CTT - Correios De Portugal, S.A.

Good day and welcome to the CTT nine-month 2022 results conference call with Joao Bento, CEO, and Guy Pacheco, CFO. Today's call is being recorded. I will now hand the call over to Joao Bento, CEO. Please go ahead, sir.

Thank you, Diana. Good morning, everyone. Welcome to our third quarter webcast. I believe we have a set of good news today. starting with the first slide, which is slide number four, with the key takeaways from the quarter. As you've seen, we have a positive revenue trend across all business areas in this quarter, with the financial components performing better than the G61, financial services in detail, and the bank performing very well. And this positive revenue trend occurs in a challenging economic context, reason why we value that even more. And the result is that we have a third quarter recurring EBIT of just over 20 million euros, a significant year-on-year performance growth versus last year. As for the cash flow, we have also exhibited a strong operating cash flow generation in this quarter. of 40 million versus 3.5 in the equivalent quarter last year, on the back of efficient working capital management, in particular with improved collections from important clients. Moving to parcels, we have positive news for different reasons in Portugal and Spain. While in Portugal, volumes grew 5.8% in the quarter, so resuming a good start In Spain, it was the revenue per parcel, so pricing dynamics that resulted in growth while the volumes remained relatively flat. Then we had an outstanding performance in the public debt placement in the sense that with the existing context for interest rates the offer became very interesting and therefore an outstanding performance from the financial services business area. And finally for the bank, volume growth across all business segments in the bank resulting in both revenue growth and a very significant expansion on return on tangible equity that is benefiting from repratting all short-term interest rates so a business portfolio that is hedging itself very well and and providing a very good performance in the quarter moving to slide number five which is second five uh while the the the title says the most important thing solid operational financial performance in the quarter as anticipated uh revenue growth for the year is now for the quarter it was in line with with the figures for the year with an 8.1% growth in revenues and an outstanding growth in terms of the recurring EBIT, with 20.1 million euros in the quarter. As I said, this was mostly driven by the financial component, financial services and the bank. with significant growth in revenues, but mostly on recurring EBIT. The numbers talk about themselves, revenue growth across all areas, and very significant contributions in recurring EBIT in all the areas, except in Brussels. Moving to the detail in slide number six, regarding EMP Portugal, as previously referred, obtaining in the volumes, while EBITDA was penalized by operational constraints and inflation, which are pressuring operational costs, and also suffering from operational constraints regarding hiring of people for the magnetic during the summer. In any case, we've seen volume growth resuming, and the chart in the left-hand side is quite representative of the new trend, generating, therefore, a slight growth in revenues for the quarter. Moving to slide number seven, we have, as we said, a good performance of parcels in Spain for different reasons. So this federal resolution of the average revenue per item drove, in fact, significant profitability. On the left-hand side, we see a sluggish volume performance, which in itself is significant because e-commerce in Spain is declining in absolute terms. And with this revenue per item, Improvement revenue evolved very positively, 12.5%, to 31 million euros in the quarter, which then leads to an impressive evolution of EBITDA of about 300% versus the year-on-year, the similar quarter last year. Moving to mail, in slide number eight, where we see stable trends in address net volumes, which is interesting, while inbound continues under pressure, now with a decline which is lower in relative terms, but still considerable. So we can see on the right-hand side, on the address net volumes chart, declining, start stabilizing at around 4%, so slightly lower or significantly lower this decline than before, and apparently steady. But on the left-hand side, we see inbound, although at lower level than before, still declining quite significantly. As we've seen this before, this is very much associated to the fact that e-commerce parcels are no longer using the mail networks globally. Moving to slide number nine. an increased detail on the behavior of male. We have a regulated price increase affecting almost 60% of revenues, while competitive segments, that is male, where we have competition, showing volume and revenue growth. So these are both good news, since for the regulated pricing, we have now a price increase that somehow provides for a different, more positive behavior than before. And in profit competitive mode, we've been able to do growth on revenues. And then we have this already mentioned impact on inbound mail that is now starting to decline. And with this, I will pass the floor to Guy to guide us through the financial aspects of the business in the port.

Thank you, João. So starting, good morning, starting on slide 10 where we can see our financial services in detail that have a strong revenue growth driven by a very strong performance in public debt placements that grew 40.5% and a similar growth in financial services revenue. This is on the back of the increased attractiveness of our short-term product certificates default that right now have a very interest rate and assets are driving an increased demand, strong demand that we still see during this month. On retail and product services, also a small growth of 1.7%, where we continue to have the impact of the renewed commercial dynamics on that segment. On the next page, we can see the Banco numbers. Banco CTT has a revenue growth and return on tangible equity expansion driven by growth and volumes. In fact, we have the double-digit growth in every credit line, so on auto loans, 18.2%, on mortgage, 11.3%, and on credit cards under the SONAI partnership with 41.1%. Our customer resources also increasing 20.9% both on deposits and both on balance sheet, off balance sheet saving. Our return on technical equity now stands on 4.7%, clearly in line to the path to the double digit that we aim in the medium term. On slide 12, we should also, on ESG, we choose to show the breakdown of our carbon footprint to see the challenges that we have in the past to be carbon neutral in 2030. Of course, being a logistic company, our challenge is reducing the emissions that account for 72% with our own seats or subcontractors. And that's what we are doing. We are moving aggressively to green vehicles. On the next page, we see our ESG long-term commitments. So on our environmental, it's net zero by 2030. On social, having gender parity in 25 on top and mid-management and trying to have a positive impact on our local communities, dedicating 1% of our EBIT to that end, and on governments having incentives linked to EHE, at least for 50% of our top and mid-managers. In terms of highlights of 2022, we stated a few. I'm only going to focus on the five 100% electric cuts on the country. We increased 90% electrical vehicles and we just launched this partnership with EDP where we'll be building 40 solar energy communities that will enable us not only to reduce our carbon footprint, increase our own production that will stand at almost 20% of our electric bill and also providing real benefits for the local communities that can benefit on their energy bills. We also are in line with the commitment to invest 1% of VEBIT with already 0.6 million invested in social initiatives. Then moving on to the financial review and starting on slide 15 where we have our key financial resources. What we consider a very strong quarter with growth in revenues, EBIT and cash flow. An healthy growth in revenues of 8% with all business units contributing positively. Our EBIT increasing 82.7%. And in the quarter, our net profits reached 13.8 million, growing 50% year-on-year. And our cash flow reaching 28.1 million in the third quarter. On slide 16, we can see the detailed revenue evolution. As I mentioned, a growth of 8.1% with the biggest contribution coming from expression parcels and banks. In the third quarter, expression parcels growing 7.6% in revenues and 2.6% in volumes. In Portugal, volumes recovering to growing 5.8%. and our SEP revenues grew 12%. In Spain, the volumes remained flat, although with a sequential improvement in the volume trend, with our Chinese customers improving the overall number of volumes, although our big accounts still fighting some pressure on volumes. Our price was also supporting the revenue growth with 12.5%. Mail another growing 2.4%, positively impacted by the consolidation of New Spring and growth in business solutions that contributed with 4.3 million euros of growth. Revenues on mail declining 1.7% or 1.8%, sorry, 1.7 million or 1.8%, mostly coming from inbound revenues. We continue to see stabilizing trends as well as shares with you on the back of mail pricing lever in the regulated part and ringbacks on the competitive net. Financial services also growing 29.1% with the extraordinary performance of public services as I mentioned with an increase of 40% in placement. Banco CTT continuing the strong passive growth, also growing 21.5% with expanding net interest margin and commissions on the back of the increased monetization of the bank customer base. Slide 17 shows us our OPEX that grew 3.8%, mostly driven by parcels and Banco. In expressing parcels, we increased 5.1 million or 8.7%. Especially in Portugal, fuel inflation impacting unit costs and the constraints on the base network of hiring people to face holidays during the summer prevented us to reuse the base network as much as we normally do in order to have increased efficiencies by synergies between the networks. We also have the additional investment in capacity, what were our previous trends that are still impacting OPEX. In Spain, productivity gains offsetting the inflation impacts and that sets a good performance there. Melanother declining 3.8 million, despite of having 3.9 million increase on business solutions, and that's coming from the new spring consolidation. The remainder of the business unit declining 7.8 million in OPEX, namely due to the change of our headquarters in this one. Financial services growing 0.9 million euros, basically linked with increased activity, and Banco with an increase of 4.9 million, out of which 3.1 are related with cost of risk. In the third quarter, 22, our cost of risk is moving 1.5% and increasing from the 1.1% in the third quarter last year The cost of risk remains volatile, namely on the credit cards. We have implemented measures to improve our collection process with already some benefits in the quarter, and we expect those benefits to continue to fall in the coming quarter. On slide 18, we have the evolution of our EBIT that will go 9.1 million euros with mail and financial services and bank CCT contributing positively. In the quarter, expense and cost was declining 0.6 million due to Portugal's performance with inflation and investment incapacity, and lower price per item impacting margins. In Spain, good performance on price per object coupled with higher efficiency driving margin improvement, and in Melanada, improving 6.4 million due to the cost reductions, especially the impact on the exchange of quarters, of headquarters in Lisbon. Financial services growing 2.6 million on the back of that extraordinary performance on placement, and bankruptcy growing 0.7 million due to strong growth in banking product, although still impacted by higher cost of risk in the third quarter. In page 19, we can see our cash flow evolution. We are in a very good quarter in cash flow. Our operating cash flow reaching in the nine months is 59 million, with working capital management improving during this last quarter. Our capex is standing now at 19.9 million, growing 1.5 million euros versus last year. And the free cash flow in the nine months is reaching 31.9 million euros. Our net debt now stands at 63.2 million euros. And with that, I'll hand you over to Juan for his final remarks. Thank you, Guy.

Well, in page 20, we resume what our final remarks regarding guidance. The economic context remains not only volatile, but very challenging, particularly for CDB in demand and inflation being very significant. It was already cited by us and all our industry players. Nonetheless, the quarter and the cumulative results in the first nine months confirmed the anticipated recovery trend that we have announced and predicted during the capital market today. that are anchored on the measures that we have announced and are implementing. And therefore, we remain committed to continue to undertake all the necessary initiatives to deliver on the guidance that have been identified and that have been negotiated. But it depends, the outcome depends very strongly on economic conditions in Iberia that are not evolving in the best sense. And with this, we would be open for Thank you.

Thank you. Ladies and gentlemen, if you would like to ask a question, please press star 1 on your telephone keypad. We will take the first question from Marco Limite with Barclays. Marco, the floor is yours.

Sorry, I had mute on. So thanks for taking my question. My first question is on the exit rates and October rates for parcel volume growth, both in Portugal and Spain. Given that you have mentioned macro somehow softening, have you seen, yeah, what can you tell us about October's create for parcels growth. Second question is about your medium term EBIT guidance of 100 to 120 million by 2025. So just wondering if who were the kind of macro conditions or the macro drivers you were backing in that guidance and if that macro conditions have kind of deteriorated compared to your assumptions. And a third question is slightly more technical. When I look at the mail P&L for Q3 results, clearly EBITDA was strong thanks to some cost savings you achieved from your headquarters cost savings, but I also see a special item below the EBIT line So I was just wondering if we should read that as a one-off cost in order to achieve those cost savings, which are structural. Thank you.

Thank you, Marco. I was also muted. So, concerning the first question, growth in Portugal and Spain in parcels in October, we are observing a similar trend as we are, so I will provide any additional cover on that. As for the mid-term EBIT guidance and the macro, it is obvious that, well, they have been worsening, but let me recall that we had an interval, so you should probably start looking, using that interval in an environment where the micro-guidance have been, are not evolving in the better direction. As for the cost setting, I will pass the floor to you.

Yes, on the cost saving, on the third quarter, we book a saving related with the movement of moving our headquarters to a different and smaller place. That has a cash saving. Part of that booking is a cash saving that we'll have this year that will recur next year fully cashed during not in so concentrated but linear distributed through the year with an equivalent amount. And on the specific items you are right, it's the extraordinary expenses that we have to move between air quotas that will not recur and as such we book that as a specific item. Thank you.

And we will take the next question from Filipe Leite with CaixaBank.

Hi, hello everyone. Good morning. I have three questions, if I may. The first one is actually a clarification regarding the potential agreement at Banco CTT and the expected financial product distribution agreement. Just to clarify, if it will include or not the public debt during being sold by CTT, I mean, you will continue to sell sub-6,000, so in the fall, despite this agreement or not. Second question, regarding ENP in Portugal, and the reason why, if you can explain to us the reason why EBITDA dropped so significantly in this quarter, despite top-line increase, and what should we expect for this quarter, fourth quarter, and next year, in terms of EBITDA margin? for this Portuguese E&P operations. And last one, considering your stable balance sheet position and the completion of share buyback, if you are considering further share buybacks for this year or for the next one. Thank you.

Thank you. Well, concerning the potential agreement with the bank, we have made an announcement tonight. We don't intend to detail anything else prior to the final communication. But regarding the specific question you have, I can be absolutely clear on that. The placement of public debt is something that will remain within the CPP network and was not and will not be a matter for CPP. And this is an important fundamental pillar, I'd say, with our partnership with NGCP. So regardless of what's going to happen soon about this agreement that is mentioned, it has no relation with the public debt. On debt declining in EDP, there are at least three fundamental aspects we can mobilize. One is that inflation is very strong on the cost side, in particular for landholds, because not only of wages, but also of petrol costs. Then we've been investing in capacity. And we have now, in fact, suffering a little bit for that. We need to improve volumes to be able to regain part of those margins. And there is a very specific thing that happened throughout the summer, which Guy already alluded and myself, that is we have a strong need for holiday replacements during the summer. regardless of the management we do, try to spread holidays in the distribution network across the year. But there's always a significant concentration during the summer. And in this particular year, with basically full employment, it was very difficult for us to replace. At some stage during August and September, we had close to 200 positions to fulfill. And with that, we could not use as much as we would prefer and predicted.

uh the the device network to distribute parcels and which is a very it has a very significant impact on costs and therefore as they relate to the margin um and with this i will pass the floor to you again yeah just just complementing uh so all we have those effects that we still have also some pressure on average revenue for item uh that is pressuring margins Going forward, we have a number of initiatives to correct things, and we see EBIT margins in Portugal resuming levels close to high single digits. On Share by VEX, that was your last question. We remain vigilant. We have a strong balance sheet. to see our opportunities, mainly between having additional shareholder remuneration and building on strengthening our competitive positioning. As we mentioned on our capital market day, we continue to invest on reinforcing our competitive stance in Iberia, if there is opportunities that we can fill or pursue in order to reinforce mainly on express and passive or competitive positioning, but we remain vigilant vis-a-vis what is the share price. Maybe we can announce another share buyback in the near future, but no commitment at this stage.

A reminder to ask a question, press star one. We will take the next question from Arthur Amaro with Caixa Bank Investments.

Hi, good morning, everyone. Just one question. If you can give a little color, some detail to explain the better operational performance of the metal business in this quarter. So there's a 70% increase in terms of EBTDA in this business, if you can give some explanation on this matter, please.

Thank you. Thank you, Artur. So there are basically three fundamental reasons. The first, please remind that the third quarter last year was the first quarter we had the full impact on inbound mail declines that was heavier than we expected. And since then, we have been redimensioning our network to accommodate the new reality. And at the same time, this year we have better performance in terms of volumes that are stabilizing and price lever there to help us on the revenue side. On this quarter, we started to see the effects of the measures of cost-cutting that we announced during the second quarter flowing through the P&L. The most emblematic of those is the change of our headquarters that contributed with 3.4 million on the quarter. is the comparison with last year, because last year we were still very depressed by the new effect of inbound and no time to react to that new reality. It's stronger performance on revenue and the cost savings that we are implementing.

Okay. Thank you very much, Guy.

And once again, to ask a question, press star one. We'll now take the next question from Antonio Saladas with AS Research.

Hello, good morning. Thank you for taking my question. They are both related with the bank. The first one is related with the cost of risk. You already mentioned that it's related with the problem with the collection at credit card portfolio. I don't know if it can provide more color because it was 1.1 or 1% one year ago, 1.3 at the end of the second half and now 1.5. Is there any idea what will be the top of the level or is 1.5 a figure that you believe is sustainable in the medium term? And the second question is related with net interest margins. that according to your slide was flat year-on-year, year-to-date. Which is interesting because interest rates have been increasing and so banks are benefiting. So I was expecting a slight improvement at net interest margin. So I don't know if you can explain why it's not improving the net interest margin. Thank you very much.

Thank you, Antonio. I'll be starting with your last question. You are right, but please take into consideration two things. First, that it will take time for the repricing, namely on our mortgage credit, to kick in fully, and it will be, as it is the arrival of 12 months, the repricing will still take time to kick in. Nevertheless, the underlying net interest margin is increasing, but we have the dilutive effects to account on this quarter of the securitization we did in June. As you know, the securitization has some dilutive effects on net interest margin. But the underlying is increasing. take time to show, especially because of the securitization as repricing of the mortgage credit kicks in. On cost of risk, it's something that we already mentioned last quarter. We have an increased cost of risk, namely on the credit cards, versus the discrete Last quarter we had a special improvement, was 1.7, now it's 1.5. We see those measures continue to, that we are implementing to improve. And we see between, during next year, a cost of risk between around 1.3, 1.4, it's where we see cost of risk moving. So decreasing from the current levels as the corrective measures that we are putting on the collection processes take full benefit.

Can I ask you if it's related with the new portfolio or is the portfolio that you built or are both portfolios?

it's it's the it's within the universal partnership uh it's so it's it's it's in because it's one collection it's on all of course the the new the new credit cards are more excellent okay okay thank you very much

And there are no further questions, so I will turn the call back to the speakers for closing remarks.

Okay. Once again, thank you all for coming. I believe we've shown a very good quarter. We remain attentive with the concerning and declining economic outlook. And as I've said before, we are going to do all it takes to try to execute all the measures we have to fulfill the guidance. Thank you for coming and good morning.

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