CTT - Correios De Portugal, S.A.

Thank you. Good morning, everyone.

Welcome to our results presentation webcast. I would invite you to follow me through the presentation.

So moving to Slide 4, which is in fact the first slide. Our key takeaways for the quarter are that we have what we call a transitory slowdown in E&P and also the impact of investments in capacity to enable foreseen growth that have impacted the quarter results.

On Mail, we’ve seen revenues penalized by a slowdown in e-commerce and adverse evolution of the mix of Mail. And in spite of that, the earnings momentum is improving following regulated price increase as we’re going to see it.

That’s why we have a much better month of March. We keep in the bank a solid and indeed expanding balance sheet, which positions the bank for further revenue growth and offers the interest rate leverage to grab the momentum on that front.

Transformation continues to deliver on sustainable market share gains, mainly in B2B where we regained important contracts in BPO, printing and finishing and even mail. And, of course, this is the quarter, where we distribute dividend amounting to 12% [ph] per share to be paid on May 20 with ex-dividend starting on the 18th of May.

All-in-all notwithstanding the difficult economic environment with increased execution risk, we remain committed to achieving our final year EBIT guidance within the €65 million to €75 million range, which I believe is the most important message we have for you today. Moving to Slide 5.

Well, it’s been significant transformation that we’ve been operating in the company by increasing exposure to growing businesses. And I believe this is a very interesting slide in a sense that if you look at well the final year that we closed accounts before this management team became in place, we had Mail representing 67% of our revenues and 118% of recurring EBIT.

And we have in fact produced a very significant transformation with Mail representing just below 50%, 49% by year-end and representing near 28% of recurring EBIT. But we have done so while growing the turnover and profitability of the company while this quarter follows that trend although with a very significant impact on Mail decline.

Moving to Slide 6. I’m sorry, I’ll be coughing throughout the presentation.

The quarter was marked by this transitory e-commerce slowdown and challenging economic conditions. But even so, revenues grew slightly above 14% with a significant decline in recurring EBIT, although with an improving performance throughout the quarter.

This means that on Express & Parcels, we had roughly steady revenue behavior, but the significant recurring EBIT decline on profitability for Mail. Financial Services performing reasonably well and with the recurring EBIT falling for reasons we’re going to see.

And a very good quarter for the bank as we shall see later in a more detailed slide. Moving to Slide #7, and talking about Parcels on an Iberian perspective, which is the one we have more and more.

Notwithstanding the transitory loss of momentum, we are delivering consistent market share gains in Spain and we clearly kept our leading position in Portugal. We won several clients and we lost none in the quarter and that’s visible on the chart.

So if you see the series from the first – series regarding first quarters from 2018 to this quarter with a steady growth. Of course with a positive bump in Portugal last year, because we were confined.

So e-commerce was at, let’s say, extraordinary peak, but a consistent growth of 9% per year in Portugal and 22% in Spain. The quarter reflects a combination of negative effects, because indeed we fell 12% in Portugal although growing 7% in Spain.

But these results from customers returning to physical retail. This is a trend that we have observed or it’s been observed globally and the macro context, which has impacted significantly consumer confidence with minus 30 points in Portugal and minus 36 points in Spain.

Still the longest series highlights very clearly the persistent growth trend in both markets. And also we have good news because moving to slide – sorry, we’re going to see that later on.

There is a convergence towards more mature e-commerce market and so a huge room to growth in both countries. Moving to Slide #8.

What we see this very clearly with the behavior between 2020, 2021 and 2022. Significant growth on volumes, revenues and recurring EBIT.

But as we said, a bad comparison with last quarter – sorry, with last year’s first quarter because of the reasons that we have mentioned. This was a quarter and the [Technical Difficulty].

Moving to Slide #9. Notwithstanding the growth breather, we continue to prepare the structure for the structural growth we see ahead and this is a very important point.

E&P is a growth contributor and is remaining so. But if you compare the performance in the first quarter last year with the first quarter this year, we have a number of effects that we’d like to comment with you.

We have a negative contribution margin for Portugal with the slowdown in e-commerce, which forced higher externalization. Then we have the almost symmetrical positive effect regarding the contribution margin in Spain because as scale progresses we grab operational leverage and therefore capacity improvement is render, its benefit.

Then we have also a positive effect regarding the change in the cargo operating model that we have. And finally, we have of course the structural costs that are mostly associated with rent and associated with the cost related with capacity and quality improvement and this is extremely important, as you all know, for the Parcels business.

Then we have – consequently because of that, we have a very significant quality evolution on Iberia of more 4% and we have also increased with very significantly the automated sorting capacity in Iberia. If we compare with 2019 when we came in and started the restructuring program.

In Spain, we have now more than 3 times the automated sorting capacity and an impressive 38% higher than last year. Moving to Slide 10 and zooming now in Portugal.

E&P reflects primarily a difficult comparison with same quarter last year resulting from, well, change of behavior, as I mentioned before, towards – with the bias towards the physical retail and also a sharp decline in consumer confidence. Nevertheless, we see a steady growth from quarter-by-quarter with the usual seasonality and a decline of 7.2% in volumes and a decline of 11.8% in revenues when comparing to the first quarter of 2021, but still a very significant growth when comparing to the – before that of 65% in volumes and 30% in revenues.

Moving to Slide 11 and now zooming in Spain. We continue improving in volumes, in revenues and in profitability with, well, an interesting behavior of course with the slowdown in growth.

But with the increased capacity that I’ve already mentioned, we are now ready to grab not only the market growth, but also market share as we’ve been doing right now. And so that Slide #12 is quite interesting, because it shows that e-commerce market will continue to grow and it will continue to grow very significantly in Iberia.

Portugal is where it is with lagging behind almost everyone – actually lagging everyone in this chart. But we have now 73% of first users planning to continue using digital channels after COVID and customers are now accessing 48% more industry digitally.

So on the left, we see the huge room we have to grow both in Portugal and in Spain. And this is good news because we have been market leader in Portugal, we need the market to grow and we are helping the market to grow.

And in Spain, we are also not only following the market growth, but also grabbing market share. And this is very obvious when you look to the right – at the right, where we represent the percentage of e-buyers that are now buying online.

So we believe that the fact that the pandemic brought a lot of new users to this new mode of e-commerce. Some of them are buying less now than they were 1 quarter ago, but they became e-buyers and this is very good news and this is why we are so positive on the role that Express & Parcels will play – is playing and will play mainly for our equity story this year.

And with that, I will hand over to Guy to guide you on Mail and the Other.

Good morning. So starting on Page 13, where we show the evolution of our Mail volumes that are consistently declining less over the last 3 years with B2B big accounts recovery from competition, partially offsetting declines in retail and inbound parcel de minimis although with a lower average revenue per object.

In the next slide, we can see the progress revenue transformation that we’re doing in Mail, while positively impacted by de minimis and adverse mix effects on National Mail. Business Solutions showing very good progress, even if we account for the special laptop project that got a huge amount of revenues with the inclusion of NewSpring on our perimeter, and with good underlying growth.

Increased B2B competitiveness especially in utilities is driving improvement in volumes in the B2B segment although at a lower pricing than average. In National Mail, we continue to see the effects of e-commerce migrating to Express & Parcels from Mail, and the de minimis impact that started in the third quarter last year.

That will continue to impact till the next quarter, and then washing through our numbers… We also increased prices in March on the last 3 weeks of March that will be helping the profitability of Mail going forward. We chose to detail our Mail EBIT evolutions.

That should improve sequentially after the price increase, but with strong impact this quarter that we are detailing. First, we had the €5.5 million of de minimis impact.

That continues to show through all the numbers especially this quarter when we compare with the very high e-commerce trend that we saw last year. Then the rerun of the legislative election helped slightly our numbers.

And then a decline in domestic volumes with e-commerce so that also affects Mail and with adverse mix effects due to high price of wire weight classes that this kind of mail carries. Then €1.7 million impact of lower mail network used by E&P.

We chose to preserve our external last mile capacity Express & Parcels due to the foreseen growth, but that had a negative impact on Mail as we use less of the available capacity on these business units. Then we had unfortunately the direct and indirect impacts of fuel inflation that is very present right now in the market especially after the Ukrainian situation.

That’s negatively impacting our numbers of €1.3 million. Then a very good progress in Business Solutions, 2 one-off effects, the NewSpring integration and the sale of computer equipment, but good underlying growth of €0.6 million on Business Solutions.

We chose also to show you the progress of EBIT on this division, but as sequential improvement with March benefiting from 3 weeks of price increase. That’s benefiting our numbers and we hope this will continue to positively impact the following month.

On Page 16, we can see the Financial Service evolutions that have 2 separate performances. Retail revenues continue to have a very consistent and strong growth driven by more focused retail approach.

And our Financial Services revenues were hit by less public debt placements following the consumer confidence impacts and this more uncertain environment that is leading people to place less savings. On Page 17, we can see the Banco CTT numbers.

That posted another quarter of consistent growth across all business lines especially on consumer credit that we can see on the left part of the slide with auto loans growing 13.2% and our credit cards tripling in the period to more than €300 million in line with or ahead of our expectation. Mortgage is also progressing well with 12.3% growth in year-on-year and we continue to capture savings and off-balance sheet savings, while we continue the monetization of our waste.

On Slide 18, we continue – we detail ESG measures where we highlight our continued focus on these fronts. We chose to share with you some of the projects.

So in the environment dimension, we supported this partnership with Quercus to plant 6,000 trees and we work this year on the electrification of the fleet with the first acquisition of 71 electrical vehicles that enable already to have 2 full CTT hubs fully electric so no fuel. And we continue to install meters around our buildings to bring about better energy savings.

In the social dimension, we supported the Ukrainian people through [Technical difficulty] held in our stores, where we collected more than 40 tons of help that we shipped to Poland. And we initiated the third edition of CTT student monitoring program for underprivileged students where we – the students are tutored by CTT employees.

Then I invite you to start our financial review, although, this mid-quarter we already gave a lot of detail on the operational review. But nevertheless, on Page 20, you can see our key financial indicators where we see a difficult quarter in business performance with challenging environment, with the combination of effects of the end of the COVID-19 pandemic this year, the logistics chain disruption from Asia and the impact of consumer confidence with the rise in inflation and the situation on Ukraine.

CTT had a double-digit growth in revenues in the quarter on the back of a special laptop sale project. Excluding that effect, our revenues would grow 3.8%.

Our EBIT declining 55.7% due to a strong impact on the Mail division and the lack of growth on Express & Parcels. In the quarter, our net profit stood at €5.4 million, a decline of 38% and our cash flow reached €6.2 million in the first quarter.

On Page 21, we can see the detailed revenue evolution with the already mentioned growth of 14.3% due to the Mail performance on the back of Business Solutions and Bank CTT. If we focus on Express & Parcels, we had a decline of €2.1 million, 3.3% due to the transitory slowdown in e-commerce and a difficult comparable due to the end of COVID-19 and then the consumer confidence in these logistics chains.

All these effects have heavily affected volumes in Iberia. In Spain, we continued to grow although at a lower rate 3.9% in volumes and 7.1% in revenues.

This is obviously a slowdown in growth while we saw the e-commerce market that is our strongest market in Spain declining for the first time in years with the decline in demand, namely on weak marketplaces. In Portugal, the e-commerce market also suffering and suffering more than in Spain with overall decline of the market of 13%.

This context [ph] obviously impacted our operation in Portugal with volumes declining 7.5% and 9.7% in revenues on the CEP line. Mail & Other business growing €24.9 million positively impacted by the consolidation of NewSpring that accounted for €6 million of this growth and the special laptop project that accounted for €21.5 million.

The remainder of the core Mail revenues declining [€3.8 million] [ph] with an inbound Mail effect that I already shared with you partially offset by the rerun of legislative elections and for declines on the National Mail. Financial Services maintaining a good performance on retail sales, but consumer confidence penalizing placement in savings with overall revenues declining €1.2 million.

Banco CTT growing 32.5% with expanding net interest margin driven by credit cards and auto loans and also commissions that we are increasing, as we are increasing the monetization of our customer base through balance sheet, off-balance sheet savings and account and debit card commissions. In the next page, we see our OpEx that grew basically on the back of Business Solutions, Mail and Banco CTT.

Focusing on Express & Parcels, we declined €0.9 million or 1.5% as a result of 2.9% volume decline in Iberia that were partially offset by investments in higher capacity and last mile unit costs in Portugal where we leverage less on the Mail install capacity to preserve our external last mile network to support future work. On Mail & Other, excluding Business Solutions, we are growing €6.6 million.

€3.3 million related with general election costs with foreign operators, €1.3 million related with the fuel inflation that we shared in the previous slide, €1.7 million in lower usage of mail network by Express & Parcels and €0.6 million in our carrier cost inflation. Financial Services increasing €0.7 million, 50% of that increase coming from cost of goods sold in the retail in line with the revenue increase and increase in commercial cost on the Financial Services side.

Banco CTT increasing €4.9 million, €2.7 million of cost of risk that stood at 1% increasing from 0.5% last year due to the growth in the credit card book. So that is a mix driven growth and increasing in retail activity and customer transactions.

Slide 23 shows our EBIT performance that reflects the decline in Mail revenues and the continuing investments in quality. In the quarter, Express & Parcels declining due to softer e-commerce evolution mainly in Portugal and the impact in capacity to cope with the expected growth in Iberia.

Mail & Other heavily hit by de minimis and lower volumes in National Mail and adverse mix effect coupled with effects of inflation and lower integration with the parcel network. Price increase only took place in the last 3 weeks of March and this coupled with cost measures should improve profitability of the business going forward.

Financial Service showing the effect of slowdown in placements and lower remuneration in public debt. Banco CTT growing €2 million in the quarter on the back of strong growth in banking product and contained cost of risk around 1%, as I already mentioned.

On Slide 24, we can see our cash flow evolution in the quarter declining to €10.4 million, declining €2.5 million versus last year. CapEx stood at €5.9 million, flat year-on-year.

Our free cash flow of €6.2 million and our net debt is now €64.9 million in the end of the first quarter. And with that, I’ll pass it to João for his closing remarks.

Thank you, Guy. So as closing remarks, we start by stating that we increased capacity to cope with future demand and we are doing that preserving operational flexibility to adjust these requirements.

We see commercial market initiatives improving customer intake and we have quite some of these with real impacts already felt in the last weeks especially in E&P and Business Services. On profitability measures namely in operations and central structure, we have been intensifying them and will deliver results – measurable results as from the second half of this year so starting next quarter.

On EBIT generation, it has improved and this is something that I must call your attention I referred this before. It improved throughout the quarter with 81% of the recurrent EBIT having been generated in March and I recall that we had the price increase on the March 7.

Previously identified risks remain active and the second quarter will still be penalized by some macroeconomic factors when compared with March 2022 run rate. Finally, notwithstanding a difficult environment, increasing execution risks; we remain committed to achieving the final year 2022 EBIT within the €65 million to €75 million range, which is probably our most important message today.

And with this, we remain available for your questions. Thank you.

Hi, good morning, João and Guy. I have 4 questions, if I may.

First one is actually a clarification regarding your presentation on Page 9. You mentioned higher externalization on Portuguese E&P from the slowdown in e-commerce.

Can you give us more details regarding what externalizations are you talking about and also if such negative impact can be somehow mitigated in the upcoming quarters? Second question on outlook.

And how confident you are that you will be able to reach the full-year target? Because as you mentioned second quarter will continue to be tough and doing some rough math if we assume for instance no increase in second quarter EBIT, it will still imply a significant increase in second half EBIT so more than 40% to reach the low end of your target.

So from what activity should we expect this strong growth in second half to reach the full-year target? And last 2 questions is a request of an update.

First one on real estate and when should we expect the announcement of the deal? And last one, if you can confirm to us as mentioned in the press, you are in the negotiations for the entry of the new partner at Banco CTT and if it’s the case, when should we expect novelties on that front?

Thank you.

Okay. Thank you, Filipe.

Guy will start with the first question.

Hi, Filipe. So we – as you know, we use both external partners for distributing last mile in Express & Parcels and our Mail network capacity – installed capacity, where we blend the Mail with Express & Parcels.

This quarter with the pressure on volumes, what we chose to do to protect our capacity to support growth in the future is to not offload as much parcels as we could to the mail network and that actually had a negative impact that we detail on Mail EBIT. To keep a lifeline on the partners we have on Express & Parcels because otherwise there will be no volumes to distribute and that would impair our ability to support growth going forward.

As we see the slowdown on Express & Parcels as transitional, we thought this was the right thing to do to continue to be able to support additional growth. Nevertheless, it s a lever that remains available if it’s required.

Moving to the outlook, Filipe, we are as confident as to have decided to leave the outlook as it stays. We are quite positive on E&P both in Spain and in Portugal, and we expect a significant impact of the price increase as we are already feeling and measuring in March.

And, of course, we have good expectations – very good expectations regarding the bank behavior throughout the year. I will leave the question around legal for Guy to answer, but I would reply your question of the bank.

We have a process going on. The process is progressing very well.

We are on time with that. It’s running well and we will disclose relevant information as soon as we are in a position to do so.

So the idea is that the process is running well and we will most likely have a positive outcome.

On labor – on real estate, we continued to progress well on resuming the transaction that we envisaged last year and we continue to – committed to announce or to share with you news on this until the end of the quarter and we expect to announce either structure or a transaction within this quarter.

Okay. Perfect.

Thank you.

Hi, good morning, everyone. Just 1 question.

I was particularly worried between comments with EBIT performance on Mail. I see that the main explanation and I’m now reading due to the decline in higher value and higher margin Mail volumes and the costs associated with the capacity building of the distribution network of structural growth of e-commerce.

So my question is on the first side of the explanation, I don’t think that the higher value and the higher margin Mail volumes will change dramatically in the next quarter. So my main question is for how long or for how many quarters should we expect costs associated with this capacity building of the distribution network?

And can we see the EBIT in Mail improve significantly in the coming quarters? And this is my question.

Thank you.

Thank you, Artur. Just clarifying, the capacity that we are building is on Express & Parcels side of things.

As explained to Filipe what we do, we use the installed capacity of mail to distribute parcels, but this quarter we used less – deliberately used less of that capacity to maintain our external partners alive in order to support future growth. What we expect and what we already saw in the numbers that we shared with you is EBIT performance of Mail improving by price increase, by additional growth on parcels that should resume and our ability to continue to distribute parcels to the mail network in a higher percentage that we did.

On commenting on the National Mail as well as mix effects. This is mainly retail mail that is also associated with e-commerce.

Last year, we saw 1 additional effect, that was people that – or businesses that were mainly doing business through the brick and mortar that was closed using our retail network to send goods to their customers. And also the increase of e-commerce because part of the e-commerce is actually registered mail, more bulkier registered mail as such higher price mails.

This effect continues there. The other was more transitory and disappear, and will continue – it was still high in April last year, but then it normalized throughout the rest of the year.

That are businesses that resume their brick and mortar activity, and as such stopped going to our retail to send objects. What we are aiming is to go after those businesses with our offer of Express & Parcels in order to convince them to keep using the e-commerce channel as an additional source of revenues.

That we think they can do with margin or extra costs using our offering, but nevertheless it’s a process that needs to take some time to be evolving.

Okay. So – sorry, go ahead.

Artur, this is just to complement on Guy. A good part of the commercial initiative intensified that I referred in my presentation are related exactly with this portion of the market.

We are now even redesigning the way we use the retail channel as also our B2B channel and we are seeing some initial results. So one of the reasons why we are positive there is that part of the mix will improve, because we are going to grab this chunk of e-commerce related low-size, low-sophistication e-commerce retailers that will improve the margin.

Very well. So just to follow-up.

By looking at the first quarter figures in terms of EBIT and in order for you to reaffirm or to reach the previous guidance that you gave between of €65 million and €75 million, it’s wise to say that for the next 3 coming quarters what we should see is a recovery in the Mail and in the Express & Parcels EBIT? Correct?

Yes, very much so.

Okay. Thank you very much both of you.

Very clear.

Yeah.

Thank you very much. Just a follow-up question related with this external capacity employment instead of your internal capacity at Mail.

So can you explain how much – what is the cost of it? What was the cost of it?

And then what were the arguments to decide to do this instead of just employ your internal capacity? So what I’m trying to understand is since second quarter, if Express & Parcels still be weak, will you continue to do the same or not?

So can you clarify these issues? Or share your – how do you decide – how do you take these decisions?

The direct costs, it’s shown on the operational review on Mail. It’s €1.7 million.

The direct cost both of the decision of lower volumes, because overall volumes should also be impacting this year everything equal. We feel and I think it’s very easy to understand when you close an external partner network, it’s very difficult to rebuild it.

So it will – if we tackle and follow that path, it will be a path where we would be impairing our external capabilities in Express & Parcels. And as such when growth resumes, as we are already seeing in the second half of April, it will be very difficult to build again the capacity to support that growth.

And as such, we took this management decision to keep external parcel owners’ capabilities alive while in a way impacting the Mail profitably. What we can share with you if that growth for any reason doesn’t appear again, that is not our best case scenario.

We have that lever available that is to internalize the volumes in the mail network.

Okay. Okay.

Thank you very much.

Thank you. Thank you, everybody, for coming.

It was not our best quarter, but we are very positive that we are going to have a great year. Thank you very much for coming.