CTT - Correios De Portugal, S.A.

Hello and welcome to the CTT first quarter 2023 results. My name is Caroline. I'll be your coordinator for today's event. Please note this call is being recorded and for the duration of the call your lines will be on 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 questions. If you require assistance at any point, please press star 0 and you will be connected to an operator. I will now hand over the call to your host, Mr. Joao Bento, the CEO, and Guy Pachico, the CFO, to begin today's conference. Thank you.

Thank you, Caroline. Good morning, everyone. Welcome to our first quarter results broadcast. Today we are also including an update on our real estate portfolio optimization, as you've seen in the presentation. That was this evening yesterday. So if you follow me, starting on slide number four, The overall impression we'd like to have is that we have a very robust operational performance in Portugal and a strong cash flow, free cash flow generation in the quarter. This was a result of several factors of which I would highlight a strong growth of volumes in Portugal reaching almost 16% year on year. And although Spain had a challenging quarter, we see visible improvement in activity throughout the quarter and as you're going to see later. Then on May, it was a very interesting quarter with recovery in revenues and with revenue growth and also the cost reduction inducing an improvement, significant improvement in profitability. Likewise, for financial services, where we have an exceptional high demand of public debt certificates, driving record high revenues for the quarter. We continue to transform our retail network, as we've stated many times recently, towards a service network, which is important, also given the high rate of placement that we are observing. Results from insurance distribution with Gemini were also present in the quarter, although not yet very visible, but going forward also looking very good. Finally, the bank with the growth on all aspects, client, volumes, and revenue with a solid performance, and the improvement in profitability is clearly driven by this exact growth. And with these factors, we move into the right-hand side of the slide. We see the main financials with revenues up 3% year-on-year. If we would remove or normalize to the special effects of the first quarter last year, revenues would have grown by 15.3%, quite substantially, and recurring EBIT of the 25.7 million euros also. a very significant growth year-on-year. Also an important facet of this quarter results a strong operating cash flow generation of 44 million euros, free cash flow of reaching almost 40 million euros, and therefore a consolidated net cash position with significant improvement versus the year-end results. If we account or while accounting on equity methods, the net debt stays now at €150 million, down €42.5 million. So, very good drivers in the quarter and very good finances as a result. Moving to slide number five and going into a bit more of detail. So, we see this robust performance across all segments. why we need to improve EMP in Spain. We've seen the numbers, both on revenues and recurring EBIT, so I would invite you to follow the bridge on the right-hand side, top right-hand side, where we see that apart from a slightly negative contribution in terms of growth of EMP, which is explained only by the Spanish performance, we have many others, financial services and results, and the banks, all with positive contributions In this bridge, that took us from 6.7 to 25.7 million years of recurring EBIT in the quarter. One of the most relevant news being the performance in mail. Moving to slide number six, we see a continuous recovery in volumes, revenues, and profitability. So we have this chart on the left-hand side exhibiting a monotonic growth in volumes. And again, an interesting step forward in the quarter. This translates to revenue growth of 9.3% and likewise for the margins with improvements in EBITDA and EBIT margins as shown in the right-hand side of the quarter. So a very, very promising quarter for mail. Moving to slide number seven. we see volume performance, inflation, and capacity expansion as the combination of factors that affected the performance in Spain. So volume still below target, although, as you can see in that detail in the left-hand side chart, we are seeing an interesting trend throughout the quarter, with February performing better than January and March with the positive growth of already 10%, which gives us confidence that things in Spain are improving in the right direction. With this volume performance, revenues stood, well, flattish with a minor growth, and it's basically inflation and the capacity expansion that provides now a higher operational leverage potential. in the sense that we have more capacity than the volume that we have throughout the quarter. That affects margin, and therefore we saw reduction in EBITDA and EBIT in the quarter. Moving to slide number eight, we've seen improving traffic and revenue dynamics leading to this growth in mail that I've referred to. We are observing a what I would call a low decline, 4.4% if adjusted for the elections impact of last year, or 5.2%, so low. And combined with an average return revenue per item, we see as a factor or a consequence of the new pricing power that the new concession contract provides, we see a very distinct 10.3% revenue per item growth. which provides for this improvement in mail revenues, which would be 1.4% or it was in fact 1.4% if not considering the special effects of last year, but a very significant growth without the elections impact. That, by the way, doesn't seem to repeat this year. So that would represent a 5.4% growth in revenues year on year. This is more visible or visible with more detail if we go to slide number nine where we see the balanced revenue growth across regulated and competitive mail segments. Indeed, we see for the first time for a long time regulated mail growing revenues from 56 to 57 million euros. Competitive mail also with a small 2.3% year-on-year growth. And more than that we see maybe for the first time for a long time a contribution of international inbound roughly neutral in the sense that we came from five million euros of revenues to five million euros of revenues in the quarter. And it was in fact only the fact that we have a decline on business solutions revenues that accounted for the difference. But even so, If you look at the call we have at the left-hand side, laptop sales, that we call box-moving things with smaller margins, last year accounted for more than €1.31 million. So if you remove that effect, even on business solutions, like for like growth, growth was significant, more specifically 6.5% year-on-year. So moving on. To slide number 10, we are highlighting a focus on transforming CTDs with their network in a services platform, on a platform of services to the CTDs. And this is important in the sense that we are focusing our portfolio of services. We are, of course, the service provider for the bank in terms of a physical network. But we, given the new partnership with the Generali, the transformation of the reserve medical services platform becomes even more relevant. And we are now providing a portfolio of financial services that goes from credits, of course, in the bank, savings in the bank, savings in TDD, non-life insurance, money transfers, payments, and all that in fact provides a portfolio of financial services that starts to be relevant. But for that to be possible, we need to keep improving our, what we call, store experience or user experience at the store in the sense that we need to improve efficiency in the usage of the space and the time in the store. And we are doing that by building customer journeys that are omnichannel. That includes self-service so that people can start their journeys online on their mobile or in a self-service mode while in the store or outside of the store. And for that we are also redesigning a number of processes. So a more efficient return network and a better user experience enables and provides for a higher business activity. And that is exactly what we have observed given the public debt performance that in detail we could see better if you follow me on slide number 11. In fact, it grows revenue performance and offers a very solid outlook. This is in fact one of the most, not to say the most significant factors of this quarter. We almost doubled a very strong last quarter of last year where we had placed 4.3 billion years and we moved to 7.5. and accordingly so for revenues. On the other hand, we have also declined 17.1% other retail stuff in the sense that we keep pursuing the repositioning of the network, as I said, towards services. And as such, we need to discontinue and we are discontinuing certain retail products That includes, for example, scratch cards. So a very good performance of the return network, of course, with a significant contribution from financial services. And now I will hand over to Gui for him to guide us through the bank performance and the financials.

Thank you, João. Good morning. So on slide 12, we can see Banco CDB drivers. Banco continues its path of growth, with auto loans growing 16.7%, the mortgage 9.2%, and we continue this good performance of opening new accounts, and that grew 6.3%. Our customer resources with a slight stabilization trend, now with a growth year-on-year of 5.7%, but I should say in line with Portuguese banking sector. On the next slide, we can see the top line and return on tangible equity of the bank. On the middle, we have the revenues at 21.4%. mainly driven by the net interest income, both by factor of volumes and higher yields. The net interest margin now stands at 2.9% on the bank. The revenue performance and higher efficiency drove our return on tangible equity upwards. That now stands on an annualized basis of 6.7%. On slide 15, we start our financial review with the key financial indicators where we can see what we consider a set of strong financials with a reverse performance in revenues that was 3%. With the exception of the middle business unit, we saw all units contributing positively to growth. Our recurring EBIT almost quadrupled in the quarter to 25.7 million euros. Our net income reached 16.1 million and our free cash flow generations to the 39.7 million euros. On slide 16, we have the group revenue evolutions that grew the 3% that we mentioned. In parcels, a positive contribution of 3.3 million, 5.4%, with this split or contrasting performance with Portuguese operations continue to have a sustained improvement both on volumes and revenues. Volumes grew 14.7% and revenues 9.3%. Quite the opposite, we have declining volumes of 8.3%, although, as Juan mentioned, with continuous improvements throughout the quarter, that closed with March already accruing 10% of growth. Revenues with a marginal growth of 0.6%. On mail, a decline of 19.1 million, but completely explained by these two events last year, the laptop sales and general elections rebrand that happened on first quarter 2022. If we exclude that, we have a strong underlying growth of other mail revenues that contributed positively for our profitability that we will see In terms of financial services and retail, 16.8 million growth driven by this exceptional high demand for public debt certificates that placements reached 7.5 billion euros in the quarter that more than offset the revenue decline and retail and drove the results of the quarter. Buying for CPT continue to grow on the back of net interest income, expanding higher volumes and higher yields. On the next slide, we see our OPEX that declined 5.3%, with the E&P growing 3.7 million, Portugal growing costs below volumes, with unit costs declining despite continuous inflation pressures. In Spain, a growth of 3%, as João mentioned, driven by higher overheads because we continue to expand capacity. We have these portfolio projects to expand capacity that come online this year, and we continue to have higher unit costs that are driven for inflation, of course, the compression of volumes doesn't help us on that front. Mail another decline in 24.5 million euros due to the reductions of direct costs coming from those two events, laptop project and general elections. But we continue to achieve additional cost savings that help us to offset wage inflation but this year is still significant as you know. under such a good performance here. Financial service is growing 4 million euros with increased activity. Bunked CTT increasing 5.1 million euros, mostly driven by cost of risk. That increased 2.2 million. Cost of risk now stands at 1.4%, in line with what we expected for this year and with stabilization trends versus the last quarter last year. Slide 18, we can see our strong performance in EBIT that grew 19 million euros in the quarter. Expected parcels declining by the split performance where Portuguese operations Gross started to offset the higher overheads that we had last year and consistently positively for profitability and Spain with this lag in resuming growth, although we had positive signs, but in the process still contributing negative. Mail, another improving 6 million due to the robust sales and cost efficiency. Financial services completely explained by the exceptionally high demands for public certificates. The bank growing 0.9 million euros with net income driving revenues upwards. On slide 19, We have the cash flow, a strong performance here as well, driven by operational performance. Our operational cash flow standing at 44.2 million euros. Our capex of 5.6 million in the quarter, declining 6.2% year-on-year. And all of this led to a free cash flow of 39.7 million euros. We have now a net cash position at the consolidated level of 17.3 million if we account for IRS 15 lease liabilities. Now, changing, starting on the final remarks, we included, as Ron mentioned, some slides that we extracted from the deck that we distributed with the announcement of our real estate transaction. As you know, we basically split our retail assets in two buckets, if you want. One with the development assets, a set of 10 assets in good locations in Portugal that we see our operations exiting those buildings and buildings that have development opportunities. And as such, we are addressing a strategy for those assets, an asset-by-asset strategy that we think will take from two to five years to execute. And for the remaining of the assets, so assets that we aim to continue developing using for our operational activities, we decided to create a yield vehicle that we call this set of assets, a yield portfolio, that will be carved out into a new entity that we could call CTT in more yield. This entity will be converted to a SICAFI and then it will be selling a stake of 30.1% of this vehicle to a set of investors, external investors and Sierra that will be the manager, asset and property manager of this regulated vehicle. We continue to see the opportunity or we maintain flexibility to monetize these assets if you want in the future, always keeping a controlling stake of 15.1%. On slide 22, we can see the main figures of these transactions. So we are transferring the assets with a valuation of 136,000. where we can expect an additional earn out of 2.6 million depending on the monetization of some of the assets. And we have agreed the sale of the stake of 30.1% for a fixed price of 42 million euros. The base case investment cash yield for the vehicle will be 6.3%. This transaction has some one-off transaction costs, mainly tax of 12 million euros and 2 million to set up the vehicle. And we continue to have this additional buffer of liquidity if we decide to sell additional stakes. Those additional stakes won't have additional transaction costs. We continue to see inside of the vehicle upside for additional cash flows generation by the optimization of the properties and both use and in use with a more professional management of the portfolio. In terms of lease agreement highlights, we will be renting 75% of the gross lease area We have basically two periods of lease agreements. One minority of assets with 20 years lease agreement and the rest with 12 years agreement. All triple nets. And we expect on year one the amounts of rents paid to the vehicle by CDT of 9.5 million euros. On slide 23, we highlight what are, in our view, the benefits of this transaction. First, crystallizing the value of our real estate for the yield portfolio. We continue to see opportunities of adding value to this portfolio by a more efficient and professional approach. management of the assets with clear opportunities to have operations to enhance value. And we keep flexibility for the future to tap in additional liquidity if needed. And as such, I will pass you to João for his final remarks.

Thank you Gui. Well, the overall message we'd like to convey is that it's quite explicit. Obviously, we are upgrading our recurring EBITDA. And then this conviction stems from the fact that we have seen improving EMP performance in Portugal. And we also see a trend of an early positive sign or positive signs that will enable prospective improvement in Spain, which is our main focus. focus to resolve from now on going forward. Also on mail, we saw improving revenue performance and we see it staying as it is, driving profitability while we keep focused on costs and on the sustainability of the margins that we are now starting to recover from. We keep a strong emphasis on this idea of transforming the retail network idea and action towards the service platform with special focus on savings and insurance distribution. We see the bank delivering on volume, revenue, and profitability growth as it did during the quarter. And therefore, overall, we had a strong quarter with consolidated revenue and recurring debit growth. We generated strongly cash flow, improving our financial flexibility. We delivered on this real estate transaction that crystallizes value and, again, optimizes our capital usage and enhances our balance sheet flexibility. And with all this summing up and the trends that we see and the dynamics that we are observing, we decided to upgrade our return on debit guidance to at least €18 million for the year, which again stays as an open-ended guidance in the right-hand side, and we believe that was the right thing to do. And with this, we remain available for your questions. Thank you all.

Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. We will take the first question from Johan Safara from Banco Santander. The line is open now. Please go ahead.

Yes. Hi. Good morning. This is Johan Safara from Banco Santander. I have three questions. The first on expressed and parcels, particularly in Spain, just wanted to understand how is the mix evolving here in terms of B2C and B2B. And also, I mean, the weak volumes, what is the explanation for the weak volumes in first quarter, if there's anything? Any client that moved away from the contract you had with them or any explanation would be very helpful. Then the second question is on the real estate strategy and just wanted to understand what you intend to do with the 40 million euros proceeds from this transaction. And thinking about also the longer term, how is this vehicle going to be used in the future? Will this be a platform to invest in, I don't know, new logistic, new network that you need? I mean, will this be, let's say, just a just a fund where you want that will remain with the same assets or will this be used in the future to also to invest in other assets or in logistics? And then just a last question, if you could give us some idea of I mean, we saw a slowdown in the deposits versus the fourth quarter of the year. Just wanted to understand if there has been, let's say, withdrawals from the deposits into public debt instruments. Is that what has been happening, or is that just the fact that you've been I think you're struggling getting more clients on board.

That's it, sorry.

So expectant possible. So thank you, John, for your questions. Let's see, we continue to see after the difficult two months of January and February a strong demand for B2C and we saw volumes increasing since then. We continue to see the market in more recent days strong in that area. what explains our loss of volumes on the first two months of the year. It's not any churn on any big clients, but a bad dynamic on that portfolio of clients. So we, at least on the volumes treated by CTT Express in Spain, Our biggest clients, the Chinese or other big European players, we saw reduction of volumes. We continue to, although being B2C, to be very active in trying to diversify away from these big customers to the... to the local Spanish companies with small, medium or big corporates. That we are doing with some degree of success. We are gathering space because we are building a sales funnel and starting to have decent heat ratios on those funnels. This is a process that we need to continue to develop in order to also to manage the price per unit because, as you know, this commands higher price per unit and also better margins. Nevertheless, also on the big accounts, we are seeing very positive trends in terms of volumes. I think that we can expect that the scale will be there, either by big accounts or small accounts for the next quarters, but we'll continue these efforts of creating less dependency of big accounts, at least for the minimum critical market. In terms of deposits, And then I leave the real estate question for João. Of course, we have the banking sector in Portugal lost, in our view, some deposits to the government competition in terms of public debt certificates. As we see the overall market numbers, CTD was less affected by that flow of money. We increased our share of the national deposits, although we saw some declines on deposits, but not by losing customers or lower growth, because we continue to have a significant number of accounts in the in our stores every week. That continues and actually is showing signs of improvement. We saw the banking sector losing 4% of deposits. We lost 1.6%. So, in our review, we gained share, but the sector lost deposits to the government size issues. We remain active and, of course, we continue to vigilantly address any issues on this issue. On real estate, João.

João, thank you for your question. So what to do with the proceeds, the portfolio of usage is quite obvious for us. We have restructuring costs that we'd like to mobilize, or to compensate, to fund. Through this, we have M&A for growth and filling in our value chain. And of course, shareholders remuneration. We have taken this quite clearly. So the main comment here is that we see what we are doing here as a capital optimization initiative. And we are monetizing the value that was not usable. and the proceeds will be for these two purposes. So, structuring, that will then deliver further efficiency, M&A, and of course, shareholder remuneration. You also asked what we're going to do with this vehicle. This vehicle is one of the things that Guy has mentioned in his disclosure in the presentation, that with a professional partner, we will have help in actually optimizing our real estate presence. for operational purposes and for business purposes so we get also that it will obviously promote and facilitate and improve our ability to grow as a logistics operator but formally the vehicle is a vehicle that can operate in the real estate sector and so this is the first purpose that it will be available for For other things, as you stated clearly, we are now freeing part of the value of the assets. We do not intend to lose the majority. So we will always consolidate this vehicle, but in this initial investment that we have disclosed now and the remainder to keep the majority, There is further room for additional discussion that we can mobilize.

Thank you.

Thank you. We will take the next question from line Philippe from Cash App. The line is open now. Please go ahead.

Hi. Good morning, everyone. I have three quick questions. First one on working capital. Because as in the previous quarter, you had a very strong quarter in terms of working capital and I would like to understand the reason for this strong performance and if this is a seasonal move and if we can expect during the rest of the year some kind of reversal of this strong performance in these two past quarters. Second question regarding real estate, just if you can give us the amount that will be paid by the portfolio to Sierra as a manager of the portfolio. And last one, you can give us also an update regarding the wage increase being negotiated with the union.

Thank you.

Thank you, Philippe. I'll start with wage increase and then hand over to you. So we have closed the deals, agreements with both CCT and CED Expresso at 4.6% and 4.9% respectively. And we have already accounted for that starting from January because the agreement applies to January. So it is already reflected in the accounts of this quarter, the contribution of those values that increased during this year. We see here a couple of positive things. One is that this increase is clearly below inflation. And the other one is that it was in both situations. With CTD, it was a longer process. With TDA Express, it was a faster run, and it happened after the first CTD agreement. We stroked agreement with all the unions, and therefore it provides for the kind of level of stability that we like and we need for the transformation process that we are involved in. So I think it's good news in this front.

Then on working capital, so last quarter, the reasons for working capital, it was the better management of accounts receivable and accounts payable. That, as I mentioned in the previous call, we shouldn't expect any reversals on that front. The reasons for this quarter are, part is the same trend, Another part has to do with the way we account revenues from financial services. As you know, we have this contract that has two steps in terms of remuneration, and we accrue revenues with our average expectation of what will be the blended remuneration for CTT throughout the year. As such, we, in terms of cash flow, we receive upfront more money than it flows through the operation. That's why we have part of working capital is by that reason. So we should expect that part of this working capital performance will reverse, but not its entirety or totality. In terms of SONAI, Remuneration. We don't feel comfortable disclosing specific numbers, but you can assume that is in line with market practices.

Okay. If I may just follow up on working capital, can you give us an idea of the amount related with this accounting, the way you account the financial revenues?

It should be, it's not an easy way to answer, but you can assume that it's more or less half of the amount. But nevertheless, we see this year being a strong year in cash flow generation. I wouldn't be very focused on that.

Understood. Thank you.

Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. We will take the next question from Lion Antonio Saldes from . The line is open now.

Please go ahead. Good morning. Thank you for taking my questions. So the first one is on serving certificates, placement of serving certificates for the second half of the year. My feeling is that this ability is too low. Nevertheless, I would like to know your opinion on this or if you can share with us your opinion on this issue. And second one is related with the bank portfolio and the cost of credit risk is now stabilizing at 1.4, 1.5, which is okay, it's fine. Nevertheless, the NPE ratio is still increasing, and I guess that the credit card universe of the portfolio is already coming down. So maybe you can explain why the NPE is still increasing, the rush is still increasing, the economy is doing well, unemployment is low, and if you can provide some color by the end of the year, what kind of cost of credit list the bank should have, without the credit card loans thank you very much

Thank you, Anton.

So regarding the first question on that certificate, what we are observing is that we saw now a slowdown on these levels, but for values that are much, much above what they were before. So what we are seeing is that we see no reasons in our interactions with with Treasury and by GCP we don't see any dynamics to change things soon. And so our expectation is that it will be not as strong as it was in the first quarter, but much stronger than it used to be before. So that's the outlook and our assumption.

On the cost of risk of bank, first you are right, we are seeing already a decline on the credit card portfolio. And as such, mechanically, it's putting pressure on the cost of risk. Regarding the end of the year without credit card portfolio, we see our cost of risk coming below the 1% threshold.

And regarding the NPEs, the ratio NPEs still increasing. I think they are increasing sequentially, quarter on quarter.

In our view, the same mechanics applies for the NPE of the reduction of the credit card portfolio versus the NPE ratio quarter on quarter.

Okay. Thank you very much.

Thank you. We will take the next question from Lionhawking Garcia from JP Capital. The line is open now. Please go ahead.

Yes. Hello. Thank you for taking my questions. Most of them have already been answered, but I just had a question regarding the increasing guidance for the year. I just want to make sure does the majority or all of the An annual increase in recurring EBIT comes from the better-than-expected performance of the financial segment. And then regarding the guidance for the year, do you still expect high – well, not high, but double-digit growth in Spain and low growth in Portugal after seeing the performance of this first quarter? Thank you.

Thank you, Joaquin.

So on guidance, why has it improved? First of all, let me remind you that, as we mentioned in our past conference call, our guidance has embedded an expectation that growth will happen in every and all business lines. So this is very important to keep in mind. We had a guidance statement back in the previous conference call that provided for improvements related with the pending macroeconomic risks and financial service problems. That's why it was open on the right-hand side. Well, in the quarter now, we've seen the performance of financial services above our initial expectation and the confirmation of positive trends in mail and DNP Portugal. And we also developed confidence that Spain will improve reason why we have decided to raise the guidance. So, in a way, we have translated the above than expected performance in personal services, but the confirmation that mail and personal is going okay, it also helped us in that decision. For the EMP, I will ask João Sousa, our executive team colleague, to answer.

So we are confident on the double digit growth in Spain for this year. And when we look for Portugal, we believe that we're going to stay in this good momentum we are seeing. And that's it.

Yes. Just complementing that we saw single digit in Portugal Initially, our expectations, but recent trends are positive about that.

Maybe I can give just a little bit more color about Spain, why we believe on this. So we see the commercial strategy we implemented the last quarter of last year. We see now the results. So we are seeing growth on SMEs and B clients. That's going to help us. to create the depreciation in the portfolio of our customers, and also some positive final in what we call strategic clients or international clients. So when we look for this final, that's what we believe in the number we are seeing right now.

Thank you.

Thank you. It appears no further question at this time.

Okay.

If no more questions, thank you all for coming and for your questions. We remain, as always, available to you and our IR team, and looking forward to meeting you soon. Thank you very much. Good morning.