Oesterreichische Post AG

VSE:POST

Earnings Call Transcript 2019-Q1

[Operator]

Ladies and gentlemen, thank you for standing by. I am Jasmine, your Chorus Call operator. Welcome, and thank you for joining Austrian Post Results Q1 2019. [Operator Instructions] I would now like to turn the conference over to Harald Hagenauer, Head of Investor Relations. Please go ahead.

[Harald Hagenauer, executive]

Good afternoon, ladies and gentlemen. Welcome to this conference call of Austrian Post where we want to discuss our first quarter and our start to the year. Here, I would like to hand over to our CFO, Walter Oblin. He will head the presentation and we will be ready then for your questions afterwards or to answer.

[Walter Oblin, executive]

Good afternoon, ladies and gentlemen. Austrian Post has had a solid start into 2019, and I'm pleased to present to you our Q1 results.

Let me start on Page 3 summarizing the highlight of Q1. We had a quarter with stable revenue development. Revenue was up 0.4%. A moderate decline of 1.4% was more than compensated by a 6.7% parcel growth. We had solid earnings. EBIT was up from a very good last year, Q1 at 1.3% due to solid revenue development and stringent cost discipline. Our massive investment program to upgrade our capacity in the parcel business is up at full speed, and we'll provide more details later on. And we continue to look confident into the full year and confirm the outlook of stable revenues and stable operating income for the full year 2019.

Page 4 gives you an overview of our revenue development. Mail & Branch Network revenue was down 1.4%. A moderate -- still moderate mail decline was partly compensated by positive effects from elections and the new tariff scheme that we introduced July last year. On the parcel side, total revenue was up 6.7%, and this growth equally came from Austria and Eastern Europe.

EBIT development is shown on Page 5. A very good last year's Q1 result of EUR 56.7 million EBIT was topped a 1.3% increase. This increase came -- was a result from a slight increase from high level in the Mail & Branch Network, continued margin pressure in our Parcel & Logistics business where EBIT was down EUR 1.2 million, and a flat corporate segment.

Let me continue with an update on strategy implementation. Page 7 summarizes the well-known 4 strategic pillars of our strategy, and let me jump right away to Page 8, starting with our core business in Austria. Page 8 summarizes both the multiyear trend in our addressed letter mail and Media Post business as well as the key highlight of Q1. We continue to see the structural decline in addressed mail volumes for the quarter. This was roughly 3.7 -- 3.5%. For the full year, we continue to expect around 5%. Our new product structure that was introduced July 1, 2018, has been well received. The current split is around 40:60, 40 priority product and 60 economy product, with the economy product still gaining share. And on top of this structural development, we had some positive one-off mailings resulting from elections and some one-off mailings from banks and insurance companies.

A similar structural trend as in addressed mail, we increasingly also see in Direct Mail. Here, we have seen volumes come down 4.9% from a record 2017 level, which was a little bit unusual as we experimented with innovative pricing models, pushing volumes. So 2018 in -- to cut it short, was coming back to the volume levels of 2016. In Q1, we saw a volume decline that was driven, on one hand, by a structural decline in addressed volumes partly due to a shift towards digital advertising but also due to uncertainty from GDPR where advertisers continue to streamline their client databases, and we also had some negative impact on advertising volumes from a late Easter seasonality. Last year, Easter week was late March, whereas this year, it was mid late April.

Moving to the parcel business on Page 10. The growth momentum continues in the Austrian parcel business despite intense competition and despite the market entry of our largest customer in the Greater Vienna area. For the quarter, we had volume growth of around 6% and similar revenue growth.

The most important strategic highlight -- and this is a very important strategic achievement for us, was an agreement that we signed with DHL a few weeks ago, which we already communicated, where, in essence, Austrian Post will become the -- again, the delivery partner for Deutsche Post DHL Group in Austria. This agreement is now subject to approval by the competition authorities in Austria. We expect a decision by mid-2019, so somewhere -- hopefully in summer. Part of this agreement is that we would take over roughly 200 employees and selected sites and selected sorting equipment worth roughly EUR 15 million, including some investments on our side. And we are in the midst of intense preparations to operationally be able to absorb this substantial volume from DHL.

Page 12 gives you an update on our international business. In Germany, our pharmaceutical wholesale startup, AEP, is gaining momentum. Last year, we had revenues of beyond EUR 400 million. In Q1, we had the first EBIT breakeven -- EBIT positive month, and we continue to grow substantially and to gain profitability, as said. In Eastern Europe, the focus is on growth in the parcel business, good revenue development, intense competition. In Turkey, not much news, continued revenue growth, and we continue to be both in discussions as well as in arbitration proceedings with our coshareholders.

Page 13 gives an update on our retail network and on the future of our financial service business. We continue to rely on 3 pillars in our retail network: first, postal products; second, telecommunications product in cooperation with A1 Telekom incumbent in Austria; and pillar #3, financial services. We communicated a few weeks ago a partnership with a, in Austria, well-known and well-reputed [indiscernible] banking and insurance group where Austrian Post will acquire 80% of a banking platform called Brüll Kallmus Bank. This will most likely not be the brand name to introduce a new financial service offering into the market. It still is subject to regulatory approval, which we expect late this year. We will contribute EUR 56 million equity into this bank, GRAWE. We'll then take 80% of the stake in this bank. GRAWE will contribute equivalent capital according to their 20% share. And together, we will fill up a very focused -- mass retail-focused banking offering, low risk profile provision focused with a market launch target mid next year.

Page 14 is an update on our capacity expansion program given the good growth momentum in parcels and the expectation that we will take over a substantial DHL volume later this year. We have been accelerating our capacity expansion program, and as a result also, CapEx cash-outs this year will be higher than previously communicated on top of around EUR 70 million maintenance CapEx. We will spend roughly around EUR 15 million for taking over sorting equipment and other expenditures related to the takeover of DHL infrastructure in Austria. We have signed land acquisition deals worth roughly EUR 25 million to provide land for future expansion. And on top of that and that is constant with what we already communicated, we will invest more than EUR 50 million in specific projects -- in growth projects, most importantly 2 new sorting centers, 1 north of Vienna, and a second big sorting center for the Greater Vienna area in a place called Hagenbrunn in Lower Austria. The picture you see here is still a rendering, but the webcam looks very similar already. So the building and -- the building is complete and the equipment is currently being installed. We target the start of operation still this summer, and construction is also started for a second big project, a new parcel center for the southeast of Austria in a place called Kalsdorf close to Graz.

Page 15 gives you the full picture of our capacity expansion program. Pretty much, we are talking about substantially expanding or building from scratch as it is -- for the 2 projects that I talked about, new sorting centers. The project in the very south of Austria in Carinthia has already been finished 2 years ago; Styria; I just talked about the project north of Vienna. I also just talked about the current big sorting center in Vienna will be expanded over the next year -- over the next years. In the very west in Vorarlberg, we will also start construction this year. And for the other 3 sorting centers, we are still in early planning and preparation period.

Our staff transformation, moving to Page 16, is running at accelerated speed. In particular, the transformation from civil servant employee structure to employees under the new collective wage agreement has gained momentum in the last 18 months. We see that almost 900 people -- Q1 versus Q1 last year, 900 civil servants have left Austrian Post and have been replaced by people under the new collective wage agreement. This helps us to keep our staff costs under control and we expect further momentum over the coming months.

Page 17, moving to the fourth pillar of our strategy, innovation and improving customer service. Our self-service initiative is well accepted by consumers. Numbers are up every quarter. Those of installed facilities, be it pickup boxes, pickup stations or drop-off boxes, a substantial number of parcels is flowing through these self-service solutions every day. And this is, as I said, well accepted already and a source of differentiation and quality in a very competitive marketplace.

Let me now give you a little bit more details on our group financials. Page 19 summarizes the core KPIs, revenue slightly up at EUR 492.5 million. Now I have to briefly mention that IFRS 16, which we are applying now for the first time, is substantially changing a few lines in our profit and loss statement as well as changing our balance sheet picture. In particular, it is increasing our EBIT margin. So net of that effect, both EBITDA as well as EBIT margin is stable on a high last year's level. Earnings per share, slightly up; cash flow, robust, pretty much on last year's level with some one-offs; and equity ratio, still high, the decline comes pretty much from IFRS 16 only.

Page 20 gives you the details of our key -- of our income statement. I think worth mentioning last year in Q1, we had substantial one-off post in other operating income as well as some staff costs resulting from the disintegration agreement that we signed with BAWAG P.S.K. Net of these one-offs, staff costs have been pretty flat, pretty much flat, which I think is good news. And then both in other operating interest as well as in the depreciation and other financial result line, you see the impact of IFRS 16. On an EBIT level, there is little net impact of IFRS 16. So with an EBIT of EUR 57.4 million or 11.7%, I think a very solid or good Q1. In other financial result, we saw a small positive impact of improved valuation of our stake in FinTech Group. And profit for the period up -- was EUR 43.3 million, up from EUR 41.8 million.

Going into the segments, mail -- starting with Mail & Branch Network on Page 21. Letter Mail & Mail Solutions revenues, up almost 3%, which is the net of a mail volume decline of around 3.5%, a tariff -- net tariff improvement resulting from the new tariff structure, and some positive one-off mailings. On the Direct Mail side, minus 6%., this is the combined impact of structural volume decline, the impact of 1 or 2 bigger Direct Mail customers exiting the uncertainty caused by GDPR and late Easter seasonality this quarter.

Page 22, our Mail & Branch Network income statement. I think the most important line, EBIT up EUR 1.7 million, high EBIT margin on -- even slightly up from last year. On the revenue side, you'll see on the Branch Services also that decline of revenues in -- from financial services resulting from the ramp-down of our operation with BAWAG P.S.K.

Moving to our Parcel & Logistics division on the next page. Revenue, up 6.7%, pretty much equally coming from both Austria and Eastern Europe. In Austria, I think a good revenue development despite our largest customer having started its own delivery in the Greater Vienna area. And in Eastern Europe, we have seen good revenue development however see -- continue to see quite intense competition and margin pressure.

Page 24. The, I think, most important message on this line on this page, again, we see margin pressure in our Parcel & Logistics division as already in the 2, 3 last months. The main reason for this margin pressure is that we are operating substantially beyond efficient capacity and are urgently waiting for the new capacity from our new sorting centers to come on time and where we expect that some expensive extra sorting facilities where we are not operating in a fully automated way that we will be able to take those out of our value chain and see the improvement in productivity and margins.

Page 25, here, you see the impact from IFRS 16 on our balance sheet, substantial extension of our balance sheet, roughly EUR 240 million but otherwise pretty much unchanged picture; substantial cash surplus, this is before the payout of EUR 140 million dividends end of April; low risk profile; low goodwill position. And on the equity and liability side, basically no real financial liabilities outside IFRS 16, no pension obligations, a high level of debt provisions and a strong equity position with above EUR 700 million equity.

Page 26, update on cash flow development. Let me ask you to focus on the pillar in the middle, the free cash flow before acquisitions, changes in our security portfolio and before growth CapEx, EUR 60.8 million after EUR 55.1 million last year. So I think overall, robust cash flows in Q1. And I think we are well on track towards a good free cash flow from ongoing operations that could be again the base for an attractive dividend payout on the full year.

Let me close on Page 28 with the outlook for 2019. As said, we can confirm our outlook that we have already given late last year and that we have reiterated in the full year results presentation in March. We see the core structural trends decline in addressed mail on the one hand. And growth in e-commerce, driving parcel volumes, we see those trends pretty much unchanged. Of course, the 2 big drivers of our parcel volumes will be the net of DHL volume coming in depending on when and how the competition authorities will approve the deal. And on the other hand, the impact of our largest customer delivering on its own in Vienna will continue to have a dampening impact on our growth figures. Revenue-wise, this will translate into stable to slightly higher revenue for the full year depending on the start of the planned cooperation with Deutsche Post DHL. I already gave you a view on our CapEx development. And on earnings, we confirm our target of generating stable operating earnings in the core business portfolio.

So again, I think a good solid start into the full year, a confident outlook in a challenging market environment, and we are now happy to take your questions.

[Operator]

[Operator Instructions] The first question comes from the line of Ruairi Cullinane of RBC.

[Ruairi Cullinane, analyst]

My first question relates to your planned banking venture. Would you be able to give an indication of the magnitude of the start-up losses you expect over the next 3 years and the earnings accretion that you're targeting beyond that? And then secondly, the earnings growth that you've delivered in Q1 has been supported by some factors that won't persist into next year, including the product performed last July and potentially the relatively high-rate civil servant departures. So wondering if you could tell us a little bit more about your pipeline of cost or pricing measures that you may be considering to help offset now volume decline into next year.

[Walter Oblin, executive]

Yes, of course. Thanks for your questions, Ruairi. Let me start with the mail question. Yes, you're fully right. The impact of our tariff reform from July 1 last year will, of course, in the comparison with the previous year, start to be effective in the second half of this year. So then, of course, we will see the pure impact of volume decline on the revenue side and cost development on the cost side. We continue to push ahead with various cost reduction initiatives. I commented on our staff transformation where a change in civil servant regulations causes a run-on early retirement programs, and you see already some of that in the numbers and that will continue until the end of the year, which will help us on the staff cost side going into the second half and going into next year.

And I think we have been communicating, we -- the Supervisory Board, end of last year, decided to go from 4 to 3 Board members, and part of that was that we will fully integrate our logistics networks for parcel and mail in one area of responsibility so the full operations value chain from sorting centers to the last mile will come under one leadership. And we expect substantial synergies to come out of that over the coming quarters and years both in overhead structure as well as in the last mile. And then of course, we continue to push with what we call integrated last mile, where the increase in parcel volume helps alleviate the fixed cost progression or the result of increased -- of decreasing mail volumes.

So this is, I think, a brief overview of what we do on the cost side. On the revenue side, of course, the ambition is -- and the necessity is to continue to work on average prices for mail. It is too early to talk about specific plans, but I would like to remind you of the fact that our price levels are on the very low end in Western Europe and that we see substantial headroom to increase pricing in line with declining mail volumes.

Maybe so much on the second question. On the bank, the rough plan is that we see a ramp-up curve over the next 2 years, where we will have ramp-up losses on -- for the new bank, on average, around -- I would say around EUR 50 million per year. And we are currently in the detailed planning, and please bear with us that we cannot give you detailed numbers for 2019 yet. I think in August, we will be better prepared to give out more precise answers to that question. We expect to break even after 3 years. And of course, the target is to generate double-digit contributions to Austrian Post Group's bottom line from the banking operations.

[Operator]

The next question comes from the line of Bernd Maurer of RCB.

[Bernd Maurer, analyst]

One question referring to the reduction of the corporate tax rate in Austria, which will be reduced in 2 steps by 4 percentage points, still, I think it's 2023. Is it fair to assume that Austrian Post is going to benefit by the full extent that more or less your total income is taxed in Austria?

[Walter Oblin, executive]

I think that is a fair assumption, yes.

[Bernd Maurer, analyst]

Yes. Okay.

[Walter Oblin, executive]

Yes. So I think it's worth highlighting we didn't -- including -- included in our presentation as this is still yet to become law, but there are plans by the Austrian government to reduce the corporate tax rate from currently 25% to, I think, 23% in 2 years and to 21% roughly 2 years later, and that should be fully effective for Austrian Post.

[Bernd Maurer, analyst]

Yes. To the full extent?

[Walter Oblin, executive]

Yes.

[Operator]

The next question comes from the line of Mark McVicar of Barclays.

[Mark McVicar, analyst]

Two questions, please. Within the Parcel & Logistics division, could you give us some sense in the difference in margins between the Austrian operation and the other -- see, how big is the gap?

[Walter Oblin, executive]

Well, thank you for your question, Mark. You are right. We foresee different profitabilities across different countries mostly correlating with the -- correlated with the strategic position and the market share we have in those countries. In Austria, we have a quite strong market position. We benefit from synergies with mail operations from synergies between B2B and B2C volumes. And in Eastern Europe, we have a portfolio of 7 countries with different profitability levels. I would say there is a few percentage point difference between Austria and some of our Eastern European countries.

[Mark McVicar, analyst]

Okay. And as a sort of follow-up to that, do you think over time, you can lift the margins outside of Austria to what you're achieving in your home market?

[Walter Oblin, executive]

I think we will not be able to fully lift Eastern Europe to the margin levels we have seen in the past in Austria and which we hope to see again in the future after coming back to efficient production structures with our new capacity. We see some improvement potential in Eastern Europe, but given the different levels in market share, given synergies with mail network, there will be a sustainable difference between those portfolios. But we think we have some countries in Eastern Europe where we are at least close to Austria and where we have definitely industry average, if not beyond, profitability, countries like Hungary or 1 or 2 other markets.

[Mark McVicar, analyst]

And then my other question was really, could you just remind us of the size of your investment in financial terms in the -- in Aras Kargo in Turkey? And do you still expect a negotiated way forward? Or do you think this is just going to be arbitrated by the courts? It's obviously been going on a very long time now, this one.

[Walter Oblin, executive]

Yes. We have learned, too, that arbitration processes take their time, but in the end, they come to results. And we have seen some interim results which have been positive for us and which, I think, have also brought dynamic to the negotiations. Yes, I think in principle, all options are on the table, as we said in previous calls, and there is also -- that includes also a negotiated solution.

[Mark McVicar, analyst]

Okay. Yes. I'm sorry. Just the size of the investments at the moment?

[Walter Oblin, executive]

We currently have roughly EUR 25 million valuation of the stake in our balance sheet.

[Operator]

[Operator Instructions] There are no further questions at this time. I hand back to Harald Hagenauer for closing comments. Excuse me, there's one question from Lello Della Ragione of One Investment.

[Lello Della Ragione, analyst]

Just a clarification since you gave an idea on the further investment that DHL deal might trigger. In terms of -- so you said on the banking side, do you see -- or do you have any idea at the moment if you have to deploy some further capital for the division apart from the EUR 56 million that you already allot?

[Walter Oblin, executive]

Thank you for your question. I'm not sure -- acoustically, it was very hard to understand you, but let me try to rephrase what I've heard. I think that the first question, are there further CapEx needs around planned takeover of DHL volumes? I think the answer is the CapEx plans that I presented include the required capacity for DHL. The -- basically, we have been accelerating what we had in the pipeline and pulled forward some investments. And to some extent, we are taking over infrastructure from DHL.

And I think the second question was, if I heard it correctly out there, further financing or capitalization needs for the planned banking joint venture. So as we communicated, the first capitalization step will include EUR 56 million from our side and the 20% equivalent on the side of our partner. And we -- I think we currently -- the current business plans work with a total capitalization of EUR 100 million plus/minus. So there will most likely be some additional capitalization step but a relatively minor one.

[Lello Della Ragione, analyst]

Just to clarify on this point and before on this point, the EUR 100 million includes the possible capital need of the -- all companies who are coming from multi-side or just from your side? And going back to DHL, you said -- more to understand is the additional CapEx that you guided for this year is just an element for this year or is this something that will -- would might even impact the next year or even one after?

[Walter Oblin, executive]

First question, the EUR 100 million includes -- is for both parties and includes the EUR 56 million plus the equivalent on our partner side that we already communicated. And the question on DHL, I think we have not provided detailed guidance for the next years. I think the guidance that we have provided was around EUR 70 million maintenance CapEx plus more than EUR 50 million for the next years -- for growth CapEx, and I think that is still valid and very specific CapEx that we have earmarked this year for DHL, the EUR 50 million that is the one-time 2019 CapEx.

[Operator]

And there are no further questions at this time. I hand back to Harald Hagenauer.

[Harald Hagenauer, executive]

Thank you. If there are no further questions anymore, I would like to thank you for participating in the call. For some more questions, of course, we are available the next hours or days. So feel free to reach out. Thank you very much. Bye-bye.

[Operator]

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