bpost NV/SA

Hello and welcome to the BPAL Second Quarter 2020 Analyst Call. My name is Judy and I'll be the coordinator for today's event. Please note that this call is being recorded and for the duration of the call, your lines will be in listen only. However, you will have the opportunity to ask questions at the end of the call. This can be done by pressing star 1 on your telephone keypad to register your question. If you require assistance at any point, please press star zero and you'll be connected to an operator. I will now hand you over to your host, CEO, Jean-Paul Van Avermaet, and CFO, Lynn Gernadet, to begin today's conference. Thank you.

Okay. Good morning, ladies and gentlemen. I'm very pleased to be here to present you BPOST Group's second quarter 2020 results. I'd like to welcome you and thank you for joining us. With me I have Leen Geernaert, our CFO, as well as Saskia and Stephanie from Investor Relations. I assume you already had the opportunity to read through the materials which we posted on our website last night, and we will talk you through the presentation, and afterwards we will take your questions. Our second quarter results were obviously still impacted by COVID-19, and this until the end of May. The second quarter was fully dominated by the lockdowns in place, as well in Europe as in North America. This resulting in a net negative impact on the total group EBIT year over year. Also, when we exclude the gain on sale of the headquarters building we had last year, in May 2019. With regards to the timeline, let me remind you that the federal government in Belgium imposed a lockdown as from March 18th, including the closure of non-essential retail, and this until May 10th included. A promotion ban was also introduced at the start of that period and was in place till April 3rd. The month of June, on the other hand, proved to be unexpectedly and exceptionally strong. We will elaborate on that later on. Predictability remains very low since there are many unknown factors as to how COVID-19 will further evolve. However, we can say that we are seeing some structural trends emerging from this crisis. These trends also confirm that the diversification strategy, which Bepo's group embarked on since a few years, is really bearing fruits. I repeat, remaining an efficient mail operator in Belgium while growing in the areas of e-commerce and last mile delivery in the home country. For that purpose, we continue to invest in capacity expansion in those growing activities. This with two new parcel sorting machines in Antwerp and Brussels, and site expansion for e-commerce logistics in Europe and in North America. Coming back to our second quarter 2020 results on slide three, The group adjusted EBIT stood at 74.9 million euro. This includes an estimated net negative impact of 9.5 million euro related to COVID-19. This result is much stronger than our own expectations, driven by the sharp recovery during the month of June. where we have seen that mail volumes were much better than expected and e-commerce volumes remained at a very high level. Please do note that all COVID-19 impacts mentioned are best effort estimates based on actuals and are net of negative and positive impacts. Our mail and retail business contributed for 36 million euro to the group adjusted EBIT and this with a margin of 7.7%. The COVID-19 net EBIT impact over the quarter was still significant for this business and is estimated at minus 37 million euro. Year on year, the segment was impacted by accelerating mail volume decline at minus 17.7% and this with a severe negative development quarter to date May and a much higher than anticipated catch-up during the month of June. Our retail business as well was negatively impacted by COVID-19. These top line developments are the main drivers behind adjusted EBIT decline and are partly offset by cost phasing and the cost containment measures taken to face the current volatile environment. In our business parcels and logistics Eurasia, we generated 32.4 million euro adjusted EBIT, and this with a margin of 11%. Topline here was fueled by COVID-19-driven growth in all revenue lines, in particular in the parcels Belgium and Netherlands, with volume growth of 78.4%. This started only slowly at the end of the first quarter in March, but exceeded our expectations since that persisted to a large extent up to June. in the second quarter, and this despite the reopening of non-essential retail in the beginning of May. Excluding the unfavorable year-over-year evolution in terminal due settlements, adjusted EBIT was up by €13 million, or 76% operationally. The net COVID-19 impact on EBIT is estimated at plus 13.1 million euro going to north america north america was affected later in time by the pandemic while we did not see an impact in the first quarter the second quarter showed a significant e-commerce volume growth from existing clients at radial and positive operating leverage e-commerce logistics operating income grew by 53.5% to €331 million. The adjusted EBIT for the whole business unit increased by €18.1 million to €17.6 million. The positive EBIT evolution at Radial North America was partly offset by continued margin pressure in the international mail business. For this business line, the net COVID-19 impact on EBIT is estimated at plus €16.5 million for the quarter. Thanks to this contained net financial impact from COVID-19 on Bepo's group so far, we are able now to reconfirm our initial group adjusted EBIT guidance range of 240 to 270 million euro. The contribution by business unit, though, will be different versus what was initially foreseen and that you will understand. Of course, this outlook is based on the current situation. In fact, assuming no second national or important local lockdown during the rest to the remaining time of 2020. I will come back on this in more details, but we'll first hand over to Laine for more details on the financials of the second quarter. Laine?

Yes. Thank you, Jean-Paul, and good morning to you all. We are together on page four now. And that shows the Abbott Bridge for the second quarter. As you can see, the adjusted EBIT showed a decline of €32.6 million compared to the same period last year. Two big things that we noticed there, €19.9 million is due to the gain on the sale of our headquarter building that we had last year in the month of May. And as Jean-Paul mentioned, the second thing is the impact of COVID-19 with an estimated EBIT impact of negative €9.5 million. where on the one hand we had a decline in meal and retail, which was to a large extent compensated by a significant growth in our parcels and logistics businesses. Besides this COVID-19 and the headquarters sale, our second quarter EBIT was favorably impacted by targeted cost containment actions and cost phasing towards the second half of 2020. Emile retail adjusted EBIT decline by €38.8 million, mainly impacted by COVID-19. We estimate this as €37 million on a net basis. This was visible through the domestic meal volume decline at minus 17.7%, while specific cost containment actions as well as phasing helped us to smoothen significantly the impact at EBIT level. Partial and logistics Eurasia, they recorded an adjusted EBIT increase of 8.8 million euro. The adjusted EBIT figure of 32.4 million includes an estimated positive net impact of 13.1 million euro from COVID-19. And on the other hand, minus 4.2 million euro negative evolution in the settlement of terminal use. You will remember And last year in the second quarter, that was a very positive phasing. Parsons and Logistics North America adjusted EBITs, increased by €18.1 million versus the second quarter of 2019. This strong positive EBIT development from e-commerce logistics, and Radial in particular, was only slightly upset by margin pressure in the international mail in the U.S. Like said, in corporate, the adjusted EBIT decline of €20.7 million is largely explained by the gain on disposal of our headquarters in the second quarter of 2019. On the next page, we have an insight on the key financials for the quarter. At group level, total operating income was up by 12.5%. positively impacted by the strong growth in parcels, B&A, and e-commerce logistics, both in Europe and in North America. More details on the revenue and EBIT developments following the breakdowns per business unit later on. When looking at the EBIT, always we have the adjustment for non-cash amortization charges on intangible assets that were recognized in the purchase price allocation. These charges also positively impacted the reported income tax. That effect has been adjusted here as well. The net financial result of minus 14 million euro improved slightly by 0.8 million euro versus second quarter of last year, and that's mainly due to improved exchange rate results. Income tax expense decreased by 13.5 million euro as a result of lower profits before tax, while also the effective tax rate of 26.7% decreased mainly as a result of the lower Belgian corporate tax rate from 29.58% last year to 25% as of this fiscal year. The normalized free cash flow increased thanks to an improvement in the working capital evolution. This is primarily thanks to COVID-19 extended payment terms, and the absence of tax prepayments in the second quarter this year, something that was allowed by the Belgian federal government. These effects were partly upset by lower building sales, given the sales of our headquarters last year, and I will come back on the cash flow elements a bit later in the presentation. All in all, and by consequence, the net debt decreased compared to end of 2019, helped by the free cash flow generation, and of course also by the absence of paying a final dividend on 2019 in the second quarter of this year. Capital expenditure for the quarter amounted to €24.9 million, a decrease of €0.9 million compared to the second quarter of 2019, which spent primarily relating to capacity expansion, partial sorting on the one hand, and also in e-commerce logistics. Let's now have a look at the different operating segments. On this slide, you will find, we are on page six, the results by segment in which you see the contribution per business unit. And it shows a strong contrast to the previous quarter's due, or thanks to, if I can combine that with the word COVID-19. And it boosted the growth in parcels and logistics segments, contrary to the acceleration of mail volume decline in mail and retail. So indeed, mail and retail generated 48% of the group adjusted EBIT of 74.9 million Euro. Remember that on a full year basis, last year, mail and retail was contributing about 80% of the EBIT. Parcels and Logistics Eurasia was a second contributor at 43%, and Parcels and Logistics North America contributed positively as well, accounting for 24% of the group adjusted EBIT in the quarter. These figures do show that the business transformation is the right track towards sustainable EBIT growth. Over time, the growing EBIT contributions from our parcels and logistics business will increasingly compensate the EBIT decline in mail and retail. We can move to page 6, where we see the external revenue bridge of mail and retail. We see a decline in the external revenue of 71.9 million euro to 407 million euros. And we see a couple of things, 40.9 million euro revenue loss from domestic mail and 27.8 million euro decline in proximity and convenience retail networks. Domestic mail was driven by an underlying mail volume decline in the quarter of minus 17.7% and the absence of elections, partly compensated by positive price mix impacts. Mail volume decline shows a very different pattern between quarter to date May, it was at minus 22.3%, and between the month of June, which showed a stronger than anticipated recovery, and it stood at only minus 6.6%. The discrepancy in trend is particularly obvious for advertising and transactional mail. In transactional mail, the underlying mail volume decline was minus 16.7%, of which minus 19 in the first two months, and in June, we noted minus 8.9%. Transactional mail was relatively resilient to the impact of COVID-19, because it was still supported by big senders' administrative volumes, which were less impacted than the smaller administrative volumes, the daily and the registered mail. Despite this, all product categories were negatively impacted over April and May, with a catch-up in June. Then the advertising mail volume declined. It stood at minus 26.6%, of which minus 37% in April and May, still impacted by the ban on promotions in April and by the closure of non-essential stores. Advertising mail then gradually resumed, with food retail in the second half of April, and the other sectors as of May. In June, the picture was very different, with a minus 4.2% in advertising mail volume decline, which highlights indeed a sharp catch-up, although not in all sectors. The press volumes in the quarter are minus 8%. It shows a continuation of the trend towards e-substitution and rationalization, so normal trends relatively robust in the COVID-19. Proximity and convenience retail network revenues declined by 27.8, partly due to one, the consolidation of Alvarez, that explains minus 7.8 million Euro versus last year. Secondly, the YubiWei retail revenues that were impacted by the COVID-19 confinement measures, which led to significant decrease in footfall primarily in our travel locations. Then, thirdly, banking and finance revenues also declined due to less traffic in post offices and also less ATM transactions. Value-added services decreased by €3.2 million, and we observed that in phasing out of the EID activities, nothing to do with COVID-19. the document management and the European license plates, which was impacted by COVID-19. Looking then at the P&L for MNR, the adjusted EBIT amounted to €36 million with a margin of 7.7%. This is a net decrease of €38.8 million compared to the second quarter of 2019, explained by the decrease in total revenues of €53.2 million combined with a 14.4 million euro decrease in operating costs when including the adjusted DNA. Operating expenses declined as a result of the following. We did have higher paywall and interim costs. We did have specific COVID-19 OPEX. But on the other hand, that was more than compensated by lower costs from, again, technically, the material costs from ALVADIS, deconsolidation impacts, The fact that we have a higher recoverable VAT amount than last year, cost containment actions, and also a bit of cost phasing towards the second half of 2020. COVID-19 had an estimated net impact on mail and retail's EBIT of 37 million euro. And we see two things. Of course, the top line developments at domestic mail and in UBWay retail I just explained. as well as by additional costs linked to the COVID-19 premium, health and safety measures, an increase in absenteeism, and also additional debt at risk. Note that the estimated COVID-19 net impact was significantly negative quarter to date May, while in June we noted a faster than anticipated catch-up in the male volumes. Then we move to the parallels, and starting with Eurasia. On revenue, we recorded a growth of 95.6 million euro. This is driven by favorable development across all sub-segments, thanks to the strong increase in online demand due to the lockdown. Marshall's B&A to start with. It recorded an increase of 58.4 million euro. That's an increase of 64.2%. And that's driven by a significant organic volume growth of 78.4%. only slightly slowing down in the month of June from the peak levels recorded in April and in May. Also DynaLogic continued on a very good volume trend. E-commerce logistics revenue also increased nicely by 17 million euro, thanks mainly to positive COVID-19 impact on Radio Europe, Active Ants and DynaFresh, as well as the MCS fulfillment consolidation impact. cross-border revenues. Contrary to what happened in the first quarter, as you remember, we have now in the second quarter a very positive top-line impact from COVID-19, which explains an estimated 15.4 million euro of the 20.2 million euro increase year over year. The important activity loss that we experienced at the beginning of the COVID-19 outbreak relating to the lack of air freight capacity closure of international borders gradually recovered over the month of May, although still modest. But through June, the cross-border activities evolved exponentially, and especially for the parcels from Asia, as a result of the train solution that we put in place as an alternative to the air freight. What does it give in results? Adjusted EBIT for Parsons and Logistics Eurasia increased by €8.8 million to €32.4 million, with a margin of 11%. This was driven by top-line evolution I just talked about, partly offset by higher variable costs, and specifically also COVID-19-related costs. In addition to that, and that's €4.2 million less terminal use settlements than we experienced last year. Excluding those terminal use impacts, the adjusted EBIT would be up by €13 million or 67% operationally. COVID-19 had an estimated net positive EBIT impact of €13.1 million, supported by a much stronger month of June than anticipated with e-commerce volumes remaining at high levels and cross-border showing a strongly positive evolution as opposed to what we've seen to a quarter to date, May. Then let's talk North America. Operating income of e-commerce logistics. We've been in pools of COVID-19 lockdowns and they started a bit later in North America than they did in Europe. But we experienced the growth of 115.4 million Euro. It was mainly driven by Radio North America recording 49% growth from existing customers, as well as significant growth from the new clients that we launched end of 2019. This was only to a small extent offset by churn. In international mail, we saw external revenues declining by 1.4 million, that's minus 6.5%, this despite positive foreign exchange evolution. This was due to negative impact on business from mail from COVID-19. Overall external revenues were just up by 113.9 million euro for the business unit. We estimate here, just to give you a bit of color, that COVID-19 impact on revenues is 90 million euro positive. On slide 12, we see that that positive top line development translated into a strong adjusted EBIT increase of €18.1 million to amount now to €17.6 million and an EBIT margin of 5%. I think we all agree that this is a very promising result, as it does show the importance of reaching a critical scale in that business and that North America, radio in particular, is geared to do that. The positive evolution at Radial was slightly offset by continued margin pressure in international mail from lower volumes and also higher transport costs. The COVID-19 net impact is estimated at a positive €16.5 million and is the net of a higher variable margin contribution driven by the volumes on the one hand, and on the other hand, costs of additional health and safety measures and increased transport costs for international mail, and also . May I also point your attention to the bottom of the table, where you see Radial North America had an EBIT margin of 4.3%, as you can see in the US dollar KPIs. With the result of the second quarter, Radial achieves a break-even result after the first half year. In total, North America is now contributing positively to BIPO's group with an adjusted EBIT of €10.1 million. Then moving to the corporate segment, not many things to say because we already said it all. It's mainly the gain on the disposal of headquarter buildings in the second quarter last year. Net net of interest rating income, the OPEX was flat. And it's led to an adjusted EBIT decline within corporate of 20.7 million euro. On slide 14, you can see that the reported free cash flow stood at 130.2 million euro, which is an increase of 108.7 million euro versus the second quarter of 2019. The cash flow from operating activities stood at 138.3 million euro, which is a 165.7 million improvement compared to last year. That and a couple of things. The cash flow from operating activities before the change in working capital at 135.2 million Euro or 53 million better than last year. This is primarily because we made use of the fact that we could postpone our tax prepayments in 2020. We used the possibility offered by the Belgian government. Secondly, we have the cash relating to the collected proceeds due to ratios clients, as we call it, and that amounted to 69 million euro, which is an increase of 83 million. Remember that that due to effect is excluded from the adjusted free cash flow that we present in the key financials on slide five. Finally, the working capital excluding that due to represented an outflow of €63.7 million for the quarter, which is also €30 million better than last year. And this is primarily driven by extended payment terms during the COVID-19 period, partly offset by high receivables due to increased sales. Looking at the cash flow from investing activities that decreased by €56.9 million year-on-year, was driven by the proceeds on the sales of our headquarters last year. Apex of €24.9 million, like said, was spent on capacity expansion. We've done that at Radial, at the Barshels B2C, and at Active Amps. The cash flow from financing activities at minus €24.4 million in the quarter It's also improved by 36.4 million Euro versus the same periods of last year. Of course, that's explained by the absence of dividend payment in the second quarter 2020. Having a look at the balance sheet, we already mentioned the net debt at 539.5 million Euro. That includes, of course, now IFRS 16. And a decrease versus the same quarter last year as a result of the cash generation that which is explained. The main balance sheet movements versus end of 2019 relate to decrease in trade and other receivables due to the usual settlement of the SG&I receivable in the first quarter, which also resulted in an increase in cash and cash equivalents. The other liabilities that there is increase in, that's due to the income tax payable as no prepayments were done in 2020 yet. Like previous quarter and given the current circumstances, we also like to give you some more insight in our financing structure and liquidity. The total available liquidity at the end of June consisted of 925 million euro of cash and cash equivalent, of which 718.5 million euro is readily available on bank current accounts and as short-term deposits. BPOS Group also has two undrawn revolving credit facilities for a total amount of €375 million. Looking at the total external funding, it amounts to roughly €1 billion, out of which €833.4 million is long-term debt. And then looking at outstanding commercial papers, they amount to €168 million, with a maturity between one and six months. Early July, remaining prudent on liquidity, we took the advantage of favorable market conditions to issue €100 million, and this secured a major part of our short-term funding until the collection of the next SD&I payment in January 2021. The current portion of the European Investment Bank amortizing loan of €9.1 million will be repaid in the fourth quarter. So we can conclude. that we have sufficient short-term liquidity to serve our debt obligations, and we keep on managing this in a very cautious way, given the lack of visibility on the length, the impact, and the severity of the crisis. I hand back to you, Jean-Paul, for the outlook.