CTT – Correios De Portugal, S.A. (OTCPK:CTTPY) Q3 2022 Earnings Conference Call November 4, 2022 5:00 AM ET
Company Participants
João Bento – Chief Executive Officer
Guy Pacheco – Chief Financial Officer
Conference Call Participants
Marco Limite – Barclays
Filipe Leite – CaixaBank
Artur Amaro – CaixaBI
António Seladas – AS Independent Research
Operator
Good day, and welcome to the CTT Nine Months 2022 Results Conference Call with João Bento, CEO; and Guy Pacheco, CFO. Today’s call is being recorded.
I will now hand the call over to João Bento, CEO. Please go ahead, sir.
João Bento
Thank you, DeAnna. Good morning, everyone. Welcome to our third quarter webcast. I believe, we have a set of good news today. Starting with Slide #4 with key takeaways from the quarter. As you’ve seen, we have a positive revenue trend across all business areas in this quarter with the financial components are performing better than logistics line, Financial Services & Retail, and the Bank performing very well. And this positive revenue trend occurs in a challenging economic context, reason why we value that even more.
And the result is that we have third quarter recurring EBIT of just over €20 million, a significant year-on-year performance growth versus last year. As for the cash flow, we are also exhibited the strong operating cash flow generation in this quarter of €40 million versus €13.5 million in the equivalent quarter last year on the back of efficient working capital management, in particular with improved collections from important clients.
Moving to Parcels, we have positive news for different reasons in Portugal and Spain. While in Portugal volumes grew 5.8% in the quarter, so assuming it will start [ph]. In Spain, it was the revenue per parcel, so pricing dynamics that resulted in growth, while the volumes remained relatively flat. Then we had an outstanding performance in the public debt placements, in the sense that with increasing context for interest rates, the offer we can, the end is becoming very interesting. And therefore, an outstanding performance from the financial services business area.
And finally for the Bank, volume growth across all business segments, in the Bank resulting in both revenue growth and very significant expansion on return on tangible equity that is benefiting from repricing of short-term interest rates. So, business portfolio that is hedging itself very well and providing a very good performance in the quarter.
Moving to Slide #5, which is second slide. While the title says the most important thing, solid operational and financial performance in the quarter as anticipated. Revenue growth for the quarter was in line with the figures for the year with an 8.1% growth in revenues, and then outstanding growth in terms of the recurring EBIT with €20.1 million in the quarter.
As I said, this was mostly driven by the component Financial Services and the Bank with significant growth in revenues, but mostly on recurring EBIT. The numbers talk by themselves, revenue growth across all areas and very significant contributions in recurring EBIT, in all the areas except Express & Parcels.
Moving to the detail in Slide #6 regarding E&P Portugal, as previously referred upturn in the volumes, while EBITDA was penalized by operational constraints and inflation, which are pressuring operational costs, and also suffering from operational constraints regarding hiring of people for the [Mail & Other] [ph] during the summer. In any case, we’ve seen volume growth resuming and the chart in the left hand side is quite representative of the new trend, it generating therefore slight growth in revenues for the quarter.
Moving to Slide #7. We have the E&P Spain. Good performance of process in Spain for different reasons. So this favorable evolution of the average revenue per item drove in fact significant profitability. On the left hand side, we see a flattish volume performance. And which in itself, it’s significant because e-commerce in Spain is declining in absolute terms. And with this revenue price and improvement in revenue evolved very positively 12.5% to €31 million in the quarter, which then leads to an impressive evolution of EBITDA of about 300% versus the year-on-year with this similar quarter last year.
Moving to Mail in Slide #8, we see stable trends in addressed mail volumes, which is interesting. While inbound continues under pressure. Now with the decline which is lower in relative terms, but still consider the sale you can see on the right hand side on the addressed mail volumes chart, declining and stabilizing at around 4%, so slightly lower – significantly lower this decline than before and the price is steady. On the left hand side we see inbound, although, at lower levels than before still declining quite significantly. As we’ve seen this before, this is very much associated to the fact that e-commerce parcels are no longer using the mail networks globally.
Moving to Slide #9, an increase detail on behavior of mail. We have regulated price increase affecting almost 60% of revenues, while competitive segments that is mail where we have competition, showing volume and revenue growth. So these are both good news since for the regulatory pricing we have now, the pricing is that somehow provides for a different more positive behavior than before. And in topics, competitive mail, we’ve been able to grow on revenues. And then we have this already mentioned inbound in fact on inbound mail that is now starting to decline.
And with this, I will pass the floor to Guy to guide us through the financial update of the business in the quarter.
Guy Pacheco
Thank you, João. Good morning. Starting on Slide 10, where we can see our Financial Services in detail, but our strong revenue growth driven by a very strong performance in public debt placements that grew 40.5% on a similar growth in Financial Services revenues. This is on the back of the increase attractiveness of our short-term product certificates before, that’s right now other varying interest rates and assets are driving and increase demand. Strong demand that we still see during this month. On retail and product services also a small growth of 1.7%, where we continue to have the impact of the renewed commercial dynamics on that segment.
On the next page, we can see the Banco numbers, Banco CTT have the revenue growth and return on tangible equity expansion driven by grow some volumes. In fact, we are the double-digit growth in every credit line. So on auto loans 18.2%, on mortgage 11.3%, and on credit cards under the Sonae partnership with 41.1%. Our customer resources also increasing 20.9%, both on deposits and both on off-balance sheet savings. Our return on tangible equity now stands on 4.7% to be in line to the path to the double-digit that we aim in the medium-term.
On Slide 12, on ESG, we choose to show the breakdown of our carbon footprints to see the challenges that we have had about in the path to be carbon neutral in 2030. Of course, being a logistic company, our challenge is reducing the emissions that account for 72%. We – our own seats or subcontractors, and that’s what we are doing and we are moving aggressively to green vehicles.
On the next page, we see our ESG long-term commitment. So on our environmental, it’s net zero by 2030; on social having gender parity in 2025 and mid-management, and trying to have a positive impact; on our local communities dedicating 1% of our EBIT to attempt [ph]; and on governance having incentives linked to ESG, at least 50% of our top- and mid-management.
In terms of highlights, of 2022, we stated a few are only going to focus on the five 100% electric hubs on the country. We increase 90% are with electrical vehicles. And we just launched this partnership we did EV, where we’ll be building 40 solar energy communities, that will enable us not only to reduce our carbon footprint increase our own production that will stand up almost 20% of our annual electric bill, and also providing real benefits for the local community that can benefit on their energy bills. We also are in line with the commitment to 0.1% of EBIT with already €0.6 million invested in social initiatives.
Then moving on to the financial review. I’m starting on Slide 15, where we have our key financial indicators. We can see what we consider a very strong quarter with growth in revenues, EBIT and cash flow. And now see growth in revenues of 8% with all business units contributing positively, our EBIT increasing 82.7%. And in the quarter, our net profits reached €13.8 million, 50% year-on-year and our cash flow reaching €28.1 million in the third quarter.
On Slide 16, you can see the detailed revenue evolution, as I mentioned, a growth of 8.1% with the biggest contribution coming from Express & Parcels and Banks. In the third quarter, Express & Parcels growing 7.6% in revenues and 2.6% in volumes. In Portugal, volumes recovering – growing 5.8%, and now CEP revenues grew 4%.
In Spain, the volumes remain flat, although, with a sequential improvement in the volume trend with our Chinese customers improving the overall number of volumes, although our big accounts still facing some pressure on volumes, higher price on Parcels supporting the revenue growth without 12.5%.
Mail & Other growing 2.4%, positively impacted by the consolidation of NewSpring and growth in Business Solutions that contributed with €4.3 million of growth. Revenues on Mail declining 1.7% or 1.8% – €1.7 million or 1.8% mostly coming from inbound revenues.
We continue to see stabilizing trends, I’d like to share with you on the back of mail pricing lever in the regulated parts and wingbacks [ph] on the competitive mail. Financial Services also growing 29.1% with the extraordinary performance of public debt services. As I mentioned, we’ve increased 40% in placement.
Banco CTT continuing to strong path of growth, also growing 21.5% with expanding net interest margin and commissions on the back of the increased monetization of the bank customers.
Slide 17 shows us our OpEx that grew 3.8% mostly driven by Parcels and Banco. In Express & Parcels, we increased €5.1 million, or 8.7%. Especially in Portugal, to fuel inflation impacting unit costs and the constraints on the base network of hiring people to face holidays during the summer, presenters to talk to use the base network as much as we normally do in order to increase efficiencies by synergies between the network.
We also have the additional investments in capacity, so what we’re always previous trend that has still impacting OpEx in Spain. Productivity gains offsetting the inflation impacts and that’s a good performance there. Mail & Other declining €3.8 million, despite of having €3.9 million increase on Business Solutions that coming from the NewSpring consolidation. The remainder of the business units declining €7.8 million in OpEx, mainly due to the change of our headquarters envisaged.
Financial Services growing €0.9 million, basically with the increased activities, and Banco with an increase of €4.9 million, out of which €3.1 million are related with cost of risk. In the first quarter 2022, our cost of risks within 1.5%, and increasing from 1.1% in the third quarter last year. The cost of risk remains volatile, namely on the credit cards, we have implemented measures to improve our collection process with already some benefits in the process. And we expect those benefits to continue to fall in the coming quarter.
On Slide 18, the evolution of our EBIT that was grew €9.1 million with Mail, Financial Services and Banco CTT contributing positively. In the quarter, Express & Parcels declining €0.6 million due to Portugal performance with inflation and investment in capacity, lower price for item impacting market.
In Spain, good performance impact projects coupled with higher efficiency in driving margin improvement. And in Mail & Other improving €6.4 million due to the cost reductions, especially the impact on the change of our headquarters envisaged.
Financial Services growing €2.6 million on the back of extraordinary performance on placement. And Banco CTT growing €0.7 million due to strong growth in banking products, although, still impacted by higher costs of risk in the third quarter.
In page 19, we can see our cash flow evolution. We have a very good quarter in cash flow. Our operating cash flow reaching in the 9 months is €59 million with working capital management improving during the last quarter. Our CapEx is standing now at €19.9 million, growing €1.5 million versus last year, and the free cash flow in the 9 months is reaching €31.9 million. Our net debt now stands at €63.2 million.
And with that, I’ll hand it over to João, for his final remarks.
João Bento
Thank you, Guy. Well, in Page 20, we resume what our final remarks regarding guidance. The economic context remains not only volatile, but very challenging in particularly for CTT in demand and inflation being very significant, because already flagged by us, and all our industry players. Nonetheless, the quarter and the committed results in the first 9 months confirm the anticipated recovery trend that we have announced and predicted during the Capital Markets Day that anchored on the measures that we have announced and are implementing.
And therefore, we remain committed to continue to undertake all the necessary initiatives similarly to deliver on the guidance, which has been identified and there to be executed, but it depends – the outcome depends very strongly on economic conditions in Iberia that are not evolving in the best sense.
And with this, we will be opening for Q&A. Thank you.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] We will take the first question from Marco Limite with Barclays. Marco, the floor is yours.
Marco Limite
Sorry, I had mute on. So thanks for taking my question. My first question is on the exit trades and October rates for Parcel volume growth both in Portugal and in Spain. Given that you have mentioned macro somehow softening. Have you seen – yeah, what can you tell us about October’s credit for Parcels growth?
Second question is about your medium-term EBIT guidance of €100 million to €120 million by 2025. So just wondering if over the kind of macro conditions or the macro drivers, you are backing in that guidance and if that macro conditions have kind of deteriorated compared to your assumptions?
And third question is a bit slightly more technical. When I look at the Mail P&L for Q2 results, clearly EBITDA was strong thanks to some cost savings you achieve from your headquarters cost savings. But I also see a special item below the EBIT line. So I was just wondering, if we should read that as a one-off cost sort of – yeah, one-off cost in order to achieve those cost savings, which are structural? Thank you.
João Bento
Thank you, Marco. I was also mute. So concerned with this question, growth in Portugal and Spain in Parcels in October, it’s – we are observing the similar trend as we are, so I wouldn’t provide any additional color on that. As for the midterm, we can send the macro assumptions, it is obvious that they’ve been worsening, but let me recall that we had an interval. So you should probably start looking, using that interval in an environment where the macro guidance has been or not evolving in the better direction.
As for the cost saving, I will pass to Guy.
Guy Pacheco
Yes, on the cost saving, So, what we – on the third quarter, we book a cost saving related with the movement, or moving our headquarters through this, for instance, more place. But as a cash saving part of that booking is the cash saving that we allow this year. That will recur next year, fully cash during not in so concentrated, but linear distributed through the year with the equivalent amount.
And on the specific items, you’re right. It’s the extraordinary expenses that beyond to move between headquarters that will not recur. And as such, we booked that as a specific trend.
Marco Limite
Thank you.
Operator
And we will take the next question from Filipe Leite with CaixaBank.
Filipe Leite
Hi, hello, everyone. Good morning. I have 3 questions, if I may. The first one is actually a clarification regarding the potential agreement at Banco CTT and the expected financial product distribution agreement. Just to clarify, if we will include or not the public there during being sold by CTT, I mean, you will continue to sell €50,000 [ph], despite this agreement or not?
Second question, regarding E&P in Portugal. And the reason why – if you can explain to us, the reason why EBITDA drop it so significantly in this quarter, despite top-line increase and what should we expect for this quarter, fourth quarter, and next year in terms of EBITDA margin for this Portuguese E&P operations? And last one, considering your stable balance sheet position and the completion of share buyback, if you are considering further share buybacks for this year or for next one? Thank you.
João Bento
Thank you. Well, concerning the potential agreement with the Bank, we have – we made an announcement tonight. We don’t intend to detail anything else prior to the final communication. But regarding the specific question you have, I can be absolutely clear on that. So the placement of public debt is something that will remain within CTT network, and was not and will never be a matter [ph] program, CTT, and this is an important fundamental pillar, I’d say with our partnership with HCP [ph]. So regardless of what’s going to happen soon about this agreement that we’ve mentioned, it has no relation with the public debt.
On the EBIT declining you need to be, there’s at least 3 fundamental aspects we can modulate. One is that inflation is very strong on the cost side, in particular, for [land hold] [ph], because [indiscernible], but also on petrol costs. Then we’ve been investing in capacity, and we have now in fact suffering a little bit, that we need to improve volumes to be able to regain part of gross margins. And this is a very specific thing that happened throughout December, which – well, Guy already alluded and myself, that is we have a strong need for holiday replacements during December.
Regardless of the management, we do try to spread holidays in the distribution network across there, but there’s always a significant concentration during December. And in this particular year with basically full employment, it was very difficult for us to replace. At some stage during August and September, we have close to 200 positions to fulfill.
And with that, we could not use as much as we would prefer and predicted the base network for Express & Parcels, and which is a very significant impact on costs, and therefore, as aggregated gross margin.
And with that, I’ll pass the floor to Guy, again.
Guy Pacheco
Yeah, just complimenting. So we aren’t those effects, that we still have also some pressure on average revenue per item that is pressuring margins going forward. We have a number of initiatives to correct things. When we see EBIT margins in Portugal, resuming levels close to high-single-digit. On share buybacks, that was your last question. We remain vigilant, we have a strong balance sheet. We continue to see our opportunities mainly between having additional shareholder remuneration building on strengthening our competitive positioning. As we mentioned on our Capital Markets Day, we continue to invest on or reinforcing our competitive stance in Iberia, there is opportunities that we can feel or pursue in order to enforce namely on Express & Parcels our competitive positioning.
But we remain vigilant, vis-à-vis what is the share price, maybe we can announce another share buyback in the near future, but no commitment at this stage.
Operator
[Operator Instructions] We will take the next question from Artur Amaro with CaixaBank Investments.
Artur Amaro
Hi, good morning, everyone. Just one question. If you can give a little color some detail on to explain the better operational performance of the Mail business in this quarter. So there’s a 70% increase in terms of EBITDA in this business, if you can give some explanation on this matter, please? Thank you.
Guy Pacheco
Thank you, Artur. So there are basically three fundamental reasons. The first is remind that the third quarter last year, was the first quarter we had the full impact on inbound mail declined that was heavier than we expected. And as such things done we have been re-dimensioning our network to accommodate the new reality. And, at the same time, this year we have better performance in terms of volumes that are stabilizing and price lever there to help us on the revenue side.
On this quarter, we started see the effects of the measures of cost cutting that we announced during the second quarter flowing through the P&L, the most emblematic of those with the change of our headquarters that contributed with €3.4 million on the quarter. So the comparison with last year, because last year was still very depressed by the fact of the new effect of inbound and no time to react to that new reality. It’s stronger performance on revenue and the cost saving that we are being – we are implemented.
Artur Amaro
Okay. Thank you very much, Guy.
Operator
[Operator Instructions] We will now take the next questions from António Seladas with AS Research.
António Seladas
Hello, good morning. Thank you for taking my question. They’re both relatively the bank. First one is relatively the cost of risk, you already mentioned that is related to the problem with collections at Sonae [ph] credit card portfolio? I don’t know if you can provide more color, because it was 1.1% or 1% one year ago, 1.3% at the end of the second half and now 1.5%. There’s any idea what will be the top off the level or it’s 1.5? It’s a figure that you believe is sustainable in the medium-term?
And second question is relatively with net interest margin. That according to your slide was flat year-on-year, year-to-date, which is interesting, because interest rates have been increasing. And so banks are benefiting. So I was expecting slight improvement at net interest margin. So, I don’t know, you’re going to explain why is not improving the net interest margin? Thank you very much.
Guy Pacheco
Thank you, António. I’ll be starting with your last question. You’re right. But please take in consideration two things. First, it will take time for the re-pricing are now namely on our mortgage credit to kick in fully. And there will be as it is in light of 12 months the repricing will still take time to kick in. Nevertheless, the underlying net interest margin keeps increasing. But we have the dilutive effect to account on this quarter of the securitization we did in June. As you know, the securitization have some dilutive effect on net interest margin.
But the underlying is increasing. It will take time to show especially, because of the securitization, as re-pricing mainly of the mortgage credit kicks in. On cost of risk, it’s something that we already mentioned last quarter, we have an increased cost of risk, namely on the credit cards versus the discrete quarter loss. Last quarter, we have a special improvement was 1.7%, now stands at 1.5%. We see those measures continued to that we are implementing, we improve. And we see between during next year, a cost of risk between around 1.3%, 1.4%, it’s where we see cost of risk moving. So decreasing from the current levels of the collective measures that we are putting on the collection processes to take full benefit.
António Seladas
Can I ask you, if it’s selected with a new portfolio? Or is the portfolio that you would portfolio that you build or at both portfolios?
João Bento
It’s within the universal partnership. So it’s – because it’s on collection. It’s on all, of course, the new credit cards are more exposed.
António Seladas
Okay. Thank you very much.
Operator
And there are no further questions. I will turn the call back to the speakers for closing remarks.
João Bento
Okay. Once again, thank you all for coming. I believe, we’ve shown a very good quarter. We remain attentive with the concerning and declining economic outlook. And as I’ve said before, we are going to do all it takes to try to execute all the measures we have to fulfill the guidance. Thank you for coming and good morning.
Operator
Thank you for joining today’s call. You may now disconnect.
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