PostNL N.V. (OTCPK:TNTFF) Q2 2022 Earnings Conference Call August 8, 2022 5:00 AM ET
Company Participants
Jochem van de Laarschot – Director Communications & Investor Relations
Herna Verhagen – Chairman & Chief Executive Officer
Pim Berendsen – Chief Financial Officer
Conference Call Participants
Henk Slotboom – The Idea
Marco Limite – Barclays
Frank Claassen – Degroof Petercam
Marc Zwartsenburg – ING
Operator
Good morning, ladies and gentlemen. Welcome to the PostNL Second Quarter and Half Year 2022 Analyst Calls [Operator Instructions]
Now, I would like to hand the conference over to Mr. Jochem van de Laarschot, Director, Communications and Investor Relations, PostNL. Please, go ahead, sir.
Jochem van de Laarschot
Thank you, operator and thank you everyone for joining us this morning. We have presented our second quarter results this morning. You have seen the press release and you can also download the presentation on our website. It’s also visible on your screen if you’re logged in that way. We will follow the usual pattern. We will go through the presentation with Verhagen, our CEO and Pim Berendsen, our CFO, after which we will open up the floor for your questions.
Herna, over to you.
Herna Verhagen
Thank you. And let’s start with the key takeaways of the second quarter. Our normalized EBIT came in at €10 million. We saw high inflation and pressure on consumer spending which impacted our cost development but also e-commerce volumes. And that’s what we of course saw in the volumes at Parcels.
The domestic volume growth was still 3%, excluding non-recurring impact related to COVID-19. Overall volume decline was 12.6% and this is of course, this reflects the COVID-19 impact and the development in cross-border activities. Volumes at Mail in the Netherlands was down 7.4% and that is slightly better than expected. The cash flow reflects the step-down in normalized EBIT and also some working a capital phasing.
I think, important also is of course progress on our important strategic items under which ESG and they are especially attention for the 20% carbon efficiency improvements and the acceleration of our digital transformation on which I will give a few examples later on in the presentation. We also announced the interim dividend which is set at €0.14 per share. And with the developments of course, in volume and development in inflation and pressure on consumer spending, we’ve changed our outlook for the full year to €145 million to 175 million. And of course, we’ll get more highlights on that change. Secondly, we keep the free cash flow at €110 million to 114 million at the lower end of this already initially guidance range.
Let’s move into the numbers. Of course, the external headwinds of inflation cost rising for example, labor costs, impacted results. What you find over here is that revenue came down compared to the second quarter of 2021 with 11% which is due to the change in COVID — no COVID impact anymore in the second quarter of 2022. Our normalized EBIT came down to €10 million. Part of that is of course, non-recurring COVID which was €26 million and part of that is business impact. And we’ll give you details on that business impact in later slides.
Our free cash flow in the second quarter was negative, as already said, due to our normalized EBIT decreased and of course, facing a working capital. We had a normalized comprehensive income which was positive of 19. Share buybacks. The share buyback for 2022 is fully completed and pay mortgage details on one of the slides which will come in a few minutes. I think, important to start the presentation on business with our strategy. Nothing changed in the strategy.
And what you find over here is that, we create value in the end of course, attractive total shareholder return and in that value creation of three important propositions. The first one is in Parcels which we manage for profitable growth. Important in that is of course the customer interaction, the capture of future e-commerce growth and we’ll give you an overview of how online penetration, online spending is still growing but also managing our network capacity.
Within Mail in the Netherlands, we manage for value. Mail in the Netherlands had a strong and a solid second quarter, where we reinforced the value of mail, where we saw more volume coming from direct mail for example but here you also see price — the cost saving programs are well managed and are delivering the results we expect.
It is our next an important program for the digitalization of our propositions but also our back office services. We’re investing in digital NEXT because we do think it’s crucial for our future and we remain to do that going forward. So three important value creation propositions in our portfolio which will lead going forward to attractive shareholder returns. I think in that strategy in which we highlight of course, Parcels, Mail and Digital, also we highlight ESG because one of our strategic aims is to decrease the amount of CO2 emission, that’s one and that’s what you find in the above part of the slides in our environmental. We saw a 20% carbon efficiency improvement for this full year of 2021.
Important to say over here is that, we received a Platinum rating from EcoVadis and that means that we’re in the top 1% of 75,000 companies which are surveyed on several aspects on ESG. Social remains in the heart or at the heart of our organization. And we were happy to see that our workforce is still highly motivated. That’s what we saw in the strong engagement scores. Together with of course, the fact that we were reached an agreement on the CLA for mail deliverers, where we agreed two times 4% of increase on their base salary. And you probably did read the news of last week that we’re now offering our mail deliverers and indefinite employment contracts per direct.
On governance, as already said, an important Platinum rating in EcoVadis but also ranked at the highest ESG performing and mid cap companies. So on ESG fortunately, we did see progress also in the second quarter. Probably, important value creating propositions is of course, a digital transformation. And to follow the speed of the digital transformation, we are using a few KPIs which you find on slide number 7. Here you see that what is important to us, for example, is the PostNL consumer accounts. We saw an increase to €7.2 million consumers using the account of PostNL, compared to €6.4 million last year, first half year of 2021. An important increase because that’s the outreach we have to consumers.
I think also important to mention is the speed of our APL implementation. We have by now 315 APLs in the Netherlands which was last year 214. And we agreed with two regional organizations to place 200 APLs in the year 2022 and 2023, bringing the total to around 500. And of course, still working for further implementation to reach our 2024 goal. Already mentioned is the PostNL app where we now have 7.2 million users. We’ve upgraded the app, for example that also in Belgium consumers can use the app, that’s one and secondly, that it has a better accuracy and reduced time to market when it comes for example, to new technical infrastructure. So we keep working on the digital transformation because we do think that it is a crucial element in the realization of the strategy we set out.
Then dive into a little bit into the development in our businesses and come back to Parcels of course and Mail. In parcels, we did feel lower volumes and increasing costs. Unprecedented inflation impacts our margin and that’s literally of course, what you see when you look into the numbers. Our revenue came down from €589 million to €519 million. And also normalized EBIT came down from €56 million to €14 million. Volumes, 12.6% down.
Overall, we see a few important developments within Parcels. I think the first one is that the domestic volumes. If you exclude for COVID effect, do show a volume of up 3%. That means that there was still underlying growth in the e-commerce market. Of course, it is less than we expected it to be but that’s a positive development. Overall, 12.6% of decline which is reflecting COVID impact and reflecting the development in cross-border activities.
Important to mention is that market share of PostNL in the e-commerce market is stable. The impact in revenue is, of course by a lesser volume declined but also by a volume decline, we did see in Spring and Logistics. Within Spring, of course, it has to do with the high second quarter of 2021 just before the VAT implementation within Logistics. For example, we did not have a peak in the second quarter which we do see in the volumes.
Fortunately, we do have a positive price mix effect where we see price increases and a favorable change in the mix. And of course, cost has already set the inflation results in an increase in fuel and labor costs. We continuously scale our operations to align the operation with the volume developments and of course, to manage daily and weekly volume fluctuations.
I think it’s also important to say over here, that we’re not scaling down the operations to the level where we could do looking into volumes and that has to do with a tight labor market. We want to keep our employees employed one and secondly, be prepared for a peak season which we still affects — which we still aspect in the fourth quarter. The network expansion in Belgium is on track. We will come to, of course, measures we’ve taken to reduce the increase of our cost but in the end, it will not level and it doesn’t level the increase we did see because of inflation.
On Slide 9, you find some of those measures. So Parcels, its assets and our strategy is managed for profitable growth. And that means that we’re scaling our network as far as we can without risking quality and without risking, of course, peak season. And we’re taking actions to reduce the indirect cost. For example, when you think about strict cost control and that’s what you find in the column, balance of volume and value, we have focused on our overhead costs but also reduce costs by phasing certain projects.
As we did say in the press release, we’re looking into new propositions but also looking into additional price adjustments where we do think they are necessary in the e-commerce value chain because to address the inflationary pressure we do see. So far and Pim will come back to the numbers. So far, we took up in our numbers most of those organic costs. But when we see the increase, we do think it’s necessary to have additional price adjustments in the market. Of course, we keep putting customers first and that means that we’re still investing in service offering, like, for example, consumer in conform with the additional delivery options, with extra options of the APLs but also for our customers was [indiscernible] and that means that they can have same day delivery, they can offer till late in the morning and it still is delivered that day.
When we think about the cost increase, we have to take into account that we’re already continuously scaling our operations to the volume we have at that moment in time. That’s what we do by, for example, the optimization of routes, staffing and fleet. And as already said, also taking into account that our network is still able to deliver high quality and is able to do peak season which we expect in the fourth quarter. That efficient and future-proof infrastructure remains part of our strategy going forward. Although we do think that looking into volume growth, we do think that further fluctualization of the investment but also phasing of investments can be done also in the infrastructure of Parcels.
We’re still positive when it comes to Parcels, when it comes to the e-commerce market and that’s what we showed you on Slide 10. When we think about e-commerce growth, then it is mainly driven by two important factors. The most important one is e-commerce penetration and secondly, by online retail spend. And in both occasions, we still do see growth in the e-commerce penetration and we do see growth in retail spend. It also means that underlying, we expect a positive trend in e-commerce and e-commerce markets.
Although visibility is limited in the shorter term, we’ve seen structural growth over the past years and continue to see an upward trend. And we are therefore convinced that the Parcel market is an attractive market to be in. It gives you a first view on Parcels.
Then let’s move to Mail. In Mail, second quarter did see a solid performance. We successfully mitigated the volume decline through a moderate pricing policy but also, of course, cost savings initiatives. Revenue was down in the second quarter 2022, caused by volume decline of 7.4% which is an improvement in substitution rate. And excluding COVID effect, the mail volumes were down 3.3%. Second reason why revenue is down is because of the international mail. Normalized EBIT came from €23 million last year second quarter to €13 million this year second quarter. I think important to understand that when you exclude COVID effect in the second quarter 2021, we saw an improvement in normalized EBIT of €2 million. That is partly, of course, by a positive or a better-than-expected volume development. That’s one. And secondly, cost-saving plans are in line with expectation.
We also do see here increasing labor costs. Following the CLA, of course, we agreed for mail deliverers which includes a pay rate of 4% in the year 2022 and again, a 4% in 2023. Further cost savings will come from, of course, our normal cost saving plans which are on track to deliver. And that’s what you see on Slide number 12. There, we give you an overview why we successfully delivered stable and predictable normalized EBIT and cash flow and think we can do that over the next coming periods as well.
Looking into the Mail market. Of course, the integration of Sandd is fully completed already in February, 2020. There is one strong nationwide network which operates, for example, with social welfare companies. For many, many years, we are using a moderate pricing policy and therefore, we also resumed pricing increases for the USO in 2023 within our legal boundaries. Volume development expected to be 8% to 10% down in the year 2022 but at the lower end of the band which means around the 8%.
Increase relevance for customers. Mail, especially in COVID times, was a need to have. And there, we did see that there was some rediscovery of the strength of mail, for example, in direct mail. And we did see more direct mail volumes in the second quarter than expected. We have strong focus on the sustainable delivery of mail. As you do understand, most of the Mail in the Netherlands is delivered by foot or by bike. It’s already the biggest part of our mail delivery is CO2 emission free. But also the parts we do by cars or by scooters, we electrify those as much as possible.
Adapting the organization is a way to live for mail, already for many years and that means that they, of course, are further — that they are further developing their cost-saving programs for the next coming years. And an important approval is received from the workers conduit for a further optimization of delivery routes which leads to a further improvement of efficiency. Important element last week was, of course, the announcement that we offer everyone an indefinite employment contract for all mail deliverers which hopefully will help us to fill in the vacancies we still have. What we did see in the first days after the announcement is that, we did receive times than the amounts of CVs compared to before the announcement.
Slide 13; our focus is to deliver on our strategy and together with adaptive measures which can mitigate our external headwinds. We’re living in a challenging macroeconomic environment, where, of course, there is still ongoing inflationary pressure and impact on e-commerce volumes which leads on our side to tight cost control and other adaptive measures, for example, adjusting our CapEx to align with volume projections and applying strict working capital. Mail in the Netherlands keeps on delivering its solid performance. So it will be a combination of further cost-saving measures taken within Parcels and then especially on the indirect side of parcels together with keeping up the strong performance of mail.
We don’t see yet clear signs of recovery. And that means that stronger headwinds in consumer behaviors remain to be a source of uncertainty, especially for the peak quarter. We adjusted our full year outlook to a normalized EBIT between €145 million and €175 million, with still a strong cash conversion, where we expect that free cash flow comes in within the initially given outlook range of €110 million to €140 million at the lower end of this range.
I would like to hand over to Pim, to go with you into the financial performance and some of the other details.
Pim Berendsen
Thank you, Herna. Let’s go into more financial details. And before I do, I just wanted to remind you that in the back pocket, you will see the reconciliations on key financial drivers to help you understanding the comparisons on all relevant financial drivers properly.
And let’s go to Slide 15. And there, you will find the overview of the normalized EBIT comparison, €63 million last year compared to €10 million this year. Basically, 50-50 split, half is driven by the non-recurring COVID reduction in comparison to last year, €40 million of which is at Parcels, €12 million of that is within Mail in the Netherlands. And basically, the remainder of the gap is explained by €28 million Parcel down €2 million up, as Herna already indicated on the back of a very strong mail performance.
If we then zoom into the Parcels performance on Slide 16 and there we’ll have the bridge of €56 million Q2 2021 towards €14 million of this quarter. A big revenue volume effect, obviously driven by the 12.6% volume decline driven by lower consumer spending at the same market share as before. Positive price mix as a consequence of price measures already taken in the beginning of the year and a bigger organic cost down than originally anticipated, €16 million additional organic cost in comparison to last year. Obviously, we’re scaling down the operations in line with lower volumes, particularly in this quarter. And also in other results, you see the lower contribution of Spring and Logistics. As Herna already said, in the Logistics business, there was not much of a home and garden peak season this quarter, also driven by higher inflation rates impacting consumer spending also driven by supply chain issues.
So overall, a tough quarter for Parcels. If we then go to mail [ph] on Slide 17, there’s a reconciliation of €23 million towards €13 million, as said, the biggest driver between those is actually the non-recurring COVID of last year €12 million of that downturn and the volume development here is driven on a 7.4% volume decline which indicate a slight improvement in the substitution rate.
Organic costs slightly higher there as well, obviously, on the back of the new collective labor agreement that has been concluded but other costs here reflect the strong performance on cost savings as well as positive results on bilaterals. If we then from profit go to cash, Slide 18 provides a reconciliation of the cash flow for the quarter, a negative free cash flow of €43 million. Obviously, the most important driver behind it is the step-down in normalized EBIT.
And next to that, we see an investment in working capital within the quarter which to a large extent is phasing and related to cutoffs of Q2 2022 between Q2 and Q3. So no reason that, that should be the profile going forward. So all-in-all, a negative of €43 million of cash flow, the fourth quarter. And then on Slide 19, we’ve completed our first tranche of the share buyback program. €51 million shares were bought back for a total consideration, including cost of €164 million. That concludes the first clients. We plan to execute the second tranche of around about €90 million in 2023.
And also today, in line with our dividend policy, we today announced our interim dividend for 2022 at €0.14 per share which is 1/3 of the dividend of previous year in line with dividend policy. Obviously, the dividend will always be paid by the shareholders’ election either in cash or in ordinary shares. And if it’s dividend shares, obviously, we’ll use the shares that were repurchased through the first tranche of our share buyback program.
So when we’ve discussed profit cash, we’ll end up with the balance sheet on Slide 20, still a strong balance sheet, positive consolidated equity. Obviously, adjusted net debt has increased in comparison to the balance for the end of 2021, driven by the lower cash flow of the quarter as well as obviously the final dividend over 2021, as well as the share buyback program that resulted overall in an adjusted net debt by the end of the quarter being €494 million. Important to spend a bit more detail and words on the full year expectation for this year.
And we’ll do that on the back of Slide 22 to start off with. Obviously, Herna talked about the macroeconomic circumstances, impact of inflation, our own cost base on fuel, on energy and also more in particular on labor. This slide provides our latest view on it. And I think it’s important to note that normally, difficult world in these days. But let’s say, from the past years, a roughly €45 million to €50 million step-up in organic cost base year-over-year has been the norm. You can see at the — down at the bottom of the graph, that is also regularly approximately the level that through price increases we can get back.
As of March this year, we’ve seen an acceleration of inflation, leading to higher costs, particularly on labor fuel. And that basically drives up the organic cost developments from the roughly €45 million to around about €100 million which is more than roughly €20 million more than what we anticipated by the end of the first quarter. Obviously, that additional step-up in organic costs cannot be absorbed within year by efficiency improvements or price measures. But clearly, I think it’s clear that, let’s say, the entire industry cannot absorb these type of organic costs and this should then also lead to, over time increasing of price points to offset these higher organic costs throughout the supply chain.
If we then go to our outlook for 2022, then we’ve revised the outlook on normalized EBIT to €145 million to €175 million. We still believe that we can get to the lower end of the free cash flow range of €110 million to €140 million. On the profit, the expectation is that originally in the beginning of the year, you remember that we expected growth at Parcels of 3% to 5%. At the end of Q1, we’ve adjusted that to more or less flat. And by now, given the pressure on consumer spending, we expect a decline of a couple of percentage points.
On the back of the inflationary macroeconomic circumstances, we do expect a step-up in organic cost increases. We just explained that it’s around €20 million more than what we originally thought by Q1. The volume expectations at Mail are unchanged, albeit at the lower end of the 8% to 10% decline range. In order to end up with the free cash flow at the lower end of the range, as we discussed before, we’ll adjust the level of our investments, roughly by €25 million to get to a comparable number at the investment levels of 2021 and keep on managing the working capital in order to get to the lower end of the €110 million and to a 140 million range.
Normalize comprehensive income follows the same trend and will develop in line with normalized EBIT. On Slide 24, we’ll get to the quarterly split of the normalized EBIT. And as you know, we are getting back to a normal pre-COVID seasonal pattern for our business which indicates a very strong Q4. And that’s also why we’ve said that there are still obviously limited visibility on the impact of consumer spending and the uncertainty around that, particularly for Q4. So that’s the phasing in Q3, Q4 back-end loaded on Q4 which is the normal pattern.
I think in relation to comparability of last year, it’s important to note that in the first two quarters last year, we had very strong e-commerce driven cross-border growth and those comparisons will ease in Q3 and Q4, given the fact that the low value threshold on value-added tax has been abandoned as per July 1 of last year.
To wrap it up, as Herna already said, we obviously will continue delivering upon our strategy. But at the same time, we do not turn a blind eye to the changing and very demanding macroeconomic environment. And that’s why we provide tight cost control, we’re phasing projects. We’re adjusting our capital base by reducing the level of investments, both in terms of CapEx but also in lease additions and align the investments to volume projections by applying strict worker capital or get to the free cash flow lower end band with strong performance in mail and we need to obviously recognize that there are strong headwinds in this market. But fundamentally, we do expect the e-commerce market to grow and to continue to grow from arrow marks.
And that concludes my part of the presentation. I’ll hand it back to Jochem and then to you for questions, I guess.
Jochem van de Laarschot
Thank you, Pim. Operator, please open the floor for Q&A.
Question-and-Answer Session
Operator
[Operator Instructions] The first question comes from the line of Henk Slotboom from The Idea.
Henk Slotboom
I’ve got a number of questions. Pim, you already said we’re phasing the speed of investments in Parcels amongst others. Last year, you presented a program, a step-up of in total €450 million. Could you roughly indicate on the basis of what you know today, how that is going to phase out going forward? That’s one thing. The second thing is the €450 million was obviously linked to a certain growth model. Looking at the outlook and I respect that I can fully understand it because of the market circumstances that you can’t say anything about 2024. But how realistic given where we are today, is the ambition level you guided for 2024? And shall I take the rest of the questions at the same time or do I take this?
Pim Berendsen
Yes, please do.
Herna Verhagen
That’s okay, Henk.
Henk Slotboom
Then on mail, two questions. One is, your guidance is still pointing towards the lower end of the 8% to 10% decline mark but we’ll have a booster campaign again in the fall of this year. Shouldn’t you — shouldn’t that help you to basically do a bit better than the 8% or 10% or alternatively, what is causing this to be offset by other factors? Is that direct mall, for example which could come under pressure if the economy turns sour?
And secondly, on Mail, is the pricing going forward, at this year, you couldn’t raise your USO tariffs. For next year, you make a couple of remarks on Slide 12 that you will increase the prices in line with what has been agreed upon legally, what is allowed on the base of the postal regulation. But if I look at inflation and if I look at the decrease in volumes, those are the two main components in the formula that is being used. How do you think your clients will react if you confront them with a double-digit tariff increase if that is possible at all? Will that inflate or will that increase the rate of substitution?
And then the last question is, what are your expectations in terms of volumes for this year? You already said the headwinds are bigger in the second half for Parcels than in the first half. You cited quite correctly, the fact that the Dutch consumers are getting a little bit more cautious in their spending. Could you give us any hint as to where you expect parcel volumes to be at the end of this year and what kind of range? Those were my questions.
Pim Berendsen
Thank you, Henk. Shall I start, Herna and then maybe Jochem [ph], you can add. If you don’t mind, I’ll take question one and two together because, let’s say, the level of long-term investments is a function of growth expectations and they go together. So obviously, what is difficult right now, Henk, what we — we indicated the limited feasibility in this specific day and in relation to our Q4 expectations on consumer spending. So it’s very difficult to even prolong that horizon to 2024 because it will be a function of how macroeconomic developments will continue and what will happen geopolitically speaking and the implications of energy shortages in the entire economy.
So, I cannot be specific on 2024. But if we just take the big drivers of business that we’re going to post the step-up, then obviously, we have to note that we’re expecting to end the year 2022 at lower volumes at Parcel than originally planned. We do see higher organic cost increases. And at the same time, we do expect benefits on the pension expense side, knowing that interest rates will be up. So there is definitely a change in market circumstances. At this point in time, I don’t dare to be specific on 2024. What I meant to indicate for 2022 is that we’ll reduce the level of CapEx back to the — from the €160 million, €170 million towards the 2021 number, roughly around about €140 million which is a €20 million, €25 million reduction, given the fact that we are aiming for lower volume and have adjusted our investment base accordingly.
On top of that, €25 million, roughly speaking, on the lease additions, a reduction of also around about €50 million, should be expected. So roughly speaking, a €75 million lower capital employed by the end of the year, balancing the lower volume expectations in comparison to where we started off the year. The volume development Mail in the Netherlands, we’re cautious. We were cautious in the beginning of the year. We already indicated that there could be slight improvement in underlying volume development but still early days to determine whether or not they are actually structural. We’ve not taken into account massive COVID volumes for the second half of the year. If they are there and if that would be the case, then that could be a improvement in comparison to the guidance on volume development that we’ve just given.
Herna Verhagen
And actually do you know, Henk, so far, what they expect to do with the booster campaign is only a very limited amount of people and so, it’s free for everyone below 60 but only above 60 probably will be invited. So that’s one. I think pricing — if you think about the Universal Service Obligation room, we have then that fits within our moderate pricing policy which means that, that is what we expect to do in 2023 and that fits within the regulatory framework we have. And I should probably do remember what we did say when we could not increase prices in 2022, that there was some sort of a special ruling which gives us as the opportunity to increase in 2023 but it also, of course, indicates that the room we have to stay below the 9% return on sales is not unlimited.
So the model at pricing increase, as we’ve indicated also in our presentation is what we think we can do over the year 2023. You know, of course, that when you come up with much higher price increases than the 3% to 4% to 5% that they have — do have a significant impact on volume development. So we’re not planning to do that. That’s one. But secondly, if you would do so, you do know that you have to take into account additional volume decreases.
Henk Slotboom
So it’s either you get bitten by the dog or the cat, to put it in those phrases. If you moderate your tariff increase, then probably you won’t be able to offset the weight of inflation other than by announcing cost cuts. If you do raise it by more than the, say, traditional increase, you risk a decrease in volume acceleration of the decrease in volume.
Herna Verhagen
Of course, that’s not new to us, Henk. It’s already the case for 10 years that there is, of course, a certain — if you think about creating extra substitution, there is a certain limit or a certain elasticity to where we can go with price increases. So in that sense, it’s what we already lived with for many, many years.
Henk Slotboom
Sorry to react again. The difference this time is the rate of inflation. I mean, the last figure we saw last week was 10.3% in the Netherlands, so we haven’t seen that since 1970s.
Pim Berendsen
No, that’s true. But I think, Henk, the bigger element of organic cost pressure is in the e-commerce segment rather than in the Mail segment. And that’s where we quite clearly say that we believe industry-wide, those organic cost increases cannot be offset by productivity gains and should lead to higher price increases. And well, I’m not the macroeconomic expert here but obviously, it’s not the case that everybody predicts 8%, 10% inflation to remain at that point going forward. At least that’s not what the most recent scenarios look like. But I think we need to distinct the organic cost pressure in Mail and in Parcels and the relevant pricing mechanisms that we can apply in both segments.
Maybe back to your last question which if I’m not mistaken, related to the volume expectations at Parcels for the second part of actually full year. At the beginning of the year, we did expect reported volume growth of 3% to 5%. By Q1, we had to adjust that on the back of the March numbers close to 0. And now, we’ve adjusted to a couple of percentage points decline in comparison to last year. And knowing where we are today that still assumes a growth for half year to on the back of a good Q4. That’s what we currently assume. Roughly speaking, you need to get to approximately double-digit growth for the remainder of the year to end up, roughly speaking, at a couple of percentage points down in comparison to last year.
Then I can expect a follow-up question and what makes you confident that, that is actually the case. Well, as said, it’s not easy to predict but we want to be as transparent as we can be on our current estimations. We have reported volume growth underlying in the second quarter, gradually speaking, May and June were better than April. That trend continues into July. So we do whatever we could to look at drivers to indicate that on the back of online penetration, still increasing we should expect growth for the remainder of this year. And again, obviously, nobody knows exactly what higher inflation rates and potential risks going forward could mean to consumer spending. But it’s today our best estimate.
Operator
And the next question comes from the line of Sean [ph] from Bank of America.
Unidentified Analyst
Actually, just two from me. So just on the Q4 season and, of course, you mentioned that everything is very uncertain right now. Your guidance still assumes actually a higher EBIT than last year. And what are the sort of key drivers behind this and what are the risks for us as well, of course? And next, just on the competitive environment, what are you seeing in current — sort of in terms of competition at the moment from other players? And of course, Amazon is not as much of a risk really to you in the Netherlands but have you seen them sort of growing at all? Just some comments on that would be great.
Pim Berendsen
Well, on the Q4 question, obviously, the driver there is the growth we just talked about. So that is — our price is in the quarter-to-quarter bridge on Slide 24, you can see that. Obviously, that’s driven by the reported growth that we do expect in Q4 2022 in comparison to 2021. And on Amazon, we’ve not seen fundamental changes to their market position in the Netherlands in the second quarter, more in the first actually. So no fundamental changes to the industry dynamics. And as I said, we’ve managed to keep our market share roughly stable.
Herna Verhagen
And the same accounts for the other competitors we see in the Dutch market. So it’s a relatively stable market so far in the Netherlands and no big changes expected in the second half of 2022.
Operator
[Operator Instructions] And the next question comes from the line of Marco Limite from Barclays.
Marco Limite
So my first question is on your pension expenses. So I’m just wondering if your new 2022 guidance you are factoring in a lower pension expense. So if 2021, you reported PostNL other EBIT of minus €82 million, where broadly so we expect PostNL other EBIT this year? And my second question is just a follow-up on the question on Parcel volume growth outlook for the second half. So you are now expecting 10% or double-digit volume growth in the second half. I assume this is because you also expect a recovery in international volumes. And I’m just wondering if you can disclose what was the underlying volume growth in Q2, excluding COVID one-off but also the international or the VAT volume, let’s say, mismatch in the base? Just to understand what’s the real underlying volume growth that we can expect also from the second half of the year?
And finally, the third question is can you just remind us if in the Q4 last year, you had any sort of lockdown in Netherlands or restrictions or anything like that?
Pim Berendsen
First on pension expense, let’s say, the pension expense is driven by crew accounting requirements which means that you set the accounting and expense for the next year at the end of the previous year. In other words, within the year, the metrics on which they are based will not change. So within 2022, there is no data on pension expenses nor is it assets than part of adjusted outlook. What is the case is that throughout the year, obviously, we’ve seen discount rates and also IS 19 discount rates to gradually increase. And if they were to end up by the end of the year, roughly speaking, around the level that we currently see, then you should expect an improvement, in other words, a lower pension expense in 2023. But it’s going to be fixed by the end of 2022 on the back of at that moment in time, the discount rates and indexation parameters.
In the back pocket slide on pension expense, you can find the reconciliation as well as the sensitivity, basically indicating that the 25 base points leads to a €5 million improvement of pension expense. On the Parcel growth, yes, international is expected to improve. If you break down the overall volume development in the different components, it is reported €12.6 million. The impact of non-recurring COVID is 11.4%. The underlying growth is 1.2% down. The impact of international is 4.3% negative here which brings us to a positive of 3% underlying growth for the quarter.
Herna Verhagen
And your last question was the Q4 last year. If we had any lockdown, yes, we did have last year, as of December ’15, there was lockdown in the Netherlands.
Operator
And the next question comes from the line of Frank Claassen from the Group Degroof Petercam.
Frank Claassen
I’ve got a question left on the Parcels price mix. Can we expect an acceleration of this price mix going forward? And how flexible are you in adapting your price with surcharges and your preference? And then secondly, on your free cash flow guidance of the [indiscernible]. What do you assume for working capital swing? How much negative or maybe positive could it be for this year?
Pim Berendsen
The parts of price mix, that we do not expect an acceleration in comparison to Q2 of this year. So there are not a fundamental change. Obviously, all of a sudden happening that will make that price mix effect very different than what you’ve seen right here. If we talk about pricing policies within a year, we already indicated that before, it’s very difficult to adjust your commercial contracts and increase prices higher than originally anticipated within the year. But what we’ll do is consider adjustments to our pricing policies for ’23 and beyond to offset to as much as we can the organic cost increases that we’ve just indicated. And obviously, that is a function of also a contracts terminate. But clearly, it should be clear that those organic costs need to find their way throughout the value chain and cannot be absorbed by us or mitigated through productivity gains, given the fact that the size is almost twice as big as in normal years.
Herna Verhagen
And as indicated in earlier years, quite a big percentage of our contracts are yearly contracts. And that means that they are up for negotiation in the last quarter of 2022. So there is a possibility to discuss price increases at that moment in time.
Pim Berendsen
Maybe then back to the question on working capital for the year and that’s going to be slightly lower than originally expected. We do expect an investment in working capital somewhere, I would say, around about €25 million to €45 million mark. Maybe if I may, I want to get back to the answer I’ve given Marco on his question on the pension expense sensitivity. I made a mistake there. So it’s actually €25 million impact on 50 basis points. That is kind of the sensitivity we talk about. So for every 50 basis points increase in discount rate €25 million improvement on our normalized EBIT level.
Operator
And the last question comes from the line of Marc Zwartsenburg from ING.
Marc Zwartsenburg
A couple of them left. First, on the €20 million cost increase and more cost expected than at the Q1 stage. What is really the driver behind the €20 million increase in cost expectations? Because I can imagine that fuel is part of that. But since fuel is currently only say, €15 million to €20 million already in total, it can’t be explaining the €20 million versus the month of May. So what is really driving that? Because I think also wage inflation at the 9th of May, most of that was known, I think, because the CLA negotiations were already running or finalized. Can you explain a bit more the €20 million cost increase that we are now expecting?
Pim Berendsen
Yes. No problem. Roughly speaking, €5 million of that is related to fuel, Mark. I think you’ll remember that by Q1, we kind of indicated what, let’s say, would be the expected diesel price per liter at that point in time, that assumed a certain recovery throughout the months we’re currently at a higher levels than anticipated then which will have an impact of, roughly speaking, €5 million. The other element there is related to labor costs and particularly in a tight labor market and to ensure that we can deliver the peak period like we plan to. On the quality standards, we do expect there’s going to be more costs in relation to ensuring that we have the capacity in place to do all of that. And that is related to our own staff, that’s relating to sorting capacity. And obviously, there are still the collective labor agreement of the bigger PostNL CLA to be negotiated. So those elements are included in that step-up of organic costs.
Marc Zwartsenburg
And if the peak period is a little bit less robust as you currently anticipated with the double-digit volumes, could you then still scale it down in time to save a bit of that cost? Or is it the cost that is already there because you have to plan for that big period?
Pim Berendsen
There, we make a different choice basically, Mark. Let’s say, based on volume expectations only and in less than current type labor markets, we could scale down on operations more than we’re currently doing. So we take a bigger workforce towards Q4, just to ensure in these site labor markets that we have enough people in place to in any event, even though even if volume might slightly lower than expected, there will be a big ramp-up required towards Black Friday and Sinterklaas anyway. And we just want to avoid the risk of having the volume and not sufficient people. And that’s why we accept potentially higher cost in relation to the volume that you would in other less tight labor market circumstances.
Herna Verhagen
And to organize peak-season market for – and specially for Parcels and to a lesser extent, for Mail, we already start organizing peak season in April, May. And that means that you start ramping up as of — normally as of September. And as said by Pim, we’re now already keeping part of our employees to make sure that we will be able to ramp-up. So the — there is a certain flexibility but it is not as high as you were assuming in your question.
Marc Zwartsenburg
Then on the €50 million recovery of costs through price increases that was put on the outlook slide. I guess that’s mainly driven by price increases in the Parcel division cost. In Mail, I assume that the price increase was already necessary to offset the digitization. So can you give a bit more color on what kind of price increases we’re then looking at and how we should model that for ’23? Because it’s dear to 23%, as I understood because you will also have some inflationary prices probably also going into full year ’23. What should we be thinking about price increases in cash just to get to the €50 million number?
Pim Berendsen
Yes. To be clear, Mark, the €50 million is the balance of the bridge to indicate, okay, what is kind of the normal level of organic cost increases? What do we see this year and what can be offset by regular price policy? Then there remains the €50 million which is basically included in our full year adjustments because we are not in a position to within year adjust the pricing mechanisms in such a way that we’ll get back part of that 15 million. So we’re not indicating that we were able to absorb that €50 million more within ’22 or in ’23.
What we do say is that, that is such a level of organic cost pressure, obviously heating up a bit of our margins that cannot be offset by productivity gains and should lead and I think not only at our end but industry-wide on price points to increase higher than normally would be the case. At this day and age, I cannot be too specific on how we’re going to do that and to what extent we’ll be able to get that into the ’23 contract negotiations. But certainly, we will seek to improve those individual price points more than we would do otherwise.
Marc Zwartsenburg
So just to be clear, for this year, obviously, you can’t compensate but for — what does that mean that you can — maybe can get some €50 million cost recovery by regular price increases? Because at some point, that should then compensate a bit in ’23 or am I mistaken here?
Pim Berendsen
Well, I’m not saying we’re compensated. It needs to get to higher price points. That’s clear because we cannot afford, let’s say, to absorb that level of organic cost as an industry or as PostNL within this industry. So it should lead to higher price increases in the e-commerce domain. And you’re right, this is focused on e-commerce. So in the mail side, by the moderate pricing policies we adopt, by the combination of slightly better volume development and the performance on cost savings, we do expect to keep the mail profit more or less stable. So this is related to e-commerce.
And as a consequence, it’s also a function of a very competitive market and how to operate within that market in relation to price points. So that’s also why I can’t and don’t want to be too specific at this point in time.
Marc Zwartsenburg
And then on the cost savings in Mail NL expected for Q4, can you give a bit of an indication of what kind of numbers we’re looking at? So it’s one of the big drivers, I believe, of the improvement in EBIT year-on-year?
Pim Berendsen
That’s part of the explanation for Q4 indeed. Full year, we do expect a cost saving of around the €30 million mark and that’s what we expect which is still a bit of a step-up in comparison to where we currently are [indiscernible].
Marc Zwartsenburg
Q2, Q4, that’s our —
Pim Berendsen
But all those projects are running in accordance with our expectations and time line in ways of implementation so far.
Herna Verhagen
And as I said, in the business update on Mail in the Netherlands, we also received an important approval from the workers’ council to further — to start further centralizing our preparation centers which also helps, of course, in getting up the cost savings within Mail in the Netherlands. So they’re on track and delivering good performance in many ways but also on cost savings.
Pim Berendsen
Yes. So we need to get to roughly the €30 million. And just to give you the latest point there, the year-to-date performance on cost savings is around about the €10 million mark.
Marc Zwartsenburg
And then, a final one. On bol.com, I saw some news I think over the last week that they were setting up their own parcel collection company on par to collect the parcels from there — what do you call it? Not our own web shops and to collect them. Does it have any impact on your operations that they’re trying to do some of the sourcing from different web shops to the platform themselves? Does it have any impact on the volumes from bol.com?
Herna Verhagen
No, it doesn’t have a real impact on the volumes we currently have from bol.com. And they, of course, were — they were diligent to announce it upfront to us but it doesn’t have a big impact.
Operator
And the question comes to the line of Stefano Tufano from [indiscernible].
Unidentified Analyst
So one question remaining from my side relates to the question that Mark asked about the labor tightness. I totally understand the strategy going into Q4. But I was wondering how you were looking at the staffing situation versus the labor market for next year going forward because obviously, one of the main issue for PostNL is its flexibility to adjust its same force when needed at least partially. And obviously, it depends on the macro situation and what the economy is going to do but how are we supposed to look at this flexibility going forward as of 2023?
Herna Verhagen
Yes. I think flexibility comes mostly from the fact that we — within Mail in the Netherlands, we have a higher attrition rate than in normal companies. So the attrition rate is around 15% to 20%. Of course, that’s what we want to reduce slightly but we do not want to reduce it significantly. So there is quite some turnover in the population which helps us, of course, to be flexible. Within our Parcels operations, there is always a certain flexibility for the same reason and that is for attrition.
And secondly, with the growing amount of parcels, of course, there you are in a different development. You more or less year-over-year expand the amount of people working for us.
Unidentified Analyst
And maybe more specifically also what you mentioned regarding the labor tightens because obviously, you mentioned a couple of times that you’re preparing yourself given the bad labor market. So you keep some employees you could reuse them. You go to save more cost but you don’t do that because you expect a very busy Q4. And given the labor tightness, it’s better to have these people on board right now otherwise, something you might not be prepared. And given this, how are you — how do we — should we look at it as of next year and the flexibility with this respect?
Pim Berendsen
I think Herna already indicated that also, we’ll expect growth in 2023. Obviously and that’s the seasonality we always have from Q4 to Q1, there’s always a reduction of capacity because we ramped down after Christmas period anyway. And certainly, will not take the full capacity of fourth quarter into Q1, Q2 2023.
Herna Verhagen
But I think important one [indiscernible].
Pim Berendsen
That’s kind of present a normal seasonality.
Herna Verhagen
Yes, exactly. Important to understand is that the amount of people we’re keeping at this moment in time to be sure that we deliver high quality and already for peak season, means that we still have to add people from flexible sources to deliver the amount of parcels and mail pieces we expect in the fourth quarter. That flexible part, we still have to add to be sure that there is enough capacity to deliver. That’s what Pim is referring to is what we do not take with us into the first and second quarter of 2023. So that’s maybe it gives you a perspective of how we’re dealing with the tightness of the labor market but also being sure that we have capacity and people to deliver and keep our quality at a high level.
Operator
There are no further questions. I would like to hand the conference over to your speaker Jochem van de Laarschot for closing remarks.
Jochem van de Laarschot
Thank you, operator. I’ve got one final remark which is that we are planning to host a deep dive, an investor deep dive on the 22nd of September in The Hague which is at the center of the Netherlands, where our small parcel sorting center is located. It was opened last year and we hope to host you there to show you how it works and we will also talk about robotics. So save the date, the 22, September, please note it. And hope to see then, if you have any remaining questions, please let us know. Thanks very much. See you next time.
Operator
That concludes out conference for today. Thank you for participating. You may all disconnect. Have a nice day.
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