PostNL N.V. ADR (OTCPK:PNLYY) Q2 2016 Earnings Conference Call August 8, 2016 6:30 AM ET
Karen Berg - Director Treasury and Investor Relations
Herna Verhagen - Chief Executive Officer
Jan Bos - Chief Financial Officer
Philip Scholte - Kempen & Co.
Henk Slotboom - The Idea-Driven Equities Analyses Company
Maarten Bakker - ABN AMRO Bank N.V.
André Mulder - Kepler Cheuvreux
David Kerstens - Jefferies Group
Good morning, and welcome to the Q2 Results Analysts Presentation of PostNL. I’m here together with Herna Verhagen and Jan Bos. Herna will start with explaining the business results and then Jan will go into the financials. So, Herna…?
All right. Welcome to the Q2 results of PostNL. First of all, let me start to give you a little bit of an overview. The world around us is digitizing, and that’s no news to you, it’s no news to us. And that’s means that we do see growth in workshops, we do see growth in e-commerce, which translate into parcel volumes. And on the other hand, it’s also the fact that mail volumes are declining, which we do see in Q2 as well.
In that framework of digitization, PostNL has a role to play. And that’s our strategy 2020, in which we do think that PostNL will be the mail and logistic solution provider in the Benelux. The strategy which was presented last year November will be implemented and is implemented step by step.
The first steps were taken in Q1, and the next steps were taken in Q2, which I’ll share some highlights with you. And, of course, going forward we’ll continue to implement that strategy. When it comes to the second quarter, we do see solid results; solid results, of course, together with some highlights and of that quarter.
In the second quarter, we sold the shares in TNT Express, which have led to a cash-in of to PostNL. We ended together with bpost the negotiations. We could not reach agreement on the conditions which are normal part of a merger agreement.
And I think important in the second quarter is that we did find comfortable headroom going forward if interest rates go down further, next to the fact that the impact of pensions on our equity in the second quarter was limited. A good operational performance, which I will highlight over the next slide, together with of course what we do expect for the second-half of the year, bring us to reconfirming the outlook 2016 from €220 million to €260 million.
We think we can continue that operational performance in 2017. And that means that for 2017 we give an outlook, which is higher than the one of 2016 of €230 million to €270 million. Our operational performance together with the sale of our shares in TNT Express, together with the headroom of interest rates are to reduce further, makes us say that we expect and are committed to resume paying dividend in 2017.
And of course, going forward, step by step implementing our strategy towards 2020, in which we again confirm our ambition of an underlying cash operating income of €285 million to €355 million.
That solid Q2, in the second quarter we did see a revenue which is in line with the revenue of last year. The underlying cash operating income was down from €65 million to €47 million. And the reasons already mentioned at strategy update of last year, partly in our adjusted market approach, because we said it is important to maintain volumes within our own network, partly because of measures taken by ACM and partly because of the implementation of the sustainable delivery model, the fact that we offer sub-contracted within parcels the possibility to get a labor contract with PostNL.
Those are still the main reasons behind. Of course, the underlying cash operating income of €47 million in the second quarter of 2016. Important in the second quarter was the improvement of our financial position, part, because we moved from a net debt to a net cash position after the sale of shares in TNT Express and partly because of the improvement of our consolidated equity.
And Jan will go into much more of the highlight around pensions, the effect of pensions in quarter two, but also the expected effect going forward in case interest rates would come down further, a solid quarter.
If you look into more details, I would like to step into Mail in the Netherlands, Parcels and after that, of course, International.
First, Mail in the Netherlands. In Mail in the Netherlands we did an underlying cash operating income of €29 million. The underlying cash operating income is partly caused, of course, by volume decline, 7.6% in the second quarter. If you adjust for work days it’s 8.3% and that with the year-to-date market decline of 9%.
Of course, underlying cash operating income is also impacted by the measures of ACM, and as already said, by our adjusted market approach. If you want to offset volume decline, then there are three ways to do so. First of all, of course, cost savings; secondly, price increases; and thirdly, innovation; making sure that your customer is the focus of what you do also in a declining mail market.
In the next slide, I will give you some more information around ACM and the price increases in 2017, about cost savings, and about innovation. Let’s start with the regulator.
In the regulatory environment, we always talk about non-Universal Service Obligation, which is bulk mail, if I simplify it a little bit, Universal Service Obligation. In the non-Universal Service Obligation arena, we have to handle, of course, significant market power. And ACM came up with a draft decision on significant market power, together with the fact that the Ministry of Economic Affairs came up with a draft policy guideline.
We gave our views on both documents. In combination of the two, we still do think that the financial impact is somewhere between the €30 million and €50 million, as already earlier indicated to you.
In the Universal Service Obligation, there is of course an evaluation of the Universal Service Obligation done by the Ministry of Economic Affairs, and that evaluation started this summer. Next to that, we started the process for price increase for our stamps as of January 1, 2017, and that process is expected to re-finalize somewhere in Q4.
And we started the adjustment of our retail network. The new regulation in the Netherlands PostNL has the possibility to reduce the amount of postboxes and the amount of post-offices. And that’s what we are planning to do over the next coming years, starting July 1 of this year.
We expect to close 300 post-offices in 2016. On the other hand for opening parcel points, and in this change you see the transformation of our company, less mail, more parcel volumes; and in total the amount of points, postal and parcel points, where you can do your parcel and postal business, will grow.
We will go from around 2,000; 300, 500 points at this moment in time; to around 3,000 points in a few years from now. But those 3,000 are much more parcel-oriented and parcel focused.
If you want to offset volume decline, its price increases which are necessary as already said, process started this summer. Secondly, cost savings. Cost savings came in for €15 million in the second quarter. They’re based upon several projects. And those projects didn’t change. So we summarize this in Q1 as well, which are more efficient sorting process, where we installed the next sorting machines, but also more efficient delivery process, in which we closed 7 depots and migrated those to centralized locations.
The optimization of the retail network, as just explained; and staff and management, where we further reduced. The strategy update - in the strategy update we said that €345 million is the goal of cost savings till the end of 2020. By the end of Q2 this year we did €150 million. The €230 million, which we still have to do till the end of 2020, are underpinned with plans. And those plans are in the area of what is mentioned here in the column, towards 2020 ambition.
And they’re still in the area of enhancing our sorting process. Further centralization and the optimization of our locations, of course, further implementation in the reduction of post offices and mail boxes, leaner staff, leaner management and finding synergies, also in the combination of delivery networks of mail and parcels.
And the third important element, when it comes to offsetting volume decline remains to be innovation.
We’re a people’s company, a company in which 50,000 people connect customers day after day. And the innovation is also partly shown in the advertisement campaign, which we started. And this is irregular for an analyst meeting. But what I would like to do in the next 45 minutes is to show you our advertisement campaign, which we started on television.
It’s in Dutch, so for most in this room it’s no problem. But for the ones who are listening in stay with me for 45 seconds, not minutes, seconds, and then we’ll be back on parcels. So we’ll start the video.
It’s really quickest 45 minutes in my life. But let’s move on to parcels.
The second quarter for parcels was a very strong quarter. We saw volume growth of around 16% and adjusted for working days it was 14%. That is translated into revenue and also translated into underlying cash operating income. The increase in underlying cash operating income of 12.5% is partly because of course of volume growth, but also partly because of the fact that the 18 new logistical infrastructure centers are fully operational.
They’re well connected to each other and they’re also delivering the efficiency we expected them to deliver. We are on track with the implementation of our sustainable delivery model and that means that the impact of €10 million over the full year is expected to be the impact in 2016. To maintain growth within parcels, it’s important also here innovation is important, because part of the growth we do see in the e-commerce market is also because of innovations done together with customers.
If you think about the last few years, the fact that we’ve introduced evening deliveries, early morning deliveries, same-day delivery, Sunday delivery, delivery in the early morning at post offices and other examples which we’ve introduced that, of course, creates a possibility for e-commerce customers to grow and to grow much faster than in many other markets in Europe.
Two innovations I would like to highlight. The first one is an acquisition we did. And we talked, of course, many times about Extra@Home, which is delivery of heavy goods to consumers at home. We acquired a company, which gives us the possibility to do not only the delivery of the heavy goods but also the installment and the installments in your kitchen.
I think the expanding of this service offering is important to enhance further growth of Extra@Home. The second example is Food, and you do remember probably the first food-box, which we showed to you in this meeting as well. What we do see is for example that the volume of foods from quarter one 2016 to quarter two 2016 doubled. We do fresh food deliveries; we do meal boxes; we do all sort of different fresh food deliveries to homes.
It’s a nation-wide covered network, which delivers in the evening. And what you do see is the national, but also local retailers, use the opportunity of our parcel network to have the possibility to deliver in the whole of the Netherlands. Parcels: a strong quarter, with strong growth.
Then International, in International, the results are below last year: €5 million, last year Q2 zero this quarter, which is partly because of Germany. In Germany we did had a temporary effect of the relocation of sorting centers and one-offs which we had in the second quarter of 2015. And in Italy, we do see that the volumes of Formula Certa are slightly lower than last year together with price competition with Poste italiane.
Next to the fact that we’re investing in, of course, building up our parcel network and parcels is growing. We expect improvement in the second-half year, based on cost saving plans which were already implemented. However, we expect that cost savings are coming in, in the second-half year; and secondly, of course, commercial successes, which we had in the first-half year and with volume which will come in, in the second-half year.
Spring is doing very well. Growth of 33% of Spring in revenue. And that’s mainly due also here to e-commerce, streams out of Asia and out of - of course, within Europe. That is also translated into results.
If you want to continue growing in the international e-commerce innovation is important in this area as well. And I’ll give you an example of how we innovated over the last period within Spring, which helps us, of course, to grow the International volume.
We all do know registered, a registered means that you can - that you do have a signature at arrival and that in most of the occasion is tracked and traced. What we did develop for e-commerce parcels is what we call, tag and trace. If you print your address label, then the RFID tag is immediately incorporated in that address label, and so you follow your parcel, all your package from Asia to Europe or from countries within Europe to the Netherlands from the beginning till the end.
And these sorts of solutions are important to be a big e-commerce player in an area where we have a lot of competition.
A solid second quarter, making us say that we do believe and do expect to reach the year-end results as forecasted. Together with the sale of TNT Express and, of course, the headroom we see in case interest rates come down further, we expect and are committed to pay dividend in 2017, partly also based on operational performance in 2017, where we gave an outlook or a guidance on our underlying cash operating income which is higher than 2016.
I would like to hand over to Jan.
Okay, thank you, Herna. Let’s go to some more details of the financials. First of all, so what’s the solid performance of Q2, that stable revenue, decline in underlying cash operating income, which is in line with the full-year trend, and also an improvement of our financial position, getting to a net cash position.
If you look at our underlying cash operating income, it came in at €47 million. You have there to take into account that we had some one-offs in 2015, which is a more or less, say, explaining that we are telling that the Q2 results were in line with the full-year trend.
If you look at the bridge of underlying cash operating income, the first and last orange part explains the deferment of the underlying cash operating income; and the second and third orange bar explaining the development of the underlying operating income.
To start with the last part, that’s underlying operating income, first you see negative volume price mix effect coming from the volume decline of Mail in the Netherlands, not fully compensated by price increases, then we have the autonomous cost increases. And that’s not fully compensated together with volume price mix effect by our cost savings.
Then parcels coming in with additional profit, international, like Herna also said a declining profit compared to last year. And then we’ve seen improvement coming in from pension expenses. And the last part is €20 million of other effects, that’s explained by decline in traditional cross-border mail in Mail in the Netherlands. That’s one-off step down in unaddressed results because of difficult market circumstances in unaddressed.
Then some one-offs related to advisory costs and also the bilaterals I mentioned realized in 2015 Q2, and then some phasing of cost towards or, say, phasing effects between Q2 and Q3.
So that explains €90 million decline in underlying operating income and then we have a net positive effect from less cash out for pensions and provisions. And that explains the €80 million decline in the underlying operating income - cash operating income.
If you look at our cost savings, so more details on cost savings, we realized €50 million of cost savings. So year to date €30 million realized, so we’re well ahead on our outlook for the full-year 2016 of cost savings between €50 million and €70 million. If you look at the cost coming in and CapEx coming in with those cost savings, those were also a little bit higher than last year, which we also forecasted in also our outlook for the full-year on implementation cost and restructuring cash out and CapEx is maintained.
You have to be aware that we will invest a little bit more in the second-half here on CapEx, and that’s related to the sorting machines and coding machines in Mail in the Netherlands.
So then to the results per segment on the next slide, some highlights there, first of all the decline in Mail in the Netherlands. So volume decline was around 8%, revenue decline less. But in revenue decline you have to take into account, we had additional internal revenues with cross-border, on cross-border with our international segment, so underlying revenue development in more in line with the volume decline.
If you look at the underlying cash operating income of Mail in the Netherlands a €11 million decline, so partly explained by the volume price mix effect and autonomous cost increase is not fully compensated by cost savings, but also by the other impact in unaddressed and decline in cross-border mail.
Within parcels, I think, Herna already explained the difference between, let’s say, 16% of volume decline and 6% revenue increase. So there we have seen, say, the impact of declining milk powder and also the decline in non-volume related revenue. And if you look at underlying cash operating income, an improvement of 12.5%, so that’s also good performance and solid performance for parcels.
On International, I think it’s good to repeat that we expect better results in the second-half year on Germany and Italy, related to already installed actions, commercial actions and cost saving actions, from which we expect to have improved results in the second-half year.
Last, but not least, is PostNL Other, there you see also the increase in advisory costs related to regulations and also to our project with bpost.
If you look at our full-year expectations, then we reiterate our outlook for the underlying cash operating income between €220 million and €260 million for the full-year 2016. We also give some additional information on the expectations for Q3, where we expect better results than the full-year trend, partly driven by expected better performance in parcels, and also by the improvement in our results for International.
Then on the cash side, like I said a litter bit higher CapEx also related to the investments in sorting and coding machines in Mail in the Netherlands, and then some phasing effects in working capital, so negative in Q3 and positive in Q4.
Going to the statement of income, an improvement in profit for the period of €170 million; of course, mainly explained by a recycling effect from other comprehensive income to normal profit from the sale of TNT Express, €145 million. Then the next part is that last year we had the one-off loss of the discontinued activities in UK of €43 million and then also the - if you adjust for those two items, then our net profit was also in line with normal operational development, so a decline in operating profit.
Net cash, if I think, so we reached our milestone to be net cash positive, due to the proceeds coming in from the sale of TNT Express. If you look at the Q2 results then also good to highlight less CapEx in Q2 and also so less interest paid, because we have less loans outstanding. And next to that what we’ve also explained you last quarter, we did tax payment in Q1 in 2016 and in 2015, give a spread of Q1 and Q2. So that explained more or less the improvement in our cash position.
Like I said, we still expect to spend around €100 million on CapEx for the full-year 2016 related to expected higher investments in the second-half year on the new sorting machines and coding machines but also on parcels.
On our balance sheet, I think three items to highlight. First of all, the improvement of our debt position to net cash position. Secondly, the improvement in our consolidated equity mainly related to the net profit we just shown. And last but not least, also our distributable equity has increased with more than €200 million, partly explained by TNT Express, but also by dividend coming in from the underlying companies to PostNL N.V.
Then my favorite subject, of course, pensions. First of all, so to highlight the Q2 results, there you see a rather limited impact on our equity of €8 million, despite the decline of the corporate bond trade of 1.7% to 1.5%, that’s related to better-than-assumed return on assets of the pension fund.
If you look at the performance of the pension funds, so that’s more the cash side, there you see a further decline in the 12-month average coverage ratio to 104.2% and as you know, our minimum coverage ratio is 104% exactly.
So that gave us also reason for further analysis of the impact of further declining interest rates, on our equity position, we call that’s important for our ability to pay dividend. And current analysis shows that our impact, the impact of further declining interest rates and that’s on the main pension liability is capped to, A, the unconditional funding obligation, which is already in our balance sheet of €129 million and then an estimate of our top-up payments.
And whereas the estimate of top-up payment is based on this, A, triggered when the 12-month average discount rates comes below 104% and the pension fund is enabled to recover to that 104% in five years. And that’s already what you know because that’s what the deal is with our pension funds. And taking into account, so the expectation of recovery that we calculate with an average return on assets of the pension fund with 1.5%.
Then next to that, say, the top-up payments are already capped at 1.25% per year of the pension obligation, which is around at this moment €95 million. So based on all those facts and further analysis, our projections at this moment are and starting point is there the Q2 results and also a discount rate of the pension fund of around 1%, that we have still an headroom for further decline of interest rates of 0.5%.
And that means that the interest rate of the pension fund can have a further decline of 2.5% before equity is relatively impacted.
Next to that, so if the interest rates would further decline, say, from 0.5% to 0.4%, then the equity impact will be around €50 million. So those are net amounts, so after tax and that’s in the equity impact.
And it’s referred inside to compare to where we were a quarter before. So the bit also to our main conclusion I think also for today is that we have the expectation that we are able to pay dividend in 2017 and also we like to repeat that’s also our commitment to pay dividend in 2017.
And that’s next to a lot of key messages for today, that’s, A, reconfirmation of our outlook for 2016. Also reconfirmation of our ambition for 2020 of an underlying cash operating income between €285 million and €355 million, and that we also expect gradual improvement already in 2017, and that’s also the reason why we also given outlook for 2017 of an underlying cash operating income between €230 million and €270 million.
And with that, I like to finish my presentation and thank you for your attention.
A - Karen Berg
Thank you, Herna. Thank you, Jan. We’d like now to start with the Q&A. We’ll start with the people who are in the room. And the people who are dialing in can ask their question by pressing star one. Who wants to go first? Mark?
The second one, you now provided an outlook for 2017, can you share with us also the building blocks to come from 2016 to 2017 in terms of cost savings, for instance, cash out for restructuring and all of that, sort of main building blocks to get to the outlook for 2017?
And then on the ACM draft, can you share us any details on what the - because you now provide still the range of €30 million to €50 million, but if the draft now different from your initial thoughts, say, a year-ago, what is more positive? What is more negative? Can you maybe narrow down the impact, because we already some impact from ACM that is already in the P&L? But since you’re appealing to this first draft or does that also mean that the first draft is perhaps less in line with expectations than previously anticipated? That’s my first questions.
I will start with the two questions, Mark. First of all, so like we said before we really use proceeds coming in from TNT Express referred to debt reduction, that’s our priority. So in that we’re looking at economically wise, let’s say, possible bond buyback, of course. And secondly we take that into consideration the impact it will have on 2016 and 2017 on our consolidated equity.
But is it still as likely or possible since interest rates came down, is it - has that situation change of potential penalties, et cetera?
Yes. So you have to take into account of declining interest rate, but also it is reflecting in - so the interest we are paying on our cash position. So that means to economically balance almost comparable to where we were.
And the second and third question on the, say, more building blocks on 2017, I think for today we - let’s stick with the guidance for 2017 and we will as normally used to come back on building blocks at Q4.
Then on significant market power, I think the concerns we have around significant market power are not changed. And the concerns we have is of course we’re working in a very strong declining market. And if you want to maintain a sustainable network over the next coming 5 to 10 years, you have to take that into account when regulating the market together with, that’s also earlier said, that the impact of significant market power may also have an impact on the amount of people working for PostNL.
So what we try to do, and what we try to ask is to do this with prudence. I think significant market power is new territory, which means that there is no other country in Europe, except Malta, which did implement significant market power. And that also means that for both parties it’s not always an easy exercise to make sure that significant market power is implemented as good as possible going forward.
There are two draft views on the table at this moment in time, that the draft, of course, view of ACM on significant market power. And it’s the draft policy of the Ministry of Economic Affairs, which gives guidance to how to implement and how to explain significant market power, because towards the draft there is no reason for us to adjust the €30 million to €50 million, which we earlier communicated.
What we did say to refer to your last part of the question is, yes, there is already of course some of the effect of measures taken by ACM in our numbers. But they were part of the €30 million to €50 million as well, because as explained by the end of last year, it will hit our numbers in next coming three to four years and the first year was 2016 and the full amount will be visible in 2019.
On these drafts, in line with each other or is that the big discrepancy between what was initially the task from the government and what is now the outcome from the ACM, which is sort of an independent party that is now coming over the draft. Is that in line with what was initially targeted by the government? And can you share us also maybe the bit of timeline from now, what we can expect? When will we see a final outcome for instance?
I am not sure if it was target with upfront by the government, how it is now viewed by ACM. The only thing that I see, is that there are two views on the table, the view of the Ministry of Economic Affairs, which gives guidance to how to implement significant market power and if you want significant market power of the ACM. The timeline for me it’s difficult to say.
So to be honest, I don’t know what the exact time frame is in which they will come up with conclusion, because both have to come up with their final view. And in principle, the guideline of the Ministry of Economic Affairs has to be taken into account in the final view of ACM on significant market power.
Who else? Philip.
Yes, thank you. Philip Scholte from Kempen. Jan, also my favorite subject, on pensions, if that the accounting is now more aligned with cash, does that also mean that we actually have to smooth the coverage ratio of the pension fund, that which the official reported coverage ratio, of course, is the 12-month average? Does that mean that the impact on your equity position only kicked in, if the smooth coverage ratio dropped below that 99%?
I think of two different answers. A is if you look at the cash, so there is more alignment. But if you look at the cash roads, then the pension fund, we have an agreement with pension funds which states that every year you have to look if the 12-month average coverage ratio come to below - say the coverage ratio, which we agreed with the pension funds, we have to pay the top-up payment.
If you look at accounting, we have to make an estimate in accounting terms for the full five years of top-up payment. So that’s a different impact for the pension funds. It’s looking every year if you have to do a top-up payment for that year. For equity, you have to look at the full five-year estimate. And there you have to take into account an assumption on recurrent on assets and there you have to take into account also, let’s say, the coverage ratio. So that’s - I think it’s a different method, but it’s more aligned.
Right, but so the - the impact on your equity position would be more based on a spot rate on the actual coverage ratio?
Yes, I mean, and it’s triggered, only then you have to look at that estimate. It’s triggered when the 12-month average corporate ratio come to below 104%. And that’s probably by the way the case at Q3.
Right, okay, and then, a short follow-up on that, you say the relative impact is modest with the first 50 bps, can you sort of quantify that?
I think it gives you an idea there to say after that 0.1% gives an impact of €50 million, so it should be less. And, second, we have to take into account, it’s the impact not only from the, say, main pension fund, of course, we’re also still a little bit interest sensitive on the, say, order pension obligations and that’s mainly to conditional pension obligation for short pensions.
Right, right, okay, thanks. Then on bpost, Herna, can you maybe share your thoughts on maybe a bit more detail on why you think it didn’t really work and maybe with now, well, sort of the more clarity on the pension side you have given today, do you think that - was that part of the issues, part of the discussion, maybe part of a solution?
I think what we will share on bpost is what we did share in the press release, which means that on the conditions of a merger agreement we did not come to finalization. The gap on those conditions was too big to come to an agreement. That’s conclusion which we both shared over the last week and before we came to market on Sunday evening. I think, would play the role of course is that when you talk about all those conditions, you also have to talk about deal certainty, so what makes a deal certain and there was not enough deal certainty in the end to finalize it. I, of course did read also all speculations on what would recent wide is didn’t happen.
And the only thing I can say is that if you look into those reasons it was part of good conditions, but there was much more when it comes to conditions in merger agreement which in the end did not lead to a conclusion and to, of course, a positive conclusion.
We closed the book and that we can’t - and that is a reason why we went to the market to give clarity around that we ended negotiations.
Can you maybe share one other issue with us that you did not read in the press or wherever to give us a bit more feeling about what we can think about?
Yes. I think, in the - what we did share also together with bpost is that when it comes to negotiations around these sort of mergers, there is a lot trust is necessary to make sure that you can negotiate in a trustworthy environment. And that also after the deal, which means that we will not highlight on the issue, we will not highlight on specific conditions. It was a total deal, which in the end came not to good conclusion and would led to the conclusion by the end of the weekend do not finalize it.
Right. Then thirdly, if I may, on the unaddressed mail business in the Netherlands, are we bottoming out here or it is - it continue to impact the sort of the other line and are there any possibilities you just closed or fully integrated in your mail business to just stop the - what I assume to be operating losses at the moment.
I think, our future growth is more one-off step down in unaddressed, because of difficult market circumstances and our projection is that there will be a one-off step down for 2016.
But then it is loss making.
No, No. It’s still profitable.
I think it’s Henk’s turn now.
Obviously. Henk Slotboom, the IDEA! A couple of questions, Jan, sorry to be such a pain on the pension fund, [that such] [ph] would be as well, the 1%, where does it - the 1%, where does it come from, this rate that you apply as of the - yes, as of now for a discount rate. What - it is something that is a fixed thing, it’s something we can try and place ourselves. Perhaps, you can share some light on that?
It’s the discount rate. The pension fund you say, there is not a public rate available to follow that. But I think, we have - say, if you follow [ph] the Dutch central bank, the top [ph]of the 20 years pension fund rate, so they did change and that’s a good indicator for deferment also of this discount rate.
Well, I asked you already before the meeting, what’s there a moment that you saw, also given the factor, that’s being quite a little research written in the past few weeks on the pension fund and the possible impact - the potential impact of the discount rate on the pension liability and with it on consolidated equity. When did it become clear for you that that there was a deviation between the guidance you issued in November of last year at the pension workshop? And now, was there enough time to have prevented all these reports from being issued that you would have said, for example, you’re investigating it out of for a while and we’ll clarify this in the second quarter results.
I think, I said - so what we said before is I think undefined territory at the combination of the declining interest rates and which are going across liability ceiling together with our limited top-up payment obligation that was also the conclusion of our experts and our auditor. And so we did a very thorough, say, analysis also because of the implications it had on our ability to pay dividend. And I think that analysis ended say just a few days ago to be actual - also with conclusions of the impact on our equity. And that’s why we communicated today.
Okay. Now, let’s go for something completely different, to put in multi-pricing [ph] terms, let’s look forward. The good news of all of this is of course, that you expect to be able to pay dividend in 2017. If I look at the annual report than your dividend policy shows that you want to aim at a payout ratio of 75%. I know that the guidance you gave on the underlying cash earnings is not the same as the basis on which you define the dividend.
But suppose and purely for argument’s sake 75% of the definition there you use is €150 million, you have €150-million-ish as a benchmark figure next year as a consolidated - positive consolidated equity, which you go as far as paying out this €150 million dividend in one go, for example, if that equals 75% or do you say, okay, well, let’s take it easy and let’s save something for rainy day, and we want to pay a dividend in 2018 as well, you never know what happens?
First of all, of course, we are planning to pay dividend on our consolidated equity, which means that we add the net profit of the two quarters still to go in 2016, and then, of course, the profit over 2017. We pay a dividend over 2017. So it should be expected in the second half of the year, and we will apply by that time our dividend policy, which is indeed 75% of the underlying net cash income.
So you see underlying cash net income, in my example what you call €150 million then you’ll be prepared to payout a full €150 million to go to, yes, equity position of zero again?
As long as we have - as long as we can follow of course, we have to have positive corporate equity. We have to have a positive consolidated equity. We want to be a structural dividend payer, and we will apply our dividend policy, which is 75% of the underlying net cash income.
So it will be such a pain, but even if it means going to in this case, you payout 99.9% of the €150 million hypothetically, that’s possible, you say?
And Jan, one last question for you, perhaps is the - the building blocks of the consolidated equity, I’m completely lost there. Perhaps you can - sorry, now the corporate equity, the distributable corporate equity, because that’s a figure every time it’s a bit surprise for me?
Okay. And to help you, this distributable corporate equity and the positive development is actually the release, I would say, the value increase in our TNT Express share, due to the fact that the sale is accomplished. That’s part of €140 million. And next to that the corporate equity is depending on dividends coming in from underlying companies to PostNL N.V. So that’s the reason that the other €100 million more or less which is dividend out from underlying companies to PostNL N.V. and that also explained an increase in distributable corporate equity.
And we are a little bit to say, so unique in effect that we have a difference between corporate and consolidated equity that you know already.
May I do one more question, about the - you already referred to the letter - the draft letter, the consultation letter written by the Dutch Ministry of Economic Affairs. Do you agree with me that the undertone is a bit friendlier than what we have seen from the ACM so far in terms of action on Dutch provision? I get the impression that can be saying, ease off a little bit, be careful with extent of provision.
Yes, we give our view which is confidential to the Ministry of Economic Affairs on the draft policy. And I would say from my position, I would like to wait till the final policy is there, and then I’ll give you my view on it.
Maarten Bakker, ABN AMRO. The ACM is also looking into the parcels side of your business. Can you give us some - just give us some color on where you expect this discussion to go through. And then, regarding the impact on the Mail in the Netherlands results of already ACM measures, so what - I mean, you’ve indicated €30 million to €50 million in the coming years. To what extent are these already being seen in the second quarter, I mean, to get some feel for that of how much more is to come to - I mean, let’s give the percentage or something.
And final question for Jan is whether the pension accounting also affects corporate equity into the same degree as consolidated equity?
ACM did review parcels market in the Netherland. And they came up with a report and based on that report, they asked follow-up questions which we’ve answered in the meantime as well. I don’t have a real expectation at this moment in time, where that discussion leads to, but they did say in the report is of course that, they don’t see that there is - that there are hinders for competition in parts of market at this moment in time. But that they want to review the market in a year from now again.
I don’t know, what’s the follow-up questions in the end, how there will be incorporate in their final future, that’s what we have to wait for, but that’s at least what they said in there in between few. When it comes to Asia measures, what we did say at the strategy update is that our adjusted market approach together with the Asia measures has an impact of €35 million in 2016, and the impact of both is in line with expectation also for the second quarter. So part of that €30 million to €50 million has its impact in 2016.
And your last question is so for the main pension plan, say, the pension accounting is a same impact on corporate equity.
Any further questions, [indiscernible]?
[Reynolds Heyneke, Independent Minds] [ph]. So I’m afraid, still a few questions on the pensions. You mentioned that it is expected in Q3 that the coverage ratio will be below the minimum required level and that is definitely something to expect taking into account the trend we have seen, but there is still something that is not just clear to me, because it is not something automatically happening that when you touch lower than 104%, you need to get into top-up payments, it depends on the recovery of the front itself by the return on its investment.
Now, I just wanted to have a bit more background if possible, on how that process is working, because if you have to look in to the recovery power than its make unanticipated returns on your investments or the investments of the pension fund. Now that will not depend on one quarter.
So you might - you must have a feel at this moment that when we hit less than 104%, what will happen next, how big is the chance that you actually do - need to get into the top-up payments. And then, as far as actual payments of top-up premium payments that is linked to the dividend payment as well. Is that still the case?
And final question I have, unconditional funding obligation is kept at €129 million. Does that mean that there is a chance that actual payments will be higher than the €120 million you guided for the year? Thank you.
Okay. First your first question is I think, we have reached an agreement with the pension fund already, say, end of 2013, where we agreed on a mechanism how to determine top-up payments and that’s based also on new legislation adopted that it’s based on the average coverage ratio and that’s determined every at the end of the year. And then pension fund takes into account its own ability to recover, there they take into account their own, say, return on assets, but also the fact that during a period of under coverage. There is also no indexation for the retired people.
So that means that at the first year you need to reach a coverage ratio below 98.6%, before you have to do a top-up payment. And then in the second year it will be higher, say, about 99.5% or something that until the last year you have to reach 104%. And then, every year our top-up payment obligation is maximized to 1.25% of the pension obligation. That’s in answer to your first question.
Then about - and I think that’s the same number, but unconditional pension obligation we are having, the €129 million, that was formal linked to payment, to the ability to pay dividend. But we’ve changed that last year, because we are paying interest also on that, say, obligation. And that’s the reason why we already start to pay-off that obligation in 2015.
And the remaining part, €129 million is still in our balance sheet. And we expect end of this year that we still pay, say, one-fourth of that number and that’s about €30 million.
Any further questions? Let’s give, Andre first.
André Mulder, Kepler. The volume increase of 14% in parcels, can you split them into the Benelux, Belgium and International activities? And also would like to know what your growth rate was from B2B?
Understandable questions. We never did give any disclosure on what’s the different growth numbers are in parcels. But Benelux, Belgium and International are growing fast or growing all fast, and 2B is almost in line with 2C at this moment in time.
One last question, well, of course a long shot from the next topic. In parcels, you used to give this range of 3.7 to 1.5. Is that 3.7 still standing, so that means that from there on every 10 bps will be [€100 million] [ph] positive?
That’s still standing.
Yes, it’s Mark again, can you give us an indication, Jan, of the expected, I know it’s a difficult one, the dividend from the joint ventures or the other companies that are feeling into your consolidated equity. I think you mentioned now an amount of €100 million that’s quite sizable. So what do you have as a sort of ballpark figure in there for next year?
And the other one is on the milk powder, is that currently declining and then at what rate? And what proportion of parcels revenue is still the milk powder? Thank you.
So the first question, I think so good indication for the dividend coming in from the underlying companies is more or less the net profit of the whole company, normalized for extraordinaries, so for the underlying business profit so to say.
And then the second question was related to milk powder, I didn’t…
Yes, on milk powder, what you do say, there is a - when we first, of course, communicated about the milk powder, we already said we do not expect this to be fully sustainable. That’s what we also - what we did see slightly in Q1, what we do see more in Q2. And we do see a significant decline in milk powder to China that’s also the reason why - that’s one of the biggest reasons why the 16% or 14% of volume growth in parcels is not translated one-to-one into revenue.
Part of that milk powder decline is probably because of the fact that there is more milk powder made in the Netherlands. So the shortage we had is not anymore there. Part of it is because there is price competition in that market, and part of it, but we don’t know, could be that there is less demand in China. But that’s the latter is difficult for us to estimate.
What’s the exposure to milk powder of revenues roughly?
That’s relatively small - that’s relatively small, if you compare to the total revenue of parcels.
But not to be still quite sizeable or not like a few percentage points, because it has quite an impact on your price mix. So it must be quite sizeable in terms of proportion of revenues in parcels, I mean.
If you take into account earlier, we guided to say that we - so I think, one and a half year we guided that one quarter was about €11 million to €12 million of revenues in milk powder. So that gives an indication, but so…
And then significantly down from the numbers roughly.
And if you get operational results of course less, less, less.
Okay. Thank you.
Any further questions, because there is no one on the line asking questions. So well…
No. Well then, Philip is one more.
In that case I’ll chip in. The evaluation of the USO, is that - did you - are you afraid of that or is that just a theoretical exercise?
I do not think it is theoretical exercise, because also the last evaluation of the USO was done thoroughly. So that what I expect the Ministry of Economic Affairs to do this time as well. I’m not afraid in that sense, but it will be in my view thoroughly a review.
And what could it lead to, I mean, they conclude something and then?
And then, there will be discussion in parliament.
I don’t know. Yes, that’s of course, that will - whether we’ll be part of the evaluation, I don’t know what the outcome will be, but what I do know is that they will come with a view on the evaluation of the universal service obligation that needs to be discussed in parliament, and that may lead or can lead of course to changes that can be changes in regulation that can be changes in law. And those will need their own process in the end. So it’s difficult to say at this moment in time, they just started.
Okay my - I think, I was quite effective, so we now have two callers on the line as well, David Kerstens, can I give the floor to you?
Thank you. Good morning, everybody. There is a question also on the discount rate for the pension fund. Do we now have to look at two different discount rates or just the interest rate of the pension fund move in line with the IFRS discount rate that you have been reporting?
Then the second question is regarding your guidance, you confirmed full-year 2016 guidance, but you leave the range unchanged after six months in the year. And I think, you showed a historic seasonality and based on that, you would expect that you would arrive exactly in the middle of your guidance range. However, in the fourth quarter you’re highlighting you have four fewer working days. What’s the likelihood you will be able to end up in the upper end of the range and what will be the impact of the working days in the fourth quarter?
And has that to do perhaps with the effect? Then so my final question in the UCOI bridge that you presented, the other category of €20 million that you had in the second quarter, €20 million negative. Is that largely nonrecurring and if some coming back in the third and fourth quarter? Those are my questions. Thank you.
To start with your first question David for also accounting reasons, until that we cross the border of liability ceiling we still have to use the corporate bond trade as a discount rate in our accounting, but if we have cross liability ceiling, then we have to look at the estimated top-up payment and for that estimate, we have to look at the discount rate of the pension fund and that’s 1%. So it makes a little bit more complex, so that’s it to answer.
Then the second question on your - question on guidance, I think, so we repeat and reiterate our guidance between €220 million and €260 million and do not see reasons to guide to the low or upper bandwidth. The third part on the, say, the €20 million other, I would say, it’s partly that’s why I used the word, so declining in traditional cross border mail I think, that’s I think also which we could expect in the future. If you look at unaddressed, we call that one-off step down in 2016 and phasing in one-off, yes, so our words we use for phasing one-offs.
Andy, the floor is yours.
Thank you and good morning. Three questions, all kind of pension related as well, I’m afraid. Firstly, can you just be clear on how once you get below or once the liability ceiling starts to kick in, how this would be reported. So your slide on pensions, does this mean we will see the full movement in the gross liability and then there will be kind of a credit back from the impact of the liability ceiling?
And my second question is when it comes to the top-up calculations or top-up discussions, does the pension fund include the unconditional payments which you need to make in the future in calculating that 104%?
And then, finally, I guess, the reality of all of this is that as the discount rate falls more of the risk is being pushed on towards the pensioners rather than the company. So is this something that the union has an eye on or the employees have an eye on? Is there any addressed around this, the worse a situation get so they might want to come back and change the situation with the pension agreement? Thank you.
Okay. Turning to your first question, I think, you’re right in concluding that gross impact on pension liability then netted by say a tax position and the impact on the P&Ls running via other comprehensive income. And, yes, the second question, say, the pension fund takes into account into our assets as an asset, the unconditional pension obligation we are having towards pension fund.
And your last question, we did not change anything in the conditions and the agreement we have with the pension fund. So every payment we have to do to the pension fund will be done by PostNL. The changes you find are what we’ve discussed today and we’ve highlighted it in our press release, are in accounting.
So in our discussions and meetings with the workers’ council and unions, there is nothing changed in the agreement we have and in the conditions underpinning debt agreement with the pension fund.
Okay. Thank you.
Tobias, I think, you have some questions too.
Yes. Good afternoon. I just seized the opportunity to ask some questions on the international business, please. First, in Germany, your revenues are flat, but you had higher price yield from Deutsche Post [in mail-strive] [ph] last year and sort of the talk was that you are gaining some market shares. So I’m wondering whether it’s only flat.
And the second question on Germany. Is there is a change in the legislation or in the way Deutsche Post handles registered mails, or do you think there are any major tenders for registered mail coming off that you could potentially win or benefit from in the second-half?
The second, on Italy, I’m just a little bit surprised that Formula Certa is moving backwards, given the price here in Italy is also moving upwards. And what’s your analysis of how competitive that product still is and then what’s sort of the counter measure to make it grow, because the way it is today, it’s probably not large enough from the network to be profitable product in the long-run.
And thirdly on Spring, just surprised by the 37% growth in revenue. Can you provide a little more granularity on what that actually is, whether that’s a new product that you’ve introduced as well or it’s really - is it parcels that are put in envelopes as letters, that’s replicating other businesses or where is that strong growth coming from? Thank you.
First, on Germany, revenue is flat, that partly has to do with the fact that we’ve sold Frankfurt and partly has to do with the fact that we did not increase our prices at March as Deutsche Post did. The changes in legislation and what we - and then especially on registered mail items and will we benefit from these standards, what I did see from our German team when I talked about the customers they’ve won and the volume they’ve won, it was not in registered mail. It was in bulk mail and they are mainly specialized in B2C mail.
In Italy, the prices of Poste italiane, especially in bulk mail are not moving upwards, they’re moving downwards and that’s what we see impacting Formula Certa as well. Formula Certa is a profitable product, that’s what we expect it to be going forward as well. And what we do see is that, of course, the amount of mail, which is in the known Universal Service Obligation arena in Italy is growing and there we see opportunities going forward.
The growth in Spring is parcels and packages. And packages are small parcels in an envelope and parcels are normal parcels, but it’s both, and it’s from Asia to the Netherlands and from Europe to the Netherlands. And the trend is a trend we already did see over the last quarters.
And just following up on Italy, can we expect that to bottom out volume-wise in the second-half of the year, how do you look at that?
Yeah, what we do expect is that it will to a certain extent bottom out, that’s one. And secondly, we expect further growth in parcels, because also the rollout of the parcel network is of course impacting the results in Italy.
Thank you, very clear.
Okay, any more questions in the room? Well, then, thank you very much for attending this meeting. And I hope to see you next time. Thank you. Bye-bye.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: firstname.lastname@example.org. Thank you!