PostNL N.V. (PNL) Earnings Call Transcript

Good morning, ladies and gentlemen, and welcome to the PostNL conference call. [Operator Instructions] Now I would like to hand over the conference call to Mr. Jochem van de Laarschot, Director, Communications and Investor Relations PostNL. Please go ahead, sir.

Thank you, and thank you for joining us this morning. We have issued a press release this morning with an update on our third quarter performance and with the preliminary results for the quarter. We thought it was a good idea to provide you with a brief opportunity to ask some questions to our Board of Management. So with us in the call, Herna Verhagen, our CEO; and Pim Berendsen, our CFO. We'll have a quick introduction followed by the opportunity for Q&A. Herna, over to you, please.

Yes. Thanks for being present so quickly after we issued our trading update. And as said by Jochem, we find it important to have a moment with our analysts to give our explanation, but also answer your questions. As you have seen in our trading update, macroeconomic conditions have worsened since we last spoke in August, and we expect them to continue to do so in the quarters to come. In the next few minutes, Pim will give you some more background around those conditions and especially, of course, also the impact on PostNL, especially on Parcels, the impact on our profitability, et cetera. I understand that our trading update, of course, also leads to questions around 2023. Those questions, we will not answer today, as you probably understand. Pim, may I give you the floor, please?

Thank you, Herna, and good morning to all of you. Well, clearly, you see the press release, we had to issue this given the further deterioration of the macroeconomic environment. And basically, those implications are simply said, twofolds. We've seen unprecedented high inflation levels, really higher than everybody expected. All regulatory bodies didn't expect that high of an inflation level. And obviously, those higher inflations lead to even more pressure on organic cost developments, not necessarily that much on fuel and energy in comparison to our assumptions of a year. But certainly, higher inflation levels do have its impact on the cost of labor in an already very tight labor market. So that is one element of it. We're seeing rising costs, even higher organic cost, obviously, as costs come after the moment in time that we fixed the price points and as such, will deteriorate margins within 2022. The other element is that given the higher uncertainty, the higher inflation level and the all-time low consumer confidence, we see lower consumer spending and also lower consumer spending in the category that through online lead to Parcel volume. So we anticipated relatively small, but still growth at Parcel volumes for Q3 and Q4. Originally -- now we see that not materializing in Q3 and also I do not expect that to happen in Q4. At the same time, and that is just to make clear, the fourth quarter will see a peak, albeit maybe not that high a peak that we originally anticipated, but will still ramp up our capacity to almost double the number of Parcels to be delivered than on a regular base. And currently, expectations are that we're roughly around about the level of volume that we've reported in 2021 for the fourth quarter. With that said, there is a fair amount of uncertainty around the developments at this point in time. Obviously, within that, very difficult circumstances. We're taking all actions and measures that we can do. They relate, obviously, to yield management. We're adjusting as much as we can the flexible part of the Parcel cost base in line with current fuel volume development we're aiming to reduce indirect cost, if possible, tight control of overhead costs, prime approach of filling staff vacancies. And obviously, we strive to maintain a healthy balance sheet which obviously relates to the level of capital employed. So we're reducing the level of our CapEx, the lease additions and keep on rigorously focusing on working capital to ensure as much as we can, a strong balance sheet. That's what we're doing in very, very difficult market circumstances. The preliminary Q3 results you've seen. So a normalized EBIT loss of EUR 20 million and a free cash flow of minus EUR 49 million and that minus EUR 49 million is impacted also by phasing of working capital settlements. So that is not necessarily the proxy for the end of the year. Because of these circumstances, it's no longer realistic to assume that the current -- the outlook that we've provided at half year is -- will materialize and that's why we're basically taking it off the table. Today -- on the 7th of November, we'll get back with kind of the normal regular detailed Q3 results and then we'll be able to continue the conversation. But I'm sure you will have questions for us right now. So maybe it's time for those. Operator, can you open the floor for Q&A?

[Operator Instructions] And the first question comes from the line of Henk Slotboom from The Idea.

Maybe I'm wrong, but there seems to be something contradicting in the guidance for the full year. On the one hand, you say you expect volumes to be -- Parcel volumes to be more or less in line with the fourth quarter of last year. And on the other hand, you take the full year guidance off the table. But you don't come with a new guidance. What -- is there something else? Is the -- the guidance for the Parcels, is that based on -- yes, a best guess at this moment? I can understand and we hear that from a lot of big centers as well that the visibility is close to zero. Or am I missing something? Is there something in mill or anywhere else that is causing the reason why you don't come up with a concrete forecast for the full year? The second question I had is, can you perhaps provide some color as to how the volume developed in Parcels in the third quarter? Because in the pre-earnings closing call, we heard that July and August were more or less in line with the trends we saw in May and June. Have things got worse in September? And what is your early view on October? The third question is, I think, an easy one. You mentioned a series of mitigation measures. Is it fair to expect that you will come with more details as to how much you plan to save or how much that could save at the time you publish your definitive results. And the final question I had is on tariff negotiations. We all know that they are about to start. And I'm not going to ask you how much you're going to raise tariffs or whatever. But in this environment, where things are definitely getting more complicated, not only for you as a logistics provider, but also for the e-commerce companies. How easy will it be to increase tariffs Moreover, because we obviously also see increased competition from, yes, new kids on the block, but also from companies like DHL? Those were my questions.

Good questions, Henk. Thank you very much. I'll try to take them one by one. Well, in our minds, there's no contradiction as to what we're saying and the reason why we're taking out the full year outlook. What I intended to clarify is that our current view, our current expectations in very difficult circumstances is Parcel volumes more or less with last year's volume. But -- you also know that deviations from that currently impact the P&L more significant than in our more regular terms. So the margin we miss of every other Parcels that we are not getting, becomes bigger and bigger, given the fact that we're basically now at fixed cost at Parcels. And that is one. So the expectation is what it is. The volatility around it is still very high. There's a lot of uncertainty around it. Obviously, for the full year, profit number for the group, it's not only about Parcels. It's also mail performance and you know there's a very big contribution of Christmas cards in the mail P&L always in November and December and it's very difficult, given the fact there is no trend line throughout the year to determine what the implications of why our inflation level is going to be more permanent on those Christmas cards will be. So although we do as much as we can to provide you with our view or background on our view, it is still too uncertain for us, and that's why we're not replacing the previous outlook with a new one. That is basically the answer on the first question. If we go to the second one that relates to color on volume developments, we did say indeed that July and August followed the trends of the previous months, but those trends were no growth whilst we were expecting a bit bigger growth in Q3. If you break down the volume development, what we've done in Q2 is that there are still a 3% underlying domestic growth. If we look at it at Q3, it's only 0.8 of a percent of growth. So a further slowdown of growth, whilst we did anticipate slightly higher growth numbers for the third quarter. And as a consequence, we've had to adjust the full year expectations on it as well.

Sorry to interrupt you with -- Pim. but that means that September was clearly worse than the first 2 months of the quarter.

No, that's not what I said. Let's say if the underlying development is the same. The expectation was higher. The development was not that much different on actuals. The expectation was that we clearly indicated that we would see an improvement in Q3 and Q4 to end up with the volume expectations. On the back of the assumptions we -- at that point in time, got from our customers and all the analysis that we've done. Given the high inflation, low confidence, the actual run rate is lower. It's on domestic still positive, as I said, 4% to 4.8% growth, but which is significantly lower than anticipated. On the mitigation measures, we currently really focus on full year 2022 and take measures that impact 2022 will definitely give you a bit of more color around it. But don't expect every measure to come with a euro amount and will certainly take the time to, as Herna said in the beginning, determine what additional measures need to be taken for 2023, given various scenarios that we'll explore. Obviously, the 7th of November will be too early to talk about 2023 as well. Only tariff negotiations, yes, we're in the middle of those. Indeed, you're right that obviously, our biggest clients being the e-commerce providers face the same macroeconomic developments as we do, which means that although parties do understand that the organic cost levels that have risen quite significantly, we need to find its way in price points. It is going to be a tough discussions and tough negotiations. We do not really see increased competition we already are in very competitive markets. We've not seen a deterioration of our market share position to DHL. But we need to be smart, we need to be careful, and we'll be very selective. Customer segment by customer segment is how we go about the tariff increase discussions. But what is clear is there are going to be quite significant tariff increases across our customer segments. We'll just need to do it as smartly as we can given the current macroeconomic and competitive landscape.

Okay. With the rest of my questions -- sorry.

It's not realistic Henk to assume that our competitors will focus on all our customers. So, there are, of course, segments that's one. And secondly, we'll follow it very closely to make sure that we stay in the position we are today when it comes to market share.

[Operator Instructions] And the next question comes from line of Ivar Billfalk-Kelly from UBS.

Given the staff cost negotiations with the unions are clearly a big contributing factor to withdrawal of the guidance. Can you please tell us what you had been expecting when you most recently adjusted your guidance to 1 45 to 1 75. We're looking at sort of a similar 4% annual increases that the mail delivery has got? Or have you been expecting something bigger? And then linked to that, given that your disclosure is a little bit difficult, can you tell us what proportion of the wage bill that is attributable to the people that you are negotiating with now? And linked to that, I believe your subcontractors actually get paid based on the same CLAs. So are there automatic increases in your payments to subcontractors that you are going to have to pay? And then separately, given that you have lower earnings now and potentially lower cash flow, is there a chance that if your leverage goes above 2x that you will stop paying your dividends given that, that was a soft threshold that you had in the past?

I'll start on the unions and negotiations. We're in the midst of those negotiations, and that's the reason why the information we give is not that clear. And for sure, we're not yet at the end. So does not yet side on a close CLA I think what we try to do is to in the CLA to differentiate, and that means that not all people will get the same increase. That's, first of all, to support the ones who need it most lower earning jobs within PostNL. And secondly, what we try have to do with that as well is, of course, to make sure that in the end, we get an annual increase, which is also payable for PostNL looking into the profits, we, of course, also announced today. So it's difficult to give you a very clear insight in what it exactly is. We're in the midst of the negotiations. And next week, we will have another full day of negotiations with the unions. The contracts of our contractors. They do not follow the PostNL CLA. They follow another CLA in the Netherlands, which is the [ FeeCLA ]. It's a CLA used by most of the logistical companies in the Netherlands. They put they put on table and bid. So there are more or less in the end of their negotiations. It's not yet approved by the unions and members of unions and that's the CLA we have to follow when it comes to our subcontractors. So it's a different one from the CLA of PostNL. May I hand over to you, Pim?

Yes. Maybe in addition to this last point, that is the case for delivery partners. But given the fact that there are still going to be a peak, we need to ramp up our sorting capacity for peak as well. We also use temp staff in those processes. And given the tight labor markets, the cost of those will also increase on the back of the higher inflation levels and tight labor market. So it's not only directly related to CLAs that we see the upward pressure on labor cost. The third question was around lower earnings, lower cash flow and the consequences in dividends. Yes, lower earnings, given the same dividend policy will lead to lower dividend payments. The dividend policy is the policy. It's still on the table. Obviously, the mitigating measures that I've talked about are also there to secure a certain level of strength of the balance sheet and to try to avoid the leverage ratio going beyond to. That is what the effort is all about to keep the balance sheet strong and try to keep the leverage ratio below 2. That is what we're working for.