PostNL N.V. (PNL) Earnings Call Transcript

Good morning, and welcome to the PostNL Third Quarter 2020 Analyst call. [Operator Instruction]. I would now like to hand the call over to Jochem van de Laarschot, Investor Relations. Go ahead, please, sir.

Thank you very much, and good morning. With me in the room, Herna Verhagen, our CEO; and Pim Berendsen, our CFO. Pim will take you through the slides that you can find on our website and that are available in the webcast, after which we will answer your questions. Pim, please go ahead.

Yes. Thank you, Jochem. Good morning, everyone. Let's start with Slide 4. And there, let's say, the key takeaway from us is that basically, let's say, over the last couple of months, been very clear to us and very many other people that mail and parcel delivery has provide a vital service to society, particularly in these days. And basically, as of the first COVID-19 signals in the Netherlands, we've made clear that our first and foremost priority is the health and safety of our people and our customers. And as a consequence, we've taken a comprehensive set of measures taken across our business to ensure and safeguard that. And also in this period in preparation of our Q4 peak volumes, we have taken separate -- several additional measures to safeguard that our employees can work safely and continue to operate our networks as we normally do. We are extremely proud of our people that have put that commitment in each and every day to get people connected and deliver all the goods and letters and cards to everyone. So we're also very happy that we're able to provide them, as an extra recognition for their hard work, another EUR 250 net, and that is the good news that we've obviously shared on 6th October as well. Next to that, we see an unprecedented -- unprecedented -- we see a substantial improvement in our employee satisfaction, now above the sector benchmark. And also satisfaction amongst our delivery partners also increased significantly. At the moment, we're, of course, in full preparation for the peak season. We're scaling up capacity. We're hiring roughly 1,000 people for delivery and sorting centers. And we're also opening our operations on Sunday to be able to accommodate the higher volumes, running additional locations and additional line [ holds ] to do whatever we can to accommodate with the high-volume that we do expect in the fourth quarter. To be able to absorb peak also in mail, we'll be collecting mail on Sundays, and we'll be delivering on 2 Mondays, the day in which we normally do not deliver mail. If we now look to the Q3 results on Slide 5, we again report strong business performance, and our financial position improved significantly. We're very happy with the Q3 numbers. Revenue was up EUR 106 million to EUR 742 million, which is an increase of 17% top line growth. And normalized EBIT came in at EUR 36 million, EUR 10 million or 38% higher than last year. Basically all our business segments have shown continuation of the strong performance that we also saw in the first half year. It's both in parcels as well as the realization of the anticipated benefits and synergies of the mail networks, which are ahead of schedule. And the volume declined in mail in the Netherlands in this quarter, has slowed down in comparison to the last quarter. As said, normalized EBIT was $36 million for the quarter. This number includes a negative impact of EUR 16 million that is not directly business related; EUR 7 million for the extra payment to our employees; and another EUR 9 million relating to higher pension expense and effects of the adjusted labor regulation. So adjusted for these elements, let's say, profit would have been EUR 52 million, which was obviously a EUR 16 million higher comparison than last year. Underlying free cash flow development was positive. This quarter, we see timing effects, which we've talked about also by -- on half year numbers. And part of this phasing that we said was -- is backward phasing towards the first half of the year and a little bit continues into Q4. The overall free cash flow for the quarter was EUR 5 million. And a little bit later on in the presentation, I'll go in a little bit more depth in the different components that drive cash flow for the quarter as well as year-to-date. As already announced on October 6, we now expect normalized EBIT for 2020 to amount to at least EUR 175 million. And combined with the improving financial position support, of course, also by the sale and leaseback transaction, we're pleased to say that we do expect to resume dividend payments over 2020. On Slide 6. A key component of our strategy going forward is, obviously, digitalization and the acceleration of our digitalization efforts. We announced that we will further accelerate this program over the next 2 to 3 years, in which we aim to strengthen our competitive position, contribute to customer satisfaction. Reducing our cost base and attracting new customers. Let's look at some of the main developments that we've seen during 2020. First of all, we had 419 million online visitors, which is a growth of 37%. And what is important to note that also a larger percentage of this 59%, at this moment in time, of visitors reach us via the app, which, of course, makes the app more and more relevant day after day. The number of PostNL accounts increased by 16% to EUR 5.8 million, and we also see a very strong growth in the stamp code. We sold 74% more stamp codes compared to last year. Then we see that more and more people can be helped by our chatbot Daan, over 1.5 million interactions we've done to date, up 72%. And also quite recently, we've introduced some, our chatbot in Belgium to offer the same type of customer service solutions in Belgium as we do in the Netherlands. We started an internal program, our digital Academy to educate our people on their knowledge of digitalization. These developments illustrate the efforts that we're taking to further digitalize our business. Now let's look in the quarter with a little bit more detail on a segment per segment level. And let's first look at Parcels' performance on Slide 8. Another strong performance quarter by Parcels, strong volume development, volume, almost 17% up in comparison to last year, which brings the year-to-date figure to 15%. That means that in 2020, so far, we've delivered 232 million parcels. And as we've said before, driven by the COVID start in Q2, there's also part of that volume, which is we expect to be incidental volume. And you need to think about people offering -- buying a new laptop, a new headset, whatever, everything that helps people from working from. And we think about 10 million to 15 million of that 230 million parcels is volume that will not repeat itself. Euro component yield management measures, including improved pricing, explain the positive price/mix effect. And what we also see is that this growth is particularly visible amongst small and mid-sized webshops, which is positive for the price/mix effect this quarter. Revenue development has also been strong in spring and logistics. Both in Asia and Europe report a sharp growth in e-commerce volumes. In logistics, revenue increased in all business lines, also due to the healthy e-commerce growth in these segments, such as fulfillment health as well. All in all, increase in revenue was the basis for a normalized EBIT of EUR 36 million, EUR 22 million above last year's results, good operational leverage to a very efficient utilization of capacity during the summer months and hit rate that improved compared to last year. Spring and logistics had a relatively large contribution in the result improvements driven by their volume growth and revenue growth. On Slide 9, you see the EBIT -- normalized EBIT bridge from EUR 27 million to EUR 49 million or like-for-like, EUR 51 million, of course, driven by the 17% volume growth; EUR 48 million volume effect; a positive price/mix effect, EUR 5 million; combination of the yield measures as well as the mix in customer growth. The CLA increase indexation of subcontractors then takes EUR 5 million additional organic costs. The volume-dependent costs are a function of a very efficient utilization of the network in this quarter. And in other costs, you see a combination of efficiency and other costs, amongst others there. You see the EUR 2 million additional payment to the employees as well as a nonrecurring refund transition payment that we reported in the third quarter last year. The other results contain the good results at spring and logistics, and that brings the normalized EBIT to EUR 49 million. And of course, as you know, the new labor law regulation had an impact of EUR 2 million in the quarter. So like-for-like, a EUR 24 million improvement comparison to last year. If we then move over to Mail in the Netherlands, we'd like to start by repeating that the integration of Sandd is running along very smoothly. And we're ahead of schedule. Sandd is accretive to normalized EBIT in this quarter again. Total net contribution this quarter was $8 million, which brings the total to EUR 28 million so far, and that's the net impact. There's EUR 30 million of one-off costs in relation to the overall synergies, so gross synergies currently amount to EUR 58 million. Mail volumes were down in the quarter 10.4%, and this still includes a 3% acceleration of digitalization impact from COVID-19, which is significantly less than the 5% impact that we reported in Q2. Overall, this means that the normal decline that relate to substitution is in line with our expectations. COVID-19 also had an impact on our international mail activities because also the cross-border import flows have been affected by COVID-19. The volume effect -- the volume decline effect was partially offset by a positive price/mix effect, which was more favorable this quarter than it usually is on the back of changes in the product mix predominantly. So drivers for the result were Sandd, impact of COVID-19, focus on our core activities and, of course, the usual business development. Cost savings, as indicated before, a little bit of delay also in relation to the measures taken to apply social distancing guidelines in operations that don't allow us to centralize certain locations, at least not for now. So also from Mail, in the Netherlands' perspective, a strong and positive quarter. Slide 11 is the bridge and the normalized EBIT Q3 2019, EUR 4 million normalized EBIT Q3 2020, EUR 4 million as well. Volume effect, EUR 17 million plus, of course, driven by the 10.4% volume decline and the EUR 33 million top line addition as a consequence of the Sandd consolidation, EUR 9 million positive price/mix effect, moderate pricing policies supported by the favorable development in price/mix. Yes. The volume-dependent cost contains part of the additional volume-dependent costs related to the acquisition of Sandd. And then the other costs there, you see the EUR 5 million extra payment to our employees as well as EUR 6 million incidental costs in relation to the integration of Sandd. And other results, you see the effect of our focus on our core activities, in other words, the divestiture of PCS and Spotta last year -- or this year have contributed to the improvement here of other results, EUR 5 million. Now let's move to Slide 13 for the overview of the free cash flow generation in this quarter. As you can see, obviously, normalized EBIT up EUR 10 million. Depreciation, amortization and CapEx roughly in line with last year. Lease payments, slightly higher, which, of course, is also driven by the Sandd acquisition. And here, in the third quarter, we see an investment in net working capital in the quarter, which relates to the phasing effects that I've talked about also at Q2. Biggest component of this phasing is phasing backwards to Q2, partly to Q4 and some settlements of terminal dues are also included in this number. On the interest paid and income tax line, there's a deviation of EUR 6 million in comparison to last year, which contains the first interest payments on the Green Bond, which makes the free cash flow for the quarter, EUR 5 million. Slide 14 talks about pension developments. And no, I think we've spent quite some time over the last quarters to explain the agreement that we've reached with the pension fund. So for now, I will not repeat that. Main news for now is that the actual coverage ratio of the fund was 104.4% at the end of September. Which brings the relevant coverage ratio, which is the 12-month average coverage ratio to 105.2%, which is still above the minimum required level of EUR 104 million. Taking into account the resilience of the pension fund, no top-up obligation is foreseen. Maybe for your cash flow numbers in Q4, have a look at the table where we see, let's say, the year-end expectations 2020 tax -- pension expense of EUR 145 million and a regular pension cash contribution of EUR 110 million, the gap being EUR 35 million. And the year-to-date numbers are also there for your reference. And of course, next to that, we expect to pay roughly EUR 205 million on the transitional pension schemes by the end of this year. Let's look at the balance sheet on Slide 15. There you see that consolidated equity is up EUR 29 million compared to the end of June, which almost equals the total comprehensive income for the quarter, which is EUR 28 million. As you know, the normalized comprehensive income will be the basis for our dividend payout ratio, and this metric is derived from total comprehensive income. And the comprehensive income for year-to-date is EUR 75 million. Drivers for the movement in equity are the net profit of EUR 24 million and another comprehensive income effect from pensions being EUR 4 million net of tax. Adjusted net debt is up to EUR 618 million from EUR 614 million 3 months ago. Then I think important to spend some time discussing the generation of free cash flow year-to-date 2020 numbers on Slide 16. Normalized EBIT is at EUR 105 million, which is EUR 10 million up compared to last year. Depreciation and amortization is higher, of course, also related to Sandd. CapEx more or less in line and lease payments are higher. And I think we've made clear to you, and otherwise, I repeat that, that we've guided you to around EUR 80 million of lease payments for the full year. So those are not evenly spread over the year. If you talk about change in working capital, then we see a EUR 9 million investment in working capital full year on the back of significantly higher revenues, which indicates to a very strong performance and strict working capital management. And that brings the free cash flow for the year so far to EUR 103 million, which is a EUR 64 million improvement compared to last year. If we then step over to the outlook for 2020. On October 6, we've already informed you that we adjusted our full year outlook for normalized EBIT to at least EUR 175 million based on the strong operational performance. At the same date, we've announced a sale leaseback transaction, which will lead to proceeds of around EUR 150 million a related book gain of around EUR 61 million, and the impact on adjusted net debt will be EUR 97 million positive. For free cash flow, this means that we expect an additional positive impact when looking at our latest guidance. That's a strong improvement compared to between EUR 215 million and EUR 185 million. Please remember that this range already includes the favorable impact from the agreement on the final payment of transitional plans. So if you look at this in a slightly different way, then I think if you look at the current year-to-date free cash flow, EUR 103 million, there will be a EUR 150 million added as a consequence of the sale leaseback. There will be EUR 205 million being taken out as a final payment to the transitional pension scheme. And then the balance of the cash flow generated by the profits in Q4 as well as the step-up in CapEx and lease payments will lead to a positive cash flow for the full year, which is a significant improvement, obviously, from the minus EUR 300 million, which was the basis starting point, our initial outlook by the 24th of February. Clearly, when looking forward, we need to point out that there are still some uncertainties in relation to the second wave of the pandemic. Visibility remains limited and also depending on social distancing measures, which could lead to a potentially higher sick leave and additional cost, obviously, to accommodate for volume growth that we still expect in the fourth quarter. Then some attention points for the fourth quarter on Slide 18, we expect for Parcels, the full year volume growth to be more or less equal to the year-to-date number of 15%. We expect a better price/mix effect that we saw in Q3 to continue; expected peak volume will be 1.5 million a day compared to an annual leverage of 0.9 million a day. Of course, we've taken into account additional peak season costs to accommodate for that growth and also in the fourth quarter, as we've seen in the previous 3 quarters, we will incur adjusted labor regulation costs of EUR 2 million to EUR 3 million a quarter. For Mail in the Netherlands, we expect the volume decline to continue to slow down compared to Q3 numbers. There's 3 additional working days and positive synergies from the combination of networks; a nonrecurring negative contribution in Q4 2019 in combination, let's say, between restructuring charges and integration costs of EUR 30 million will not come back; and some delay in cost savings due to the integrated networks and COVID-19. Pension expenses, again, also in the last quarter will be EUR 6 million to EUR 7 million higher than -- in comparison to last year. All in all, the graph also shows, on the right-hand side, based on our outlook for normalized EBIT of at least EUR 175 million. Our Q4 numbers weigh heavy on the annual results and important in this period of limited visibility that we continue to push for that as we do expect to end up at least EUR 175 million. On Slide 19, to summarize the third quarter for 2020. We are -- we saw a strong performance basically across all business units. Parcels, Mail showed very good results. We're happy with that. The synergies from the combination of the networks is there and ahead of schedule. Normalized EBIT of the group came in at EUR 36 million, EUR 10 million above last year or EUR 26 million higher if you account for the higher pension expense and the one-off additional bonus for our staff. With very good underlying free cash flow performance, we've announced that we'll further accelerate our digitalization programs which underpin our ambition to be the favorite deliverer in the Benelux. When looking at our ESG performance, we're very proud that we see a substantial improvement in employee satisfaction, which is now above sector benchmark and at the same time, satisfaction of our delivery partners is also substantially improving. My key takeaway for Q3 is that posting our reports' ongoing strong performance, which brings our outlook for full year 2020 normalized EBIT to at least EUR 175 million, our financial position is solid and further improving. And all in all, we do expect to be able to resume dividends already over full year 2020, which is significantly ahead of our earlier indications. Thank you for now. And let's go back to you, Jochem, to facilitate the Q&A process.

Thank you, Pim. Patricia, our operator, will explain to you how to ask questions.

[Operator Instruction]. Our first question is from Mr. Frank Claassen, Degroof Petercam.

Frank Claassen, Degroof Petercam. Two questions, please. First of all, on your outlook for the underlying mail volume decline for Q4. What makes you so confident that you expect it to be lower than Q3? Aren't you afraid that the current COVID situation could have an adverse effect on, for instance, the mail campaigns? So that's the first question. And then secondly, more housekeeping question. On your sale and leaseback transaction, what can we expect for additional lease costs going into next year?

On your first question, the outlook, which is underlying our Q4. In Q4, we, of course, also have the Christmas cards, the extra Christmas cards on our volume expectation. And what we did say is we expect, if we talk to customers, that slowly the decline we've seen from -- because of COVID from beginning, that it slowly will disappear. That's still the expectation for Q4 also when we talk to customers. But as said in our press release as well, COVID is difficult of course, to forecast and difficult to predict that makes that -- we do say we expect it to -- we expect it, of course, to improve, but we don't know exactly how long the period will take before it's fully improved.

Okay?

Yes. So that was the answer on the first question. In relation to the sale and leaseback transaction, as you can see, that we report EUR 150 million and -- as proceeds. Of course, the book profit is then a function of the sale and the, let's say, additional lease obligations that you take, which is approximately the difference, let's say, EUR 90 million additional leases divided by an average length of around about 7 years, I would say, that gives you the additional lease payments to be expected in 2021 and onwards.

So let's say, EUR 12 million, EUR 13 million or so. Is that...

Yes, I would say, a little bit less around about -- yes, EUR 10-ish million.

Our next question is from Mr. Marc Zwartsenburg ING.

Couple of questions from my side. First, to start with the Parcels guidance said at plus 15%, if you read the line for Q4. Actually, the comps are a bit easier in Q4. We're already trending at around 17%. But we also see that spring is performing even above that rate. So is it then a very cautious outlook for Q4 to remain at plus 15% because we also have the additional price increases on top of that? Can you maybe give a bit more flavor why it's plus 15% for Q4 and how much caution is baked into that number? Then a follow-up on the Parcels. Is there also a working day impact positively in Q4 for Parcels? That's my first question then. And then the second question on the Mail volumes. You just mentioned -- in your archive, it just say that it did decline or will get a little bit less. Does this also include already that you have 3 more working days in Mail? Or should we add that to that guidance so that it's even better than what your -- that underlying, it's already a lower decline. And on top, we will get, say, 1.5% working day positive impact? And then the third and last question is on your net debt position. Pim, can you help me a bit, building the bridge from net debt at the end of Q3 of EUR 618 million towards the end of the year, should we expect the net debt to increase or even come down a bit? Anything, give me a bit, the building blocks there.

The easiest question is the Mail one. So the 3 working days are included. That's one. On parcels, are we cautious? It's difficult to say with the second wave we see at this moment in time, to be honest. We do think that when we look to the plus 15 million, it is at least taking into account the expectations customers do have in Q4. But also, when we talk to customers, it's not always easy for them to forecast, of course, what the peak because of Singles Day, Black Friday and Santa Claus will mean. So in our view, it's a good prediction of what we can see at this moment in time. But as said, it's not very easy to get a very good visibility on volume growth. That's how we look into parcels and probably I've said enough about it. But to do all the volumes, we expect lots of extra measures have been taken to be able to deliver the amount of parcels we expect around this period in the year.

But that is the volume on parcels, if I may interrupt. But then we have spring and the pricing effect on top of that and that was already an impact of almost 5 percentage points in Q3. Should we expect a higher contribution from those 2 elements...

No, relatively speaking, as of 3 -- a very good third quarter. Also last year, let's say, the contribution of those parts wasn't to that. So the increase in result will not be that big for those 2 companies, so for logistics and spring together, as we've seen in Q3.

Yes. Because of the size of the Q4 quarter on the Parcel side is what -- yes.

Yes. So there will be an improvement from logistics and spring at our expectation in comparison to last year, but not of the size that we've reported in Q3.

Net debt was your third question.

Yes. Net debt, let's say, well, I think on the balance sheet, you can see that we're at EUR 618 million. We do expect the fourth quarter on an adjusted net debt level to be positively impacted, so more cash than that being added. So we do expect the adjusted net debt to come down to below -- significantly below the EUR 600 million.

Our next question is from Ms. Najet El Kassir of Bank of America.

Just if you can share with us, please, in terms of what are you seeing in terms of parcel growth and mail volume decline in October. And also, what are you expecting in terms of CapEx in the fourth quarter, please?

Yes. So as said, let's say, in October, we more or less see the developments. We expected to see, which is a slight step-up in volume in October for parcels and a continuation of the trends that we've seen at mail. But as said, bear in mind that, let's say, November and December are the months where the true peak is expected to be a Black Friday, Singles Day -- Black Friday from mid-November onwards to Christmas. But so far, positive signals throughout October, if you talk about the volume developments.

Could you share -- quantify the volume, please, that you've seen...

No. I'm not going to quantify it. It is higher than the average of the quarter. But as said, the bigger component of the volume needs to come in November and December. On CapEx, we've guided to roughly EUR 100 million full year, and let's say, that is also still roughly what we expect it to be. Which means that in Q4, we'll have to do a lot of CapEx, which is also in the plans because, for instance, part of the sorters that will be part of the small sorting -- small parcel sorting center, we'll need to start being built in, in this fourth quarter. So we do expect -- you should expect a step-up of CapEx in the fourth quarter I would say, roughly to the EUR 90 million to EUR 100 million mark for full year.

Our next question is from Ms. Lotte Timmermans of ABN AMRO.

First, a question on working capital. I missed the statement on the year to -- on the flow when you said year-to-date. Was it a year-to-date EUR 9 million? Or was it full year '20 outlook? Or is it still the same roughly EUR 35 million compared to year '19?

Now only year-to-date performance, you can see that it is for the year-to-date, an investment of EUR 9 million, so far for the year, in comparison to EUR 34 million, which was the investment last year. By Q2, indeed, I guided roughly in comparison to the investment in working capital for the full year 2019 for 2020. But as we said on the 6th of October, that we do expect the improvement of profit to also turn into cash flow that was combined by the comment that underlying working capital is improving as well as driven by the different mix and import/export. So you should expect an improvement in comparison to the minus EUR 35 million that you just mentioned, but it will still be a negative number for the full year. That's negative then, EUR 35 million.

Okay. That's the statement. Then what...

I would say somewhere between minus EUR 9 million and minus EUR 35 million.

Okay. Then 1 question on the partial volumes daily volumes, you stated Q4 peak volumes is expected 1.5 million, and the average was 0.9 million, that was the peak volume last year?

I think peak volume last year was a little bit less than 1.5 million. But I think the peak you do is much more depending on the amount of peak days then the amount of volume per day. So the growth you will see in the period we're moving to is that we will have more peak days where we are at a max of 1.5 million or a little bit above the 1.5 million that we had last year. So that's how you have to look into peaks and into the amount of parcels a day. So it's much more about the amount of days we expect a full day than it is about having 1.5 million per day.

Our next question is from Mr. David Kerstens, Jefferies.

Three questions, please. First, maybe to better understand the volume momentum versus some of your peers in Europe. I think, Herna, and you explained previously that mail volume now in the Netherlands is looking somewhat better than elsewhere because you already had a steep decline before. The parcel volume growth of 15% looks at the low end of the range, I think, kind of think Deutsche Post even said that they expect to grow that parcel volume by 15% this year, even though they have a headwind from Amazon in-sourcing and already a very high level of parcels per capita. But what explains the difference with 15% growth you are seeing for the fourth quarter and for the full year in comparison, for example, with Germany or some other postal markets? And the second question is related. You highlighted the one-off element of 10 million to 15 million parcels so far year-to-date. We expect that number to further increase in Q4. So will it stay at, let's say, at around 4% to 6% of volume. And should we expect that, that will reverse in 2021? And the final question, a lot of attention to elections, these days, with U.S. elections tomorrow and voting by mail. Elections in the Netherlands next year. Also, I think there's an increased focus on mail folks. What do you think the potential benefit could be on your mail volume next year or your mail revenue? And what would be a normal election effect historically?