Oesterreichische Post AG

VSE:POST

Earnings Call Transcript 2022-Q3

[Operator]

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome and thank you for joining the first 3 quarters of 2022 results call. [Operator Instructions]

It's my pleasure and I would now like to turn the conference over to Mr. 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, where we want to discuss the [ fourth ] quarter. And I would directly like to hand over to Walter Oblin, our CFO.

[Walter Oblin, executive]

Good afternoon, ladies and gentlemen. It's a pleasure to have the opportunity to present to you our Q1 -- our Q3, sorry, apologies, our Q3 results. As a summary upfront, I think we can say that after a typical Q1, our business portfolio has returned to revenue growth and has delivered solid results in a challenging environment.

Let me start on Page 3, which provides you the, I think, well-known overview of our business portfolio and about the 3 segments along which we report: our incumbent Austrian Mail business; our Parcel & Logistics portfolio, consisting of 9 parcel networks, including Austria, Turkey and a number of Eastern European countries; and our third segment, Retail & Bank, which includes both our post office network as well as our recently founded bank99. Overall revenues for the first 3 quarters of EUR 1.8 billion.

Page 4 summarizes the macroeconomic environment. I think a number of headwinds, in particular, rising inflation reaching double-digit figures in Austria; rising energy costs; a subdued consumer sentiment; and a very difficult, very challenging macroeconomic environment in Turkey are characterized by a substantially depreciating Turkish lira and a high inflation in the area of around 80%.

Against this environment, I think, as already said, the business portfolio for Austrian Post has delivered a solid performance over the last 3 quarters and in Q3 in particular. We can report a revenue growth of 5.7% for the Q -- for the quarter alone and minus 1% year-to-date. I think, very positive to mention that all 3 segments have shown a positive revenue development in Q3, including our Mail segment, our Parcel & Logistics segment with a growth of plus 6%, and our Retail & Bank segment benefiting from the takeover of the Austrian ING retail banks last year.

And based on that promising development, we are in a position to confirm our outlook for 2022, where we already said that our EBIT will come out somewhere between the EBIT of last year and the year before. And I think today, we can fine-tune this guidance, saying that we are confident that we can come out at least at the midpoint of the previously indicated range with potentially some upside.

On Page 6, I will continue giving you more details about our revenue development. As already summarized year-to-date, we are minus 1%. Do remember the line over the last 3 quarters, we started in Q1 with minus 7% group revenues. After 6 months, it was minus 4%. Now we are at minus 1%. And I think we're confident that at the end of the year, we will come somewhere around last year's revenues, maybe a little bit above, maybe a little bit below, but quite close.

In Q3, as I said, already, plus 6% revenue with a positive development, as already mentioned, because the 3 segments. Mail has benefited from a combination of price increases, one-off revenues from a presidential election and the large project delivering a so-called climate bonus to 1.2 million Austrian households. Parcel & Logistics has benefited from a combination of positive volume developments across the business portfolio. Basically, the whole portfolio has come back into volume growth. Plus -- also the effect of price increases in the plus 91% in the Retail & Bank segment are a combination of organic growth plus in particular the impact of the takeover of the Austrian ING retail bank.

Page 7 summarizes our EBIT development. EBIT margins continue to come out a little bit below a record year 2021, where we had substantial tailwinds, in particular, in our Parcel & Logistics business. Most of these tailwinds have been -- have -- yes, have been replaced by -- rather by headwinds. As a result, Parcel & Logistics EBIT, down EUR 22 million after 3 quarters from record years last year. This in particular is due to, first, the one-off revenues and EBIT last year from pandemic-related revenues both in the core parcel business as well as in value-added services, [ pest ] logistics, delivery of masks and other things.

And the other important factor is to mention is our Turkish business, where last year provided record margins, clearly not sustainable record double-digit margins. Normalization there in combination with Turkish lira, which in Q4 last year heavily depreciated, has led to a decline in EBIT contribution from our Turkish business. So Parcel & Logistics, I would say, coming back to rather normal margin levels of year-to-date around 7%.

Mail EBIT stable on a very decent level. Retail & Bank improving, particularly in Q3, also benefiting from an improved interest rate environment. And corporate, quite stable overall.

Let me continue giving you a few highlights along our strategy framework and highlighting a few developments in our 4 business lines. Top thing was Mail, on Page 10. As I think most of you are aware, over the last 10 years, a relatively stable, relatively moderate Mail decline of around 5% somewhat accelerated in the pandemic. In the year 2020, we get pandemic. Last year already, you saw some normalization with a decline coming back to around 4%, 5%

This year, we see a combination of a continued structural decline in the order of magnitude of around 4%. And at the same time, a number of one-off mailings around energy price increases from utilities. And one-off mailings, as I mentioned, around various [ empty ] inflation measures from our government. I already mentioned climate bonus, a so-called energy bonus in spring, presidential elections in October. So net these one-off mailings have pretty much compensated the structural Mail decline so that we can report almost stable volumes and I think continue to show a quite resilient, stable Mail business.

On Page 11, moving towards Direct Mail and Media Post businesses. I think here light and shadow, positive to mention recovery from lockdown losses last year, which was, in particular, in the first months of this year where volumes recovered in the year-on-year comparison. Over the last month, I think we have seen more and more pressure on Direct Mail, pressure coming from increasing energy costs, increasing paper costs, where our business customers, in particular, the food retailers and nonfood stationery retailers in Austria, have to -- had to make leaflets, unaddressed direct mail smaller, and in some areas, less frequent to save paper and to save costs. And some of that has led to volume and revenue losses, still in a relatively small order of magnitude, but this continues to be a significant risk year-to-date. On the other hand, the sum of all these developments, we can report plus 3% volume change.

Moving to Parcel. After the record growth over the last 2 years where we -- over 2 years, our business grew by 50% volume-wise, we entered the year as many other postal companies and the whole e-commerce arena with volumes consolidating. I think now quarter-over-quarter, we have come back into growth mode, Q2 already substantially better than Q1. Now in Q3, we have seen in Austria plus 6% volume translating also into a substantial revenue increase. And we are, I would say, relatively confident for the Christmas business.

Page 13. We continue in our investment program to substantially expand parcel sorting capacity and parcel delivery capacity in particular, in Austria, but also in the rest of the portfolio. As a result, we do expect to come out with a CapEx volume of around EUR 180 million this year. Similar order of magnitude is planned for next year. After that, our -- the majority of our expansion program in Austria should be finalized. And we do expect our CapEx volume to come back to a more sustainable level, somewhere around our depreciation level of around EUR 140 million.

Page 14 shows you the history and the pipeline of capacity expansion projects in Austria. You'll see here that we are in the final phase of this capacity expansion program. We finished and opened successfully in time, in budget our second phase of our biggest sorting center in Upper Austria in a place called Allhaming. This center is now fully operational. And the biggest construction site currently is our oldest and historically biggest sorting center in Vienna. This will lead us into 2023 and partly also into 2024. But you see here that the majority of projects have been finished and are operational. And as a result, we have substantially upgraded our parcel capacity.

Page 15 gives you an update on our staff development, the transformation of our staff structure from civil servant contracts to come to new employees under the new collective wage agreement is progressing. The new collective wage agreement are already for quite some time now the biggest part of our staff structure. Still there are more than 7,000 civil servants and employees under the old collective wage agreement still within our workforce. We are working in a quite challenging, very tight Austrian labor market where we would like to find more the employees than we can find.

Page 16. Moving to our international portfolio and our international Parcel portfolio. Here, as I already said, Turkey coming back into a revenue growth and volume growth mode with Q3 plus 1% after first 6 months where we were substantially below last year. Eastern Europe, actually quite stable over the last 3 quarters with year-to-date, plus 11% volume growth. So I think overall, a good revenue development in these markets, of course, similar as in Austria.

Also here, inflation becoming a substantial challenge, most visible and most pronounced in Turkey, where inflation is in the order of magnitude of around 80%. I would like to come to it since half year results, we are also applying the hyperinflation accounting standard, IAS 29, which leads to some deviations from the numbers that we have been reporting so far.

Page 17. Moving to the third strategy pillar, our Austrian consumer market initiatives where our bank and our post office network are the most important pillars. bank99, after the integration from ING's retail business in Austria, which we closed December 1 last year, now a small focused bank with critical mass: 255,000 customers; balance sheet of EUR 3.2 billion; EUR 1.6 billion credit thereof; roughly 1.2 mortgages and the rest of consumer credit.

And I think most importantly, the change in the interest rate environment, of course, provides a tailwind here, the historical strength of postal banks to have access to cheap liquidity in the form of retail customer deposits now becomes a strength again after it has been more a liability given the negative interest rate environment.

And I think month over month, we see this tailwind also materializing in our P&L. Still, we are in a post-merger integration mode with the challenge to integrate 2 organizations, 2 product offerings and 2 IT systems. But I think operationally, the bank is performing quite well.

Page 18 gives you an update on the numbers of our self-service facilities, which I think continue to be well received by consumers, and we are continuing -- continuously investing.

Let me now continue on Page 20 with some more details on our group results. Page 20 gives you the usual overview of our financial KPIs. I've already commented on revenue. EBITDA and EBIT margins show the already mentioned margin compression due, in particular, to the absence of the one-off tailwinds, which we had over the last 2 years resulting from the pandemic. Still, I think 7% given the environment is a decent margin for the group overall.

Cash flow with an operative free cash flow before growth CapEx of EUR 150 million after 3 quarters, I think we are well on track to not only finance investments, but also ensure that there is sufficient cash flow generation for a decent dividend to be paid out and proposed a payout for the full year.

Page 21 shows you our -- the details of our group P&L. I do not want to go into the details. I think I have commented on the substantial developments already or we'll do that on a segment level. As mentioned since our half year results, we apply the IAS 29 standard financial reporting in hyperinflationary economies for our Turkish business, which means that we basically adjust our numbers in the ways foreseen by this standard to the current purchasing power net in Q3. This has had a negative impact of around EUR 2 million.

Let me continue with more details on our segment development and segment financials starting with the Mail Division. The addressed Letter Mail business, including our business solutions business, I think is holding well despite the continued structural decline of addressed Letter Mail. Group revenues down 2.2%, where the [ spit shine ] in particular, coming from Q1 where there was a combination of some one-offs from 2021 missing, with a difficult start into the new year. In Q2 as well as in Q3 here, positive deviations from last year due to a combination of resilient volume development, one-off mailings and in particular, since Q3, the impact of a tariff change that was implemented effective July 1.

Direct Mail, as I said, in Q1 and in the first 6 months, we saw recovery from a difficult previous year of Q1 in particular, with lockdowns last year. In the meantime, I think the negative impact from energy and paper price developments outweighs these recovery effects. And we are back into an environment where there is structural pressure on Direct Mail volumes. In Q3, Mail volumes were down -- Mail revenues -- Direct Mail revenues, including with Post, were down minus 2%.

As a result of these developments, Page 23, our group revenue for the first 9 months -- or Mail division's group revenues on an accumulated level year-to-date, relatively stable, minus 0.7%. EBIT, quite stable with EUR 110 million in absolute terms and a favorable EBIT margin.

Moving to Parcel & Logistics -- to the Parcel & Logistics Division on Page 24. Group segment revenues are down minus 4.5% for the first 9 months. In Q3, as already mentioned, segment revenue is up 5.6% with growth here across the geographic portfolio: Austria, plus 8.6%; Turkey, plus 6.4%; and Eastern Europe, plus 5.5%. Logistics Solutions here with a negative deviations compared to previous year due to the absence of one-off pandemic revenues. So overall, I think a quite positive trend here in the Parcel & Logistics Division on the revenue side.

On the margin side, we -- on Page 25, we see here the combination of a normalizing business where last year, we had, as I already mentioned, record margins in Turkey. And in some other areas, we had one-off revenues with their contribution margins in particular. We see also the impact of the depreciation of the Turkish lira in Q4 last year. Still, I would say, was around 7%, a decent margin for our Parcel business.

Page 26. Moving to our Retail & Bank Division. Revenues up 62.2%. Most of this -- or actually all of this revenue increase is coming from our bank, bank99. And here, it's mostly coming from the acquisition of ING's retail business last year, also some organic growth in our bank business. On the other hand, a small decline in our branch. But our branch external revenue, mostly related to a small decline in provision income from telecom products and services.

Moving to Page 27. Overall, this segment is improving, still showing ramp-up losses for the bank in particular, but an improvement both year-to-date as well as in Q3 standalone.

Page 28, balance sheet. I would say, stable, healthy balance sheet, which continues to show expansion. This is mostly coming from our bank, where we continue to grow our balance sheet, both coming from customer deposits as well as assets. The industrial part of the balance sheet, quite stable. Also quite stable, our equity position was -- total equity was EUR 671 million, almost matching the end of the year number despite a dividend being paid out in-between.

Page 29 shows you the usual cash flow waterfall, cash flow from operating activities, excluding changes in our bank assets. This is what's meant by excluding core banking assets. So we try to show here the free cash flow resulting from our industrial business: our logistics business, EUR 195 million; maintenance CapEx, around EUR 43 million, resulting in some other special developments and operating free cash flow before growth CapEx of around EUR 150 million, which I think after next 3 months -- after 3 quarters is -- those are quite well cash-generating business. And even after a growth CapEx of EUR 56 million, a full free cash flow before changes in our security portfolio of EUR 93 million.

With that said, I'm coming to our outlook at the end of my presentation. As already mentioned upfront, we confirm our outlook was a small improvement on the EBIT guidance. I think we continue to see a quite challenging market environment, in particular, if we look into 2023 with inflation, which is still increasing in Austria and our business in the 4 countries where we operate as being the dominant challenge. Also, the economic environment deteriorating and still a lot of uncertainty, what this means for parcel volumes going forward.

Still, I think, for 2022, after now 10 months already in our books, I think we can provide a well-based outlook. And we do expect revenues for the full year pretty close to last year's level, where we showed EUR 2.5 billion in revenues, probably the major uncertainty being the Turkish lira, although the exchange rate has been quite stable over the last months.

I already mentioned our investment. Our investment guidance for this year was a total CapEx of around EUR 180 million with maintenance CapEx around EUR 100 million and growth CapEx around EUR 80 million. And on the earnings side, we do an EBIT at least at the midpoint of the range of our last 2 years of the now third year. 2021 was EUR 205 million and the difficult year, 2020 was EUR 161 million.

And while we do not yet provide detailed guidance for 2023, I think it is clear that we will face -- we will continue to face, as I already said, a challenging macroeconomic environment with substantial economic headwinds, in particular, substantial inflation and limited visibility in the mail and parcel markets. Still, given what we know today and what we see today, we have a target to at least slightly increase revenues against -- compared to this year and try to compensate the rising effect of cost and keep earnings as stable as possible. So this will be the target for 2023.

And with that said, I'm at the end of my presentation, and we look forward to your questions.

[Operator]

[Operator Instructions] We have the first question from Ivar Billfalk-Kelly from UBS.

[Ivar Billfalk-Kelly, analyst]

Maybe if we start with the parcels in Austria. It wasn't a strong quarter relative to some of your peers both in terms of volume and pricing. But what trends have you seen over October and the start of November? And what are your expectations for the fourth quarter as a whole? And maybe linked to that, what performance would you actually need to see from Parcel to be able to achieve guidance towards the upper end of your current range?

Secondly, Turkey does seem to be doing a little bit better and stabilized a little bit compared to recent quarters. But are you able to share the approximate EBIT contribution that the division is generating for you now? And what would be the expectation for [ Eastern ] next year? And thirdly, I'll sneak in another one. Your banking division is doing quite a bit better now as well. So in the context of the higher-yield environment, has your expected run rate to break even changed at all? Or is it still the same as it was before?

[Walter Oblin, executive]

Yes. Thank you for your questions. Let me try to answer. But I'm not sure if I fully understood, the line was not that good -- if I understood all of them, but I'll try. Starting I think it was the first question around Parcel Austria. I think -- we think the [ disclaimer ] is that the Christmas business only is starting these days. And I think -- but we do not provide here months with transparency. I think we would expect some -- at least some small growth compared to last year.

Otherwise, we will not have come to the revenue growth in Q4 that's needed to reach last year's full group revenues. So we do expect, I would say, single-digit volume growth in the last quarter. And I think it's really also for us hard to give a more precise guidance where exactly we will come out, yes? I think most of our customers don't know themselves how the Christmas business will develop.

On Turkey, here, I did not 100% understand basically your question, but I think it was around EBIT level, where we come from, where we're at today and where we can end up next year and beyond. I think, as mentioned, we've come from double-digit levels last year, that the company currently is operating in an 80% inflation environment, where every 6 months the minimum wages are increased by around 40%, which directly ends up in the company's P&L.

In this background -- in this environment, the company continues to be profitable over the last 9 months in the -- I would say, in the lower single-digit numbers. But we have seen a promising development in the recent months, and we expect to come back to an industry typical margin in the order of magnitude of 6% to 7%, with some fluctuations on a monthly and quarterly level given the developments I have already mentioned.

Coming to bank99, I think we do confirm our target of breaking even in the course of 2024. I think was the headwind from the interest rate environment. This target has become a lot more robust. Still, there is substantial integration work, as I have mentioned, still to do. And for next year, we do expect our ramp-up losses, I would say, order of magnitude could be [ passed ] from the current, around minus EUR 30 million.

[Operator]

The next question is from Marco Limite from Barclays.

[Marco Limite, analyst]

The first question would be on repricing of letters and parcels in 2023. I think over the last 6 months or 9 months you've already announced a couple of price increases for letters. So yes, by how much and to what percentage of the revenues you will apply price increases on letters and as some questions on parcels, please?

Second question is on your CapEx spend. So if I look at your Slide 29, year-to-date CapEx spend is at about EUR 100 million, including gross CapEx, which is quite below the EUR 180 million guidance. So are you planning to spend EUR 80 million of CapEx in Q4? Or that guidance is simply being conservative?

And still on this topic, can you remind us if you have a net debt-to-EBITDA target that you would like not to go over? And the final question is, if you can remind us the split between fixed rate debt and floating rate debt on your debt.

[Walter Oblin, executive]

Yes. Thank you, Marco, for your questions. I think on repricing letters and parcels, of course, the target is to forward the inflation we have on the cost side to our customers. I think the reality is that there will be some time lag between inflation within our P&L and being fully capable to forward this to our customers. In some areas, it will be faster and maybe a little bit easier than in others.

I think on the addressed letter side, we have already implemented substantial price increases. As I mentioned, on economy letter -- economy letter effective July 1, priority letter effective October 1. So there, we will see some impact in Q4. So this is on the regulatory side -- on the regulated side.

On the parcel side, there is a mix of regulated business and nonregulated business, which mostly is with large customers with longer-running contracts. There, we also have implemented some smaller price increase on the regulated side. In our post offices, there is a constant positive price impact from an instrument, which we call diesel floaters or basically a [ cousin ].

Almost all our contracts where we see increasing fuel prices, our prices change almost automatically. And I think, of course, the challenge we have is to implement the required price changes in the contracts with our big customers. You will get the feeling of gilly price negotiations, and of course, also substantial negotiation power of some of our customers. So I think we have areas where this will be a little bit more difficult and will require some time.

On CapEx, I think your observation is right. We have a strong Q4 ahead of us. And I think we do expect to come in a bit close to those EUR 80 million. There are 2 big projects partly being -- so I talked about this project in Upper Austria, which went online in recent weeks, so where the final bills are coming in. We have a substantial construction project in Austria, which is running at full steam. We have substantial fleet orders, which we expect to be delivered in Q4, also a little bit delayed.

So while I understand the CapEx development is a little bit nonlinear and maybe hard to believe at this point in time, we believe this EUR 180 million is not -- it's not purposely conservative. There might be deviations resulting from delivery delays, which we cannot inform, yes? But the orders are out there, and we believe we [ should have it ].

Net debt to EBITDA, I think there's no explicit target. But I think on -- I think we would rather suggest to look at financial debt over EBITDA that has in our basis a little bit misleading, with all our provisions and in particular, our substantial IFRS 16. IFRS 16 assets and liabilities, we would suggest to look at financial debt over EBITDA. We do have financial debt of around EUR 160 million. This is fixed -- the fixed interest loan at around 1.5%, running, I believe, probably [ 5 to 7 ] years, I think earlier this year. And still, I think we would try to not substantially exceed a financial debt over EBITDA ratio of around 1. I hope I have answered all your questions.

[Marco Limite, analyst]

Yes. Sorry, the other question was if your financial debt, how much is floating rate and how much is fixed rate?

[Walter Oblin, executive]

Yes. I'm saying that all the EUR 150 million is fixed at around 1.5%.

[Operator]

The next question is from Bernd Maur from RBI.

[Bernd Maurer, analyst]

One question. Media was reporting about the big fire you faced at the sorting center in the West of Austria end of the last week, if I'm not mistaken. Will this show any noticeable impact in the P&L in the fourth quarter or with CapEx next year? I'm not sure about your insurance policy as. If I'm not mistaken, cars and most buildings are not insured given the big number of fleet and the big number of assets. So perhaps a question regarding the insurance policy in general and second, to the impact from the fire and [ FinTech ].

[Walter Oblin, executive]

Yes. So I think I can comfort you there is no substantial -- at least from today's point of view, there is no substantial P&L hit to be expected. I think other than it was mentioned in the media, this was not a German [Foreign Language], which typically we use as a work for our large sorting center. It was a relatively small delivery depot [Foreign Language] for around 50 postmen start their work in the morning.

It was, yes, fully demolished and fully burnt down. As it was a rented building, we do expect the landlord's insurance to cover the building. There will be some interiors where if we get on our -- if we -- we will have to take the damage, but we do expect this not to exceed a 6-figure digit amount -- 6-figure amount. And on the insurance, I have to correct you. We do have, of course, an insurance covering our buildings, and there were no cars damaged in this fire.

[Bernd Maurer, analyst]

Okay. And just one clarification. Did I understand you correctly before that the net debt-to-EBITDA target is around about 1x?

[Walter Oblin, executive]

Yes. It's not a target, but I would say it's a threshold which we do not plan to exceed in the foreseeable future.

[Operator]

[Operator Instructions] There seems to be no further questions at this time. And I hand back to Harald Hagenauer for closing comments.

[Harald Hagenauer, executive]

Well, thank you, ladies and gentlemen, for participating in this call. So we are ready for the day. And if you have -- but if you have some more questions today or next week, we are ready, we are here, so call us. Thank you. Bye-bye.

[Operator]

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