U.S. Markets closed

Edited Transcript of POST.VA earnings conference call or presentation 14-Nov-19 2:00pm GMT

Q3 2019 Oesterreichische Post AG Earnings Call

Vienna Nov 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Oesterreichische Post AG earnings conference call or presentation Thursday, November 14, 2019 at 2:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Harald Hagenauer

Österreichische Post AG - Head of IR, Group Auditing & Compliance

* Walter Oblin

Österreichische Post AG - CFO and Deputy Chairman of the Management Board of Mail & Direct Mail, Finance

================================================================================

Conference Call Participants

================================================================================

* Andre F. M. Mulder

Kepler Cheuvreux, Research Division - Analyst

* Bernd Maurer

Raiffeisen CENTROBANK AG, Research Division - Head of Company Research & Chief Analyst

* David Kerstens

Jefferies LLC, Research Division - Equity Analyst

* Mark John McVicar

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

* Matija Gergolet

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Tobias Sittig

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

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for standing by. I'm Stuart, your Chorus Call operator. Welcome, and thank you for joining Austrian Post Results Q3 2019. (Operator Instructions)

I would now like to turn the conference over to Harald Hagenauer, Head of Investor Relations. Please go ahead.

--------------------------------------------------------------------------------

Harald Hagenauer, Österreichische Post AG - Head of IR, Group Auditing & Compliance [2]

--------------------------------------------------------------------------------

Good afternoon, ladies and gentlemen, to this conference call of Austrian Post. We would like to present the quarterly results 2019 and also the 9-month figures, of course. Our CFO, Walter Oblin, will present the technical figures of this quarter and also be ready then for your questions. So please go ahead, Oblin.

--------------------------------------------------------------------------------

Walter Oblin, Österreichische Post AG - CFO and Deputy Chairman of the Management Board of Mail & Direct Mail, Finance [3]

--------------------------------------------------------------------------------

Good afternoon, ladies and gentlemen. It's a pleasure to have the opportunity to present to you our Q3 results.

Let me start right away on Page 3, summarizing the highlights of first 3 quarters of the year. Overall, on an operating business level, Q3 was a very good quarter. On the mail side, we saw a robust volumes, additionally, supported by election effect. Parcel on the other hand showed strong organic growth on top of which came the volumes from the new cooperation with DHL.

Revenue on a group level was up 3.2% where parcel showed revenue growth of 11.3% and mail a stable revenue development was plus 0.6%. This group revenue development translated into a positive EBIT development in the underlying business where as reported EBIT was down by 8.4% to EUR 130 million due to a provision for a data protection fine that we communicated 2 weeks ago.

We confirm a positive outlook for our stable operating earnings before the already mentioned provision for the running year 2019 and also for 2020, stability both in terms of revenues and operating earnings before start-up costs for our new financial service businesses is the objective.

Let me proceed on Page 4, summarizing our revenue development in the first 9 months of this year. Group revenue up 3.2%, mostly driven by a strong parcel business with organic growth in the high single-digit figures on top of which came additional volumes from the new cooperation with DHL that was fully implemented August 1 this year. And this integration was going very well and is now running at full steam.

The mail business, as already said, resilient revenue development plus 0.6%. This is the net of a moderate letter mail volume decline, positive effect from elections, in particular, European elections and Austrian parliamentary elections in Q3 and a decline in financial services revenues due to the gradual ramp down of our cooperation with BAWAG P.S.K.

Page 5 shows you the result in EBIT development. As already said, reported EBIT down 8.4% or roughly EUR 12 million. This includes EUR 20 million provision for the already mentioned fine. This fine was booked in the Mail & Branch Network, which, including this fine, was down EUR 12 million. So I think you see that on an operational level, the first 9 months were strong 3 quarters for the mail business. Parcel & Logistics up 0.9%, driven by strong volume growth, at the same time, integration costs and costs of running beyond optimal capacity weight on our results there and on our margins.

Corporate relatively stable. It's minus EUR 0.8 million. This is the net off a positive one-off of roughly EUR 5 million related to a non-wage labor cost paid in previous periods and the ramp-up costs of our new bank business. So if you'll take here the one-off of EUR 5 million and the negative one-off of EUR 20 million then the net of roughly EUR 15 million, if you adjust for that I think is a good proxy where our operational business performance was.

Let me now proceed giving you an update on the implementation of our strategy. Page 7 summarizes the well-known 4 strategic pillars of our strategy: defending our market leadership in the core Mail & Parcel business in Austria; profitable growth in selected markets, in particular, outside Austria, but not only; priority three, working on our cost structure every day; and at the same time, pillar number four, improving customer service and innovating our service portfolio.

Let me start on Page 8, giving you an update on our letter mail business in Austria. As already said, mail volume decline continued, however, at a relatively moderate level of 3.1% in the first 9 months. Our new product structure that we implemented in July 2018 continues to be well received by our corporate customers. We had positive special effects in the first 9 months, in particular from the already mentioned 2 large elections in Austria.

Moving to Page 9. In 2020, we will make another step in developing our core product portfolio. This includes, on the one hand, new and enhanced product features, among them a refinement of our priority economy mail product structure, a simplification of certain specialty products, e.g., for valuables and hazardous goods and an upgrading of features in our parcel business including pickup service, our parcel receiving service, AllesPost, and additional features in the Post App.

On the other hand, this product reform for 2020 includes postal rate adjustments for our core mail products. In total, I would say relatively moderate adjustments in line with inflation, since the last product reform. We continue to stick to the strategy of moderate prices and high quality in Austria. Page 10 shows you that before and also after this mail rate adjustments, price levels in Austria will remain in the lower third in Europe, confirming what I said, our strategy is to deliver high-quality at moderate prices.

Page 11. Moving to our Direct Mail and to Media Post business in Austria. Here, we continue to face structural headwinds, in particular from GDPR, causing uncertainty among advertisers from a trend towards digital marketing and from the structural crisis of the nonfood stationery retailers, operating volume decline in Q -- in the first 3 quarters was around 3.8%. Our revenue development was a little better than that. We'll come to that later.

Moving to our Parcel business on Page 12. Parcel continues to be our growth engine. We have been growing over the last at high single-digit rates, as shown on Page 12. Also in 2019, organic growth was in the order of magnitude of 8% to 9%. And on top of that, since August 1, we have additional volumes from the new cooperation in ground parcel with DHL. At the same time, competition remains intense, in particular, from one large important customer who has started up his own delivery network in the area of Vienna.

Page 13 gives you an update or reminds you of the cornerstones of our cooperation with DHL. As said, this cooperation started with a big bang on August 1, which went very well. We took over 140 employees, 3 logistics centers and a number of delivery bases throughout the country. We first, of course, tried to ensure our operational stability and then started on integrating the 2 networks. Last mile delivery integration has already progressed well. And over the course of next year is also the backbone structure of sorting centers and delivery bases will be optimized. As a result of this new cooperation, our daily volumes are up roughly 25%.

With this good organic and inorganic growth, we, moving to Page 14, aim a total volume of around 125 million parcels for this year, and accordingly, we have pulled forward our target of reaching 150 million parcels already by 2021. This, of course, requires a substantial upgrading of our capacities and our infrastructure, and I will comment on that later on.

Page 15 gives you an update on our international portfolio, moving now to the second pillar of our strategy, growth elsewhere outside our core business. In Germany, there are a few things I want to highlight. One is our wholesale pharmaceutical start-up AEP. In Germany, revenue in the first 9 months of about EUR 360 million. Again, wholesale revenues was in lower margins, but still after a few years in operation, I would say a very respectable figure, growth still high at 15%, and for the full year we expect to breakeven in this business, again a major milestone.

In Austria, one further highlight, I would like to include here is our small subsidiary, ACL advanced commerce labs joint venture, which we acquired -- where we acquired the majority 2 years ago, where we provide e-commerce solutions. One of the examples where we provide additional value beyond the delivery of mail and parcel, again, here very good growth of almost 30% and at very good margins.

In Eastern Europe, one thing I would like to mention is that we also here started to cooperate with Deutsche Post DHL Group in the ground parcels business in the countries, Slovakia and Czech Republic. In Slovakia, we have started to deliver it to former DHL own delivered volumes, whereas in the Czech Republic, the cooperation goes the other way.

Page 16 gives an update on the development of our new financial services business. As already said, we are in the process of finally ramping down our cooperation with BAWAG P.S.K. to a large extent by the end of this year with some cooperation elements continuing in the first months of next year.

In parallel, we are well on track to build up a new financial services business with our partner, Grazer Wechselseitige Group, called GRAWE, short. Our 80-20 joint venture has been finally approved by ECB. We have closed this acquisition over the last days, have made very good progress in implementing the core IT system for this new bank and have made very good progress in building up the core banking organization. Focus of the next months will be to prepare the market launch, which is expected for -- to happen in Q2. Again, the business model of this new bank will focus on a risk-averse business model, with the proprietary offering focused on payment transactions and current account products supplemented by partner products that we will sell on a commission basis.

Moving to pillar number three of our strategy, improving our cost structure, enhancing the efficiency and the capacity of our network. Here, the focus is currently on a major capacity expansion program for our parcel network. As a result, our CapEx level in 2019 will be on a record level. On top of EUR 70 million to EUR 75 million maintenance CapEx, we will have more than EUR 50 million in growth CapEx on top of which additional CapEx has already been spent on property acquisitions for new projects and another EUR 50 million on the acquisition of sorting technology in the course of the DHL cooperation.

Page 18 gives you an overview of the plans and already executed projects. In Q3, we successfully launched a new sorting center in Hagenbrunn village, north of Vienna. So this is the second major hub from the urban area of Vienna. The project is fully up and running after a very short ramp-up period. A large news sorting center in Styria, a place called Kalsdorf in an advanced construction phase, and a number of projects that you see here on this page in advanced planning for preparation and permit approval process with the relevant authorities.

Page 19 gives an update on the development of our staff structure. While total headcount, given the strong growth in our parcel business, shows a pretty much flattish development, the transformation from expensive civil servant and old collective wage agreement contracts to employees under the new collective wage agreement is advancing and progressing at accelerated pace this year. You see here some of the numbers. And we'll continue to progress over the next year.

Page 20 gives an update on the implementation and consumer acceptance of our self-service solutions. These solutions continue to provide competitive advantage, superior service quality in the Austrian parcel business. The number of parcels handled through these solutions, in particular, pickup boxes, pickup stations and drop-off boxes has increased order of magnitude 20% to 30% depending on the individual solutions compared to last year already at high absolute figures, and we continue to invest in these solutions.

Let me proceed with some more details on our group results for the first 9 months.

Page 22 showing you an overview, revenue up 3.2% to EUR 1.462 billion. EBITDA and EBIT margins somewhat below last year mostly due to the already mentioned provision. Earnings per share somewhat compensated by one-offs -- positive one-offs in the financial results. A strong robust cash flow and a -- we continue and we'll continue to operate a conservative balance sheet. The reduction in the equity ratio is primarily due to the implementation of the new IFRS 16 standard, where rental contracts are now shown on the balance sheet.

Page 23 shows you some details of our P&L. In other operating income and other operating costs, you will see some big movements. These are the result of claims related to non-wage labor cost paid in previous periods, where we would both income, but at the same time, booked our provisions for expecting some of these positive claim results so that we have to pay them back in future periods.

Operational staff cost is pretty much constant. The provision for the data protection fine, you will also find on the operating costs. And in the financial results, we see a positive valuation effect from our shareholding in the flatex group, formerly FinTech Group.

Page 24 gives you an update on the mail segment, revenue development in the core segments. Letter Mail & Mail Solutions up 3.3%. Again, this is the net of the structural decline, one-offs but also the tariff impact from the product reform in July 2018, which was still effective compared to the previous year in the first 6 months. Direct Mail and Media Post down 1.3%. You earlier saw a higher volume declines of -- given the mix and price development, I would say a relatively resilient development.

Page 25 shows you our Mail & Branch Network P&L. Again, I think you -- most of the lines and the most important drivers behind the lines have already been commented on. Maybe in Branch Services, you see the continued decline in financial service revenues resulting from the redimensioning of our financial service offering in the still ongoing cooperation with BAWAG P.S.K.

Page 26 shows you the revenue development of our Parcel & Logistics Division. Total revenue up 11.3% with Eastern Europe growing at 8%, Austria growing at 12%. Of course, that includes the DHL volumes.

And Page 27 shows you the P&L -- the segment P&L, group revenue development translating into an increase in EBIT margins somewhat under pressure due to the already mentioned additional costs due to running now for a certain period a nonoptimal network setup, given that we have to integrate 2 networks, our own with the network of DHL.

Page 28 gives you an update on our balance sheet. I would say, overall a very stable balance sheet, although, you see here a substantial expansion of our balance sheet. This is a pure accounting effect from the implementation of IFRS 16, where we now show a carrying amount of rights of use from leases of approximately EUR 320 million and a similar amount on the equity and liability side. The core characteristics of our balance sheet is substantial cash surplus, no financial liabilities, a low level of immaterial assets with low impairment risk and a strong equity position remain intact.

Page 29. I think the key message here is a robust cash flow that should be a good basis for an attractive dividend, again, for 2019. Operating free cash flow is a little bit hard to work out here, given that we have a number of one-offs and changes. Also, IFRS 16 had some impact. But I would say the EUR 153 million that you see in the middle column is a good indication of an operating free cash flow from our operating business before growth CapEx expenses for property and not including a one-off cash flow from the real estate development in -- from the project -- Mittelgasse luxury apartment development project in the Central Vienna business district.

So overall, I think the message is strong cash flow. And with that, I would like to conclude with outlook on Page 31. The core structural trends, the core drivers of the market environment continue to be around going forward, we continue to guide a decline of around 5% in the traditional addressed mail business. We continue to see structural headwinds in Direct Mail. And we continue to see strong e-commerce development driving parcel volumes. As a result, on the top line, we expect a good growth for 2019 and stable to slightly higher revenues for 2020. Both 2019 and 2020 will be high -- will show high CapEx cash outs. I've talked about the numbers for 2019 and expect similar amounts for 2020. And on earnings level, the target for 2019 for stable operating results including ramp-up cost for our bank business has been confirmed, however, excluding the provision for the air protection fine. And for 2020, while we target stable operating result in the core business before start-up costs for the new bank business for this new bank business for the years 2020 and 2021, we expect start-up cost in the order of magnitude of EUR 40 million with more of debt losses, of course, next year than 2020 -- than 2021.

So overall, I would say a good operational Q3. We look relatively confident despite the challenging market environment into the near and more distant future. And so I would say now at this point, thank you for your attention. And I'm ready to take your questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) First question comes from the line of David Kerstens from Jefferies.

--------------------------------------------------------------------------------

David Kerstens, Jefferies LLC, Research Division - Equity Analyst [2]

--------------------------------------------------------------------------------

Just 2 questions please from my side. First of all on the mail volume decline. You highlighted that Direct Mail was a bit worse impacted by GDPR. But why was letter mail relatively more resilient this year at only 3.1%, and why do you expect it to go back to rate of decline of 5% next year? So is there a one-off effect related to your product offerings, or something structural changing in the Austrian letter market? And the second question is regarding the comment you made about the increasing demand for faster parcel delivery. Do you see your new competitor in the Vienna area already moving toward same-day delivery and is it something that you're planning to offer as well at some point?

--------------------------------------------------------------------------------

Walter Oblin, Österreichische Post AG - CFO and Deputy Chairman of the Management Board of Mail & Direct Mail, Finance [3]

--------------------------------------------------------------------------------

Thank you very much for your question, David. I think on the mail volume, on Direct Mail, what we mean was GDPR is just -- GDPR is causing a lot of uncertainty on retail investors, among retail advertisers who they can still send mail to, direct mail to. And as a result, this is weighing on volumes, and we expect this and the other drivers I mentioned to continue in 2020 and the years to follow. On the letter mail side, there is another step in e-government that where a law, so-called, (foreign language), sorry for the German word, it's hard to translate, is becoming effective January 1, 2020. Basically, this requires companies to communicate electronically with the government in key areas. And we expect this as another driver as slightly accelerating mail decline, and so we will basically stick with our guidance of 5% decline, which we have been working with over the last 2 or 3 years, although, there have been periods where mail volume decline was lower.

On the parcel side. Actually in Austria, we do not see same-day delivery to pick up substantially. This is a very small niche market still. I think the barrier for this also to substantial accelerate quickly is the absence of large fulfillment centers in Austria. Austria is an e-commerce market, which is predominantly served by German retailers or German subsidiaries of global retailers, where the fulfillment centers either are located in Germany or Eastern Europe and where there is no major fulfillment center in Austria or very close to Austria, which is just an operational barrier for same-day delivery.

--------------------------------------------------------------------------------

Operator [4]

--------------------------------------------------------------------------------

Next question is from the line of Mark McVicar from Barclays London.

--------------------------------------------------------------------------------

Mark John McVicar, Barclays Bank PLC, Research Division - Head of European Transportation Research [5]

--------------------------------------------------------------------------------

I actually have 4 questions, which is very unusual. First one, can you give us an idea of the scale of the revenues related to the 2 elections across the quarters?

--------------------------------------------------------------------------------

Walter Oblin, Österreichische Post AG - CFO and Deputy Chairman of the Management Board of Mail & Direct Mail, Finance [6]

--------------------------------------------------------------------------------

You want that I answer your questions individually? So we are talking roughly about a net change versus the previous year election impact of around EUR 16 million roughly.

--------------------------------------------------------------------------------

Mark John McVicar, Barclays Bank PLC, Research Division - Head of European Transportation Research [7]

--------------------------------------------------------------------------------

Okay. That's great. And then the next 2 questions really relate to, I'm looking on Slide 23. So you've got a very big jump in Q3 in the other operating income. It goes up by just under EUR 50 million. And I guess part of that is the EUR 4.9 million, but what else has caused that very large jump? Or is the EUR 4.9 million not just the Q3 effect?

--------------------------------------------------------------------------------

Walter Oblin, Österreichische Post AG - CFO and Deputy Chairman of the Management Board of Mail & Direct Mail, Finance [8]

--------------------------------------------------------------------------------

Yes. No, this EUR 4.9 million is the net of a -- of other operating income resulting from claims relating to non-wage labor costs paid in previous period and other operating costs including provisions related to the same topic. This is quite a complex manner, which I would like to simplify. Basically, we booked roughly EUR 58 million in income and EUR 53 million in provisions, net was EUR 5 million. It's -- again it's about claims for civil servants from -- related to non-wage labor costs related to previous periods where some court rulings took place in Q3. And where we had to account for that.

--------------------------------------------------------------------------------

Mark John McVicar, Barclays Bank PLC, Research Division - Head of European Transportation Research [9]

--------------------------------------------------------------------------------

Okay. And broadly, that big uplift in other operating income in Q3 is offset by -- partially offset by the operating -- the increase in other operating costs, yes?

--------------------------------------------------------------------------------

Walter Oblin, Österreichische Post AG - CFO and Deputy Chairman of the Management Board of Mail & Direct Mail, Finance [10]

--------------------------------------------------------------------------------

Right.

--------------------------------------------------------------------------------

Mark John McVicar, Barclays Bank PLC, Research Division - Head of European Transportation Research [11]

--------------------------------------------------------------------------------

And then the net of the 2 is EUR 4.9 million.

--------------------------------------------------------------------------------

Walter Oblin, Österreichische Post AG - CFO and Deputy Chairman of the Management Board of Mail & Direct Mail, Finance [12]

--------------------------------------------------------------------------------

Right, right.

--------------------------------------------------------------------------------

Mark John McVicar, Barclays Bank PLC, Research Division - Head of European Transportation Research [13]

--------------------------------------------------------------------------------

Right. Got it. And my last question is, could you just remind us, if you haven't already told us, what the -- what your capital contribution to the new financial services JV will be? And when that goes in, is that a '19 item or '20 item?

--------------------------------------------------------------------------------

Walter Oblin, Österreichische Post AG - CFO and Deputy Chairman of the Management Board of Mail & Direct Mail, Finance [14]

--------------------------------------------------------------------------------

Well, I think we're currently talking about the ramp-up costs, and again, for the next 2 years, so 2020 and '21, we expect ramp-up costs of roughly EUR 40 million, more of that next year and a little bit less the year after. This year, we're talking about in the order of magnitude of around EUR 15 million. So in total, we're talking about roughly EUR 55 million.

--------------------------------------------------------------------------------

Mark John McVicar, Barclays Bank PLC, Research Division - Head of European Transportation Research [15]

--------------------------------------------------------------------------------

Okay. But what about -- that's operating cost. But what about your share of the equity base of the new bank? How much capital are you going to be putting in to the bank to capitalize the balance sheet?

--------------------------------------------------------------------------------

Walter Oblin, Österreichische Post AG - CFO and Deputy Chairman of the Management Board of Mail & Direct Mail, Finance [16]

--------------------------------------------------------------------------------

Yes. We're talking about the 80%, of course, of the total capital commitment, and so we're talking about, I would say, order of magnitude EUR 70 million to EUR 80 million.

--------------------------------------------------------------------------------

Operator [17]

--------------------------------------------------------------------------------

Next question comes from the line of Bernd Maurer from RCB.

--------------------------------------------------------------------------------

Bernd Maurer, Raiffeisen CENTROBANK AG, Research Division - Head of Company Research & Chief Analyst [18]

--------------------------------------------------------------------------------

3 questions from my side. First to clarify on the CapEx guidance. The EUR 15 million indicated for infrastructure for DHL assets, are these included in your base CapEx of EUR 70 million to EUR 80 million or do they come above? That's question number one. Question number two. Depreciation charges show a bit of an increase in 3Q. I'm curious, is this a result from the increased asset base following the new distribution centers or are there some extraordinary depreciation charges included in Q3? And the last question also I come back to the setup of the banking business. What do we expect of the running operating costs for banking activities excluding personnel expenses?

--------------------------------------------------------------------------------

Walter Oblin, Österreichische Post AG - CFO and Deputy Chairman of the Management Board of Mail & Direct Mail, Finance [19]

--------------------------------------------------------------------------------

Yes. Sorry, on the last question, I think we're not prepared to give those details. On the second question -- the second question again was -- well, the first question was CapEx, you know the EUR 15 million is not part of the EUR 70 million. I think Page 17 shows that. And the second question was a lift up in depreciation. Yes, the higher CapEx from previous periods is starting to show in depreciation.

--------------------------------------------------------------------------------

Operator [20]

--------------------------------------------------------------------------------

(Operator Instructions) The next question is from Tobias Sittig from MainFirst.

--------------------------------------------------------------------------------

Tobias Sittig, MainFirst Bank AG, Research Division - Head of Equity Research Germany & Senior Equity Analyst [21]

--------------------------------------------------------------------------------

I've got some on parcels, 3 on parcels and 1 on mail. Firstly, on the parcel side. How do you see the Amazon offer evolving? Do you think they'll plan to offer other geographies outside Vienna? Or do you think they will remain restricted to Vienna? Secondly, when you look at the customers contributing to your volume growth, is that largely driven by the big accounts? Or is there a broader mix of customers contributing in the similar way to the growth there? And is that pattern changing? And thirdly in terms of peak season preparation, we see some of your international peers doing stuff like peak season surcharges or changing the way they draft their contracts in terms of better predicting volumes and then penalizing if the volume pattern doesn't come in as agreed. Is there anything that you do in this regard or is there a fair opportunity to do something like that? And the second one on mail side. You agreed to a new price increase, can you elaborate a little bit on how the regulator goes about your proposals? Is there any kind of benchmark margin or return on capital that he crosschecks your proposals with in order to find out whether that fare is reasonable or what's the process there? And is there any risk for your proposal at some day not going through as you'd like them to?

--------------------------------------------------------------------------------

Walter Oblin, Österreichische Post AG - CFO and Deputy Chairman of the Management Board of Mail & Direct Mail, Finance [22]

--------------------------------------------------------------------------------

Okay. Well Thanks, Tobias, for the questions. I think our largest customer and I think, the question was on their plans to further expand their own delivery. I think we are only aware of their own distribution in Vienna, which is up and running more or less, and we are not aware of plans to expand that, but, of course, cannot exclude that there are plans. I think the second question was where does the growth in parcel come from? I think primarily it comes from our largest customers but equally from medium-sized customers where also e-commerce is picking up and showing good growth. I think on the peak season, we -- we are, of course, preparing very diligently in operations to provide enough capacity, be it sorting capacity, be it last mile capacity. And we work intensively with our customers to know when volumes are coming and to syndicate on timing and then optimizing the distribution of volumes in our network wherever we have degrees of freedom. So far peak prices or surcharges have, to my knowledge, not been applied on a broad basis.

On the mail side, the regulatory framework that the regulator uses to assess our product and tariff changes basically is based on 2 main criteria. One is the cost base-ness or the question is our prices are based on our costs and basically there the regulator runs us a certain return capital in the universal service area. So basically there we have to prove that we need price increases going forward to earn our cost of capital. And the second criteria is the criteria of affordability, and there he in the past has used inflation as a proxy for affordability.

--------------------------------------------------------------------------------

Tobias Sittig, MainFirst Bank AG, Research Division - Head of Equity Research Germany & Senior Equity Analyst [23]

--------------------------------------------------------------------------------

Can you share the cost of capital that regulator applies for you? Or is that not disclosed?

--------------------------------------------------------------------------------

Walter Oblin, Österreichische Post AG - CFO and Deputy Chairman of the Management Board of Mail & Direct Mail, Finance [24]

--------------------------------------------------------------------------------

I think it's our WACC, which is in the order of somewhere 7% to 8% or 6% to 8% depending on current interest rates and things like that. But it's the universal service area. So it's not -- a segment or our group P&L and apply that, it's a subsection that is not in line with our reported segments.

--------------------------------------------------------------------------------

Operator [25]

--------------------------------------------------------------------------------

The next question comes from the line of Andre Mulder from Kepler.

--------------------------------------------------------------------------------

Andre F. M. Mulder, Kepler Cheuvreux, Research Division - Analyst [26]

--------------------------------------------------------------------------------

A couple of questions. First question. Has there been any tax effect of the one-offs? Second question. If we look at the development of parcels in first half of plus 8%, 9 months plus 12% with Deutsche Post in between, can you split what development of the Austrian basis -- the existing Austrian basis has been in Q3? And then I'll pose some more question -- I have some more to follow up, but let me first give you the opportunity to answer. The last question is, can you say what the effect of the pricing measures will be? What's the base that your use for these pricing measures both in mail and parcels? With an increase of around 5% to 6%, what do you expect of the possibility that volumes will be drawn away because of the higher price increase? So my questions so far.

--------------------------------------------------------------------------------

Walter Oblin, Österreichische Post AG - CFO and Deputy Chairman of the Management Board of Mail & Direct Mail, Finance [27]

--------------------------------------------------------------------------------

Yes. So the question, one was tax effect on one-offs. Fines unfortunately are not tax deductible. Again, it's a provision for a fine that is not legally binding. We will take all legal steps to appeal against that. But so far, we show EUR 20 million in as one-off, which is not tax deductible, unfortunately. I would say the rest is pretty much taxed using our corporate tax rate of 25%.

On pricing in mail, we're talking about on average -- if you weigh this with volumes and we're talking about roughly 3.5% price increase, translating roughly, I'm talking orders of magnitude, and of course, not knowing how what will be the price elasticity in the market, of a full year impact of roughly EUR 20 million and take 3 quarters of that. And let me just remind you that this is already included in our guidance. So please do not add this to our guidance. And I think on the parcel in Q3 not -- I'm not able to fully give you clarity, but I would say by and large, organic growth rate of the first 2 quarters, which was around 7% to 8% continued in Q3.

--------------------------------------------------------------------------------

Andre F. M. Mulder, Kepler Cheuvreux, Research Division - Analyst [28]

--------------------------------------------------------------------------------

Okay. Then 3 follow-up questions. Firstly, can you give us the split between the ECO and the PRIO letters?

--------------------------------------------------------------------------------

Walter Oblin, Österreichische Post AG - CFO and Deputy Chairman of the Management Board of Mail & Direct Mail, Finance [29]

--------------------------------------------------------------------------------

Yes. We're talking about roughly 60-40 with, of course, economy progressing and every month some more customers, some more customers in volume going economy.

--------------------------------------------------------------------------------

Andre F. M. Mulder, Kepler Cheuvreux, Research Division - Analyst [30]

--------------------------------------------------------------------------------

And then last question. Can you explain what the extra cost have been of running dual networks?

--------------------------------------------------------------------------------

Walter Oblin, Österreichische Post AG - CFO and Deputy Chairman of the Management Board of Mail & Direct Mail, Finance [31]

--------------------------------------------------------------------------------

I think that is not an easy question. And it's really hard to single out this impact as you would have to model a greenfield optimized network. Sorry for not being able to give you a decent answer on that, Andre.

--------------------------------------------------------------------------------

Operator [32]

--------------------------------------------------------------------------------

Next question comes from the line of Matija Gergolet from Goldman Sachs.

--------------------------------------------------------------------------------

Matija Gergolet, Goldman Sachs Group Inc., Research Division - Equity Analyst [33]

--------------------------------------------------------------------------------

2 questions for me. Just a follow-up maybe I didn't catch the number right. So firstly on the pricing in mail, you mentioned there's a 3.5% price increase. So that should annualize to around what EUR 50 million revenues in terms of, say, positive price delta? Or did I get that number right or not? And second question is just on...sorry.

--------------------------------------------------------------------------------

Walter Oblin, Österreichische Post AG - CFO and Deputy Chairman of the Management Board of Mail & Direct Mail, Finance [34]

--------------------------------------------------------------------------------

Go ahead, Matija.

--------------------------------------------------------------------------------

Matija Gergolet, Goldman Sachs Group Inc., Research Division - Equity Analyst [35]

--------------------------------------------------------------------------------

Okay. Second question is just on the pricing in parcels. Can you give us some color about what are you thinking about pricing in parcels? Are you planning now to increase prices in the segment? And if so, what kind of, say, order of magnitude would you -- do you think is realistic to assume for maybe 2020 or 2021?

--------------------------------------------------------------------------------

Walter Oblin, Österreichische Post AG - CFO and Deputy Chairman of the Management Board of Mail & Direct Mail, Finance [36]

--------------------------------------------------------------------------------

Let me start with the second question. Of course, improving our top line in parcel beyond pure volume growth is a priority given that the whole industry is suffering from price pressure and at the same time, running at full capacity or beyond. So this is a priority, and we are working on that, but bear with me that I'm not ready to give you detailed targets on that.

Second on mail side. The relevant scope of revenues where this rate adjustment can be applied on is a revenue volume of roughly EUR 600 million or a little bit less, we're talking about letter mail volumes only. And if you multiply that with 3.5%, you'll end up with order of magnitude of EUR 20 million. And take that -- take 3 quarters of that, given that the price increase only will be effective April 1, you'll end up with roughly EUR 15 million.

--------------------------------------------------------------------------------

Operator [37]

--------------------------------------------------------------------------------

We have a follow-up question from Andre Mulder from Kepler.

--------------------------------------------------------------------------------

Andre F. M. Mulder, Kepler Cheuvreux, Research Division - Analyst [38]

--------------------------------------------------------------------------------

So you commented on the impact of pricing on the mail side. On the parcel side, there is 2% increase in the price. Are these parcels part of the parcels part? Or are they -- because of the small packages, are they part of the mail side?

--------------------------------------------------------------------------------

Walter Oblin, Österreichische Post AG - CFO and Deputy Chairman of the Management Board of Mail & Direct Mail, Finance [39]

--------------------------------------------------------------------------------

Andre, this -- we're not talking about parcels, this is a product called packet, which is a hybrid product in between. So the real parcel product is not affected by this postal rate adjustment. A box of large letters, small packets that fit into the mailbox.

--------------------------------------------------------------------------------

Andre F. M. Mulder, Kepler Cheuvreux, Research Division - Analyst [40]

--------------------------------------------------------------------------------

And what is the impact, I know you said EUR 20 million on the mail side for -- because of the price increases? What would be the impact of this 2% price rise?

--------------------------------------------------------------------------------

Harald Hagenauer, Österreichische Post AG - Head of IR, Group Auditing & Compliance [41]

--------------------------------------------------------------------------------

We didn't talk about 2%.

--------------------------------------------------------------------------------

Walter Oblin, Österreichische Post AG - CFO and Deputy Chairman of the Management Board of Mail & Direct Mail, Finance [42]

--------------------------------------------------------------------------------

We did not talk about 2%. The number I gave was roughly -- this increase weighted with the relevant volumes translates into 3.5% across the product range. So -- and I don't know where you got the 2% from?

--------------------------------------------------------------------------------

Andre F. M. Mulder, Kepler Cheuvreux, Research Division - Analyst [43]

--------------------------------------------------------------------------------

The 2% is the increase between the EUR 2.50 and the EUR 2.55.

--------------------------------------------------------------------------------

Walter Oblin, Österreichische Post AG - CFO and Deputy Chairman of the Management Board of Mail & Direct Mail, Finance [44]

--------------------------------------------------------------------------------

EUR 2.50 and the EUR 2.55.

--------------------------------------------------------------------------------

Harald Hagenauer, Österreichische Post AG - Head of IR, Group Auditing & Compliance [45]

--------------------------------------------------------------------------------

All mail products.

--------------------------------------------------------------------------------

Walter Oblin, Österreichische Post AG - CFO and Deputy Chairman of the Management Board of Mail & Direct Mail, Finance [46]

--------------------------------------------------------------------------------

This is one single product, which was a relatively lower volume. So the 3.5% is the weighted -- the volume-weighted price increase across all product.

--------------------------------------------------------------------------------

Operator [47]

--------------------------------------------------------------------------------

(Operator Instructions) There are no further questions at this time. And I would like to hand back to Harald Hagenauer for closing comments. Please go ahead.

--------------------------------------------------------------------------------

Harald Hagenauer, Österreichische Post AG - Head of IR, Group Auditing & Compliance [48]

--------------------------------------------------------------------------------

So thanks, ladies and gentlemen, for participating in this call. And we, of course, are still ready there for the questions. So hope to see you again next time. Bye-bye.

--------------------------------------------------------------------------------

Operator [49]

--------------------------------------------------------------------------------

Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Good-bye.