InPost S.A. (INPST) Earnings Call Transcript

Good morning, everyone, and thank you for joining us today. We have prepared a short presentation about the transaction, and we will go to the slides, looking on them to leave more space for Q&A. Today on the call, we have Rafal Brzoska, CEO; Michael Rouse, CEO, International; and Adam Aleksandrowicz, CFO. And Rafal Brzoska, over to you.

Thank you, Gabi. Good morning, everyone. I'm very happy to share a significant development in our U.K. operations. Finally, we announced that we have strengthened our partnership with Menzies, a leading logistics provider in the U.K., through the acquisition of minority equity stake. And just a quick reminder, as you know already in recent months, we face growth limitations, prioritizing the delivery of a high-quality product to our clients and unfortunately lacking of capacity with the third-party providers. By joining forces with Menzies, we overcome these constraints while adding that capacity and enhancing our ability to serve our clients' needs. In my opinion, this strategic move enables us to provide the best quality service to our clients, leveraging Menzies' expertise and infrastructure and, of course, geographical coverage. Moreover, it literally empowers us to scale up our operations, exploring new markets and driving our company's growth in the U.K., being vertically integrated with the whole logistics chain. And we are super confident that this acquisition will have a very transformative impact, allowing us to exceed expectations, strengthen our position in the market, but also create new opportunities for success. As you know, Menzies is the only company in the U.K. providing logistics capabilities for more than 360 days a year, 7 days a week, which becomes super unique in comparison to third-party providers existing on the e-commerce market. So thank you for joining us today. I'm passing now to Adam and Michael to share more details about the transaction and, of course, later on being ready to answer any question. Adam, the floor is yours.

Good morning, everyone. So very, very quickly, just a brief overview of the transaction structure. So we have entered a share purchase agreement with Menzies' shareholders to acquire 30% of equity and 30% of voting rights in Menzies Distribution Group Limited. The prices -- the acquisition price is fully cash settled and the cash consideration for the 30% is GBP 49.3 million. Furthermore, as part of that transaction, InPost have secured a call option to acquire the remaining 70% of the equity in the company over the period of 3 years commencing today, so commencing immediately post the initial acquisition. What is important is that call option can be exercised at any time during the 3-year call option period. And the decision around the execution of the call option is fully at InPost's discretion. In terms of the governance post transaction, so InPost is granted 2 non-exec director seats at Menzies' Board of Directors. And we'll also retain certain decision rights over the strategic decisions, very customary catalog of important investments based on these JVs, et cetera. There will be no change to the effective management of Menzies as a result of this transaction. And the Menzies will be managed as is today. The operations will not change. Also, what is important, the commercial trade agreement that we have entered with Menzies earlier this year will continue as is on arm's length basis. So again, no changes to how this relationship operates as a result of this transaction. So summarizing this, as Rafal mentioned, locking this partnership and creating closer ties with Menzies, but most importantly, I think securing ability and full decision around execution of the call option for the remaining 70% creates for InPost an avenue to find a resolution for bringing logistics capabilities for the U.K. in-house and utilize the very robust Menzies' asset base. So that's the short coverage of the transaction structure. And now handing over to Michael to provide the business rationale behind this transaction. Thank you.

Thank you, Adam. Good morning, everyone. Let me just take you through a few slides now to highlight really the backbone of what Menzies is providing in our U.K. business and sort of the overview of the structure of Menzies today. Today, as Rafal already mentioned, Menzies is operating in national network over 360 days a year servicing the full U.K. and Ireland market. But more importantly, offering a 7-day service to all of that region, which really gives us a unique point of selling as we think about our opportunity for B2C as we expand the offering. Today, they're covering 47,000 daily deliveries across the U.K. and Ireland as part of that national network. The infrastructure to deliver that is really a network of over 100 locations. They have 1 central hub and 9 regional hubs. It really gives us immediate scale and ability to accelerate the U.K. business backboned by 3,200 vehicles and 5,000 employees. What also is quite unique about this relationship as we've seen in the commercial agreement already is that Menzies already touched on a number of locations of potential commercial partners that really today InPost operate as part of our landlord [indiscernible], retailers such as Tesco, Sainsbury's, Co-op, Morrisons, WHSmith to name a few. And really, we see potential avenues of acceleration around our network as well as broadening our commercial partnerships together. And then finally, an important lever here is clearly the experienced logistics management team that is already today operating Menzies with significant experience from companies such as DHL and Royal Mail. What is Menzies today? Menzies has 3 divisions. Going on to the next slide. The first part of Menzies is a Newstrade business where they today service daily the newspaper and magazine industry with 21,000 delivery points on a daily basis. Key customers clearly are some of the major supermarkets that touched on the previous slide, but also a large significant independent retailer base, again, really covering the same points of distribution that we are already having a high proportion of our lockers did today. They have also a developing Express business, which is a national B2B final mile parcel delivery business, touching 26,000 locations across the U.K. and Ireland with clear capabilities to deliver D+1 and D+2 services. Clearly, the infrastructure for both first mile and last mile is really underpinned in this Newstrade and Express business and where we see the immediate opportunity already in terms of shared assets, infrastructure and potentially leveraging unlocking synergies for both the businesses. And then finally, as Menzies Distribution Solutions, which is principally their warehousing and linehaul transport and middle-mile business with long-standing blue chip customer relationships. So on the next slide, let me touch on really the partnership and transaction rationale. There are clearly a significant amounts of different sort of opportunities we've identified. And clearly, the commercial relationship that we've been working on over the last number of months is actually really cemented and really give us concrete view to sort of what we can leverage. Clearly, the immediate opportunity is nationwide coverage in high density, the capacity to majorly scale the business for InPost really to meet the growing consumer demand without immediate CapEx. The synergies I've already talked about. But clearly, we want to accelerate our speed and market momentum due to the volume increase we've seen and the challenges we have faced in the last few quarters with capping our volume. So clearly, our focus now is unlocking the growth in the booming parcel segment and clearly to operate as a disruptor within the U.K. business. And so as we think about sort of the future, clearly, we already see the immediate impact that this has provided to our business in the last few months as we have sort of unlocked the potential. And really touching on the last slide, on the left-hand side here, you can see the APM utilization as we've unlocked potential with Menzies as we entered the commercial relationship and really what I'm showing on the right-hand side is actually the immediate jump we've seen in the volume as a consequence and really these early phases of May and June as we've really gone to market now in an accelerated fashion. So this is an exciting time for our U.K. business and one that really gives us strong conviction to make this investment. And really what we are bringing to market now, firstly, for consumers, they will have to secure low-cost, environmentally sustainable way of sending and receiving parcels. For suppliers and publishers, they will have a fast, cost-effective and robust sustainable route to market. And for retailers, we're now bringing a new alternative 7 day a week, 360 days a year sustainable and efficient alternative route to market. Let me stop there, and I'll open it up for questions. Thank you.

[Operator Instructions] We will take now our first question from Paul Kirjanovs from Bank of America.

Paul Kirjanovs from Bank of America here. Two questions from our side, please. First, what does today's transaction mean for U.K. business outlook overall? Does this change your path towards breakeven this year? And then our second question is what is the advantage that you receive in the equity ownership versus the previous commercial agreement you had with Menzies?

Let me firstly comment and then, Adam, feel free to add anything on top. Firstly, it doesn't change our outlook. In fact, it gives us conviction on our outlook in terms of heading for breakeven for Q4. And really, I think the -- clearly, we've just announced the partnership today. And so clearly, we've already been working with Menzies for the last few months. And really we started retail conversations to really confirm and accelerate our business model, but no real change to outlook at this point. When -- sorry, what was the second question?

Sorry. I just wanted to find out what is the advantage you received from an equity ownership versus the previous commercial agreement you had with them?

Yes. Clearly, the commercial agreement was done at an arm's length position. Now as effectively a shareholder in Menzies, one, it ensures both parties are fully aligned and committed to the future and outlook of how we see growing the business. And two, clearly would say, the non-executive director positions that we've taken on their Board, we can really ensure both parties remain aligned, but we work collaboratively together on the future road map, both for the Menzies business, but obviously, how we want to steer the InPost business in sort of the future view.

I think maybe just building on this, I would probably look at this investment as the first step of securing the mid- to long-term perspective of owning our own logistics in the market. And as such, I think as Michael said, no changes to the short-term outlook. We will operate as we operated since May on an arm's length basis. But strategically, that gives us visibility around how we make sure we are a fully integrated player in the U.K. market in the midterm.

And on top of what Adam and Michael said, bear in mind that no one else on the U.K. market may provide 360-plus days a year delivery for e-commerce, which makes us a very unique asset on 2 dimensions, not only automated out-of-home leader, but also the fastest and most accessible network for the merchants. And in the U.K., the key constraints still remains the capacity constraint and, of course, a big challenge to provide next-day deliveries, which for Menzies is literally bread and butter service. So those elements are critical for our mid- to long-term strategy for our U.K. market.

We'll take now our next question from Sathish Sivakumar from Citigroup.

I've got 3 questions. So first is actually, yes, you've gone from commercial partnership into a 30% stake in a short span. Why not 100%, why 30%? What is that stopping you from getting 100% right now rather than in 3 years' time? And the second one is when you say D+1 and D+2 capabilities that Menzies have today, is it related to B2C? Or is it more on B2B? And the third one, so with this transaction or with this partnership, much more runway you have in terms of ramping up APMs without needing any further investments in the U.K. on the -- not on the APM side, but on, say, first of all, middle-mile capabilities. So as of Q1, you got about 5,000 under APM. So I just want to get a context like how much more you can ramp up there.

Let me take the first question, maybe. So again, I would go back to the statement I made at the very beginning of this call. I think the fundamental importance of the deal structure is the 70% call option and our ability to exercise at any time. So that secures us really the ability to take control of 100% of the business when we need it. And the 30% initial acquisition actually allows us to pace the investment and to manage the leverage in a proper way. Whereas, as we said, in the short term, nothing changes. We're pretty confident around our ability to hit the breakeven towards the end of this year. I think the visibility together with the Menzies' partnership and the current investment is even better than it was before. So I think we're in a good place, and we've concluded the critical for us is to have that ability to control to take the 100% when we need it. But at this point in time, in the short term, simply there was no need to do that. So we believe the way its structure is optimal from the control versus visibility versus leverage perspective for the business.

Okay. Thank you, Adam. Let me take just the last two. On the D+1 and D+2 capabilities, I think Rafal already mentioned this, Menzies today are already delivering from a newspaper and publisher point of view, visiting in most locations, at least once, if not twice a day. So pre-6 a.m. and post 7 p.m. So already that ability to deliver in a D+1 environment, certainly to a locker location where there is a high coverage overlap even on our existing network with our existing last mile and first mile routes already exists. And the second is the predominant business today for Menzies when it comes to deliveries outside of Newstrades is mainly B2B. And today, they service again a good handful of B2B clients that I've already identified on the slides, again, on a daily basis for the majority of the country. So the opportunity is there for us, certainly from a locker perspective and out-of-home perspective to really complement the existing route mapping and route planning that they already do today. When it comes to the final question, when it comes to potential, I think we've highlighted this before. Sathish, clearly, we're over the 5,000 mark today in the U.K. But the U.K. market is so large and the potential is so significant, even with 20,000 lockers in the ground like we have today. In Poland, we still wouldn't have the enough capacity to serve more than sort of single-digit figures in terms of market share within the market. So clearly, what this does is give us capacity and ability to grow the coverage beyond our core regions from a national point of view. So clearly, we've been heavily focused on predominantly London -- Greater London, Greater Manchester and Greater Birmingham. Now this natural coverage will give us the ability to expand as well as provide a more meaningful B2C coverage opportunity beyond the current returns and C2C business that we do today.

We'll take now our next question from Sam Bland from JPMorgan.

I have 2, please. The first one is just on that point actually. You talked about Menzies giving you nationwide coverage. We've said before around sort of importance of 3 cities, I think London, Birmingham and Manchester. Can you just talk about how -- I know the sort of coverage or density of the Menzies' network around those 3 locations in particular. And the next one is, I guess, Menzies delivers to, I think, you said 27,000 locations. Is the expectation to still primarily deliver InPost volume to APMs? Or could you deliver InPost volume to some of these other -- I don't know, whether it's news agents or something that Menzies is delivering to every day?

So Sam, let me comment on the first comment. Today, Menzies have got over 100 locations across the U.K. and Ireland, actually nearly over 90 in the U.K. alone. So from a density point of view, actually, their overlap with our current regions is quite strong. I think when we did a mapping exercise, we were very much in a plus 90% overlap in terms of existing locations of their coverage and what we need to do. And then clearly, today, just for reference, we won't take full advantage of the full 100 locations. We will only leverage today, based on current volume and trajectory, only 40 locations. And that shows you one sort of where we are today and what opportunity there is, most importantly, to expand and scale without the further need of further CapEx investments, et cetera. So that's the first element. On the second question, actually, to deliver to APM, I think it provides both options actually. First and foremost is delivery to APMs. So again, there's a really high overlap with their current delivery schedules, both on the Newstrade and the existing Express business. From that perspective, clearly, the Express business tends to do major deliveries on B2B to supermarket chains where we have nearly more than half of our stake and the Newstrade deliver to independent locations where again we have sort of half of our stake. So there's a really strong overlap in synergy, but today, I think I've mentioned before, we've already started testing PUDO. So really as we accelerate and scale the network, we've seen that PUDO is a really efficient CapEx-light way to accelerate the speed while we play catch-up with APMs just from a deployment case. So really we're leveraging both now today in the U.K. market. And clearly, the opportunity with Menzies and their relationships, both with the supermarket chains and independents provides opportunity for both APM and immediately for PUDO as we need it.

We'll take now our next question from Robert Joynson from BNP Paribas.

A couple of questions from me, please. Firstly, on the call option, can you just confirm, would that be at the same price that you've just paid for the 30% stake? And then the second question just on Menzies' profitability. We can see from U.K. companies house that Menzies produced EBIT at around GBP 25 million in 2021. Could you maybe just confirm what EBIT was in 2022, which hasn't been disclosed yet?