bpost NV/SA

Hello and welcome to the BPOST second quarter 2022 analyst call. My name is Courtney and I'll be your coordinator for today's event. Please note this call is being recorded and for the duration, your lines will be on listen only. However, you will have the opportunity to ask questions and this can be done by pressing star one on your telephone keypad. If you require assistance at any time, please press star zero and you will be connected to an operator. And I will now hand you over to your host, Mr. Dirk Tires, Chief Executive Officer, to begin today's conference. Thank you.

Well, good morning, ladies and gentlemen. Welcome. I'm pleased to discuss our second quarter 2022 results as CEO of Bepos Group. Welcome to all of you, and thank you for joining us. I'm delighted to be joined by Philippe Dacien, our new CFO since June, as well as Antoine Lebec from Investor Relations. We posted the materials on our website last night. We will walk you through the presentation, and of course, we'll then take your questions. Two questions each would ensure everyone gets the chance to be addressed in the upcoming hour. I'm pleased with our Q2 results and the management initiatives supporting them. I will share at the end some of the strong momentum in each business and how our efforts have been paying off since the Q1 results in this adverse environment. You remember the initial EBIT guidance of 280 to 310 million euro communicated in February before the world changed. I'm pleased to report that the results of the second quarter exceed the estimations underlying the initial guidance, despite the ongoing macroeconomic pressures. How did that happen? Resilient mail volumes, continued nice growth at Radial North America, and the successful implementation of the management actions we have shared with you. We see that our group adjusted EBIT stands at 82.6 million euro with a margin of 8%. As expected, EBIT is down by 22.5% compared to the high comps of the second quarter last year with a full lockdown in the month of April in Belgium and the pre-VET regulation period. Our group operating income for Q2 stands at €1,035,000,000 and remained stable year over year, also when combining the deconsolidation impact of UBB Retail and the mail group with favourable foreign exchange movements. This mainly results from the organic contribution of Radial's new customers partially offset by the decreased Asian cross-border revenues due to the new European regulation on VAT, slightly lower but resilient male revenues, and lower revenues from lower parcels volumes. At Belgium, adjusted EBIT declined by €22 million to €62.8 million, mainly due to lower operating income from lower mail and parcel volumes, coupled with nearly stable OPEX, again when excluding UBWay impacts, despite the forced recent salary indexations of 2% each and higher energy costs, which we are able to mitigate by FTE reductions and higher recoverable VAT. At eLogistics Eurasia, The adjusted EBIT stands at 7.1 million, a 15 million decrease year over year due to the lower cross-border activities and continuous pressure on volumes and dyno. We have a different picture at eLogistics North America, where EBIT grew by more than 7 million and increased by almost 70% to 15.2 million euro with an improved margin of 4.8%, mainly thanks to the radius contribution, which continues its path to higher growth and profitability. These results were obtained despite the continued adverse macroeconomic environment. Following the start of the war in Ukraine and the surge in inflation, we observed a significant drop in consumer confidence in the month of March, which has continued to deteriorate in the second quarter 2022. Only Belgium saw a slight recovery month after month until June. This contrast with the trend observed in the Netherlands or in the Eurozone, where consumer confidence deteriorated further. In all geographies, this indicator remains below last year's levels, and first views on July levels indicate that consumer confidence remains fragile. We also observe a continued decline in online retail sales year over year, but statistics suggest a softer decrease in the month of May in Belgium, with a limited decline of minus 5%. percent year-over-year and a 10 percent point sequential improvements on April. At EU aggregated level, the year-over-year pattern remained broadly unchanged over the past three months. In the US, online retail sales show a different trend as they continue to grow year-over-year, but they are stabilizing on a monthly basis since February. In Belgium, inflation continued to climb from 8.3% in March to 9.7% in June, the highest reading since 1982. For the remainder of the year, global recession risks now arise as high inflation hurts consumer disposable income and retail spend capacity, and central banks are taking measures with regards to their monetary policy to combat disinflation. I will later on elaborate more on the actions taken by the management to face and mitigate such sudden impacts in the past quarter and also for the rest of the year. I would now like to hand over to Philippe for more details on the financials of the second quarter.

Thank you, Dirk, and good morning to all. I'm very happy to be here to comment on our second quarter results, and I look forward to meeting you all. I've enjoyed my first two months at BPOS Group. I am impressed by the energy within the group and the collective desire to drive change and implement the management actions Dirk mentioned. For your reference, you will find on page five an overview of the key financials for the quarter, both reported and adjusted. Dirk already mentioned our group Topline and EBIT. Our adjusted net profit amounts to 71.4 million euros. It benefited from net financial results increasing by 18 million euros year over year, reflecting lower financial charges related to IS-19 employee benefit in line with higher discount rates and thus a non-cash impact. Effective tax rate being at 27.3, very close to the statutory tax rate. Allow me to move directly to the details of Belgium on page six. Belgium at constant perimeter, external revenues decreased by 12 million to 519 million euro. Let me walk you through our sub-segment. Domestic mail recorded an underlying mail volume decline of 7.5% for the quarter against the post-COVID rebound of plus 1.4% in Q2 2021. This impacted revenues by minus €20 million, but was mitigated by a positive price and mix impact of plus €30 million, mainly through mail pricing. Altogether, domestic mail revenues decreased by 7 million year over year. Admin main volumes were only slightly supported by some COVID-19 communication. We estimate a contribution of less than a million euros to the top line in the second quarter, which contrasts with the contribution of about 8 million euros to the top line in Q2 last year. Parcels Belgium recorded a decrease of 11 million euros, or minus 9.5%. Our volumes were 12.9% below last year. This volume trend reflects the tough comes of last year when there was a full lockdown in the month of April. It also reflects Amazon insourcing, without which the underlying parcel volume decline stood at minus 2.9%. This is an improvement on Q1 when this amounted to minus 1.8%. Volume was supported by resilient demand in fashion in the months of May and June. At the same time, the price mix improved from plus 3% in Q1 to plus 3.4% in Q2, thanks to recent price increases and a favorable customer mix. This contrast with the negative price mix effect of last year. As a reminder, given the further inflationary pressure on cost, BPOST announced in May a second price increase of plus 2.9% for its contractual product applied since the month of June. To put things in perspective, parcel volume remained 57% above the pre-pandemic second quarter of 2019. Let me move to proximity and convenience retail network, where revenue increased organically by 6 million euros, resulting from the new management contract. Recall that the management contract was already approved by the Belgian government in July 2021. On July 19, 2022, the European Commission approved Belgium's plan to compensate BPOS for providing service of general economic interest for the period 2022 to 2026 under the seven management contracts. In this sub-segment, the consolidation impact of UBWay retail as from the month of March this year was minus 34 million in the quarter. Value added services slightly increased by one million euro, mostly resulting from higher revenues from fine solutions. Let's move to the P&L of Belgium on page 7. As a result of lower volumes, operating income decreased by 14 million euros in Belgium. On the cost side, excluding UBA retail, the operating expenses remain nearly stable year over year, despite inflationary pressure. We indeed suffer from, first, higher payroll costs per FTE, reflecting the impact of each of the plus 2% salary indexation of November 2021, February, April, and June 2022, as well as the change in nine shift regulation. We also suffered from higher energy costs. But on the other end, we benefited from lower fleet and subcontractor costs, less FTEs due to the lower parcels volume, and the execution of the dedicated management action Dirk will discuss later on in the presentation. We also enjoy higher recoverable VAT in this quarter. Moving to e-logistic regia on page eight. External operating income was down 27 million euro contrasting the strong growth in e-commerce logistics with lower volumes at dyna and cross-border. Looking at the revenue development per sub-segment, we see that in e-commerce logistics, Radial Europe and Active End sales enjoy an healthy 12.8% growth, mainly from new customers' onboardings. Note that despite lower sales in April, sales of existing customers, the same store sales, started to pick up in May and June. At Dyna, sales were down around minus 20% versus last year, similar to the previous quarter and due to the volume in one and two-man delivery at DynaLogic exclusively driven by lower consumption spending in white goods and less divide devices to be repaired at Dynafix. Dyna's development did offset the strong growth momentum at Radial Europe and Activance with a combined decrease of minus 2 million euros in revenue. Let's move to cross-border. Cross-border, as expected, recorded a weak quarter against High Comps last year. Revenue decreased by minus 25 million euros or minus 26%. Similar to the previous quarters, we continue to see the ongoing pressure on Asian parcel volumes. The minus 50% decline in Asian sale is the consequence of the termination of the VAT exemption on low value consignment since July 2021. but also reflect the recent COVID-related lockdowns in China and the consequences of the Ukraine war resulting in delays or reduced shipment to Europe. Note that as from Q3 onwards, we will start comparing with post-VAT regulation quarters. We continue to expect in the future a progressive recovery from VAT regulation impacts and sales in June were slightly recovering. Let's move to slide nine. Operating expenses decreased by minus 14 million. Across sub-segment, we had, for cross-border, lower transportation costs and lower inter-segment OPEX charged by Belgium, in line with the lower Asian volumes. For e-commerce and logistics, lower material costs, lower interim and transportation costs in line with our volumes at Dynalogic and Dynafix Dynashore. And higher payroll costs from inflation and recent site openings in line with our expansion and the strategic development initiative for Radial Europe and Activance. Moving on to our North American e-logistics business on page 10. The operating income of e-commerce logistics increased by 86 million euros up plus 15% at constant exchange rate. A very healthy level of growth at Radial but also Landmark and Apple Express that benefited from new clients or volumes won in 2021. Radial revenues amounted to 321 million US dollars in this quarter. This is respectively plus 61 and plus 18% above the second quarter of 2019 and 2021, which reflects the structural e-commerce logistic growth and radials expansion plan. You can also see the impact of the consolidation of the mail group in early August 2021. Moving to the P&L on slide 11. Operating expenses increased by 6.6% excluding FX impact. Variable OPEX evolved at a slightly lower pace than the revenue development at plus 8.2% and include labor cost headwinds from wage inflation in fulfillment, but were also mitigated by some productivity gains. We also incur lower SG&E costs and higher fixed costs from the new site opening, which support our commercial successes. Year over year, e-logistics non-America adjusted EBIT increased by 7 million, almost 70% up to 18.1 million euro, with an improved margin of 4.8%, reflecting the continuous progress at Radial. Moving on to the corporate segment on page 12. External operating income slightly increased by €1 million year-over-year from higher building sales. More importantly, lower OPEX include a reduction of 3.8% in override FTEs and interims resulting in an improved EBIT. Then we move to the cash flow on slide 13. The main items to flag are the following. The cash flow from operating activities before change in working capital remains stable year over year, mainly resulting from lower prepayment of corporate income taxes, offsetting the lower operating results. The change in working capital and provision decreased by minus 62 million, resulting from lower supplier balance due to a different payment calendar resulting in one additional accounts payable run in the month of June 2022 compared to last year, but also a different payment schedule of terminal use advances. These were made in the second quarter this year, whereas these advances were paid in Q3 last year. These timing effects are expected to reverse in the coming quarters. The cash outflow from investing activities increased by 14 million to 42 million euros, including higher capex to support the logistic growth of Regal US and the optimization of our domestic network, but also higher M&As activities, mainly from the acquisition of IMX in May. In line with our strategy to transform Belgium, build e-logistics Eurasia and grow e-logistics in North America. I now hand over to Dirk to cover our outlook for the remainder of 2022 and elaborate on management action that resulted in operational improvement in the first half of 2022.