CTT - Correios De Portugal, S.A.

good day and thank you for standing by welcome to this ctt first quarter 2022 results webcast and conference call at this time all participants are in a listen only mode after the speaker's presentation there'll be a question and answer session to ask a question during the session you will need to press star one on your telephone please be advised that today's conference is being recorded if you require any further assistance please press star zero I would now like to hand the conference over to your speaker today, Mr. Bento. Please go ahead.

Thank you. Good morning, everyone. Welcome to our results presentation. I will invite you to follow me through the presentation. So moving to slide four, which is in fact the first slide, our key takeaways for the quarter. are that we have what we call a transitory slowdown in E&P and also the impacts of investment incapacity to enable foreseen growth that have impacted the quarter results. On mail, we've seen revenues penalized by a slowdown in e-commerce and adverse evolution of the mix of mail. And in spite of that, the earnings momentum is improving following regulated price increase as we're going to see. That's why we have a much better month of March. We keep in the bank a solid and indeed expanding balance sheet which positions the bank for further revenue growth and offers interest rate leverage to grab the momentum on that front. Transformation continues to deliver on sustainable market share gains, namely in B2B, where we regain important contracts in BPO, printing and finishing, and even mail. And of course, this is the part where we remove the dividends amounting to 12% per share to be paid on May 20th, with ex-dividends starting on the 18th of May. All in all, notwithstanding the difficult economic environment with increased execution risks, we remain committed to achieving our final year EBIT guidance within the 65 to 75 million euros branch, which I believe is the most important passage we have for you today. Moving to slide five. Well, it's been a significant transformation that we've been operating in the company by increasing exposure to growing businesses. I believe this is a very interesting slide in the sense that if you look at the final year that we closed the accounts before this management team became in place, we had mail representing 67% of our revenues. and 118% of recurring EBIT and we have in fact produced a very significant transformation with miles representing just below 50% 49% by year end and representing near 28% of recurring EBIT but we have done so while growing the turnover and profitability of the company. While this quarter follows that trend, although with a very significant impact on mail declines. Moving to slide six. I'm sorry, I'll be coughing throughout the presentation. The quarter was marked by this transitory commerce slowdown and challenging economic conditions. But even so, revenues grew slightly above 40% with a significant decline in recurring EBIT although with an improving performance throughout the quarter. This means that on expressing parcels we had a roughly steady revenue behavior but a significant recurring EBIT decline, decline on profitability for mail Financial services performing reasonably well and with the recurring EBIT following for reasons we're going to see and a very good quarter for the bank as we shall see later in the more detailed slides. Moving to slide number seven, I'm talking about parcels on an Iberian perspective, which is the one we have more and more. Notwithstanding the transitory loss of momentum, we are delivering consistent market share gains in Spain and we clearly kept our leading position in Portugal. We won several clients and we lost none in the quarter. And that's visible on the charts if you see the series regarding first quarters from 2018 to this quarter. with a steady growth, of course with a positive bump in Portugal last year because we were confined, so e-commerce was at an extraordinary peak, but a consistent growth of 9% in Portugal and 22% in Spain. The quarter reflects a combination of negative effects because indeed we fell 12% in Portugal, although growing 7% in Spain, but this results from customers returning to physical retail. This is a trend that we have observed globally and the macro context which has impacted significantly consumer confidence with minus 30 points in Portugal and minus 36 points in Spain. Still, the longer series highlights very clearly the persistent growth trend in both markets and also we have good news because moving to slide, sorry, we're going to see that later on, there is a convergence towards more e-commerce, more mature e-commerce markets and so a huge room to growth in both countries. Moving to slide number eight, we see this very clearly with the behavior, well, between 20, 21 and 22. significant growth on volumes, revenues and recurring EBIT, but as we said, a bad comparison with last year's first quarter because of the reasons that we have mentioned. Moving to slide number nine. And notwithstanding the growth, we continue to prepare the structure for the structural growth we see ahead. And this is a very important point. E&P is a growth contributor and is remaining so. But if you compare... the performance in the first quarter last year. With the first quarter this year, we have a number of effects that we'd like to comment with you. We have a negative contribution margin for Portugal with the slowdown in e-commerce, which forced higher externalization. Then we have this almost symmetrical positive effect regarding the contribution margin in Spain, because as scale progresses, we grab operational leverage and therefore capacity improvement is rendered its benefit. Then we have also a positive effect regarding the change in the cargo operation operating model that we have. And finally, we have, of course, structural costs that are mostly associated with rent and associated facility costs. with capacity and quality improvement, and this is extremely important, as you all know, for the parcels business. Consequently, because of that, we have a very significant quality evolution on Iberia of more than 4%. And we have also increased very significantly the automated sorting capacity in Iberia. If we compare with 2019, when we came in and started the restructuring program in Spain, we are now at more than three times the automated sorting capacity and an impressive 38% higher than last year. Moving to slide 10 and zooming now in Portugal, ENP reflects primarily a difficult comparison with in Portugal last year, resulting from change of behavior, as I mentioned before, with a bias towards physical retail and also a sharp decline in consumer confidence. Nevertheless, we see a steady growth from quarter by quarter with the usual seasonality and the decline of 7.2% in volumes and the decline of 11.8% in revenues when comparing to the first quarter of 2021, but still a very significant growth when comparing before that of 55% in volumes and 30% in revenues. Moving to slide 11, and now the Zoom is in Spain. We continue improving in volumes, in revenues, and in profitability with an interesting behavior, of course, with the slowdown in growth but with the increased capacity that I've already mentioned, we are now ready to grab not only the market growth but also market share as we've been doing right now. And for that, slide number 12 is quite interesting because it shows that e-commerce market will continue to grow and it will continue to grow very significantly in Iberia. Portugal is where it is with lagging behind almost everyone, actually with lagging everyone in this chart. But we have now 73% of first users planning to continue using digital channels after COVID and customers are now accessing 48% more industries digitally. On the left, we see the huge room we have to grow both in Portugal and in Spain. And this is good news because being market leader in Portugal, we need the market to grow and we are helping the market to grow. And in Spain, we are also not only following the market growth but also grabbing market share. And this is very obvious when you look at the right where you represent the percentage of e-buyers that are now buying online. So we believe that the fact that the pandemic brought a lot of new users to this new mode of e-commerce Some of them are buying less now than they were one quarter ago, but they became e-buyers for good. And this is very good news, and this is why we are so positive on the role that Express and Parcels is playing and will play, mainly for our equity story this year. And with that, I would hand over to Guy to guide you on mail and the other.

Good morning. So starting on page 13, where we show the evolution of our mail volumes that are consistently declining less over the last three years, with big to be big accounts recovery from competition, partially offsetting declines in retail and in bonds of the minimis, although the lower average revenue per object. In the next slide, we can see The progress revenue transformation that we are doing in mail, while being impacted by the minimis and adverse mixed effects on national mail. Business solutions showing very good progress, even if we account for the special laptop project that brought a huge amount of revenues, with the inclusion of New Spring on our perimeter and with good underlying growth. Increased B2B competitiveness, especially utilities, is driving improvement in volumes in the B2B segment, although at a lower price than average. In national mail, we continue to see the effects of e-commerce migrating to express and parcels from mail and the diminished impact that started in the third quarter last year. That will continue to impact till the next quarter and then washing through our numbers. We also increased prices in March, on the last three weeks of March. That will be helping the profitability of our portfolio. We chose to to detail our mainly evolutions that should improve sequentially after the price increase. But with strong impact this quarter, that's all we did detailing. First, we had the 5.5 million euros of the minimum impact that continues to show through our numbers, especially this quarter. when we compare with the very high e-commerce trend that we saw last year. Then the rerun of the legislative election helped slightly our numbers. And then a decline in domestic volumes with e-commerce sold-out, that also affects mail, and with adverse mixed effects due to high price of wire weight classes that this kind of mail carries. Then 1.7 million impact of lower mail network usage by EMP. We chose to preserve our external last mile capacity in next-person passwords due to the foreseen growth, but that had a negative impact on mail as we used less of the available capacity on these business units. Then we have, unfortunately, the direct and indirect impacts of fuel inflation that is very present right now in the market, especially after the Ukrainian situation, that negatively impacts our numbers of 1.3 million euros. Then a very good progress in business solutions, to one-off effects, the New Spring integration and the sale of computer equipment, but good underlying growth of $0.6 million on business solutions. We chose also to show you the progress of VBIT on this division that has a sequential improvement with March benefiting from three weeks of price increase that benefit our numbers and we hope this will continue to positively impact the following month. On page 16 we can see the financial service evolutions that have two separate performance. Retail revenues continue to have a very consistent and strong growth driven by more focused retail approach. And our financial services revenues were hit by less public debt placements following the consumer confidence impacts and this more uncertain environment that is leading to people to place less savings. On page 17, we can see the Banco CTD numbers that posted another quarter of consistent growth across all business lines. especially on consumer credit that we can see on the left part of the slide, with auto loans growing 13.2% and our credit cards tripling in the period to more than 300 million in line with or ahead of our expectations. Markets are also progressing well with 12.3% growth year-on-year. And we continue to capture savings and off-balance sheet savings while we continue the monetization of our waste. On slide 18, we detail ESG measures where we highlight our continued focus on this front. We chose to share with you some of the projects. So in the environment dimension, We supported this partnership with Quercus to plant 6,000 trees. A big gap this year on the electrification of the fleet with the first acquisition of 71 electrical vehicles that enabled already to have two full CTTFs, full electric, so no fuel. And we continue to install meters around our buildings to enable better energy savings. In the social dimension, we supported the Ukrainian people to help in our stores where we collected more than 40 tons of help that we shipped to Poland. And we initiated a third edition of CTT student monitoring program for underprivileged students where these students are tutored by CTT in place. Then I invite you to start our financial review, although this quarter we already gave a lot of detail on the operational review. But nevertheless, on page 23, you can see our key financial indicators, where we see a difficult quarter in business performance, with challenging environment, with the combination of effects of the end of the COVID-19 pandemic this year, the logistics change disruption from Asia, and the impact of consumer confidence with the rising inflation and the situation on Ukraine. CTTR, the double-digit growth in revenues in the quarter on the back of a special laptop sales project. Excluding that effect, our revenues would grow 3.8%. Our EBIT declining 55.7% due to a strong impact on the mail division and the lack of growth on express and parcels. In the quarter, our net profit stood at 5.4 million, the decline of 38% and our cash flow reached 6.2 million euros in the first quarter. On page 21, we can see the detailed revenue evolution with the already mentioned growth of 14.3% due to the male performance on the back of Business Solutions and Bunk CTD. If we focus on experts and parcels, we had a decline of 2.1 million euros 3.3% due to the transitory slowdown in commerce, and a difficult comparable due to the end of COVID-19. And then the consumer confidence and these logistics chains, all these heavily affected volumes in Iberia. In Spain, we continue to grow, although at a lower rate, 3.9% in volumes and 7.1% in revenues. This is obviously a slowdown in growth while we saw the e-commerce market, that is our strongest market in Spain, declining for the first time in years with a decline in demand, namely on the big marketplaces. In Portugal, the e-commerce market is also suffering and suffering more than in Spain, with overall decline of the market of 13%. impacted our operation in Portugal with volumes declining 7.5% and 9.7% in revenues on the CEP line. Another business growing 24.9 million euros positively impacted by the consolidation of New Spring that accounted for 6 million of this growth and the the special laptop project that accounted for 21.5 million euros. The remainder of the core mail revenues declining 3.8 million with the inbound mail effect that I already shared with you, partially offset by the rerun of the legislative elections and for declines on the national mail. Financial services maintaining a good performance on retail sales, but consumer confidence analyzing the placement in savings, with overall revenues declining to €0.2 million. Banco CTT growing 32.5%, with its spending net interest margin driven by credit cards and auto loans, and also commissions that we are increasing as we are increasing the monetization of our customer base, through off-balance sheet savings and account on debit card commissioning. In the next page, we see our OPEX that grew basically on the back of business solutions, Mel and Banco CTT. Focusing on express and parcels, we declined 0.9 million euros or 1.5% as a result of 2.9% volume decline in Iberia. that were partially offset by investments in higher capacity and last mile unit costs in Portugal, where we leveraged less on the mail-in full capacity to preserve our external last mile network to support future work. On mail and other, excluding business solutions, we are growing 6.6 million. €3.3 million related with general election costs with foreign operators, €1.3 million related with the fluvial inflation that we shared in the previous slides, €1.7 million in lower usage of mail network by express and parcels, and €0.6 million in healthcare cost inflation. Financial services increasing €0.7 million, 50% of that increase coming from cost of goods sold in the retail in line with the revenue increase and increase in commercial costs on the financial service side. Banco CTT increasing 4.9 million euros, 2.7 million euros of cost of risk, that's 2.1%, increasing from 0.5% last year due to the growth in the credit card book So that is a mix driven growth and increasing in retail activity and customer transactions. Slide 23 shows our EBIT performance that reflects the decline in mail revenues and the continued investment in quality. In the quarter, express and parcel declining due to software. economic evolution, mainly in Portugal, and the impact on capacity to cope with the expected growth in Iberia. Another heavily hit point, the minimis and lower volumes in national mail and adverse mixed effects, coupled with the effects of inflation and lower integration with the fossil network. Price increase only took place in the last three weeks of March and these coupled with cost measures should improve profitability of the business unit going forward. Financial service showing the effect of slowdown in placements and lower remuneration in public debt. Bank CTT growing 2 million euros in the quarter on the back of strong growth in banking product and contained cost of risk around 1%, as I already mentioned. On slide 24, we can see our cash flow evolution in the quarter declining to 10.4 million euros, declining 2.5 million euros versus last year, capex to the 5.9 million flat year on year, our free cash flow of 6.2 million euros, and our net debt is now 64.9 million euros. in the end of the first quarter. And with that, I pass you through to Joan for his closing remarks. Thank you, Guy.

So, as closing remarks, we start by stating that we have the capacity to cope with future demands and we are doing that preserving operation flexibility to adjust if required. We see commercial and market initiatives improving customer intake, and we have quite some of these with real impacts already felt in the last weeks, especially in E&P and business services. on profitability measures, namely in operations and central structure, we have been intensifying them and we'll deliver results, measurable results, as from the second half of this year, so starting next quarter. On a regeneration, it has improved, and this is something of your attention, I've referred to this before, It increased throughout the quarter, with 81% of the recurrent EBIT being generated in March. And I recall that we had the price increase on the 7th of March. Previous identified risks remain active, and the second quarter will still be penalized by some macroeconomic factors when compared with March 22 run rates. Finally, notwithstanding a difficult environment, increasing execution risks, we remain committed to achieving the final year 2022 EBIT within the 65 to 75 million euros range, which is probably our most important message today. And with this, we remain available for your questions. Thank you.

Thank you. As a reminder, to ask a question, you'll need to press star 1 on your telephone. To withdraw your question, press the pound hash key. Once again, please press star 1 if you would like to ask a question. Your first question today comes from the line of Philippe Leiter from CaixaBank. Please go ahead, your line is open.

Hi, good morning, John. I have four questions, if I may. The first one is actually a clarification regarding your presentation on page 9. You mentioned higher externalizations on Portuguese EMP from the slowdown in e-commerce. Can you give us more details regarding what externalizations are you talking about and also if such negative impact can be somehow mitigated in the upcoming quarters? Second question on Outlook. and how confident you are that you will be able to reach the target, the full-year target, because as you mentioned, second quarter will continue to be tough. And doing some rough map, if we assume, for instance, no increase in second quarter EBIT, it will still imply a significant increase in second half EBIT, so more than 40% to reach the low end of your target. So from what activity should we expect this strong growth in second half to reach the full year target. And last two questions is a request of an update. First one on real estate and when should we expect the announcement of the deal. And last one, if you can confirm to us, as mentioned in the press, you are in the negotiations for the entry of the new partner at Banco CTT? And if it's the case, when should we expect novelties on that front? Thank you.

Okay, thank you, Philippe. Guy will start with the first question.

Hi, Philip. So we, as you know, we use both external partners for distributing last mile in express and parcels and our mail network capacity, installed capacity where we blend the mail with express and parcels. This quarter, with the pressure on volumes, what we chose to do to protect our capacity to support growth in the future is to not offload as much parcels as we could to the mail network and that actually had a negative impact that we did tell on mail EBIT. to keep a lifeline on the partners we have on expressive parcels because otherwise there will be no volumes to distribute and that would impair our ability to support growth going forward. As we see the slowdown on expressive parcels as transitional, we thought this was the right thing to do. to continue to be able to support additional growth. Nevertheless, it is a lever that remains available if it's required.

Moving to the outlook, we are as confident as to have decided to leave the the outlook as it stays. We are quite positive on E&P both in Spain and in Portugal and we expect a significant impact of the price increase as we are already feeling and measuring in March. And of course, we have good expectations, very good expectations regarding the bank behavior throughout the year. I will leave the question for Gui to answer, but I will reply to the question of the bank. We have a process going on. The process is progressing very well. We are on time with that. It's running well and we will disclose relevant information as soon as we are in a position to do so. So the idea is that the process is running well and will most likely have a positive outcome.

On real estate, we continue to progress well on resuming the transaction that we envisaged last year and we continue to commit to announce or to share with you news on this until the end of the quarter and we expect to announce with the structure or a transaction within this box.

OK, perfect. Thank you.

Thank you. As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Your next question comes from the line of Arta Amouro from Caixa BI. Please go ahead. Your line is open.

Hi, good morning, everyone. Just one question. I was particularly worried between commerce with EBIT performance on mail. I see that the main explanation, and I'm now reading, due to the decline in higher value and higher margin mail volumes and the costs associated with the capacity building of the distribution network of structural growth of e-commerce. So my question is, On the first side of the explanation, I don't think that the higher value and the higher margin mill volumes will change dramatically in the next quarter. So my main question is, for how long or for how many quarters should we expect costs associated with this capacity building of the distribution network? And can we see the EBIT in-mile improve significantly in the coming quarters? And this is my question. Thank you.

Just clarifying that the capacity that we are building is on the express and parcel side of things. As I explained to Philippe, what we do, we use the installed capacity of mail to distribute parcels, but this quarter we use less, deliberately use less of that capacity to maintain our external partners alive in order to support future growth. What we expect and what we already saw in the numbers that we share with you is a bit performance of mail improving by price increase, by additional growth and parcels that should resume and our ability to continue to distribute parcels to the mail network in a higher percentage than we did. Commenting on the national mail adverse mix effect, this is mainly retail mail that is also associated with e-commerce. Last year, we saw one additional effect that was people or businesses that were mainly doing business through the brick and mortar that was closed using our retail network to send goods to their customers. And also the increase of e-commerce because part of e-commerce is actually registered mail more bulkier precious metals and such higher priced metals. This effect continues there. The other was more transitory and disappeared and will continue. It was still high in April last year, but then it normalized throughout the rest of the year. That are businesses. that resumed their brick and mortar activity and assets stopped going to our retail to send objects. What we are aiming is to go after those businesses with our offer of express and parcels in order to convince them to keep using the e-commerce channel as an additional source of revenues that we think they can do with marginal extra costs using our offering. But nevertheless, it's a process that needs to take some time to be evolved.

Just to compliment on Guy's presentation, A good part of the commercial initiative intensified that I've referred in my presentation are related exactly with this portion of the market. We are now even redesigning the way we use the retail channel as also a B2B channel, and we are seeing some initial results. So one of the reasons why we are positive there is that part of the mix will improve because we are going to grab this chunk of e-commerce related, low size, low sophistication e-commerce retailers that will improve margins.

Very well. So just to follow up, by looking at the first quarter figures in terms of EBIT and in order for you to reaffirm or to reach the previous guidance that you gave between 65 and 75 million, it's wise to say that for the next three coming quarters what we should see is a recovery in the mild and in the express and parcels EBIT. Correct? Yes, very much so. Okay. Thank you very much, both of you. Very clear.

Thank you. Your next question comes from the line of Antonio Saladas from AS Independent. Please go ahead. Your line is open.

Thank you very much. Just a follow-up question related with this external capacity employment instead of your internal capacity at miles. So can you explain how much, what is the cost of it? What was the cost of it? And what were the arguments to decide to do this instead of just employ your internal capacity? So what I'm trying to understand is if in the second quarter e-express and parcels still be weak, you continue to do the same or not? So you can clarify these issues and or share your How do you decide, how do you take these decisions?

The direct cost, it's shown on the operational review on mail, it's 1.7 million euros. The direct cost both of the decision of lower volumes, because overall volume should also be impacting this year, everything is equal. We feel, and I think it's very easy to understand, when you close an external partner network, it's very difficult to rebuild it. So if we follow that path, it will be a path where we be impairing our external capabilities in the expression process. As such, when growth resumes, as we are already seeing in the second half of April, it will be very difficult to build again the capacity to support that growth. As such, we took this management decision to keep external processes capabilities alive while in a way impacting the male profitability. What we can share with you and if that growth for any reason doesn't appear again, that is not our base case scenario. We have that lever available that is to internalize the volumes in the base network.

Okay. Okay. Thank you very much.

Thank you. As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Thank you. That does conclude today's conference call. Thank you for participating. You may now all disconnect.

Thank you everybody for coming. It was not our best quarter, but we are very positive that we're going to have a great year. Thank you very much for coming.