bpost SA/NV (BPOSF) CEO Jean-Paul Van Avermaet on Q4 2019 Results – Earnings Call Transcript

bpost SA/NV (OTC:BPOSF) Q4 2019 Results Earnings Conference Call March 18, 2020 9:00 AM ET

Company Participants

Jean-Paul Van Avermaet – Chief Executive Officer

Leen Geirnaerdt – Chief Financial Officer

Conference Call Participants

Ruben Devos – KBC Securities

David Kerstens – Jefferies

André Mulder – Kepler Cheuvreux

Marc Zwartsenburg – ING Bank

Marco Limite – Barclays

Operator

Ladies and gentlemen, welcome to the bpost Fourth Quarter 2019 Results Call. At this moment, all participants are in listen-only mode After the presentation, there will be an opportunity to ask questions. bpost CEO Mr. Jean-Paul Van Avermaet, and bpost CFO Mrs. Leen Geirnaerdt will be the speakers for this event. I would now like to hand over to them for the start of the conference. Go ahead, please

Jean-Paul Van Avermaet

Okay. Good morning, ladies and gentlemen. I am very pleased to be here to present you bpost group’s fourth quarter and full-year 2019 results. I want to welcome you and thank you also for joining us on the call.

With me, I have Leen Geirnaerdt, our CFO, as well as Saskia and Stéphanie from our Investor Relations Department.

I assume you already had the opportunity to read through the materials, which we have posted last night on our website. We will summarize key messages, so as to move on to the Q&A rather quickly.

Although the full-year and fourth quarter results have not been realized under my CEO mandate, I’m happy to present you the highlights of both.

On page 3, you see that the full-year results are in line with the guidance. Group adjusted EBIT stood at €310.8 million. This compares with our full-year guidance of above €300 million.

Note that in order to align our terminology of alternative performance measures to ESMA guidelines, our previous “normalized figures” are now labeled adjusted figures.

The Mail & Retail business contributed for €257.4 million to the group adjusted EBIT. This with a margin of 12.4%, well within the guided 11% to 13% range. Year-on-year, the segment was impacted by accelerating mail volume declines of minus 7.9% due to continued e-substitution and rationalization, and this partly mitigated by pricing effects.

The cost base increased as a result of the collective labor agreement signed at the end of 2018 and preparatory work for our alternating distribution model and also general cost inflation.

Excluding the effect of earn-out reversals in 2018, our Parcels & Logistics Eurasia’s top line growth was driven by good volume development of parcels. Belgium and Netherlands at 20% and growth also in ecommerce logistics.

The adjusted EBIT stood at €65.8 million, with a margin of 7.9%. Also, this was fully in line with guidance, at the high end of the 6% to 8% range and represents a strong increase versus 2018 at 4.8%.

At Parcels & Logistics North America, although new business is gaining pace, top line was still negatively impacted by the 2018 customer churn and repricing at Radial.

As expected, adjusted EBIT was slightly below breakeven at minus €3 million, driven by top line developments and setup costs for the 22 newly onboarded customers.

Total contract value signed at Radial reached $385 million, well above the initial ambition of €300 million, and partly, we must say, supported by Trade Global exiting the business.

CapEx ended up at €162.3 million, which is also in line with the guided range.

I’m now on slide four, presenting the dividends. These results allow us to propose a final dividend of €0.11 to the general shareholders meeting, which brings the total gross dividend per share based on the full-year 2019 results to €0.73. This represents a payout ratio to 85% of the BGAAP net profit, fully in line with our dividend policy defined at the IPO.

Moving to page 5, with the highlights of the fourth quarter, we see that group adjusted EBIT at €69.2 million was fully in line with the expectations.

Total operating income at Mail & Retail declined by 2.3% year-on-year, and this is mainly as a result of domestic mail volume decline limited to minus 5.5% and the deconsolidation of Alvadis sold to Conway end of August 2019.

Underlying mail volume decline was rather contained at minus 5.5%, and this supported by a favorable phasing effect in transactional mail and small growth in advertising mail, thanks to our dedicated sales efforts.

Adjusted EBIT for the division at €51.5 million was impacted by higher payroll and project-related costs related to the CLA, the end-of-year peak and the alternating distribution model.

At Parcels & Logistics Eurasia, excluding the net impact of earn-out reversals, top line growth reached 8.8% year-on-year, driven by a strong volume development at Parcels BeNe of 24.3% in the quarter, driven by ecommerce growth as well as by growth of DynaLogic.

Again, excluding the aforementioned elements and a goodwill impairment in the fourth quarter of 2018, adjusted EBIT showed a €6.6 million business-driven growth, which represents an increase of 115%.

Total operating income at Parcels & Logistics North America was supported by positive foreign exchange and commercial developments, still partly offset by the 2018 customer churn and repricing impacts.

Fourth quarter results were, as already mentioned, negatively impacted at the EBIT level by the additional set of costs of the newly onboarded clients in three new facilities.

Therefore, adjusted EBIT stood in Europe €4.9 million below the fourth quarter of 2018.

Before handing over to Leen, I would like to give a short update on a few topics. First of all, we are satisfied that the end-of-year peak has been well managed, both in Belgium and in the US.

In Belgium, we were again able to deliver excellent quality. In the US, revenues were as expected, and labor management, productivity and quality were also according to the expectations.

Also, importantly, in December 2019, the Belgian Federal Council of Ministers has decided to extend the current press concessions. So, this means the two contracts for newspapers and periodicals, and this for a period of two years, at the same conditions as those applicable for the year 2020.

This is a positive development for bpost group. The decision is currently being notified to the European Commission.

Operationally, we have launched the national rollout of our alternating distribution model this week. As from now on, the mail rounds will be split into two. It means the postman will distribute prior and non-prior products on the first half of his round and prior products only on the second half of his route.

After the evaluation period, we will start the phase three organization of the mail rounds distribution office by distribution office. The full reorganization cycle can take up to 18 months to be completed. Therefore, savings in 2020 will be fairly limited.

I will now hand over to Leen for more details on the financials. Leen?

Leen Geirnaerdt

Yeah. Good morning, everybody. Happy to see that you’re all in the call and in safe health. So, I’m with you on page six, showing the EBIT bridge for the fourth quarter.

As you can see, and as expected, the adjusted EBIT showed a decline of €87.7 million compared to the fourth quarter of 2018. The year-on-year comparison is impacted by a lot of accounting adjustments, which makes it a bit more difficult to see really the pure operating performance. So, I’ll do my best in the presentation to shape some clarity there.

In Mail & Retail, adjusted EBIT was negatively impacted by the domestic mail volume decline of minus 5.5% in the quarter, not fully compensated by pricing, as well as cost inflation in the division stemming from payroll costs, mainly relating, as you know, to the collective labor agreements and project-related costs like Jean-Paul indicated.

Parcels & Logistics Eurasia. They reported, on first sight, in the adjusted EBIT a decline of minus $1.7 million. However, this figure includes two important things. First, we see a net negative impact of €16.7 million relating to earn-out reversal, and that consists of minus €18.2 million on DynaGroup and de Buren, which took place in the fourth quarter of 2018, a profit which we do not have in this quarter. In addition, this quarter, we do have €1.5 million on Leen Menken.

Secondly, there’s also the positive year-on-year effect relating to goodwill impairments, an amount of €8.4 million that was taken in the fourth quarter of 2018.

Excluding those two impacts, the divisional logistics EBIT, it grew by €6.6 million or an increase of 115%.

Parcels & Logistics North America, adjusted EBIT declined by €4.9 million versus fourth quarter of 2018. This is primarily as a result of the remaining effect of the past customer churn and the repricing, as well as some set of costs relating to the rapid launch of the 22 newly onboarded clients at Radial.

Then in Corporate, the year-over-year results were heavily impacted by several positive elements from the fourth quarter of 2018. To start with, the gain of the sale of the Old Brussels X [Technical Difficulty]; and secondly, the IAS19 non-cash gain relating to group insurance. Excluding these, corporate adjusted EBIT shows a decline of €32.4 million because of lower building sales, some being phased towards 2020; higher payroll; and higher project-specific costs at corporate level in procurement and in communication.

The page 7, it shows the key financials for the quarter. At group level, total operating income was down by 1.6%, negatively impacted by the mail volume decline and by lower building sales. More details on revenue and EBIT developments following the breakdowns per business units.

EBIT was adjusted for non-cash amortization charges on several intangible assets that were recognized following the purchase price allocation of acquisition, same practice as in other quarters.

These charges also positively impacted reported income tax. That effect has been adjusted here as well.

The net financial result of minus €26.7 million, it decreased by 18.6% versus the fourth quarter of 2018, mainly due to the €10.2 million increase of non-cash financial charges relating to IAS19 employee benefits as a result of the decrease in the discount rate.

Secondly, we have the first application of IFRS 16 for €2.6 million. And thirdly, the €7.3 million fair value adjustment for the purchase of the remaining shares of Active Ants related to the strong performance of that subsidiary.

So, the adjusted income tax decreased by €21.8 million compared to the fourth quarter of 2018. This is, of course, as a result of the lower profit before tax. While the effective tax rate is 35.4%, and it increased as a result of lower deferred tax assets being booked.

The normalized free cash flow decreased despite the initial application of IFRS 16 with lease costs moving to the financial activities. I will come back more in detail on the cash flow elements later in this presentation.

Then the BGAAP net profit of the mother company, it was down by €23.7 million to €54.4 million in the quarter.

For the full year, BGAAP net profit of €172.6 million declined by 34.2%, which is broadly in line with the IFRS adjusted EBIT decline of 31.4% when we exclude the gain on disposal on the headquarter. That was a bit the rule of thumb that we communicated to you earlier.

As Jean-Paul already mentioned, based on this net result and also based on the current dividend policy, we will propose a final dividend of €0.11 cents to the General Assembly, bringing the total dividends per share to €0.73 based on the full-year 2019 results.

The net debt, excluding the effects of the application of IFRS 16, has remained broadly stable compared to end 2018. I’ll come back on that too in the cash flow movements.

The CapEx for the full year, it amounted €162.3 million. It’s an increase of €47.4 million compared to 2018, and that’s primarily related to the build out of the new fulfillment centers in North America, as well as meal centers, infrastructure, vehicles, ICT and the alternating distribution model.

Page 8. It gives us a view on the different operating segments and how they contribute. For the year as a whole, Mail & Retail generates 82.8% of the group adjusted EBIT. Parcels & Logistics Eurasia was the second contributor of 21.2%, while Parcels & Logistics North America still contributed negatively.

So, we can shift to page 9, which shows the external revenue bridge of Mail & Retail. So, in the quarter, Mail & Retail external revenues, they declined by €19.2 million to €486.8 million, mainly impacted by a €10.6 million revenue loss in the domestic mail. This was driven by an underlying mail volume decline of minus 5.5% for the quarter, partly compensated by a positive price mix effect. The mail volume declined for the full year stands at minus 7.9%.

In transactional mail, the volume decline is minus 7.2%. It’s a slightly better trend than in the three previous quarters. We have to point out that, in the fourth quarter 2018, we saw an acceleration of the mail volume decline, so the comparatives are a bit more easy.

In addition, the 2020 administrative mailings might have been shifted towards December 2019, ahead of the considerable price increases in 2020. I want to add that the structural trends remain with the continued e-substitution by big centers and as they need, as well the further digitization and rationalization through bundled mailing. So, nothing really changed there.

Moving to advertising mail. That volume decline stood at a plus 2.5%, excluding elections that favorably impacted the fourth quarter of last year. Here, we do observe the first visible effects of the marketing and sales projects in that reboosting advertising mail.

Then the press volumes, they’re at minus 6.5%. They’re quite in line with the full-year trends and were driven by continued e-substitution and rationalization.

Proximity and convenience retail network revenues, they increased €3.5 million. This is excluding the deconsolidation of Alvadis, which is a prepaid product distribution, which was sold to Conway at the end of August. This underlying increase results from higher sales at Ubiway and the bpost group retail operation.

Value-added services, a small decline of €1.8 million, as higher revenues from find management were offset by somewhat lower revenues from document management and the phasing out of e-ID activities.

Then I’ll explain a bit more per business unit. Sorry, for the EBIT of M&R on slide 10, the adjusted EBIT amounted to €51.5 million and the margin is 9.6%. This is a net decrease of €30 million compared to the fourth quarter 2018, explained by decrease in total revenues of €12.7 million and a €17.8 million increase in operating costs and adjusted D&A.

Looking at that OpEx increase, it was mainly driven by higher payroll and interim costs, which are reflecting the impact of the new collective labor agreement that was concluded end of last year, as well some project-related costs and also the negative impact of the unpaid hours that we had in November 2018 when experiencing these strikes. These effects were only partly compensated by the favorable evolution of the FTE mix.

Moving to Parcels & Logistics Eurasia, we recorded an external revenue growth of €11.2 million. This is mainly driven by a €19.7 million increase or 22.4% of Parcels BeNe. That is partly offset by earn-out reversals in the fourth quarter of 2018, the amount being €18.2 million.

Organic volume growth was solid at 24.3% for the quarter and 20% for the full year, with a good performance also at DynaLogic. As in the past quarters, we recorded a slightly negative price mix effect. Still, we see that it’s fully mix driven.

e-commerce logistics revenues were increased by €7.3 million, thanks to client wins at Radial Europe and also Active Ants organic business developments, as well as the acquisition of MCS Fulfillment in October 2019. Like said, this quarter was positively impacted by a €1.5 million euro earn-out reversal on Leen Menken.

Cross-border increased by €2.5 million to €81.5 million, primarily driven by inbound with a better price mix and additional revenues in the UK and Asia, offset by lower revenues from the rest of Europe and outbound.

Slide 12, adjusted EBIT for Parcels & Logistics Eurasia. You can see it decreased by €1.7 million, a margin of 5.9%. This is the business unit with the most accounting adjustments and all the elements are explained on the slides.

But the message I want to bring across is that, all in all, excluding those net year-over-year impact of earn-out reversals and goodwill impairment, adjusted EBIT actually increased by €6.6 million. This relating to top line increase of €18.8 million or 8.8% and the lower increase in operating expenses and depreciation amortization of €12.2 million euro when we exclude the IFRS 16 impact.

Then, PaLo North America. There, the growth in external operating income was driven by new clients at Radial North American, growth from key existing customers and, very important, positive FX development. This was partly offset by the 2018 client churn, as well as repricing on a number of contracts.

International mail was broadly stable, with slightly negative business development, also compensated by the FX.

Overall, the external revenues were up €15.4 million for the business unit, including a positive €10.9 million foreign exchange impact.

On slide 14, we see that adjusted EBIT declined by €4.9 million to amount to €10.6 million. Excluding IFRS 16 impact, total adjusted OpEx, including depreciation and amortization, increased by €19.5 million. That’s driven – to start with – the impact of the foreign currency – that is €10.6 million euro – higher volume and setup costs related to onboarding of new clients. However, this was partly compensated by lower medical expenses and reduced fraud chargebacks in our payment business.

Note when looking at the evolution of the KPIs of region North America in US dollar, the positive 1.3% of revenue growth in the quarter compares with minus 17.1% in the first quarter, minus 10.2% in the second quarter and minus 6.1% in the third quarter.

So, this shows that the negative effect of customer churn and repricing has now leveled off and we are starting to see the positive effect of the commercial efforts in our numbers.

As you know, commercial progress, it continued in fourth quarter, and the total contractual value reached $385 million at the year-end.

Moving to the Corporate segment on page 15. You will see that the external operating income was lower by €25.2 million compared to the same period in 2018 due to lower building sales.

Adjusted EBIT of minus €51.2 million was also impacted by higher costs [Technical Difficulty] because we had cash gain here of €10.9 million. We also had high payroll and project-specific costs at corporate level in procurement and in communication.

Turning to cash flows. Slide 16, it’s the cash flow of the quarter. You can see that reported operating cash flows stood at €217.6 million, a decrease of 6.2%. Excluding the €25.5 million, that shift of lease related cash flow from operating to financing activities, the decrease stood at €31.8 million. This results from lower cash flow from operations before changes in working capital, of course, due to lower operating results and also a different timing of the tax prepayment.

These elements were partly compensated by a better working capital of €14.4 million, mainly resulting from higher payables on the one hand, and secondly, more collective proceeds in the “due to” Radial’s clients.

The cash flow from investing activities decreased by €88.3 million. This was driven by lower building sales compared to the fourth quarter of 2018. At €25 million, subordinated loan granted to bpost bank and higher capital expenditures primarily related to the new fulfillment centers in the US, to additional fleet and also to our alternating distribution model.

For the full year, the CapEx stood at €162.3 million, within the guided range, and €47.3 million above 2018.

In the quarter, excluding IFRS 16 impact, the free cash flow decreased by €120.1 million, reflecting primarily the lower operating results, higher investment outflows and lower building sales.

Cash flow from financing activities is also minus €162 million in the fourth quarter, declined by – so it stands at minus €162 million and the decline is €83.3 million versus the same period last year. This results from the fact that we had an issuance of commercial papers in the fourth quarter last year for an amount of €165 million and, of course, again, the shift of lease-related cash outflows to financing activities for €25.5 million. These effects were partially compensated by an €88 million lower dividend payment.

So, all in all, concluding from this cash flow, the debt remains rather stable because of all the explanations given.

On the next slide, we present the face of the balance sheet. We already mentioned the net debt standing at €780 million, which remained broadly stable.

IFRS 16 also led to an increase in the property, plant and equipment. The right of use of assets stood at €443.4 million end of 2019 versus lease liabilities of €449.3 million.

Other than those accounting effects, intangible assets increased by €23.4 million and that’s actually mainly the foreign currency on goodwill.

Other assets and other liabilities, they decreased as a result of the sale of Alvadis and de Buren, previously classified as held for sale assets.

I will now hand over back to Jean-Paul, who will talk you through the outlook of next year and, of course, happy to come back during the Q&A.

Jean-Paul Van Avermaet

Thank you, Leen. Before walking you through our outlook for 2020, we can thus summarize that 2019 was a challenging year, but we have delivered on our promises, with full-year adjusted EBIT comfortably above the €300 million guided and contributions by business unit as anticipated.

Over 2019, we witnessed additional pressure on mail volume decline, with the percentage stepping up from 5.8% to 7.9%, and we had a very important here in terms of preparing our operations for the national rollout of our alternating distribution model, which we did this week.

At the same time, we can say that we continue to record very strong organic parcels volume growth in our home region. And in the US, after first promising signs in the second half of 2018, Radial North America continued to turn the tide over 2019, with new client arrivals ahead of expectations, increased client satisfaction and also reduced customer churn.

As the new CEO of bpost group, I understand fully the bpost group’s strategy to be a relevant actor in the ecommerce logistics and parcel space, while remaining an efficient mail operator in Belgium. The move into ecommerce logistics is also, in my opinion, an important element going forward.

The management team has a relentless focus on establishing prominent positions in the parcels and ecommerce logistics space in Europe and also in the US.

We can say that important milestones have already been achieved. However, it requires time and investments for these businesses to reach the critical scale. Therefore, we have to be conscious of short to medium-term negative effects from group earnings, mainly as a result of mail volume decline.

This brings me to our outlook for 2020. But before walking you through, I would like to point out that this outlook is based on a 2020 budget that was realized under the previous CEO. I will personally take time over the coming months to look at it with great scrutiny.

In 2020, we expect group adjusted EBIT to be impacted by the structural acceleration in mail volume decline, which will not yet be fully compensated by the growing contribution of our parcels and logistics activities.

Group total operating income for 2020 is expected to increase by a low-single digit percentage, while group adjusted EBIT is expected to range between €240 million and €270 million.

For Mail & Retail, we expect a total operating income decline up to 5%, driven by an expected mail volume decline of 9% to 11%. This will only be partly compensated by an improved mail pricing increase of 5.1%, and the adjusted EBIT margin is expected to range between 8% and 10%.

For the Parcels & Logistics Europe and Asia business, we anticipate a low teens percentage growth in total operating income and the same margin range as of 2019, meaning between 6% and 8%.

Our Parcels & Logistics activities in North America are expected to grow at the operating income level [Technical Difficulty] and it’s adjusted EBIT margin is expected to be positive, up to 2%.

Growing parcels and ecommerce logistics will also require more investments. Therefore, the budget anticipates a gross CapEx of €200 million euro for the group in 2020.

The Board and the management team are currently reviewing our long-term capital allocation policy, of which the dividend policy is an integral part. Therefore, we cannot commit as of yet to a dividend for 2020, and we plan to update the market with the revised capital allocation, including dividend for 2020, on May 5 before trading hours. During the 2020 results analyst call, we will address any questions on that topic.

Note that we are monitoring closely the potential impact of the coronavirus on bpost group and are putting contingency plans in place in order to safeguard the continuity of our operations.

However, it cannot be excluded that there could be negative impacts on 2020 group results. We are currently not really in a position to make more concrete assessments on this.

With this, we are happy to answer your questions. So, operator, please open the lines.

Question-and-Answer Session

Operator

Thank you, sir. [Operator Instructions]. The first question is coming from Ruben Devos, KBC Securities. Go ahead, sir.

Ruben Devos

Yes, good morning. I’ve got three questions. First one relates to PaLo Eurasia. It seems that, based on the revenue guidance, you’re expecting another solid year in terms of parcel volume growth. That’s a bit of a divergence versus what had been guided by your peer here in the Netherlands, flagging more moderate ecommerce market growth, lower consumer confidence. So, could you help us understand what some of the elements that makes you confident for providing that guidance? And maybe provide some comments on the growth region? That’s question number one.

The second one relates to corona, any impact on your business? Very curious where you could give some color on how you’re managing the crisis at this stage. On the one hand, some say we could expect an uptick in ecommerce. On the other hand, you may be restricted by the measures that have been taken in the Benelux. So, yeah, very curious to what degree deliveries are affected. That’s the second question.

Then thirdly, it relates to Amazon. So, they’re looking to expand their offering in the Benelux. They have recently gone live in the Netherlands. Some say it’s an opportunity. Others say it’s a threat. So, again, curious whether you could share your thoughts on their launch and the potential impact on the ecommerce market in the Benelux. Thank you very much.

Leen Geirnaerdt

Okay. I’ll take the question on the guidance on PaLo Eurasia. Perhaps looking first into our results, so if you look at the current year results, so excluding all the one-offs that relate to earn-out reversals, et cetera, we see that the total operating income of PaLo Eurasia increased by plus 6.9%. And if you also exclude the impact in that business unit of terminal use, then the revenues of the segment would have increased by 6.6%.

So, our full year 2020 guidance, in which we see the low teens, it is actually significantly higher than the underlying percentage for the segment full-year. Does that mean that indeed the trends that might have been indicated by peers on that and then indeed do a supplier, some rationalization perhaps in how many packages or not? We do see the same trends, which, yes, we do think that low teens, even given that, should be profitable.

Then for the impact on the corona, I give the floor to Jean-Paul.

Jean-Paul Van Avermaet

Yes. To answer your question, we are monitoring the impact closely, but it’s very difficult, since it changes every day, to make concrete assessments on this moment and definitely not to give an aggregated number on that.

Last night, the Belgian government imposed stricter measures [Technical Difficulty] the virus that will be applicable as of noon today. But it was also said that bpost will continue its societal role in the crisis and that we are an essential service and, therefore, our services to the citizens in the country remain assured.

I can give you some effects that we feel that are possible and where we see possible impacts already or have some feelings about. On the Mail & Retail business, we think there might be an impact on advertising mail since we feel that quite some companies will postpone their advertising budget. It’s also seen in, I would say, advertising companies that say the same.

Transactional mail, we do not feel that it will be impacted. For Ubiway, we mainly see on the last two days impact in the stores that are in travel environments, meaning railway stations and also, of course, airports; and this, to enormous decreased traffic in those places.

On the other stores, it’s less impacted since also in the government announcement last night, press distribution and press shops stay open and can say open because they are seen as an essential service to the citizens.

On our own retail network, the post offices, there, they are seen also as an essential service and they will remain open as well. Of course, we’ve taken in all these places the necessary measures to guarantee the health of our employees and of our customers.

On the Parcels & Logistics Eurasia, we see, on the one hand, an upside from some increased parcel volumes since retail is shifting to online instead of physical shops. But we see also a downside and feel that there is quite some risk on supply chain shortages to fulfill the parcels and the orders by customers.

In the cross-border business, there, we expect impact on the international mail and also international parcels, seeing that flights are being canceled heavily and borders are being closed, and thus also air freight capacity will be limited or there will be a shortage.

For the Parcels & Logistics North America, the same trend when it concerns international meal. For the ecommercial districts, we expect mainly impact on the supply chain of customers with regard to sourcing products from China at this moment.

Leen Geirnaerdt

Okay. The Amazon question, to be very frank, actually, we don’t know. I will give you some color, just that you can make your own conclusions out of it. But it’s not that we can predict what exactly the impact will be. So, it’s true that, early March this year, Amazon launched Amazon.nl with about 20 product categories. And they see a huge potential in the Netherlands to compete with Bol.com and Coolblue. The fulfillment is expected to continue to be out of Germany for the time being.

If we look at the Dutch operations, we have there DynaGroup. Actually, we do not expect any impact there because Amazon, they do not offer the specialized delivery services. So, it could offer opportunities, any fulfillment activities, driven by the accelerated growth in ecommerce, generally speaking.

Then moving to what impact might it have on Belgium in the last mile delivery that we do here. Today, bpost delivers close to 100% of the Amazon shipments in Belgium, of which the majority is in the southern part. So, the French speaking part. So, there, we do not really expect any impact as these customers, they will continue to be served from Amazon.fr.

And then, for Flanders, yeah, that’s the difficult part, to really have a vision on, we might see it as an opportunity. It could boost organic growth of Amazon in Flanders. It could also cannibalize other ecommerce players delivering in the Flemish market to competitors, what would possibly imply additional volumes for bpost.

Of course, if Amazon flourishes very well and they start seeing Belgium, because of that also, as a new market, then there might be a different flip side on the story. But that’s very hard to predict.

Just giving some color, but the answer on – the honest answer is we do know really and we keep a very close eye on what is happening and how we can anticipate on that.

Ruben Devos

All right. Thank you very much. Just to come back on corona. So, thanks for the info. The only thing I was wondering is, obviously, you’re talking about some constraints [indiscernible] in sourcing the products and fulfillment, but curious to know whether there is any impact on the mail deliveries where they are constrained for the parcel deliveries, whether the new measures that will go into effect as of noon, whether that will have any impact on the employees and then what is the absenteeism, for instance, at this point? Yeah, so any commentary on your workforce is helpful.

Jean-Paul Van Avermaet

Well, I shall answer you briefly. As I said in my first answer, we continue deliver the services. This has also been clearly set by the government. It’s also instructed by the government. There is an increase of absenteeism, like with every company in the country, but until now, we are able to, I would say, keep the airplane in the air and continue to deliver. It might be that deliveries of the mailman are one day later than originally foreseen, but this is also in coordination with the government. No issue. We have installed quite some actions and also procedures to avoid maximally or totally any physical contact with the citizens. So, we are fully going on with delivering mail and parcels to the citizens.

Ruben Devos

Okay, thank you very much.

Leen Geirnaerdt

Thank you, Ruben.

Operator

The next question is coming from David Kerstens from Jefferies. Go ahead, sir.

David Kerstens

Good morning, everybody. I’ve got three quick questions, please. First of all, on Mail & Retail, you’re guiding for another quite significant step down in the profitability by about 350 basis points because of the launch of the new alternating mail distribution model. Do you expect that that will come back in 2021 when the model has been fully introduced, and you will still be back at an EBIT margin, let’s say, in the previous range of 11% to 13%? So, what are the associated costs savings of this new business model?

Just to understand, the 9% to 11% mail volume decline, is 9% your underlying rate of e-substitution and 11% is potentially the additional substitution that you see from this on this new mail distribution model?

Then the second question is about the newspaper contracts. You said that it is extended by two years, but still subject to the review by the European Commission. When will this review take place? And what is the expectation for when this two-year period finishes? Will there then be a new tender launched for these contracts?

And then, finally, have you seen any positive impacts from trend towards growing in-sourcing in the US by Amazon Logistics? Is that a trend that is actually benefiting Radial? Thank you very much.

Leen Geirnaerdt

Okay. Mail & Retail, so you had a lot of questions on the outlook there on. Where shall I start? If we look at the current year and we look at the mail volume decline that we’ve seen, as you remember, in the first quarter, it was minus 9.2%. Then it moved minus 9.4%. 7.8% in the third quarter. 5.5%. So, we end close to 8%. Our guidance was 9%.

And actually, when we look at the States today, like I indicated in the presentation, in transactional mail, we do not see any specific positive change in the underlying structural trends. So, we expect that will continue. And indeed, that explains also a bit that the minus 9%, like you call it, is that the underlying one? So, the answer is yes. Let’s presume, indeed, that based on trends that we’ve seen, that as far as we can predict, we would expect the minus 9%. [Technical Difficulty] minus 11% is, of course, simply out of a prudency because we cannot predict actually what will happen.

And you’re right, with the alternating distribution model, which has a lot of positives, especially the advertising mail might be impacted. I think we have been very close to our customers when explaining that new operating model to find solutions for them, but in the end, we will find out together with them during 2020 what choices they will make if they will choose for the solutions that we offered or not. So, it’s indeed true that, there, we say, if worse comes worse, it might be minus 11%, starting from the minus 9%, but also have to predict. Let me say that.

Then on the EBIT profitability, so indeed we guide for 8% to 10% on 2020. I think you understood correctly that, on the one hand, we have the top line decrease that we explained with volume decline, and that will go up to minus 5%. And then, on the other hand, we have the operating expenses, which then concludes with profitability. And the first ADM savings that we expect to see in the year, it’s hard to predict, but probably there will be sufficient only to absorb the cost inflation and also the salary indexation, which is foreseen as of April 2020 which is a plus 2%.

The ADM is a big operational exercise. I do want to repeat perhaps for us as analysts and me as a number lady, it’s not always the thing that we discuss about, but we did move it forward with one year. So, a lot of work has been done by all the operational team, and today also by all the mailman to have that thing going. But it’s an exercise that we have to see how does it go. We are in an evaluation period to see what works well. What efficiency do really emerge? And based on that, distribution by distribution office, we will start indeed to restructure it. That depends on the evaluation period. That also depends, as you know, about the sort of dialogue that we have with the trade unions, which is very good for the moment. But we’ll have to see moving forward how soon we can take the measures that come from the evaluation period on the ADM?

So, coming to your question, 2020 indeed will not – we expect – and in the outlook, we guide for – we will not see much of it yet. And how soon it rubs in in 2021 or 2022, allow me that we will not give any comments on that. But for sure, it is to support the profitability of mail.

Will it come back to the double-digit numbers that we’ve seen in the past? I think you can make the math for yourself. I think it’s not for nothing that we indeed focus a lot on ecommerce logistics and on parcels because indeed we have to substitute a bit going forward.

Then on the press contracts. So, we’re busy with the – sorry, excuse me. Jean-Paul.

Jean-Paul Van Avermaet

Well, on the press contract, to be more clear, we are really in the pre-notification phase with the European Commission. It means that they have been informed about the extension of the contract and that they are asking several questions to the Belgian state on several elements, conditions, et cetera. So, the real status today is that there are ongoing discussions between the European Commission and the Belgian state and we have no clear view on what the outcome will be or when the outcome will be there at this stage.

On your question, will there be a new tender, well, probably yes. That could be normal unless there would be a new extension. So, also, that is to be evaluated and is not known today.

David Kerstens

Okay. But now you have shown there will be no change to conditions from what you had in 2020.

Jean-Paul Van Avermaet

Yeah.

David Kerstens

2019, sorry. Okay, okay.

Jean-Paul Van Avermaet

That’s correct. Yeah.

Leen Geirnaerdt

And then there was a question on the insourcing by Amazon, which I did not really – so, I didn’t really get your question or the comment.

David Kerstens

Amazon Logistics in the US has increased their own delivery, I think up to 50% of the volume last year, and I was wondering if the strong contract wins that Radial had experienced last year was a function of that. Is there any positive correlation?

Leen Geirnaerdt

No.

Jean-Paul Van Avermaet

No.

David Kerstens

Okay, okay. That’s clear. Fair enough.

Operator

Okay. The next question is from André Mulder, Kepler. Go ahead, sir.

André Mulder

Good morning. First question is on the Parcels Eurasia. If we look at your top line growth, why doesn’t that translate into a better margin development? You’re already at 7.9%. It looks like you may be even below that this year. So, that will be my first question.

The next question is also about the margin. So, also about Parcels & Logistics North America. You made 2.7% last year. You’re now guiding for 0% to 2%. Can you give me some of the arguments behind that?

Leen Geirnaerdt

Okay. So, PaLo Eurasia, that was also about the guidance that your question refers to?

André Mulder

Yeah. That’s right.

Leen Geirnaerdt

Okay. Yeah. So, looking at the guidance for the top line – or you ask actually – especially on the EBIT, to start with, in PaLo Eurasia, we have a couple of things. We have different business units. So, there’s not only parcels, we also have ecommerce logistics which is included. So, looking at the guidance, it’s, of course, driven on the one hand by growth on the top line. But if we look at the adjusted EBIT in the fiscal year 2019 and excluding the several non-recurring elements, excluding all those, the margin would have been at 7.1%. So, that’s also in the middle of the guidance range for fiscal year 2019. If your question is why doesn’t it grow further, that is because we’re still investing in the company to make it grow too. So, I think keeping at that range while investing for growth is a good goal to set for 2020.

Then, on North America, so we had a good successful year on the commercial side. That will drive indeed top line in the course of 2020. Actually, most of the contracts, they go three to five years, to give you a bit of color there on, so that you can see what it means to the top line.

In addition to those new customers, we have the existing clients, which is very mixed bag where we see high growth for some, some declines of others. So, in the mix of the portfolio, it’s hard to predict. Will we have same store sales that go up very rapidly? That’s difficult to predict. And the client churn, that’s also another factor that we look into. So, yes, we gain customers. Yes, we see that customer satisfaction is going up. But also, there, still being young in this business, I’m not talking about myself, but being bpost within ecommerce and within Radial, we had successes in 2019. And we have to see how indeed next year, that turns into operating income.

For the rest of the programs [Technical Difficulty] productivity that we’re running on the costs, they also keep implemented. And that’s why we see EBIT percentage will go up and we expect it to be or it can be up to 2%.

André Mulder

Last question on your regulated mail margin in Belgium. Where are you compared to what you’re allowed to make? PostNL is calling for hard subsidies because they feel that with every price increase, they’re losing volume. What’s your stance in that?

Leen Geirnaerdt

Are you referring what room we have for price increases? Is that your question?

André Mulder

Yeah.

Leen Geirnaerdt

Yeah, based on the formula, we do. We do have the room. But also, there, it’s a bit of a judgment call, what is wise, because we’re implementing the alternate distribution model. So, there, indeed, we also want to see what effect that has. We have a actually big unused headroom. It’s more than 5%. But, actually, we always say that not a lot of elasticity, but let’s look at what we can do operationally and not stress too much. So, we do not have plans on the very short term to use that headroom.

André Mulder

Okay. Where are you in 2019 compared to what you’re allowed to make according to the regulator?

Leen Geirnaerdt

We could increase further by 5% – we have an additional headroom of 5.4%.

André Mulder

In terms of margins, where are you?

Leen Geirnaerdt

Margin? No, we don’t – so, we are okay. And it’s more that we cannot surpass anything, but that’s a fully different story. And not an issue because it’s declined.

Okay. Next question.

Operator

[Operator Instructions]. There’s one additional question coming from Marc Zwartsenburg, ING. Go ahead, sir.

Marc Zwartsenburg

Yes, good morning, everybody. For additional, I’m just starting with my questions. The first question is on free cash flow generation. Can you give us a bit of an indication where we stand on the bridge from 2019 to 2020? Because, obviously, you’re guiding for a lower EBIT. Also, higher CapEx versus 2019. Can you give us a bit of a feel where you think the free cash flow might come out for 2020?

Leen Geirnaerdt

That’s your only question, Marc, or…?

Marc Zwartsenburg

No, I’ve got a few more.

Leen Geirnaerdt

Go ahead. Please first have your questions.

Marc Zwartsenburg

Okay. Then returning a bit to the corona impact, can you give us an indication of what big campaigns were scheduled for April/May, so for Q2, but now with the lockdown that might be swept or phased into the second half? Can you give us a bit of a feel for what can happen there? Because it means that cancellation of a campaign was something that it will not happen in the second half. Will there always be a catchup? Or? Or can they also cancel and not come back. And just get a bit of a feel for your stress test on your mail business because that’s still – the parcels is doing quite well there. There’s a lot of people ordering online, but your mail might come to a standstill. Maybe give us a bit of a feel for what you see and what we might see there in the coming months.

Those are my two questions for now.

Leen Geirnaerdt

Okay, very good. On the free cash flow generation, very good and relevant question. So, a couple of elements that I give you to consider when you look at cash flow. You indicated a couple of them. So, we have the reduction in EBIT that we guide for that you have to take into account. We have the effective tax rate, which is also an important one. So, we expect it to be lower. It was now 36.7%, but impacted by non-cash items, being a DTA that we did not fully recognize. But we also see we have a decline in the Belgian statutory tax rate. It goes from 29.58% to 25%. We do think that the full ETR will probably about – will still be around 30% or above slightly. And that depends, of course, on the recognition of the DTA on loss making subsidiaries. But purely on a cash basis, I think main message there is that the statutory tax rate in Belgium goes down.

Working capital requirements, there, we think it might be minus €50 million. Like I said in the explanation of this year, we already expected some negatives there in the current year to happen, but actually we see, with the payment business, et cetera, that it holds up longer than we initially foreseen. It’s a bit difficult to forecast that exactly as to when it will materialize. But it’s something that we monitor very closely. But that might be the case.

Marc Zwartsenburg

So, you’re stating that you see a positive inflow from working capital of €50 million in 2020?

Jean-Paul Van Avermaet

No, no – sorry, positive – we expected it to be more negative in 2019. That’s what I say. So, therefore, we think that, in 2020, it might be negative up to €50 million. And that is because the product mix is moving away from the payment business. So, we do not have that full cash at our disposal anymore. And the new business that we sell is rather more on the invoice side.

You mentioned also the CapEx. It’s up to €200 million of CapEx. Also, there it’s – part of that is also the shift. So, we spent less than we guided for in 2019. Also, that has to do a bit with timing. So, normally speaking, we expect the investment to be up to €200 million CapEx.

And then, what we don’t know yet is the bpost bank. So, in light of any regulatory requirements that might be also there to question to have an additional loan or a tier 2 loan or whatever. So, those are a bit the ingredients, I think, to make your conclusion on the free cash flow.

Marc Zwartsenburg

Can you help me a bit with the bridge, 2019?

Leen Geirnaerdt

Sorry?

Marc Zwartsenburg

Can you help me a bit with the bridge of free cash flow for 2019 towards 2020? Can you help me a bit with the bridge, where we start from and where we can get?

Leen Geirnaerdt

I think I gave everything to make the cash flow based on…

Marc Zwartsenburg

Those are the key moving parts. Okay.

Leen Geirnaerdt

Yeah, exactly. And then, for corona, I move back to Jean-Paul.

Jean-Paul Van Avermaet

Well, your corona question, it’s really too early to judge and to look into it. We could also see possibly coming up new campaigns for food stores. But it’s really too early. We are looking into it. And I would say it changed only from this week. Last week, there was no view or no feeling that campaigns would stop. It’s really started this Monday. And we are putting in place a stress test to do in the coming week. But, okay, we give priority, first of all, to the health and to the instructions to our staff, so that we can keep on moving and that we don’t have a standstill, as you say, which is definitely our first priority, is to keep on the operations going.

Marc Zwartsenburg

Just out of curiosity, if you look to your mix of business, could you all of a sudden see a 5% negative impact on your total 2020 mail volumes? Is that possible given that you have more insight in what kind of discretionary mail items are in there?

Jean-Paul Van Avermaet

With the figures that we have, regularly, we have no impact yet that we can see.

Marc Zwartsenburg

All right. Thank you very much.

Operator

[Operator Instructions]. There’s a question coming from Marco Limite, Barclays. Go ahead, sir.

Marco Limite

Hi, there. Thanks for the presentation. Can you please give a bit of color also on what we should expect in the corporate center for 2020? So, if you foresee additional gains from real estate? Is the first.

And my second question is also about a little bit more color on what’s happening in the parcel division. So, if you see pressure in pricing and/or increasing competition, aside from the Amazon topics that we have already covered? Thank you.

Leen Geirnaerdt

Okay. So, again, building sales, so if you look at the assets, it’s particularly in corporate, but I think you know that. It mainly includes gains on the building sales. Looking at the results of this year, actually, some building sales shifted towards 2020. And, therefore, we expect actually that the operating on the building sales will not be materially lower than that we have seen in 2019. Again, this excludes the fact that we do know a lot of deals will pass given the new circumstances. But putting that aside, we also – and in preparing our numbers, we see that some building sales have shifted from 2019 moving forward, and that’s why we expect that, normally, it should not be materially lower than in 2019.

color on the parcels pricing competition, since the last time that we spoke, what changed? I think there has been a lot in the press going on. If we look at our peers, indeed, what will we do with peak? Because the peak is really a moment in which the demand is so high and naturally you expect that, at that point in time, the prices can go up. If you see that the suppliers of ours, they say, oh no, we should get a volume discount. So, that’s a bit of discussion that we have.

But like all of our peers, we are working hard to make parcels a sustainable business. And for that, we indeed look into, together with our customers, what is feasible to have as extra surcharges and it also has to do with sustainability. Very often, we are transporting air. There are two big boxes in which something very small is. So, we could say we can rationalize the number of packages in one parcel. That’s one thing. Or we say that we surcharge things.

That’s a discussion that is going on. That is – I cannot give very clear views on that because everybody is reacting differently as customers. But we see that it’s done across the board. So, if we look at competition, I think everybody is working to make this sustainable business.

Marco Limite

Okay, thank you.

Leen Geirnaerdt

Other questions?

Operator

There are no further questions at this moment.

Jean-Paul Van Avermaet

Okay. If there are no further questions, I would like to thank you, operator, and I would like to give a final note.

I started my mission a few weeks ago now. I must say that I’m very positive and enthusiastic about the challenges and tackling the challenges of the industry. I look forward really to working on a prosperous future with the team and all the colleagues of bpost group. And I also look forward to meeting you in one of the upcoming roadshows or conferences.

And let’s hope that we all stay healthy and can see each other on those moments. Thank you.

Leen Geirnaerdt

Thank you all.

Operator

This concludes the bpost event call. Thank you for attending and you may disconnect your line now.

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