PostNL NV
AEX:PNL
PostNL NV
AEX:PNL
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Earnings Call Transcript
Earnings Call Recording
Other Earnings Calls
Good morning and welcome to the analyst presentation for Q4 and full year 2017 results of PostNL. My name is Karen Berg. I'm here together with our CEO, Herna Verhagen, and Jan Bos, our CFO. Unfortunately it's the last time Jan will present the numbers, so that's a special occasion. Today we will start with a brief explanation of the Q4 results by Herna and Jan and then we will look towards the future with an outlook on 2018 and the ambition for 2020. So Herna, up to you.
Thank you. Good morning to all. You all did read the press release and probably also already did see some of our slides. The major part of this presentation is on 2018 and on 2020 and especially on our changed assumptions because I can imagine then those are to your interests at most. If I look into 2017 -- and that's if it works. It doesn't work. [indiscernible]Then let's do shortly 2017. What we did see in '17 is a revenue growth and then of course an underlying cash operating income which is EUR 225 million which is the lower part of the bandwidth and already guided for at our Q2 presentation. For the first time since 2013 a positive consolidated equity of EUR 34 million and a proposed total dividend of EUR 0.23 per share which needs to be approved by shareholders in April. Progress in our acceleration of the transformation of this company into e-commerce logistical company, 38% of the revenue comes from e-commerce logistics business.On the nonfinancial KPIs we did see improvement in customer satisfaction, we did see an improvement in our C02 index. Unfortunately employee engagement was 1% down and the quality of mail delivery was also 1% down and above the level which is required by the Universal Service Obligation.So if we go into a little bit more detail -- this one is not working -- then we see the following numbers. As already said, our revenue is up 2.4%, the underlying cash operating income is EUR 225 million, little bit EUR 20 million lower than last year. The underlying cash operating income margin for mail was 7% in 2017, for parcels 10.8% and for international 0.6%. And I would like to give you a little bit more light on the numbers of Mail in the Netherlands, parcels and international on the next slides.Starting with Mail in the Netherlands. In Mail in the Netherlands we see a continued volume decline. Volume decline in -- over the whole year 2017 was 9.9% and in the last quarter even 10.8%. That is of course caused by substitution where we do see the same trend as forecasted last year, but stronger decline because of competition which is created by the significant market power regulation.The underlying cash operating income lower than in Q4 2016 partly because of more competition, partly because of cost savings which was in the last quarter a little bit less than expected and of course partly also because volumes from competition that come in via significant market power, price of those volumes is lower than of our order volumes.The mail delivery quality already mentioned is 95.4% in 2017. If we move into parcels, in parcels we did see strong growth in volume. In the fourth quarter 20% growth over the full year 17% growth which is of course translated into revenue, a revenue growth of almost 15% and also into underlying cash operating income where we did see equal growth of 10.8%. I think important and that's what we present almost every quarter is that if you look into the revenue mix of parcels more or less 60% of parcels is Benelux B2C and B2B Parcels, then we have international volumes and we have logistics.What we did see within parcels is of course a record-high during peak season where we delivered almost 33 million parcels to households in the Benelux. Strong revenue growth, partly offset by a negative price mix which we do see already for many quarters. Continuing strong volume growth also in Belgium where it was even 36%. We also do see growth in logistics, partly organic and partly via acquisitions where we did acquisitions for example in in-night but also in services behind the door and we see an increasing demand in additional services like for example same-day delivery and evening delivery. So in every part of this business we do see growth which is fueled by e-commerce and also fueled by the implementation of new services by ourselves.In international, the international had in our view disappointing results. It's what we did see in revenue as well as an underlying cash operating income. The total underlying cash operating income for 2017 was EUR 6 million which is a margin of 0.6% and also here the revenue mix more or less 50%, 55% Germany. Spring and Italy is more or less equally divided.What were the reasons for these results in 2017? In Spring, we did see lower revenue partly because of fierce competition and partly because of our compliance with strict rules around dangerous goods. On the other hand we see steady progress in the transformation of Spring towards a global e-commerce player. In Germany we suffered mainly because of consolidation which means that part of the volume in consolidation but mainly the margins in consolidation came down dramatically and that's what we did see in 2017.Of course we did an acquisition of Pin Mail Berlin and Mail Alliance which is accounted for in revenue to EUR 24 million and also in the underlying cash operating income. In Italy we expected recovery and that comes in step-by-step. We do see strong growth in parcels, same trend as in the Netherlands although different of course in Italy, partly of new contract wins and partly existing customers who are doing more volume. And on the other hand revenue growth is also supported by our expanding client portfolio in mail, but nevertheless price pressure in Italy remains fierce because of competition with Poste Italiane.So we delay in recovery for international and the reasons behind the delay are a little bit different per country and also different for Spring. Then let's move on to the financial review of the Q4 and full year 2017.
That's main message for 2017 is that our main KPI underlying cash operating income with the full-year results of EUR 225 million was in line with early expectations and like previous quarters these results were fueled by some positive one-offs mainly bilaterals and depreciation. Underlying trends were negative in Mail in the Netherlands mainly due to the accelerated impact of ACM measures, in international due to the delay in recovery not compensated by the accelerated growth in parcels. Net cash was below expectation, so next to the impact with the operational results we saw some negative impacts in working capital and I will come back on that later on.Detailed look on the results per segment for Q4, I will highlight them shortly, Mail in the Netherlands revenue down with 7% and fueled by a volume decline of 11% in Q4 and not fully compensated by price increases and lower performance in our cross-border business. The underlying cash operating income of Mail in the Netherlands was EUR 50 million lower despite the help of some positive incidents. Next to the impact of the accelerated impact of the ACM measures we also saw some delay in our cost savings.Parcels showed a strong revenue growth fueled by 20% volume growth this quarter. And we saw an acceleration in volume growth which also led to some additional costs feasible in the development of our underlying operating income due to the fact that pension cash out in parcels and also restructuring cash out was lower. The underlying cash operating income came in EUR 4 million higher.In international we saw again a delay in recovery, although underlying trends became better Q4 was disappointing so to say with lower-than-expected growth in revenue and the underlying cash operating income was EUR 7 million lower than last year and mainly explained by fierce and continuous competition in our cross-border business and in Germany. And in PostNL Other we see the impact of cost savings in our head office and also lower advisory cost.Then the underlying cash operating income bridge, so this is the next slide. The bridge explains the development of the underlying operating income and underlying cash operating income and the first is the development of the underlying operating income, there is a second and third orange bar and that's a decrease of EUR 30 million. The main cause is a negative volume-price-mix effect of EUR 19 million and it includes the accelerated impact of the ACM measures and volume decline of almost 11%.Autonomous costs increases were inline with expectations, minus EUR 6 million, cost savings came in lower than expected with EUR 9 million. And due to the implementation of our coding machines as well as lower efficiency in our delivery.Parcels, as said, profited from the accelerated volume growth but also had to make some additional costs which led to an zero increase in our underlying operating income and then although you see the impact of some positive incidentals and also some negative impact from our cross-border business in Mail in the Netherlands and some higher IT costs. All in all, a decrease of our underlying operating income of EUR 30 million in Q4 and the lower decrease in underlying cash operating income of EUR 12 million as explained by mainly lower restructuring cash out with also EUR 5 million lower pension cash out. And as said, our full year underlying cash operating income came in inline with earlier expectations.Then over to the statement of income, Q4 normalized net profit was in line with the development of our operational results and full year normalized net profit was higher as you can see and helped by lower financial expenses related to repayment of bonds in '16 and '17.The next slide shows the development of our net cash from operating and investing activities. As we're used to, due to our seasonal pattern Q4 is always very positive with the cash generated from operations of EUR 130 million. This again EUR 50 million lower than last year partly explained by the lower operational results and also some negative developments in working capital related to our cross-border business. And there we see a change in mix and that's more import volumes mainly from China and less export volumes mainly due to fierce competition in our cross-border business in Spring and the net impact leads to less outstanding balance of outstanding debts to our postal operators and that's a negative impact on our working capital.If you look at the full year you see the same trend but there you see that it's compensated by lower tax and interest paid. Then to pensions. Last year, when you remember, we looked at the coverage ratio below the minimum required level of 104%. The end of 2017 you've seen a recovery in the pension coverage ratio to 113.4%. And like I said before, the risk of top-up payments is and remains almost 0. In Q4 we paid the third part of our unconditional funding obligation. It's a little bit more than EUR 30 million. And in our other comprehensive income we saw a small negative impact of pensions and that's related to the impact of a bit lower discount rate on our unfunded pension obligation.In our balance sheet we had achieved a milestone since 2013. We had a negative consolidated equity. With our operational results from Q4 we achieved, as guided, a positive consolidated equity of EUR 34 million. Next to that I would like to mention two other indicators of our financial position, and that's a net cash position of EUR 27 million and the corporate equity of EUR 2.7 billion which reflects the value of our adjusted strategic plan.Then over to the last slide of this part of my presentation dividends. Based on the outcome of 2017 we proposed a dividend and according to our dividend policy of EUR 0.23 per share taking into account the interim dividend we have paid of EUR 0.06. This means a final dividend of EUR 0.17. And we are glad we can propose that to the annual meeting of our shareholders. Herna, over to you.
Yes. We'll move into progress of our accelerated transformation. And as we did show you last year we developed a strategy which is unlock value through acceleration of our transformation. We have confidence in this strategy, confidence which is partly built of course on the progress we have booked on the percentage of e-commerce revenue we do see in our total revenue. The strategy is aimed for Mail in the Netherlands of course at delivering sustainable cash flow, for parcels create further profitable growth and for international enhance our further cash profitability.With the transformation we are well on track. What we did see in 2017, 38% of our revenue is e-commerce logistical revenue and we expect in 2020 to have a little bit around or little bit more than 50% of the revenue out of e-commerce logistics and that means the company is transforming in a quite rapidly pace. That transformation is of course because of market development but also because of changing customers and customer behavior and because of our operational network. And I would like to highlight some of those transformational changes in the next few slides.The first one is of course the acceleration of our growth in parcels which is driven by e-commerce. What we do see is that the growth of online spending in the Netherlands is around 22%, in Belgium around 13%. And fortunately it does lead to more growth of volume within parcels and also within peak season, and that's what you see in the graph on this slide where you find in the orange bar the assumption of 2017 and in the dark gray bar the assumption of 2016 and here you see the accelerating growth in the amount of parcels.The accelerating growth in the amount of parcels is also partly caused by removing barriers to make customer interaction much more easy and what did we do over in the last period. First what we do see is that the percentage of consumer sales online did grow with 63%. What we also of course follow is the amount of consumers in the Netherlands who download the app of PostNL 50% -- growth of 52% in 2017. And I think most impressive is the growth we see in value-added services like for example same-day but also for example the option to change the delivery time and location but evening delivery. We started our food delivery network in Belgium, we introduced evening delivery in Belgium, et cetera, et cetera, a growth of 90%. What in the end does that mean, that means of course more volume on the one hand. What we also do see is that consumers who use more of those extended delivery options, so for example evening, early morning of Sunday are ordering more than twice the amount of people who only use the same-day delivery options and we see high customer satisfaction. So removing barriers also helps in growing the amount of parcels.And of course important in that transformation is the expansion of our network. In 2017 we've built the new sorting center which is integrated in the bol.com facilities. We also built a new sorting center in Nieuwegein, an Autostore in Houten which is a fully automated and robotized order picking system to support customers in the fast execution.We also implement smart software that for example better predicts the occupation of retail points and improve efficiency. The amount of our logistical infrastructure has grown from 18 to 19 in '17 and the amount of parcel points grew from 3,400 to almost 4,000 parcel points in the Benelux by the end of 2017. The expansion of our network and to enable everyone to have delivery on high quality is of utmost importance for the future of our company.Here you find a picture, because we've never been in one of those sorting and delivery centers of parcels, here you find a picture of one of those. This is the one in Nieuwegein. And what you also see on these slides are the solar panels on the roof. This year we will finalize that on every sorting center in the Netherlands we have solar panels and 40% of the energy use we have is then provided via those solar panels. I think what is promising as well is of course we've introduced our growth areas when we discussed strategy by the end of 2015. And by then we mentioned three areas for growth, convenience shopping, connected community and network logistics. And in the last 2 years we've built further on those 3 domains. That's what we did organically for example by introducing new services like Sunday, like evening delivery, like return on demand, like pharma logistics, like Extra@Home. But we also did that inorganically via acquisitions. And here you find acquisitions like PS Nachtdistributie in-night services, JP Haarlem Delivery but also companies like MyParcel who do have special propositions for the small- and medium-business accounts.So we do think that going forward leveraging on our core competencies organically but also inorganically via acquisitions remains important to maintain our leading position in that e-commerce logistical market in the Benelux. What you did see in your press release is of course the outlook for 2018 and the ambition for 2020. And I would like to highlight what are the changed assumptions and what are the important drivers behind the outlook and behind the ambition. Within Mail in the Netherlands important drivers are the adjusted impact for regulation, of course stronger volume decline and a short-term mismatch in cost savings and therefore the impact of volume decline.In international we do improve our cash profitability going forward but the impact of the delay will not be fully recovered. And in parcels we do see acceleration of volume growth and we expect that volume growth to continue and that means that we have to do investments to accommodate the growth.And let me give some details on these 3 important drivers in every segment. Within Mail in the Netherlands, as said the first one was an important driver behind the outlook '18, but also the ambition 2020 is the adjusted impact of regulation. And our expectation is that that impact will be between EUR 50 million to EUR 70 million which will be fully visible in the year 2020. Significant market power came into place August 1 of last year, August 1, 2017. As of the beginning of November we've implemented our proposed tariff structure and our operational conditional structure.As of that moment we are experiencing the effects of significant market power and we do see 2 things. First of all that postal operators are delivering more volume via their own networks which is resulting in a higher volume decline within PostNL, and that's what we will see in 2018 as well. And secondly, the remaining volume that is delivered via the network of PostNL is against lower prices resulting in pressure on the average price.Second important thing we see is that with the operational requirements we do see an increase in complexity of our organization, frustrating cost saving plans and increase our costs. And of course the impact remains subject to final decision which still has to be taken by the regulator on SMP. But based on the experience of the first month of implementation of SMP our expectation on the impact of the financials is EUR 50 million to EUR 70 million on an annualized basis, fully visible in full year 2020.If we look into the developments in the mail market but also look into the financial impact, we do think that intervention is required to safeguard a sustainable postal market for Netherlands. And for us consolidation of networks is inevitable. The impact of the changing Dutch postal market on PostNL is clearly visible. Since 2005 the volume of mail is halved and that decline will continue in the next coming years. The volumes and also profitability in Mail in the Netherlands deteriorated significantly over the years and combined with the increasing impact of ACM this endangers not only Mail in the Netherlands but also the quality of postal delivery in the Netherlands, the reliability and accessibility of a postal network.For that reason we do welcome the postal dialogue in which stakeholders will be asked how they think, how this postal market should be organized going forward. And in our view to safeguard reliability and accessibility and preserve decent labor conditions in a fastly shrinking market consolidation of networks is inevitable. This is an important driver behind the outlook for 2018 and also the ambition, the changed ambition for 2020.Second important driver is a strong volume decline which is supported by regulation. Substitution remains of course the main explanation of volume decline, and that's because of strong digitization in all segments and with all customers. We do see increased pressure from postal operators supported by regulation which results in more volume loss to competition. And the expected volume loss for 2018 is 10% to 12%. When it comes to pricing, which is an important element to offset of course part of the volume decline, for bulk mail we still expect pricing to be well above inflation with targeted discounts in certain segments.Next to that, because of ACM we did implement wholesale pricing in the 24-hour segment which is based on the tariff regulation of significant market power. In single mail pricing will be within the headroom which is given via postal regulation. And to bring into memory, the price increase for January 1, 2018, was 6.4%. And we do see a shift in product mix due to higher decline in single mail and 24 hour towards bulk mail. So strong volume decline which is supported by regulation.Then cost savings. Our cost saving target is increased to EUR 500 million towards 2021, and on the short term we see a mismatch with the impact of volume decline. What you see in the left graph is in light and dark orange, the cost savings we did over the last 4 years. And in gray you find cost savings we still have to do in the years '18, '19 and '20. We do have a strong track record in realizing cost savings and we added EUR 40 million additional cost savings towards 2021. The outlook for 2018 regarding cost savings is EUR 50 million to €70 million.With the realization of cost savings also comes related cash out. And what you find in the graphs in the gray graph for '18, 19, and '20 is more or less what was presented last year as well and it is therefore every euro we have to -- where we find cost savings we have to spend EUR 1 in cash-out. But of course the related cash-out is a one off and it equals to structural expected cost savings.What makes us confident that we can do EUR 500 million of cost savings, partly because of the existing plans and most of those existing plans are running well, and we added additional ones. And those you can find on this slide.So what are the additional cost saving plans. First of all the redesign of our delivery model to optimize the use of capacity. With a decline in mail volume year-over-year of almost 10% it is necessary to constantly optimize the way you deliver mail to households. But the fact that we have less mail volume also means that we can reduce our transportation further. It means that we can have -- can reduce our depots further and that we spend more in digitization and self-service of administrative processes.Of course it's also important to save within our overhead. And there when it comes to the additional plans we see a further reduction of production and commercial staff and management inline, in line with revenue decline, and we see of course a significant reduction of people and products at head office.So we do have lots of plans in place which are underpinning the already presented cost saving plans and we added additional ones. Will this be easy? This will not be a walk in the park. But based on the experience we have is what we think we can do and that's one. And secondly, of course fits to volume decline we expect.How is that planned over the year or what are the important milestones when it comes to those cost saving plans? Here you find some of our important projects which will contribute of course to the cost saving till the end of 2020 which is still EUR 295 million. The centralization of locations, we will of course go further with that centralization also in '18 also in '19.The improvement of our sorting efficiency and of course also the automation of our sorting. And many of you've read that in the newspapers that we had some delay because of our coding system, that's what we're working hard upon at this moment in time. And we do expect with clear milestones that we can improve our sorting efficiency and therefore also improve the efficiency in preparation.Optimize our delivery routes and implement e-cargo bikes which gives opportunity and possibility to have more mail items on one bike that's one, and secondly travel more kilometers instead of using cars or using other vehicles.On an offline communication, move customers from offline to online which is an important part of the cost savings we want to do with our commercial department.Simplify our portfolio, the amount of products we have do have an impact on our processes and do have an impact on our back office processes, so simplifying the portfolio will help us going forward to further reduce costs and of course reduce staff.What you can see on this slide is that the cost savings we still have to do till the end of 2020 and toward 2021 are first of all underpinned with plans and secondly with clear milestones so that we can follow the progress on those several cost saving plans.So three important drivers within Mail in the Netherlands, regulation, volume decline and cost savings. International is fully focused on the improvement of cash profitability. Within Spring we will of course make use of and benefits from the further acceleration of global e-commerce. And for example by offering cross-border mail and e-commerce solutions we will start the rollout of new service propositions in four countries for SMEs but also grow volume from recent contract wins like for example AliExpress.With Nexive we will focus on further rollout of parcels which is successful in Italy and strengthen our position in mail activities where we are helped by favorable development in the regulatory environment.In Postcon it's adding volume. More volume in the network means higher margins and business improvement initiatives. Also here we see favorable development of the regulatory environment which will help us in improving pricing environment in 2018 and further on. And we had an important contract wins in 2017, a big one which will start in Q2 2018. So every action taken within international is into the direction of the improvement of our cash profitability.Then parcels, within parcels we see high growth of the amount of parcels and higher than anticipated. Why is it that we expect that the high growth going forward will be maintained. The first one is we still do see big growth potential in the amount of parcels per capita per year. What you find over here is the average amount which is received per capita per year in 2017 but you also see the potential of more already e-commerce driven countries like the U.S. and U.K.What we also do see is that the online share of retail is growing. It was 14% in 2016, it's 16% in 2017. And of course that means there is still lots of potential because 84% of the market is still offline. And a broader adoption of online shopping means that the spend will increase over the next coming years. That's also the reason why we changed the assumptions when it comes to the growth of parcel volume. And that's what you on the right side of this slide find in the orange bars shown for '17, '18 '19 and '20.That accelerated growth also compared to what we presented last year, means that we have to do investments to accommodate this volume growth. That also means that we have a one-time step up in implementation cost of EUR 10 million. We will build 11 sorting centers of which 3 in 2018 in the Netherlands, 3 in '19 and 3 in 2020 all in the Netherlands and another 2 in Belgium. In other words, an investment is necessary to make sure that the growth we expect for the next coming years can be accommodated by the infrastructure we have.What is the improvement of performance we expect. After 2018 debt improvement is based upon of course the acceleration in volume and therefore revenue growth within parcels. No additional implementation costs after 2018 and the increase of operational efficiency via increased use for example of data analytics, robotization but also of course the fact that the infrastructure will be filled more and more with the volume growth over the next coming years.So looking back into what we've presented, we present an outlook for 2018 which is between EUR 160 million and EUR 200 million, an ambition in 2010 which is EUR 230 million to EUR 300 million, a commitment to progressive dividend in '18 and the years after.Now what are the key drivers behind that improvement of performance after 2018. First of all, the slowdown of the impact of regulation after '18 but also the improvement of the run rate of our cost savings. In international it's of course improving our contribution due to strengthening our e-commerce position in spring and the recovery of Nexive and Postcon and in parcels is harvesting from investments to capture further volume growth. And that's what you see translated also towards 2020 in the percentage of revenue which will be related to e-commerce logistics and is expected to be around 50% by 2020.Then for the last time I'll give the floor to Jan.
Remember all moment, yes.
Yes.
Thank you, Herna. As you know, this is my last analyst presentation. And looking forward to '18 and '20 I would have liked to leave PostNL with a better message. But the factual deferments of 2017 make it necessary to forecast an operational result between EUR 160 million and EUR 200 million in '18 and adjust our ambition for 2020 to EUR 230 million to EUR 300 million.And on this slide you see some details on this outlook and ambition 2020. For Mail in the Netherlands revenue decline of mid single digits in '18 which will slow down in '19 and '20, in line with a lower expected regulatory impact in these years. Our marginal Mail in the Netherlands will be lower than '18, partly related to the additional regulatory impacts and partly due to a mismatch between a higher volume decline and a delay in cost savings in '17 and '18.After '18 we expect recovery, as said, by lower negative regulatory impact in these years and accelerated cost savings. In parcels we expect the accelerated revenue growth to continue in '18 mid-teens partially fuelled by acquisitions we did it in '17 and in '19 and '20 low-teens. The accelerated growth is also visible in our development of our operational results.In '18 we expect only a small increase in operational results due to the costs of necessary acceleration of the expansion of our infrastructure, and after '18 we expect continuation of growth in operational results and even with higher volumes. In international we expect recovery of our results visible in high single digit revenue growth and operational results increasing as from now.All in all this leads to an outlook for '18 of mid-single-digit revenue growth and an UCOI between EUR 160 million and EUR 200 million and an ambition for 2020 of EUR 230 million to EUR 300 million. I will first dive into the development of '18 and then explain why we expect better results in '19 and '20. So first of all we are looking at the outlook for 2018. In '18 we expect a negative volume price mix effect to be between EUR 50 million and EUR 70 million. This is fueled also by the increased impact of the ACM measures also visible in an increase in expected volume decline between 10% and 12%. Autonomous cost increases are in line with what you're used to, so about EUR 20 million. Cost savings are with a level of between EUR 50 million and EUR 70 million not fully compensating both effects.As Herna explained to you, we have seen and will see some delay in '17 and '18 and an acceleration in cost savings in '19 and '20. Parcels and international will contribute to the results. Parcels less than normally due to the cost of expansion of our infrastructure. [indiscernible] is mainly representing the impact of one-offs we have seen in '17 on bilaterals and depreciation.Then how we will improve the results after '18. As expected we expect recovery and the main contributors are a less negative impact of regulatory measures compared to '17 and '18 and the difference you have to think about between EUR 10 million and EUR 15 million per year. The acceleration of cost savings in '19 and '20 delivers about EUR 30 million annual higher results. The recovery of international contributing around EUR 10 million per year to the recovery. And last but not least the combination of the accelerated growth in parcels and the oneoff of additional costs we expect as from '18 in expansion of our infrastructure that will contribute around EUR 15 million annual per year into the recovery.On our financial strategy, that remains the same. We achieved in 2017 a positive consolidated equity and we are well-financed with a new issued bond of EUR 400 million at an interest rate of 1%. Our aim for a leverage ratio not exceeding 2 remains and also our priorities for capital allocation. First of all a sustainable dividend to our shareholders with the aim of progressive dividend and secondly investing growth in the 3 growth domains Herna have told you about.With the expected accelerating growth in parcels and also to developments in cross-border we expect some additional investments in CapEx and in working capital. Until 2020 we will invest in 11 depots in parcels to handle the expected additional volume. Partly this will be financed via CapEx and partly for reasons of flexibility via lease. As earlier said, we also have seen and expect some change in the mix between imports and export volumes in cross-border leading to more investments in working capital than earlier expected, and that's in the range of about 2% of revenue.As said, our aim for progressive dividend remains and it's based on our outlook for 2018 and lower interest expenses after '18 due to the repayment of our British pound flow and trust in our ambition for 2020. And we have considered for that reason a one-time increase in the payout ratio in 2018.To conclude my last part of this presentation I repeat the main messages for today. Confidence in our accelerating transformation strategy with an outlook for EUR 160 million to EUR 200 million for '18 and we expect an improvement of our operational results in '19 and '20 based on a slowdown of impact of regulation, we increased impact of cost savings after '18, the recovery of international and of course the accelerating growth of our parcel. This leads to an underlying cash operating income ambition in 2020 between EUR 230 million and EUR 300 million. And based on that trust in our strategy and our ambition we continue to aim for progressive dividend also in '18. And with that I had handover to Karen for the Q&A. Thank you.
Thank you. Thank you, Jan. We start with questions here in the room but those on the phone please press star 1 if you have any questions. So if there's anyone in here who has any questions. [ Martin ]?
Yes, can you update us on the agenda of the Dutch government with regards to when do they expect to talk about its changes of regulations. The postal dialogue that you refereed to, what's the agenda of that. And secondly, can you update us on the legal procedures that you have started against the ACM measures. Have you started them already and how long do you expect it to take and do you expected it to be successful and how everything has been implemented and what makes you confident in that? And you made an argument for consolidation in the press release and how do you see that? Do you see PostNL involved. I mean what is the room for movement there?
What's the agenda of the Dutch government. The postal dialogue started and that means that they're creating their agenda at this moment in time and the ambition is, as far as we understood that postal dialogue will be finished before summer and delivers a report to the Ministry of Economic Affairs. That report of course is input for the Ministry of Economic Affairs to come up with their view or vision on the postal market towards the future and a connected legal or regulatory framework. So that's -- the exact planning of that we do not have. What we also do today is to press again on the urgency we feel in this discussion, so in our view hopefully there will be a conclusion in 2017 -- sorry, '18, but not sure. Legal procedures against ACM, we of course started the legal procedure against the decision of ACM on significant market power. It will take 1 to 2 years, so it will take a long time. Are we confident? We do have lots of arguments why we do think that you have to define the market in which you define significant market power broader than the definition used. We do have of course, we do underpin our arguments that the decisions taken are not proportionate to what we do think is and could be significant market power, so there are many I think arguments on which we've based our legal procedures. But it will take quite some time and I think that's the second region -- reason why we press on the urgency is that it will take quite a long time before the recent outcome of that. And then most of of course the impact of significant market power already took place. Then consolidation. We say consolidation is inevitable and if we translate that into something simple in every street, in the Netherlands today you have 2, 3, 4 mailmen and in the end we do think this should be one that is in our few consolidation.
More questions in the room? [ Andre ]?
You cut your 2020 targets, giving a specific range. What's the reason of not giving any statements on margins of the divisions there? It seems like the biggest question mark is on Mail in Netherlands, parcels is static in terms of margins. I assume that the margin development in international is not really material, so why not give us margin targets for division there?
Yes. We've decided given say some uncertainty also in Mail in the Netherlands not to give margin ranges like we did last time for the 3 segments for 2020, but only for '18 and development going up are stable.
The new EUR 40 million in cost savings are those included in your targets for 2020?
No, we've taken into account a part, only a small part probably we'll realize in 2020 and parts will be realized after 2020.
Apart from the investments in Parcels what do you aim to do with EUR 600 million in net cash?
So what we said before, first priority is paying progressive dividend and the second priority is to invest in growth opportunities, that's what we said before in terms of capital allocation.
The 20% volume growth in Parcels, I assume that's a total number. So including both the Netherlands and Belgium. So Belgium is 36 and Netherlands is then a bit lower than 20?
Yes.
Thank you, Andre. I think we have [ Ruben ] on the line. Sorry, Ruben first and then Henk.
So Ruben from KBC. I got 2. The first one to come back on consolidation. So regarding your call for consolidation to safeguard [ mailters ] and labor conditions. Does that indicate that there is still downside risk versus the outlook from Mail in the Netherlands if nothing changes? How have you seen mail volumes change on your on your network throughout Q4, and I mean that in terms of market share changes and then in discussions with clients and other market parties. What is sort of your assessment, that other mail operators in the Netherlands suffer as much from declining market? Then the second question basically on pricing. So, yes, with the mail market again is structurally in decline both on residential as on the mail side, as on the biz mail side. Volumes are now expected to decline by 10% to 12%. You've got a price lever on the residential side and to offset somewhat the volume decline. However, in business it's proven to be much more difficult to raise prices I guess. So given the current climate and the poor projections for the mail market in general would you think that there would be more scope to raise prices on the business side as well mainly as labor conditions should become more aligned?
On your first question, I think if you look into volumes 2017 part of the volume decline is always substitution and that's the biggest part of volume decline, that didn't change '17, that will be the case in '18 as well. What is added is competition, volume loss to competition which is created by significant market power. That is what is added in 2017 and what we mainly did see coming into existence as of November 1, 2017. So this is very recently. Is volume declining as fast as it does with PostNL with our competition? In our view, yes. The substitution level in the market is the same for everyone. So every mailback in the Netherlands becomes 8% to 9% emptier year-over-year, that's the situation.So price increases. We do increase our prices also in the bulk mail market well above inflation except for certain segments where we have specific pricing. For the single mail items it's of course regulated and it was 6.4% per January 1, 2018, and we do forecast that more or less the same room for price increases in bulk mail and single mail items is what we will have going forward.
Henk?
Henk Slotboom, The Idea. Herna, please don't take this seriously, but when I see a slide that you have confidence in your strategy then I have to go back a year in time, and I won't mention the b-word or bpost but I will mention the fact that exactly a year ago today you rose the targets for 2020 from EUR 285 million to EUR 355 million to a range of EUR 310 million to EUR 380 million. Now you're cutting them again by EUR 80 million for a number of reasons and you say you're confidence about the future, but how can you be confident about the results in mail if the dialogue is still taking place and the outcome of the dialogue is not clear. You can aim for consultation and I think we both agree that that should take place, but how much of that do you -- how can you control this whole process? I asked this question half year ago as well. So that's the first question. The second question is about confidence, if I look at the share price it's now trading at EUR 3.25 or around that level. There's still a higher number in the back of my mind, and again I'm not referring to the bpost again, but I had a discussion with Jan a year ago about how do you develop -- how do you unlock the value in PostNL, is the -- are the targets for 2020 indeed leading to a value which could get anywhere near to a bpost was proposed to put on the table. Now you're lowering the target quite significantly and that means that the fair value without going into too much detail must be a lot lower than the fair value you had in mind a year ago. How are you going to deal with investors because in-between the lines I appreciate all the -- I accept the all the external factors you're dealing with, I appreciate the fact that you're going to cut costs by an incremental EUR 40 million, but at the same time I hear that part of the EUR 40 million is spilling over into 2021. So to cut a long story short, what I -- what can you do to give investors more confidence than is -- what is reflected in the share price today?
Reason why we have trust in our strategy of acceleration is of course the proof given in the presentation, if you look into the growth the amount of Parcles, if you look into the growth of added services, if you look into the growth of a new services we implemented that's what gives trust, that's one. I think secondly an important area for trust to me is what we did over the last 5 years when it comes to cost savings, that we are able to adjust the organization to volume decline, that gives trust as well. What gives trust to me is the fact that with the 44,000 people employed by PostNL we are able to change the organization and reflect of course also market circumstances. What is more difficult of course is to forecast the impact of regulation and that's what you do see in our numbers. And we do see big impact in the 2020 numbers by regulation. And if you would have asked me a year before do you think that regulation which is focused on network and trends will mean that in the end there will be much more volume delivered by those postal operators themselves, probably that's not what we had forecasted. And what we see today as of November 1 after the implementation we do see that much more volume is delivered by them and that's part of of course the change we did when it comes to the ambition 2020. The second important change when it comes to 2020 is that the mismatch we do see in volume decline and cost savings is not easily solved short term. So our volume decline expectation was around 9%, what we see for 2018 is 10% to 12%, it's mainly caused by the same competition which is caused by the regulation which gives us an issue short term to increase the cost savings high enough to offset volume decline, that's what changed if you look into the last quarter of 2017. And last but not least, I think what is good news, although it does cost a one-off step up is of course volume growth in parcels, that will help us to transform this company going forward. So trust is based on what I did see happening in the organization over the last few years, trust is based on the people we have, trust is based on the growth I see in parcels, the adjustments we did in our mail organization and then hopefully we will have a fair discussion in the postal dialogue which will lead to a conclusion which safeguards the mail market for the next coming 10 to 15 years. And that's of course what is not in our hands, that's where we put all the energy we have into to make sure that we have the right discussion and we have the right arguments on the table to have that discussion in a good way and in a good manner. And I think that's our obligation. If you look into PostNL going forward then mail remains important, but also for the Netherlands mail remains important for the next coming years. And how can we create, I would say, a market circumstances in which that is possible and that's what we tried to do but there's no certainty in that area, there we can create consolidation. And consolidation is not part of the ambition we gave for 2020.
Perhaps you'll allow me one follow-up.
Yes, of course.
I sympathize with what you tell about parcels because the growth there is quite impressive and has been quite impressive over recent years, but I know it's looking into a Crystal Ball but I'm trying to get a better feel for the potential downside of a discussion on the mail market. You said yourself that the consultation is currently going on, needs to be finished by the summer of this year and then [indiscernible] and her civil servants will give it [indiscernible] and translate that into a new legislation and/or a new structure. To put it quite bluntly, the legislator, the regulator has been not the most reliable force, this is perhaps the understatement of the day. Isn't it time to -- up for a different tactic so that you're a little bit more in control of your own face going forward. You've mobilized forces against the takeover by bpost, you had all the political support you needed, the unions were backing you, isn't it time to deploy a similar strategy in terms of getting to a solution for the mail market soon, would that accelerate things?
I think the postal dialogue is of utmost importance in that because finding a solution for the mail market it does ask that all parties active in that mail market will discuss the situation together and try to find a solution going forward, that's one. So I think postal dialogue is of utmost importance when it comes to a clear definition of the issue we have in the mail market. Secondly why I think postal dialogue is important because it needs to give an answer on the how and how can we solve what's happening in that mail market. And then hopefully that's enough input for the Ministry of Economic Affairs to come up with their legal or regulatory agenda for of course the discussion in government. But in my view postal dialogue is of utmost importance to bring all the arguments together, that's one, think about what is the best way forward for the mail market and how can we organize that, and that's what I hope will be done in the process of the next coming month till summer.
I think we have [ Edward ] on the line with some questions.
Good morning everybody, just a couple of questions please, some clarification if I may, on the CapEx spend. Just to confirm that you're talking about CapEx relating to cost savings of EUR 200 million to EUR 220 million. I presume that's, can you just -- is that per annum or in total? And I think you said that the working capital outflow would be around 2% of revenue in future. Can you just confirm I understood that correctly? And secondly, with the dividend policy, clearly you are looking at a one-off increase in the payout ratio. Have you -- can you give us some flavor to what level you think you might increase that to? And a more broader question, to what extent -- when do profits start -- have to grow again for you dividend to remain sustainable?
To answer your first question on CapEx, EUR 200 million to EUR 220 million for the period '15 till '20 of which almost half already has been spent. It's not only for cost saving but also for our depots and parcels. So I would say explanation for the CapEx and it excludes now also certain goals for investing partially via lease and therefore an additional 6 depots in parcels until 2020.
But that's a cumulated number?
Yes. And then 2% of revenue, that's a good indication for the investments in working capital. And your third question? What's the third?
I'm trying to understand your dividend. You talked about considering one-off change in the payout ratio, what...
Yes, to what level. Yes, we don't. So I would say easy to calculate, I would say, with the guidance between EUR 160 million to EUR 200 million with a little bit of lower interest rate but we consider a higher payout ratio than 75%.
A broader medium-term question is at what -- when the profits start -- have starting to have, when do they have to start growing again to make sure your dividend policy in the medium term is sustainable, how long can you need tolerate declining profit?
Yes, the graph of the dividend going forward is I would say an indication of the dividends we expect. For 2019 you have to take into account that we also profit from lower interest rates and then you have to take into account the ambition for 2020 and that will do the work.
I'll get my ruler out.
Thank you, Edward. Then David, Jefferies.
It's David Kerstens from Jefferies, couple of questions please. First of all do you see any change in the market following the enforcement of the 80% contextual worker rule and what do you expect the potential impact of this rule would be? Would this sufficient to be, to trigger the consolidation in the market or does it require a change of postal law. Then secondly regarding the 2020 targets, you lowered it by EUR 80 million, but you only increased the significant market power impact by around EUR 20 million whereas also your cost savings are going up by EUR 40 million by 2021. What explains the difference between the EUR 80 million reduction in your 2020 targets and the increase related to the significant market power impact? And certainly regarding the full year '18 revenue guidance for Mail in the Netherlands you are expecting a mid-single-digit decline within 10% to 12% volume decline. Is the difference mainly made up by steeper price increases than we've seen before or is this some part of the mail bank that doesn't move that much in line with the volume? And then the improvements towards 2018 to 2024, low-single-digit revenue decline. Is that because we will be back at the normal volume decline of 7% to 9%?
To come to your fist question, the implementation of the 80% labor contract in the mail market is that enough to come to consolidation, in our view not, we already are I would say pleading more than 5 or 6 years that we need to have a level playing field in the mail market when it comes to labor conditions. That at least came into plays per January 1 when it comes to labor contract. That doesn't mean immediately that labor conditions are at a level playing field in the mail market but it's only one of the, in my view, necessary steps to take when it comes to consolidation of the market. So this in its own will not lead to consolidation and it will not lead to a solution for the issues we face in the mail market. That's my answer to the question of the 80% rule.
Have you seen any change in behavior already or is it too early to tell?
That's too early to tell, to be honest.
Second question the 2020 ambition, so the adjustment of EUR 80 million is EUR 20 million for regulatory impact and then an higher amount for the mismatch between higher volume decline and a slowdown in cost savings. Then next to that is the delay in the recovery of international and then compensated by an increase of results in parcels but also like we said before, a one-off step up in costs for parcels to increase with high-speed infrastructure of parcels. Those are the main elements for the EUR 80 million adjustments in ambition. If you look at the 10% to 12% volume decline forecasted for 2018, it includes also loss to competition because of the increased coverage ratio of postal operators, so it's mainly increased by the regulatory impact. And that also explains how our revenue development from mid-single-digit to low-single-digit after '18, and that's less impact of regulatory loss to competition and also that means less say negative impact on revenue.
But is the 2018 difference between your volume expectation and your revenue guidance mainly coming from the step up in price increases or are there other factors?
It's partly explained by price increase of course because we are pricing well above inflation. But it's also explained by also the whole of Mail in the Netherlands is not only addressed mail, we also have other businesses within Mail in the Netherlands, for example cross-border, and there you see also still some say less decline than the 10% to 12%.
Then I think we have [ Matija ] on the line with some questions.
Couple of things from my side. Firstly with H1, sounds like the outlook for mail, for margins in mail as well as say the regulatory debate, I mean if I understood it correctly on the regulated USO bid you should be making a fairly good margin, close to 10% I presume. And so if you then make 3% to 5% for the whole mail division and now assuming something close to 10% for the USO part it kind of implies that you will be making almost 0 margin on the rest of the business. How -- I mean is that a fair assumption first of all, and secondly do you have any room in the regulation or within the laws to actually push already on the basis of basically making almost no money in the business for better regulation? So that's the first question. Secondly just checking a little bit on the numbers, so you had quite few incidentals in 2017. In your 2018 guidance do you still assume some incidentals, some capital gains from real estate, are any of those still included in the guidance or not? And then just lastly one more clarification on the working capital where you mention 2% of working capital over sales. Is this referring just to the international bids or how should we interpret that, around 2% of sales -- working capital sales on incremental revenues on the group level, is that what you mean?
Coming back to your first question which is on the outlook of the margins in mail, our universal service obligation has a margin of around 6% not 10%. There is a regulatory room for 10% but it is over 2016. 2017 numbers is not yet published but around 6%. Secondly what you have to take into account that in the revenue of mail in the Netherlands you also find nonmail related items like for example print, like for example retail, like for example our call centers. Is there room in regulation or is there room to change regulation, the answer is not specifically from our side. If regulation needs to be changed it can only be changed via proposal of the Ministry of Economic Affairs which needs to be approved in parliament. So the assumptions of your calculations are not fully right.
Then for your second question on the incidentals. So sale of buildings is included in our forecast for '18 as well as '19 and '20, so there are some capital gains [indiscernible] real estate, on bilaterals [Indiscernible] are not included in our forecast for '18 or '19 or '20 and in depreciation you will see some positive impact still but less, far less in '18 and then 0 in '19 and thereafter. On working capital, the 2% I indicated is the total of the revenue of the company. The working capital impact is visible within this segment Mail in the Netherlands because there we also have cross-border business and [ there other ] say payments to and from postal operators are arranged.
Okay, I think there are no more questions on the call, so Andre.
Andre Mulder, Kepler. Still a few questions left. Certainly again digging into the margins of the divisions. You're saying that the international margin will be higher but should we also assume that they will be lower than the initially guided range of 2% to 4%?
[Indiscernible] yes, yes.
And on the SMP effect, last time you said that most of the effect would already be in the number 17, can you give us some guidance on that, is that the case and any numbers to be mentioned?
No, what we said before, the EUR 30 million to EUR 50 million was because of the accelerated impact was already mainly in '16-'17 happening and then so we increased now the impact of EUR 50 million to EUR 70 million. A part will be in '18 and then a smaller part in '19 and '20. And that's also why we see -- say that there is a slowdown in the regulatory impact after '18.
And a question on parcels. Looking at your guidance of mid-teens revenue growth in '18 and the low-teens in '18 to '20, does that indicate some kind of situation in the numbers?
No, what I said in the presentation, that part of the, say, revenue growth in '18 was fueled by acquisitions we did in '17 that's on the in-night company, furniture company and some cheap cargo, et cetera.
Okay. No more questions. Okay, then I would like to thank everyone for attending this call and, Jan, particularly for this final analyst presentation results. I hope to speak to you soon on the phone and in the room. And see you next time.