moment.

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Koen Van Gerven, bpost SA/NV - CEO & Director [41]

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Okay. Then I will take back, operator.

So ladies and gentlemen, let's make -- let's call this -- let's close this call on a personal notice because this was my 24th and last analyst call as CEO in bpost. And over the last 6 years, it was a privilege for me to talk to you on a quarterly basis. And I have to admit, I didn't sort out yet if I will miss it or not.

A lot of had happened, of course, during this period in the world, in our economy and in our market environment and with bpost and also with all the people, of course, that I met in the analyst community. Many people left and new faces and voices appeared like we have in real world. I think -- and I hope I don't miss anyone, but I think only 4 people remained during the whole period.

Next to me, it is Marc of ING, Mark McVicar of Barclays, Andre from Kepler Cheuvreux and David from Jefferies. But I want to thank all of you. Your talks were not always a smooth ride, I have to admit, but I always appreciate the candor and the quality of your questions and remarks. Some even kept resonating and helped us to shape the future of bpost.

Leen, Saskia and Stéphanie will continue their good work and support Jean-Paul in their awesome way as they did for me. Many thanks for them, too.

Some I will meet during the upcoming roadshows. But to all of you, I wish you all the best in your endeavors. And in the short term, enjoy the upcoming end-of-year season. Bye-bye.

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Operator [42]

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