CTT, the Portuguese postal and financial services company, has reported a robust first quarter in 2024, with significant revenue growth across most business areas except financial services. The company's Express & Parcels division, particularly in Spain and Portugal, experienced substantial volume growth leading to margin expansion.
The Mail and others segment also saw increased profitability due to a price hike and higher mail volumes attributed to elections. Despite additional costs from elections and wage inflation, CTT's cost efficiency measures are expected to bolster profitability in the upcoming periods.
The company's financial services faced challenges, with a decline attributed to Banco CTT's activities and credit risk concerns. However, improvements in profitability are anticipated for the second half of 2024. CTT's free cash flow stood at €3.9 million, with a healthy net cash position of €63.9 million.
The company plans to continue investments in the parcels sector in Iberia and is aiming for a recurring EBIT above €88 million by year-end. CTT's leadership remains optimistic about its performance and growth potential.
Key Takeaways
- CTT reported revenue growth in most segments, with significant expansion in the Express & Parcels business.
- The company is implementing cost efficiency measures to counteract additional costs from elections and wage inflation.
- Financial services saw a decline due to Banco CTT's performance and credit risk, but profitability is expected to improve in the latter half of 2024.
- CTT's free cash flow was €3.9 million, and its net cash position was strong at €63.9 million.
- Investments in parcels in Iberia are ongoing, with a target for recurring EBIT to surpass €88 million by the end of 2024.
Company Outlook
- CTT is focused on improving margins through further investments and efficiency measures.
- The company anticipates an improvement in the profitability of mail and financial services after the elections.
- CTT plans to continue investing in its parcels business to enhance its competitive position in the Iberian market.
Bearish Highlights
- The financial services segment experienced a decline due to Banco CTT's activities and increased credit risk.
- Additional costs related to elections and wage inflation have temporarily offset efficiency measures.
Bullish Highlights
- CTT saw record growth in its Parcels business, with triple-digit volume growth in Spain and double-digit growth in Portugal.
- The company reported positive trends in other segments, including Mail and others.
Misses
- Despite overall growth, the financial services segment did not perform as well as other business areas.
Q&A Highlights
- CTT has increased the cost of risk and is closely monitoring non-performing loans to reduce exposure.
- The company is active in the mortgage market, despite increased competition and market stress.
- CTT is less exposed to interest rate changes due to its fixed-rate credit book.
- Plans are underway to open 60 dedicated bank stores, which will be managed directly by the bank, with progress expected in the second half of the year.
As CTT continues to navigate the challenges and opportunities in its various business segments, the company remains committed to enhancing shareholder value and maintaining a cautious approach to risk, especially in auto loans, while actively participating in the competitive mortgage market. The CEO's confidence in meeting guidance reflects the company's strategic initiatives and its potential for continued growth.
Full transcript - None (CTTPY) Q1 2024:
Operator: Hello, and welcome to CTT First Quarter 2024 Results Conference Call. My name is Sergey, and I will be your coordinator for today's event. Please note, this conference is being recorded. And for the duration of the call, your lines will be in a listen-only mode. However, you'll have the opportunity to ask questions at the end of the presentation. [Operator Instructions]. I'll now turn the call over to Mr. Joao Bento, CEO. Please go ahead, sir.
Joao Bento: Thank you, Sergey. Good morning, everyone. Welcome to our first quarter results call. If you join me on Page number 4 of the presentation, I would start to call your occasion the fact that we had revenue growth in all business areas except the financial services, mostly as a result of market expansion and share gains both from parcels and the bank. In fact, the decline in financial services was more than offset in revenues, although not yet in margin, given the performance that we can see on the right-hand side. If you follow me on Express & Parcels first with an amazing triple-digit volume growth in Spain and also double-digit growth in Portugal, that produced margin expansion, leveraging our increased sales. Then on Mail and others, we are benefiting from a very decent price increase also good mix and the effect of the elections that led to higher Mail volumes. And we of course, remain very focused on cost efficiency measures, given the fact that we believe that the Mail business will perform better than before going on -- going forward. On Financial Services & Retail, the commercial focus is now on distribution of insurance and related products, namely health insurance programs. And it's finally gaining traction, while public debt placements remain still in low levels, although we have a positive outlook for that. Finally, the bank performed with a stronger client engagement and therefore growth in the business resources and operational leverage, driving significantly profitability in the quarter. Moving to Slide number 5, and with a bit more detail on the Parcel business, we have seen volumes in Spain close to peak season levels, so this peak season well continued throughout the quarter. This drove record growth on revenues, as we said, more than doubling year-on-year if you compare the first quarter of last year with the first quarter of this year, both on volumes and on revenues, and also a very decent performance in Portugal with the growth promising again in volumes and revenues with the significant growth. So we have the Parcels business on path for certainly another record here in Iberia. And if you follow me on Slide 6, we can then look at the margin, which expanded significantly driven by operational gearing. We have in fact an impressive progress on the EBIT generation in Spain. We came from minus €1.5 million to plus €2.9 million, a very decent EBIT margin already reaching 4.5%. And in fact, we are benefiting from our prior investments on capacity and the resulting operational leverage when now volumes are as high as they remain being. In Portugal, likewise, we had an improvement on the EBIT margin from 6.5% to 7.4% quarter-to-quarter or year-on-year for the first quarter with the continued improvement on the absolute value margin growing almost 28% from €2.1 million to €2.7 million. And here again grabbing market share and leveraging on the fact that we keep performing very well in distributing parcels using also the Mail network. So we see a continued investment in expansion of capacity since we are positive about the volume growth and the trend that we are feeling to enable future growth and of course, improved profitability. And with this, I would invite you to follow my colleague, Joao Sousa, to guide you through Mail and Retail.
Joao Sousa: Thank you, Joao. As you can see on Slide 7, the increase of price and the type of meats are helping to offset the some of the drop in volumes. We had a 10.5% drop in addressable volumes. If we take the effect of elections, it's less. It's minus 11.8% against the previous year, but the average revenue per item growing 18.3% versus the previous year. It's also very important to mention that the price increase of 9.49% that was made in February is not fully reflected in the quarter. And we also have information from part of our customers, namely the public sector. That was a delay of the production in March, mainly because of these elections. So the election allow us to have better traffic and more traffic in this quarter, but also was a backlog of production in May that we are already seeing in effort. These allow us to achieve €100.7 million in revenues in this first quarter that compares plus 5.9% against the third quarter in the last year. As you can see on Slide 8, the elections allow us to have a positive effect in price and traffic and price per item, but they also brought an increase in costs -- on costs in this period. We had €180.3 million of costs in this quarter that compares with €111.7 million with the quarter of last year of more €6.7 million, which results in €2 million of EBIT in this quarter that compares with €2.7 million in the quarter of last year. However, the cost efficient program that we talked about in the last quarter is still ongoing and we expect results in this year. Also the effect of the price -- with the price increase, we believe that when full reflected will help to stabilize the margins in this business area. On Slide 9, on the Retail and Financial Services, we saw in this quarter a weak performance in the public replacement of public debt, mainly justified by the €50,000 caps that you see just per saver and because the market still has the perception that the conditions are not yet very attractive compared with the other offers in the market. We believe that the levels of product debt should improve and revert to normal mainly for two main reasons. The first one is the conditions we believe that is better than the market at the perception. And in that way for the first time IGCP allow us to do communication campaigns and we are doing right now and we already see its early days, but we already see a positive path when we explain to the markets that the conditions are more competitive than the market perception. And the second reason is we also believe that in the future -- the other office in the market going to lose competitiveness and with that this series of profit that going to gain competition. Then allow us to with the volumes of public sales. At the same time and in association with the retail strategy for that we have for CTT that we already say want to be the largest and the best service platform in Portugal, we have greatly boosted insurance and health brands with very positive results. It's a lot of traction in the market. As you can see in the graph on the right side, we are looking for the health plans with very good attraction. And with this we believe that we are creating a serious alternative for the future for retail business of CTT and with performance control by CTT that's guaranteed with also these services have a guaranteed revenue model that help products to control these business areas. And with that, I pass over to Pacheco.
Guy Pacheco: Thank you, Joao. Good morning. Starting on Page 10, we can see the revenues and profitability of our bank that continues to improve on the back of volumes as NIM compressed as we guided with the double effect of cost of deposits going up and one winding of [indiscernible] universe, but still good progress. 6.3% growth and 67.1% in terms of earnings before taxes. That puts our return on tangible equity on 8.4%. On the next slide, we can see the enormous progress on customer deposits that continue to grow more than €100 million per month, driving customer acquisition and market share gains both on deposit goods on customers. Also loans also progressing well, the credit book increased €17 million in the quarter and mortgage €9 million in the same time period. Yields stable and improving on the on the auto loans. Now, moving to Page 13, where we have our key financial indicators, we can see a strong quarter in revenue growth with 9% growth in year-on-year, driven by Parcels, Banco CTT and Mail. Although, our recurring event was heavily affected as expected by a difficult comparable in the Financial Services business unit and our EBIT reached €16.9 million declining 34.2% in the quarter. Our net profit reached €7.4 million and our free cash flow €3.9 million in the first quarter of 2024. On the next slide, we can see our detailed revenue evolution. So the 9% that I already mentioned with Express & Parcels growing an impressive 57% year-on-year or €36.7 million Portugal operations continues with volumes and revenues growing more than 12%. And Spain continues with these fantastic levels of growth, more than doubling 110% in growth in volumes and revenues. We continue to gain share across all market segments, despite some pressure on price units. Mellonazzaro [ph] growing €6 million coming from mainly of the one-off effect of elections. If we exclude that effect, we saw some pressure in volumes. And we believe that the fact of being a short quarter, a number of protective days and the general elections that ruled the Portuguese states to completely stall the printing of mail, condition our underlying performance there, despite of the growth and April, we can say that shows encouraging signs of recovery both by recovering the delayed volumes from March and also because it has the converse -- the symmetric effects in terms of productivity. Financial Services declining €23.2 million with placements just below the €300 million, €295 million. That, of course, compare badly against the €7.5 billion that we placed on the first quarter last year. As Joao mentioned, we believe that both the removal of the cap that we expect and the increasingly being more competitive vis-à-vis alternatives as interest rates should decline. We remain very confident that we'll reach our target here. Lack of Banco CTT growing €2.2 million on the back of net interest income, completely driven by our volumes, as margins are pressured as expected. In next slide, we see our OpEx increasing 14.1%, driven by Express & Parcels and Mail. In Express & Parcels, we increased 49.6%, our costs, or €31.8 million. We have year-on-year margin expansion, but sequentially we are -- we continue to have some pressure on unit costs. Staying to cope with these big growth in last mile had to invest some money to grow its last mile capacity. That's something that we already saw in fourth quarter last year and continue to pressure January and February that we are now improving going forward. Portugal with some declines driven by Chinese traffic in the density of the routes, although, we firmly believe that further investments and efficiency measures that we have in place will allow the margin to improve going forward. [Indiscernible] increasing €6.7 million. This is essential election costs on terminal dues on other countries for the mail sent to our immigrants and wage inflation. And that plus the additional costs that flow from retail stores completely offset the efficiency measures that are in place as elections will go away and we firmly believe that we'll see a resume on Financial Services performance with efficiency measures in place we think will normalize and improve the profitability of Mail. Financial Services decline in €1.1 million basically linked with activity and Banco CTT with a flattish performance in terms of costs, of course, credit risk here helping on the comparison year-on-year. Next Slide 16, we can see our EBIT generation that was heavily affected by private financial services. As guided, we believe the report our profitability will be skewed to the second half of 2024 by the same reason. So our Financial Service will improve. Our profitability will also improve and allow us to show the growth that is coming from Express & Parcels and CTT that's now is suffering from that concurrency. Now with our borrowings decline and that affected the profitability with the wage inflation and the elections costs as mentioned. In Financial Services, we see the comparison effect of that €7.5 billion placements on fourth quarter last year. In Page 17, we can see our free cash flow that reached €3.9 million with €8.5 million in operating. We have a big effect in terms of working capital driven by growth, the growth in Express & Parcels and some pending receivables on both Portuguese state, namely the elections that basically drove this negative working capital this quarter. Although, we firmly believe that this will be reversed and no big concerns here. Our net cash position increased to €63.9 million, if we include the bank, if we exclude the bank, we have €153 million of net debt, including lease liabilities. And with that, I'll pass you to Joao Bento for his final remarks.
Joao Bento: Thank you, Guy. So if you join me on Slide number 19, a note on our balance sheet. We just mentioned that we kept investing very comfortably on capacity expansion in parcels, parcels in Spain, on IT, on technology, on machinery. We have reinforced our shareholder remuneration. But all that with keeping it prudent gearing and preserving a very, I'd say, high flexibility in the balance sheet. And looking at the declared gearing limits that we want to keep on €2.5 million our net debt over EBITDA. We can see that there is a significant expansion buffer for keeping investing in the business. Moving to Slide number 20 to close. So in a nutshell, we have seen a strong performance on Parcels on the bank that were passionately attenuated by the abnormally weak debt placements. It's important to stress that we are very positive about the reversal of this trend in placing a public debt. And business by business the world on parcels, we believe we are going towards another record year for sure. We are stabilizing revenues through price and increase, price increase and a good mix on Mail and others. So we see the result of our cost efficiency measures to produce better results throughout the year. On Financial Services & Retail, we are now delivering on insurance distribution and health protection plans while we prepare for improved conditions on public debt profits that hopefully should come sooner than later. And finally, we continue to see the bank growing, driven by higher engagement with clients and also with a significant rhythm of client acquisition. With that, and given the fact that we keep a solid balance sheet and we are capable of keep generating free cash flow, we see our continued investment in parcels in Iberia as a key lever for improving our competitive position. And we affirm the guidance that we have provided for finally 2024 of recurring EBIT to be above €88 million, assuming that place -- public debt placements will reach around €3 billion. And with that, we remain available for your questions.
Operator: Thank you, sir. [Operator Instructions]. And we will take our first question from Filipe Leite from CaixaBank. Please go ahead. Your line is open.
Filipe Leite: Yes. Good morning. So I have three questions, if I may. First one on profitability of Mail, because despite improvement on this quarter in terms of EBIT margin, we are talking a lot of a very low margin level of less than 2%. In the presentation, you mentioned that the price increase will help to stabilize margins. But when you talk about stabilization, are you talking about the same levels of last year or what level of margin stabilization are you referring to? Second question on working capital. Just a clarification to confirm that out of the €12.3 million consumption during the quarter, €7.8 million was related with the elections and the remaining roughly €4.5 million consumption came from the underlying activity, including what you said, the growth of E&P or to break down is different. And last one, regarding your view or if you can share with us your thoughts on what is happening in France with the intention to tax severely the Chinese online retailers of so called ultrafast fashion. If you believe that Spain and Portugal can follow France on this decision. And just to have an idea, if you can give us the percentage of your parcels in Iberia that came from Chinese and other non-EU fashion retailers. Thank you.
Guy Pacheco: Thank you, Filipe. Starting with the profitability, so we -- as we mentioned, we expect this year our absolute margin in Mail to improve. This quarter, we still have the three factors I mentioned. We have wage inflation that is €2.5 million on this quarter. We have the costs coming from elections, that the overall margin of elections is lower than the normal margin of Mail. And we have these activity effect still putting pressure on the retail costs that we share with Financial Services, as we have an inelastic capacity there. Mail in this quarter is paying more than its fair share of cost of the retail. As elections will go away, as Financial Service will resume its performance having -- and having its fair share of the cost of the retail. And we have a number of efficiency measures, we believe with the stabilization of volumes that we are also seeing throughout April, profitability stabilizing and improving. Regarding the working capital, you -- I won't comment the specific numbers, but we are -- you are basically right on the two effects. So it's Mail, its elections, another receivables, because the government, as you know, on this -- on the region of the elections, basically stops and also payment on the government side, namely on Mail also stopped and something that is now normalizing, but normally impacts the vicinity of the election and also the growth in we are exchanging growth of Financial Services, as you know, it's prepaid, where we keep the revenues that we collect. And by growth in Express & Parcels that are payment terms that are different from this prepayment of Financial Services. Regarding the Chinese and [indiscernible], I'll give it to Joao.
Joao Bento: Thank you, Guy. Thank you, Filipe, for the question. So we are, of course, paying attention to the issue. To be honest, we are not very much concerned. So there are a number of things that the Chinese decelerators will do themselves and they are doing themselves. And even recently we've been with chain and chain feels very relaxed with a number of measures that they are putting in place to fight this trend. One of the reasons that we remain relaxed is also because the prices are so low. But even a significant tax increase would not have -- would not produce a significant elasticity in demand, and also because there are other ways to increase fulfillment that is within the European Union. And so we are -- there is also the issue of many European brands sourcing significantly in China. And therefore, it would be very difficult for the EU to impose taxes that will not affect those European companies that source in China. So it's an issue that we take -- that we follow carefully, but in fact, we don't see any major risk in the long run. We have now roughly 65% of our traffic coming from China, but this number was already higher than it is. So if anything, as volumes increase, we've been able, as you know, to grow the non-strategic large clients in Spain at a higher price than the Chinese. So it's very important, it's very significant, but we had higher exposure in relative terms than we have today.
Operator: We will now take our next question from João Safara from Banco Santander (BME:SAN). Please go ahead.
João Safara: Yes. Hi, guys. Thank you for taking my questions. Just two very quick ones. First on the Financial Service, if you can give us some color on the contribution from the healthcare plans that you now reported, and it started to become relevant for you, if you could give us some numbers there. And then, the second one just on the state of your partnership with Generali (BIT:GASI) and the approval of the transaction, if you could give us some timing on that front. Thank you.
Joao Bento: Thank you, João. So starting with the partnership on Generali, while we keep interacting with the Banco Portugal, we have been given the expectation that a decision should be taken sooner than later. And we keep our previous statement that we see no reason for it not to be approved during this semester. And so that's how we continue. There's not much new information to share, although, we see the process converging.
Guy Pacheco: On the first question on the insurance and health care plans, we won't comment on numbers, that's why they were not on the presentation. But I think it's important to keep the idea that we are building fast stock that will remain, that is something that will very different profile in terms of recurring revenues that we have with the public debt services. And as such, we are incurring or building a very big or what can be a very meaningful base of recurring revenue that depends solely on us going forward, and as such, creating more and more independence from the public products that have its own dynamics and that we control less. And as such, it's something that we are seeing very encouraging signs of very fast takeoff that in a couple of years will give us a meaningful revenue that can offset the volatility of Financial Services.
Operator: Thank you. [Operator Instructions]. The next question comes from António Seladas with AS Independent Research. Please go ahead.
António Seladas: Hi, good morning. Thank you for taking my questions. It's about the bank mainly non-performing exposure increased in the quarterly value. So I don't know if you can explain the reason. And secondly, the bank has been very, very keen about positive, not so keen apparently about loans. Nevertheless, it will capitalize. And with the capital increase that you mentioned should occur until the end of June of the first half, it will be even more capitalized. So my question is, are you slowing or are you -- why are you not more active in terms of loans? And because at some point in time, maybe if the interest rates come down, your margin should start to suffer. I don't know if you can share with us what you think about the bank and how do you plan to deal with this with the margin, the net interest margin. Thank you very much.
Guy Pacheco: Thank you, António. On the non-performing, yes, we have slightly increased on cost of risk and we have something that we are monitoring closely and we have some pickup on the non-performing. We are taking a number of measures to reduce that exposure. Let's wait a little bit to see news on that front. On the overcapitalization, I think I see your point. As I mentioned on last call, we continue to work internally and with our regulators in order to have a more balanced mix between -- to cover our total capital ratio that we need to comply on morel in first half of 2026, to have a mix more beneficial for the shareholder or with less on that mix. On the dynamics, we remain very prudent on the appetite for risk on the loans, we namely on auto loans. We are not catering to other risk profiles in mortgage we remain very active, but the market is more competitive and also more stress in the number of placement of deals as you know. Going forward, as financial interest rates change, we remain with a very liquid balance sheet and we -- as you know, our credit book is less exposed to those things. And as more than 50% of our credit book is fixed rate. And as such, we didn't benefit as much from the upside on the interest rates than us, but also will protect us on the downturn of interest rates.
António Seladas: Just a follow-up question. I think that's on the bank presentation one year ago or more. You mentioned about -- maybe I didn't understand well, but you mentioned about refurbished your stores, your banking stores, to have a different approach to customer. I didn't see anything. I don't know if you are still thinking about how to do it or not, so.
Guy Pacheco: So we are on that front, we are progressing. So we want to have 60 dedicated stores for the bank. We call it dedicated, where it won't be only bank. We will continue to have this approach of sharing the space with the postal network are dedicated in the sense that the human resources inside of catering for the bank, inside that store will be directly managed by the bank. We are ramping up here, namely these Intels and overall of the shop interior that we are executing. So we'll start to see that coming online during the second half of this year. Although, in terms of human resources, we are already taking those actions. And I think you can see that through the strong traction that we are having on deposits that we hope to see also in transformation of in credit going forward. It's a process that we continue to implement and that we think it will be visible throughout the second half of this year.
Operator: Thank you. And if there are no further questions at this time, with this, I'd like to hand the call back over to Mr. Joao Bento, CEO, for any additional or closing remarks. Over to you, sir.
Joao Bento: Thank you. So thank you for your questions. Thank you for attending. We believe that we've been able to build a good first quarter in line with our expectation with the parcels and the bank performing very well. And we are now betting on an improvement on Financial Services and also an improvement on the performance of Mail. So, all in all, a good semester that positions us well for delivering the guidance that we gave. Thank you for coming. And of course, our IR team remains available for and all of us to interact with you when necessary. Thank you. Good morning.
Operator: Thank you. This concludes today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.
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