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Edited Transcript of CTT.EP earnings conference call or presentation 26-Jul-19 8:00am GMT

Half Year 2019 CTT Correios de Portugal SA Earnings Call

LISBOA Aug 10, 2019 (Thomson StreetEvents) -- Edited Transcript of CTT Correios de Portugal SA earnings conference call or presentation Friday, July 26, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Guy Patrick Guimarães de Goyri Pacheco

CTT - Correios De Portugal, S.A. - CFO & Executive Director

* João Afonso Ramalho Sopas Pereira Bento

CTT - Correios De Portugal, S.A. - Executive Director & CEO

* Peter Iordanov Tsvetkov

CTT - Correios De Portugal, S.A. - Director of IR

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Conference Call Participants

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* Filipe Martins Leite

Banco Português de Investimento, S.A., Research Division - Research Analyst

* Nuno Estácio

Haitong Bank S.A., Research Division - Equity Research Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Thank you for standing by, and welcome to today's CTT First Half 2019 Results. (Operator Instructions) I must advise you that this conference is being recorded today, Friday, the 26th of July 2019.

And I would now like to hand the conference over to your speaker today, Mr. João Bento, CEO. Please go ahead, sir.

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João Afonso Ramalho Sopas Pereira Bento, CTT - Correios De Portugal, S.A. - Executive Director & CEO [2]

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Thank you. Good morning, everyone. I'll join you through the highlights part of the presentation, and then hand over to Guy Pacheco, our CFO.

So on Page 4, I'll go through the main highlights, milestones for this half of '19. On the 15th of March, as you know, we have published quality indicators for 2018, which exhibited a 40% improvement over the previous year. With the overall quality indicator scoring 155. Then on March, we have -- we had a soft launch for our initiative with our partner, Sonae, Dott, which we hope and we aim will be the major marketplace in Portugal, which is now growing at a very interesting pace, and we'll bring news in the next quarter.

On May -- the 2nd of May, a major milestone for our bank, Banco CTT, has completed the acquisition of 321 Crédito, as you know, a specialized consumer credit institution, and the operation is now fully undergoing. I'm going to address that soon. We've paid our dividend in May, on the 17th, which represented a cash outflow of EUR 15 million. And on the end of that month, I've been appointed by the Board as the new Chief Executive for the company. And finally, the first milestone, I feel responsible for by the end of July -- 18th of July, more exactly, we have appointed a new and very experienced CEO, a Spanish CEO, for our Tourline operation, which is undertaking a full turnaround of the company that we'll disclose also in the next quarter.

Moving to Slide 5. Main highlights for this first half. I'll call the attention for the -- of course, the transformation -- transformational quarter it -- the second quarter was for Banco CTT with the full integration of 321 Crédito. I'll also call your attention to the, I would say, very well advancing savings placements throughout the quarter. And interesting recovery in Mail and in domestic parcels. And as a last highlight I would say, a very good quarter on -- which refers to operating cost behavior.

So going line-by-line, on the addressed mail volumes, as you know, a 9.1% decline, which, adjusted by working days, represents a 6.1% decline. And this is, well, the most interesting part here is that it was an improvement over the first quarter.

On Express & Parcels volumes, we now start to see recovering in Portugal with almost 6% of growth. Spain being very much impacted by the full loss, and this was the first quarter where this -- the former main customer disappeared. By the way, if you refer to the remaining customers, the quarter also saw a very interesting growth.

Moving to the -- again, to the bank, as I said, it was, I would say, the most relevant quarter for the life of the bank, given the integration of 321. On what regard, savings and insurance placements, a very steady growth. The quarter reached roughly the same level of placements, starting from a higher base in the previous year. In what regards, the operation -- operational transmission plan, operating costs savings are for the mostly secured. So a very good quarter. It is, in fact, the first quarter that, for several years, exhibited a relevant decline in operating costs, which we feel as being very good news. And finally, in terms of cash position. The quarter was obviously impacted by the closing of the acquisition of 321.

Moving in more details to each of the areas, and starting with Mail. Just a graphic depiction of what we've referred, a lower decline in Mail, which is significantly lower if we adjust for working days. And in which refers parcels, again, we are seeing a consolidated 3.7% growth in Portugal, with a significant decline in Spain. But again, if we would exclude the effects of the exiting of the main customer, this would have represented for the full semester a 9% growth, which is a trend that July is confirming.

Moving to Slide 7. We have seen, in terms of financials, a very good quarter in terms of savings and, therefore, a very good semester, with roughly 50% revenue increase, both in the bank and in the savings and insurance placements. Of course, in the bank, with a very relevant contribution of EUR 5.1 million of 321 Crédito. But even without that, a steady growth in bank revenues.

Regarding savings and insurance, I'll probably call your attention to the fact that we feel very positive. As I said, we have quarters around EUR 1 billion placements, EUR 900 million. We are very positive because, in the second semester, the majority, roughly 60%, of the maturities will occur now. And we are, indeed, seeing July as a very good and very strong placements month, which probably allows us to think that something around EUR 4 billion for the year remains a good target for savings.

Moving to Slide 8, a word again on costs. As I said, most of the savings of the transformation plan for the year have already been secured, of those EUR 9 million are already reflected in our accounts for the first semester. Then we are now in a much more advanced phase of looking in a structured way to optimize our real estate portfolio. And this is something that's going to be developed throughout the second semester. And we hope to bring news again in the second semester, for sure, eventually, this quarter.

And finally, a word on specific items, which are also lower than before, but are mostly justified by negotiating staff exits, that accounts for almost EUR 7 million. And M&A costs, mostly in this case, related with the acquisition of 321 Crédito.

So again, if we would exclude here the inclusion of -- in the bank, this quarter revealed a 2.6% decline, which we think it's a very relevant development in terms of operating costs.

Moving to Slide 9. Our strategic priorities remain in line with previous concerns. Of course, in Mail, our main concern and energy is devoted to fully implement the operation -- Operational Transformation Plan and to exceed the communicated targets, and we are very active on that. We've been looking mostly at efficiency and operating costs in operations. We are now looking again to central structure and support functions. And therefore, well, a strong, commitment to that in terms of Mail.

We are very focused on achieving incremental savings to be presented this quarter in a more detailed way. And there's also a word on being more strict in terms of negotiating staff exit costs in the sense that we are now testing and measuring and starting to implement what I would call cheaper exit mechanisms, which includes, in a relevant scale, I hope, some early retirement schemes that are now possible according to Portuguese labor law.

Regarding Express & Parcels, well, the most relevant strategic update refers to Spain. We've been, for a long time, looking at M&A opportunities in Spain. We've managed to identify and being active, and could decide on some of them. Our view is that there are no M&A opportunities in Spain at a relevant and acceptable price. And therefore, the decision not to go along that line was a very sound decision by the Board.

And we have decided to take a different look to developing our Spanish operation. The most relevant aspect is that, as of the 18th of July, last week, we have hired a new CEO with a very relevant track record, Manuel Molins, a former CEO of Correos Express, responsible for its turnaround; former CEO of SEUR, responsible for its turn around, and more than having a new Spanish team that will be fully in place throughout the summer. We have also new ideas about operating -- operation efficiency in terms of B2C delivery and in terms of the commercial approach regarding the role of the franchisees and this plan is now being rolled out. We're going to commit to this plan of turnaround that should last for 18, 24 months, and we're going to monitor it and report to market in a very strict way. And so in a word, we are very optimistic with the situation, although it is and remains, of course, very challenging.

A final word on the bank. Just to say that, of course, we're going to focus on monetizing the exist client base. We are now seeing also some synergistic opportunities with the customer base of 321 Crédito, mostly through placement of insurance -- of insurance offers. And of course, we are reaffirming the aim of EBITDA breakeven for this year and net profit breakeven for the forthcoming year.

We have also decided to update our EBITDA guidance for the year, which is now between EUR 100 million and EUR 105 million, including, obviously, the contribution of 321 Crédito. And we have decided to disclose our updated view on CapEx, in the sense that we feel we're going to be able to do mostly what we have in mind with a significant reduction. And therefore, the guidance is now EUR 45 million, which represents a reduction of EUR 10 million versus initial target.

There's also a symbolic measure that I have laid of voluntary reductions of Board remuneration. The details are in the presentation.

A final word on the bank. Just to -- because it's, I would say, the most relevant milestone for this semester. Not only to -- not only because it produces, I would say, a profound change in the uses of the funds that the bank has been able to raise, and that will be the most successful activity and achievement of the bank so far. And also because the combined numbers are now relevant numbers, with more than 0.5 million customers; total credit over of EUR 800 million; production of credit for this year, around EUR 400 million; and a loan-to-deposit ratio, which is now very respectable, of 70%.

My final comment on this is that the main synergies of the incorporation of 321 are already executed, namely the funding synergy, and this is not reflected yet in the 2 months of the bank that are in the account -- in the results, but they will be fully reflected across the whole of the second half of this year, which represents good news for the bank, and therefore, for CTT.

I'll hand over to Guy Pacheco for the financials.

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Guy Patrick Guimarães de Goyri Pacheco, CTT - Correios De Portugal, S.A. - CFO & Executive Director [3]

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Thank you. Good morning. So starting on Page 12, we see an overview of our financial performance, where, in the second quarter, we saw improvements in all relevant financial metrics, although it was a difficult quarter in the number of working days, which has the direct impact in our operations of Mail and Express & Parcels. This quarter had less 2 working days, which obviously affects volumes in these 2 divisions.

Our revenues remained flat in the quarter and in the first half due to the good performance of the financial areas, despite a very challenging quarter in terms of Mail. If we exclude the effect of 321 acquisition, our revenues declined 1.4%. OpEx, with a very positive performance in the quarter, 1.3% decline or 2.6% if we exclude 321 Crédito, which enabled our EBITDA to grow 8.7% in the quarter or 0.7% in the first half. EBIT also with growth with lower specific items, the cost with negotiated staff exits were lower at EUR 6.8 million in the first half. Our net income amounted to EUR 9 million, representing a growth of 21% year-on-year on the first semester.

On the next slide, we can see the overview of our revenues. As we -- I already commented, revenues remained flat due to the contribution of Banco CTT and obviously, the inclusion of 321 Crédito in our perimeter and Financial Services. Mail was heavily affected by the number of working days, especially in the month of June, where we saw less 3 working days this year.

Mail revenues declined 4.3%, despite volumes declined 10.3%, partially offset by a strong mix effect that we continue to see from inbound mail and price effect. We are able to increase prices more in non-regulated prices to compensate a lower price increase authorized by ANACOM in the Universal Service Products.

Express & Parcels growing 5.9% or EUR 1.7 million, fully offset by Spain following the loss of the biggest -- of its biggest customer that caused a volume decline in the end of first half of 8.2%. Although, commercially, as João already mentioned, the pipeline in Spain remains strong, so if we exclude the loss of that customer, the remaining of the volumes increased 9.1%.

Banco CTT growing EUR 7.8 million or 49.7%, with the contribution of EUR 5.1 million of 321 Crédito and a solid growth in net interest margin and commissions from the organic part of the bank, Financial Services continued to recover with a robust growth in public debt placements, growing 24.1% in first half or EUR 3 million in the same period.

In going to our next slide, an overview of OpEx. OpEx remained flat in the first half with the consolidation of 321 Crédito that include -- that represented a EUR 1.9 million increase on costs with a very positive performance in the second quarter, as we already mentioned.

Mail and Financial Services declined EUR 7.6 million in costs, with strong reductions, namely, in facilities. Our staff costs, Express & Parcels growing to EUR 2.7 million, out of which EUR 2.3 million were in the first quarter. Mainly to the need of rescaling Spanish operations to the new volume reality, that was mainly done throughout the second quarter, an increase in unit prices. But in both countries, in labor and fuel, Banco CTT costs, growing EUR 2.6 million organically due to higher transaction costs, IT and stuff.

In the next slide, you can see the breakdown of our EBITDA. EBITDA remained flat in first half, growing 8.7% in the second quarter, obviously, underpinned by the performance of financial services and Banco CTT that offset -- fully offset the decline that we saw in Mail and Express & Parcels.

Mail declining EUR 4.4 million, with cost performance offsetting the revenue decline due to lower volumes affected by the number of working days. Express & Parcels declining EUR 2.6 million due to the revenue decline in Spain and high costs, especially in the first quarter. We improved slightly the performance on the second quarter. Banco CTT growing EUR 3.3 million with a positive contribution, this 321 Crédito financial services, growing $4.1 million, with robust revenue growth and cost control.

Moving to our balance sheet on Page 16. Our balance sheet reflects the incorporation of 321 Crédito and the growth of the bank that now it stands at EUR 2.3 billion of assets, up from the EUR 1.8 billion that we had in the first quarter. Our health care benefits, liabilities now stand at EUR 251 million. And a corresponding tax credit of EUR 72 million, which result in EUR 179 million net.

After the adoption of IFRS 16, we now also have EUR 90 million of lease liabilities, reducing from the EUR 97 million in the end of 2018.

In the next page, our cash and cash flow. After the acquisition of 321 Crédito and dividend payment, our net debt, excluding leases, is now 0 or EUR 90 million if we include the leases after IFRS 16. Our cash flow was very affected by our working capital performance. Mainly 2 effects, we are now a net receivable of terminal dues due to our good performance in inbound mail, and the payment terms between postal operators are very long.

We increased our receivables in EUR 5.6 million from postal operators. Normally, the settlements are, the main settlements, namely from China are done in the third quarter. So we expect to receive this one soon next month. And we have also a EUR 5.7 million in receivables from the Portuguese states related with the mobility allowance. That is a service that we provide to the state where we have front money to subsidize the cost of airplane tickets from the Portuguese islands to the mainland. And this service has a normal update during December, which explains the higher receivables. These 2 effects would be recovered until the end of the year. But right now, our free cash flow stands at minus EUR 1 million.

Going to the detailed overview of the business units and starting with Mail in Page 19. Mail, we made an improvement, overall, in volume trends, but still heavily affected by working days and the digitalization in the private sector. Transactional mail is where we see most of the impact, with EUR 6.8 million decline, 3.2%, with a price and mix effect that offsets partially the 9.3% decline in volumes.

Advertising mail continues under pressure, with very 2 -- with 2 very different trends. As the retired address advertising mail suffering from GDPR, mainly, that impacts the size of mailing databases after the request of consent and all the database in the country registers somehow in a significant way. And addressed mail, where we are growing, growing based on gaining market share. But then unfortunately, has lower unit prices on the addressed mail, that's why we see the revenue of minus 12%.

Retail on order with a decline of 18%. Philatelic products justifying EUR 800,000 of that decline, and lower retail sales and FX gains explain the rest of decline. Business solutions continue to grow, especially in new business areas, like geographical data sales, and costs remain very much under control, declining EUR 6.6 million, partially offsetting the revenue decline as such, our EBITDA declined EUR 4.4 million or 9.7%. EBIT -- at EBIT level, a better performance because of lower specific items, especially lower costs with staff exits.

Moving to Express & Parcels. In Portugal, Express & Parcels is growing 4.4% in the second quarter and 3.9% in the first half. If we focus only on parcels, we improved our performance to 8.8% growth in revenues in this quarter, accelerating from the 3% that we saw in first quarter. Unfortunately, spend declining 11.9% in this quarter, with volumes declining 6.6%, following, I already mentioned, loss of its biggest customer, and it was the first quarter without any volumes from that customer, in particular.

In the first half, volumes declined 8.2%. But if we exclude these key accounts, volumes would have increase 9.1%. So in terms of commercial pipelines, things are going well, although it will take some quarters to recover the previous volumes.

We were able to reduce costs and resize financial operations this quarter, but not enough to compensate the revenue decline that we saw. And as a result, our EBITDA was negative EUR 0.8 million in the first half or declining EUR 2.7 million, a similar decline that we see at the EBIT level.

Moving to the bank. Banco CTT growing 49.7% in the first half or 17.4% if we exclude the 321 acquisition. We continue to see a very robust operational performance in terms of customer acquisition and credit placements, now reinforced with 321 Crédito acquisition. As João said, we'll now be able to place an equivalent of 40 -- EUR 400 million of credit in 2019, leveraging on our ability, continuing to attract customer funds at a marginal cost. Our customer deposits now stands at EUR 1.064 billion, and our transformation ratio with 321 reaching 69.3%.

EBITDA of the bank, improving to minus EUR 3.3 million. At EBIT level, the EBIT improvement is lower because we had EUR 1.2 million of specific items related with M&A transaction. Growth in impairments due to the incorporation of 321 Crédito, that has a different risk profile and a higher G&A.

Moving to Financial Services. Financial Services continuing to recover, and we continue to see robust debt placements. Although in the -- with an expected slowdown in the second quarter, total debt placements grew 37.5% in the second quarter and 55.6% in the first half. In the second half of the year, we'll mature approximately 60% of the total certificates in 2019, and this will continue to fuel our growth of debt placement. July and August are always strong months due to the inflow of immigrants that normally place their savings here in Portugal. Costs continue under control on this division, with EBITDA reaching 90 -- EUR 9.4 million, growing EUR 4.1 million. That is a similar growth that we see at the EBIT level.

I'll now pass you back to João.

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João Afonso Ramalho Sopas Pereira Bento, CTT - Correios De Portugal, S.A. - Executive Director & CEO [4]

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Okay. Well, we're ready for Q&A, it's been an interesting -- a very interesting quarter, which provides a good outlook for the rest of the year. Please bring in your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Filipe Leite from CaixaBank.

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Filipe Martins Leite, Banco Português de Investimento, S.A., Research Division - Research Analyst [2]

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This is Filipe Leite from CaixaBank. I have a couple of questions, if I might. The first one is related with specific items. You mentioned a EUR 1 million cost in first half related with the measurement system of new quality indicators, which were required by the regulator. My -- is why are you considering this as a specific or a nonrecurring item if this is a regulatory decision that will force you probably to have this extra cost in the upcoming quarters or years? And also, in the past, you mentioned EUR 15 million nonrecurring costs expected for full year. In this first half, you already reported close to EUR 12 million, do you reiterate your expectations for the full year or should we expect a higher amount?

My second question is related with the salary increase for the workers because some press today is mentioning an already agreed increased between EUR 1.6 and EUR 0.8, I think, with retroactive effect at January, can you confirm it?

And my third and last question is related with 321 Crédito. And if you have any idea of the sensitivity of the potential loss in the target of EUR 400 million loan book in a situation of an economic downturn. I mean, in a situation of tough economic environment, I assume that this type of credit could suffer more than other type of credits. My question is if you have any idea of what could be the expected loss on 321 Crédito loan book in a situation of lower economic growth or even in a situation of an economic recession?

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João Afonso Ramalho Sopas Pereira Bento, CTT - Correios De Portugal, S.A. - Executive Director & CEO [3]

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Okay. I'll take the question on the wages. In fact, I don't know what you read, but what's been announced internally is that there was no agreement with the unions, and therefore, we have decided to put forward a wage increase, that goes for the lower wages, that goes from EUR 1.0 to EUR 0.8 maximum, with the minimum of EUR 10 per person. And again, this produces an impact, which has been negotiated for a long term, but didn't produce an agreement with the unions. And we feel very optimistic that most of our workers will accept this, and therefore, those are the facts.

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Guy Patrick Guimarães de Goyri Pacheco, CTT - Correios De Portugal, S.A. - CFO & Executive Director [4]

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Regarding the specific items question. You are right, it is a cost that we'll have forever or until this decision stands. But what we put in specific items, it's not a recurrent cost of the measuring system. We have -- because the -- we have the new technology to be in place and we need to try and hire a number of people that do the measuring system, and what we booked as a nonrecurrent, it was the set-up costs of these new measuring system that, as you know, we are challenging it in court because we think the costs associated with the measurements are now very disproportionate in giving the profitability of these business lines.

Regarding -- Peter is answering you on the economic downturn.

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Peter Iordanov Tsvetkov, CTT - Correios De Portugal, S.A. - Director of IR [5]

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On 321 Crédito, Filipe, I'll just refer you back to the presentation that we did last year around this time in July, with the acquisition of 321 Crédito. It outlined, basically, the risk, risk profile of 321 Crédito, and it also presented that risk profile throughout the cycle. If that's not clear, we can take this offline also.

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Operator [6]

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(Operator Instructions) Your next question comes from the line of Nuno Estácio from Haitong Bank.

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Nuno Estácio, Haitong Bank S.A., Research Division - Equity Research Analyst [7]

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The first question would be regarding the restructuring that you are planning now in Spain. Can you indicate us if you have an estimate of if there will be significant upfront payments or investments for this new strategic plan? And are you considering now because, essentially, previous management has always said that selling these or -- was almost out of the question. Are you more open to eventually getting rid of this business, which has been contributing negatively since the IPO? And if you could give us any additional hints of what you're planning to do there would be helpful.

A second point would be in terms of the higher costs related to these additional requirements from the regulator. How much are you -- do you think you are already facing because of this? And are there going to be additional costs because, apparently, you are going to reopen some stores? What is the potential cost for these additional services and additional presence in the country?

A final question, just on the Slide 17 of the net cash. You have -- you are presenting a net position -- or a net debt position of EUR 90 million, which is essentially the leases liabilities, but this is on an aggregate basis, correct? I would like to know what is the current net debt position of CTT, excluding the bank, if you could give us that number.

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João Afonso Ramalho Sopas Pereira Bento, CTT - Correios De Portugal, S.A. - Executive Director & CEO [8]

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Okay. Nuno. This is João. I'm going to cover Spain. As I mentioned briefly, we've been looking at, for a long time, for M&A opportunities in Spain. That would -- that will require some funding, of course, and we didn't think that would be the right path to proceed. The dynamics of the parcels -- Spanish parcels market, very much like everywhere. But in Spain, very clearly, is that B2C is growing at a much faster pace and -- than B2B. And therefore, we decided to challenge the strategic model because it was, in fact, the -- mostly franchise-based model was conceived and deployed for a different scenario.

What this new leadership and new ideas we have for what's going to happen is now being fully planned. And we're going to disclose the plan and the targets in the next quarter results presentation. But there are 2, I would say, strategic strengths that I might share right now. One is that, since B2C is growing at a much faster pace, we need to be much more efficient in delivery of our B2C. And what the most successful operators in Spain are doing is doing that through their own operations.

And the other one is that there are now, and we have tested that already in July with some of our franchisees. There is scope for a much, much more effective way of deploying our commercial relation with different (inaudible) by removing some of the delivery costs and weight they have. And by replacing some of them, or maybe most of them, with a much higher commercial content. So we have ideas for a plan which are very sound. They have improved, the group is successful already with the leadership that we have hired.

And may I repeat that Manuel Molins, which is now building a new leadership team that will be in place before the end of December, is the person that produced the turnaround of SEUR a long time ago. In fact, he was the man that sold SEUR to the DPDgroup. And after that, he produced a very impressive turnaround for Correos Express. So we are very positive on that.

And coming back to your question, any investments that we need for deploying this plan, and we will disclose that soon, as I said, are, of course, of an order of magnitude very different than the ones that we would have deployed if we would proceed for an M&A, for an M&A route.

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Guy Patrick Guimarães de Goyri Pacheco, CTT - Correios De Portugal, S.A. - CFO & Executive Director [9]

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Regarding ANACOM costs, what we can share is that our guidance includes all the costs that we tend to -- with ANACOM, even this last decision on the new measurement. On the cash position, so our net debt, excluding the bank, is around EUR 70 million, 7-0.

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Operator [10]

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(Operator Instructions) There are no further questions at present. Please continue.

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João Afonso Ramalho Sopas Pereira Bento, CTT - Correios De Portugal, S.A. - Executive Director & CEO [11]

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Okay. Thank you all for coming. It's my first results presentation. The next one will be my first results presentation with a full quarter under my leadership, so I look very much forward to that moment. And please stay with us, we are very committed to what's going around, and we count on you for joining us in this route. Thank you very much.

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Operator [12]

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Thank you. That does conclude our conference for today. Thank you for participating. You may now all disconnect.