CTT - Correios De Portugal, S.A.

Welcome to the CTT Full Year 2022 Results Conference. My name is George. I'll be your coordinator for today's event. Please note, this conference is being recorded and for the duration of the call, your lines will be in listen-only mode. However, you will have the opportunity to ask questions at the end of the call. This can be done by pressing star 1 on your telephone keypad to register your question. If you require any assistance at any point, please press star 0 or you will be connected to an operator. I'd like to hand the call over to your hosts, Mr. Joao Bento, CEO, and Mr. Guy Pacheco, CFO, to begin today's conference. Please go ahead, gentlemen.

Good morning, everyone. Welcome to our 2022 final year results presentation. I would invite you to follow me through the presentation. So if we start on slide number four, Our main highlight for the year is, of course, that we've been able to meet the guidance in a quite challenging macro environment. Looking at the top bottom left corner, starting with parcels in Portugal, we've observed a steady recovery of volumes along the year, starting from a decline of 7% in the first quarter to an improvement of 12% in the fourth, a steady monotonic improvement. While in Spain, the levers were slightly different because volumes were lower. In fact, the whole of the Spanish e-commerce market became depressed last year. But our focus on revenue price and growth and scale drove profitability. On mail, we still felt the impact of the minimum cancellation and the elections of the previous year, but apart from those effects, there was a mild traffic decline, which is also a consequence of a very solid commercial performance and a significant retain of large clients. And we've observed a positive contribution from business solutions to this mail-in business area. Moving to our retail network and mostly on public debt, we have observed record levels of demand of debt certificates. We've been able to beat records in October, November, and December consecutively. and so significant revenue growth on financial services and retail, given the favorable interest rate environment that, as you are aware of, persists. We are also repositioning the retail network towards a service network to drive future growth, as announced during the capital market today, with a slight impact on the product numbers, as you're going to see later on. Finally, moving to the bank, it has delivered growth, interesting growth, both on volume and profitability, remaining with a prudent balance sheet leveraged by the new interest rate environment, which provides an interesting outlook. This was a very important deal for the bank, given the deal that we've struck with Generali, and therefore bank assurance is the new growth avenue that should grab relevance starting this year. On financials, on the right side of the slide, so the main highlight is the fact that revenues grew 7%, 6.9% more exactly, year on year, with the positive revenue trend across all business areas in the quarter, especially in financial services and the bank. And with that, again, we've been able to meet the guidance with the recurring EBIT of 64.5 or 65, representing a 7.4 growth year-on-year. A strong performance in terms of cash flow generation, amongst other things, because of improved collections. And against a backdrop of share buyback and dividends paid, we have consolidated net debt and with the equity accounted, the numbers stay at 29.8 million and 192.6 respectively. Finally, given the fact that we have this new interest rate environment, the reduction in net employee benefits reduced significantly. 54 million euros to roughly 150 million euros. So with this, I invite you to move to slide number five, which provides us a bit more of detail on the quarter financials and the ERMs. And again, so with a positive contribution from the financial area of the business portfolio, outpacing and more than offsetting the slight decrease in the logistics part of it. A significant improvement on the recurring EBIT in the quarter, 26.3%. And this is the composition of business profile and figures that enable us to reach these numbers of 906 million, 0.6 million of revenue and 64.5 million recurring EBIT that I've already stated. Moving to slide number six and getting into the details of the business areas, starting with Parcels and Portugal. Again, as I said, a steady recovery in volumes and revenues, but profitability pressured by inflation, mainly labor, fuel inflation, and also investment in capacity that we've done before and now starts to be present in our cost structure. If we look at the chart in the left, it is a very interesting graphic depiction of the steady growth in volumes that I mentioned earlier in the call from minus 7.2 to plus 11.6. and volume growth remains, and the inflation effects, once we are able to pass most of them to the customers, will also improve significantly our profitability profile. Again, on slide number seven, as stated before, in Spain things were a bit different in the sense that the market context has placed significant pressure on volumes, But we've been able to grow average revenue per item and also improve further efficiency on the cost side and this real profitability in a way where we've been able to offset the decline of around 11% in volumes to a flat-ish revenue performance in the quarter. And looking at the right-hand side, and because we've stated from the beginning of this management team addressing Spain that EBITDA was the metric in which we were trying to monitor improvement, we observed a very significant profitable improvement in terms of EBITDA of almost 30% in the year. Moving to mail on slide number eight. Again, a bit more detail on top of what I've said before, a stronger average revenue per item, especially on back of premium mail, but well-adjusted mail revenues. And also a significant fact that we would like to highlight, which is a softer volume, but also a mild decline. And looking at the right-hand side chart, without last year's election effect, we observed a very mild decline of 3.5 on May, which is a decline rate that we didn't observe for quite some time. This is also visible on slide number nine, which shows that, again, elections apart, the decline was interesting. both in volumes and in revenues. On the bottom part of the slide, there is a call about the inbound mail and the de minimis impact. It's now starting to flatten, but it was in absolute terms still relevant. We believe that this is in fact probably the last time it happened. since it's now starting to improve, and we observed that even in the beginning of this year. So, all in all, a low decline, especially without elections, both on volume and on revenue, that is explicitly shown on the right-hand side of the chart. And I will now invite Guy to guide us through the financial part of the portfolio. And I'll be with you later in the call.

Thank you, Joao. And good morning to you all. Starting on slide 10 with some highlights on the financial service and retail, where we are focusing in transforming CTT retail network in a powerhouse of services to the citizen. We have been developing the distribution of public debt in this new interest rate environment. We've been able, as announced, to renew the distribution agreement with the IGCP, where the key commercial conditions were maintained. And the novelty is that this new contract includes the ability to distribute depth to the online channels that we think is key to ensure the future of this business line. Despite the dramatic increase in demand, we were able to keep the market share of distribution vis-à-vis the direct channel that the IGCP still maintains, so good progress on that front. On the right side of the chart, you can see the citizen services that are mainly around the new distribution agreement with Generali where we'll be distributing non-life insurance products to the CTT side of things. This distribution already started the pilot in March and we expect when the rollout until the end of the second quarter. The bank distribution is still pending regulatory approvals and that will follow suit after those. We will be maintaining the existing services to the citizen and we continue to evaluate new distribution agreements for other services to leverage our retail capabilities. On the next slide, we can see this fantastic performance of public debt. Treasure certificates remain very competitive vis-à-vis other saving alternatives, and we placed almost 4.3 billion in the quarter, a very similar number with last year. That shows how strong were the placements on the fourth quarter. Retail products and services declining, both by the factor of increased demand of financial services, but also because we are discontinuing some retail activities to focus on services providing. On page 12, we can see a bunch of CCT strong performance. Our credit group is now around 1.8 billion. with strong progress in all lines. Auto loans grew 17.2%, mortgage 10%, and the credit cards 21.1%. The customer resources, even despite this competition from the state, still growing 12.1%. And our return on tangible equity with a solid progress. clearly in line to meet our target and close this year with 5.5% return on tangible equity. On slide 13, we highlight these two key events that happened related with the bank. The first is the end of the agreement with Universo. The partnership will be closing in the end of this year. The net exposure of the bank will gradually decrease during 2023 and the book will end in the end of the year. We put some key indicators to let the financial community read around the effects of this. And the second is the partnership signed with Generali that will bring 25 million of additional capital in exchange of 8.71% stake. And this capital corresponds to 210 basis points in our set one ratio. Banco CTP will gain after these two events strategic options in the management of its portfolio by releasing liquidity and capital that will strengthen its balance sheets and profitable growth. In ESG slide 14, we can see a solid progress, especially on the environment front where we doubled our green fleet and clearly in line with the target of reaching 50% in 2025. We also almost doubled the reusable packaging. In gender parity, already with a strong starting point, we will be converging to the 45% of top and mid-management gender parity on social. we already met the target of contribution to social impact initiatives. Now, moving on to the financial review section, starting on phase 16, where we can see our key financial indicators, where we see a strong fourth quarter with growth in revenues, recurring EBIT and cash flow, Also, a similar pattern in the full year. In the quarter, we grew 33.8% in revenues with the exception of mail, although other business units contributing positively. Our recurring EBIT increasing 26.3% in the quarter. And in the full year, our net profit reaching 36.4 million. with a small decline of 5.2%, and our cash flow reached 67.4 million, growing 48% in the full year. On slide 17, we can see the detailed revenue revolution, with revenues growing, as I already mentioned, with the biggest contribution coming from Banco CPP and financial services. On the fourth quarter, express and parcels grew 2.8% or 1.9 million euros. In Portugal, volumes with a sustained recovery and growing 11.6% in the quarter and revenues growing 5.1%. In Spain, quite different performance. Volumes still declining 11.2%. which we think with the information we have this is in line with the market performance that continues to be pressured especially on e-commerce where we have the biggest exposure but the higher revenue average revenue per parcel enabling us to sustain the decline and revenues are declining slightly 0.4 percent in the quarter. Melanada declining 10.1 million euros, no performance in 2021 with impact by general elections, as Juan already mentioned, and that accounts for 5.9 million euros. If we exclude that effect, revenues would have declined 3.5% due to stronger volumes declines that were partially offset by a stronger price effect of 6.3%. Financial services also growing 59% with that extraordinary performance in placements, the 4.3 billion that I mentioned before. Bank of CPP also growing 34.3%, mainly through the net interest margin expansion. That's 2.6% in the quarter. Our OPEX in page 18. grew 1.6% driven by parcels and bank coup. In expressing parcels, we saw OPEX increasing 5.5% in the quarter. That is mainly due to the inflation impacting unit costs and investment putting pressure, investment incapacity putting pressure on margin. and this is especially an effect in Portugal. Now another decline in €8.1 million, out of which are €4.1 million of direct costs associated with the general election, that's been mentioned on revenues as well. The remainder of the €4 million resulting of lower revenues and the efficiency measures that we are putting in place and that we announced in the second quarter last year that we continue to have good progress on that front. Financial services growing 1.3 million euros linked with increased activity. Bank of CPP increasing 6.7 million euros, 4 million of which related with cost of risk. In the fourth Q2022, our cost of risk is 2.7%. That is an increase of over the 1.1% seen in the last quarter of 2021. In slide 19, our EVT evolution, where we grew 5.4 million in the quarter with the financial services and bank security contributing positively. Express and parcels decline in 1.6 million, essentially due to the Portuguese performance. Mail and other decline in 2 million euros. If we adjust for the positive impact of the election last year, it will be almost flat. Financial service is growing 6.5% and the GDP is going 2.5 million euros due to the increase of... In slide 20, we can see our cash flow evolution. Pretty strong cash performance with 99.6 million euros of operating cash flow. The improvement in working capital management through the last part of the year helping on this front. Our capex totaled 37 million below our initial guidance, and our free cash flow reached 67.4 million, which drove our net debt position to stand now at 29.8 million euros in the end of the year. And with that, I'll pass you to Raoul again for his final remarks.

Thank you, Guy. If you join me on slide 22, we are proposing on the board as opposed to yesterday to the general meeting an increase in recurring dividends to be paid of 12.5 cents per share. It complies with dividend policy that we stated in capital market today. And let me recall those main principles. We are committed to improve shareholder innovation while maintaining financial flexibility subject to, one, keeping the ability to invest in business growth, two, to implement an attractive shareholder remuneration policy, and finally, to combine this kind of recurrent dividend-based remuneration with opportunistic shareholder remuneration based on share buyback. These 12 cents and a half do represent a payout ratio of 47.7%, therefore, within our stated policy, which is I recall between 35% and 50%, and it represents a dividend yield of 4.1%. And moving to the final page, page 23, the main message I would like to convey is that we continue to grow and to transform the company. And we did that in 2022, notwithstanding a very challenging environment. I recall that we started the year thinking that this would be, well, for the first time for this management team, a rather normal year because COVID seemed to be fading out. Actually, January was the worst COVID month for CBD in terms of infected people and people that could not come to work. And then on February, the worry rate exploded. But despite that, we continue to grow from the company. The guidance is, if you follow me on the left side of this chart, mid-single-digit decline in mail volumes. So we foresee a mild decline in mail volumes. Low to mid-single-digit growth in Portugal for parcels with improved revenue per item. So on parcels, we'll be working on pricing on cost structure and also on the commercial front to improve volumes. We want to resume double-digit volume growth in Spain. So in Spain, the motto is growth volumes. A robust growth envisage for financial services for reasons that we don't need to comment further. For back to CPT, we are expecting an improved return on tangible equity further to what happened this year. And with all this, emitting the digital revenue growth then derives into our guidance statement of recurring EBIT in final year 23 expected to grow at least 10%. CPT remains growing and that is a growing increase because 10% is more than we had last year. That can be observed on the right-hand side. a trend that, let me state, is quite unique in the sector. We have announced a growing guidance for last year. We met that guidance and we are now announcing a further growth regarding this year and last year. Well, there are also risks. We highlight the high geopolitical uncertainty and the macro risks that we believe continue to be relevant and persistent inflation, cost of energy and raw materials, and regarding uncertainty. This is a week where we have a few very exciting examples that things are not always as predictable as possible. But I'd like to close this presentation before moving to Q&A. As I said in my last slide, this has been a great year. We continue to go and transform the company in a challenging environment, and we are guiding further growth for the year. Thank you.

Thank you, Mr. Bento. Ladies and gentlemen, if you'd like to ask an audio question, please press star 1 on your telephone keypad. Please also ensure your mute function is not activated until I send through your equipment. So once again, please press star 1 for questions. Our first question is coming from Mr. Felipe Leite, colleague from CaixaBank. Please go ahead. Your line is open, sir.

Hi, good morning, everyone. I have three questions. If I may, first one at Express and Parcels, and if you can explain the different trends in terms of revenue per item that we saw in Portugal and Spain. What is so different between these two markets that could justify the different performance of Portugal, which is decreasing, and in Spain, which is increasing? I don't know if it's the competitive landscape, the mix between B2B or B2C, or if there is any other explanation for these different performance. And also, why are you targeting a volume growing Portugal below the double digit that you expect for Spain? Second question, regarding outlook and if you can provide us more granularity regarding each area and specifically what should be the recurring EBIT growth implicit in your guidance for mail and express and parcels? I mean, excluding financial services, what should be the growth of recurring EBIT implicit in your guidance? And last one, on working capital and if you can elaborate a little bit more on the reasons for so strong performance in per quarter and expectations for this year. Thank you.

Thank you, Philippe. Starting with the revenue per item difference between the two countries, you are mostly right. In Portugal, we have a lot of B2B or a much higher percentage of B2B than in Spain. Spain is almost an e-commerce dedicated company. We are seeing a trend of growth still in Portugal, much higher in e-commerce that is driving mix downwards. In Spain, although the trends are the same, we have been working in terms of gaining market share in smaller customers and moving away of these big e-commerce retailers or not depending as much on the e-commerce retailers, and that is driving the average unit revenue upwards. In terms of volume performance expected for 2023, we continue to see both countries growing, although with the macro environment that is affecting both countries, we are seeing a smaller growth performance in Portugal. Given that we don't have the market share lever and in Spain we continue to have that ability and that we think giving a more stable performance of the big e-tailer accounts, it's possible to continue to grow with a visible contribution to growth on the smaller accounts. In terms of guidance, we are expecting, we are working towards having all business units growing EBIT. Of course, inflation is still there and affecting more the logistic side of our business. in time launched a number of initiatives that we think will help us counteracting most of those effects and such we think we could grow in all business areas. Of course, that growth this year will be slightly geared more to the financial business units with financial services or the bank, but we expect to business units growing. In working capital performance, we've been doubling down our efforts to be more efficient on the collection front. We were able to collect a number of backlogs, so we think that improvement is sustainable, but it won't be in a way, it's a one-off that won't work this year, but we don't see a part of the normal seasonality of working capital that normally on first quarter is slightly more challenging. We don't see any reversal of that working capital performance.

And I think I covered all your questions. Yeah, thank you. Thank you, Mr. Joao Safara from Banco Santander.

Good morning and thank you for taking my questions. I have a few. I just wanted to start with financial services. You recently signed an exclusivity agreement for another three years. And my question here is, I mean, we also seen some comments from the EGCP saying that obviously it's not the optimal solution to have just one provider of, well, one distributor for this kind of product. So what is your take on that? I mean, obviously for the next three years, it seems that you, I mean, the agreement is done, but I would like to have a bit of your view on that, on any potential risk that could be of having competition on the placement of the financial, on the saving certificates and the public placements. And then also regarding with this is... We had a spectacular month of January in terms of subscriptions, and I understand it's very difficult to have really visibility on this, but if things continue as we've seen in January, it should be even a better year than in 2022, and Guy has just confirmed that you see growth in all the in all the EBIT lines, is there anything that, I mean, is there any specific indicator that you're seeing that corroborate this in terms of ongoing strong momentum of public placements? Obviously, other than the fact that REIBA rates are higher. And then just a last one, Related to this and to the deposits, what is your strategy in terms of the deposit remuneration for 2023? And are you seeing more competition in the market on gaining these deposits and potentially also in having a lower growth for your deposit base? And I think that's it. Thank you.

Thank you, João. So, starting with the agreement that we've signed, a couple of points here.

First... Sorry.

First, we have... Well, this is a relation that has been studied and preserved in market conditions, under market conditions. We have an exclusivity agreement in terms of the placing in the retail network. So competition there is not an issue for these three years. And we have something which is new, and we have highlighted when we communicated it to the market, which is that now, as Guy stressed, we are able to develop also placement through a digital channel. Our strategy here is that, and it's always been like that, and we are steadily progressing on that line, is that the partnership and the dependency, let's call it, I mean, the partnership between CDD and IGCP shall rely on better user experiences and on the unique positioning of retail networks. There is no other alternative retail network with this kind of capillarity and spread throughout the country. So we are very positive and cool on the fact that this is a growing partnership that is mutually interesting. Moving to the spectacular performance of public debt in January. What I'd like to say here is that I would reassure what Guy said about our guidance. We have this guidance based on an assumption that all business areas are going to grow. And of course, if the financial services performance throughout the year is well above expectations, then what you should expect and the market should expect is that the EBIT performance will be better than we have got it. That's why we have an open-ended on the right-hand side of the interval by saying that it's at least 10%. So there is, I would say, there is a positive outlook risk here. We, regarding the question or the sub-question about the trend, If something is to be projected in the future, the trend is that we've been growing month by month the ability to place. Banks have started to react with alternative products, but we see that for a long period it's going to be very difficult to match the competitiveness of judges' certificates. The trend now is not yet of stability. It has been of growth, and therefore we are quite positive on that. For the question about the remuneration of deposits and bank policy, I will hand over to Guy.

Thank you, Raoul. So on deposits, we expect, as we have already mentioned, increasing competition in the sector. The retail banking is suffering some competition from the government side and we see rates starting to increase. As we are a retail bank, we'll also gradually increase our remuneration through the year and that's embedded in our guidance. Of course, CTP continues to grow. We are focusing on new clients and attracting new money from those and from the existing customers. So we expect the market remuneration to increase. We will be acting accordingly to the market evolution.

Okay, thank you. Thank you much, Mr. Zafara. Ladies and gentlemen, once again, if you wish to ask a question or have any follow-up questions, please do press star 1 at this time. Our next question is coming from Mr. Antonio Salinas, calling from AS Independent Research. Please go ahead.

Hi, good morning. Thank you for taking my questions. I have two questions. One is related with the bank, and the second one is related with parcels in Spain. Maybe starting by parcels in Spain. So you mentioned that growth should resume in this year. And I just want to know if there's already any signals that growth is already improving. And because my sense is that the weakness in parcels in Spain last year was related with a general trend of weakness on parcels. So my question is, if there's already signals that this weakness on parcels and e-commerce that we saw last year is rewarding. And the second question is related to the bank. The bank will have a capital increase and probably at some time or maybe by the end of the year, so not very different in terms of time, will sell the portfolio of credit cards. So it will be overcapitalized or, well, it will be well capitalized. So my question is, if you would like to share with us where the bank plans to grow. Thank you very much.

Thank you, Antonio. On the weakness on parcels in Spain, as you know, we started last year with a big concentration on big customers in Spain. That was the way we structured the strategy for the time around to acquire fast volumes to give us the scale we needed and we successfully did that. Those big accounts with the macro context and e-commerce trends on Spain were heavily pressured on volumes. We see that stabilizing since the end of last year and beginning of this year. that will enable our already in place strategy to grow on smaller accounts that have been growing but that growth is being overshown by the decline on those big customers. As these big accounts start to stabilize trends, we are forecasting that the growth we are obtaining in smaller accounts to start to show and as such will be driving the growth we are giving you on the guidance. On the capital, John, I don't know.

Yes, let me just add something on Spain to what you already mentioned. In fact, our expectation is the market in Spain is not going to reverse, coming to your point. It's basically our ability to grab market share, as Guy said, especially through these lower-sized customers where there is a huge opportunity to grow. On the bank, there is short-term and medium-long-term. Obviously, in the short-term, the environment is now very favorable, and therefore the bank should take advantage of the additional liquidity. But the additional capital, as you said, not excessive, as guides the bank towards revising the mid-term business plan, and that we shall come to the market later on in the year. sooner than later with what could be the new outcome of the planning process that is now taking place. But in any case, a more favorable environment in terms of financial margins and interest rates goes well with additional liquidity and additional capital.

Exactly. Okay. Thank you very much. We should expect that by the second or third quarter you mentioned something about the bank. Yes. I understood well.

That's right. You understood well, Antonio.

Okay. Thank you. Thank you very much.

Thank you, Mr. Sardis. Ladies and gentlemen, as a final reminder, if you wish to ask any questions, please do press star 1 at this time. We'll now go to Marco Limite calling from Barclays. Please go ahead.

Hi, good morning. Thanks for taking my questions. Can you please update us on what we should expect in terms of price increases in Portugal for parcels? I understand there is a bit of a mixed shift from softer B2B and stronger B2C, but what are you expecting in terms of price increases, especially in B2C volumes? Similar question, price increases for the mail volumes, given that you are entering into a three-year kind of framework in 2023. So what is the expectation there? Third quick question, what we should expect in terms of wage increases if there are discussions going on with unions. And fourth question, what's the latest update on the real estate project? Thank you.

Thank you, Marco.

On price increasing in parts of Portugal, so there is B2C and B2B. On B2C, we have already increased prices on the 1st of March, and this is land deflation, so you know what deflation is, and that is already, it's done. Then for B2B, we have, again, different segments. For very large clients, And for mid-sized clients, we are basically trying to offset the cost of inflation. And we are segmenting that. And we've started already increasing prices. But one should expect that the compound increasing price between the smaller companies and the larger companies doesn't match inflation. Then on my price expectation, it's pretty stable from now on. As you know, we have this new tariff agreement in place. We have agreed the price increase for this year. The agreement comes strictly in line with our expectation and claim. It offsets decline of volumes and inflation with an additional demand on productivity. And so we should expect prices to increase in line with volume and inflation, or slightly below that, which is our responsibility for improving profitability. And it's basically, it covers 86%, if I'm not wrong, of decline and inflation. And therefore, we feel very relaxed and it's very easy to predict what's going to happen from now on. On the wage increase and the relation with the unions, we cannot be absolutely objective here, but I should say that the negotiations that started earlier this year are going well in the sense that the expectation is that we will be able to strike a deal within our budget assumptions. And it's always a bit unpredictable, but so far the move is positive and our expectation, again, is that it's going to be within budget or even below budget. On the real estate, well, this is a very complex project. That's why it's taking so long. And we keep working on details and tax issues and administrative issues, licensing. There's been progress on potential investors that are now looking at the final terms that have been agreed. And, well, we should keep the market informed if something relevant happens and when it happens.

Mr. Dimitris, that's your question, sir. Okay, thank you very much. Ladies and gentlemen, as we do not have any further questions at this time, I would turn the call back over to your host for any additional or closing remarks. Thank you.

Well, thank you. Thank you for your questions. Thank you for coming. Well, I'd like to close as we started. It's been a tough year. We feel we take pride of how we've managed to, well, to surface the year with a difficult beginning, first half, significant recovery, and it provides a good basis for 2023. which is reflected in the positive way in U3F's stated guidance of at least 10% and with improvement across all business areas. And therefore, well, again, thank you for coming and let's keep in touch.

Thank you. Thank you much, sir. Ladies and gentlemen, that will conclude today's conference. Thank you much for your attendance. You may now disconnect.