Poste Italiane SpA

MIL:PST

Earnings Call Transcript 2018-Q1

[Matteo del Fante, executive]

Good afternoon, ladies and gentlemen. We're pleased to present Poste Italiane First Quarter 2018 Results as well as an update on Deliver 2022. As presented at our Capital Markets Day in February, we are undertaking Deliver 2022, a group-wide transformation program with a focus on Poste Italiane people and system for the benefit of our customers.

As you will see today, we're already on track with our financial targets and KPIs, underpinned by the renewed focus on operational performance. We closed the first quarter with a net profit of EUR 485 million, up by a strong 38%.

Some of the key initiatives related to the execution of Deliver 2022 have already been launched. And we will share some of the major developments with you today. We'll also provide additional details on our increased focus on commercial distribution across our network, which will have an impact in the coming few quarters. We will also outline our efforts in maintaining cross-business cost control, which is already delivering a cost base in line with our 5-year target. Let's first move to Slide #4 for an overview of the financial results for the first quarter. The first quarter results demonstrate that -- sorry, we are on the right track with our Deliver 2022 plan. Revenue reached almost EUR 2.9 billion, an increase of 1.8%. This was mainly thanks to a renewed focus on postal savings under the new CDP agreement and remuneration scheme.

EBIT was EUR 703 million, underpinned by our cost discipline efforts. As a result, our EBIT margin increased to 24.4%, up by almost 6 percentage points year-on-year, resulting in a net profit of EUR 485 million, up by a sound 38.2% year-on-year.

We have also included for your information EBIT excluding capital gains, which demonstrates the underlying improvement in our operational performance.

Earnings per share reached EUR 0.37, up EUR 0.10 versus last year.

On Slide 5, we see that revenues in the first quarter increased by 1.8% year-on-year to EUR 2.884 billion. The revenue mix across our business segments is in line with our expectations and guidance within the Deliver 2022 strategic plan.

Mail, Parcel and Distribution is down by only 1.8%, with Parcel revenue up, mitigating Mail revenue, which are actually declining at a slower pace.

Financial Services improved by 3.9%, thanks to a renewed focus on postal savings under the improved remuneration agreement reached with CDP. There is more to come in terms of product distribution in 2018 in this space.

Payments, Mobile & Digital posted a healthy revenue increase of 10%, with positive trend across all commercial KPIs.

Insurance Services proved to be resilient, supported by P&C and pension plan contribution, and we expect nonlife revenue to continue to gradually increase.

All of this translates into a stronger growth in operating profitability, shown on Slide #6.

EBIT rose significantly, up 33.7% year-on-year, thanks to a strong focus on efficiency, especially in Mail, Parcel and Distribution. Please bear in mind that Mail, Parcel and Distribution revenue in the first quarter benefited from most of the capital gains booked in 2018. On the cost side also, early retirement charges will be booked towards year-end.

Financial Services improved by 25% year-on-year, outperforming revenue trends. Payments, Mobile & Digital shows a positive trend with EBIT up by 3.6% year-on-year, supported by all business lines, as we will see in more detail later on.

EBIT for Insurance Services remained resilient and we'll go into the segment in more detail later.

Slide #6 (sic) [ Slide #7 ] summarizes our progress to date on our Deliver 2022 targets. We're committed to providing regular updates on our 5-year plan. We're pleased with the immediate actions that are delivering changes across each business divisions. Specifically in Mail, Parcel and Distribution, our strategic focus is on rolling out the new joint mail & parcel delivery model with a new approach based on population and volume density, which includes afternoon and weekend deliveries.

We'll also invest in new technology to create a fully integrated mail & parcel network. We have already launched the new Joint Delivery Model and have initiated a phased rollout across Italy. And we have streamlined our organizational structure, reducing territories and operating areas from 9 to 6. Mail, Parcel and Distribution is gradually improving with EUR 3.5 billion revenue target for 2018 and an improved operating profitability.

The focus on Payments, Mobile & Digital segment is to capitalize on opportunity arising from the convergence in the sector, while also supporting a group-wide digital division. We will consolidate our leadership in payment system, including expanding our acquiring business and in mobile, thanks to innovative new offers. We have already obtained Bank of Italy authorization for our payment institution and we are on track for the formal launch in the second half of 2018. This will be key to reaffirm our undisputed leadership in Italian digital ecosystem. Payments, Mobile & Digital is growing at a sustained pace, aiming to reach an EBIT of about EUR 0.2 billion in 2018.

In Financial Services, we will capitalize on growing Italian household wealth while capturing additional opportunities, thanks to our market-leading physical and digital distribution networks to drive growth and serve customers in the best possible way.

So far in 2018, we have fully implemented the new CDP agreement with an attractive new offering and new commercial initiatives. We have also booked the capital gains for 2018 in the first quarter and also secured most of the capital gains which we will book in 2019. This gives us clear visibility. And impacting both our Payments, Mobile & Digital and Financial Services segments, we have signed a distribution agreement with Banca Intesa.

In Financial Services, total financial assets are increasing at a rate of 3%, in line with our target. The goal is a net profit of EUR 0.7 billion for 2018.

In Insurance Services, we will retain our leadership position in life and develop our nonlife offer, providing our customer with the best products. We're also launching a selection process in order to choose the best potential partner in motor insurance and new initiatives are underway to complete the range of our products in nonlife, in line with our plan. Our insurance business is expected to maintain its market leadership with resilient revenue and net profit in 2018 compared to last year.

Across our payment, financial and insurance activities, we have already begun the implementation of a smart distribution model, balancing white-label and in-house products to optimize capital and gradually develop internal know-how in financial, insurance and payments.

On the next few slides, I want to focus on 2 key areas of progress related to Deliver 2022. On Slide #8, let's first look at 2 developments in relation to our Mail, Parcel and Distribution segment. The first and most important is the implementation of the new Joint Delivery Model. As you remember, this model is based on applying 3 different approaches based on the distinctive characteristics of each area, mainly in terms of drop density and competition level. The new Joint Delivery Model will: improve service level in order to meet the needs of e-commerce consumers; two, provide increased flexibility through afternoon and weekend deliveries; and number three, reduce cost.

During 2018, we will reorganize more than 300 delivery centers out of a total of 800 requiring reorganization. This process began on April 16 and already 71 delivery centers have been rolled out on the new model. More than 500 municipalities in Italy are already working under the new Joint Delivery Model. As a result, efficiency and flexibility is already improving in line with our targets. Execution is on track.

We have also reduced the number of operating regions as anticipated, from 9 to 6 across Italy. As a result, 3,000 FTEs are gradually being redeployed to commercial frontline activities to support our distribution efforts.

Let's move to Slide #9 on the distribution agreement with Intesa. Poste Italiane, most trusted and effective distribution business, and unlocking the power of our network is a key component of Deliver 2022. In April, as you know, we signed a 3-year nonexclusive agreement with Intesa Sanpaolo for the reciprocal distribution of selected products and services.

There are 3 area of focus, and I will briefly share the key details and strategy behind the agreements. Number one, we will distribute Intesa mortgages and loans through our postal office network. This will be white-label products underwritten by Intesa with upfront fees for Poste Italiane. This is in line with our strategy to expand our product offer to meet customer needs without increasing our risk profile.

Number two, in payments, Intesa will accept traditional Bollettino payment slips and allow the top-up of Postepay prepaid cards in their 20,000 point of sales across the Banca [indiscernible] network. As a result, we will be able to better manage the transition from Bollettino to digital payments, while also leveraging on third-party networks to consolidate our leadership with Postepay.

And third, we will distribute asset management products without any exclusivity or target in terms of minimum volumes. We will widen our product range in line with our strategy to have a controlled open platform to best serve our customers, and our sales teams will benefit from training and commercial support to strengthen our financial adviser capabilities.

We began to distribute the first fund in April, a simple and competitive product which has already proven to be successful with net inflows exceeding EUR 100 million during the first weeks.

I would like now to hand over to the head of our business unit and to our CFO, who will explain these trends in more details.

As stated in our Capital Market Day in February, we have a strong leadership team committed to making Poste Italiane a great success. You will hear more from our business leader on these calls going forward. Today, you will hear Massimo Rosini, Head of Mail & Parcel; and Andrea Novelli, CEO of BancoPosta, who will share more detail on the results of Financial Services. Payment, Mobile & Digital highlights will be covered by our CFO, Roberto Giacchi, as Marco Siracusano unfortunately cannot be here with us today. And as per our Capital Markets Day, Roberto will also cover Insurance Services and other group topics.

Over to you Massimo, please.

[Massimo Rosini, executive]

Thank you, Matteo, and good afternoon, everybody.

In Mail, Parcels and Distribution, our efforts to refocus this segment, as presented within the Deliver 2022 plan, have already begun and you are seeing some of the key trends as well as the impact show through in these results.

Segment revenue decreased by only 1.8% year-on-year. We have had a strong performance in Mail revenue, down only 2% or EUR 14 million. Parcel revenue increased slightly, recovering from an industrial action that affected our Express Courier SDA, which negatively impacted the fourth quarter 2017. This result is in line with our expectation. B2C revenues are up 18%, and we confirm our targets for the full year 2018.

Also, intercompany revenue were up 3% or EUR 56 million, thanks to the growth in other segments revenue. This positive revenue trend, combined with a strong cost discipline, allowed us to post an impressive EUR 263 million EBIT, up nearly 95% year-on-year. The first quarter, as usual, includes the positive impact of capital gains, while early retiring incentives show later in the fourth quarter. Considering all of this, at the moment, we forecast a full year result in line with targets, with a significant improvement compared to 2017.

Let's move to Slide 12. Here you can see volumes and price trends for Mail & Parcels. Mail volumes decreased by only 3%, which positively exceeded expectations. Additionally, the decrease is mainly related to lower-margin products, such as direct marketing. Mail volumes are also positively impacted by the significant increase of packets as more parcels related to e-commerce transaction coming from abroad that are distributed through our postal network.

The 5.4% registered in parcel volumes in the first quarter 2018 will, therefore, actually be 11.3%, including these packets. Average prices increased by about 3%, thanks to positive volume mix effect.

At the moment, we confirm our 2018 targets for Mail revenue, because we believe that the trend improvement recorded in this quarter is yet to be confirmed in the coming months.

Parcel volumes increased by 5.4%, boosted by positive e-commerce developments. Average parcel prices were down about 4%, reflecting the changing volume mix from C2C/B2B to B2C.

Thank you for your attention. I will be available for any questions during the Q&A part of this call. Let me now hand over to Andrea Novelli.

[Andrea Novelli, executive]

Thank you, Massimo, and let's start from Slide 13 with our segments' key financials.

Here, we show Financial Services revenue, including net capital gains, rather than gross capital gains as shown on Slide 6. Revenue increased by 2.2% in the first quarter 2018, reaching EUR 1,494,000,000, mainly thanks to the ramp-up of savings under the new remuneration agreement in place since January.

Postal savings are key for Poste and will support profitability of our Financial Services segment, while also allowing us to attract new resources and to engage in strong and trusted relationship with our customers, thus enabling cost saving.

Third-party distribution revenue was impacted by 2 items: first, accounting changes introduced in 2018, which require us to report revenue net of the fees paid back to the originating bank for the repaid back loans; and second, the impact of the disposal of Banca del Mezzogiorno-MCC, which occurred in August 2017. Neutralizing these 2 items, as I'll show later, third-party distribution revenue increased by 12% during the period.

Interest income maintained a highly resilient trend and assets under management are showing positive growth trend, with revenue relying more on asset -- on management fees, rather than upfront fees.

Thanks to our systems and our people, we are now poised to develop our asset management business to best serve our customers. The launch of the new mutual fund back in April that Matteo mentioned earlier is a good example of our development.

EBIT and net profit growth outperformed the revenue trend just described, supported also by reduction provisions.

Let's now look more in detail at the evolution of total financial assets on Slide 14. Total financial assets levels confirm a solid positive trend over time and show an increase of 3.3% in the first quarter 2018 compared to the previous year and in line with Deliver 2022 projections, with a EUR 17 billion increase in assets.

We booked strong net inflows of EUR 4.4 billion, driven by life insurance, deposits and mutual funds. Overall, net inflows increased by over EUR 0.2 billion year-over-year, while retail new inflows increased by EUR 0.5 billion, confirming our ability to attract new resources, also thanks to the new postal savings products. As a result, postal savings negative net inflows significantly improved to minus EUR 2.6 billion, thanks to new commercial initiatives, while maintaining positive inflows for all other products.

Net inflows in insurance were equal to EUR 3.1 billion, of which more than EUR 200 million coming from unit-linked and multiasset Class III products. And mutual funds posted positive net inflows above EUR 100 million. Let's see these components more in detail over the next slides.

On Slide 15, we have the distribution of TFAs in the first quarter of 2018 by customer segments based on wealth and related financial needs [ addressed in ] our Deliver 2022 plan. The growth of EUR 8 billion in TFA is distributed across almost all customer segment, with a concentration in private and affluent, thanks to our marketing approach aimed to increase our share of their assets with a stable number of clients. The total number of retail customers increased from 34.4 million at the end of 2017 to 34.5 million at the end of the first quarter 2018.

Slide 16 focuses on postal savings, but we can already see early results of the new remuneration scheme agreed with CDP. The average stock remained broadly stable year-on-year, thanks to the interest accrual on postal bonds mitigating the negative flows. Negative net sales came to EUR 2.6 billion in the first quarter, strongly improving versus the previous year, and we expect a stronger performance in the second half given traditional positive seasonality. This is in line with our guidance of progressively improving negative net inflows, keeping an average of minus EUR 4 billion between 2018 and 2020, allowing us to enhance our remuneration.

In the first quarter, we launched 3 new products with CDP, all with very attractive yields and different maturity options for our customers' financial need. As a result, fees from postal savings came to EUR 450 million in the first quarter, delivering an increase of 27% year-on-year.

Let's move to Slide 17. Average current accounts reached EUR 57.8 billion in the first quarter of 2018, up by 5.9%, mainly thanks to corporate and public administration customers. Interest income from the Govies portfolio into which we must invest deposits was EUR 361 million, broadly stable year-on-year, thanks to higher volumes offsetting lower returns. We realized the expected capital gains for 2018 and we secured most of the capital gains that we plan to book in 2019. Notwithstanding that, unrealized gains at the end of March increased to EUR 2.8 billion, improving mostly thanks to the reduction of the BTP bond spread.

In terms of sensitivity to interest rates, a parallel increase in the yield curve of 10 basis points results in less than EUR 10 million interest income on a yearly basis, while the sensitivity to the BTP bond spread impacts annualized gains. With plus 10 basis points of spread, annualized gains decreased by about EUR 550 million.

Moving to Slide 18. Here we focus on asset management and loan and mortgage distribution. In the first quarter of 2018, we registered positive net inflows for EUR 322 million in mutual funds, Class III multiasset and unit-linked insurance products.

During the period, we also completed the deployment of MiFID II guided advisory platform in all post offices and the assessment of our salespeople. The vast majority of our staff are now MiFID II compliant, while the small remainder will work under supervision until qualification. We therefore expect to see a positive impact of this development as the year progresses.

Assets under management increased, reaching EUR 9.3 billion, including multiasset Class III and unit-linked insurance products, with a change of mix from bonds and cash towards other asset classes with a higher share of equity.

Moving to loans and mortgages. In the first quarter of 2018, distribution continued to increase. Volumes increased 2% year-on-year, leading to higher revenue by 12%, as you can see on the line adjusted revenue. The 2% increase in volumes is the result of high growth in personal and salary-backed loans, while the mortgages, we expect a meaningful ramp-up in the second half of the year, also thanks to the new agreement with Intesa.

As I said earlier, stated numbers are not meaningful due to a change in accounting principles as of this year and for the disposal of BdM-MCC in August 2017. You can also find further detail in the appendix of this presentation.

That's all for me. Thank you for your attention. Let me hand over to the CFO, Roberto Giacchi, to talk about Payments, Mobile & Digital, Insurance Services and other group topics.

[Roberto Giacchi, executive]

Thank you, Andrea. I will briefly take you through the highlights for the Payments, Mobile & Digital segment, where Poste Italiane benefits from clear leadership in a fast-growing market. Revenue increased by 10% in the first quarter of 2018 compared to 2017, supported by all business line, leading to an operating profit of EUR 57 million, up by 3.6% year-on-year.

In card payments, we have increased revenue by 20% year-on-year, supported by an increased stock of Postepay cards and higher transactions, both in physical and digital channels.

In other payments, revenue amounted to EUR 32 million, up by 3%, thanks to positive seasonality in utility bills.

In telecom, we have registered revenues of EUR 52 million, increasing by 4% compared to last year as we continue to grow, thanks to our new product sales, both mobile and fixed.

Let's move to Slide 20 to have a closer look at the drivers underlying this business. In card payments, we have reached EUR 18.4 million Postepay prepaid cards, increasing 12.6% year-on-year. Poste Italiane carried out some EUR 270 million payments card transaction, increasing by 24.8% year-on-year.

In the fast-growing environment of e-commerce, we reached almost 50 million transactions, increasing by 25.2% year-on-year.

In telecoms, we sold about 300,000 new lines, mobile and fixed, increasing by nearly 1% year-on-year.

Finally, the success of our digital e-wallets is confirmed, reaching EUR 2 million in the first quarter.

Let's move to Slide 21. The continued increase in users accessing our digital properties shown on this slide confirms our leadership in the digital ecosystem in Italy. For mobile apps, we have reached 16.5 million downloads, up 47% year-on-year. Online registered users increased at a pace of 20%, reaching 15.6 million at the end of March. We have also seen a very solid growth in the number of electronic identification system released, reaching 2 million identities at the end of the first quarter, up 70%.

On the right side of the slide, you can see the synergies between our physical and digital channels. Daily online user reached 1.4 million, approaching the number of physical visitors to our post office of 1.5 million. This translate into a strong growth of online transactions, increasing by 20% year-on-year, and into a strong growth of track and trace searches, mainly related to the delivery of parcel, increasing by 24% year-on-year. This is only the beginning of the story.

As Matteo mentioned, we have now obtained the necessary authorization from the Bank of Italy to set up our payment institution, which we expect to be fully operational by the last quarter of 2018.

Let's now move to the insurance business on Slide 22. All in all, insurance revenues was resilient, despite lower gross written premiums, with an ongoing rebalance of the insurance offerings. In particular, life insurance-related revenue decreased 5% year-on-year, while private pension plan-related revenue increased 77% and P&C was up 19%. EBIT is almost in line with last year at EUR 144 million, and also net profit remains resilient. In line with Deliver 2022, we confirm that full year 2018 results will be broadly stable compared year-on-year.

Let's move to Slide 23. Gross written premiums. Here we can see that, as announced, a gradual rebalance of our insurance business is taking place. Gross written premiums of life products are down by 11% year-on-year, with a steady increase in unit-linked and multiasset premiums. Gross written premiums for private pension plans increased by 6% to EUR 272 million, while our P&C business increased by 21% to EUR 48 million, supported by all business lines: welfare, personal, property and payments.

In P&C, we have experienced not only a strong performance in premium growth but also a combined ratio level of 51.1%, mirroring the strong relationship with our customers.

Looking at gross written premiums as a whole, the trend is in line with our expectation for the full year 2018, where we expect a reduction by about EUR 3 billion compared to 2017.

Moving to Slide 24. Technical reserves increased versus full year 2017 by EUR 4.6 billion or 3.7%. In particular, net premiums and accrued interest increased the stock by EUR 5.7 billion, runoffs decreased the stock by EUR 2.2 billion and capital gains contribute to an increase of EUR 1 billion.

The evolution of our investment portfolio is in line with the new strategic asset allocation that foresees a gradual increase in multiasset funds and in alternative investments, and consequently, a reduction in bonds.

The minimum return guaranteed to our customers has been reduced by 2 basis points in comparison with full year 2017, mirroring the gradual runoff of these type of policies. Please bear in mind that even if current level of minimum return guarantee is below our competitors, we expect further improvement due to the increasing weight of new business.

Class I return was down due to a persisting lower -- low interest rate environment, but we are in line with our target.

Slide 25 gives a comprehensive picture of regulatory requirements for the insurance business. Poste Italiane solvency ratio is up to 284% from 279% at year-end 2017. Own funds increased, thanks to the growth of business and the higher risk-free rate in the context of lower duration on assets than liabilities. The increase in capital requirements results from higher lapse risk mitigated by higher interest rate and lower spread. The sensitivities on the bottom right part of the chart confirms the resilience of our solvency ratio to stock. That's all on our business segments breakdown.

Let's now move to group costs on Slide 26. Here you can see the results of our focus on cost discipline. All ordinary items were down. HR costs amounted to EUR 1,430,000,000 in the first quarter, down by 3.4% or EUR 50 million compared to the same period of 2017. The weight of HR costs of revenue came down to 50% in the first quarter 2018 from 52% 1 year before. On HR costs, please remember that we expect to book the majority of early retirement incentives in the fourth quarter of 2018.

Non-HR operating costs were also down 9.2% year-on-year. In particular, cost of goods and services are down by 5%, other costs are down by 38%. Depreciation and amortization decreased, but are expected to remain broadly stable in 2018 versus 2017. The weight of non-HR operating costs on revenue came down to 26% in the first quarter 2018 from 29% 1 year before. Please note that there are some nonrecurring costs in the first quarter 2017 that we need to consider when looking at the yearly trend: The deconsolidation of MCC during 2017 for EUR 10 million; charge for early redemption on distributed loans, which are now deducted from revenue since 2018, for EUR 7 million; provision related to real estate funds for EUR 6 million. Excluding these nonrecurring items impacting the first quarter '17, non-HR operating costs decreased by 7% year-on-year. Overall, the first quarter cost base is in line with our targets for 2018.

On Slide 27, we had outlined the positive HR cost trend as well as provided additional details on average headcount levels. We have reduced the total headcount year-on-year by 2,200 FTEs despite flexible hirings of 3,000 FTEs. Let me highlight that we can rely now on about 8,400 temporary FTEs on average, which can enable further efficiencies going forward as the Joint Delivery Model is rolled out and headcount requirements decrease.

Labor cost per FTE stood at EUR 42,000, broadly in line with year-end projection and down year-on-year, mainly thanks to one day paid national holiday less in the first quarter 2018, the release of provision previously accrued and the deconsolidation effect of BdM-MCC.

Finally, Slide 27 shows that the industrial net cash position stood at EUR 385 million at the end of March 2018, affected by a seasonal trend, which also occurred last year. The operating activities increased the cash position by EUR 279 million compared to the end of 2017. The change in working capital resulted in lower cash of about EUR 700 million due to the payment of personnel early retirement incentive, the cash out of the 14th month salary installment paid in March, the one-off payment related to the renewal of labor contract. Capital expenditure absorbed EUR 46 million, with investments due to ramp up over the next quarter as Deliver 2022 moves forward.

Overall, our financial position is strong, confirming our ability to generate positive cash flow after taking into account our needs from operation.

That is all on my side. Let me now hand over back to Matteo for some closing remarks. Thank you.

[Matteo del Fante, executive]

Thank you to my team. Before taking your question, let me briefly reiterate some key points. Poste Italiane achieved strong results in the first quarter. Revenue increased by 1.8% year-on-year, while EBIT was up by a much stronger 33.7%. This performance was underpinned by a renewed commercial focus, which you will see ramping up in 2018, as well as an ongoing focus on cost discipline that is already positively impacting our bottom line. Deliver 2022, our group-wide transformation program based on [ pragmatic ] targets and clear KPIs, is moving ahead. This has just been 1 quarter in our 5-year journey to 2022, and all business segments are fully focused on the effective execution of the plan. We'll continue to provide progress updates on a quarterly basis. Thank you very much for your attention. We're now ready to answer your questions.

[Operator]

[Operator Instructions] We will now take a first question from Fabrizio Bernardi from Fidentiis.

[Fabrizio Bernardi, analyst]

I have a few questions on the cost base, if I can. I would like you to focus on the trend of the cost base, which had a great trend in this quarter. In particular, I would like to understand if we can consider this improvement as recurring. More specifically, if I consider the, let's say, the EBIT margin of 29% of the M&P division versus the 15% 1 year ago as a new sort of base case for the division, obviously, apart from the early retirement cost usually booked in the last quarter of the year? Also, if you can give us a little color on D&A, mainly, obviously, in the M&P division, where when they were down more or less EUR 10 million, which since -- as [indiscernible] but on a full year basis would be great. And then a curiosity, if I can. Would you remind me what happened to HR cost in the banking division? There is a sharp drop, but if I'm not mistaken, the same drop was visible already in the last quarter of 2017?

[Matteo del Fante, executive]

Thank you for your questions. I'll start with the D&A. Yes, the EUR 10 million lower CapEx is under scrutiny and control, but there are no worry and I would not consider the exercise of taking the EUR 10 million and making it a EUR 40 million decrease in CapEx in 2018. So we are targeting our CapEx for year-end in line with the plan. On cost, maybe Roberto, you want to follow up?

[Roberto Giacchi, executive]

Yes. Thank you. As we say, at this stage, we are confirming the target for 2018 that we deliver with the capital -- within the Capital Markets Day. More precisely, we can consider the efficiencies that we have reached in this quarter all consolidated, and when I say consolidated, I mean that only a small part of these efficiencies are related to the shift of some cost to the next quarter. But we cannot say that these kind of efficiencies will be repeated in the next quarter. On depreciation and amortization, Matteo already answered. Then, if I may, I would ask you to repeat your last question on banking HR cost.

[Fabrizio Bernardi, analyst]

Yes, if I look at the presentation, one of the last 2 slides, where you've put the P&L of Financial Services, I read personnel expenses were EUR 30 million in 2017 and EUR 21 million in first quarter 2018, so it's a drop of EUR 9 million, minus 30%. I checked the fourth quarter of '17 and HR personnel expenses were already down materially. So I would like you to remind me what happened to the Financial Services division in terms of HR cost because minus 30% is a record, I guess. Page 37.

[Roberto Giacchi, executive]

Yes, thank you for [ this question ]. As we said before, in the first quarter of 2017, we have -- we still have in our numbers the BdM-MCC legal entity. Then we [indiscernible].

[Fabrizio Bernardi, analyst]

[indiscernible].

[Roberto Giacchi, executive]

Yes, so we had deconsolidated the revenues and cost. So that reduction is mainly related to deconsolidation of BdM-MCC.

[Operator]

We will now take our next question from Gian Luca Ferrari from Mediobanca.

[Gian Ferrari, analyst]

I have 3 questions. The first one is on the 2% decline in retail deposits. I was wondering why you had this small reduction, given that your retail deposits were up quite substantially last year. Second is on the buyback, when you intend to start it. And I know you have an authorization to complete it by 18 months, but I was wondering if you plan to complete it by end of this year. Third and final question is, if you can give us a sense of the rebates that you will get from Intesa on the mortgages.

[Matteo del Fante, executive]

Okay, on the buyback, we were not yet authorized. There is the General Assembly on the 29th of May, then we have 18 months. But I want to be clear with investors, no decision has been taken by the board. And so we have -- the board has allowed us this flexibility for the future, but there is no commitment to proceed with the buyback and no specific decision has been taken. The third question was on rebates, which is, I think, easy because we don't disclose it. And more specifically, on the first question, 2% decrease in retail deposits. I think Andrea can top up.

[Andrea Novelli, executive]

Yes, thank you, Matteo. If you look on the same slide at the corporate and other component, in that part, that is actually growing. You have also the deposit coming from the Postepay part of our business. So if you take into account, the total retail component, summing up the current accounts and the Postepay cards, that component is actually growing and not declining.

[Operator]

We will now take our next question from Kunal Zaveri from JPMorgan.

[Ashik Musaddi, analyst]

This is Ashik here. I'm using Kunal's line. I'm from JPMorgan. Just a few questions I have is -- one is, can you give us some color about what's happening with the nonlife distribution, where are we on the process, and when shall we expect clarity on nonlife distribution? So that would be the first one. The second question is with respect to Mail & Parcels business, now the volume of mail business declined only by 3% in the quarter. And if I understand correctly, this used to be around, say, 7% to 9% in past. So what's driving such a low drop in mail business in the quarter? And is it fair to say that this would be the new normal, i.e. it will decline, but at a lower pace? And the third question is, you mentioned that you have logged in some capital gains for next year, now what does that mean? I mean, will -- is it still part of unrealized gains or is it already taken out of unrealized gains? A bit of clarity on -- if you can give on that capital gains for 2019, which you mentioned you have taken some forward contracts. Any clarity on that would be great.

[Matteo del Fante, executive]

Thank you for your question. Nonlife distribution is [ another ] specifically partner or partners that we are going to select, and the process is ongoing. In terms of Mail & Parcel -- -- sorry, please.

[Ashik Musaddi, analyst]

No, I was just saying, is there any particular criteria that you're looking for, like, okay, this must be my upfront payment, I should be expecting this much of a commission? Any sort of criteria you have in mind to select a partner that you can disclose or is it just a bit too early to disclose that?

[Matteo del Fante, executive]

Yes, yes. First of all, let me remind that in terms of Deliver 2022, this was an activity plan towards the last 2 years of the plan. So as we are anticipating potentially the process, and there are no meaningful revenues embedded in the plan for this distribution agreement. In terms of criteria, there are 2 main criteria, if I want to summarize. The service that we get from the partners on the overall product, and specifically the claims management, is going to be fully analyzed because we want to give to our customer the best possible product. And the second is competition in pricing of the product, because if Postepay enters such a market, the natural expectation from our clients would be for us not only to offer a very good product, and our reputation is extremely important and the trust that our clients have with Poste is extremely important, but our clients would expect also to have a competitive product in terms of pricing. So there is quality and price, and obviously a fees consideration for us. But this is not the main criteria because with the number of clients and the opportunity that we have ahead of us, it's not a matter of maximizing upfront fees in the first few months or years, but it's a matter of building a stable presence into a new segment. And your last -- your second question on Mail & Parcel is -- unfortunately, we cannot consider, I believe, the minus 2%/3% on mail as the new normal, as you hinted. We believe that we have to be more conservative. There have been some one-off revenues that have been booked in the first quarter. Having said that, our focus on commercial activities in the space is increasing. The third question on capital gains of 2019 is straightforward. The EUR 2.8 billion unrealized in the portfolio today is a number that has to be considered after having already closed all the capital gains we needed for 2018 and a meaningful part of the '19. We don't disclose, at the moment, the 2019 total amount, but we have started, when the spread was interesting and low, to realize the gains so that we will have the opportunity in a more volatile environment with wider spreads to reinvest in a more benign and rich yield and spread environment.

[Ashik Musaddi, analyst]

Sorry, just to confirm, so you mentioned EUR 2.8 billion is after 2018 and after a meaningful part of 2019?

[Matteo del Fante, executive]

No, sorry, only 2018.

[Ashik Musaddi, analyst]

Okay, and 2019, which you have already secured, will have to go out from this number?

[Matteo del Fante, executive]

Yes.

[Operator]

We will now take our next question from Giovanni Razzoli from Equita.

[Giovanni Razzoli, analyst]

I have a couple of questions. The first one is on the very good result, in my view, on the Mail & Parcels and Distribution division. I was wondering whether you can provide us an update of the direct injection project that you have started, if I'm not mistaken, at the beginning of the year. If you do plan to enlarge this project to other areas, and to what extent this can contribute to accelerate the revenues of the B2C segment? The second question is actually a clarification on the EBIT of the Mail & Parcel, Distribution. Honestly, I didn't get why you provide an adjusted EBIT figure of minus EUR 43 million, excluding the capital gains. If you -- if it's my mistake, I don't understand this, so if you can just give us an idea? And shall we consider this as a run rate going forward, excluding the extraordinary cost for [indiscernible] that you expect to book in the Q4? And the very last question, a clarification on what's the sensitivity of the capital gains of the [indiscernible] portfolio? You said you have a sensitivity of minus, if I'm not mistaken, EUR 550 million to 10 basis points in the [ sovereign ] spread. I was wondering whether this understanding is correct?

[Matteo del Fante, executive]

Okay. We're working very hard in terms of the Joint Delivery Model on one side, which is the last mile, which is basically increasing the number of parcels that our lettermen deliver. And this is going relatively smoothly. As I said, we had implemented already 71 delivery centers since mid-April, and already 500 new municipalities in Italy are experiencing the new delivery model. On the back of it, if I understood correctly the question, we are optimizing the backbone and the network, and direct injection is being implemented everywhere we can in terms of shortening the number of touches, the number of work that needs to be done for the parcel to get to the delivery center. And that's a part of the reorganization of our backbone logistic infrastructure, and clearly covers also our Express Courier SDAs.

In terms of the second question, why do we show the EBIT adjusted, I will let the CFO...

[Roberto Giacchi, executive]

Thank you, Matteo. As we see, we have booked both in the first quarter 2017 and in the first quarter 2018, capital gains. Capital gains are passed for something like 80% to the Mail, Parcel and Distribution segment as commission for sales of product. So if we do not consider this part of the commission, like if we do not have done the capital gains, the underlying EBIT would have moved -- would have passed from minus EUR 186 million to minus EUR 43 million. That is the underlying EBIT without the capital gain effect. Then, I would take also the question on sensitivity. With a 10 basis point spread increase, our realized capital gain would decrease by about EUR 550 million.

[Operator]

We will now take our next question from Anna Benassi from Kepler.

[Anna Maria Benassi, analyst]

I have 3 questions. The first question relates to the unit-linked business. It's a small portion of your insurance business, but is the most -- the fast-growing segment. And we hear about the supreme court, Corte Costituzionale, having taken a view on that. We hear the association of insurers, but can you give us an idea what you expect to happen in coming months in terms of the regulatory authority could change some of these products, and how you -- do you expect to react to that? My second question relates SIA. We have understood that the CEO has resigned, and as far as we understand, you are in favor of the IPO of the company. You are a shareholder of the company and the fit between the SIA business and your business could be perfect. Do you believe that something could move in terms of changing the shareholder base of the company? And my last question relates to your several comments about not annualized Q1 results, both in terms of EBIT and net profit. That is very clear to us for what capital gains and restructuring charges are concerned, that is typical between the first quarter and the last quarter. But looking to the cost performance, so the efficiency, and also better growth in certain division and the ramp-up of the Intesa agreement in the second half of the year, don't you think that we can consider your comments as conservative just because we are only in May and not in September?

[Matteo del Fante, executive]

I wanted to interrupt you because the line was really, really bad and it was difficult for us to hear. We missed, basically, the first question. We understood that the second question was about Corte Costituzionale, and there's a new ruling on unit link. Not much to say, but first of all, we are the company which is the least exposed to the matter because we have always sold Class I products. As you have seen in the data, we are starting to increase our penetration of Class III, but we believe that the insurance component of unit link is there by law, by contract, and this will be clarified down the road. We're not worried that we're not changing our business and marketing strategy. I captured the word SIA and shareholders in your third question. So I assume you were referring to our participation in SIA, which is the process payment company controlled by CDP, and to a lower extent, ourself with 15%. We're working with SIA on many industrial developments to support our business. The business is changing from an operating level very fast. And the fact that we can be supported into the new developments, into the new products, into the new integration, from the excellence that the market recognizes to SIA is clearly positive for us. In terms of shareholders, there is nothing on the table. And I have to apologize, but it was very difficult to understand your last question, maybe you were saying something like, given this very strong Q1 on cost, and to some extent on revenues, aren't you too conservative towards your year-end target. Can you say yes or no? Well, maybe we lost the line...

[Operator]

Pardon the interruption, the line has disconnected. We will now take our next question from Matija Gergolet from Goldman Sachs.

[Matija Gergolet, analyst]

I have 3 topics, if I can say we can elaborate a bit on. First is on the capital gains. I find it very interesting that you are saying that you have already locked in some forward capital gains for 2019. You have almost EUR 3 billion of accumulated capital gains. Can you help us a little bit to understand how you're thinking about, say, forward sales should lock in more capital gains for the coming years? Because it seems that you almost have a bit of a play on the spread, 50 basis points of spread is basically EUR 3 billion of capital gains. Why not just realizing now a good chunk of those spreads and thus securing several hundred million of capital gains all the way through 2022? Are you thinking about this? That was the first question.

[Matteo del Fante, executive]

Yes, that's a good question. Sensitivity is clearly extremely big because at the end of the day, 10 basis points of spread are something that can happen over 1 or 2 weeks. The way we look at it is combining our capital gains needs for the plan. And you remember from Deliver 2022, that the needs we have in the plan are decreasing, more or less call it EUR 100 million per year decrease. We want to be, at the end of the plan in 2022, with an EBIT without capital gains. But we need to balance our capital gains in the plan with our interest margin in the plan. And if you have the time to go back to Section 5 of our Deliver 2022 plan, and specifically on Page 13, 1 3, of Section 5, we were showing exactly the balancing effect of the 2 elements. So when rates are going lower, we clearly have a benefit in terms of higher potential capital gains, but we suffer on the interest margin. So we run, and what we stated in Deliver 2022 is that all assumptions and all simulation and all the spread scenarios were performed with a static management approach. But we are showing, I believe, already in the first quarter, that we're not static, and when the market allows us to bring home and anticipate some capital gains because the spread is on the tight end of the range, we bring it home. That means that basically, should there be a widening of the spreads, we will have liquidity and opportunity to invest more. Should there be additional tightening that is putting pressure on our interest margin, we will be able to sell more and get what we need to deliver the plan. And it has not gone unnoticed when we presented the plan, that we did it with a spread of 130. And if you sum up the capital gain needs that we have put in the plan, decreasing, you always get, for the time being, at a total value which is significantly lower than what we have in the portfolio. And nobody has asked us what we would do with the rest, but we have it, okay.

[Matija Gergolet, analyst]

Okay. Got it. Very clear. Secondly, on the cost. So Slides 26 and 27. I think now, I find this as a cost reduction almost a bit surprising. Now I think the CFO mentioned that in the wage costs, there was also, say, a 1 day of national holiday is not paid this year and some provision reversal. Could you just quantify that, please? Because 3.4% lower employee cost, I don't think has been achieved at any point in time over the last now 3, 4 years, but the number of FTE reduction is more or less in line with recent history.

[Roberto Giacchi, executive]

Yes, the 1 day less paid national holiday has a value of EUR 12 million that was accounted in first quarter 2017. And the effect of the provisions that we did in the first quarter of 2017 to take into account the renewal of the labor contracts had a value -- would reduce, netting the value, the labor cost for full-time equivalent, for this value, that this value would be reduced from EUR 43,100, as stated in the chart, to EUR 42,600 (sic) [ EUR 42,000 ]. These are euros annualized labor cost for FTE.

[Matija Gergolet, analyst]

Got it. Sorry, just on the cost side, what are the expected wages for wage increases for this year? Is there like a premium in Q2 you mentioned? What shall we say -- assume for the rest of the year for, say, wage increases?

[Roberto Giacchi, executive]

We can assume the same value that we stated in the Deliver 2022 plan. We think we are in line with that value.

[Matija Gergolet, analyst]

Okay. And just last topic, quickly. So you mentioned on mail volume declines and say Q1 is good, but it almost seems that you don't want to increase the guidance for that division because you say that you want to see that these trends from international, e-commerce, inbound or say e-commerce going via mail have to be confirmed. What exactly do you need to have confirmed at the end of the day basically to have more confidence that there is a change in trend in mail, perhaps driven by more mail going through -- no, more -- sorry, e-commerce going through mail? We're hearing the same thing from pretty much all the other postal companies that there's now more and more e-commerce packages going through the mail. So what's your view there?

[Matteo del Fante, executive]

The trend of international package going through the mail channel, I agree with you is -- there is not a lot we need to wait to see it confirmed. If anything, probably it will increase. But it's probably not only that. The first quarter of the year, there were some additional mailing, due to regulatory aspects, that we need to verify whether it will be replicated toward the end of the year. In the first month of the year for regulatory purposes, all financial institutions need to restate conditions, and that has been, in our opinion, particularly strong this year. And we're not sure that this will be sustained. So that's the reason why we are not ready to change our view towards year-end volumes and revenues.

[Operator]

We will now take our next question from Elena Perini from Banca IMI.

[Elena Perini, analyst]

I have 2 questions left. The first one is, again, on the Mail & Parcels business. If I understood correctly, you have not recorded any one-offs in terms of costs in this first quarter, but you have recorded some one-offs on revenue side. Could you please make some sort of a recap on this, please? And the second question is on the insurance business. Because if I look at your Excel -- Excel file -- Excel database, I see that financial and insurance activities suffer from a strong decline in this quarter compared to the first quarter of 2017. In particular, we have EUR 429 million versus EUR 982 million last year. If I look at Page 14 of your press release, I see that this comes from both income and expenses. Could you please elaborate a bit more on this, please?

[Matteo del Fante, executive]

Okay, I will ask the CFO to take the first question. Please, Roberto.

[Roberto Giacchi, executive]

Yes. Thank you, Matteo. As we see it, the nonrecurring items that we have recorded on this quarter -- on the last quarter, Q1 quarter in 2017 versus the first quarter 2018, are the one that I mentioned on slide -- I give you the number, on Slide 26. So those are the nonrecurring items. The figures for Mail & Parcels so are consistent, in terms of revenues and in terms of cost, quarter versus quarter. The only adjustment that we did is to take into consideration the capital gain effects and to show you the underlying EBIT of the segment without the capital gains.

[Matteo del Fante, executive]

On the second question, I'm not sure I understood it, but if I try to answer anyway. When you say that on Page 14 of our press release, you see a decrease in revenues or income from the insurance activities, I believe the answer was in the presentation related to the financial -- the insurance sector, where we actually sold, in the first quarter, less Class I premium than we sold in the first quarter of 2017. This is absolutely in line with the plan because there is a rebalancing exercise taking place with our clients, that in the first quarter of 2017, were not able to buy postal savings products because basically the offering was not there. So as we anticipated in Deliver 2022, the new offering of postal savings plan is creating with clients -- in the interest and under the choice of clients, a gradual rebalancing away from Class I products and that has clearly an impact on the specific insurance premium. But all in all, the segment has provided stable margins and revenues.

[Operator]

I would now like to hand the call back to Matteo del Fante for any additional or closing remarks.

[Matteo del Fante, executive]

There are no additional remarks on our side. And we're on the road to see more clients. And we thank everybody for the attention and the time you spend on Poste. Thank you.