Oesterreichische Post AG

VSE:POST

Earnings Call Transcript 2018-Q1

[Operator]

Ladies and gentlemen, thank you for standing by. My name is Emma, your Chorus Call operator. Welcome, and thank you for joining the Austrian Post conference call. [Operator Instructions] I would now like to turn the conference over to Harald Hagenauer, Head of Investor Relations. Please go ahead, sir.

[Harald Hagenauer, executive]

Good afternoon, ladies and gentlemen. Welcome to this conference call of Austrian Post. Our CFO, Walter Oblin, will discuss the Q1 results, so our start into the year and the recent trends of Austrian Post. So please, Walter, go on.

[Walter Oblin, executive]

Good afternoon, ladies and gentlemen. It's my pleasure to present to you now our Q1 results for 2018. As a summary upfront, Q1 has been a good, solid start into the new year in a challenging environment. Let me start on Page 3, summarizing the highlights of this quarter. On the market side, the 2 core trends that drive our business have continued to be very pronounced. On the one hand, the decline in addressed letter mail at the rate of around 5%, on the other hand, double-digit parcel growth in a tough competitive environment. On the revenue side, our growth in parcel double-digit growth has slightly overcompensated drop in letter mail, and as a result, group revenues are up slightly by 0.4%. On an earnings side, our EBIT has increased by 4.3% to EUR 56.7 million, based on the solid revenue development and continued cost discipline.

And in terms of outlook for the full year, we are happy to confirm the outlook that we have given 2 months ago where we said that we continue to aim for stable revenues and stable operating earnings at the level of last year. Let me proceed on Page 4, summarizing our revenue development, starting with the mail division. Our mail division has declined by 3.5% with the core drivers being the decline of around 5% in addressed letter mail is starting decline in our financial service revenues from our bank partner, BAWAG P.S.K. due to a step-by-step redimensioning and also our exit from Eastern Europe has contributed to this decline by roughly 1 percentage point.

On the other hand, our Parcel & Logistics segment continued to show strong growth, in particular, coming from Austria, where we saw again double-digit volume and revenue growth. Additional revenue for this segment came due to a segment change of our operations subsidiary, Weber Escal, that's provided roughly 2 percentage points of the 12.9% growth. As a result, group revenue up 0.4%. Page 5 summarizes our earnings development. Last year, we had a group EBIT of EUR 54.4 million. Our Mail & Branch Network pretty much came out at the level of last year, down EUR 0.4 million. Parcel & Logistics, here their revenue growth translated also into EBIT growth, plus EUR 1.5 million and also our corporate segment was up EUR 1.3 million. So in total, a net increase of EUR 2.3 million or 4.3%. Let me give you a short update on the implementation of our strategy. Page 7 reminds you of the well-known 4 priorities of our strategy: defending our core business in Austria; seeking profitable growth in selected markets, in particular in parcel markets in Eastern Europe; priority #3 being to enhance the efficiency and the capacity of our infrastructure and of our cost structure; and priority #4 being to continue to innovate and improve customer service. Starting with strategy pillar #1, our core business in Austria. Page 8 is there to remind you that customer preferences continue to differentiate from time-critical same-day deliveries, time-definite expectations, whereas, on the other hand, on the mail segment, we see increasingly less demand from corporate shippers for next-day delivery.

And as a result of these differentiating customer segments, we will introduce, moving to Page 9, a new product offering in our mail business in Austria effective July 1, 2018, which will introduce a differentiated runtime offering with a threefold product offering. We continue to offer a priority product, which were -- was a promise of more than 95% letters will be delivered next day. This is kind of the equivalent of today's standard letter.

In addition to that, we will introduce an economy product which will have a runtime promise of 2 to 3 days. And the third product line, our economy business product will slightly be repositioned -- this is in a product we already introduced beginning of 2011. Outside the Universal Service Obligation, whereas, the new economy product will be a universal service product. I may remind you that 2 years ago, we got an amendment to the Austrian Postal Market law, which would -- allowed us to introduce such a slower product in the USO. And we will now -- and this new product structure is now using this degree of freedom.

Together with the introduction of these new products, we will adjust our rates so the standard next-day priority letter rate will increase from EUR 0.68 to EUR 0.80, so it's from EUR 0.68 to EUR 0.80. The economy product will be introduced at a rate of EUR 0.70, and our economy business product will be introduced or will be, in effect, slightly repositioned at a rate of EUR 0.65.

The introduction of this new product offering really has 2 objectives. On the one hand, the objective is to stabilize revenues through rate adjustment, and on the other hand, the introduction of the slower products has the intention, on one hand, to provide lower-cost alternatives for our corporate customers, while at the same time giving us degrees of freedom for further cost savings in the last mile as slower products give us the opportunity to bundle the delivery of these slower products on fewer days per week thus decreasing the touch rate of households on a given day and thus allowing us to cut the routes of our mailmen in a different way, saving on costs in this way. So this is a very important step. This new product structure, of course, has been approved by the regulator and will be introduced effective July 1.

Page 10 shows you that with this new product structure and with these new rates, we continue to rank in the lower third of our Western -- of our European peers. This chart shows you the rates for the 20-gram standard letter adjusted for purchasing power, and I think the core message of this chart is we continue to offer good quality at relatively modest rates. And there is further headroom for adjusting our rates in line with decreasing business volumes. Page 11. In addition to this important step, we continued to differentiate our service offering and to introduce new services, on one hand, value-added services around the pure parcel delivery and the e-commerce arena. An important step over the last month was the step-up in our participation in an Austrian company called Advanced Commerce Labs, or ACL, a very innovative company that offers online shopping solution, software solutions, operating solutions for e-commerce for retailers and producers.

Company has shown profitable growth throughout the last years where we were a minority shareholder and we have stepped up our participation to 70% last year, enough when we consolidate in this company and see good growth here.

On the other hand, we continue to experiment with various new offerings, be it next-day services, be it full delivery services, be it time window deliveries and other services, and we will need to come also to an update on our self-service solutions and further innovations in terms of customer service. Page 12 gives you an update on development in our Branch Network. We continue to look at our branch network as a source of competitive advantage in the Austrian parcel market and in our Post market at-large. While at the same time, developing our ecosystem beyond postal products. Core pillars in the past have been both telecommunications as well as financial services, and we continue to believe that Austrian Post has an opportunity in both fields.

On the telecommunications side, our corporation agreement with A1 is running well and showing good volume and revenue growth. We continue to be a very strong and very productive sales channel for A1. And on the financial services side, we communicated 2 months ago that we have signed dissolution agreement with BAWAG P.S.K., basically ending our cooperation by the end of 2019, and until then, step-by-step, ramping down the cooperation both in terms of numbers of financial advisers that we provide for BAWAG P.S.K. as well as the number of outlets where BAWAG P.S.K. offers financial services.

As a compensation, both -- or in line with this agreement, we agreed that BAWAG P.S.K. will make a onetime payment of in total EUR 107 million to Austrian Post, which has been paid in Q1. These EUR 107 million is basically payment that both or that, on one hand, is an advance payment for services that we still have to provide over the course of the remaining cooperation as well as a lump-sum payment for reducing the remaining runtime by roughly 1 year. And we will, later, during the numbers, give you a breakdown for how we have accounted these EUR 107 million. At the same time, we continue to believe that there is an opportunity, also going forward, for Austrian Post in the area of financial services, and we are in advanced talks with potential new banking partners, both national as well as international potential partners, and hope to be -- to give you more -- to be able to give you more clarity in our next quarterly communication. Moving to Page 13 to our international portfolio. Actually, no big changes there. In Germany, we continue to operate 2 very focused elements of our business portfolio. On the one hand Austrian Post International, where -- which shows good growth in the transitional international letter mail business. And the second German activity being our stake in AEP, a pharmaceutical wholesale discounter that we started 3 years ago with other shareholders together as a joint venture. In Q1, this company showed a growth of 24%, achieved wholesale revenue of more than EUR 100 million. And for the first time in its history was EBITDA positive over a whole quarter. So good progress there.

In Eastern Europe, our focus now is exclusively on growth in the parcel market. We have concluded our exit from the letter mail business. Let me remind you that from the 6 small subsidiaries we had on the mail side in Eastern Europe, we sold 4 and reallocated 2 to our parcel segment in order to build out a parcel network and a parcel business in Bulgaria and strengthening our parcel business in Croatia into one our international -- or Eastern Europe parcel portfolio for the mixed development good growth in some markets, strong competitive and price pressure in other markets. And we continue to focus here, as I said, on profitable growth on our pushing into B2C but also see strong competitive headwinds. In Turkey, we continue to be a 25% shareholder in Aras Kargo. On an operational level, the business is showing strong growth despite our politic and macroeconomic development in Turkey. Our shareholder conflict is by and large unchanged. We continue to progress in arbitration proceedings but, at the same times, we are also in bilateral talks with the family, which has become more intense and constructive over the last weeks. Our top priority remains to preserve the value of our Turkish investment. Moving to Page 14, strategy pillar #3. And already over the last quarters, we communicated that we are at the beginning of a comprehensive expansion program -- capacity expansion program for our parcel segment in Austria. Parcel volumes have grown strongly over the last 2 years, and we continue to expect double-digit growth over the next years.

As a result, we have a target to double our sorting capacity to 100,000 parcels per hour by 2021, which should provide us enough capacity to handle 150 million parcels per year at even shorter delivery times and later cutoff times, which are demands that our big shippers increasingly demand. We will start construction of a new logistics center north of Vienna in a place called Hagenbrunn after searching for the right site with the right permit for quite some time, but we are now very confident that this is the right location and that this project is now well on track.

In terms of CapEx, this means that, on top of EUR 60 million to EUR 70 million maintenance CapEx that we have seen over the last years and we will continue to see, we will most probably spend EUR 50 million-plus this year and also over the next years on growth CapEx for our Austrian parcel operations. Page 15 shows you the usual development of our staff structure in Austria in 2 important messages. One is the continuous shrinking of our total headcount for the first time over the last decade has reversed. We, in Q1, we had 140 FTEs more than in Q1 2017. This is the result of our strong growth in parcels and does not come unexpected. We already gave some guidance in that direction in our last communication.

Message 2 is the to change from expensive civil servants and employees under the old Collective Wage Agreement to employees under the new Collective Wage Agreement is progressing even at advanced speed. In the rectangle in the top-right corner, you see that, compared to last year, more than 1,000 civil servants and employees under the old collective wage agreement have left and have been replaced by new employees under the new collective wage agreement, which is a substantially lower cost structure. Page 16 gives you an update on the success of our self-service solutions, be it pickup boxes, pickup stations or dropoff boxes. We are in the process of doubling the number of these self-service solutions and also expanding capacity of existing solutions as these solutions are well accepted by consumers and are a real source of differentiation and competitive advantage in the area of customer service.

Page 17. We are also introducing new services to improve customer convenience and consumer convenience. Over the last years, over the last months, we have introduced a pickup service for consumers and new features to our Post app, including a service evaluation and a damage report. Let me now move to Page 19 and give you some details on our Q1 results and financials. Page 19 summarizes the core financial indicators. Revenue up slightly with EUR 490.6 million. Both EBITDA as well as EBIT margin pretty much at last year's level. A very high level of 15.6% and 11.6%. Last year's level were clearly all-time high in the history of Austrian Post, and we either reached or slightly surpassed last year's level. Earnings per share at EUR 0.62. A strong Q1 cash flow was a lot of the -- was a large share of the EUR 175.9 million cash flow from operating activities [Audio Gap]

from the already mentioned onetime payment from our P.S.K. But even adjusted for that, we have seen an operating free cash flow, which has been robust at last year's level. And we continue to operate a conservative balance sheet. Page 20 gives you an overview of our key income statement. Let me just highlight some lines and give you some additional information on some one-offs. Other operating income, the increase here, to a large extent, comes from a EUR 20 million one-off income that we recognized as part of the onetime payment that we received from BAWAG P.S.K. The remainder of this onetime payment has either been already digested in our full year accounts 2017, or the larger share of it will be distributed as revenues over the last -- over the next quarters until the end of 2019.

So EUR 20 million positive one-off in staff costs. You see the impact of a negative one-off also coming from this agreement with BAWAG P.S.K. As a result of this agreement, we booked a provision of EUR 22 million for the restructuring of staff that is today operating our financial transactions in the retail outlets. With that provision, I think we can say that pretty much the restructuring need that comes from the ramp-down of our financial services business pretty much has been booked and there should be no more substantial negative impact coming from further restructuring needs. EBITDA at EUR 76.5 million or 15.6% of revenues, EBIT EUR 56.7 million or 11.6%, and also a small positive one-off in our financial result. Finally, a profit for the period of EUR 41.8 million, translating into EUR 0.62 earnings per share. A small deeper dive into our 2 business segments, starting with the Mail & Branch Network division on Page 21. Here you see the usual breakdown and the usual representation of the development of revenues in our core product segment. Letter Mail & Mail Solutions revenues down 2.1%, which is the net of the result of the drop in our Letter Mail volume of around 5%. A good positive development in our Mail Solutions business and in our International Letter Mail business and the exit from Eastern Europe.

On the Direct Mail and Media Post side, a net revenue decline of 3.8%, which is to a substantial extent, coming from the exit in Eastern Europe, EUR 3.3 million or roughly 2.5 percentage points of the 3.8%. In addition, the Easter seasonal -- the seasonal effects from our Easter business has been somewhat differently allocated over Q1 and Q2 with rather negative tendencies for Q1. And as a result, again, 3.8% decline in our Direct Mail business. Page 22 shows you our segment P&L. I think I've commented on the main product lines. On branch services, you see here minus 12% revenues. This is, of course, the result of the starting ramp-down of our financial services business. Intra-group revenue, on the other hand, up 18.2%. This shows you that increase in utilization of our Mail last mile for us by our parcel business. I think you're -- most of you are aware that more than 50% of our parcels are delivered through the last mile and, thus, the growth in parcel also compensates, to some extent, for the decline in Mail volumes. EBIT margin of around 19% is a very good high level. Page 23 gives you the revenue breakdown by region for our Parcel & Logistics division. Austria up 13.1%. This is a result of a strong, continued e-commerce development in Austria, double-digit volume growth and, to some extent, also the full consolidation of the already mentioned company, ACL, supported revenue development in Austria. In Eastern Europe, revenue is up 12.3%. This is a result of a, as I said already, more mixed revenue development across the countries and the segment change of our former creation Mail subsidiary, Weber Escal. In total, Parcel & Logistics revenue is up almost 13%. Page 24 shows you the segment P&L. I think worth noting here also the increase in EBIT, EUR 10.9 million, best-ever EBIT in Q1 for our Parcel & Logistics division. That is to my knowledge. And we hope that we will also show a good full year result for our Parcel division. Page 25 gives you an update on our balance sheet. Yes, overall picture pretty much unchanged. Strong cash flow plus, however EUR 138 million out of the EUR 500 million cash and cash equivalent have been paid out on May 3 as dividends. Worth noting again also the low level of intangibles. I think we have substantially derisked our balance sheet over the last years. And on the equity liability side, a stable level of provisions, we are free of financial liabilities, free of pension obligations and had a strong and stable equity ratio of above 40%. Page 26 shows you our cash flow development, and what we try here is to help you separate one-off impact from the payment of BAWAG P.S.K. from the recurring business activities. So out of the 100 -- roughly EUR 176 million operating cash flow, we adjust here for EUR 96 million, which are -- which has a one-off character resulting in EUR 80 million operating cash flow. EUR 24.7 million maintenance CapEx resulting in what we call operating free cash flow of 55th -- EUR 55.1 million. In addition, we spent EUR 16 million on growth CapEx resulting in a total free cash flow of EUR 38 million. Yes, let me close with the outlook for the full year. As already said at the beginning, the outlook is pretty much unchanged from what we communicated 2 months ago. It continues to be a confident outlook for the full year. We expect the core market trends around 5% decline in addressed Letter Mail on the one hand, double-digit growth in our parcel market on the other hand to continue. As a result, we expect stable revenue development which, of course, will be supported to buy our new service offering, whereas, the realignment of financial service business will continue to result in a decline in our retail revenues. On the investment side, we expect, as I said, EUR 60 million to EUR 70 million maintenance CapEx and additional growth CapEx of around EUR 50 million, maybe on top of one or the other, expense for the acquisition of real estate for further capacity expansions. And finally, on the earnings level, we continue to target stability in operating earnings, meaning that we aspire to reach last year's EBIT of above EUR 200 million also this year. So overall, I think a confident outlook for the full year based on a good start in Q1, and we are now happy to take your questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Mark McVicar of Barclays.

[Mark McVicar, analyst]

Three questions from me. First of all, just so I totally understand it, of the EUR 107 million payment from BAWAG, could you confirm how much is the normal payment that they would make in advance? And how much is a contribution towards your need to restructure because of the early termination, is the first part. And the second part is, could you just confirm how much of that payment you took or accounted for in 2017, and how much is still left to be accounted for through '18 and '19, if that makes sense?

[Walter Oblin, executive]

Okay. Yes, so it is indeed a more complicated matter. Out of the EUR 107 million, we -- I think the split, to keep it simple, is roughly, last year, we also -- we already recognized roughly EUR 27 million, which we netted against a provision for the restructuring of financial services -- of financial advisers, sorry, so EUR 27 million. Last year, EUR 20 million we booked as a one-off income now in Q1, and the remaining roughly EUR 60 million is what we will show as revenue over the remaining 8 quarters of the year, there of EUR 11.1 million-or-so we already booked in Q1. Is that clear?

[Mark McVicar, analyst]

Yes -- no, I think that's fine. You can see the EUR 11.1 million from the early one. So the balance doesn't need to be offset by -- or isn't going towards any further restructuring charges. I think you said you'd finish that process [indiscernible], the rest is just a normal recognition of the BAWAG contribution except they paid it early? Yes?

[Walter Oblin, executive]

Exactly, exactly. So we continue to provide services to them by reduced, on the one hand, in the form of reduced number of financial advisers. We're continually ramping down the number of outlets where they -- which they occupy and so in line with declining level of services, we will show the remaining EUR 60 million minus EUR 11 million revenues, the remaining payment we will show as revenue over the next 7 quarters.

[Mark McVicar, analyst]

Yes. And it would decline gradually as you -- they sort of put out different branches, yes?

[Walter Oblin, executive]

Right. Yes.

[Mark McVicar, analyst]

Got it. Second question, I think you mentioned that with the full year results that you expected some sort of property development contribution over the next couple of years ago, sort of Cotton Residences, things like that. Could you tell -- is there any updates on the likely magnitude of that contribution? And can we see any of it in Q1?

[Walter Oblin, executive]

In Q1, I think there are different -- I think we can distinguish 3 different contributions from real estate. On the one hand, we already, for quite some time, have had rents from our relative portfolio in the order of magnitude of EUR 15 million to EUR 20 million, which will continue to be there in that ordinal of magnitude, yes, point one. Point two, we have one bigger project ongoing, which is the Cotton Residence, which will provide, more or less -- this is a luxury apartment development where we will sell most of the apartment or actually all of the apartment, and as a result, we will pretty much have a onetime contribution of the order of magnitude of [ EUR 15 million ], which will be distributed over this and next year. And on top of that, we have in our existing real estate portfolio, we have a few interesting pieces of real estate where we see development upside. However, which are all longer shots, if I may call it like that, and where we will give you an update on any fears. Just to give you one example, we lost 2 years ago, we pulled out of a sorting center at Linz station in the center of the city, interesting location in the city of Linz and where we are now, together with the city, in the development of a new quarter, this will not be in logistics use anymore. And we plan to update you on projects like this over the course of the next quarters.

[Mark McVicar, analyst]

Okay. My next question, a small one, could you just remind us what the book value of Aras Kargo is at the moment?

[Walter Oblin, executive]

It's EUR 44 million.

[Mark McVicar, analyst]

Good. And finally, my last question, you mentioned in a number of places, price competition in parcels both within Austria and in some of your other Eastern European countries. Could you say a little bit more about where that is coming from? Is it coming from the very large operators, the big international groups? Is it local operators, other postal businesses trying to hold onto -- for that volume? What's the sort of sense in terms of where it's coming from most?

[Walter Oblin, executive]

I think it is a general phenomenon. It is more in our business portfolio. It has been more prominent in some Eastern European countries than in Austria. Yes, we have some slight decline in revenues per parcel, but it is more a structural impact of increasing [ equity ] share, increasing [ Amazon ] share and thus smaller and lighter-weight parcels. In some Eastern European markets, it's country by country, and competition comes from and the price pressure comes from various angles. It's hard to provide the general phenomenon.

[Mark McVicar, analyst]

But you would be happy that, in Austria, adjusting for the mix, I get the whole thing about smaller parcels, all that kind of stuff. The pricing is reasonably stable, or like-for-like, is it still down despite the mix, excluding the mix effect?

[Walter Oblin, executive]

I would say it's reasonably stable. We see a relatively healthy industry conduct, but yes, so I would say, adjusted for the mix, it's a pretty much stable price level. We don't see strong, aggressive price pressure or price aggressive behavior from our competitors in Austria.

[Operator]

Next question comes from the line of David Kerstens with Jefferies.

[David Kerstens, analyst]

Just a question on the new product offering. You mentioned the economy products. Based on your research, how important do you think this product will become in case of the price differential rate, the priority product? And will you be able to consolidate this in, let's say, just 2 delivery days, for example, just Tuesdays and Friday? And what will be the best rate to quantify potential savings of the, if you would for example, could consolidate 50% of [ area ] volume in just 2 delivery days?

[Walter Oblin, executive]

Very good question, and I think today, we are not in a position to give you precise expectations as we still have to observe how quickly customers will adopt this new product offering. We do expect that a large share of not time-critical mail over time would go into the ECO product. And yes, as I said and as you rightly summarize, the objective of the ECO product is to bundle delivery for a given household on 2 days per week, does reduce the number of households that we touch -- that we have to touch every day, for basically we would touch every day only was priority mail, and as the share of priority mail will continue to become smaller, the number of households that we touch every day will reduce. We expect this to become significant in terms of savings, but it will only [indiscernible] over time. We need some critical mass in this ECO product for this to materialize. Overall, we think, of course, that this measure should positively impact our mail bottom line and should help to stabilize both revenues as well as bottom line. But it's too early to quantify the impact.

[David Kerstens, analyst]

Okay. And maybe a follow-up on the BAWAG question, the EUR 107 million. Are there any assets in the balance sheet related to this agreement at BAWAG? Or is it balance sheet neutral?

[Walter Oblin, executive]

It is pretty much balance sheet neutral, so there's no assets where we see need for writeoffs. Of course, the provisions have an impact. They both have an impact on the balance sheet, but I think that is clear but no big additional impact. So no immaterial materials that we have to write off or material assets.

[Operator]

Next question comes from the lean of Bernd Maurer with RCB.

[Bernd Maurer, analyst]

Good afternoon. Two questions from my side. First, marketing revenues were down year-on-year a bit more than expected. Is it exclusively explained by the Easter effect and the segment change of Weber Escal as you stated? Or would you also point to any price pressure which is increasing and/or a potential shift of info mail items to other advertising channels. If you see any structural changes, that's point one. Point two is you mentioned AIP (sic) [ AEP ] in your presentation, how you're going to have a 50% stake. It's consolidated at equity. Do you think of any increase of the stake here the full consolidation? Or would this be a scenario in the initial to mid-term?

[Walter Oblin, executive]

Thanks for your questions. Let me start with your second question. There are currently no plans for ownership changes and for full consolidation. We have a strong and committed partner with [indiscernible], an Austrian entrepreneur active in the pharmaceutical industry. I think he's equally committed to developing AEP. And we have a shareholders' agreement where we do not have full control independent of whether we have below or above 50% of the shares, so neither do we expect significant ownership changes nor do I expect any full consolidation in the first year or near future. And on your advertising our Direct Mail revenue question, to put things into perspective, we're talking about a decline of EUR 5.2 million out of EUR 137.4 million. I'm on Page 21. EUR 3.3 million out of those EUR 5.2 million are pretty much inorganic, resulting from the exit from Eastern Europe. So we're talking about EUR 2 million in revenues, which are a result of seasonality and onetime advertising campaigns. Yes, I think as always communicated, the nonfood stationery retail in Austria as well as in other countries is under pressure from e-commerce, retailers and volumes and revenues that the Amazons of this world generate are, to a large extent, coming from existing stationery retailers. As a result, every year, we have companies exiting, becoming bankrupt. Also, we had -- was the company [indiscernible] one insolvency of an advertising customer. So there is this structural pressure on the nonfood side. On the other hand, the food retailers really are fully committed as we see it on our -- the unaddressed Direct Mail as a very important element of their marketing mix. This has rather grown in volumes and revenues over the last years. So yes, there will be some volatility. There is some structural pressure. But overall, we do not see a strong structural decline here.

[Operator]

Next question comes from the line of Edward Stanford with HSBC.

[Edward Stanford, analyst]

Can I just come back on Mark's original question, just so I completely understand the BAWAG payment in Q1. So you had a roughly EUR 20 million credit in the other operating income against a EUR 22 million provision. The remainder of the funds are just going straight to revenue, so that the EUR 20 million payment we see this quarter was for to cover the provision. Is that how one should think about it? And the rest of [indiscernible] revenue in succeeding quarters? That's question one. And question two, regarding your negotiations with potential future financial services partners, could you say how those are progressing. And is there any limitation under the agreement with BAWAG of when the new relationship can start?

[Walter Oblin, executive]

Once again, Edward, thank you for the question. I'll once again try to clarify. So the EUR 107 million payment was basically a payment that relates to 2 legal agreements: one we signed end of last year and one final agreement that we signed this year. So part of the EUR 107 million that was related to the agreement that we signed last year was recognized in the full year accounts 2017, pretty much an amount of EUR 27 million. So EUR 80 million remain. Out of the EUR 80 million, we booked EUR 20 million as kind of a lump-sum payment, mostly related to shortening the runtime of the remaining contract. So remains EUR 60 million. And out of the EUR 60 million, we booked EUR 11 million as revenue for services that we provided in Q1 so remain roughly EUR 49 million or EUR 50 million that we will distribute with a declining tendency over the remaining 7 quarters of the contract as we still are providing services to BAWAG.

[Operator]

Next question comes from the line of Ruairi Cullinane with RBC.

[Ruairi Cullinane, analyst]

A couple of questions, please. Firstly, you bring EBIT, 4.7% in Q1, and will have the sported product perform in H2. So it seems like there might be some upside to your guidance of stable earnings. Are there any headwinds or negative one-offs on the horizon that might limit your EBIT performance in 2017? And then secondly, a question on your potential new financial services partner. I was wondering in which circumstances you'd consider taking a stake and what kind of criteria you'd like to be met?

[Walter Oblin, executive]

Well, thank you for your question. And let me start with your second question because I realize that I did not answer the second question of Edward. Going back to Edward's question, yes, basically we have an exclusivity until end of 2019 with some degrees of freedom what we can do under this exclusivity by then. Now coming to the last question on financial services, basically, what we're looking for is a bank partnership that not only leaves us as a transaction and infrastructure partner on the declining physical channel of retail banking but that gives us a share in the overall development of a banking partnership in the market across both digital and physical channels. And given that objective, we are also prepared to invest, to take an entrepreneurial stake in a joint venture also investing capital. I hope I answered your question, and coming back to the first question, I think, given that it's now mid-May, there are always upsides and downsides for the full year. In principle, we see headwinds. Yes, we see headwinds given the decline in mail so 5% decline on total revenues of EUR 750 million is roughly EUR 40 million of revenues that would be lost if we don't have any compensating tariff adjustments. We see headwinds on the cost side. We are in collective wage agreement negotiations these days and feeling that inflation in Austria is up compared to last year and given that we have a tight labor market, yes, we have some cost pressure. And as a result, we currently do not see our guidance of stable earnings as very conservative. Yes, we still have 7 months to go -- or 7.5 months to go, and there are both headwinds as well as events that will stabilize our revenues and earnings.

[Ruairi Cullinane, analyst]

Okay. And on the banking partner, I was wondering, is there a specific return that you'd like to get from your investment? And is there any sort of particular degree of control that you would like to get from your stake?

[Walter Oblin, executive]

Of course, we -- first and foremost, we would like to earn a return that is above the capital cost that we would have investing in a banking partnership. And of course, any investment into a bank partnership needs, maybe after some ramp-up of investment time, needs to contribute to our dividend story. In the end, we are a defensive dividend stock. This is all promised to investors. And whatever we do, be it in our core mail and parcel business, be it in real estate, be it in financial services, in the end, has to contribute and not risk our dividend story.

[Operator]

Next question comes from the line of Andre Mulder with Kepler.

[Andre Mulder, analyst]

Four questions. First question on the new partner that you were talking to. Basically, I understand that you will be fully covered with the agreement with BAWAG until the end of 2019. So the risk is more for 2020 should you not find a newer partner. Is that a right assumption?

[Walter Oblin, executive]

Well, until the end of 2009 (sic) [ 2019 ], we have an ongoing partnership with BAWAG P.S.K., where we provide services across Austria and where we will be -- where we will book revenues both from payments that we have already received but also from smaller payments that we still will receive from BAWAG P.S.K. and the focus of any banking partnership, first and foremost, is for the period starting January 1, 2020. Yes, as I said, there are maybe some things we can do in advance, but this is to -- the primary target is to find a new banking partner where we can get operational after the existing agreement with BAWAG ends.

[Andre Mulder, analyst]

And the second question is then with this new partner, would that new partner be able to fully replace BAWAG? Or would there be just a small part of the activities of 50%-or-so? Could you give an indication of what and what could happen in that part?

[Walter Oblin, executive]

No. of course, we do not expect a new banking partnership. That will definitely start from a lower base to contribute the same level of revenues as BAWAG has provided in the past. We do expect it to be substantially smaller, but that's also why we have started restructuring and why we have booked restructuring provisions. And as I said, assuming that we will come to an agreement with a new banking partner, most of the restructuring need that we see has been provisioned for.

[Andre Mulder, analyst]

Then on Aras, you said that there are more constructive talks with the family. Any idea what caused that after being further allowances that you offered? Or have they changed their mind?

[Walter Oblin, executive]

I do not want to go into detail as this is still in an early and confidential stage, and it's too early to tell whether anything meaningful comes out of more constructive talks. But in principle, we are begging for talks, and we will update you whenever we have anything new to tell. But this is not the case yet.

[Andre Mulder, analyst]

And the last question on IFRS 16. That is ground to comment to your P&L or balance sheet in 2019. Have you already looked at that? What could we expect for an impact? Secondly, could that bring a change where you were to go for more premises to be owned rather than leased?

[Walter Oblin, executive]

Yes, we have looked at that. We will implement IFRS 16 next year. I think the principal direction is that, that you see with other postal companies that have already adopted it. It will, in principle, of course, lengthen our balance sheet. Second, it will increase EBITDA while at the same time increasing amortization, depreciation and so the lines below EBITDA will also have a slight -- small positive impact on EBIT, making sure impact on net earnings, but we're not yet in a position to give you the full numbers yet. But we have done some simulations internally.

[Andre Mulder, analyst]

Would it make any change whether you own [indiscernible] or lease them?

[Walter Oblin, executive]

No we do not see any changing business rationale from accounting changes. And also the accounting changes, apart from transfers between lines will be almost negligible. So net impact on [indiscernible] even more on net earnings will be negligible.

[Operator]

The next question comes from the line of Tobias Sittig with MainFirst.

[Tobias Sittig, analyst]

So 2 questions from me, please. Firstly, on the new pricing scheme, can you talk a little bit on how the regulatory [indiscernible] one? Basically what the regulators sort of took as a benchmark for approving that [indiscernible] scheme, whether it's return on capital or margin or stability of earnings? So what's the thinking there? And secondly, on the parcel side, [indiscernible] you do you reckon that you took market share in the first quarter? And secondly, at least among other parcel operators in Europe, there seems to be an increasing scarcity of getting people for delivery at the moment or they have to pay up on the higher thickness levels. Do you encounter any such difficulties? Or is it still all good and easy in Austria?

[Walter Oblin, executive]

Let me try to answer the first question. The line was a little bit bad. I'm not sure whether I correctly understood both questions. On the question how the regulator looked at our request for approval, basically, the formal answer is he has to assess whether we need a change in rates in order to earn our cost of capital in the Universal Service Obligation segment of our business, and this is how we prepare the calculations for him, and this has been an established process over the last years, and we were able to prove to him that the suggested changes will help us to earn our cost of capital but also will be required to do that. So this is the criteria number one that's used to assess on the postal market law, and the criteria number two is to assess is whether our prices are "affordable." There, in the past, he has looked at -- has this been in line with inflation. I think we are -- we always try to convince him that, given the mail decline, inflation will not be enough, and if you look at what we have achieved together with the regulator that the net changes have been above inflation. Has it been an easy discussion? No, of course, the cost of a regulator is to critically look at what we propose, but in the end, we achieved the buy-in and the approval of the regulator, and as a result, we will implement this as of July 1. On the parcel side, so I understood the question, one was around how our market shares have developed, and the question two was how we do in the labor market. Was that correct?

[Tobias Sittig, analyst]

Yes, whether you find it difficult to hire enough people for parcel delivery or whether we should expect wages to go up there, something?

[Walter Oblin, executive]

So on the market share side, I would say it has been stable, yes. We definitely do not believe that we have lost substantially market share, but on a quarterly level, this is always a little bit difficult to assess as you don't really have reliable numbers for the total market. On the labor market, yes, probably across Europe but definitely in Austria that we are, I would say, close -- at least to my judgment, close to full occupation of those willing and ready to work. And we need increasing efforts to find the number of people that we are recruiting partly replacing the civil servants and employees on an old collective wage agreement that has left us, but of course, under the new collective wage agreement, also fluctuation is higher than on the civil servants. So far, we have been successful in finding the people we need, but it requires more effort. And yes, as I said, we are faced with some demands knowing our -- in our collective wage agreements that are actually I have to run to in a few minutes. We're in the next round. But still, we hope that we can come up with a reasonable agreement with our business -- with our social partner.

[Operator]

And there are no further questions at this time.

[Harald Hagenauer, executive]

Thank you, ladies and gentlemen, for participating in this call. And we -- I hope to see or hear you in a couple months. Thanks. Bye-bye.

[Operator]

Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.