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.

Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star followed by the number one. Please unmute your phone and record your name clearly when prompted. Your name is required to introduce your question. And to cancel your request, you may press star followed by the number two. One moment, please, as we wait for the questions to queue up. At this time, speakers, we do have two questions in queue. Our first questioner comes from the line of Joao. Your line is now open. You may now raise your question.

I'm sorry, we are not getting any questions.

I'm sorry about that. I'll check on Joao's line. One moment. Hello? Joao, your line is now open. You may now raise your question.

Hello? Well, can you hear us? We are not hearing you.

Maybe you can move to the next speaker because this line doesn't seem to be working.

Okay, that is noted. Our next question comes from the line of Philippia. Your line is now open. You may now raise your question.

I have three questions, if I may. The first one is related with the net liability of the employee health care and pension plan benefits. As far as I can see, it dropped by more than $30 million this quarter. And my question is basically if this is related only with the discount rate used or if there are any other reasons for this drop. Second question, on quality KPIs, now that the price formula was approved, when do you expect an agreement on quality KPIs for the upcoming years? And last one, regarding your target, because looking at the historical evolution of the second half, typically third quarter represents one-third of second half EBITDA, and fourth quarter, two-thirds. Do you expect a similar breakdown this year? one-third, two-thirds, or there are any reasons that can justify a different breakdown than the historical one. Thank you.

Okay, so thank you, Philippe.

I will start with the second question, and then we'll hand over to Guy for the first and final one. Regarding quality KPIs, The matter here is not exactly in agreement, as we have in the regarding price. Just to recall, for price, what the law and the new contract establishes is that price from now on is going to be approved by government out of a proposal by CPP based on criteria that should have been agreed between the three parties, as we did yesterday. Hence, the agreement, and now with that, With those criteria approved by government, we will have our proposal for concrete prices, and then we will go forward. In quality, what happens is that ANACOM should make a proposal of new quality KPIs based on several principles, the most relevant ones being they have to be in line with the best practices in Europe, And, in fact, it refers to the average of similar countries to Portugal. And because we are so – we rank so badly in terms of the level of demand, any vague application of those principles will improve criteria. But it's not a matter of agreement. Now, Anacom should make that proposal. and then government will approve them. We hope this to happen throughout this year so that we get the new quality criteria for next year. I also recall that the consequences for the quality criteria eventually not being achieved from now on are no longer affecting price, but investment. But it will represent investment obligations for CPP. And with this, I will ask you to address the first and last question. Philippe, thank you. Starting with the pension and the healthcare liabilities, you're right, it's mainly discount rate updates. Normally, we do this exercise on a yearly basis, but because the materiality of the change on the discount rate has been so So significantly, we were forced to revise it on the quarter. The discount rate rose from 1.42% to 2.94% as the index that we follow for this has increased in the same magnitude. Going to the discussion between the split on the quarters of the second half, You're right on your analysis. This year, we are seeing a more balanced split, mainly by two factors. The first one is because last year, the third quarter was with a significant impact of the diminuities where we weren't able to react in terms of sizing of our operations during that quarter. and because we will benefit more from price increase this year, and because a significant part of the savings that we are seeing for the second half will start to flow already on the third quarter. And as such, we are seeing a more balanced split between the third and the fourth quarter.

Thank you. Our next question comes from the line of Marco. Marco, your line is now open. You may now raise your question.

Thanks. Hi, Marco Linte from Barclays. I have a couple of questions on your parcel volume growth. So, first question is on what do you expect for the full year in terms of parcel volume growth and specifically for the second half of the year if you can give us a broad indication and what gives you confidence actually on parcel volume growth recovering given that clearly you know macro is deteriorating and online spending is clearly discretionary spending so might be affected by macro deterioration and the second question is on your parcel volume growth in the second quarter Clearly in Spain you have highlighted a bit of a change in the strategy, but I was just curious if you have any indication of where do you think that both the Portuguese and the Spanish parcel market by how much has grown in Q2, especially in Portugal, if you have been growing in line with the market above or below the market. Thanks.

Thank you, Marco.

So maybe I'll start by the current trends and then I'll move to the end-of-year views. In Portugal, we have been seeing a recovering cost with the first half of April still very challenging and then improving sequentially. to a level that is already above what we saw in the post-lockdown period in Portugal. The public available data on the markets or official sources of Eurostats show the Portuguese e-commerce market slowing down between 4% and 5%. So in a way, we are above the market trend and we continue to see the same trend in July. So we are seeing a steady, robust recovery. In Spain, we have this very harsh effect from the supply chain in China. we have still a high exposure to to chinese interiors in our customers in spain and as such the beginning of the quarter in spain was was challenging that has been recovering and we we already see about with double digit growth on in spain in july we we the data that are that we have available in spain in eurostar show still still declining e-commerce and we lost yesterday there was a comment on the on the spanish press by by the last mile association saying that the market was declining 16 percent but the Eurostat numbers show such a decline, so reality should be in the middle. Nevertheless, we are seeing these recovering trends already in July, and as such, we think that the second half will still be with double-digit growth, or that we are currently seeing. I understand your macro concerns, the issue in Portugal and in Spain. There is this looming of macro, but actual numbers are still not showing, and we see potential to continue for people to shift from brick and mortar to digital.

Thank you. Our next question comes from the line of Joao. Your line is now open. You may now raise your question.

Okay. Hi. Good morning. Sorry for that. Let's see if it works now. I have a follow-up question if I understood the answer correctly on the quality indicator, the question made by Philippe. And then also I'd have a question on the... on the bank and on cost savings. So starting with the first one, just to understand in terms of what you mentioned, what is a similar country to Portugal? I mean, how this is measured? How do you think this is going to be measured? Is it volume, a male volume per capita? What kind of indicators do you think the regulator will look at? And then also on the timeline of this decision by Anacom, if there's any specific timeline there. And sorry if you already answered, but I had some issues with the call. And then the second question would be on the cost savings. I mean, if I understand that this cost savings are new, the 5 million euros in the second half, the question here is if this is basically – anticipating the cost savings you mentioned at the Capital Markets Day, or if this is incremental to those cost savings, and if you could detail a bit more of the initiative that you're anticipating or that you're doing there. And then the third question on the bank's partnership, I mean, you mentioned in the Capital Markets Day that you were – looking to do a partnership in Banco CDT. The question here is how is this process evolving? And also, and this I guess was a question I should have made in the Capital Markets Day, but I would make it now. If this agreement implies a mutual exclusivity with this partner, meaning that you would only be able to sell insurance products from your partner and not from the other companies you currently sell in your network. Thank you.

Thank you, João.

We could hear you very well and loudly now. So, for the whole work on policy, the formulation that was transported to the law and the contract is vague, which is not necessarily bad for us in what regards the countries with which we compare. It is not so positive by being vague regarding the timeline because, in fact, what is implied and we've been trying to interpret in that way is that this year of 2022 should be a transition year for every purpose because there was no time for anything related with discussing price rates for this year. We have included that as part of the negotiation of the contract. That was, in fact, in the decree law that launched the negotiation process. And for quality, the same should apply, meaning that the existing quality criteria still apply. By the way, we've been waived already from them in the first quarter because of the pandemic. And therefore, our expectation is that the new criteria will be proposed and approved by government this year to start early next year. But we have no, I would say, formal or legal confirmation for that. Regarding the similar countries, this vague thing always falls to the European Union, of course, because while we have a very thorough benchmark of similar peers, both state-owned, publicly listed, all sorts of societal arrangements, but the number and the level of quality criteria are reasonably similar, and the benchmark is very favorable, if you want. That's why I said that anything that approaches us from the average of the European Union, for example, would represent a significant improvement in the level of demand. So we are positive on that, not as much as we would be if there was a secure timeline for things to unfold. As for the cost and the bank partnership, I will hand again to Guy. Thank you, João. Good morning, João. On the cost, We shared on the capital market the amount of savings between 15 and 20 million and the phase-in. On that phase-in, we already mentioned that we would expect 5 to 6 million still this year. And when we refer to the cost savings, we are referring to the same 5 to 6 million that we are on track to achieve. For this year, the main initiatives are around facilities, mainly the most significant one will be moving out of our current headquarters and reducing the space that we occupy. And we have a number of initiatives on energy, that is both to have A price reduction vis-à-vis where we are and increasing the edge going forward. We are namely investing in solar production and in reducing the consumption of our footprint. Also, the headquarters reduction helps on that front. And we have a number of quick wins in terms of data consumption throughout our operations and retail network. And so those are pretty much in line and those are to go for the DTR savings. And the 20 million that we shared on the capital market day, it's a broader list of things. On the bank partnership, we cannot share much. more than we already are. What I can say is things are evolving as expected. And regarding exclusivity, if we enter a distribution agreement for insurance, it's expected to have exclusivity, although normally exclusivity comes up with a price. And it's what we are currently negotiating. Let's see, I think.

Perfect. Thank you very much.

Thank you, Joao. Our next question comes from the line of Antonio. Your line is now open. You may now raise your question.

Taking my questions, I have two. The first one is related to the bank. So the cost of risk increased by 30 various points, more or less, quarter to quarter. And the non-performing exposure also increased. Nevertheless, you are able to also increase your core equity to one, which is fantastic. So my question is, this increase in the cost of risk is related to one of the events. or is something that is changing on the portfolio, those portfolios that you built one year ago from Universal? Should we expect 1.3 from now on, or this figure will increase? Because, in fact, the economy is now stable, so unemployment rate is stable. There's no yet signals of slowdown or recession. uh so uh i'm a little bit worried about the increase in the cost of risk at this point in time so you can provide more color on these and taking questions related to the price increase on my for for 2023 if you could if you'd like to share with us what are your um your view or what what what is that will be uh a proxy for price increase in 2023, according to the new form, of course.

Hello? Thank you, Antonio.

Sorry. On price increase, I think the formula is pretty much straightforward. Your expectation on volume times 84% less 0.5% for efficiency and inflation expectation. It depends on your view on volume decline. The other variables are pretty much straightforward. what i can share we are not seeing a significant increase on volume declines we are seeing uh and on on the same range of volume declines that we have seen during the last two years and and that's that's our expectation for 23. regarding the cost of risk there is still a mechanical effect because we we have uh a loan book that is more skewed to the consumer side of things versus what it was last year. Although we have, in fact, a cost-risk increase on the credit card of the partnership with the university on the auto loan portfolio. That has been a consequence of the model's calibration that we've done. And we have an issue to resolve on our collection process on that front that we are actively doing and managing our credit risk profile. So we see this as a temporary issue, and you're right, it's not an economic reason because those are still not there. So we expect to, until the end of the year, to resolve this issue and get back to our historical position. cost of risk levels or the guidance that we gave in the capital market. Okay. Just a follow-up question. You're correct that you want to increase by another basis point, despite increasing provisions. So my question is, are you able to keep growing your loans portfolio or do you need to grow less to be able to continue to have a correct Q1, I guess, about 15%, 16%? We did an additional secretization in the beginning of June, and that allowed us to to have additional room to grow. We see the bank continue to have the opportunity to organically generate capital to the foreseen growth. We are comfortable with the current plan, of course, under a macro scenario that we share on the capital market today. But right now we are feeling comfortable that we have enough capital to go with the meaning and we are okay with the current capitalization of the bank.

Thank you Antonio at this time.

We don't have any questions in queue. Okay.

Thank you for coming. We remain available as always to direct the online and offline. And for those that are starting holidays, have a nice holiday. Thank you. Good morning.

And that concludes today's conference. Thank you all for your participation. You may now disconnect.