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Edited Transcript of PNL.AS earnings conference call or presentation 4-Nov-19 10:00am GMT

Q3 2019 PostNL NV Earnings Call

Amsterdam Nov 10, 2019 (Thomson StreetEvents) -- Edited Transcript of PostNL NV earnings conference call or presentation Monday, November 4, 2019 at 10:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Hendrika W. P. M. A. Verhagen

PostNL N.V. - Chairman of the Management Board & CEO

* Jochem van de Laarschot

PostNL N.V. - Director Communications & IR

* Pim Berendsen

PostNL N.V. - CFO & Member of Managing Board

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Conference Call Participants

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* Andre F. M. Mulder

Kepler Cheuvreux, Research Division - Analyst

* David Kerstens

Jefferies LLC, Research Division - Equity Analyst

* Frank Claassen

Banque Degroof Petercam S.A., Research Division - Analyst

* Henk Slotboom

The Idea-Driven Equities Analyses Company - Research Analyst

* Marc Zwartsenburg

ING Groep N.V., Research Division - Head of Benelux Equity Research

* Ruben Devos

KBC Securities NV, Research Division - Senior Financial Analyst

* Tobias Sittig

MainFirst Bank AG, Research Division - Head of Equity Research Germany & Senior Equity Analyst

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Presentation

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Operator [1]

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(technical difficulty)

Please go ahead.

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Jochem van de Laarschot, PostNL N.V. - Director Communications & IR [2]

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Good morning, everyone. This is the analyst call for the third quarter results of PostNL. My name is Jochem van de Laarschot, Investor Relations of PostNL. Here with Hendrika Verhagen, CEO; and Pim Berendsen, our CFO.

To start off with, Pim will go through the slides that you can find on the website. And afterwards, we have a Q&A. Pim, please go ahead.

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Pim Berendsen, PostNL N.V. - CFO & Member of Managing Board [3]

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Thank you, Jochem. Welcome to you all and good morning. Let's look at the key takeaways of the third quarter first. To begin with, of course, we have completed the transaction with Sandd on October 22, which will enable us to get to a secure, reliable, accessible and affordable postal service going forward. We aim to complete the integration in the first half of 2020, and we reconfirm all the financial impact and details as we've presented before, which basically means the run rate synergies of EUR 50 million to EUR 60 million, the delay of master plan savings, cost savings and implementation cost exactly as we have communicated before.

We have completed the transaction, the sale of Postcon to Quantum Capital Partners earlier last week.

Volume growth at Parcels came in at 11%, with a continuing lower growth rate in some customer segments, predominantly fashion and electronics. And this has impacted the margin development at Parcels.

Mail in the Netherlands result was slightly better than last year and against the backdrop of these developments, we see a Q3 performance which is in line with our own expectations.

We reconfirm the 2019 outlook for underlying cash operating income of EUR 170 million to EUR 200 million, excluding the implications of the Sandd acquisition, which relates to EUR 150 million to EUR 180 million, including Sandd. And the difference between those 2 is the EUR 15 million to EUR 25 million impact on underlying cash operating income as we have guided the market upon already 2 times before.

Going to Slide 4. Basically looking at the progress we made within our business. Let's look at the results first. Revenue more or less in line with revenue last year at EUR 636 million. Underlying cash operating income EUR 2 million better at EUR 25 million.

Very strong improvement in our net cash from operating and investment activities. And improvement all in all, EUR 96 million, which is explained by lower CapEx, less interest and a fundamental improvement in working capital, some terminal dues and phasing over the quarter. But all in all, a very important improvement on net cash.

Profit from continuing operations at EUR 13 million in comparison to EUR 19 million last year.

Based on the results of this third quarter, the results of the first half and the expectations we have for the remainder of the year, we reconfirm the 2019 outlook.

Let's go to the different segments in a little bit more detail. And let's start with Parcels first, I'm at Slide 6.

In Parcels, current volume development in the quarter was 11% growth. And year-to-date, the growth is at 13.4%, which was a slightly lower growth as we've seen in previous quarters, and that has impacted our margin development. Underlying cash operating income came in at EUR 27 million, more or less comparable to last year at a margin of around 6.7%.

Revenue increased to EUR 401 million, and of course, based on the growth that we just talked about of 11%. That growth has been impacted by lower growth rates in a certain customer segments, for example, fashions and electronics. And next to that, market research also indicates still a higher growth in online spending than the growth in the number of transactions, basically indicating a slightly higher value per order.

Next to this, we've seen some rationalizations in e-commerce value chains, customers focusing a bit more on taking product categories out that are less contributing in to their bottom line and in cash performance combination of orders in one box. All in all, we see a slight deterioration of the growth rate in the market. We do not have any indications that we're losing market share significantly. So just this brings the growth rate a little bit below our expectations and expect to end the year with a growth of 13% in volume terms.

Logistic business as the more revenue -- Spring revenue was backed by the transition towards the government provider of global e-commerce solutions. That means that, basically, our e-commerce business has grown quite significantly, but the deterioration of cross-border mail, in line with digitalization that we see across Europe, also continues, which has, together with the global macroeconomic pressures, impacted Spring's result in this quarter.

Overall, Parcels performance for the segment flat, EUR 1 million down in comparison to last year. EUR 8 million of volume growth, price mix effect of EUR 3 million, down, an increase of organic costs amount to EUR 4 million. And together with capacity optimization, operational efficiencies, we saw a Parcel segment result -- sorry, a Parcels Benelux result which was flat in comparison to last year, and Spring, EUR 1 million down, which basically brings us to the EUR 27 million that we reported.

Then over to Slide 7. Last May at our Capital Markets Day, we presented the strategy of Parcels going to a better balance of volume growth, margin development and investment levels that will accelerate the free cash flow creation from our Parcels segment. And of course, we said that on the back of our ambition to want to be the leading e-commerce logistic company in the Benelux.

We want to be the favorite deliverer. And in order to maintain that position, we've defined 5 key elements of that strategy that are crucially important. Let's look at them one at a time to show how we look at progress.

First ambition relates to future growth. And as we just discussed, volume growth of Parcels in the quarter came in at 11%, with 13% full year 2019 expectations.

Investment in new capacity and innovative networks. We've signed the contract for the small parcel sorting center, which will help us increasing the capacity in our sorting facilities whilst at the same time bringing down the cost per parcel.

We've opened a 24th depot in Dordrecht, and we expect to open the depot in Tilburg quite soon in time for a final year -- for a peak period.

If we talk about the third component, which is all about improving value through yield management, through both revenue per parcel improvements as well as cost per parcel improvements. I will come back at the revenue per parcel lines a little bit. Straight afterwards, we've got a separate slide.

On the cost per parcel, we've introduced only one delivery attempt. Based on data analytics and big data, we've simulated the fact that, basically, when somebody's not at home first time right, there's a very big likelihood that he will not be there next time around as well. So we redirect the parcel straight to regional networks, which improves the hit rate and which improves our operational efficiency.

Being a good employer to reduce our environmental footprint is crucially important for us as well. We work hard to reduce our environmental footprint. Our scientific base targets are approved. We aim to achieve a mission free targets of PostNL towards 2025 and 2030. And besides that, we are preparing for changes related to Dutch labor regulation, which will become effective as of 2020.

As mentioned before, our ambition is to improve value by yield management and optimizing our supply chain and reduce cost.

On this slide, you'll see an update on revenue improvement and cost improvements.

On the revenue side, we saw a stronger growth for larger customers in Q3, in line with previous quarters, which had a slightly negative, however, improving impact on our revenue per parcel.

We have full preparation to implement pricing initiatives and 2 different measures to increase our revenue per parcel. The first one relates to pricing policy changes to mitigate end of the year seasonality costs, which will be visible and will be applicable to 2020 peak period. Next to this, the price indexation for 2020 is approved and will increase our price points for the various customer contracts that we're currently renegotiating.

For our ambition to reduce cost per parcel, we work hard on improving our efficiency with focus on first time right. As said, we've introduced one delivery attempt in our operations, which improves the efficiency. And next to that, there is still increasing hit rates and drop duplication is going in the right direction as well. The optimization of capacity, the opening additional depots was impacted by the current volume growth, which was slightly below our expectations. It basically means that on a cost per parcel side, we have a higher cost per parcel as a consequence of that increase in capacity as well as higher indirect costs per parcel because of an increase of IT cost against a lower growth than we expected.

To conclude, the current volume development impacts margin improvement this quarter, but we'll take further steps in execution of our strategy to improve future margin.

So if we look at margin this year, we have adjusted the margin expectations of Parcels to around 7% from 7.5% to 0.5% down, which is predominantly driven, as you can see on this slide, on the cost per parcel development, impacted by the lower growth than we expected.

Let's move over to the Mail part of the business. And performance in Mail was marked by volume decline, price increases and cost savings. An 8% revenue decline from EUR 371 million to EUR 342 million in the third quarter of this year. And the underlying cash operating income improved by EUR 1 million.

Overall, volume decline was 10.6% in the quarter, which brings the year-to-date volume decline at 9.9%. The biggest part of this volume decline is due to substitution, as we've said before, and will continue for the next quarters and years to come.

Loss of volumes to competition in this quarter was around 3%. And of course, that mainly relates to volume lost to Sandd. Also, for the year-to-date figures, loss to competition is approximately the 3%. That's predominantly volume lost in Q4 2018, beginning 2019 to Sandd on a number of specific lines that moved over to them. Certainly, this element of volume decline will now cease to exist given the fact that we have completed the transaction with Sandd.

Delivery quality is stable at 95%. Underlying cash operating income, slightly improved. We'll see an impact from volume/price/mix of EUR 12 million in this third quarter, next to autonomous cost increases of EUR 6 million. The cost savings in the segment Mail in the Netherlands were EUR 7 million. And there, we see that volume decline together with autonomous cost increases, are not offset completely by cost payouts.

Other effects, mainly less cash-out for pensions and provisions and results from terminal dues as we have seen in previous quarters as well, have had a positive impact of EUR 12 million in the quarter.

On Slide 10, we see the cost savings that were achieved in Q3 2019. All in all, EUR 9 million for the combination of Mail in the Netherlands and other restructuring benefits. And it remains crucially important to keep focusing on taking as much cost out knowing that volume decline will continue, of course, also after the acquisition of Sandd.

For the full year, we expect cost savings to come in at the lower end of the range, between EUR 45 million and EUR 65 million.

On Slide 11, you can see an overview of the timing of the integration plan with clear milestones to complete this integration of Sandd in the first half of 2020. As said on October 22, we have completed the transaction and have immediately started with validation of our integration plans and have started also with offering contracts to Sandd's mail deliverers as well as starting to discuss the other employees as well and allow them to submit for vacancies that we have at PostNL.

First phase is all about validation of the plan, finalization of the preparations and then first part of volumes will -- are expected to be migrated before Christmas time, that will be from the 24 hour mail. And the big migration will start early in 2020 in which we will migrate all Sandd volume as quickly as we reasonably can to PostNL networks, and we expect to finalize that early in 2020.

Let's now move to the financial review section of the deck. And first, on Slide 13, you see the financial highlights of our continual operations. EUR 25 million of underlying cash operating income in comparison to EUR 23 million.

Net cash improved by EUR 96 million. And as you know, in May, we've introduced the normalized EBIT metric, which we will be using as of 2020 as the key profit metric. To help you compare, we have included the normalized EBIT here as well, which came in at EUR 26 million in comparison to EUR 32 million normalized EBIT in Q3 2018.

Definitely happy about the progress that we're making on cash and cash flow, since -- as we discussed before, ultimately, free cash flow is the basis on which we paid and can pay dividends and remain to have a resilient balance sheet going forward.

If we go to the statement of income, then you can see the profit from continued operations at EUR 13 million, which is EUR 6 million lower than last year. Net financial expense is lower, of course, because of the redemption of the Eurobond in August 2018.

In this period, we report a result from discontinued operations of EUR 7 million negative, which is explained by the combination of negative, however, improving business results of Postcon and Nexive. Last year, a negative result was mainly explained by a fair value adjustment and negative business results from Postcon and Nexive as well.

Sale of Postcon to Quantum Capital Partners completed last week Thursday, and we're still in the process of selling Nexive.

Then we move to the free cash flow generation in third quarter. Here, on Slide 15, you see the bridge from UCOI third quarter at EUR 25 million towards net cash from operating and investment activities, EUR 54 million. And of course, given the changes in IFRS 16, we separately report here the lease payments of EUR 14 million in the quarter, bringing free cash flow for the quarter at EUR 40 million.

On the right-hand side, you see the split in CapEx. EUR 30 million has been spent in the third quarter. And full year expectations are that it will not exceed the EUR 80 million CapEx number. Earlier on, we indicated that early year it will not exceed EUR 100 million, but we have brought this down to not exceeding EUR 80 million.

Slide 16 brings us to the balance sheet. Noteworthy, there is that we -- our consolidated equity decreased to minus EUR 26 million, of course, on the back of positive profit from continued operations, offset by an interim dividend, which we paid out a cash payment of EUR 23 million. And together with the negative result from discontinued operation, this gets us the minus EUR 26 million consolidated equity position at the end of the third quarter.

Based on those numbers, our adjusted net debt position is currently EUR 698 million, which compares to an adjusted net debt position of EUR 702 million at the end of Q2.

In September, we successfully offered a Green Bond of EUR 300 million in fixed rate notes with a coupon of 0.625%, a term of 7 years and no financial covenants. And this covers our financial needs for the medium term.

Then let's go to pensions. I'll take you through the pension position. At the end of this quarter, the 12-month average coverage ratio of the fund was 112.3%, above the minimum required level of 104%, however, decrease in -- because of the decline in interest rates. The impact of the current lower interest rates also show the actual month and coverage ratio of 106.1% at the end of September.

The provision for pension liabilities for Q3 amounted to EUR 321 million of which EUR 33 million relates to the fifth and last installment of our unconditional funding obligation, which we'll pay in this quarter.

The other part of the provision relates to the accounting cost of our transitional plans. As you know, the payment of the related soft pension benefits will be almost completely in 2020 with a large one-off payment to be made at the end of 2020. The decline in interest rates will obviously increase the related payments in 2020, which is already partly visible in this increased provision in 2019.

Going forward, the lower interest rates will increase our pension expense negatively, impacting normalized EBIT. As the premium percentage of the regular pension plan is capped and currently already at the maximum level, the impact of the higher cost of our equity is mitigated by a positive effect in other comprehensive income. In other words, this interest rate will impact normalized EBIT. It will not impact equity and it will not impact our cash out on regular pension payments. But as said, you will see an impact on normalized EBIT as a consequence of higher accounting pension expenses.

As a last remark, please be reminded that as of 2021, we will get to a much more normal pension situation where actual pension expense and pension cashout will only relate to 1 year's additional regular pension accrual for the people that are employed at PostNL.

Then let's move to the outlook. At first, Slide 19. Here, you see the seasonal pattern. And as always, Q4 brings the largest contribution to our full year profit, slightly less back end loaded than in 2018, but of course, still significantly higher profit numbers than in the first 3 quarters of the year. In Q4 2018, we had the nonrecurring effect from the retro-active invoice to postal operators. And if you look at Q4 going forward, our cost savings are expected to come in at the lower end of the range between EUR 45 million and EUR 65 million. We expect full year volume growth of parcels of 13%. And lastly, we have one working day extra in this fourth quarter in comparison to last year.

We confirm our outlook for 2019 underlying cash operating income and expect to deliver underlying cash operating income of between EUR 170 million to EUR 200 million before consequences of Sandd. Taking into account the developments in 2019 so far, the outlook for Parcels has been adjusted to high single digit growth in revenue and an expected full year margin of around 7%.

At Mail, we expect addressed volume decline between 8% and 10%, partly offset by price increases, resulting in a high single digit decline in revenue. And our margin guidance has been adjusted to exceeding 5%.

Adjusted for the expected and earlier communicated financial impact from the acquisition of Sandd in Q4, this will translate to an underlying cash operating income of between EUR 150 million and EUR 180 million, which should be comparable to normalized EBIT of between EUR 120 million and EUR 150 million.

On the next slide, I will explain in more detail the financial impact of the transaction of Sandd. What we've done in this Slide 21 is a comparison of full year 2019 with and without Sandd on the different profit metrics that are in use.

First, on the business case. We have started the validation and no changes whatsoever on the financials of the business case that we've presented on October 1. And the annual underlying cash operating income in synergies will amount to EUR 50 million to EUR 60 million, reaching full run rate in 2022.

The integration-related cash-out, approximately 1x run rate of synergies, roughly, equally split over 2019 and 2020. This includes one-off costs non-cash related to accelerated depreciation in 2019 and 2020. Due to quicker integration, we have to depreciate in an accelerated way some of the assets of Sandd.

The delay in the implementation of the current cost savings plan will impact the results by EUR 30 million to EUR 50 million negative, cumulative for the period 2019 to 2022.

Expected negative UCOI impact in Q4 is expected to be between EUR 15 million and EUR 25 million.

When we look at the confirmed outlook, excluding Sandd, the expected full year cash outflow from provisions is expected to be around EUR 10 million. Remember that we've indicated EUR 20 million to EUR 30 million in our annual report.

Normalizations and EBIT are equal to the underlying items in UCOI for 2019 except for restructuring-related costs.

When we look at the full year 2019 numbers, including Sandd, we see an increase of the change in provisions due to expected restructuring cash-outs related to the integration of Sandd in Q4 2019. And of course, this follows a higher restructuring-related charges. This will impact normalized EBIT by around EUR 35 million to EUR 120 million, EUR 150 million normalized EBIT, including Sandd, for 2019.

As we indicated in the beginning of the year, and I want to revisit that right now, is that we expect the strong improvement in net cash from operating and investment activities. Remember that we were minus EUR 90 million for 2018, and we expect that net cash will come in at between EUR 80 million and EUR 110 million. And this number does include the impact of Sandd that will be visible in Q4 2019. Then we'll need around EUR 60 million for lease payments and the balance will be there for the cash component of dividends and acquisitions.

All in all, it's crucial to show this improvement in net cash because, of course, it is the most important metric that will drive share value -- shareholder value going forward.

To conclude. Q3 performance was in line with our expectations. Fundamental that we've managed to complete the transaction with Sandd. Also happy that we're able to complete the sale of Postcon to Quantum. Volume growth at Parcels came in with 11%, slightly lower growth rate in certain customer segments which impacts our margin development at Parcels. Mail results slightly better than last year. And against the backdrop of these developments, we saw a satisfying Q3 performance, and we reconfirm our 2019 outlook.

Jochem, back to you for Q&A.

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Jochem van de Laarschot, PostNL N.V. - Director Communications & IR [4]

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Thank you very much, Pim. I'll transfer that right away to our operator to open up Q&A, please.

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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. Frank Claassen, Degroof Petercam.

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Frank Claassen, Banque Degroof Petercam S.A., Research Division - Analyst [2]

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Frank Claassen of Petercam. 2 questions, please. First of all, could you give us a feel for how big the impact is of the low interest on the pension costs going into 2020 on EBIT? Some quantification would be helpful. And secondly, on working capital, big improvements. What are the drivers? And is it sustainable? Could we expect it also to continue?

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Pim Berendsen, PostNL N.V. - CFO & Member of Managing Board [3]

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Thank you, Frank. Well, of course, let's say if you go back 2020 interest rates and consequences of those on pension expense, they are, of course, not completely sure yet. That we'll fix those when it is the 1st of January 2020. But roughly with current interest rates if they were to keep at the level where they were at the end of September, luckily, we've seen some increase already, you could and should think of an impact of roughly between EUR 15 million to EUR 25 million on a full year basis on pension expense increase.

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Frank Claassen, Banque Degroof Petercam S.A., Research Division - Analyst [4]

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Okay. Clear. And working capital?

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Pim Berendsen, PostNL N.V. - CFO & Member of Managing Board [5]

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Working capital, there's a couple of components to that. There is always some phasing elements of terminal dues. In this quarter, we had also some phasing element in relation to cutoff. But fundamentally, working capital is improving. And we do that because we launched several initiatives to improve our weighted average days to pay, initiatives that improve the DSO. This element of working capital improvement will definitely be sustainable, and we expect to continue improving on those. But please bear in mind that working capital is always influenced also by bigger terminal due settlements if and when they occur. So quarter between quarter, you might see some deviations. But fundamentally, we seek and see an improvement of working capital.

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Frank Claassen, Banque Degroof Petercam S.A., Research Division - Analyst [6]

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Okay. And can you remind me, this quarter was helped by the terminal dues? Could you quantify that?

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Pim Berendsen, PostNL N.V. - CFO & Member of Managing Board [7]

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I can't really quantify that, but it's -- no, I can't.

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Frank Claassen, Banque Degroof Petercam S.A., Research Division - Analyst [8]

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But it was a positive? Okay. All right.

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Pim Berendsen, PostNL N.V. - CFO & Member of Managing Board [9]

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There was less cash-out on terminal dues than in Q3 2018, yes. And there was some cutoff benefits phasing elements whereby, some payments are done in Q4 rather than in Q3 last year.

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Operator [10]

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

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Marc Zwartsenburg, ING Groep N.V., Research Division - Head of Benelux Equity Research [11]

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First, to come back also on the working capital. Pim, I think you mentioned at the Capital Market Day that the cash-out will be a touch higher versus 2018 for Parcels. And therefore, should we still assume that the cash-out for working capital then, Pim, as you just said, is less of a cash-out this year than last year? Is that the right conclusion from what you're just saying?

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Pim Berendsen, PostNL N.V. - CFO & Member of Managing Board [12]

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What I said in Capital Market Day that the normal pattern of working capital investments in Parcels and Mail are different. So Parcels is growing as a positive working capital, which means that growth in Parcels will come at an increase of working capital requirements. Plus, it's the other way around at Mail.

So we do see investment in working capital in Parcels. But as said, we also seek fundamental improvements on the key drivers that impact working capital. And we do that both on the side of Parcels as well as in Mail. And the combination leads to an improvement of overall working capital, but that does not mean that there is not an investment in working capital requirements for Parcels anymore.

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Marc Zwartsenburg, ING Groep N.V., Research Division - Head of Benelux Equity Research [13]

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Yes. Clear. And then going back to your guidance of the net cash flow of the EUR 80 million to EUR 110 million it now is. That's now a combination of say EUR 20 million lower CapEx that you're expecting versus the EUR 100 million versus the maximum EUR 80 million now. Slight improvements on working capital. And then you have the result of Sandd in there. In that combination, including the result of the group, of course, that leads to a slight shift that the cash flow was actually EUR 10 million guided lower than...

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Pim Berendsen, PostNL N.V. - CFO & Member of Managing Board [14]

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Yes. It's a combination of these effects. It was EUR 90 million to EUR 120 million. Without Sandd and in combination with the elements you talked about, it's now EUR 80 million to EUR 110 million for full year.

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Marc Zwartsenburg, ING Groep N.V., Research Division - Head of Benelux Equity Research [15]

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Okay, clear. And then over to the Parcels division. You're guiding for a high single-digit growth, revenue growth for the full year now. And it seems to imply that for Q4, we should see an acceleration of top line again to perhaps a double-digit number again if you're in the high single digits. Is that the correct observation?

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Pim Berendsen, PostNL N.V. - CFO & Member of Managing Board [16]

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I don't think so. Year-to-date, volume growth is at 13.4% on the back of a third quarter that delivered 11% growth. We expect full year to be at 13%, which basically means that Q4 will need to follow the same trends in Q3 to get to the 13% growth full year.

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Marc Zwartsenburg, ING Groep N.V., Research Division - Head of Benelux Equity Research [17]

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And in terms of revenues?

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Hendrika W. P. M. A. Verhagen, PostNL N.V. - Chairman of the Management Board & CEO [18]

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We'll look it up in a minute, Marc. We'll come back to you.

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Pim Berendsen, PostNL N.V. - CFO & Member of Managing Board [19]

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But I don't -- no fundamental change in trends.

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Marc Zwartsenburg, ING Groep N.V., Research Division - Head of Benelux Equity Research [20]

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Okay. And then on the margin, if you put your targets in there against your guidance, it seems to point to a sort of similar margin as last year in Q4. Is that indeed the line of thinking, that we should see some improvement in the margin because of the seasonal peaks, back to the same levels as last year, is that correct?

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Pim Berendsen, PostNL N.V. - CFO & Member of Managing Board [21]

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Yes, that's correct. And that -- given where we are right now, at 6.7% margin, that will bring us to around 7% margin.

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Marc Zwartsenburg, ING Groep N.V., Research Division - Head of Benelux Equity Research [22]

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And maybe to drill a bit further into that margin. We've seen some inflationary pressures. At the same time, if I look to Slide 8, top of my head, with the price mix, and on the one hand, the cost developments, the drop that is sort of showing the development of your margin. It seems to suggest that also 2020, the margin will be more or less in line with this 7% for the Parcel division. Is it -- that correct? That we should see some efficiencies as from 2020, is that a correct observation from Slide 8?

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Pim Berendsen, PostNL N.V. - CFO & Member of Managing Board [23]

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No. So I think a few points on Slide 8. I think on the revenue per parcel side, we see a slightly diminishing price mix effects, which is positive. And what we see is that we see a gradual increase in price points. The impact that those improvements will have will take slightly longer than just this quarter as we also said because we're currently negotiating the term for next year and also bringing in that discussion policy changes to mitigate end of year seasonality cost. So there will have its impact, more impact in 2020 than in 2019.

Where basically the most important driver that brings the margin below the 7% currently is that the cost per parcel development is less favorable than we want. That's driven by a slightly lower growth, and as a consequence also, less coverage for indirect cost and indirect cost increases on the back of capacity increases as well as IT costs. And basically, we'll -- the lines indicate that over the period from 2018 onwards to 2022, we'll see an improvement of those margins and helped by the growth then an acceleration of free cash flow conversion. So it's -- we have not been that specific on 2020 margins.

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Hendrika W. P. M. A. Verhagen, PostNL N.V. - Chairman of the Management Board & CEO [24]

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And I think the overview we gave on Slide 8 is also to give you the idea where we -- that we did start with the introduction, implementation of all the actions which we mentioned at the Capital Markets Day around pricing, around efficiency. And that's also the reason why this slide is in the back.

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Marc Zwartsenburg, ING Groep N.V., Research Division - Head of Benelux Equity Research [25]

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I should not read it as the margin except extrapolating it. I looked at the graph, it seems to suggest that even 2020 could be a slightly lower than the 7%, but that's not how I should read it?

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Hendrika W. P. M. A. Verhagen, PostNL N.V. - Chairman of the Management Board & CEO [26]

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It's not meant as that specific, to be honest.

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Marc Zwartsenburg, ING Groep N.V., Research Division - Head of Benelux Equity Research [27]

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And then the other question is, should we see some improvement on operational leverage in Parcels for next year and years thereafter, or particularly then looking to next year? Should we see some operational leverage? Is that possible?

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Hendrika W. P. M. A. Verhagen, PostNL N.V. - Chairman of the Management Board & CEO [28]

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I think the first items which should bring the operational leverage are introduced like, for example, that we introduced to ring the door once. And then when someone is not at home, we'll bring it immediately to, for example, a retail store, which helps because most of the people who are not at home are not the second day at home as well. So it delivers efficiency on our side. On the other side, what it does for consumers is that they have their parcel one day earlier. A second thing which we are doing to optimize, of course, our capacity is the fact that, when you look into the app, we will become more specific around the time which we come to your door, which gives us the opportunity to have less time at the door. So some of those initiatives should bring efficiency in 2020, next to the fact that, of course, drop duplication increases, it does in 2019, it will do in 2020, with the growth of volume.

That's on the efficiency side. And on the other side, of course, there is a positive impact on the yield side, where we started seasonal pricing and started discussions around the contract renewals for the year 2020.

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Marc Zwartsenburg, ING Groep N.V., Research Division - Head of Benelux Equity Research [29]

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And then maybe on Spring. Yes, the results -- maybe they improved at a time a bit in Q3, but not that much. How should we see that develop? And then the second question is, how crucial is Spring still in the strategy? Because we might be waiting for a long, long time before we might see a sort of normalized margin there. But at some point, I would say, how crucial is still -- it would, it is currently a negative for your margin on the Parcel division, and therefore, showing extra -- giving an extra negative read to the margin development in next quarters as well. How do you see that?

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Hendrika W. P. M. A. Verhagen, PostNL N.V. - Chairman of the Management Board & CEO [30]

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But it's, of course, what you say is correct. It does give a negative margin. If we look into Spring, then we see Spring -- Spring is a volatile business, so it's much more difficult to exactly forecast what will happen within Spring. It's also very low asset business, that's the other side of the coin, which means it's only a few people around the world and the rest is, of course, brought in via other distributors. If you look into Spring, Spring, of course, brings in volume and margins as we report on the Parcels next to that. It does do international mail and international Parcels. And international Mail, international Parcels do contribute positively to the margins of Parcels and Mail. And those margins, you don't see because they disappear, of course, in the margins. In the overall margins, we report on Mail Netherlands and Parcels. So it's -- there is a strong connection, a strong link to the positive contribution, the international business still have between Mail and Parcels.

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Marc Zwartsenburg, ING Groep N.V., Research Division - Head of Benelux Equity Research [31]

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And then maybe a last one. The proceeds from Postcon, Pim, can you help us anywhere in getting know contractually? You might not be able to give them, but it's any way we can get a sort of assessment, how we can get ...

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Pim Berendsen, PostNL N.V. - CFO & Member of Managing Board [32]

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No. As I told you as well on the end of Q2, we disclosed those financials in total. So for the combination of Postcon and Nexive, the remainder of book value and the PPA as relates to that is where we are. Postcon has completed, but we're still negotiating Nexive, so we'll not -- it's not of the -- in the interest of the company now to be specific on what relates to what. And we still seek to try to get to a deal for Nexive also hopefully before Q4 announcement.

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Marc Zwartsenburg, ING Groep N.V., Research Division - Head of Benelux Equity Research [33]

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Before announcement or end of year? What was the...

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Pim Berendsen, PostNL N.V. - CFO & Member of Managing Board [34]

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Before announcement is what I said.

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Marc Zwartsenburg, ING Groep N.V., Research Division - Head of Benelux Equity Research [35]

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Okay. All right. So not before year-end.

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Pim Berendsen, PostNL N.V. - CFO & Member of Managing Board [36]

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Well, that can still be. That still before Q4 announced, but (inaudible) Q4, we're still working on. And I'm really happy that we have completed Postcon.

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Operator [37]

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The next question is from Mr. Ruben Devos, KBC Securities.

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Ruben Devos, KBC Securities NV, Research Division - Senior Financial Analyst [38]

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I've got 3 questions. The first one relates to the seasonality. So I think the presentation shows that you've adopted pricing to mitigate end of the year seasonality costs. It seems like a good development ahead of a hectic Q4 period. Just wondering, what has been sort of the feedback of the webshops following the new pricing policy? It looks like there's increasing trend in Europe that more consumers tend to postpone spending until big promotion day. So just curious whether that is something that's led to differences in behavior by the webshops.

Secondly, the cost savings realized in Q3 were below the run rate of the last 12 months and you've also lowered the cost savings guidance for the year. So could you give some more color on the revised outlook? And to what degree has the consolidation of Sandd already impacted the cost savings target for 2019?

And then lastly, you're taking preparations for a new labor market regulation. Just wondering whether you could provide an update on what sort of measures you've taken and that you will take.

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Pim Berendsen, PostNL N.V. - CFO & Member of Managing Board [39]

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I lost count. There weren't 3 questions, but I think I've got 5. But never mind, Ruben. Please remind me if I've missed one.

End of year seasonality. Yes, there's, of course -- and we've planned for this Q4 peak once again. But if I -- when I talked about, let's say, the change to pricing policies reflecting the cost -- the consequences of this high capacity, I also said that we've negotiated those and implemented those for 2020 peak season, so that will not yet to have its impact on the revenue per parcel side in 2019, because those agreements were already fixed, so we can only introduce that when the legal agreements allow us to do so. So that's what we've done. And yes, particularly this year, again, we see a relatively short period between Black Friday Sinterklaas. And it's always a question as to, okay, how much of that volume shift from different weeks in the year towards those peak moments where indeed consumers also seek the lowest point for the products that they want to have. So only, as of 2020, those pricing policy changes will impact -- will be positively impacting us.

If you talk about the cost savings, slightly lower than run rate. You're correct, it's EUR 9 million. The reason why that's slightly lower is that we, from an operational cost point of view, we reached and have improved the efficiency and productivity norms. So the number of hours that we use to deliver the mail have improved in accordance with the productivity targets that we set. But the type of hours has been hours that were slightly more expensive. So a mix effect in additional hours worked, a little bit more temp laborers, slightly more expensive temp laborers than expected. So that has driven run rate savings down a bit, and that also leads to the lower end of the range, EUR 45 million to EUR 65 million, guidance on cost savings this year. And honestly, this has not been impacted by Sandd transaction for 2019.

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Hendrika W. P. M. A. Verhagen, PostNL N.V. - Chairman of the Management Board & CEO [40]

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The new labor markets regulation that is the (foreign language), and we'll try to find a better English translation to that. But it means that the flexible workforce becomes more costly in 2020. That will have an impact, of course, because we do use flexible workforce in Mail, and to a bigger extent, within Parcels. And what we're doing at this moment in time is trying to find out if we can mitigate and how far we can mitigate the impact of that new law.

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Ruben Devos, KBC Securities NV, Research Division - Senior Financial Analyst [41]

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Okay. And just had one follow-up on the Parcel volume growth. I think one of the reasons for maybe a bit moderation in growth was also, I've read it, you've taken that you have been taking measures in terms of less return shipments by the webshops. Just curious whether you could give a rough indication how that trend has changed in 2019 versus 2018.

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Hendrika W. P. M. A. Verhagen, PostNL N.V. - Chairman of the Management Board & CEO [42]

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What you do see is that it's correct. So you do see that webshops try to become more economical. That's what we see in 2 ways. What we see is that they try to collect several things ordered into one box, so we -- it went to one parcel. That's one. And secondly that they tried to reduce the amount of returns. And that, of course, also impacts the volume growth overall in the market.

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Operator [43]

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The next question is from Mr. Tobias Sittig, MainFirst Bank.

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Tobias Sittig, MainFirst Bank AG, Research Division - Head of Equity Research Germany & Senior Equity Analyst [44]

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Two on Parcels for me, please. Your revenue growth assumption that you outlined on the Capital Market Day is above 10% for -- until 2022. Now you're trailing below. So you'd need an acceleration of that growth. Where do you think that can come from? Or is it more realistic now to assume sort of slightly a slower growth also in the coming years on the revenue side and then probably also on the volume side there on the back of the trends that you've outlined? And secondly, following up on the question before on e-commerce client behavior, that trend to consolidating shipments or orders into one shipment. Is that something you see just with the top customers, or do you see it on a broader scale? Because it also implies different logistics on their side and probably also a different proposition to clients in terms of next-day delivery for everything.

So do you see a trend of that changing in the Dutch market sort of from next-day promise to getting all in one shipment kind of propositions being made there?

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Pim Berendsen, PostNL N.V. - CFO & Member of Managing Board [45]

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Thank you, Tobias. First question. On Capital Markets Day, we basically set the expectation at 14% CAGR volume growth and translating to roughly the 10% revenue growth, whereby indeed revenue growth and revenue growth would come closer together in comparison to the trendlines of the previous years on the back of the commercial initiatives so which a few were discussed earlier on today. At this moment, year-end expectations are 13%. So 14% CAGR is the combination. Some years higher, some years lower. At this moment, we don't have a fundamentally different view than the one we presented on May at the Capital Markets Day.

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Hendrika W. P. M. A. Verhagen, PostNL N.V. - Chairman of the Management Board & CEO [46]

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Your second question is much more what you do see with the bigger customers because if you want to consolidate in one box, you have to have, of course, the stuff together in your warehouse. So it's much more related to bigger customers than to smaller ones. But we do not see as a trend from next-day to all together. That's not what we do see in the market. So it's still next-day. But you do see a more economic behavior when it comes to the amount of returns and the amount of things ordered in one box.

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Tobias Sittig, MainFirst Bank AG, Research Division - Head of Equity Research Germany & Senior Equity Analyst [47]

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Okay. Just following up on the first questions because I mean you would need -- you say you're still within the bandwidth that you would need an acceleration basically of growth or some of the trends that you outlined to reverse in order to get 3 years with 15% growth or more to offset for that. Or what's you're thinking there? I mean what should be drivers for reacceleration?

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Pim Berendsen, PostNL N.V. - CFO & Member of Managing Board [48]

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What we discussed there are still several product categories that are not yet that mature online which we expect also to see increases from. And you can think of health and foods categories where we anticipate an acceleration of the growth in those categories which will help us to get to the roughly 40% on volume.

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Operator [49]

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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 [50]

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Three questions, please. First, on the market share loss. You said 3 percentage points to Sandd. I think in the past, you always highlighted that you lost market share to regional competitors on the back of Significant Market Power. How should we see this share loss to Sandd? Is that mainly to La Poste? Or is that in the traditional Sandd business? And how large is La Poste today within Sandd? Some color maybe on that would be helpful.

And secondly, on Slide 21, you highlight the one-offs excluding restructuring-related charges with Sandd's increasing to EUR 45 million to EUR 55 million. I think in the call on October 1, you said that the one-off transaction costs for Sandd were EUR 10 million to EUR 20 million. So now you're basically guiding for an additional EUR 25 million. What is that related to, please? And then finally, on the pension accounting impact, I heard you say potential impact of EUR 15 million to EUR 25 million. Will you report it in normalized EBIT? Or will that be adjusted now that you just moved from UCOI to normalized EBIT?

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Pim Berendsen, PostNL N.V. - CFO & Member of Managing Board [51]

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Okay. First one, related to market share loss. Well, let's say, the earlier quarters, definitely in 2018, we've seen always a loss to competition somewhere between 1% and 2% as part of our overall volume decline. In this year, we see a market share loss of roughly 3%, which is then the loss to all other postal operators. So not necessarily only Sandd, but of course, predominantly Sandd. So this 3% is currently lost to Sandd on contracts that Sandd gained in Q4 2018, beginning 2019. That moved over. And this as a consequence were in the base of 2018 numbers and not anymore because they were delivered by Sandd. It's a combination of volume loss on time sensitive -- non-time sensitive Mail. So basically, it hits both VSP and Sandd volume numbers. But of course, VSP is completely part of Sandd, another consequence of the transaction completed, we'll see a big diminishing element here on loss of market share.

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David Kerstens, Jefferies LLC, Research Division - Equity Analyst [52]

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Did you have that impact as well in Q1 and Q2? Or was that? Or was it still small -- again those contracts moved in Q3 mainly?

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Pim Berendsen, PostNL N.V. - CFO & Member of Managing Board [53]

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No, no. It was already in Q1, Q2 as well, also slightly above the 1% to 2% that we talked about.

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Hendrika W. P. M. A. Verhagen, PostNL N.V. - Chairman of the Management Board & CEO [54]

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And it was based on contracts won end of '18, beginning of '19.

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Pim Berendsen, PostNL N.V. - CFO & Member of Managing Board [55]

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So Slide 21, that relates to additional depreciation cost as a consequence of a quicker integration, which means that we'll use the assets of Sandd shorter than originally envisaged, and that leads to an acceleration of your depreciation line. But all in all, that's a positive sign because that also means that we'll migrate volumes over as quick as we can, leading to the run rate synergies we talked about. On the third point ...

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David Kerstens, Jefferies LLC, Research Division - Equity Analyst [56]

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How big is that effect in terms of depreciation? Is it as much as EUR 20 million, EUR 25 million?

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Pim Berendsen, PostNL N.V. - CFO & Member of Managing Board [57]

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EUR 20 million, EUR 25 million. So if they say anything otherwise, it would have been depreciated in 2020. But now, let's say, it's accelerated. EUR 20 million to EUR 25 million.

Yes, the increase in pension expense will be reported as part of normalized EBIT. So we will not create a different underlying adjustment for that. So that's what happens with the normalized EBIT definition. And what you do see is that then the gap between [equally] and normalized EBIT will increase. At the same time, we also will provide guidance on the free cash flow metric, which includes, of course, only the cash out to pensions. So the combination of the 2 will give you the proper picture of where we're heading.

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David Kerstens, Jefferies LLC, Research Division - Equity Analyst [58]

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So in 2020, it will basically be the final year where you see this mismatch between the cash contribution and the accounting cost of the pension scheme?

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Pim Berendsen, PostNL N.V. - CFO & Member of Managing Board [59]

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Not if it goes above the regular pension expense. That will continue, but all the difficult elements that relate to transitional pension plans, top-up payments, those will be gone as of 2021. What is left in 2021 is a more or less, at that moment in time, stable gap between pension expense and pension cash outs.

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David Kerstens, Jefferies LLC, Research Division - Equity Analyst [60]

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How large is that gap?

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Pim Berendsen, PostNL N.V. - CFO & Member of Managing Board [61]

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Well, that, of course, depends on the interest rate. I think you can see it in the previous quarters. And as I said on my question of somebody else, at current interest rate levels, I should say better. At end of September interest rate levels, increase of pension expense would be roughly EUR 20 million to EUR 25 million.

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Operator [62]

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

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Henk Slotboom, The Idea-Driven Equities Analyses Company - Research Analyst [63]

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I would like to drill down a little bit deeper on what happened in Parcels because I still have the feeling that I missed something here. And on Slide 6, you gave the delta on the sales figure for the effect of volume growth in Parcels Benelux. It's EUR 34 million. And EUR 3 million of that was write out by the price mix effect. So if I go back a year, that you were kind enough to specify what the sales were in Spring and also automatically deducting that, that brings you back to Parcels Benelux plus logistics. Now I see a gap in the second quarter, when I do the math correctly, I barely see a gap in the sales of Parcels Benelux and logistics compared to the second quarter of this year and the third quarter of this year. Still, I see a marked deterioration in the results. If I make the adjustment for Spring, Spring was more or less breakeven in the third quarter of last year. It's minus 1 this year. Then I see a delta in the profitability of Parcels Benelux plus logistics. In a quarter time, so second quarter onto third quarter of EUR 5 million. What am I missing here exactly? Is it really so big that a difference between 13% growth which you did in the second quarter and 11% volume growth in the third quarter is creating such a big gap?

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Pim Berendsen, PostNL N.V. - CFO & Member of Managing Board [64]

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Well, I have to -- because you went very quickly, Henk, by trying to explain how you came to that conclusion, so I need to think this over a bit more carefully. But if I look at Parcels performance in Q3, then what we see in comparison to last year is, the positive impact of volume of EUR 8 million, offset by a negative price mix of EUR 3 million, which has been higher in the past, but with also an increase in organic costs of EUR 4 million, together with capacity optimization operational efficiencies, that are impacted by that lower growth. Yes. It is a fact that the lower growth has its implications on overall Parcels margin or results, given the fact that we have invested, of course, in IT, in expansion of capacity, which also then, let's say, leads to a increase of indirect costs per parcel. And of course, you've assumed that on the back of a higher volume growth than 11% and missing out on, well, a several percentage points of growth, then has pretty significant implications on overall parcel -- domestic parcel results. I cannot calculate that quickly as you've done so. So I will not say that EUR 5 million is the correct number, but it has definitely added impact on Parcels profit.

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Henk Slotboom, The Idea-Driven Equities Analyses Company - Research Analyst [65]

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Maybe we should take this one after the call. Within with some more -- well, I'll drop you a line and see what you can...

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Pim Berendsen, PostNL N.V. - CFO & Member of Managing Board [66]

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I'm happy to look at it, happy to look at it. No problem.

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Henk Slotboom, The Idea-Driven Equities Analyses Company - Research Analyst [67]

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Then the other question I had on Parcels is on pricing. Basically, what you're saying is you're currently talking to all the clients with regard to the price negotiations for next year. Looking back at this year, what was, on average, the price increase you did for your larger clients? Is there a number you can provide us? And how do you think that, that could evolve in going into 2020? Will it be more or less or maybe the same as in the price increases you did in 2019?

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Hendrika W. P. M. A. Verhagen, PostNL N.V. - Chairman of the Management Board & CEO [68]

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On the Parcel side, Henk, we didn't give any guidance on price increases we did from '19 -- from '18 to '19. So that's what it is. No guidance.

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Henk Slotboom, The Idea-Driven Equities Analyses Company - Research Analyst [69]

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But do you expect, with the price increases you have in mind for next year, that the negative price mix effects will disappear?

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Hendrika W. P. M. A. Verhagen, PostNL N.V. - Chairman of the Management Board & CEO [70]

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What we did say at the Capital Markets Day is that, in the end, of course, we will have a more positive price mix effect, which means less negative impact because of the price increases we will make use of in the contract negotiations of '19 towards '20, and then, of course, going forward. So you should see first impact of that, of course, in 2020. And for the contract we have which are long year contracts, you will see it coming in later. But the answer is yes. If you look into the revenue per parcel line which we showed you at the Capital Markets Day, that includes, of course -- that includes an increase in revenue over a certain period of time and that meets those price initiatives.

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Operator [71]

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

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Andre F. M. Mulder, Kepler Cheuvreux, Research Division - Analyst [72]

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I missed the first part of the presentation. But can you help me with the drivers in Mail Netherlands? I'm looking at a worsening of the revenue development. I'm looking at cost savings which are at the lower end of the range. And still, you produced a margin which is higher than the top end of the previous range. Can you please shed some light on that?

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Pim Berendsen, PostNL N.V. - CFO & Member of Managing Board [73]

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Yes. The missing components there are, let's say, indeed, a higher volume growth -- sorry, volume decline, slightly lower cost savings, but those are offset by lower restructuring cash out and lower pension cash out, as well as terminal due results and compensation for transitional payments that were paid to our staff that were long-term sickness, which we can recoup. So those elements together have resulted in Mail Netherlands result being more or less stable compared to last year.

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Andre F. M. Mulder, Kepler Cheuvreux, Research Division - Analyst [74]

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And to what extent arae those elements structural? Or will they disappear next year?

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Pim Berendsen, PostNL N.V. - CFO & Member of Managing Board [75]

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Well, as you know, we -- each and every year, I try to get a positive results on terminal due negotiations, so that's certainly something which is structural, albeit that you don't exactly know up front how much it will be there. That is a function of import-export volumes and different freight line dynamics. The element of, let's say, the transitional payments paid to long-term illness is of temporary nature, so that's something that will not recur and will not be recurring.

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Operator [76]

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Mr. van de Laarschot, there are no further questions.

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Jochem van de Laarschot, PostNL N.V. - Director Communications & IR [77]

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Okay. Thank you very much. We are, of course, happy to take any further questions you may have. Please don't hesitate to contact the IR department at PostNL. And for the rest, I would like to thank you for your participation. See you next time around, thank you.

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Pim Berendsen, PostNL N.V. - CFO & Member of Managing Board [78]

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Thank you.

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Hendrika W. P. M. A. Verhagen, PostNL N.V. - Chairman of the Management Board & CEO [79]

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Thank you.

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Operator [80]

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Ladies and gentlemen, this concludes the conference call. You may now disconnect your line. Thank you for joining and have a very nice day.