Welcome to CTT first half 2022 results call, and thank you for standing by. At this time, all participants are in listen-only mode. After the presentation, we will conduct a question-and-answer session. To ask a question, you may press star followed by the number one. This call is being recorded. If you have any objections, you may disconnect at this point. Now, I'll introduce your speakers for today, Mr. João Bento, our CEO, and Mr. Guy Pacheco, our CFO. You may begin.
Thank you. Good morning, everyone. Welcome to our second quarter results presentation. Starting with slide number four, which is in fact the first slide, with the key takeaways from the quarter. We have reached exactly within the guidance that we provide in the middle of the guidance, EUR 12 million for the quarter, as announced in the Capital Markets Day. This is a combination of several factors, starting with the behavior of parcels in Portugal. We returned to growth in volumes, although lower average revenue per item penalized revenue growth. Conversely in Spain, we had a growth in revenue driven by improving pricing, which more than compensates a slight volume slowdown driven by market dynamics in e-commerce in Spain.
This is also a consequence of a change in commercial model with higher focus on smaller B2C higher margin clients. On mail, the price lever is enhancing sustainability since we are benefiting from a historically low volume decline of around 2.5%. That is partly compensating for the continued decrease in the remaining inbound mail. Moving to the bank, while a solid and expanding balance sheet positions the bank for further revenue growth and offers interest rate leverage as we go forward. We finally reaffirm our 2030 net- zero ambition that they have announced at the Capital Markets Day as the main takeaway regarding ESG concerns.
If we move to slide five, as we said, as we can see, there's a significant sequential improvement in the recurring EBIT with the second quarter much closer to last year's performance than the first one. Which is a combination as we've seen of the given behaviors, all of them positive in parcels, mail, commercial services and the bank. With this, we could move to slide number six, with the additional detail on the behavior of parcels in Portugal. In fact, the main guideline is that there's an upturn in volumes.
We have in terms of volume behavior with a small decline versus last year, but already clearly above the pandemic levels, which is even more obvious when we look at the EBITDA, where we have already a growth versus the good quarter last year. Moving to slide number seven. As I've said, a favorable evolution of pricing drives profitability with well, just below 10% decline in volume that has been superseded by the price level. Even with almost 10% decline, revenues grew regarding the same quarter last year.
This is even more visible at the EBITDA level with a significant improvement versus the quarter in 2021 and an impressive behavior if we compare to the second quarter of 2020. All in all, for different reasons, a good quarter for parcels in Spain. Moving to slide number eight, the first about mail. As I've said, there is a significantly low decline in mail. If we exclude inbound, we have addressed mail volumes falling 2.5% in the quarter. If we consider the full addressed mail volumes, 4.1%.
We also see on the left bottom part of the slide that the inbound decline is starting to flatten with 3.7 million items versus for the quarter. Moving to slide number nine, which is very interesting slide. We try to well provide an overview of how mail is behaving. The first take is that the volume is eroding significantly. We hope for the last quarter because it is annualized in this year, as you know. The volume started exactly in the third quarter last year with an impact of EUR 9 million in the quarter.
We have a competitive mail, which out of very relevant win backs, in some relevant clients, we have observed this very small decline also with a very small price increase because of competitive matters. On regulated mail, we on top of this low decline, in fact 3.8% year-on-year, we have been able to benefit from a 6.3% price increase. All in all, de minimis was the major impact, and that one is gone from now on.
Competitive mail, we've been able to sustain volumes and decline, well by showing the competitive proposals to and some win backs and regulated mail is and will remain contributing positively and actually growing revenues in mail. This is even more so with the new formula. With that, I would invite you to move to slide number 10. The new formula that results from a positive outcome of our negotiation with ANACOM and the Direção-Geral do Consumidor. As we have communicated yesterday, we have signed yesterday the agreement. The formula is well known. It provides strong visibility for the 2023-2025 period in terms of pricing.
It provides for significant hedge of the most relevant risks and problems that we had in the past because volume decline is going to be measured on a real basis, the same with inflation. It also provides for a way of resolving in a smooth way, eventually, significant extraordinary conditions with this pay factor. As we know, an excellent formula, very much in line with what we have proposed and therefore this is one of the positive news for the quarter. With this, I would pass the floor to Guy to guide us through the remainder of the business areas.
Good morning. I'll start on page 11, where we can see our Financial Services & Retail with a very positive performance of retail compensating the slowdown that we witness on public debt placements. In fact, retail products and services growing 10.4% in the quarter as financial services revenues have a small decline of 0.8%, with the other products like money orders compensating the evolution of public debt placements that declined 13.8%. The interest rates increase has been putting out of market or with less attractiveness our long maturity products. Conversely, we have seen with the interest rates rising, the short-term products increasing in competitiveness.
That gives us comfort, and we are seeing already in July a positive performance for that because our short-term products right now are Euribor three months plus 1 percentage point, and that is pretty competitive on the three-month products right now in Portugal, mainly with Portuguese risk. The Portuguese government risk. On second one, on Banco CTT on slide 12, we see the continuing iteration of a very solid volume growth performance and consequential growth in revenues, with our auto loans increasing 18.5%. The credit cards 74.7%, mortgage 11.6%. Strong double-digit growth across all the main credit products. Customer resources also growing significantly, 36.2%.
I would like to highlight that off-balance sheet savings grew 53%, and that is key for the commission side and the increase of monetization of our customer base. Our return on tangible equity also improved significantly. These are annualized numbers but now stand at 4.6%, in the past to achieve the double-digit numbers that we shared on the Capital Markets Day. Next page, we can see the progress we are doing on the ESG front. In the Capital Markets Day we renewed our ambition, and we set the target of 2030 for net- zero, and at all levels, we continue to increase the fully green delivery centers. We opened an additional four. We are increasing the number of kilometers our green fleet is covering.
We more than doubled on the first half. Our alternative vehicles now account for 12.5% of the fleet. We continue to have these initiatives to compensate our carbon footprint with 6,000 trees planted in Serra da Aboboreira and our eco reusable package was distinguished in the Prémio Nacional de Sustentabilidade with an honorable mention. On the social front, we continued to have fundraising campaigns to support Ukrainian people, and we obtained the certification for family-responsible entity in partnership with Barclays and certified by Upster. Now moving to the financial review, on page 15, we can see our key financial indicators, where we can see a second quarter that was still challenging but with stabilizing trends and in line with the expectation that we disclosed in the Capital Markets Day.
CTT with 2% revenue growth on the back of Banco CTT and financial service performance. We achieved a flat EBITDA in one year and our cost of risk still decreasing 12.2%, reflecting many investments made in capacity and automation in Express and Parcels. Our net profit in the quarter growing 77.2% and our cash flow was negative EUR 2.4 million, affected by working capital performance and we'll get to that detail in a couple of slides ahead. On the next page, we see the detailed evolution of our revenues. As mentioned, revenue is growing 2% in the first quarter, Express and Parcels. In the second quarter, sorry, Express and Parcels declining EUR 1.1 million, resulting from that 5.2% decline in volumes.
In Portugal, volumes recovered throughout the quarter ending up growing 1.9% in the second quarter, but lower unit price pressure, the revenues decreased 2.1% in sales. In Spain, volumes declining 9.9% with lower consumption and supply chain issues with China. The higher price of parcels supporting our revenue growth, and that grew 1.2%. Mail & Other declining EUR 0.8 million or 0.8%, positively impacted by the consolidation of NewSpring and growth in the Business Solutions that contributed positively with EUR 60 million. Revenues from mail still declining EUR 6.8 million, out of which EUR 5.5 million are coming from the de minimis impact in Mail & Other.
Financial services growing 6.6%, maintaining a good performance in retail sales, growing 10.4%. Financial services declining 0.8% with increasing interest spreads, rendering longer maturity public debt products less competitive. Banco CTT growing 22% as we continue to expand our net interest margin driven by credit cards and auto loans, and commissions continue to increase with the monetization of the bank customer base, namely the 53% growth on off-balance sheet trade loans. We continue to add additional fees in our account embedded cards that are also helping the commissions front. On page 17, you can see our OpEx that grew 3% in the quarter, driven by business solutions and Banco CTT.
In Express & Parcels, we had a decline of EUR 0.5 million or 0.9%, a result of the reduction in volumes and corresponding variable costs. That were partially offset by increasing D&A resulting from the investments in capacity, efficiency and automation in our unit. Mail & Other growing EUR 2.3 million, with EUR 6.3 million coming from Business Solutions. That is essentially the consolidation of NewSpring. That includes the PPA amortization that we calculated in the quarter. That's a one-off effect of EUR 0.4 million. Mail & Other declining EUR 4 million essentially on staff costs. Financial Services pretty much flat. Banco CTT with an increase of EUR 4.3 million, EUR 3.6 million coming from cost of risk.
In the second quarter, our cost of risk stood at 1.7%, increasing from 1.2% in the second quarter last year. This increase was mainly driven by impairment model calibrations in this quarter, and we are now actively managing our credit risk, including improving our collection process, to try to counteract this below-average quarter. In slide 19, we can see the evolution of our EBIT recovery rate that still declined EUR 1.6 million, essentially due to the higher D&A from investing in capacity and automation despite the revenue decline in Express and Parcels. Our EBIT grew with higher margins, but those investments are still impacting the Express and Parcels front.
Mail & Other significantly hit by EUR 5.8 million with declining mail following the new EU regulations that started in July. With our incremental margins that push our margin down. Financial Services EUR 0.9 million with margin improvement in our financial services and positive retail contribution and bank growing EUR 1.4 million after some growth in banking products although impacted by the higher cost of risk. On page 20 we can see our cash flow evolution in the first half of CTT. Sorry, page 19, we can see our first half CTT operating cash flows being in EUR 19 million penalized by working capital evolution. We have pending receivables from Portuguese tech from Novo Banco.
One subsidy that we do for the flights from the islands, the Portuguese islands to the mainland. We have some technical issues with the cost of accounts that are already being partially resolved in July, and a temporary increase in collection period from some big clients that negatively impacted our working capital. We are seeing this as a transitory effect. Of EUR 12 million, so flat year-on-year, and free cash flow of EUR 3.8 million. Our Net Debt now is EUR 97.2 million, reflecting the dividend payment and the share buyback, plus the low cash flow generation that we have on the board. Now I'll give you back to João.
Thank you, Guy. On page 20 we have news about the share buyback. On the Capital Markets Day, we have stated the clear dividend policy, but also announced that we would be active on opportunistic acquisition of own shares. Given that, we would not exhaust the current program, in fact, we would exhaust the current program below the 18 million that we have announced because of the lower price. We thought that we could extend that to 18 million. Looking at the opportunity of a very low valuation as we see, it was decided by the board to extend by 20% given that the program is run exactly within the same time frame.
The program that has been announced yesterday is to extend to another 20% or EUR 3.6 million, and the opportunity stems from the low price. This is the rationale for what has been announced yesterday. Moving to slide 21, our last slide in the presentation. The obvious main statement is that we remain committed to achieving EUR 60 million recurring EBIT guidance that was restated in the Capital Markets Day. This is on top of what should be a very positive second half, much better than last year.
The reason why we remain confident is because we believe we have the right operational levers, as you can see on the right-hand side of page 21. This means that we'll have a contribution from the price increase in mail that will not be as eroded as in the past, because the de minimis impact should be over. That is a significant evolution. We expect some better, significant evolution. There will be improving growth in parcels across Portugal and Spain, as we are already observing in July with the continued growth in the bank also favored by the impacts of higher interest rates.
The final component, very important, high efficiency of operations against increasing volumes and optimization in the corporate center. Regarding costs, from which we expect a significant contribution, we are completing EUR 5 million cost savings in the second half as a result of several initiatives, mostly facilities optimization, paperless policy and revision of software licensing. With this three main contributions, mail and impact of price, improving activity in parcels and in the bank and the significant efficiency and cost savings, we expect to be able to reach EUR 65 million in the second half, sorry, by the end of this year. With this we will be open for Q&A. Thank you.
Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star followed by the number one. Please unmute your phone and record your name clearly when prompted. Your name is required to introduce your question. To cancel your request, you may press star followed by the number two. One moment please as we wait for the questions to queue up. At this time speakers, we do have two questions in queue. Our first questioner comes from the line of João. Your line is now open. You may now raise your question.
I'm sorry, we are not getting any questions.
I'm sorry about that. I'll check with João's line. One moment.
Hello?
João, your line is now open. You may now raise your question.
Hello? João, can you hear us? We are not hearing you. Maybe you can move to the next speaker because this line doesn't seem to be working.
Okay, that is noted. Our next question comes from the line of Filipe. Your line is now open. You may now raise your question.
Filipe from CaixaBank. I have three questions, if I may. First one is related with the net liability of the employee healthcare and pension plan benefits, that as far as I can see, it dropped by more than EUR 30 million this quarter. My question is basically this is related only with the discount rate used, or if there are any other reasons for this drop. Second question on quality KPIs. Now that the price formula was approved, when do you expect an agreement on quality KPIs for the upcoming years? Last one, regarding your targets, because looking at historical evolution of the second half, typically first quarter represent 1/3 of second half EBITDA and fourth quarter 2/3. Do you expect a similar breakdown this year, 1/3, 2/3?
Are there any reasons that can justify a different breakdown than the historical one? Thank you.
Okay. Thank you, Filipe. I will start with the second question, and then we'll hand over to Guy for the first and final one. Regarding quality KPIs, the matter here is not exactly an agreement as we have in the regarding price. Just to recall, for price, what the law on the new contract establishes is that price from now on is going to be approved by government out of a proposal by CTT based on criteria that should have been agreed between the three parties, as we did yesterday. Hence the agreement. Now with that, with those criteria approved by government, we will. Sorry, sent to government, we will have our proposal for you know concrete prices and then, we will go forward.
In quality, what happens is that ANACOM should make a proposal of new quality KPIs based on several principles, the most relevant ones being they have to be in line with the best practices in Europe. In fact, it refers to the average of similar countries to Portugal. Because we rank so badly in terms of the level of demand, any vague application of those principles will improve criteria. It's not a matter of agreement. Now, ANACOM should make that proposal and then government will approve them. We hope this to happen throughout this year so that we will be able to have the new quality criteria for next year.
I also recall that the consequences for the quality criteria eventually not being achieved from now on are not only affecting price but investment, but it will represent investment obligations for CTT. With this, I will ask Guy to address the first and last question.
Filipe, thank you. Starting with the pension or the welfare liabilities, you're right. It's mainly discount rate updates. Normally we do this exercise on a yearly basis. Because the materiality of the change on the discount rate has been so significantly, we were forced to revise it on the quarter. The discount rate rose from 1.42% to 2.94% as the index that we follow for this has increased in the same magnitude. Going to the discussion between the split on the quarters of the second half. You're right on your analysis. This year we are seeing a more balanced split mainly by two factors.
The first one is because last year third quarter was with a significant impact of the de minimis, where we weren't able to react in terms of sizing of our operations during that quarter. Because we will benefit more from price increase this year. Because a significant part of the savings that we are seeing for the second half will start to flow already on the third quarter. As such, we are seeing a more balanced split between the third and the fourth quarter.
Thank you. Our next question comes from the line of Marco. Marco, your line is now open. You may now raise your question.
Thanks. Hi. Marco Limite from Barclays. I have a couple of questions on your parcel volume growth. First question is on what do you expect for the full year in terms of parcel volume growth, and specifically for the second half of the year, if you can give us a broad indication? What gives you confidence actually on parcel volume growth recovering, given that clearly, you know, macro is deteriorating and online spending is clearly discretionary spending, so might be affected by macro deterioration? The second question is on your parcel volume growth in the second quarter.
Clearly, in Spain you have highlighted a bit of a change in the strategy, but I was just curious if you have any indication of where do you think that both the Portuguese and the Spanish parcel market by how much has grown in Q2? Especially in Portugal, if you have been growing in line with the market above or below the market. Thanks.
Thank you, Marco. Maybe I'll start by the current trends, and then I'll move to the longer or to end of year views. In Portugal we have been seeing a recovering quarter, with first half of April still very challenging and then improving sequentially, to a level that is already above what we saw in the post-lockdown period in Portugal. The data that is the publicly available data on the markets or official sources or various stats show the Portuguese e-commerce market is slowing down between 4% and 5%.
In a way, we are above the market trend, and we continue to see the same trends in July. We are seeing a steady robust recovery. In Spain, we had this very after-effect from the supply chain in China. We have still a high exposure to Chinese e-tailers in our customer base in Spain. As such, the beginning of the quarter in Spain was challenging. That has been recovering and we already see above 10 with double-digit growth in Spain in July. The data that we have available in Spain, in Eurostat show still declining e-commerce.
Yesterday there was a comment on the Spanish press by the last mile association saying that the market will decline 16%. The Eurostat numbers show a softer decline, so reality should be in the middle. Nevertheless, we are seeing these recovering trends already in July. As such, we think that the second half will still be with double-digit growth or that we are currently seeing. I understand your macro concerns.
The issue in Portugal and in Spain, there is this looming of macro, but actual numbers are still not showing, and we see potential to continue to, for people to shift from brick-and-mortar to digital.
Thank you. Our next question comes from the line of João Sousa. Your line is now open. You may now raise your question.
Okay. Hi, good morning. Sorry for that. Let's see if it works now. I mean, I have a follow-up question if I understood the answer correctly on the quality indicator, the question made by Filipe.
Then also I'd have a question on the bank and on cost savings. Starting with the first one, just to understand in terms of what you mentioned, what is a similar country to Portugal? I mean, how this is measured, or how do you think this is going to be measured? Is it volume, mail volume per capita? What kind of indicators do you think the regulator will look for? Then also on the timeline of this decision by ANACOM, if there's any specific timeline there. Sorry if you already answered, but I had some issues with the call.
The second question would be on the cost savings. I mean, if I understand that these cost savings are new, the EUR 5 million in the second half, the question here is if this is basically anticipating the cost savings you mentioned at the Capital Markets Day? Or if this is incremental to those cost savings, and if you could detail a bit more of the initiative that you're anticipating or that you're doing there? The third question on the bank's partnership, I mean, you mentioned in the Capital Markets Day that you were looking to do a partnership in Banco CTT.
The question here is how is this process evolving? This, I guess, was a question I should have made in the Capital Markets Day, but I would make it now. If this agreement implies a mutual exclusivity with this partner, meaning that you would only be able to sell insurance products from your partner and not from the other companies you currently sell in your network. Thank you.
Thank you, João. We could hear you very well and loudly, now. For the follow-up on quality, the formulation that was transposed to the law or the contract is vague, which is not necessarily bad for us. In what regards the countries with which we compare, it is not so positive but being vague regarding the timeline. Because in fact, what is implied, and we've been trying to interpret in that way, is that this year of 2022 should be a transition year for every purpose, because there was no time for anything related with discussing price raise for this year. We have included that as part of the negotiation of the contract.
That was in fact in the decree law that launched the negotiation process. For quality, the same should apply, meaning that the existing quality criteria still apply. By the way, we've been waived already from them in the first quarter because of the pandemic. Therefore, our expectation is that the new criteria will be proposed and approved by government this year to start early next year. We have no, I would say, formal or legal confirmation for that. Regarding the similar countries, this vague thing always fall to the European Union, of course, because while we have a very thorough benchmark of similar peers, both state-owned, publicly listed, all sorts of societal arrangements.
The number and level of quality criteria are reasonably similar, and the benchmark is very favorable, if you want. That's why I said that anything that approaches us from the average of European Union, for example, would represent a significant improvement in the level of demand. We are positive on that. Not as much as we would be if there was a secure timeline for things to unfold. As for the cost and the bank partnership, I will hand again to Guy.
Thank you, João. Good morning, João. On the costs, we shared on the Capital Markets Day the amount of savings between EUR 15 million-EUR 20 million, and the phase-in. On that phase-in, we already mentioned that we would expect EUR 5 million-EUR 6 million still this year. When we refer to the cost savings, we are referring to the same EUR 5 million-EUR 6 million that we are on track to achieve. For this year, the main initiatives are around facilities, namely the most significant one will be moving out of our current headquarters and reducing the space that we occupy.
We have a number of initiatives on energy that is both to have a price reduction vis-a-vis where we are and increase in the EVs going forward. We are namely investing in solar production and in reducing the consumption of our footprint. Also the headquarters reduction helps on that front. We have a number of quick wins in terms of paper consumption throughout our operations and retail network. Those are pretty much in line and those were to go through this year's savings. The EUR 20 million that we shared on the Capital Markets Day is a broader list of things. On the bank partnership, we cannot share much more than we already have. What I can say is things are evolving as expected.
Regarding exclusivity, if we enter in distribution agreement for insurance, it's expected to have exclusivity, although normally exclusivity comes up with a price. It's what we are currently negotiating. Let's see how things progress.
Perfect. Thank you very much.
Thank you, João. Our next question comes from the line of António Seladas. Your line is now open. You may now raise your question.
Taking my questions. I have two. First one is related with the bank. The cost of risk increased by 30 basis points, more or less, quarter-on-quarter. The non-performing exposure also increased. Nevertheless, you are able to also increase your Common Equity Tier 1, which is fantastic. My question is, this increase in the cost of risk is related to one-off event, or it's something that is changing in the portfolio, the portfolio that you bought one year ago from Universo. Should we expect 1.3% from now on, or this figure will increase? Because in fact, the economy is now stable, unemployment rate is stable. There are no signs yet of slowdown or a recession.
I'm a little bit worried about the increase in the cost of risk at this point in time. If you can provide more color on this? Second question is related to the price increase number for 2023. If you would like to share with us what your view is, or what will be a proxy for price increase in 2023, according to the new norm, of course?
Thank you, Antonio. Sorry. On price increase, I think the formula is pretty much straightforward. Your expectation on volumes times 84% less 0.5% for efficiency, and inflation expectations. It depends on your view on volume decline. The other variables are pretty much straightforward. What I can share, we are not seeing a significant increase on volume decline. We are seeing the same range of volumes decline that we have seen during the last two years, and that's our expectation for 2023.
Regarding the cost of risk, there is still a mechanical effect because we have a loan book that is more skewed to the consumer side of things versus what it was last year. Although we have in fact a cost of risk increase on the credit card of the partnership with Universo on the auto loan portfolio. That has been a consequence of the model's calibration that we've done. We have an issue to resolve on our collection process on that front that we are actively doing and managing our credit card our credit risk profile. We see this as a temporary issue.
You're right, it's not for any economic reasons because those are still not there. We expect until the end of the year to resolve this issue and get back to our historical cost of risk levels or the guidance that we gave in the Capital Markets Day.
Okay. Just a follow-up question on your Common Equity Tier 1 increased by 100 basis points despite increasing provisions. My question is, a re you able to keep growing your loans portfolio? Or do you need to grow less to be able to continue to have a correct CET1 of about 15%-16%?
We did an additional securitization in the beginning of June, and that allow us to have additional room to grow. We see the bank continue to have the opportunity to organically generate capital to the 14% growth that we continued. We are comfortable with the current plan, of course, under a macro scenario that we share on the Capital Markets Day. Right now we are feeling comfortable that we have enough capital to grow with some meaning. We are okay with the current capitalization of the bank.
Thank you, António. At this time, we don't have any questions in queue. Speakers, you may proceed.
Okay. Thank you for coming. We remain available as always to interact online and offline. For those that will be starting holidays, have a very nice holiday. Thank you. Good morning.
That concludes today's conference. Thank you all for your participation. You may now disconnect.