bpost NV/SA (BPOST) Earnings Call Transcript & Summary

Hello. Welcome to the press update and outlook 2024. My name is Caroline, and I will be your coordinator for today's event. Please note, this call is being recorded. [Operator Instructions] I will now hand over the call to your host, Mr. Chris Peeters, Group CEO, to begin today's conference. Thank you.

Thank you, and good morning, ladies and gentlemen. Welcome to all of you, and thank you for joining us. I'm pleased to host this call as CEO of bpost Group. With me, I have Philippe Dartienne, our CFO; as well as Antoine Lebecq from Investor Relations. Now that we have reached agreements with newspapers editors, both in the North and South of the country, we would like to update you on the operational and financial implications as well as our outlook for 2024. We will walk you through the short presentation, and we'll then take your questions. As always, 2 questions each would ensure everyone gets the chance to be addressed in the upcoming session. Let me start with the status update on press. During the presentation of first quarter results in early May, we have already shared with you the outcome of the negotiations with the Dutch-speaking newspaper editors, but the negotiations were still ongoing with the French-speaking editors. This agreement has now been reached. So let me provide you with an overview of the overall situation with press. First, as a reminder, regarding the financial support from the government to publishers at the end of 2023 following the cancellation of the future press concession, the government announced that going forward, the financial support would be limited to an annual envelope of EUR 50 million until the end of 2026 in the form of a tax credit in favor of the editors. Compared to 2023 when the annual support was approximately EUR 165 million, this represents a substantial decrease of over EUR 110 million between 2023 and 2025. Second, regarding the commercial agreements reached with the press editors. As discussed last time, we reached on April 26 an agreement with the Dutch speaking newspaper publishers in the North of the country, which in terms of volumes, represents 80% of total newspapers currently distributed by bpost in Belgium. We will gradually transfer volumes from bpost SA to our subsidiary, AMP, in 2025, 2026. AMP is a subsidiary wholly owned by bpost Group and works with subcontractors employing their own workers. As a reminder, AMP has been active since 1885 in the press distribution and is the leading press distributor in Belgium, leveraging its 4 distribution centers across the country to serve over 4,500 retail outlets in Belgium, such as fresh shops. This commercial agreement will enable bpost Group to secure 75% of our current volumes after the gradual volume transition is completed by 2026. Pilot programs will begin in the third quarter of this year. For the French-speaking newspaper publishers in the Southern part of the country, which in terms of volume represents approximately 20% of our newspapers, the proposal for a gradual transfer to AMP did not receive support from our French-speaking unions, necessitating a different operational setup for press distribution in Wallonia. As announced on June 19, we reached an agreement where bpost will continue to distribute all newspapers throughout Wallonia until the end of 2025. And from 2026 onwards, publishers may eventually and gradually transfer the distribution of the newspapers. The meeting has already been scheduled with the publishers for mid-2025 to see if the potential transfer of newspaper distribution from 2026 is confirmed or if the newspaper distribution will be entrusted to bpost for a longer period. The press concession has now officially ended and the 2 new contracts took effect on July 1. Finally, regarding the periodicals. As explained last time, the periodicals are usual products. So there is no commercial negotiation involved. We have presented our new commercial offer to the regulator on April 15 and have been presenting it to our customers since then. The majority of the large editors, which represents roughly 80% of our volumes, have confirmed their intent to continue entrusting their volumes to bpost. We are currently in contracting phase, and we also continue to engage with the smaller editors. Before looking at the financial impacts in detail, it is important to note that bpost made every effort to secure volumes and protect jobs while reaching viable agreements, despite the significant reduction in government support to the press sector. With these 2 contracts, we have secured the majority of our volumes and safeguarded the jobs of our employees of fixed contracts. There will be no need for a social plan or any associated restructuring costs. Now regarding the financial impact related to these new contracts, we distinguish between direct impacts and indirect impacts. In terms of direct impacts arising from the less favorable financial conditions of the new contracts, the annual impact will vary from year-to-year following the gradual transition of volumes. For 2024, this is the first year of transition to the new contractual framework starting from July 1. The year will be marked by less favorable conditions in the expansion of the press concession in the first half of '24 due to the lower state compensation gap and the last favorable conditions for the new press contracts coming into effect in the second half of '24. We estimate a decrease of circa EUR 50 million in press revenues in 2024 compared to 2023, of which about EUR 15 million is attributable to the structural volume impact we would have faced regardless of the contract in place and about EUR 35 million is attributable to the less favorable conditions of the extended press concession and the new contracts, which will directly impact EBIT due to the limited ability to align cost. For 2025 and 2026, these years are years of gradual volume transition with a full year top line impact corresponding to the conditions of the new contracts see the circa EUR 30 million lower revenues from the second half of '24 but for full year and a progressive adjustment of costs in terms of FTEs and fixed costs, allowing to offset the impact on EBIT in the course of 2026. For 2027 and beyond, post the volume transition, of which 75% in the North of Belgium to AMP and cost alignment, the impact on the revenues due to the less favorable conditions of new contracts will be offset by cost alignment, and we will return to similar margin levels as allowed under the previous concession agreement, but on a significantly lower revenue base. In addition to these direct impacts, we will also incur some indirect impacts tied to the negotiation period of these new contracts. We have quantified an indirect impact of circa EUR 12.5 million related to the 4-day strike in April, impacting our sorting and distribution operation for press, mail and parcels as discussed last time, and delays in the reorganizations in the first half of '24, which could only resume last week. With that, we now have gained the required visibility on the operational and financial impacts around the press distribution, which allows us to introduce our group EBIT guidance for 2024. Philippe, the floor is yours.

Thank you, Chris, and good morning, everyone. Now that we have clarity on the financial impact for the press sector, as Chris explained you, we are ready to provide you guidance on the group's EBIT target for 2024. With [indiscernible] I will also take this opportunity to update you on the underlying operational and financial parameters we discussed at segment level in the context of the initial parameter guidance earlier this year. For Belgium, we anticipate a slight decrease in total operating income for 2024, which now includes reduced revenues from press. This contrast with our initial guidance where we anticipated slightly higher total operating income for 2024, excluding press revenue on which we had no certainty yet. We now notably plan for a mail volume decline of 4% to 6% for transactional and advertising, offset by the price/mix impact. This marks an upward revision from our initial guidance, where we anticipated a volume decline of 6% to 8%, partially mitigated by a price mix effect of 4% to 5%. For press, as just explained by Chris, we expect a decline of EUR 50 million in revenue, while our parcels revenue are now expected to be driven in a mid-single-digit percentage volume growth and a low single-digit percentage price mix. This is a downward revision from our initial forecast of a high single-digit percentage volume growth, which is attributed to lower-than-expected growth in first quarter of 2024 and the price impact in April. Prior to any price impact, we initially projected an adjusted EBIT margin ranging from 6% to 8%. Today, we are revisiting this range downward by 1%, meaning from 5% to 7%, considering the lower margins on the new press contract and indirect negative one-off impact of EUR 12.5 million, as explained by Chris right before. The margin outlook for 2024 also reflects increased payroll costs due salary indexation and cost inflation, partially offset by our ongoing efforts to enhance productivity and reduce costs, despite challenges encountered during the first half of the year in the context of the press negotiations. For E-Logistics Eurasia, we initially anticipated a low double-digit percentage growth in total operating income with an adjusted EBIT margin ranging between 5% and 7%. Our overall EBIT ambition remains intact, but we are slightly adjusting by a few percentage points our revenue target to a high single-digit percentage growth. Concurrently, we are revising upwards our EBIT margin target to 6% to 8%, representing a significant improvement from last year ranging from 3% to 5%. For E-Logistics North America, based on year-to-date performance and our current view for the remainder of the year, we are adjusting our top line target to a low double-digit percentage decrease. This compares with our previous expectation of a high single-digit percentage decline and reflects a Radial a net volume loss from lagging new customers' contribution in the in-year revenue and some negative and lower-than-anticipated same-store sales also impacted by the client churn that materialized in 2023 and the commercial concession granted admits challenging market conditions. While at Landmark, the increase in sourcing by Amazon exerts pressure on the top line growth impact -- on the top line growth impacting the progress from new customer wins and the expansion of new cross-border lanes. . In terms of profitability, we were initially guiding from an adjusted EBIT margin ranging between 4% and 6%, in line with 2023. However, as explained in our previous calls, persistent pressure on our top line constraints our ability to absorb fixed cost and lead to margin dilution. Mechanically, with the revision of our top line targets, the margin is now adjusted downwards by 1.5% to a range of 2.5% to 4.5%. To counter these challenges, as I already shared with you and as observed in the performance of the previous quarters, we are working on continued variable margin rate improvement. The margin is currently at its highest level ever but we have also decided to reinforce the substantial effort to further reduce the SG&A and other costs. At group level, now including price revenue, we anticipate a low single-digit decrease in the top line for 2024. We now project the group's adjusted EBIT to range between EUR 165 million and EUR 185 million. This guidance currently exclude any EBIT contribution from Staci which we expect to begin materializing from August onwards. And finally, regarding CapEx. Note that we are reducing the annual envelope from EUR 180 million to EUR 150 million. . We are now ready to take your questions. Again, 2 questions each, please, so everyone can get the chance to be addressed in the coming session. Operator, please open the lines.

[Operator Instructions] We will take the first question from Michiel Declercq from KBC Securities.

I had 2 questions related to the press more specifically. So you mentioned indeed EUR 35 million direct impact on the EBIT from those new contracts. So that's only a half year. So I assume that it's fair to assume that you will have another incremental EUR 35 million next year. I was just wondering, will there be some kind of additional transformation costs coming in on top of this? And maybe also, how do you see the gradual improvement towards the 2023 margins by 2027? And then maybe a second question related to this, a part, of course, of the impact that you see is the ongoing volume declines for press. I was just wondering with the first, yes, what's the first impression that you have because the press distributors will also have that, say, have less subsidies than what was previously the case. How do you think that this will impact the underlying volumes of your distributors because they also pay more, as to say? So those would be my questions.

Okay. Thank you. I will take the second question, and then Philippe will answer on the first one. On the volume decline, indeed, what we have seen in the discussion of the negotiation, it's clear that this change of regime has been a wake-up call for several of those editors to look at their speed of mainly digitalization or potentially some alternatives kind of distribution models. What we see, however, is that if we look at the North of the country, most of that, according to themselves, has already been done. So they basically look at it and say, look, the way how we want to do this transition is at the speed of the readers. And most of the readers that could be easily digitalized are already digitalized today. And so the paper version that they keep, they stick to that for different reasons. Like you see this, let's say, weekend edition that you have some parts of the country where people say we have the habits of paper version, and I want to do it until the end of the days, and I'm also willing to pay that difference in price. And so they see more a potential there to transfer in the longer term, the distribution costs towards those readers because those readers, they feel that they would lose them if they would force them to go there. They think they are more likely to be able to absorb the additional cost of distribution. In the South, it's a little bit different. There, you see that digitalization has not progressed that fast. And there, we could have a potential somewhat acceleration in the system. As well as we said before, there is much higher uncertainty given the fact that we there have a solution until the end of '26 and there's still a lot of discussion upcoming there how that we sold the period after '26. While if you look at the North, actually, there's a visibility for everybody for, let's say, a substantial period of time where they want to continue to work with us and where we see that we actually have a good plan to make that transition. So net-net, I would say in the North, we don't think there is a substantial impact on the further speed of decline. It will continue at the decline we've seen over the last couple of years. In the South, that could be somewhat an acceleration because obviously, if you look in terms of volumes, it's 80% North, 20% South. It should not be that much impacting compared to the trend that we already have seen over the last couple of years.

On the translation of all that into numbers, as you rightly pointed out, we had a direct impact of EUR 35 million in 2024, which is only relating to H2, where the new concession will be -- sorry, the new framework, which is commercial agreement, will be in place. Also, be reminded, the result for this indirect impact of EUR 12.5 million, as Chris mentioned it. So if we try to project our sales for '25, '26, what can we see right now? You might say on one hand as a proxy because EUR 35 million is for H2 2024. You might say on a full year basis, it would be 2x EUR 35 million. I think this proxy is not totally correct. In the sense that right now, we are in a situation where we are receiving in fact, less top line, and we have not been able to adjust yet because the transition has not started the cost base. But starting from 2025, we will gradually adjust the cost base so that should mitigate this impact. It doesn't mean that it will negate the impact. There will be an impact. There will be a significant impact. But I would not take EUR 35 million x2 as a proxy for the impact in 2025, '26, and '27. And then I come to your point of '27, as you rightly pointed out, in fact, it would be the end of the transition period. And at that time, beginning 2027, we should be in a situation which is very similar to the one we are -- we have experienced, let's say, until June 2024. And we should go back to a profitability in the range of what we are currently enjoying to date because we will have, despite our volume, the time to adjust our cost base structure.

We will take the next question from line Frank Claassen from Degroof Petercam.

Two questions. First of all, on the acquisition costs related to Staci, you flagged EUR 15 million to EUR 20 million, if I remember correctly. Is that still the case? And is that included in the guidance and in the corporate cost increase? That's my first question. And then secondly, you indicated for North America, one of the reasons for the relative weakness is the Amazon in-sourcing at Landmark. But I thought that was already going on. Has that situation changed as that deteriorated for you? Can you elaborate on that?

So Frank, thank you for your question. When it comes to the acquisition cost, I think the amount you were referring to is valid and they are not included in the guidance, nor is the contribution of Staci included in the guidance. So that one is excluding the transaction cost, but also excluding the additional EBIT, EBITDA that we will be enjoying normally starting August.

And to follow up on that, so the -- let's say, the acquisition cost will be -- you will account for that as a sort of one-off. Is that the way to think?

It's adjusted. Indeed, it's one-off exactly, exactly. Because we try to show you what is the recurrent base, and we cannot say that, and especially when they are of that level of magnitude that M&A costs are recurring. So that's the reason why we are adjusting indeed the cost base.

Okay. And then on Amazon insourcing?

Yes. So on North America, specifically Amazon, we were expecting to go down because we still remain a fraction of the volume compared to historical news, but it went further down than expected and faster.

Okay. And what can we expect going forward there? Is this it? Or is there still volumes to be lost? Do you still have Amazon as a customer or...

It's now, to put things into perspective, Amazon only accounts for less than 5% of the current revenue of Denmark.

[Operator Instructions] We will take the next from line of Marc Zwartsenburg from ING.

The first one, still the [ possibility ] with the impact of the press concession. First of all, the one-off that you also mentioned in the press release, the EUR 12.5 million. Is that included in the outlook or excluded? I got the feeling that it is excluded, but I'm not sure. Can you confirm this, please?

It's included. Yes, it is, definitely.

So that one-off is included. This one-off is included?

Yes. It's included.

Okay. So then we started with EUR 35 million impact from the press contract for the second half. That's in the outlook. But then looking a bit further, I'm still a bit puzzled how we should think about longer term. So '25, '26 is EUR 35 million plus something for the first half. Let's make it EUR 50 million, EUR 60 million. That will be partly compensated by cost adjustments, but there will be still a significant impact on '25 and '26. But how should we think about '27. When things have normalized, I can imagine, addressing the cost base, you can do that with natural attrition and with people going on retirement. But you still have, say, 4,000 people working there. They will not all be gone. So should we also take into account quite a significant provision to, in the end, have the clean cut after '26 when things really move to AMP. There, we get another additional provision of, let's say, EUR 50 million or EUR 75 million. And in the meantime, there's still some trends for cost of transferring volumes maybe to AMP. So I still don't know what the underlying EBIT impact will be over the course of the next 3 years of the press concession moving away. Because I have a feeling that it's much bigger than what we're currently looking at.

Well, I would say no, especially now when I hear how you are adding up things that should not be added up. So indeed, of course, the impact that you see now is half year impact. And as Philippe has explained in the question of KBC, there will be, let's say, an impact which will not be double, but there will be a more important impact for the next coming 2 years on that side. If you look at the cost that we will have for the transition, that will be fairly low because, a, the agreement that we have with the editors is that the way how the transfer is made is also based on a plan we jointly developed. So that's a plan where we've jointly agreed how we do that. And of course, we can optimize there the way how that plan and transfer is organized. And it's not so that we only have natural attrition as a lever to reduce cost within the company. First of all, the biggest lever that we have short term is the temporary labor that we have. That's a very big one in that. So we reduced on temporary labor by not extending contracts, so that it is coming at a very low cost that we should do. There's potentially some friction costs over a few weeks, but it's never a very big cost that you have on that. The second thing that we do is, of course, the natural attrition that we use to the maximum extent. We can do that also by a temporary positioning people in different mail centers in the neighborhood so that we can manage the volume in a very fluent way between the different mail centers and so how we do that. And also, as we have announced already end of last year, we have a quite important in-sourcing program around, for instance, transport, also around IT. It's more transport that is actually on this part of the population where we see today that we were quite substantially still with subcontractors and transport for the logistics at night that we have in Belgium. So we have, I think, 100 people now that signed already up for that program, and we think that there will be different ways of people signing up for these kind of contracts. And so if you look overall, we have sufficient labors at hand today to make sure that the cost reduction can be realized without having a substantial important additional friction costs over there. Not to be forgotten, but that is something that we have not included in the calculation is that next to that, we will have our new strategy announced, which is also focused on the B2B growth. And so some part of the people also could find a job depending on that growth, but we don't need that growth specifically, I would say, for the cost transfer that we do. But obviously, it will come as a bonus if we could have growth realizing in the B2B side of the business.

Can you put a number maybe on all these cost reduction items? Because I'm now thinking the maximum is, say, EUR 100 million, EUR 120 million. How much can you reduce that? Because in the end, there will be some tens of millions still as a provision.