The conference is now being recorded. Ladies and gentlemen, thank you for holding and welcome to the PostNL update. During the presentation, all participants are in listen only mode, and later we will conduct a question and answer session. I would like to hand over the conference to Mr. Jochem van de Laarschot. Go ahead please, sir.
Thank you, operator. Good morning, everyone. Thank you for joining us. An unscheduled call, as we published two press releases this morning. The first one about the preliminary fourth quarter and full year results 2021, as well as the announcement of the share buyback program that will start at the end of February. We're here virtually, together with Pim Berendsen, our CFO. He will do a quick introduction in a moment, after which you'll have the opportunity to ask a number of questions. Pim, over to you, please.
Thank you, Jochem, and good morning to everyone. Today we've released our preliminary Q4 and full year 2021 results, and we've announced the launch of a share buyback program. Clearly 2021 qualifies as an exceptional year impacted by the pandemic. Thanks to our people, the resilience of our business, we've shown strong results driven by solid performance at Parcels and a strong result at Mail in the Netherlands. Cash flow performance was very strong in the full year and exceeded our expectations, which then of course further strengthens our financial position balance sheet. In line with our capital allocation framework that we discussed a couple of times during this year, we are now well-positioned to launch a share buyback program.
Confident in our successful execution of our strategy gives us comfort around our longer term business performance and cash generation perspectives. We'll continue to focus on value creation for all stakeholders through growth opportunities, cost saving initiatives, acceleration of our digitalization programs and our environmental and social initiatives. Since the start of the pandemic early 2020, we've recognized the efforts and hard work of our people, partners and retailers. We will continue to take our responsibility as a company and deliver special moments. If we then now look into a little bit more detail on the financial metrics for 2021, Q4 was a busy quarter with already strong performance in the first three quarters of the year.
Strong performance also particularly in the last weeks of the year, driven by Mail in the Netherlands through a very good Christmas and New Year's campaign. On the financials, revenue is expected to be close to EUR 3.5 billion, up 6.5% in comparison to last year. Normalized EBIT expected to come in at EUR 308 million with an outlook of EUR 280 million-EUR 310 million. Clearly at the high end of the range and margin at a very solid 8.9% for the year. EUR 80 million, I would say around EUR 80 million of the 308 is qualified as non-recurring and related to COVID-19. Free cash flow came in at EUR 288 million, which clearly exceeds our outlook of EUR 250 million-EUR 280 million.
In comparison to 2020, it was a free cash flow with more than EUR 100 million more than 2020. Obviously, the high end of the normalized EBIT range also results in a higher than expected normalized comprehensive income of EUR 277 million, which is the basis of our dividend policy. Return on invested capital around 16%-17%, more than 2x higher than the WACC. If we then look into a few of the elements of full year performance on the next slide, we clearly see the EUR 308 as a normalized EBIT, then EUR 80 million of non-recurring COVID, roughly speaking 50-50 split between Parcels and Mail segments, which basically makes the normalized EBIT adjusted for non-recurring COVID at around EUR 228.
It's driven by a 14% growth of Parcels volume in 2021 and a EUR 2.363 million revenue at Parcels and normalized EBIT of 229 at the Parcels segment, of which as said EUR 40 million is non-recurring. Mail in the Netherlands, 2 billion mail items delivered in 2021. Only a volume decline of 0.3%, which is really special. Underlying substitution was around 5%. Revenue at EUR 1.683 million. Normalized EBIT at EUR 160 million, which is really a very strong performance of the mail business, of which EUR 40 million is non-recurring and related to COVID.
Going forward to 2022, clearly we'll provide a detailed outlook, both in terms of EBIT and free cash flow guidance as per the 28th of February. On this slide, you'll find some indications already. As said, we take out the EUR 80 million of non-recurring COVID-19, and then we assume a normalized EBIT that will be broadly in line with the adjusted 2021 number. Better performance at Parcels, partially offset by low results in the Netherlands. Clearly, we see some additional inflationary cost pressures on costs like energy, transportation. We've not assumed any significant impact of COVID-19 in 2022. We'll start up new facilities and accelerate our digital transformation programs, and we will see higher IFRS-related pension expenses.
What we've seen also in the fourth quarter is that the recovery of cross-border has not materialized in the fourth quarter of 2021, and we do not expect that to improve on the short term, particularly driven by global supply chain issues and increasing freight costs, particularly steeply increased freight costs in the fourth quarter that just make the Asian webshops less competitive towards domestic retailers and e-tailers. Our free cash flow will be below 2021, as discussed before, will be robust enough to fund the dividend, the cash dividends from our free cash flow in 2022. There will be a step-up of investments, and we do expect a negative working capital because of higher settlements on terminal dues. Again, that is what we've expected.
Also clearly in our journey towards 2024, we've always indicated that 2022 will be the lower year. Certainly there are still uncertainties around COVID-19 and developments around us in global markets, as well as on cross-border, as I discussed. On the next slide, and I must say for the company, for ourselves, it's a very important step to be able to announce a share buy program. For us, it's really the function of the transformation that we've made over the last years.
If you just look back in time at the ability to do the acquisition of Sandd, the pension agreement reached, multiple divestitures, a sale-and-leaseback transaction, and most importantly, rigorous focus on disciplined capital allocation and performance management, has brought us to a position that we have a very strong, robust balance sheet, a good and solid strategy that now allows us to launch a share buyback program of EUR 250 million. As promised, we follow the steps of our capital allocation framework, discipline, and after announcing the plans to invest in our business, the acceleration of our digital transformation, the normal dividends that follow business performance, it's now time to use a little bit of the excess cash that we have to launch a share buyback program of EUR 250 million. That will be split in two tranches.
The first tranche will commence at the 28th of February, for EUR 160 million-EUR 170 million, and it resembles the assumed share dividends for the book years 2021 and 2022. That we'll take out straight away. The second tranche of the remainder of the program will be launched in 2023 to offset the assumed dilutive impact of the 2023 share dividends. That is the purpose of 40-60 shares versus cash. Clearly this program will have a positive impact on earnings per share and dividend per share, up to EUR 0.03-EUR 0.05, based on the current assumptions, and we'll use the cash of our balance sheet. It is really the first time that PostNL can do this, and we're very, very confident and happy that we are able to announce this.
As said, it's a function of a very disciplined approach over the last couple of years that really strengthens the business, that brings us to this announcement today. With those words, I'll hand back to Jochem, who will certainly then open up the floor for questions.
Thank you, Pim. I'm handing it back to the operator to see whether there are any questions at this moment.
Thank you, sir. Ladies and gentlemen, we will start the question and answer session now. To be registered for questions, please press star one. So that's star one for your questions. The first question is from Mr. David Kerstens, Jefferies. Go ahead, please.
Hi. Good morning, Pim. A couple of questions, please. First of all, you highlighted some final non-recurring effects - COVID in Q4. Can you give the non-recurring parcel volumes and letter volumes that you had? I think you only gave the EBIT impact in the press release. And then maybe looking at the 2022 guidance, I think it implies that profitability is not falling back to 2019 levels, pre-COVID. And what. Can you explain why that would be? Why you would be at a structurally higher level in terms of EBIT margin? You highlighted 8.9% for 2021. That will obviously come down somewhat but well above 2019.
Then you mentioned the underlying substitution rate only 5% in 2021, 9% in Q4. What should we assume for run rate into 2022? Is that more like the 9% you had in the fourth quarter? Maybe another question on the expectation of higher IFRS pension expenses. Why would you expect higher expenses in an increasing rate environment? Is that because your rate year- on- year is still higher when you compare January with January last year? Maybe finally on the inflationary costs, you highlighted energy and transportation. But have you also already incorporated potentially higher labor costs following the conclusion of your labor negotiations? Thank you very much.
David, thanks for your questions. Please remind me if I missed some of them. Our first question was related to the volumes. Well, a lot of more detail will be presented, let's say, at the end of February. Clearly, the vast majority of the non-recurring COVID impact in the fourth quarter was in the mail business. Not so much in the parcels business, let's say. All in all, there's not much more than 1-2 million of non-recurring COVID volume in the parcels segment. Clearly on the mail side, we've seen benefits of, for instance, booster campaigns that have an impact on the volume in the mail business. You're absolutely right on the margin. We do not expect it to fall back to 2019 numbers.
That's clearly also what I've said quarter-on-quarter as a function of the improvement measures that we've taken. On the parcel side, the introduction of different pricing strategies, the operational metrics that we've introduced in our capital markets day campaign will all benefit to that margin profile. That's indeed what we've talked about before. If you talk about the substitution rate being around 5% for 2021, and indeed, let's say the higher number around 9% in the fourth quarter, has not yet changed our perspective of the volume development into 2022. Originally, that was 8%-10%. We've clearly indicated in Q3 that we do expect a slight improvement on the substitution rate.
We expect to be below the 8% volume decline expectations for 2022. The higher pension expense, you could say, how can that be given the fact that interest rates are moving up? From an IFRS point of view, you fix your pension expense at an interest rate date at the end of the year, so the 31st of December 2021. That is indeed in connection with interest rate and other pension parameters leading to pension expense, which obviously will not lead to a higher pension cash out. As a consequence, you'll see a bigger delta coming back at other comprehensive income in 2022. Pension expense from an IFRS point of view will increase in comparison to the full year 2021 pension expense.
We've taken into account our latest expectations on also wage increases that are part of the indication that are on the slide. Negotiations on collective labor agreement for postal deliverers is ongoing, but our expectations are part of the indications that I've given for 2022.
Great. Thank you very much. At this stage, can you already say how much the pension expense in the P&L will increase given you fixed the rates already at the end of last year?
Roughly, an indication, certainly you will get the right number exactly as part of the outlook, but take into account EUR 5 million-EUR 10 million.
Yeah. Then if interest rates continue to rise this year, then next year that will come down again. Is that the right way to look at it?
Exactly. During the year, the pension expense will not change. If we were to end up at the end of this year with significant or higher interest rates and in comparison, potentially significantly, relatively speaking, higher interest rates, then indeed for the year thereafter, that would lead to an improvement of the pension expense in comparison to 2021. Thank you very much, Pim. What we'll do, by the Q4 report, will indicate the delta, and also the impact that delta has on EBIT to cash EBIT, cash EBITDA. To make explicitly clear how pension expense lead to pension cash out and what the implications are for EBITDA, if you want to compare that with peers in terms of valuation metrics. Thank you.
The next question is from Mr. Marc Zwartsenburg, ING. Go ahead, please.
Yeah, thank you. A couple of questions. Hi Pim, good morning. First of all, on Mail NL. You had a very strong EBIT margin even if you exclude the COVID support in Q4. Can you give a bit of an explanation why that margin is so high despite that you actually, in terms of mail volume declines are close to 9%? Connected to that, do we maybe have an issue if you look to the EBIT margin for the full year of the mail division, do we have an issue with the threshold that's in the USO in terms of CapEx? That's the first question. My second question is on the outlook for 2022. It's not completely clear to me if there's any COVID support in that number.
Because obviously also in January, we still have some support in mail from the booster letters, and in parcels probably a few weeks of down. Is there anything from those two elements included in the outlook? Or is that more like the room you have taken to have at least a bit of leeway on the outlook? My question on the dividend. You provided the comprehensive net income. We know the policy is 70%-90%. But if you're at the low end, you're just below the EUR 0.40 that was once mentioned last year as being sort of the dividend we should expect over 2021. Is it therefore to be assumed that the payout ratio is at least 75% to just come to the EUR 0.40 per share?
How should we look to 2022? I know it's early, but we have an outlook, and of course we have COVID support in 2021, which will hopefully not be the case in 2022. Would that then imply that your dividend would come down because of the policy on the payout ratio to a level more closer to the EUR 0.30? Or would you say, I have enough room in my cash flows to model exempt from the 70%-90% and still have a sustained and later on growing dividend? 'Cause in addition to your excess cash, you have more excess cash than the EUR 250 in your share buyback.
Would you be able to use that to give at least a sort of a bridge in 2022 on the dividend to keep it on a certain level and then grow again? Lastly, parcel volumes January. Could you give us a bit of an indication how the year started out? Because you have a very tough comp with last year. Yeah, we had some lockdown in January. Hopefully by tonight it's over. Can you give a bit of an indication where you start off on the year? That's it. Thank you.
Thank you, Marc. First question was related to the margin within Mail and whether or not that would be an issue in terms of our USO margin levels. Well, clearly the Mail in the Netherlands business for the full year has gotten a margin around about the 9.5%. That is for Mail in the Netherlands. You know that the threshold for USO is specifically related to USO, and we do not expect an issue there. Margin in the quarter is obviously influenced by the product mix in the fourth quarter, where in comparison to other quarters there is significantly more single items in it. All in all, very good margin in Mail. No issue expected on the USO threshold. On the outlook-
Pim, one second.
Yeah.
One second. On the margin, because I'm excluding the high margin booster mail and vaccination, what have you, business. Even if you stripped it out, the margin is still very high. Is that the mix of Christmas cards? Is that something else?
It's to a large extent Christmas cards, yeah. The fourth quarter margin is always high, driven by Christmas cards and those Christmas cards. The development of those Christmas cards is not necessarily excluded as non-recurring COVID. Yeah. That is the key driver there.
Okay. Clear. Yeah.
You have questions on outlook. Well, clearly I've not presented an outlook yet. I've given an indication on some of the components. You also, there's COVID support in it. Well, there is still a little bit of lockdown. At the same time, you know that we've all also communicated and are compensating our retailers with additional compensation to ensure that they keep their stores open. Clearly that's a cost, an additional cost, and that additional cost offsets kind of the additional volume that might be there. In terms of volume, you're right that in January there might be a little bit more volume on the mail side, predominantly related to booster mailings. We do not include, financially speaking, a significant material impact on the 2022 numbers, driven by COVID-19.
Your question was related to the dividend policy. Having mentioned the normalized comprehensive income, I think you said low end of dividend. That's not what is on the slide nor in the press release. What we've said is to the lower end of the bandwidth, and certainly I clearly remember what I've said about the EUR 0.40. You should not expect a dividend below that EUR 0.40. Going forward, knowing that the dividend over 2021 will be influenced also by the non-recurring result that we don't take out of the normalized comprehensive income. Clearly, dividends will go down a little bit. I don't think that they will go down to the level of the EUR 0.30 that you talked about.
It's again a function of a choice in payout ratio that we want to apply on the 2022 results, which is not up for debate today. Clearly we do understand that dividend and dividend return is a key component to our equity story. On January, I think it's a bit too early to be very specific other than that. We see no change in patterns from December into early January.
What was December then?
December was, let's say you've seen Q4, a good result in underlying growth rate excluding Parcels, excluding non-recurring COVID and cross-border, significant growth of 14%. We also expect growth to continue from December to January. Indeed, without taking out the non-recurring COVID, it will be difficult comparisons. Again, that's also nothing new. That is what we've shared a few weeks ago.
It's very clear. Thank you very much, Pim.
Ladies and gentlemen, for any additional questions, please press star one. The next question is from Mr. Marco Limite, Barclays. Go ahead, please.
Hi. Good morning. Thank you for taking my question. My first question is on parcel volume in Q4. If I'm not wrong, I think in the past, the guidance was for flattish volumes in Q4. I'm wondering, you know, if you're seeing anything in particular that can explain the -5% on a reported basis. Maybe November was lower, maybe Christmas was lower. Following up on this question, may I ask what's the assumption for volume growth for your 2022 outlook? You gave a broad indication for letter volume decline for next year, and it would be quite useful to have a broad idea of what you're expecting for next year. My second question is about the share buyback.
You were clearly saying that the share buyback program aims at neutralizing the new shares issued related to the dividend payment. Let's assume that maybe you know the traditional 40%-50% of dividend payout with shares actually is paid in cash. Does your share buyback of EUR 160 million-EUR 170 million for next year changes or not? Does it mean that you are paying more cash to shareholders in case that 40% actually you know will be lower?
Thank you, Marco. Clear questions. First one relates to the parcel volumes in Q4. You say assumed flattish in Q4 and now minus. I think the biggest component that is in between those is actually the development of cross-border volumes. That cross-border volume actually turned out to a significant minus that basically has caused the -5% that you refer to. On the domestic level, it is more or less flattish. It is really a big step down on cross-border volumes in comparison to Q4 last year, driven by a steep increase in freight costs as of October.
That together with supply chain issues has caused a delay in the recovery of that cross-border volume, and basically makes Chinese webshops less competitive, both in terms of price points and in transit times, compared to just going to a physical retail store or just ordering it from a Dutch or mainland Europe webshop. That is the explanation behind the volume development, predominantly driven by cross-border developments, which I think you can also see back at some of our peers. Assumptions on 2022 on parcels, I think it's a bit too early to say. There will be growth, that is clearly also what we indicate, and on February 28 we'll substantiate the components of the bridge that you're used to, but not more for today.
On the share buyback program, we've came to the number based on a assumed split, but it's a fixed amount. The amount won't change, irrespective of whether or not shareholders select a different split between share and cash dividends. EUR 160 million-EUR 170 million, and another EUR 80 million-EUR 90 million in 2023, which is fixed.
Okay, thanks. A quick follow-up question. Earlier you mentioned that you expect few cents of EPS accretion from the buyback, but can you clarify that point? Let's say, you know, let's assume your base scenario where with the buyback you are going to neutralize the new shares issued related to the dividend payment. Therefore, you will be issuing your shares, but you will be buying back those new shares. I'm really missing where those few cents of EPS accretion are coming from.
Well, let's say the way we talked about the developments of earnings and dividend per share before already included the dilutionary effect of our dividend policy, given the fact that kind of the election our shareholders make was roughly speaking 40/60 anyway. We've calculated the dividends per share on the back of the assumption that year-over-year we'll add more shares. Now, we launch a program that is gonna take out a significant part of the outstanding shares, and a first tranche that obviously takes out more than only the share dividend on the book year 2021, but already takes out the shares on a potential 2020 share dividend. Again in 2023, and basically those combined will have a positive impact on earnings per share.
Okay, that's clear. Many thanks.
Of course, let's say it's all a function of the share price against which we buy them back. Let's say on the share price of yesterday, you could expect to take out, roughly speaking, 50 million shares that will then have a positive impact on earnings per share, dividend per share.
Thank you.
The next question is from Mr. David Kerstens, Jefferies. Go ahead, please.
Hi, thank you. Just two follow-up questions please. In the cash flow guidance for 2022, you talk about a step up in investments, and I think, yeah, we can add some components of potential CapEx for 2022 and beyond. Can you clarify what level of CapEx you do expect? I understand it's roughly EUR 120 million plus EUR 100 million, so in excess of EUR 200 million. Is that correct? And then secondly, how do you feel now about the 2024 ambition with the lower end of the range, I think implying at least EUR 100 million step up in normalized EBIT over a two-year period? What will be the key drivers to achieve that number of EUR 300 million as a lower end of that range? Thank you very much.
Thank you, David. Well, I think on the cash flow and on the cash flow bridge, you'll have to wait until the end of February. We indicated a step up of investments clearly halfway through 2021. That's the combination of increases of CapEx and increases of lease payments on the back of leaseholds that will take, and I would say together that's definitely not the size of EUR 100 million step up, but significantly less. How much exactly we'll let you know by the end of February. I said also take note of the fact that there will be an investment in working capital in 2022 on the back of settlement of terminal dues positions. We've not said anything about 2024, and we've not changed our perspective on 2024. That is the answer I can give you there.
Mm-hmm. What will be the key drivers? How important, for example, is a deduction of pension interest costs in that step up in EBIT of EUR 100 million?
Because we've calculated that on the back of at that time the pension expenses. Drivers are related to the continuous growth of Parcels, keeping as a key element of our strategy, the mail business, more or less, stable at a profit and cash flow level that is fit for that part of the business. The contribution of our Digital Next programs, which we said will be accretive as of 2023, second part of 2023. Those elements together will lead to the step up of performance towards 2024.
Yeah. Sorry, you said you expect to keep mail EBIT stable?
That's what we've said. Clearly not on the level of 2021, but on the level that we've indicated before, because 2021 also on the mail side is influenced by, as said, around EUR 40 million of non-recurring COVID-19 effect.
Yeah. All right, very clear. Thank you very much.
This was the last question for today. I would like to close the question and answer session and give the floor back to Mr. Jochem van de Laarschot. Go ahead, please.
Thank you, operator, and thank you all for joining us today. We will be back on Monday, the twenty-eighth of February, with full details of Q4 full year performance. At that moment, we will also look forward to 2022, beyond what we have said today. If you have any further questions for us, you know where to get through to the IR team. Thanks again and hope to see you soon. Thank you. Bye-bye.
Ladies and gentlemen, this concludes the conference call. Thank you for attending. You may now disconnect your line. Have a nice day.