bpost NV/SA

Hello and welcome to the BPOST Third Quarter 2020 Analyst Call. Please note that for the duration of the call, your lines will be on listen only. However, you will have the opportunity to ask questions later on 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 0 and you'll be connected to an operator. I will now hand over to your host, Jean-Paul Van Avermaet, Group CEO, to begin today's conference. Thank you.

Good morning, ladies and gentlemen. I'm pleased to present you BPOST Group's third quarter 2020 results. First of all, welcome to all of you and thank you for joining us. With me, I have Blaine Gernard. our CFO as well as Saskia Dedenen from our investor relations. I assume you already had the opportunity to read through the materials which we posted on our website last night. We will walk you through the presentation and will then take your questions. First of all, on page three, you see that we realized a very solid third quarter driven by continued strong performance in parcels and logistics, and this both in Europe and Asia and the US. Our group operating income at 972.9 million euro increased by 10.4% versus last year, while group adjusted EBIT at 69.5 million euro nearly doubled. The third quarter was a further confirmation of trends already observed in the second quarter. We continue to benefit from thriving e-commerce volumes in Belgium, Europe and the US, as well as positive operational leverage in parcels and e-commerce logistics. In Belgium, this is fueled by stellar growth at 49%, in parcel volumes handled through the mail network. Underlying mail volume decline at minus 8.2% was better than our pre-COVID-19 guidance range, which was between minus 9 to minus 11%. For the second consecutive quarter, The combined adjusted EBIT contribution of our two parcels and logistic divisions at 38.5 million euro exceeded the mail and retail adjusted EBIT of 35.7 million euro. So we see the mix shift accelerating, thereby supporting our business transformation with sustainable earnings growth and value creation as endgame. In light of this continued positive earnings momentum, we can raise our full year 2020 group adjusted EBIT guidance to at least 270 million euros. This outlook includes the estimated financial impact of a ransomware attack at Radial North America that occurred on October 15th. Due to the second wave of the pandemic, and lockdown measures taken. Visibility for Q4 is however limited. Specifically now as to this ransomware attack, immediately following the attack we voluntarily shut down our systems to prevent financial and technical damage from happening and to enable bringing the systems back up gradually and safely. This shutdown unfortunately also stopped normal fulfillment services from taking place, whereas payment processing systems were not at all impacted. Within a reasonable time frame following the attack, Radial managed to regain sufficient functionality to restart fulfillment operations at all of its locations. As the forensic investigation is still ongoing, we are, however, unable at this point to disclose and aggregate financial impact on our business. However, we can inform that we have a solid insurance in place that covers for loss of business resulting from cyber attacks. To conclude on the highlights, Standard & Poor's have made their annual review of our financials and reconfirmed our single A credit rating with a stable outlook. Before handing over to Lane, let me first give you an update on a couple of developments within B-Post in this last quarter. First of all, I would like to congratulate Elias Simpson on his nomination as Radial North America CEO and welcome him to our Group Executive Committee as Head of Parcels and Logistics North America. After successfully serving Radial for more than three years in operations and fulfillment services, he will be taking on these new responsibilities as of the 1st of December ahead of us. Thereby, he succeeds Henri de Rombray, who is leaving our Group by year-end, and this for family reasons. We continue to invest in capacity and develop further our e-commerce activities. In Belgium, the two new fully automated parcel sorting lanes installed over the summer are now 100% operational. In the Netherlands, at active ends, we have just last week inaugurated, limited inaugurated due to COVID, a new state-of-art e-fulfillment site in Roosendaal, and they are to open a first active edge branch in Boom in Belgium over 2021. In the US, we are investing in a new fulfillment site near Atlanta, foreseen to officially open end of Q2 next year, but which is meanwhile being used as a pop-up site to manage the end-of-year peak volumes over there. We are fully ready for the end-of-year peak to successfully meet our customers' expectations. We have added capacity in all of the regions where we operate and also take the necessary measures to ensure sufficient staffing at all times. Thereby, of course, respecting all health and safety measures in light of COVID-19. A month ago, we announced our new mail tariffs applicable as of January 2021. As you know, pricing is an important part of our strategy and essential to make the alternating distribution model a success. Our proposals for 2021 have been accepted by the regulator and represent a 6% increase on average with a widening gap between prior and non-prior products. For the small user basket, we are still well below the price gap from the regulator. On another note, sustainability is also very high on our agenda. Over the third quarter, we announced that as a pioneer in the Belgian parcel sector, we will implement more than 320 double-deck trailers by 2030. This will lead to a 30% reduction in... As of February 2021, we will also start lead lightning works so that all five sorting centers in Belgium are ecologically lit. This will save about half of our electricity bill and reduce CO2 emissions by 1,000 tons per year. Finally, People's Group joined the new Belgian Alliance for Climate Action, where participating members share best practices in working towards very ambitious climate goals, and science-based targets. Since my appointment earlier this year, I've been working with the executive management team on the future strategic directions for BPOS group, and I also had discussions together with them with our board. We'll be happy to present the outcome of this exercise to you on December 8, 2020. During that moment, we will also include a revised capital allocation framework and new dividend policy beyond 2020. Let me now hand over to Lane for more details on the financial.

Yeah, thank you Jean-Paul. Good morning to all of you. So together we're on page five, showing the EBIT bridge for the third quarter. Adjusted EBIT increased by €21.2 million compared to the same period last year, driven by significant growth in our parcels and logistics businesses. In the mail and retail, the adjusted EBIT decline was mitigated at only €2.7 million. This mainly as a result of higher re-invoicing of sorting and distribution expenses from the integrated mail and parcels network to Paolo Eurasia, driven by stellar parcel growth. Parses and Logistics Eurasia, they recorded an adjusted EBIT increase of 19.4 million to 29.7 million euros, driven by a very nice e-commerce growth, resulting in high parses volume handled through the integrated network. Parses and Logistics North America adjusted EBITs also increased by 40 million euros versus last year, driven by continued strong momentum in e-commerce logistics and also operating leverage. Corporate adjusted EBIT was half a million euro up versus last year. From this quarter onwards, the COVID-19 impacts, we do not longer separately disclose them since providing a split between what is now COVID-19 on the one hand and observed business developments on the other hand, really has become increasingly artificial and therefore also, for all of us, less meaningful. On page 6, we have the key financials for the quarter. At group level, total operating income up by 10.4%, driven by e-commerce, and more details on the revenue and EBITDA developments following the breakdowns per unit. As always, EBIT was adjusted for the non-cash amortization charges on intangible assets, These charges are also positively impacted the reported income tax. That effect has also been adjusted here as well. No other adjustments were made. Net financial result is minus €11.5 million. It improved slightly by almost €1 million versus the third quarter of last year. This is mainly due to lower financial charges related to EIS-19 employee benefits. partly offset by unfavorable foreign exchange results. Income tax expense, it increased by 1.1 million euro compared to last year, mainly due to, or thanks to, higher profit before tax, and of course offset by the lower statutory tax rate in Belgium, which is now at 25%. The effective tax rate for the quarter also amounted to that 25%. Normalized free cash flow at 33 million euro, it increased thanks to the higher EBITDA generation and improvements in the working capital evolution, lower cash outflow from investing activities. I will come back on the cash flow elements later in the presentation. All in all, net debt decreased by 182.3 million euro, supported by that free cash flow generation, absence of a dividend payment, of course, and lower corporate tax prepayments. The latter were phased towards the second half of 2020, since we used the possibility to postpone these payments as offered by the Belgian government. CapEx for this quarter, it amounted to €41.4 million, which is a decrease of €6.1 million compared to last year, and the spends we see them in capacity expansion in e-commerce, at radio, in active events, and Parcels B2X in Belgium. Okay, then we can move to the different operating segments. On page seven, you will find the results by segment in which you see the contribution per business unit for the third quarter. For the second quarter in a row, the combined contribution of our Paolo business units to the group adjusted EBIT is higher than new in retail, like Jean-Paul already said. and which is important in our business shifts, or mixed shifts. Mail and Retail, it generated 51% of Group Adjusted EBIT of 69.5 million euro. Parsons and Logistics Eurasia was the second contributor with 43%, and Parsons and Logistics North America, they contributed for 13%. We can now move to page eight, which shows the external revenue bridge of Mail and Retail. External revenues, they declined by 30 million and we landed at 414.3 million euro. The impact, the main impact that we see is on the one hand 20.7 million euro decline in the proximity and convenience retail network and then 8.7 million euro revenue loss from the domestic mail. Domestic mail recorded underlying mail volume decline of minus 8.2% for the quarter partly compensated by a positive price-mix effect. Transactional mail, with an underlying volume decline of minus 8.3, actually held up well, with the volumes in this particular quarter no longer impacted by the first COVID-19 lockdown, neither negatively, but also not positively. The volumes remain impacted thus by the known structural trends, which is continued e-substitution by the big centers and SMEs, A higher acceptance of each document at the receiver side, digitization of the C2B communication through smartphone apps. Then in advertising mail volume, there was a decline to that minus 9.4%. Unaddressed saw a continued recovery in mail volumes since the lockdown that was in place from March to May this year. Direct mail, we call it a quite good quarter with a boost seen in July, but it was leveling off thereafter. We do see that given the ongoing limited visibility on how COVID-19 will further evolve, advertisers were already rather hesitant to invest in direct mail campaigns, and there is general tendency of cost containment also resulting in reduced budgets. As to press volumes, they're at minus 5.4% for the full quarter. That shows a continuation of the e-substitution and rationalization trends. Like said, proximity and convenience retail network revenues, they declined firmly by 20.7 million. This is due to impact of COVID-19 on the footfall in the UBWay retail stores, especially in the travel locations. We also had the deconsolidation of Alvarez, which in the quarter still had an effect of two months, amounting to 5.4 million euros. And then finally, we also seen a decrease in the banking and finance revenues. Value-added services, they slightly decreased by 0.7 million euros, mainly due to lower revenues from data and document management, but partly compensated by higher revenues from the European license plate. Then moving to the profit and loss of mail and retail on slide nine. Adjusted EBIT amounted to 35.7 million euro with a margin of 7.7. This is a net decrease of only 2.7 million euro compared to the third quarter last year. What does explain that? First of all, decrease in total revenues of 21.7 million euro. Adjusted for the 0.6 million euro on the disposal of Alvarez. And on the other hand, the 19 million euro decrease in operating costs, including the adjusted DNA. Operating expenses, they declined as a result of a couple of things. So on the one hand, we have higher payroll and interim costs and specific COVID-19 expenses. But on the other hand, it is more than compensated by lower costs from UV-ray retail, we saw lower revenue, but the cost of goods sold are also lower, including also the Alvarez deconservation impact. Increased sorting and distribution expenses that could be transferred to Paolo Eurasia, because we've seen the growth in parcels volumes that are handled by the integrated network. Lower project-related costs, lower use of subcontracting. Then moving to Palo Eurasia, slide 10. We recorded an external revenue growth of €64.5 million. This is driven by a positive revenue development across all sub-segments, thanks to e-commerce both domestically and abroad. Parcels Bene, they recorded an increase of €31.3 million or 33.1%. When excluding last year's €1.7 million earn-out reverse on Dyna, revenue growth is even at €32.9 million. Fully driven by parcels B2X volume and revenue growth of respectively 49% of volume, 45.3% in revenue, indicating that the price mix is mitigated at minus 3.7%, which is fully mixed-driven. This is the consequence of very high growth at our big customers who benefit from lower prices than the smaller accounts because of the high volume. The remainder of parcels daily revenues, which are not captured in B2X, they had a year over year revenue development, which is driven among others by last year's closure of non-profitable businesses, as you might remember. E-commerce logistics revenues, they increased by 8.5 million euro, mainly driven by active events, growth from existing customers, as well as the integration of MCS fulfillment, as from October 1st last year. That inorganic growth is 2.7 million euros in this quarter. Radio Europe growth, mainly in the UK, from existing and new clients, and in Poland, from the opening of a new fulfillment site. Cross-border revenues, they continue to grow exponentially, with revenues up 24.6 million euro, driven by parcels from Asia, as a result of a trade solution that we had in place already last quarter. And this was partly upset by declining cross-border postal business, fully mail-driven. On slide 11, profit and loss of Paulo Eurasia, EBIT increased by 19.4%. 19.4 million euro to 29.7, margin of 11.3%. This was driven by top line evolution I just talked about, partly upset by higher volume linked variable costs and higher intersegment operating expenses from mail and retail related to sorting and distribution of parcels within the integrated last mile mail and parcels network. The steep margin improvement is explained by the stellar growth in parcel volumes handled through the mail network. Excluding last year's €1.7 million earn-out reversal at Dyna Group, the adjusted EBIT would be up by €21 million operationally. Then North America. Operating income of e-commerce logistics grew by €55 million, up 25.2%. or 31.6 when we exclude a 10.7 million euro of foreign exchange development, which was negative. This growth was mainly driven by radio, recording a 35% increase from existing customers, as well as significant growth from new clients that we launched in 2019. This was only to a very small extent offset by churn. Our gross border activities being Landmark, Apple Express and FDM also benefit from new clients' wins and higher sales from existing customers driven by increased e-commerce business overall. International mail saw external revenues flat year over year from a combination of underlying revenue growth offset by negative exchange rate impacts. Excluding the latter, higher domestic parcel revenues from new contract wins more than compensated lower revenues in the business meal segment. Overall, external revenues were up by €55 million. On slide 13, we have the profit and loss of Palo Norte America, in which you see an adjusted EBIT profit of €8.7 million, an increase of €14 million compared to prior year's loss, a margin of 2.9%. The weakening of the US dollar versus the Euro has an immaterial impact on EBIT, since both the revenues and the costs are in US dollar, so we benefit from a kind of natural hedge there. For the second quarter in a row, we have reached positive adjusted EBIT, driven by the strong top-line performance, and OPEX increasing at a slower pace, thanks to positive operating leverage, higher productivity, and our cost-saving programs. Moving to the corporate segment on page 14, the external operating income had increased by 2 million euro, driven by higher gains on building sales. Net of the intersegment operating income, OPEX including depreciation and amortization, increased by 1.6 million euro, mainly driven by higher provisions. This led to an adjusted EBIT increase within corporates of 0.5 million euro. Then we move to the cash flow, slide 15. You can see that the reported free cash flow, which stood at minus 9.1 million euro, it's the quarter that we present here, it's an increase of 6.6 million euro. The cash flow from operating activities stood at 28.4 million euro, a decline year over year, which can be split in two things. First of all, 8 million euro improvement in the cash flow from operating activities, but before the change in working capital and provision, at 93.6 million euro, mainly thanks to, of course, higher EBITDA generation, partially upset by higher tax repayment in the third quarter of 2020, because we shifted a bit, like I indicated earlier. And then the second element, is an 11.4 million euro deterioration in working capital and provision evolution to minus 65.2 million euro, which can be explained by higher cash outflow relating to the collective proceeds due to radial closure, that's 36.2 million euro. This is driven by the high level of merchandise sales during the COVID-19 period in the second quarter. And then that high due to outflow in this quarter was partly by working capital evolution, excluding the radio due to being 23.1 million better than last year. This is primarily driven by higher settlements of receivables of the increased sales in the second quarter 2020, partially offset by outflows related to social security refer to the third quarter 20 and lower supplier balances. I think for cash flow, I also want to point out that when looking at years to date, 2020, the change in working capital and provisions was positive at 3.8 million euros versus a negative 92.8 million in 2019, an improvement of 96.6 million euros. It was explained by increased cross-border activities leading to higher terminal use outstanding, and secondly, positive impact of the extended payment terms in payables due to some temporary initiatives that were set up in the context of the pandemic. The latter is expected to unwind in the course of the fourth quarter and also in the first quarter next year. The cash flow from investing activities is improved by €10 million year-on-year, driven by lower CAPEX, lower outflows for M&A, partly offset by last year's proceeds from the disposal of Alvarez. Very briefly on the balance sheet, page 16, the main balance sheet movements versus last year relate to decrease in trade and other receivables. That is due to the usual settlement of the SDNI receivable in the first quarter. And then the decrease in trade and other payables was mainly explained by cost containment actions in 2020, partially offset by the positive impact of the extended payment terms in the second and the third quarter due to COVID-19. Then on slide 17. Yeah, on financing structure. Total available liquidity at the end of September consisted of €856 million of cash and cash equivalents, of which €685.6 million is readily available on bank current accounts and as short-term deposits. Bepo's group also has still the two underlying revolving credit facilities for a total amount of €375 million. So as to external funding, no big changes occurred in the quarter. which still amounts to 1 billion euro, out of which 826.2 is long-term debt. The outstanding commercial papers, they amount 165 million, with a maturity between one and six months. The current portion of the European Investment Bank amortization loan of 9.1 million euro will be repaid during the fourth quarter. We dare but conclude, again, to 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 of the length and severity of the pandemic and the global crisis that comes with it. I will now hand over to Jean-Paul for a deep outlook.