CTT - Correios De Portugal, S.A.

Welcome to CTT First Half 2022 Results Call and thank you for standing by. At this time, all participants are in listen-only mode. After the presentation, we will conduct the question and answer session. To ask a question, you may press star followed by the number 1. This call has been recorded. If you have any objections, you may disconnect at this point. Now, I introduce your speakers for today, Mr. Joao Bento, our CEO, and Mr. Guy Pacheco, our CFO. You may begin.

Thank you. Good morning, everyone.

Welcome to our second quarter results presentation, starting with slide number four, which is, in fact, the first slide, with the key takeaways from the quarter. We have reached a bit exactly within the guidance that we provide in the middle of the guide, 12 million euros for the quarter, as announced in the capital market today. This is a combination of several factors, starting with the behavior of parcels in Portugal. We returned to growth in volumes, although lower average revenue per item penalized revenue growth. Reversely, in Spain, we had growth in revenue driven by improving pricing, which more than compensates a slight volume slowdown driven by market dynamics in e-commerce in Spain. But this is also a consequence of a change in commercial model with higher focus on smaller B2C, higher margin clients. On Mayo, the price lever is enhancing sustainability since we are benefiting from a historically low volume decline of around 2.5%. that is partly compensating for the continued decrease in the remaining inbound mail. Moving to the bank, while the solids of the expanding balance sheet positions the bank for further revenue growth, and offers interest rate leverage as we go forward. And we finally reaffirm our 2030 net zero ambition that they have announced at the Cabela Market today as the main takeaway regarding ESG concerns. If we move to slide five, As we can see, there's a significant sequential improvement in the recurrent EBIT with the second quarter much closer to last year's performance than the first one, which is a combination, as we've seen, of the given behaviors, all of them positive in Brussels mail, financial services, and the bank. And with this, we could move to slide number six with additional detail on the behavior of parcels in Portugal. In fact, the main guideline is that there's an upturn in volumes. We have, in terms of volume behavior, with a small decline versus last year, but already clearly above the pandemic, levels, which is even more obvious when you look at the EBITDA, where we have already a growth versus the report of last year. Moving to slide number seven. As I've said, the federal revolution of pricing drives profitability with just below 10% decline in volume that has been superseded by the price level. Even with almost 10% decline, revenues grew regarding the same part of last year. And this is even more visible at the EBITDA level, with a significant improvement versus the quarter in 2021, and an impressive behavior if we compare to the second quarter of 2020. So all in all, for different reasons, a good quarter for parcels in Spain. Moving to slide number eight, the first about mail. As I've said, there is a significantly low decline in May. If we exclude inbound, we have address mail volumes falling 2.5% in the quarter. If we consider the full address mail volumes, 4.1%. And we also see on the left bottom part of the slide, that the inbound declining is starting to flatten with the 3.7 million items for the quarter. Moving to slide number nine, which is a very interesting slide, we tried to provide an overview of how mail is behaving. So the first take is that the minimum is eroding significantly. We hope for the final, for the last quarter, because it is annualized in this year, as you know. The minimum started exactly in the third quarter last year, with an impact of 9 million euros in the quarter. But then we have a competitive model, which out of very relevant windbacks, in some relevant clients. We have observed a very small decline also with a very small price increase because of competitive matters. But then on regulated mail, we are on top of this low decline. In fact, 3.8% year-on-year. we have been able to benefit from a 6.3% price increase. So all in all, the minimum wage was the major impact, and that one is gone from now on. Competitive mail has been able to sustain volumes and decline and while by sharing the competitive proposals and some win-backs and regulated mail is and will remain contributing positively and actually growing revenues in email. And this is even more so with the new formula and with that I would invite you to move to slide number 10. the new formula that results from the positive outcome of our negotiations with Anacom and the General Consumer Directorate. As we have communicated yesterday, we have signed yesterday the agreement. The formula is well known. It provides strong visibility for the 2023-2025 period in terms of pricing. It provides for a significant hedge of the most relevant risks and problems that we have in the past because volume decline is going to be measured on a real basis, the same with inflation, and we also account for a way of resolving in a smooth way eventually significant, extraordinary conditions with this K-factor. So all we know, the next reform is very much in line with what we have proposed, and therefore this is one of the positive news for the quarter. And with this, I would pass the floor to Guy to guide us through the remainder of the business areas. Good morning. I'll start on page 11 where we can see our financial service and retail with a very positive performance of retail compensating the slowdown that we witnessed on product placement. In fact, retail products and services doing 10.4% in the quarter as financial services represents a small decline of 0.8% with the other products like many others compensating the evolution of public debt placements that declined 13.8%. The interest rate increase has been putting out of market or less attracting our long maturity products. But conversely, we have seen with the arrivals rising, The short-term products increase in competitiveness, and that gives us comfort. We are seeing already in July a positive performance for that because our short-term products right now are a rival three-month plus one percentage point, and that is pretty competitive on a three-month product right now in Portugal, mainly with Portuguese-based and the public Portuguese government risk. On second, on Banco CTT on slide 12, we see the continuation of a very solid volume growth performance and consequential growth in revenues, with auto loans increasing 18.5%. The book, the credit card, 74.7%, mortgage, 11.6%, so strong double-digit growth across all the main credit products. Customer resources also growing significantly, 36.2%, and I would like to highlight that off-balance sheet savings grew 53%, and that is key for the commission side and the increase of monetization of our customer base. Our return on tangible equity also improved significantly. These are annualized numbers that now stand at 4.6% in the past to achieve the double-digit numbers that we shared on the capital market site. Next page, we can see the progress we are doing on the achieved fronts. In the capital markets, we renewed our mission and we set the target of 2030 for net zero at all levels. We continue to increase the fully green delivery centers. We opened an additional four. and we are increasing the number of kilometers our green fleet is covering. We more than doubled on the first half, and our alternative vehicles now account for 12.5% of the fleet. We continue to have these initiatives composite carbon footprint with 6,000 trees planted on the first half, and our eco-usable package was distinguished in the Sustainability National Award with an honorable mention. On the social front, we continue to have fundraising campaigns to support Ukrainian people, and we obtained the certification for responsible family entity, done in partnership with APSERJ and certified by APSERJ. Now moving to the financial review on page 15, we can see our key financial indicators where we can see a second quarter that was still challenging but with stabilizing trends and in line with the expectations that we disclosed in the capital markets there. CTT 2% revenue growth on the back of long-term CTT and financial service performance. We achieved a flat EBITDA in one year. And now we're still decreasing 12.2%, reflecting many investments made in capacity and information in the expression process. Our net profit in the quarter going 77.2%, and our cash flow was negative in 2.4 million euros, affected by working capital performance, and we'll get to that detail in a couple of slides here. On the next page, we see the detail evolution of our revenues. As mentioned, revenue is growing 2%. In the second quarter, expectant passes declining 1.1 million, resulting in a 5.2% decline in volumes. In Portugal, volumes recovered throughout the quarter, ending up growing 1.9%. in the second quarter, but lower unit price pressures and revenues that decreased 2.1% in September. In Spain, volume declined 9.9%, with lower consumption and supply chain issues with China, but the higher price capacity was supporting our revenue growth, and that grew 1.2%. Melanesa declined 0.8 million, 0.8%, positively impacted by the consolidation of New Spring and growth in business solutions. That contributed positively to 6 million euros. And revenues for mail still declined to 6.8 million, out of which 5.5 million euros are coming from the diminishing impact in round mail. Financial services growing 6.6%, maintaining a good performance in retail sales, 10.4%. Financial services declining 0.8, with increasing interest rates rendering longer maturity public debt probably less competitive. Banked CCT growing 22% as we continue to expand our net interest margin, driven by credit cards and auto loans, and commissions continue to increase with the monetization of the bank's customer base, namely the 53% growth on off-balance sheet savings, and we continue to have additional fees in our account and debit cards that are also topping the Commission's funds. On page 17, we can see our OPEX that moved 3% in the quarter, driven by business solutions and then CPP. In the expression process, we have a decline of 0.5 million euros, or 0.9%, a result of the reduction in volumes and corresponding barrel of costs. But that's the world partially offset by increasing D&I resulting in the investments in capacity, efficiency, and automation in our area. Melanoia, they're growing 2.3 million, with 6.3 million coming from business solutions. That is essentially... the consolidation of New Spring, that includes the PPA amortization that we calculated in the quarter, that has one-off effect of about 4 million. Mail-on-a-loan declining 4 million euros, essentially on stock costs. Financial services pretty much flat, and back to CDT with an increase of 3.3 million euros. 3.6 million euros coming from cost of risk. In the second quarter, our cost of risk stood in 1.7%, increasing from 1.2% in the second quarter last year. This increase was mainly driven by impairment model calibration in this quarter, and we are now actively managing our credit risk, including improving our collection process to try to contract this below-average quota. In slide 19, we can see the evolution of the recurring rate. That's the decline, 1.6 million euros, essentially due to the higher DNA from investment in capacity and automation. Despite the revenue decline, The revenue declined in expression process. Our EBIT grew with higher margins. but those investments are still impacting the expression cost of funds. Melanether significantly hit by 5.8 million euros declining in balance following the new VAT regulations that started in July, and we now implement a margin that pushes our margin down. Financial services, 0.9 million euros, good to margin improvement in financial services and positive retail configuration. And bank will be growing 1.2 million euros after some growth in banking products, although impacted by the higher cost of risk. In page 20, we can see our cash flow evolution. In the first half of CPT, sorry, page 19, we can see a first half of CPT operating cash flows to be in 19 million euros. penalized by working capital resolution. We are pending receivables from Portuguese Tech, from Nobel. One subsidy that we do for the flights from the Portuguese islands to the mainland. We have some technical issues with the court of accounts that are already being partially resolved in July, and a temporary increase in collection period from big clients that negatively impacted our in-capital, but we are seeing this transitory effect. €1,000,000, so it's last year. and a free cash flow of 6.3 million euros. Our net debt now is 97.2 million euros, reflecting the dividend payments and the share buyback, plus the low cash flow generation that we have on the floor. And now I'll give you back to John. Thank you, Guy. Well, on page 20, we have news about the share buyback. On the capital market today, we have stated the clear dividend policy, but also announced that we would be active on opportunistic acquisition of own shares. And given that we would not exhaust the current program, in fact, we would exhaust the current program, below the $18 million that we have announced because of the lower price, we thought that we could extend that to the $18 million. But looking at the opportunity of a very low valuation, as we see, it was decided by the Board to extend by 20%, given that the program is then exactly the same time frame. program that has been announced yesterday is to extend to another 20% or 3.6 million euros, and the opportunity stems from the low price. And this is the rationale for what has been announced yesterday. Moving to slide 21, our last slide in the presentation. The obvious main statement is that we remain committed to achieving 60 million euros recurring EBITDA guidance. That was restated in the couple of markets today. This is on top of what should be a very positive second half, much better than last year. And the reason why we remain confident is because we believe we have the right operational levers, as you can see on the right-hand side of page 21. This means that we'll have a contribution from the price increase in May that will not be as eroded as in the past because the minimum impact should be over. So that is the significance we hope and we expect from that significant division. Then there will be improving growth in parcels because Portugal and Spain, as we are already observing in July, with the continued growth in the bank, also favored by the impacts of higher interest rates. And the final component, very important, high efficiency of operations against increasing volumes and optimization in the corporate centers. Regarding costs, from which we hope we expect a significant contribution, we are completing 5 million cost savings in the second half. as a result of several initiatives, most with facilities optimization, proper left policy, and revision of software licensing. And with these three main contributions, narrowing the impact of price, improving activity in process and in the bank, and significant efficiency and cost savings, we expect to be able to reach 65 million euros by the end of this year. And with this, we would be open for Q&A. Thank you.