Bpost Sa Unsp/Adr

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.

Thank you, Elaine. As mentioned in my introduction, Driven by the continued positive earnings momentum, we can raise our full year 2020 group adjusted EBIT guidance to at least 270 million euro. This outlook includes the estimated financial impact of the ransomware attack at Radio North America last month. Due to the second wave of the pandemic and lockdown measures taken, The visibility for Q4 is however still limited. We continue to strive for capital expenditures for the year 2020 at a maximum of €150 million. The Board will decide on a new dividend policy early December and we will communicate the new capital allocation framework including dividend policy, together with our strategic update to the financial markets, and this on December 8th. We are now ready to take your questions. Operator, please open the line.

Thank you. As a reminder, if you'd like to ask a question, please press star 1 on your telephone keypad. Ensure that your line remains unmuted locally. I'll then prompt you when to ask your question. And that's star 1. And our first question comes from a line of Frank Lassen from the Grove Peter Cam. Please go ahead.

Yes, good morning, Frank Lassen from the Grove Peter Cam. Two questions, please. First of all, on the advertising mail, did you see a shift from volumes... from Q2 going into Q3 because of the lockdown, the first lockdown in Q2. And what is your view on Q4, given the new lockdown in Belgium? Do you expect postponement of advertising campaigns? And yeah, what is the current situation? Have you maybe already seen signals of that? So that's the first one on advertising now. And then secondly on radio, what is the current situation on signing up new customers for next year? The situation was rather due to COVID. Has that already improved? So do you see momentum for new customers gaining? What is the situation there? Thank you.

Okay. Maybe on the advertising mail, it's clear that we have seen continued recovery during Q3, which... You know that during Q2, because of the lockdown, we had a big impact on the advertising mail. So it continued to recover during Q3. As far as Q4 is concerned, as you know, the lockdown just started again. on Monday of this week, the real lockdown, also with the retail, I would say. However, there's more retail open in Belgium than in the first lockdown. There's also no ban on advertising mail, which was clearly a decision that was taken in March by the Ministry of Economy. So, yeah, will there be a big impact in Q4? It's difficult to judge, eh? We are only two days in the lockdown, so will there be cancellations of advertising mail in the coming weeks? Probably yes, but it's very difficult to predict. On the other hand, we will probably also have a positive effect on the parcels in Q4 because of the current lockdown. On the radial new customers for next year, We are still in line with our expectations and we still have signed agreements for starting up new customers as we had by the end of Q2. So there's no big change during Q3. We're in the same line of expectations.

Yeah, and meeting budget. So I understand what you say as it was difficult to launch new customers. We did gain new customers. which will be launched during the first quarter next year and also in the second quarter of next year. So there we're still meeting plans on the contract signing.

Okay, thank you. That's very helpful. Thank you.

The next question in the queue comes from a line of David Kirstens from Jefferies. Please go ahead.

Hi, good morning, everybody. Three questions, please. First of all, a follow-up on the impact of the second lockdown. I appreciate the comments you made on advertising mail that there is no ban this time around. But do you think consumer behavior will be similar as during the first lockdown with regards to e-commerce? Or does everybody already have a second laptop and a home office installed? And was there a one-off effect? that you had during the first lockdown that will not repeat during the second lockdown. I think personnel had also quantified the one-off element in their partial volume that would not come back. And secondly, on Radial, do you still expect Radial to be profitable in the fourth quarter after the ransomware attack? And since we all have to position ahead of the US election outcome, would a Biden or Trump victory make any difference on Radial going forward? And then finally, is there any further clarity on the investigations around you, Sean Paul, with regards to your role at G4S that have potentially affected the performance of the group so far this year? Thank you very much.

Our performance? Okay.

I will start with the last one and then go to the first one. Okay. On the last one, if there would be news, you would have read it in the newspapers, I suppose, because they are very much, very well informed. So there's no news. The effect on BPOS group profitability or management or so on, I think that's not existing. On your first question, impact lockdown and consumer behavior. I think we've seen that we have had a partial volume growth of 49%. So we are, as I said, also after the second quarter, we are at the higher curve. So I do not expect the same jump again as in March, April, May. We will not have another big jump, but I feel that your question is more about, will it not be lower than the curve you are on? That I do not expect neither, because otherwise, I have seen it probably during Q3, there has not been a real lowering curve I would say okay if you take averages not every day or every week but if you take the averages we had a peak let's say during May and then it went a little bit down but it stayed at a very high level so I do not expect that of course shops are there are more shops open in Belgium for the moment let's say for example the do-it-yourself shops was a a big one in our parcel increase, but also a difficult one because of the pieces you buy there, it's not small parcels. So there are more shops open. On the other hand, the government has also decided on, a little bit strange I must say, on goods that are not very important that cannot be sold in supermarkets or in shops that are open. So it's a real strange feeling. However, I've seen myself that shops are very creative with that part of the rulings. So I believe that we are prepared for much more because of the end-of-year peak, of course. But I believe that the curve we are on will be... So we are ahead of end-of-year. We also have Sinterklaas, I would say, in Dutch, in Belgium, coming on on the 6th of December. already this will have a big effect on parcels with toys for the kids. So that's our expectation more or less.

Then to Regio, a question, will it again or still be profitable in the fourth quarter? Normally yes. I think the impact Normally, yes, because e-commerce is also in North America. It's driving forward. We see it in the third quarter. We don't see a reason why that would slim down in the fourth quarter. And it's a volume business, as we have seen in the second and the third quarter. So the answer is yes. What's a bit more complicated to respond on, on your question, is the impact on the ransom attack. There will be Some financial impact is difficult to assess it in full. And like Jean-Paul said in his voiceover, we have a solid insurance in place that covers the loss from businesses that would occur. A lot of the business could continue or was recovered if we still can notify the business was lost. We do have the insurance in place. Of course, also the reinstallment came with a cost. So the thing will also be when comes the cost, and that's probably more certain than when comes, or when are we allowed to account for the income of the insurance. And then Biden versus Trump.

I think not on short term, there will be no effect in my opinion.

And our customers are both, they're both Trump and both Biden, so we continue to deliver... That's for sure. So not a clear answer that we can give for the moment.

Okay, great. Thank you very much. I'm looking forward to December the 8th.

Okay. We do. The next question in the queue comes from a line of Hank Slotman from the Idea. Please go ahead.

Good morning, Hank Slotman. Well, all the results can be very brief. They are very impressive. But I would like to drill down a little bit further on the radio situation. First of all, you said in your introduction, Jean-Paul, that the fulfillment services had started again. But did I understand it correctly that the payment services are still not working properly? The second question, sorry, shall I ask them one by one or shall I ask them all together?

No, no, no, go ahead.

Go ahead. Okay. Okay. Then the second question is, you were mentioning an insurance policy that you have in place that basically reimburses all the missed revenues that are in place. That's one side of the metal, of course, and I'm happy to hear that you are insured for it. But how about your clients? How long have you been offline? what has been the reaction from your clients? Because this is happening in what normally should be your peak quarter. Have there been any claims? Have there been any clients that are so unhappy that they threatened to walk out? Perhaps you can elaborate about that. So is there any structural damage you expect? And certainly, and that's more a question Yeah, I would like to ask it anyhow. Why didn't you share the news earlier? Because this happened three weeks ago. When I read the text of your presentation, then, yeah, it says something like enough functionality has been restored. It still raises the impression that the situation is still not in a business as usual situation. Why haven't you informed the markets before? What would help you from doing that? Perfect.

Okay. First of all, on the first question, I think you must have misunderstood or I must have been wrong in what I said, but the payment services have never been down, so they have always been up. Okay. It's on the customer care and the fulfillment services that we had to shut down. We decided that on our own. And the customer care services have been up after a few days. The fulfillment services have been gradually brought back online, I would say. And as far as some small minor stuff, we are already back in business as usual. So we are ready for the end of year peak and take extra measures. As far as customers are concerned, we have informed our customers, of course, within 24 hours. We have been working with the customers, making sure that... They understand what happened for them, how we attacked the problem, I would say, if you use the word attack, how we handled the problem. And we've been working very cooperatively. And I think to minimize maximally the impact on their customers and on themselves. I think it has been going very well with the customers. And there's nothing more to say, in fact, on that side. So we really had a good cooperation with the customers.

As to communication time. Yeah. Yeah, so indeed it happened on October 15th. Like Jean-Paul indicated, first priority was limiting the harm the attack could cause. And that has multiple things, that's of course how shutting down the system, informing your customers immediately, but also how do you go forward with the attackers. So a forensic investigation going on, and then of course it's not always helping you if you communicate externally, also not knowing the the extent so we could communicate that and not giving any other answers thereon. So we think we made a call indeed that would only cause panic and as from day two we knew that we could control it.

Can I ask one more add-on please? With regard to the insurance policy, does it also cover claims from clients?

Actually, in view of forensic investigation, I'd rather not answer that one.

Okay.

I respect that.

Okay. Thank you very much. You're welcome.

The next question in the queue comes from a line of Lotte Timmermans from ABN AMRO. Please go ahead. Good morning. Two questions, please. First, on the guidance, you put solid earnings 69 to 75 million EBIT per quarter. I would expect the Q4 to be at least at the top end of the range, and that would end up a guidance of at least 20 to 95 million. Could I assume there was some conservative guidance, or is this the damage? And the second question is on your balance sheet. I would consider the balance sheet relatively healthy. What would be an ideal net debt of the year you have in mind? And would you link a target to the dividend payments? What was the last question? The last question was about the net debt of the year. So if you would link a target of net debt of the year to the dividend payments.

First thing, last one perhaps on the balance sheet. Yeah, you say it's relatively healthy. I think that's true, especially looking at it from a net debt point of view, bearing in mind that this year a very big step was taken. I think that's a very big move compared to last year. Do we have ourselves at this point in time Perhaps for your information, Lotte, we do not have particular banking covenants or something like that. So no, at BPOS we do not have really covenants that we have to follow. We do keep very close on how Standard & Post looks at it. So their matrices are also ours. And that is also indeed one of the messages that we will bring in the end of the year with December if we talk about capital allocation. What indeed do we think as a sound balance sheet? And with that goes indeed how you allocate your capital and in the end the dividend policy. But allow me to come back on that December 8th. And then for your first question on guidance, Jean-Paul.

I think the guidance is of course prudent, but it's taking into account various elements. It takes into account the second lockdown we have here, which is again very difficult to predict. We do know that the second lockdown here in Belgium and we see also the figures of absenteeism, sickness. We are reaching or going over the figures of March, beginning of this year. So we also have extra costs that will be implemented to continue to serve. We have, as I said before, on the mailing or the advertising mail, but also on the other mail, it's very difficult to predict, will we have the same effects as in the first lockdown? There will be effects for sure. And as I said before, the parcel volume growth will probably remain as it is and there will be another second jump, another jump. And it's very difficult, very unpredictable how the end of year peak will be increasing the volume, if it's going to be an increase as we have in 2019 versus 2018, yes or no. So, yeah, it is cautious, but we also say it's at least 270. But it's very difficult to predict. And we see in the second lockdown here in Belgium, it's not only sickness. We also have a big impact of people being obliged to go in quarantine. So there's a lot of effects that are very difficult to predict.

Okay, thanks. The next question in the queue comes from the line of Mark Swattenberg from ING. Please go ahead.

Yes, good morning. Thank you for taking my questions. Can we take them one by one, please? And I'll start with Mil and V2. If I look to the number of FTEs and interns there, it's 4.4% year-on-year. and actually it was quite sniffed in the client's hotline, and now it's not in a linear fashion.

Oh, Mark, Mark, Mark, the line is very bad. So first of all, we'd like to have all your questions, like everyone, and secondly, talk a bit slow, because the line is not very clear.

Thanks. Well, it's very clear, but I'll talk slowly, and I'll give you all my questions then.

All right. Thank you.

Here we go. O'Neill and retail. The number of FTEs and insurance is up 0.4% in the quarter, year-to-year, but also year-to-date. I'm trying to understand a bit why the FTEs are going up while the PUC line is declining. And I think the target is to at least strip out 750 people for a meal on an annual basis. That's my first question. My second question is, Can you maybe explain how the cost allocation works between power euro and Asia versus mill retail, that it passes on delivered by mill? How does it exactly work? Is it then when mill volumes come down, that the margin of mill retail will come down as well? Limit the dynamics there. And then lastly on... on the parcel business bandwidth with the new lockdowns and what's going on. I know that Q4 is normally not your most efficient quarter with the PPCs, which was the case in Q2, but would it be safe to assume that the parcel of Eurasia would have a higher equity than in Q2 because of the higher revenues that normally are, even despite COVID's impact in Q2? that Q4 will still be embedded in Q2. Those were my questions. Thank you.

Okay.

FTE evolution.

So, it goes together with your second question. So, I rest my case on having all questions in one. Because within mail and retail, in that business unit, we run the mail operations. With Champolle, we tend to call it more mail and parcels operations so that it has to be clear to everyone, also those who are running the operations, that it's for both products that have the right of existence. So the SCE that you see within Mera Retail do include also the people that we have in the operations, so in the last mile distribution part, and it's correct that on the one hand we have natural nutrition, so we always have people who leave, 1,200 a year approximately. On the other hand, yes, with the alternative distribution model, which was geared towards meal, remember, also there, bit by bit, we will be able to work more productively, but then gain COVID. So with parcels coming in, and if you compare the product meal with parcels, there's a big distinction, that's time. A meal, you drop very quickly in the box, A parcel, in the COVID lockdown, it was a bit easier. You could drink and everybody was home. But even then, it takes you more time. So as to productivity, they're different. So what we always do in mail operations, we look, what is the impact of mail volume decline? What FTEs should be reducing? But on the other hand, we also have an increase thanks to or due to parcels. And that's what you see in the FTEs. Then your second question is, yes, out of mail operations, An invoice is sent to Paulo Eurasia based on the parcels volume.

So it's an invoice at cost.

Then you said something. So does it mean when your parcels go down? But let me say one thing. Parcels are not really likely to go down.

Well, the growth, I mean. It becomes a bit more normalized, perhaps.

Yeah, but still, as long as they don't decrease, your impact will not happen. So when is mail profitability going down? When mail is going down. And that's something which is high on our agenda.

But it's not that the margin then in the parcel business is inflated by moving the FTEs to assign them to mail and retail?

No, no, no, because the network is within mail operations. And there is invoiced parcels. Ah, I see.

Yeah. All right, clear, thank you.

And then the last question you take is on the partial daily impact of the lockdown and will we have a higher EBITDA than in the Q2?

Well, given that it's peak season and you have lockdowns now in Q4, so Q4 should normally be even stronger than Q2, maybe a little bit less efficient, but then the question is, yeah,

Can you still make a better habit? I think the big question or the big unpredictable thing is, of course, the inefficiency we might have due to COVID. COVID hits harder, I would say, than the first lockdown on a number of staff. And as I said before, it's not only people being sick, but also the quarantine is much more affecting the FTEs that have to be replaced and not all FTE being not I would say productive is not costing anything so there is a cost on non-productive FTE which will be definitely higher in the Q4 than in Q2 it's also like that that for the moment just to give an example the government decided that even if you have no symptoms on the virus, you have to be in quarantine for 10 days and you cannot be tested. So the testing only goes for the ones who have symptoms. So somebody having been in contact with a positive tested person needs to go in quarantine for 10 days, while before it was... 7 days if you had the test after 5 days you knew the 7th day you were aware if you were positive or negative and if you were negative you could start working again on day 7 now you have to stay at home for at least 10 days so it all has a big impact a bigger impact than in Q2 so I think it's difficult to compare Q4 with Q2 for parcels B&A

Yeah, very well.

All right, thank you very much.

Thank you. We have two more questions in the queue. The next question comes from the line of Andre Mulder from Kepler Chevrolet. Please go ahead.

Good morning. Needless to say, I have a couple of questions. Firstly, did I understand it right that you also, for parcels, expect momentum around 50% in Q4? Could you also give a sort of indication for the mail sites? You should also take into account that it will be around minus 8%. Secondly, in the past, you gave the impact of COVID numbers. Have you looked into what the impact has been in Q3? On radio... You said that some operations have been affected by this. Could you give an indication of what part that would be? What percentage of sales has been affected there? Did you pay any sums to the attackers in order to restart operations? And then a question on dividends. Looking at the higher results, looking at the lower debts, looking at the lower net debt to EBITDA, It's with hindsight, but haven't you been a bit too fast to decide not to pay a dividend for this year?

Okay. Do you think the volume will go? Or I'll take the dividend meanwhile. I need to see a voice speaking, so I think we reported it just in time. Because the thing is, COVID-19 is still there. And you're absolutely right, looking at balance sheets, looking at results, perhaps if we waited longer, we would get too optimistic. But I think that indeed, and it was said in the second quarter with the board, that we want to preserve the strength of the balance sheets, the cash reserves, and the capacity to invest on the longer term. And I think that's extremely important. We will still, all companies have to see and to face on the aftermath of COVID-19. It will have a bigger impact than we live today. So I think being a bit more conservative there doesn't harm. In addition to that, as you know, BPOS has a transformation to make. So we will also need to invest to make the business transformation. So no, absolutely not. I think it's still a very wise proposal by the board. So that on the dividend. On the radio, perhaps, on the questions that you asked, impact on the revenue, I can be very brief and repeat what we said. We're still in the middle of the forensic investigation. We cannot deliver too many details. But as we said, we have the insurance in place. and also the outlook, including any impacts of at least 270, should give you enough comfort on that one. Also, as the request on did you pay for a ransom, I think you asked that. Also, that forensic investigation is ongoing. We cannot answer that question.

I think concerning this case, it's... It's too early to say because some, as I said before, some of the activities were not hit or we did not have to shut down or we didn't shut down. Secondly, the fulfillment activity has been gradually putting back online and in place. And yeah, quite a lot of the activities have been in fulfillment have been in backlog. So it's too early to reveal that. And as Leanne said, we cannot go much further into that. On the first one, I think your question is, are we going to have a 50% increase in parcels for the fourth quarter? But I think, yeah. As I said before, it's a bit difficult to say which effect we're going to have, also for the end-of-year peak, literally, combined with the lockdown. That's, I think, a difficult one. We are preparing for the maximum, I would say. We are preparing for a lot. But, yeah, we have no clear indication. For the mail, I think we... meaning that we expect some possible increase in mail volume loss. As I said in the advertising mail, we might have some effects, but it's too early to say because the lockdown is only two days old. And also in the normal mail, there might be some effects. On the other hand, we should say that there is a difference between the current lockdown and the lockdown in March, April. is that companies are fully working. There's no obligation to stay at home if office working. So that's obliged now, it's a rule to have office work. On the other hand, I think companies that probably had difficulties to and to get their, for example, their invoices out are much better prepared now to their administrative staff working at home than they were in March, April. So I think the effect or negative effect on the male side will probably be lower than in the first lockdown, but there might still be an effect.

So, like I said, we do not disclose or calculate the detail because it's getting too complicated and artificial. We're losing a bit of ground to what to compare, as you may understand. But, of course, that There are some positives and some negatives. Like we indicated, advertising mail has seen its recovery in the third quarter, but now will be, in a way, somewhere halted. To what extent, we don't know. Transaction mail, good resistance over the quarter. So there, as to volumes, I think we're quite okay. Proximity, UVA, we explained there. We are located in travel areas, so of course that is still negative. But on the other hand, in the two parallels, we are profiting from the COVID. So there the increase in volumes, to what extent is it market-driven, to what extent it's COVID-19-driven, it's hard to calculate that effect. But qualitatively, that's a big thing that you see. What I can say is, yeah, it comes with a cost. And I now refer to cost as to health and safety measures. To give you an idea, I think we're still about 3 million a quarter. that we spend on everything which is for health and safety. So that's an amount that I can give because it's easy to calculate. But on the others, it's difficult to say what exactly is now the new normal or what is really COVID-related and how to calculate it to what basis. So that's the only thing that I can respond to that one.

Maybe a follow-up on the parcel side. Looking at the development in Q3, especially on the margin side, Would you say that the operation is pretty close to being ideal, or do you still see some material setback from these hexagons?

That's a difficult question. May I just say something so that we all are aligned? You know that in Paolo, Eurasia, we do not only have parcels, right? So we also have cross-border included. So that's why it's a question to ask, because you're really asking about parcels. But of course, there are different businesses. Europe is included. Activance is included in cross-border activity. And then as to parcels, yeah, it was a good quarter, I think, as to... how operations treated and already in the second quarter I think what the network has done and get more I think that's great and I think all mailmen contributed to that extremely is it already the ideal situation yeah it's our job always to see if there are new opportunities I think Q2 Q3 has been quite good there and

As for Q2, we of course had to ramp up the possibilities to continue to serve very quickly, which is of course short-term costs, extra costs that we had, which of course have been lower in Q1. So is it pretty close to being ideal? I would say probably yes. So we had a very good... definitely a very good quarter and I think I would say short term costs which are also costing more for short term than when we can have it longer term that is the difference between Q2 and Q3 I think.

Okay, thanks.

The next question in the queue comes from the line of Najat El-Kassir from BOFA. Please go ahead.

Good morning, everyone. Three questions, please, for me. First one is, do you have surcharge in place for parcel in the fourth quarter? And also, how we should think about price mix evolution in the parcel business for the fourth quarter, as well as for fiscal year 2021? Secondly is on CAPEX for fiscal year 21, how we should think about the CAPEX at this level. And last is on main volume decline, what should we expect in terms of when all things normalize at some point, what should we expect in terms of main volume decline in fiscal year 21. Thank you very much. As to 2021, it's too early to tell.

We do not come with an outlook already in the month of November, so give us a bit more time there. So both on CAPEX, both on volume decline yields, we cannot answer yet.

Yes, we have surcharges in place, and they have been agreed already in the beginning of the year, so that is in place. And then the price mix evolution depends on which customers will grow heavily. But I think it will be probably the same view as what we had in the first lockdown. That means that the bigger customers will probably grow more than the average. So I think we will there have an evolution which is in line, in my opinion, with the second quarter.

Thank you very much.

You're welcome. The next question comes from the line of Marco Limite from Barclays. Please go ahead.

Hi, good morning. I've got two questions left. So the first one is back to the European parts of business. So if, for example, in 2021 you will see some, let's assume, 10%, 20% volume growth, on top of the very high base of 2020, do you think you still have enough capacity and flexibility to accommodate that amount of volumes? Or you would have to open a new sorting center or whatever. So, yeah, the question is if you've got still enough flexibility to deal with more growth within the current parcel network. And the second question, if you can tell at this stage, of course, if the new dividend policy that will be disclosed in December will be based on IFRS numbers or still on Belgian gaps. Thank you.

Referring to your first question, do we have enough capacity and if If 10 or if 20%, I'm not going to do that prediction. But if we have enough capacity, well, we informed you, I think, that we invested in two new sorting machines during summer. That gives us an important extra capacity of about 100,000 parcels to be sorted a day. We still have quite some flexibility and capacity after that for at least, in our opinion, for one to two years. Because also, as I said before, there is a certain capacity if you use more hours in the day. And that's a capacity which we have available if you want to unlock it, I would say, and So that's what you think about your question. We do have ideas and we do our planning to do further capacity increase, I would say, for the second half of 2022 and further on. So we are really evaluating that period already because we want to be ready for 2022 second half and end of year peak at that time. we need to start making the plans and also deciding on the investments we have to do. So that's a little bit the outlook on capacity.

As to the dividend, Eva, first I'll ask a question to you, Marco. Why do you ask?

Just because it makes it easier for us to model straight on IFRS numbers rather than trying to bridge from IFRS to Belgium.

Okay. I do have to disappoint you because we will disclose it in December, but I just wanted to understand why you are here.

There is no particular reason why now. I was just wondering if you could just tell that in advance.

Allow me to come back on that one in December. Sure, thank you.

The next and last question comes from the line of Sumit Mehrotra from Societe Generale. Please go ahead.

Hi, so apologies. I'm on a very bad line. I might trail off, but I'll still take my chance. Very straightforward question on Palo Eurasia. So do you think, so two consecutive quarters of 11% margins. Do you think that this is the new normal with the volume levels that we're seeing and I'm contrasting it with the expectations of 6% to 8% at the beginning of the year. So I know we are not crystal clear but just your thought process, given the volumes that are in the system now, do you think we have to recalibrate how we look at Palo Alto Asia margins? Then secondly, I would love to hear a bit more about your free cash flow conversion. What do you think about conversion going forward, any levers that you have in mind to improve it, that would be good to hear. Thank you.

On the operating, on the 11% margin, sorry, what you indicated is that now the new normal that you have to take into account, it's a bit what we discussed. So please keep in mind that we have and parceled and cross-border and Radio Europe and Active End, so the e-commerce in Europe. The latter one is still evolving as to profitability, so there we're not at the maximum yet. Cross-border is very fluctuating over time, and that's also what explained in the second quarter, why there was a big shift from the, what was it, five point something to 11%. So take that in mind. Is the 11% the new normal or the holy grail? I would not dare to say that because of the different mix in the products, and especially in cross-border, the fluctuation that we have over the quarters. That's the answer on that one. And then on the free cash flow conversion, like I tried to explain, and probably that's why you asked, in this year, free cash flow, especially if you look at year-to-date, A lot was done on working capital, and I'm quite happy that we could do that in a very gentle and smooth way, so it's not that we have been squeezing suppliers whatsoever. I think all of that went in very good collaboration. But some of those things will unwind, part in the fourth quarter, part in the next quarter. And then, of course, a very important one, if you look at the cash flow that we present, is the fact that we have the Q2s from radio, which is indeed cash coming in from customers, that after a certain period of time, we have to give back to our customers. So that's always a bit making the exercise that you want to do as to cash conversion a bit more complicated. That's also why we exclude it from the adjusted free cash flow. And to answer, can we further improve? So I think the two quarters coming up, it will be a bit worse because it was really management. We didn't know what was coming in front of us with COVID-19. So everything that we could do, also on tax prepayments, indeed agreeing with customers on payment terms, it was really to manage a crisis of which we did not know the impact on our cash conversion. So it will worsen a bit. On the other hand, we and the team are really working hard to get better insight on how it all works. We are working on DSO. BPOS typically, as you can see, our working capital is negative because a lot of what we do is prepaid, almost everything in the mail and retail part. So in any case, it's something that is high on our agenda. Making the business transformation, we will have a shift in working capital because from prepaid, it will be a different kind of business. So important of credit policies, collection procedures, being very firm on the DSO that you agreed upon with your customers, it will get bigger importance. So on the working capital, so much is going on that I cannot give you a rule of thumb for the future. I hope that answers your question.

Thank you very much. May I hazard one more on mail and retail? A straightforward one again. In Q3, how much, I mean, I'm not asking for quantification, but just a sense I want to get, how much of the decline in operating expenses has been because of the lower material cost from UBWay and how much is actually the shift of all the billing to Apollo Eurasia in Q3. So two things are going on together. So I just want to understand that when things come to normal in retail, how should we look at mail and retail margins then?

As to the last question, so the cross-charging from one segment to another, you can find it in the intersegment operating income in part, and then the other part is in OPEX. We do not disclose that in a detailed way. And then the other question was, what was the other question?

Actually, it is related. I want to understand how much the decline in operating expenses is coming from the UB way position and how much is from the increased cross-billing to Palo Urecia.

Yeah, we do not disclose that. Otherwise, we could start giving EBITs per operating segment and we try to stick to the business unit.

I appreciate it. Thank you.

You're welcome.

We have no further questions coming through, so I'll hand back over to your host for any concluding remarks.

Okay. Thank you for your presence and for a lot of questions, and I'm myself also looking forward to to be with you again on 8th of December when we are able to discuss with you or to present to you our strategic review and also our new dividend policy. Thank you and have a nice day and I would say also keep it safe because it's still around.

Thank you for joining today's call. You may now disconnect your handsets.