Poste Italiane SpA

MIL:PST

Earnings Call Transcript 2022-Q2

[Massimiliano Riggi, executive]

[Audio Gap] everyone, and thank you for joining us today. I'm Massimiliano Riggi. On behalf of Poste Italiane, it is my pleasure to welcome you to our second quarter '22 results. Hopefully, you all had the chance to review our documents, which, as usual, are available on the IR section of the Poste Italiane corporate website.

I'm going to turn the call over to our CEO, Matteo Del Fante for some opening comments; and then Camillo Greco, our CFO, will cover the financial details of the quarter. Following the presentation, you will be able to ask questions either by phone or through our webcast platform.

Over to you, Matteo.

[Matteo del Fante, executive]

Good afternoon, and thank you for joining us today. The macro and geopolitical outlook remains complex and uncertain. It is against this backdrop that I am proud of the results that we're delivering, as we execute on our strategy and transformation.

We're navigating a challenging environment with cool heads and warm hearts, keeping recurring revenues and cost discipline at the core of our strategy. We're presenting very strong second quarter results and a successful progression of the '24 SI plan for the year.

Overall, group revenues are up over 5% year-on-year and continue to grow with the payments and mobile business and financial services as key contributors. A positive performance across the board has led to the highest ever EBIT of EUR 1.4 billion in the first half of the year. In particular, Mail, Parcel & Distribution EBIT is improving, more than offsetting the parcel market headwinds. We're now clearly well above pre-pandemic levels.

These achievements are a tangible sign of how Poste Italiane diversified business model is delivering sustainable results, also in difficult times. The combination of our proven track record and flexible cost management and ability to generate recurring revenues give us the confidence to continue the successful execution of our plan.

Let's move to group financial results on Slide #4. The numbers on this slide speak for themselves, showing a solid financial performance. Overall revenues are almost EUR 2.9 billion and up just over 5% from Q2 2021, a significant achievement given the current macro scenario.

The strong revenue progression is supported by recurring components and all business divisions are well in line with 2022 targets, continuing to leverage on secular growth trends and expanding share of revenues originated by growing businesses.

Our cost base transformation continues with total costs down by an impressive 5.5% year-on-year, reaching EUR 2.2 billion on the back of sustainable FTE reduction and lower unit per variable cost. As part of our proactive cost management, the insourcing of backoffice activities program is delivering positive results with total savings on external cost of around EUR 25 million in 2022.

As I just said, this is the best first half EBIT ever achieved by Poste. It is fair to say that this is an impressive take home as we are experiencing a change in mix of our operating profitability. Finally, Q2 EBIT is EUR 698 million, up an outstanding 63% with net income at EUR 469 million, up 44%.

On Slide 5, we show EBIT in the quarter and first half of the year for each segment. Overall, positive contribution from most of our businesses considerably improved our operating results by EUR 269 million in the quarter. In addition to increased revenue, sustainable cost management initiatives have been put in place to respond to current market challenges.

E-mail, Parcel and Distribution, lower variable costs attached to parcel and lower FTEs has contributed to a positive EBITDA for the second consecutive quarter, reaching a total of EUR 142 million in the first half of the year, confirming visibility on our 2022 EBIT target.

Financial Services also benefited from positive EBIT progression year-on-year, thanks to higher contribution from our investment portfolio, where higher interest rates have enabled us to reap rewards from the successful management of our BTP portfolio.

Insurance Services remained stable compared to half 1 of 2021, with the quarter comparison impacted by a strong Q2 '21, which reflected an unbalanced quarterly distribution in 2021. Payments and Mobile continued its positive growth path with EBIT rising to EUR 91 million in the quarter, thanks to a solid top line growth, but also leveraging on cost savings embedded in the new telco wholesale contract.

On Slide 6, we are presenting our profitability progression since 2016. As a clear indicator that Poste's diversified and resilient business has delivered long-term sustainable value creation over time and in any market scenario. Current market conditions are challenging as was the case during 2018 and 2020. In those years, when the BTP spread spiked, we continue to run our business with the goal of managing our portfolio through the cycle.

The government bonds we bought then were eventually supporting the yield of our investment portfolio over time. We have maintained our promise and delivered on our targets. Even during 2020, our financial position remained strong, and we did not delay the distribution of target dividends as opposed to most of the financial industry that had to suspend the dividend payments.

As you can see on the chart, our solid operating performance is not corelated to BTP-swap spread volatility. We are consistently monitoring market conditions and with our cautious approach, we are maintaining a strong visibility on our 2022 EBIT target.

Our businesses are solid, profitable and resilient, and we expect to double operating profitability levels compared to 2016, proving to react quickly and efficiently to stress scenario. We've emerged stronger from the pandemic. And thanks to the resilience and flexibility we have consolidated, we have built a strong track record in diversifying our revenues and increasing their quality. Furthermore, we have demonstrated a strong ability to manage the cost base, a significant buffer against contingencies.

We remain a safe harbor for Italian sailors in all market conditions and especially during periods of uncertainty and market volatility, with 93% of clients' total financial assets not exposed to mark-to-market volatility. This is distinctive feature of our wealth management offer meets the preference of our clients who are shielded from market turbulence.

The remaining 7% is experiencing a limited impact as our products have a gradual market exposure, keeping the trusted relationship with our customers intact. Our shareholders have also benefited from our sound results with a distribution of more than EUR 3.6 billion in dividends on the results achieved between 2016 and 2021. This is equal to an outstanding EUR 2.8 per share.

Let's move to a more detailed review of our numbers by segment, and let me hand over to our CFO, Camillo Greco. Over to you, Camillo.

[Camillo Greco, executive]

Thank you, Matteo, and good afternoon, everyone. Let's start the quarterly review with Mail, Parcel & Distribution on Slide #8. Main revenues remained stable year-on-year with higher margin products offsetting the impact of structural mail decline.

Parcel revenues were down 2% year-on-year, improving when compared to minus 10% recorded in Q1. The decline was driven by weakened macroenvironment mitigated by the consolidation of Plurima operating in health logistics.

Please also note that Amazon's Prime Day this year was in July as opposed to June last year. We will, therefore, see benefit from this initiative in the next quarter.

Lower variable costs in the Parcel business mitigated the impact of parcel slowdown. In general, we were able to mitigate the impact of market headwinds with lower variable costs related to parcels and a rigorous cost discipline, contributing to EBIT increase year-on-year. This confirms our flexibility to address unfavorable market environment, giving us visibility on our 2022 EBIT target.

Let me highlight that we are progressing as planned with our contractual logistics rollout and Plurima revenues are included in these figures with EUR 15 million.

Let's now look at Mail & Parcel volumes and tariffs on Slide #9. Parcel volumes were down 11% in Q2 and 12% in H1, in line with the wider market trend, which all postal operators are currently experiencing. Volumes were down across all segments due to macroeconomic trends such as higher inflation and eroding consumer spending, adding to post-pandemic parcel normalization.

On a more positive note, as already anticipated, we have been witnessing a pickup in volumes from China since May as the lockdown is slowly lifted there, providing confidence for more positive results in parcel in the second half of the year. Looking at pricing, the average parcel tariff was up 9% in the quarter and up 6% in the first half.

Moving to mail. Volumes fell slightly by 3% in the quarter and 2% in the first half, whilst mail tariffs are up 4% in Q2, thanks a positive mix effect from higher margin products. At the end of Q2, we received a green light from the relevant authorities to reprice specific mail products. The effect of this repricing will be visible already in H2.

Let's now take a closer look at parcel revenue dynamics and growth potential on Slide #10. The pandemic represented an unprecedented and structural tailwind in the parcel market space. The trend in parcel volumes peaked in 2021 on the back of pandemic restrictions. We believe that despite the current headwinds, fundamental growth drivers are intact with Q2 '22 volumes remaining high and structurally above pre-pandemic levels.

We are promptly reacted to the short-term headwinds with our cost flexibility, maintaining full visibility on our 2022 EBIT target. In the medium term, we expect e-commerce penetration gains to continue, especially in Italy, where parts per capita still well below the European average.

Indeed, the underlying drivers have not changed. More importantly, we highlight that our strategic transformation towards a fully-fledged logistics operator gives us confidence on the long-term parcel market opportunities.

In particular, we are taking specific management actions directly to diversify revenues, venture into business models that are higher up in the commerce value chain and focusing on specific value-adding verticals. Plurima is an example of the deployment of this strategy that allowed Poste Italiane to consolidate and further develop its capabilities in the contract health care logistics space.

Moving to Financial Services on Slide 11. Gross revenues were up 11% in the quarter to EUR 1.4 billion, thanks to strong contribution from our investment portfolio. Let's review the items one by one.

NII increased 22% year-on-year, supported by increasing interest rates and tax credit investments, which we'll cover in more detail on the next slide. As expected, we booked EUR 299 million of active portfolio management in H1, almost in line with the target for 2022. Postal saving dynamics, which I'll explained later, are pointing to the floor of the remuneration for 2022, resulting in EUR 800 million in H1, down 9% year-on-year.

Payments slips continued to decline, in line with market trends, with transaction banking fees down 12% in Q2, also due to a shift of revenues now booked in payments and mobile. Loan and mortgages distribution fees were stable with customers taking a cautionary stance in an uncertain market environment with increasing rates.

Asset management revenues continue to increase, supported by resilient AUM volumes year-on-year. Distribution revenues were up with maintenance fees on the stock, more than offsetting lower upfront fees or lower insurance gross written premium. EBIT registered a healthy growth of 12% in H1, mirroring the revenue trend.

Moving to Slide 12. Let's look at the NII evolution, which continues to increase, thanks to a favorable market environment and our successful active portfolio management. Let's now focus on the quarterly trend.

Average tax credit investment, EUR 7 billion generated an increase in NII to EUR 71 million in Q2, with asked purchased now EUR 9 billion, nearing our total target appetite. The B2B portfolio increased its revenues contribution by $13 million quarter-on-quarter. Higher rates positively contributed for EUR 15 million, more than offsetting the impact of lower average volumes.

Public administration deposits that received a variable remuneration have contributed with an NII improvement quarter-over-quarter of EUR 12 million. The quarter was impacted by a negative mark-to-market for a hedge to secure the remuneration rate for public administration deposits until the end of 2022.

Taking this into effect, the underlying NII for the quarter was around EUR 460 million, which is a reasonable base for H2. As a consequence, the overall NII yield reached almost 2.1% in H1, which we expect to be a representative number for the full year 2022.

Considering the current evolution of market trends, the underlying composition of our BTP portfolio, we expect this yield to increase by some 0.1% on a yearly basis over the '24 SI plan horizon, also considering potential cost of funding, which is difficult at this stage to predict.

This is a significant upside to our regional guidance of EUR 1 billion for 2024, embedded in our plan in March '21. In 18 months, we have proven our ability to adapt to a changing market environment. Our successful active portfolio management strategy has allowed us to increase both the quantity and the quality of the contribution of our portfolio to P&L.

Moving to Slide 13. TFAs reached EUR 571 billion, down by EUR 15 billion since December with a positive net inflows of EUR 2.7 billion year-to-date. Total TFAs are down due to a negative performance effect related to higher interest rates impacting on insurance technical reserves.

Looking at each component, postal savings negative flows equal EUR 5.8 billion, excluding the impact of the end of the early pension payment scheme in March 22. Postal saving books were impacted by lower capacity to save, which is expected to continue, while postal bonds were impacted by redemptions.

Following repricing actions taken by CDP early in July, the trend of postal bonds, gross and net inflows promptly reverted with postal bonds, daily gross inflows 3x higher than the average daily base of H1.

Net technical reserves benefited from a positive net inflows, almost EUR 4 billion, but the stock was impacted by the market effect related to our interest rates, which, however, is not affecting our customer portfolio returns. Deposits grew by EUR 6 million, mainly driven by public administration accounts.

Finally, mutual funds recorded positive net inflows entire in Q1, more than offset by negative market effect. Overall, total net inflows in Q2 slowed down due to the postal savings dynamic just described, while insurance and deposits continue to positively contribute to TFAs, mitigating the negative performance effect.

Moving to Slide 14. Insurance revenues were down in the quarter due to a different seasonality in 2021 when investment margin was front loaded in Q2 due to timing effect. Life net inflows continue to remain positive in a volatile market environment, performing better than competitors, thanks to a commercial offer shielding customers from market headwinds with either capital guarantee plus on products or multiclass products envisaging a gradual exposure to market trends.

The share of multiclass products on gross written premium was at 49% in Q2 compared to 61% in Q1, adapting to a changing market environment.

The lapse rate amounted to sound 3.9% and well below the market average, thanks to our loyal customer base. P&C revenues continue to grow at a healthy rate with an increasing share of health insurance products, both welfare and retail, benefiting from a stable combined ratio. Q2 '22 EBIT is down 6%, impacted by higher maintenance fees paid by PosteVita to BancoPosta and calculated on average volumes, which continue to grow, thanks to positive net inflows.

Let's move to Slide 15. As you know, insurance companies will be adopting IFRS 17 by January 23 with relevant changes for the whole industry. Poste Italiane is on track with the adoption process, and we can confirm that we have anticipated in our Capital Markets Day last March. We do not expect material impacts over future earnings.

Specifically, we expect a neutral or slightly positive impact on our Life business P&L as our contracts envisage long maturities and low minimum guarantees, and we have traditionally managed assets and liabilities in a conservative and forward-looking manner.

For the non-Life business, the impact assessment is still ongoing. But once again, we don't see a material impact potential emerging given the relatively small weight of that business. So as a result of the transition, a significant stock of contractual service margin is expected to emerge resulting in part in a reduction of shareholders' equity inception. Let me stress on this respect that solvency ratio will not be affected from the transition to the new standards, and IFRS 17 does not impact the way on funds are calculated.

On the other hand, CSM could also be considered as a proxy of value of PosteVita in force portfolio, therefore, providing a clear guidance on the embedded value of our insurance business.

Finally, let me remind you that the new standard requires both assets and liabilities to be calculated at fair value, but we're already doing this on our assets as PosteVita was the first insurance company to adopt IFRS 9 in 2018.

With the application of IFRS 17, the temporary mismatch effect between accounting of the investment margin in rebate policyholders, which is currently generating some volatility of the results on a quarterly basis will disappear.

Let's now look at the Solvency II ratio evolution on Slide #16. PosteVita Group's Solvency II ratio is well in line with 200% managerial ambition through the cycle. The Solvency II ratio is down 50 percentage points to 222%, net of 4 percentage points of foreseeable dividend.

The decrease is due to the rapid increase of BTP spread and interest rates, the latter strong impact in our lapse risk capital requirement which is calculated with the standard formula, which is affecting both own funds and SCR.

Further in detail, the positive impact from higher risk-free rates and volatility adjustment was more than offset by increasing lapse risk, which under the standard model implies a mass lapse rate of 40% of existing policies over 10x higher than our current figure. An increased capital requirement for lapse risk is indeed a consequence of an increased value of our in-force portfolio, which means more sustainability of our future earnings.

As I mentioned earlier, this will be even more important and visible under IFRS 17. Based on first preliminary evidence, the impact of lapse risk would be mitigated by the adoption of the internal model. Transitional measures provide additional 21 percentage points. As of yesterday market closing, our Solvency II ratio was between 200% and 115% with a BTP spread on euro swap of circa 155 basis points and euro swap at 175 basis points.

Let's now move to the Slide #17 and Solvency II ratio sensitivities. As highlighted in this slide by our keys and securities, positive it has a capital position resilient to market stress. While confirming our managerial ambition to maintain around 200% Solvency II ratio through the cycle, realized at the end of June, the sensitivity of the governance spread has further reduced.

As of December 2020, Solvency II ratio decreased by 129 percentage points on the back of an increase of 100 basis points of the Italian BTP. As of March, the sensitivity dropped to 71 percentage points to date stands at 60 percentage points.

All the severe stress test scenarios shown in this slide remain well within our risk appetite framework. We will continue to optimize the capital structure of PosteVita to support growth. More in general, Poste Italiane has enough financial flexibility to ensure that PosteVita's capital position is maintained within its risk tolerance, with no impact on group dividend policy. In particular, thanks to the healthy earnings reserve at all the level, we have visibility on dividend embedded in our 24s regardless of PosteVita dividend upstream.

Moving to Payment and Mobile on Slide 18. Payments and Mobile has yet again reported a strong set of results, with revenues growing 21% in the quarter to EUR 250 million, supported by all business lines. Card payments are up a significant 21% to EUR 121 million, thanks to higher margin post pay evolution cards and increased card usage.

Transactions are increasing, supported by a secular trend, which has been consolidating since the beginning of the pandemic with a steady shift to non-cash payments. In particular, the annual growth rates in 2018 reached 19%, twice as much as the market and with e-commerce transaction in filling 28% over the same time horizon.

Other payments doubled in the quarter, mainly driven by increased payment transactions on an innovative multichannel platform where participates as a payment service provider successfully mitigating the decline in payment slips. Telco revenues grew 3% in the quarter, yet another positive set of results.

In June, we successfully launched a simple, transparent and 100% green electricity and gas offer to Poste Italiane's former and current employees. This offer is being very well received and has already reached around 10,000 users.

EBIT grew by remarkable 48% in Q2, thanks to higher external revenues and lower costs with Q2 '22 benefiting from savings from the wholesale telco contract in Q2 '21 embedding one-off migration costs to the new network. Let me remind you that we expect energy setup costs to increase in H2 in line with our original plans.

On Slide 19, you can appreciate Poste Italiane's workforce transformation is progressing. Over the year, average headcount decreased by around 2,400 to almost 119,000 FTEs despite 3,100 new hirings in H1, including some 400 average FTEs from the newly acquired Plurima.

We expect hiring to grow further in H2 as we continue to focus on financial advisers, energy business, logistics and other dedicated projects. Lower FTEs are contributing to reduced HR cost on a recurring basis, while we expect an impact of around EUR 7 million in H2 coming from the salary increase already agreed last June. As a result, HR costs are down 5% to EUR 1.3 billion in Q2. Finally, the value-added per FTE is growing by 8% year-on-year, reaching EUR 75,000 per FTE.

On Page 20, let's review non-HR costs. Costs are down EUR 37 million year-on-year. G&A increased by EUR 12 million due to higher CapEx. Our focus on cost discipline allowed us to absorb an inflation-related cost increase of EUR 13 million, mainly related to higher fuel transportation and delivery in line with our expectations, while savings on telco costs now amount to EUR 15 million. As a tangible sign of efficiency gains, the ratio between variable cost and variable revenues fell further to 63%, highlighting the reduction in variable cost per unit.

Let me remind you that the hedges we put in place for corporate energy costs and jet will contribute to shielding us from price rises until 2023. Wrapping up on cost, let me remind you that we have a strong track record in managing our cost base against end market scenario. This is the case for ordinary and extraordinary care costs as well as non-HR costs. That's all on my side.

Thank you for your time. Let me hand over to the CEO for the wrap-up.

[Matteo del Fante, executive]

Thank you, Camillo. So we have delivered a very solid quarter in a challenging environment. Our diversified business proved resilient, reflecting our ability to steadily deliver adapting to changing market conditions. We are well aware that the upcoming months are likely to experience market volatility.

This is not new as we have experienced values period in market uncertainty over the course of our history, Poste has always come through stronger. It is true period like this that customers connect more deeply with us. And we have always demonstrated that our industrial fundamentals are solid and unrelated to market volatility.

More importantly, we have a strong track record of successfully navigating challenging market environment, achieving stability in our results through the cycle. A clear example of that is how we have successfully managed our government investment portfolio in BancoPosta. Historically, volatility spikes have represented investment opportunity to enhance our yield. No matter what happened, we have consistently delivered.

Just to give you an example on our portfolio management strategy, in March 2021 in a persistently low interest rate environment, we were forecasting 2024 NII at less than EUR 1 billion. Today, we see that figure at above twice the level as we effectively manage our investment portfolio to adapt to changing market conditions through the cycle. We can now see a much higher contribution from our investment portfolio to P&L with a better quality mix.

Furthermore, we will continue leveraging our flexibility in managing the cost base to gain additional efficiencies, the fact that our businesses such as payments, parcel and energy, the new businesses are based on variable costs to provide additional protection from execution risk. We will continue monitoring this evolution in the second half of 2022, proactively adapting our business, as always, confident to successfully navigate upcoming challenges.

Thank you for your time, and let's move to our Q&A session with my management team. Over to you, Massi.

[Massimiliano Riggi, executive]

[Operator Instructions] The first question is from Manuela Meroni of Banca Imi.

[Manuela Meroni, analyst]

2 questions on my side. The first one is on NII. I'm wondering if you can provide us an updated sensitivity of your NII to interest rate increase? And what are you expecting in terms of interest yield in the next quarter? And the second question is on postal savings revenues. Postal saving revenues have been quite weak in this quarter, and we are at the floor of the remuneration in the first half. You also guided for a level close to the floor remuneration so for the full year.

So I'm wondering if you could please elaborate it on such a trend? And what are your expectations going forward? So for the next years?

And also related to this matter, you reported significant outflows from postal savings in the first half of this year, but you also had almost EUR 10 billion of inflow in deposits, insurance and mutual funds. So I'm also wondering if you managed to keep the outflows from postal savings inside the group. So reinvesting them in a different kind of financial assets, maybe at higher margins? Or if the 2 things are completely auto-related?

[Matteo del Fante, executive]

Manuela, I will ask Camillo to answer the first question, and I'll take the second, please.

[Camillo Greco, executive]

So with respect to the first question, sensitivity NII, we indicated that the -- what we received in terms of H1 of 2.1% yield is a good benchmark for the full year with respect to sensitivities. There is a slide in appendix that refers to evolution of our portfolio. We are now looking at the portfolio of around EUR 85 billion. 70% of that portfolio is at fixed, 30% of the portfolio is at a variable rate, assuming an increase of 50 bps on the euro to operate on that portfolio that would translate in around 12 basis point increase in the overall margin.

[Matteo del Fante, executive]

Okay. On postal savings, the EUR 800 million that we are posting for the first half of the year is reflecting the contractual floor of EUR 1.6 billion for 2022. We signed the new distribution agreement last quarter of 2021. And clearly, it was not anticipated to have such an increase in interest rate that after many years in a low yield environment has prompted well above historical levels of redemptions. So redemptions have penalties related and this has basically pushed us to the floor. And let's see, the second half of the year, whether we are going to improve the performance on the distribution and whether revenues and whether redemptions will eventually slow down, but we have a floor and this is, for us, certainly good news.

On the second question of the high redemption, probably the best way to one is looking at Page 13 of the presentation where you see on the net inflow, a minus EUR 7.3 million in postal savings, which was balanced by EUR 4 billion in the insurance and almost EUR 6 billion in deposits. So overall, our net inflow is positive for EUR 2.7 billion.

[Massimiliano Riggi, executive]

Thank you. Domenico Santoro, HSBC.

[Domenico Santoro, analyst]

Just a couple of questions on the NII first to liaison with the colleagues question to understand a bit more, given that I mean this line probably will get bigger and bigger in your P&L? And then a second question on the guidance. Thanks for giving us actually the reference on the portfolio, the 2.2% is very useful.

Do I understand correctly that there was a one-off and your clean base for the next quarter is for the EUR 460 million. And shall we consider your labor 6 months as a reference rate for your NII in order to calculate mark-to-market in a way of this P&L line. If I look at the year ago 6 months, it was on average still almost negative in the second quarter and already sudden, I mean, increased quite significantly recently.

So I'm just wondering whether -- I mean this is the framework that we should use actually to see NII in the third quarter that could be significantly higher than the second. And the second is instead of guidance. I mean, you reiterated your guidance on net profit on habit for 2022. But I mean, in terms of run rate, even if there is a little bit of a slowdown in certain areas, revenue-wise, cost-wise you're doing much better. So either you are still conservative. And the question is whether you're going to revise this guidance? Or you are expecting some significant deceleration of revenues in the second part of the year, even considering that there is the usual seasonality in the fourth quarter?

[Matteo del Fante, executive]

Okay. I will stick to Camillo for the NII and then I will take the guidance question. Thank you, Camillo.

[Camillo Greco, executive]

So let me repeat a few points. Number one, EUR 460 million, which we had of NII for second quarter is a good base for the calculation for 4 quarters. In other words, what we are saying is that having 460 per 4 should be a good measure of the NII for the year. That is point number one. Point number 2, we say that on the first half that amount of NII equated to a yield of 2.1%. And what we are saying is that going forward, that yield of 2.1% will increase by circa 0.1% every year in '23 and '24.

The third thing that we are seeing is that we have a portfolio of circa EUR 85 billion of investments. And of these investments, around 70% of that investment portfolio is at fixed rate as a result of portfolio reshuffle, which you have done in the last really 24 months and 30% of the portfolio is at variable rate. What we are saying is that if the rates were to increase on that 30% using today as a base, a sensitivity of 50 basis points increase on the swap rate would translate in 2023, not in 2022. In 2023, we translate in 12 basis points increase in overall NII, incremental to the 2.1 billion, which I referred to before.

[Matteo del Fante, executive]

This is calculated on the 85 million or just on the variable rate.

[Camillo Greco, executive]

Yes, exactly.

[Matteo del Fante, executive]

You need to wait for the refixing of floating leg. Yes. On the second question, you say either we are conservative or we anticipate some deceleration. I think I can answer saying that we're not anticipating any deceleration. And maybe one thing that one could consider, given the change in our mix, which is clear and given our proven cost discipline, especially on variable cost as shown in Camillo's presentation today in FTEs. One could consider the EUR 2.1 billion of consensus reference for EBIT of 2022 has a good reference. One could do this assumption.

[Domenico Santoro, analyst]

All right. That's helpful.

[Matteo del Fante, executive]

In a clearly relatively volatile environment, which is not suggested us to formally take a stance and change our guidance.

[Massimiliano Riggi, executive]

And next question is from Gian Luca Ferrari from Mediobanca. Please, Gian Luca.

[Gian Ferrari, analyst]

The first one is on the revenue per parcel. I saw it went up. And in the chart you are mentioning a change in the mix side, I suppose, lower inbound from China is one of the reasons. I was wondering if midterm, we can see repricing as it happened in mail to be applied also in parcels, if you think it's possible or doable midterm?

The second one is considering what we are seeing these days on spreads. I was wondering if you can share with us once again the road map you have in terms of managerial actions you plan to implement to face this possibility, particularly I was interested if you can update us on the level in which the volatility adjuster would kick in. At what level you would stop upstreaming dividend from PosteVita to the holdco and how many free reserves you have in the balance sheet to keep funding the levy without the remittance from PosteVita. Thank you.

[Matteo del Fante, executive]

Please, Camillo, maybe I will introduce broadly the first answer of Camillo that will go more into detail. We have been pushing very hard with all our clients in the new contracts and new tenders significant repricing. In Mail, this -- and you can see from the figures, there is clearly a change of mix effect, but there is also an underlying activity that started already last year. We have an increased pricing power versus the market. So we -- I think we have good traction and for the first time, probably in a long period, we are experiencing in mail lower volumes but significantly higher unit prices. In Parcel, Camillo then the second question on managerial action on Solvency.

[Camillo Greco, executive]

So on parcel, we are certainly pushing through price increase concretely what we have done, as you have started to charge full surcharges to our customers that have translated into the first half into incremental revenue somewhere within EUR 0.5 million. And in the second half of the year, that will translate in an incremental full surcharge of EUR 10 million to EUR 20 million. So that is the close number on full surcharge. More broadly, we are looking at having discussions with our customers as we are looking to transfer to the final customers, some of the inflation related costs that we are experiencing to our P&L.

[Matteo del Fante, executive]

I'll now move to the next question, which has to do with the Solvency II ratio. So this is a question, I guess, on our solvency duration and what we're going to do to manage it. First and foremost, let me remind you, as part of our 24-sipolicy, we are fully committed to ensure all our subsidiaries are fully capitalized to perform in any market scenario. With respect to PosteVita as you probably recall, we have a 50% payout ratio. Also, i.e., 50% of the profit stays into the group -- in the PosteVita Group.

Secondly, we have been looking at transferring capital we have done last year on the back of the issuance of the corporate hybrid where we subscribed to an instrument restricted Tier 1 capital at PosteVita. Going forward, today to be consistent with our risk appetite framework vis-a-vis the BTP to operate. Today, we measured around 155% would be within our risk appetite framework until 250%, 250 basis points. At that point, we will have to consider additional measures to further strengthen the capital of PosteVita. And we have a number of tools during the news.

First and foremost, we can take the payout ratio down vis-a-vis the 50%. Secondly, we can think of contributing additional capital. And there are other things that we will also do if we were in that scenario. We are not dependent on the -- we're not dependent on dividends from PosteVita to fulfill our commitment to the market of paying a dividend growing 7% from $0.59 this last June, translating 0.63% for next year as we have enough reserves at Poste Italiane spar to fulfill that commitment throughout the plan, i.e. 2024. More specifically, we have well in excess of EUR 1 billion to do that even isolating any dividend contribution from PosteVita.

[Gian Ferrari, analyst]

Sorry, if I may add another one. I think at some point, a couple of years ago, you said that you have a pretty good BTP traders. So net capital gains on BTP would have become, at some point, stable and recurring revenue line. Then I think right now with the good news on the NII, I think apart from what you already secured with the forward contracts, you are basically lowering expectations for '24 onwards. So with this kind of volatility isn't that line of the P&L remaining an attractive source of revenues given your skills in trading BTPs, -- what are the latest thoughts on this?

[Matteo del Fante, executive]

Look I think your you're correct. We said that we were good traders, but we're not in the business of trading. If you remember, our risk analysis and our sensitivity analysis of February 2018, we were showing scenarios of rates going up where we would increase our net interest margin with a slightly lower capital gains and obviously, vice versa in the scenario of lower rates. So we still have markets of capital gains, but it's probably fair to assume that from next year onwards, it would be a less significant item of our income statement. Having said that, 50% of capital gains of 2023 have already been secured and they have been secured in 2021. So at least on that initiative, we were good traders.

[Massimiliano Riggi, executive]

And the next question is from Azzurra Guelfi from Citigroup. Please Azzurra.

[Azzurra Guelfi, analyst]

I have 2. One is on costs, and one is on the payment revenue. When I look at costs, you show a good flexibility given the inflationary pressure. And where inflation to continue to be as high as we have experienced in the first half. Can you give us some color for the second part of the year and in 2023 on what are your flexibility or what could be initiative to mitigate cost growth?

The second one is on the prepayment revenues. We've seen them continue to grow. But if there were to be a recession as some part of the market expect and contraction of consumption, would you still think that you could experience growth because penetration is increasing and people will continue to use card more? Or can you give us some color on this?

[Matteo del Fante, executive]

Hello, Azzurra. So with respect to the first question on inflation and costs, the key items for us in our P&L that are impacted by inflation related to transport costs that have to do with fuel related to our fleet and the fleet of our partners. We have an estimate of an increase of somewhere within EUR 50 million to EUR 60 million on a full year basis. This basically means that taking our entire cost base related to transportation, which is around EUR 500 million, we would have -- we would experience somewhere between 10% and 15% increase in that cost base in 2022 vis-a-vis 2021.

Going forward, I would assume that percentage increase would not be as steep as you're clearly looking at the numbers for 2023 as we speak. I also want to remind you and the estate audience that instead, we do have hedges in place for everything has to do with energy costs as we are into hedge until the end of 2023. And we are into a hedge until mid-2023 with respect to gas.

[Camillo Greco, executive]

On the second question, Azzurra, yes, maybe there is some correlation between demand and consumption on one side and use of prepaid -- sorry, of payment cards and non-cash payment instruments. But that goes very much against the overall trend that well known in Italy of increasing non-cash payments because the system still lags European average or best European countries in terms of non-cash payments. So we will continue, we believe -- sorry, to increase and what is very important for us is that 2 things.

One, that we keep increasing, like we've been doing in the last 5 years more than the market in terms of number of payments and value payments we reached in terms of market share in terms of value of payment transaction and non-cash a level of 20%. You have to consider that we are less than 15% of the current account market. And so we have more or less 15% of debit cards. When you look at prepaid cards, which are extremely important in Italy, we have a 65% market share in value of payments in prepaid cards. And this is an operating platform that is, in our opinion, very strong against any weaker demand in the system that one can anticipate in the next few months.

The second item is more strategic and industrial. We will complete the acquisition of lease payment in this quarter, so in September. And that network is basically meeting 5 million-plus clients every day and it's going to be the platform that we will use also for our acquiring offer. So I think it's a more strategic move into the payment market where we have already a very important role. So not worry about the slowdown of demand or the GDP growth. So you have on Page 47 in the appendix, an example of how the market and the transactions by Postepay have grown since 2018 to the first half of 2020, more than doubling. Thank you.

[Massimiliano Riggi, executive]

The next question is from Gianmarco Bonacina, Equita. Please Gianmarco.

[Gianmarco Bonacina, analyst]

A couple of questions for me. A follow-up on the solvency. On insurance, you talked before about potentially moving from standard to internal model. If you can share what could be a time frame for this and also potentially a benefit in terms of solvency? Second question is some more details on your HR costs, in particular on your Slide 29. I see in the first half, you benefited from EUR 40 million pass in other. Just to understand if this will reverse in the second half. Regarding the salary, I think you mentioned before, like EUR 70 million headwind from the salary increase. And if you can comment maybe on the FT bar, which was, let's say, a positive in the first half if this will stick. So just to understand from the EUR 2.6 billion in first half '22, given these elements, what could we expect for the second half for this important item. Thank you.

[Matteo del Fante, executive]

Thank you, Gianmarco. I will ask Andrea Novelli, the CEO of PosteVita to answer the first question on the standard model?

[Andrea Novelli, executive]

Thank you, Matteo, and good afternoon to everybody. So in terms of the timing for the development and adoption of the internal model just a reminder that we need to have a formal approval from the regulator to apply the internal model. So on our part, we are working very hard to complete the development by the end of our '24 SI plan, then we will need to seek the final approval from the regulator to apply the internal model, but we are working very hard on that.

In terms of the effect and benefits of the application of the internal model, as you have seen this quarter, for example, and if you look at Page 40 of the presentation, you see that with rising interest rates there is a higher capital charge for underwriting risk. That is mainly due to lapse risk.

As Camillo has mentioned before, with the standard formula, you have to apply a stress which is extremely conservative if you compare that with our own historical data. So in that specific area, we would expect to have a benefit coming from the application of the internal model.

[Camillo Greco, executive]

So with respect to the question on HR. Number one, we do expect to have EUR 70 million more of incremental cost on that as we had already agreed with the unions to increase prices of the first -- increased salaries over the 1st of July. So that is in our numbers, and you will see the impact of that on our cost item in second half of the year, point number one.

Point number 2, with respect to how we're doing vis-a-vis budget, you might have seen that we had a budget of FTEs of 120,000 for full year '22. We're currently at 119,000.at includes 400 people extra from Plurima we will hire in 3 specific areas that have to do with logistics, energy and hair care in general. But we do certainly expect to do better than what we had at budget for the year.

[Massimiliano Riggi, executive]

The next question is from Farooq Hanif from JPMorgan. Please Farooq.

[Farooq Hanif, analyst]

Sorry to keep on Solvency II. Can you tell us if, for example, 1 quarter, the spot rate didn't change, and the BTP spreads remained flat and the volatility adjust to remain flat and if you didn't pay a dividend to the holdco. So basically, artificial scenario where nothing changes, and you don't pay a dividend. How much would in the quarter your Solvency II ratio grow operationally? That's question one.

And question 2 is, I believe the EU [ help ] is obviously reviewing the way the volatility adjust it works. Do you think the proposals that stand there could benefit you? And what do you think the timing of that may be? So that's the first question on Solvency II.

Second question is on the hedging. So you've talked about the M23 and the mid-23 hedging. How does it work when we get to M23 and mid-'23? Presumably, the cost of rolling this over is going to be really expensive. So how do we get comfort around inflation when these hedges drop off, particularly in obviously, your non-HR costs.

[Matteo del Fante, executive]

I will start on the hedging, even though I'm not sure I got the inflation comment on rolling forward hedging. We basically, when we close what we call hedging, it can be selling in 2021 for value date 2022 or as we did, it was also selling government securities in 2021 for value day 2023. Obviously, in that hedging transaction in that selling of the security, you have priced in the rolling component because you have the short-term rates, obviously priced in the pricing. So that hedging is locked. There is no exposure to inflation. We hedged 50% of what we had in our plan in terms of capital gains for 2023. As we had hedged in 2021, 100% of the capital gains or the hedging we had in the plan for 2022. I hope, Farooq, I answered the.

[Farooq Hanif, analyst]

My question was -- probably I'm really sorry, my question was on the hedging of energy costs and fuel costs, gas costs. I'm talking more about your…

[Matteo del Fante, executive]

Sorry.

[Farooq Hanif, analyst]

Yes, your cost. Not your asset management, yes, sorry.

[Matteo del Fante, executive]

Yes, yes. No, that's my mistake. We are -- I mean, we went out in the market. I remember specifically in this morning working over energy desk in March 2020 that we basically, when you remember, all energy markets were very depressed. And we reached a maximum term. So we went as far as the market allow us at the time. This will bring us into 2023 with the bulk of the energy cost hedge. When you go into second half of 2023 and 2024, obviously, we don't have that privilege. But we are -- we have already started a program of reduction of consumption. So this is to do with, for example, smart working that is reducing significantly the number of square meters that we need to obviously give electricity and temperature.

We have, in the meantime, obviously grown our in-house solar panel production. So hopefully, we'll have a lower consumption in terms of electricity and gas in 2024. We have again started already a program of reduction, but the pricing that we will face in 2023, '24 in the market will be the market price at that point.

And it all depends on where energy will go. And this -- sorry, by the way, doesn't apply at all to our third-party energy business because our third-party energy business, which has just been launched, Camillo referred to over 10,000 contracts already signed with employees is executed with no risk strategy. So it's a kind of a prepaid business. We first buy the energy in the market and then we sell it to employees or clients. So we have no energy risk whatsoever in our third-party business. Then we have your first question, Farooq corporate I will leave to Camillo and then the second one on solvency, again. Please Camillo.

[Camillo Greco, executive]

Yes. So the question was what would happen to the Solvency II ratio in case of non-distribution of dividend? And the answer to that would be that last year, the payment of circa EUR 400 million, EUR 400 million of dividend from PosteVita to Poste Italiane translating to circa 10 basis point of Solvency II ratio reduction.

[Farooq Hanif, analyst]

Sorry, my question was if you just take the dividend plus the earnings on a Solvency II basis because the earnings on Solvency II basis are different from your IFRS earnings, obviously. So what would that number be? And what I'm trying to get to is that your Solvency II ratio actually grows every year like everybody does, if markets weren't a factor and you're retaining all of that capital that you generated, what is the operational capital generation is my question?

[Camillo Greco, executive]

I'll take that then Farooq. So my understanding is that you're looking for the measure of the internal capital generation of PosteVita. As you have seen in this quarter, the solvency ratio went down by 4% because we accounted for foreseeable dividends. So given that we have a 50% payout ratio, you could assume that, that could be a measure of the capital generated internally in the first half of 2022.

Then on top of market condition that you mentioned, you also have to account for the capital you have to allocate to finance the new inflows that as you have seen are positive and growing in the case of PosteVita, but that additional capital is remunerated by an additional margin on the P&L side. But going to the internal capital generation, given that we have a 50% payout ratio that could be a good way to look at that.

[Matteo del Fante, executive]

And also, I think there was the -- there was another question on Solvency from you or that's all Farooq. Okay.

[Massimiliano Riggi, executive]

Yes. And the next question is from Ashik Musaddi from Morgan Stanley. Please Ashik.

[Ashik Musaddi, analyst]

Thank you, Massi, Matteo, Camillo, Andrea. Just a couple of questions on maybe just one. Now how do we think about parcels going forward? Now this quarter has been a good one because, I mean, clearly, the volumes went down quite a lot. I think parcels volume were down 15%. But then at the same time, you have repriced those parcels. And as a result of that, the revenue did not go down that much in parcels. So I mean, how do we think about that dynamic playing out in coming years? The reason I ask is, clearly, there is a bit of concern in the market around a significant reduction in parcels volume going forward, Parcels revenue going forward. So how should we think about that? So that's the number one question.

Secondly, Camillo, thanks a lot for giving the NII visibility for coming quarters. Just want to check like how does the deposit beta work? I mean do you plan to give some more returns to your customers in the near quarters? Or that's still not on the table as of now. So I think these 2 questions would be good.

[Matteo del Fante, executive]

I'll start with the first one and then ask Camillo to complete the first one and answer the second one, Ashik. We're moving -- we've done the first move from a postal operator of 5 years ago into a postal and parcel operator, reaching the leadership in B2C last year. And I believe that now is the time we already started, and we have, I think, discussed this with investors, the move into an all around the logistic operator, which means moving up the value chain beyond B2C and beyond the simple courier business.

So we have won significant contracts that are very meaningful for us in terms of signaling the ability of the company to enter markets, which did not belong to post before, what we do for our clients an end-to-end service. So we do the warehousing, we do the IT service and tracing. And obviously, we do the delivery. We reached, to give you an idea, significant market share in the TLC sector in this space. We are now basically the market leader in contract logistics in TLC. You have seen the moves we've made in the health.

And recently, we won another important contract of a large client in this space. So this is what we plan to do to basically react strategically and for the medium to long-term to a trend, which is clearly happening in Italy like anywhere else in the world of Amazon in-sourcing some of the B2C business and growing in the future. Please, Camillo.

[Camillo Greco, executive]

Yes. So with respect to Parcel evolution, I think that we had recorded last year around EUR 1.4 billion in parts and we put out back in March, an estimate of EUR 1.5 billion for 2022, which equates to EUR 140 million, EUR 150 million. I think that where we are today based on the visibility we are, we are probably towards the low end of that range, somewhere within the end of the range and the number we did the number with last year. That is at a revenue level. In terms of target for profitability, we have put out a target for 2022 of 0.2% negative. We absolutely and forcefully reconfirm that target for 2022. We're not going to divert from that at all. So that is on parcel.

With respect in that to possibly cost of funding for our deposits, is a fair question. It's fair to say that in 2022 for retail, we are not yet planning for that. But clearly, we are looking at the market very carefully for 2023. And onwards, there are a couple of clients in the PA, which are already receiving some compensation for the funding already in 2022, where we have not completed the estimate for 2023.

[Matteo del Fante, executive]

So if there are no additional questions, I thank you very much. As you know, we're all here, we'll start roadshowing more intensively after COVID and any additional questions, Massi is here to follow up. Thank you very much, everybody.