Transcript of the conference call held on November, 4th 2014 11:00am CET

Interim Financial Report Third quarter 2014

Conference call transcript

Brussels – November, 4th 2014

Koen Van Gerven, CEO Pierre Winand, CFO

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4th November 2014

(11.00 am)

THE OPERATOR: Ladies and gentlemen, welcome to the Bpost first quarter 2014 results

conference call. I am pleased to present Mr Koen van Gerven, Chief Executive Officer and

Pierre Winand, Chief Financial Officer. For the first part of this call let me remind you that all

participants are on listen only mode and afterwards there will be a question and answer

session. I would now like to return the conference call to Mr Koen van Gerven and Mr Pierre

Winand. Gentlemen, please begin.

MR VAN GERVEN: Thank you very much, ladies and gentlemen. Good morning and thank you

for joining thus morning. Indeed I have Pierre Winand with me this morning as well as our IR

team with Saskia Dheedene and Paul Vanwambeke. We will first give you some brief

comments on the results and then as always we will open the lines for questions. I imagine

that you already have the opportunity to read through the materials that we posted yesterday.

We adapted the formats slightly and I hope that you find the improvements good.

So I think it's correct to say that we have recorded a very solid performance on many aspects

of our business and firstly I am very pleased with the performance in parcels. We had, and

that you know, a softer start of the year but the third quarter has been strong in terms of

growth of domestic parcels with over 10 per cent volume growth. Most of that is coming from

our strong growth in e-commerce customers but we also see the first signs of improvement in

our C2C segment.

A couple of things that we did in the parcel area, this quarter we continued to improve our

parcels offering both for the senders as for the receivers. Having reached of the number of

120 machines installed throughout the country, we launched our 24/7 parcel commercially

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with a big advertising campaign seeking to enroll receivers and the other side, with

a commercial push towards the senders. We launched also our revised offering for direct

delivery and pick up, both in our post offices and our post points with an increased

accessibility, of course, and more competitive prices.

We added more convenient options to send and receive parcels, such as the online

preparation and payment of shipping for C2C customers and finally we announced the

commercial launch of the Saturday delivery of parcels. We did some piloting over the

summer and we announced it for all our customers now.

International parcels also continued to grow solidly with 10.6 million euros, a better

performance than in the second quarter. International parcels are the key area of focus for

Bpost and that requires a specific experience and expertise. This is why, following the

departure of Peter Somers a few months ago I asked Dave Mays to take the leadership and

responsibility for the totality of our international mail and parcels activities and with

a particular focus on profitable growth.

Dave is the founder and currently the CEO of our very successful US subsidiary Landmark

Global. It is a company that is built to service the needs of our e-commerce community. I am

confident that Dave will use his experience to leverage synergies between the international

mail and parcels activities and between our operations in North America, Europe, as well as

in Asia and that to maintain the growth of our international operations.

In the domestic mail, volume decline was better than in the first half of the year with

a decrease of 4.3 per cent. Most of that improvement came from transactional mail and we

have to be honest, helped by some one-offs from our customers, but with sales in advertising

mail remaining fairly weak.

At the same time, the third quarter is not the most relevant of the year. While we haven't

seen new e-substitution initiatives by our customers, the underlying e-substitution trend is still

very present. So we remain cautious and we continue to prepare ourselves actively to

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respond higher volume declines in the quarters to come and that's why we started amongst

others the analysis of our overhead and support structure, the famous Alpha plan, to identify

improvements in this area.

We also continue to manage our costs with an organic decrease by 7.2 million euros when

excluding transport costs and before handing over to Pierre I would like to comment some of

the events from the past quarter.

A couple of them and, as you heard, there is a new federal government. It already

announced some measures that will affect Bpost, as of course any other company in

Belgium. I think it's still very early days to get accurate estimates of the impact, to give you

an example, the salary indexation jump with help as salaries should increase by less than

what we had expected.

However, other announced measures might have an adverse impact and before

commencing on the net impact for Bpost, we will wait to see how the announced measures

are implemented in practice and what will be the timing of these measures. We also expect

that the tendering process for the newspaper and periodical distribution will be resumed.

However, as we speak there is no official announcement that has been made yet. Neither

did we receive any details on the request for proposal that will be put on the market.

I also want to give you some context on the non-binding offer we submitted end

of September for the acquisition of 51 per cent of the Romanian incumbent postal operator.

As we know most of our acquisition strategy is to look to opportunities that add revenue

and/or strength to our existing business. We call it the bolt-on acquisitions and especially,

we look at opportunities in Belgium and even more specifically into the parcel area.

Next to that and I stress very selectively we also look to other opportunities, if they provide

a strong return on investment and if we believe that we can bring particular benefits to this

situation. The privatisation of the Romanian post might -- and I stress the word might -- be

such a file where we could leverage our knowledge and know-how in modernizing the postal

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operator. But we are in a very early stage of assessing this file, and the process set up by the

Romanian government required a non-binding offer to be able to start an in-depth due

diligence of the company. And as we speak, the Romanian government has not yet

accepted this offer.

Now, in any event, I would like to stress that this investment would be quite limited in terms

of financial and managerial resources that would be committed to this file and it would not at

all impact our dividend payment capacity.

Finally, to round up the news from this quarter, we launched our groceries delivery service

under the name Combo. The name refers to the unique feature to combine orders placed at

different retailers and to do the delivery in one single delivery. So it's still very early days to

comment on commercial results but we are very happy that we have Cora and Carrefour on

board, together with 10 other retailers and I am sure that we will be able to tell you more in

the quarters to come on this.

So, this is a kind of an overview and I would like to give Pierre the stage to do some

comments and details on the figures.

MR WINAND: Yes, thank you very much, Koen. I suggest we go to slide 4 in the EBITDA bridge.

Maybe you will wonder after the relatively good figures we had in terms of domestic mail

decline and the very good figures in terms of parcels why our EBITDA is reasonably flat

compared to the same period last year. There are a couple of reasons for that.

The first one is that in this quarter we sold less buildings, we have less proceeds of buildings

than in the third quarter of 2013. You may remember at the time we announced the sale of

a very significant property which is not recurring this year and the variance year over year of

the sale of buildings is actually negative to the amount of 7.7 million at the level of revenues

and at the level of the EBITDA.

The second element is that although the costs are 300,000 better than last year, they include

about 3.1 million of restructuring costs which we will discuss when we look at the costs. So

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discounting those two elements you can see that the better results in terms of parcels and

domestic mail are effectively flowing through the EBITDA. You see, of course, the negative

of domestic mail, 6.5 million driven by the decline of 4.3 per cent during the quarter, more

than compensated by the significant growth in domestic parcels but also in international

parcels with the other sources of revenues being positive also this quarter. So all together we

show an EBITDA which is in line with the last year but taking into account the two elements

I mentioned.

I suggest that we move to slide 11, which states a bit about costs. The first element is of

course the growth in the transport costs, 6.9 million euros which is directly correlated with

a growth of international parcels. So excluding that increase in costs you can see

a significant reduction in the cost during the period.

You might be surprised by the fact that payroll and interim is slightly negative this quarter but,

again, this is driven mainly by the negative restructuring costs of 3.1 million, whereas we

didn't have any in the same quarter of last year.

Looking at the other drivers of payroll and interim costs, in a reported way, the number of

FTEs is 1,092 lower than in the quarter of previous year on average, which should bring us

13.3 million. But on the other hand our employees have taken less holidays this summer than

in previous years. Therefore if you correct the number of FTEs for the normal pattern of

holiday taking, in reality the reduction is 840 FTEs which is really in line with what we had

announced, which is that in the second half of the year the savings in terms of FTEs would

be lower.

Since we have also provided for this delay in the holiday, the positive impact of the volume

effect on the cost is 10.4 million which is corresponding these 840 FTEs.

Price effect includes as usual the impact of the normal seniority but also the impact of the

collective labour agreement. If you remember last quarter, there had been a catch up for this

collective labour agreement on the first quarter.The third quarter is a normal quarter. The line

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“Other” is slightly higher than previous quarter , but it's due to the revaluation under IAS19.

The rest of our costs are absolutely under control.

Moving on to slide 12, the cash flow statement. During the quarter, the net cash movement

was a negative 39 million which comes mostly from the operating free cash flow and if we go

into details, the cash flow from operating activities was 10 million lower or worse than last

year but that's really the impact of the payments, the early payments of the terminal dues by

some other postal operators.

If you remember in Q1 I told you that the cash flow was exceptionally high because we had

received earlier than usual payments of 20 million, more than 20 million from other postal

operators. Normally we receive them in the third quarter. We had received them in the first

quarter and I mentioned at that time that it would flip out. Well, it has flipped out this quarter.

Excluding that and excluding other movements on working capital the actual additional cash

remuneration from operation was 14.2 million, a perfectly good result during the quarter.

The second element is the cash flow from investing activities which was 26 million worse

than last year. The first reason is almost 14 million more capex due to the fact that we

purchased during the quarter a number of the new sorting machines which will allow us to do

sequencing of the large format. This is part of Vision 2020. And it is still perfectly within the

capex plan of the year which had been announced.

The second factor there is the lower cash proceeds for the sale of buildings. I mentioned

that the profit is 7.7 million less and the cash proceed is 14.5 million less. Again, this is

mostly linked to this one building we sold last year in the third quarter.

Moving on to slide 14, I would like to make a few comments about the dividends and the

dividend policy but also return to shareholders. We receive regularly questions on that so we

thought it would be useful to remind a few factors on that. In terms of dividend, you know our

policy is to pay a minimum of 85 per cent of the Belgian GAAP reported net profit. We pay it

in two tranches. The first tranche in December based on the results of the first 10 months of

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the year and then a top up dividend based on the result of the last two months of the year

which is then paid in May, normally. The payment of the dividend can be only made on the

results of the year plus the available or distributable reverses. As you know the amount of

distributable reverses is relatively limited and we pay 85 per cent and not 100 percent

because we want to reconstitute a little bit of this distributable reverse so that if one day we

have got significant one-offs we are able to make those one-off and still maintain the

dividend.

Speaking of this year and the first nine months, the results of the parent company amounted

to 218 million euro which is higher than the 176 million euros which had been realized at the

same period last year. Even corrected last year with the tax paid on the exceptional

dividend, we had last year 193 million of basis upon which to pay the dividends, so we are

significantly above that. We are actually already at the level of the October results of last

year upon which we paid the dividends. So that should normally allow us to pay higher than

last year in interim dividend.

A few other things around potential capital repayments. Exceptional dividends and buy

backs, they are constrained by the distributable reverse and as I mentioned we got very

limited distributable reserves and we want to reconstitute them a bit in case of. A second

mechanism for paying back would be capital reduction, which is then constrained by the

absolute level of capital which is in the parent company and the Belgian GAAP which is

an amount of 364 million as of the end of 2013. So that is technically the maximum amount

that could be paid back.

We hear sometimes, "But don't you have ways to increase your distributable reverse or to

increase your capital through corporate restructuring in some ways?"" And the short answer

is no under current Belgian law and legislation and regulations and in particular taking the

specific regulations applicable to Bpost so that's not an avenue. Which means that, and

that's our last point which is that our ability to repay to shareholders is not as much

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constrained by our cash and our borrowing ability because that is ample both in terms of net

cash but also on what we could borrow but it is limited to effectively the structure of our

equity.

I’d like to give back the word to Koen for some concluding words.

MR VAN GERVEN: Thank you, Pierre and let's go to slide 15 where we have the outlook and

here there are two main messages that I want to give you. First of all, and that's in general,

we can and we will confirm of course our outlook and in particular in terms of as well the

operational result and the dividends.

Secondly or as part of the first message to that, we –reiterate our better than expected

performance for parcels in the second half as already demonstrated in this quarter’s figures

of course. Next to that and that's of course important too, we take into account the evolution

in the third quarter of the domestic mail volumes and therefore we return to our initial figure

that we pointed out for this year and that was the 5 per cent volume decline.

So, with all of this, I think it's fair to say that we reported very strong results in this third

quarter and we are more than happy about that but on the other hand I have to stress that

we have to remain cautious since the underlying trends that we see on the market in

e-substitution, they continue to prevails and this is why we improve and we continue the

preparation of what we have to do in an environment that becomes more difficult than what

we had in the past.

So, I propose that we can go to questions now and, operator, please can you open the lines.

THE OPERATOR: I certainly will, ladies and gentlemen. We will now begin Q and A. If you wish

to ask a question, please press 01 on your telephone keypad. That's 01 on your telephone

keypad if you wish to ask a question. Our first question is from Dieter Furniere from KBC

Securities. Please go ahead your line is open.

DIETER FURNIERE: Yes, thanks. Four questions from my side. Maybe firstly on the volumes.

We know that you hinted for a 5 per cent volume decline for the year so implying 6 per cent

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decline in the second half. You guided this when you were already one -- yeah, one month

in the quarter, so could you maybe discuss what happened in August, September and how

the trend and volume decline was in July, August and September? Could you maybe also

discuss the percentage that relates to one-off mailings?

Second question: on the holiday taking of 2.9 million. Could you just give us further detail on

what that relates to because we read a lot here in the press that the unions are complaining

that people can't get their job done within the time they are giving and as such the holiday

hours are being accrued. Does that relate to this effect and what is your expectation on this

going forward?

Then thirdly, you also mentioned next to that a 3.1 million restructuring charge and also 1.5

million in transport. What is that exactly and do you have these types of items under control

or should we expect these to reappear in the coming quarters?

And then one last question, if you could update us on the Alpha plan, and discuss what

exactly it is, how many people could be affected and when you would expect to implement

this plan? Thank you.

A. Yes, in terms of volume, we don't comment on monthly evolution of volumes but clearly over

the quarter we had a better quarter than we had in Q1 and Q2 and, again, what we have

seen in the past is high volatility from month to month. What impact that we have identified is

indeed some one-off drops by a number of clients, in particular in transactional mail and

those one-off drops amount to about 0.3 per cent of growth, of less decline compared to

previous quarter. It means that excluding that, those elements that are -4.6, which is still very

much in line with the first two quarters of the year. So we are not seeing in that quarter, even

excluding these one-offs, we are not seeing the worsening trend that we have seen in

between Q4 last year, Q1, Q2. But the underlying action of customers of trying to move to

e-substitution is still there. No new big customers have taken aggressive action during the

quarter but we continue to be, as Koen has said, cautious for the future. Again, months, we

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do not comment one by one.

A. Just to add, even if we are happy on the 4.3 percent that we did in this quarter, if you put it in

a kind of perspective then the 4.3 is even worse than, for example, the 4.2 that we had last

year, over the entire year. We consider this a strong decline because it was one of the

strongest declines we ever had so and that's why although we are happy on this figure, we

have to remain cautious and we have to prepare for heavy weather in front of us.

A. In terms of the holidays, the reality is that we observe that people have taken less holidays.

During the summer, usually, we organize ourselves to be able to cope with people taking

normal holidays and it's a combination of students and interims. I think it's, we don't know

what people have done and why they have done it, but what is really important is that we

always make sure that people get the chance to take their holidays by the end of the year.

So we will continue to work with local management, the unions and the workers, to make

sure that the workers take their holidays before the end of the year. I am not entirely sure it's

linked to the complaints of the union. It just happened this year and we will make sure that it

will resolve itself or disappear by the end of the year because people are entitled to their

holidays and should be able to take them.

In terms of some of the more one-off items, the 3.1 million is restructuring, mostly linked to

the refocusing of our international operation and the new leadership. There will be probably

additional restructuring costs but nothing massive relating to that particular operation and

I think it's healthy from time to time to look and refocus on that.

In terms of the transport cost one-off, that's not a new phenomenon. This is basically

settlements with other postal operators. There is always a delay in the settlements and

some quarters you have a positive, some quarters you have a negative. In the past we have

had much bigger positives or negatives, so this amount is really a reasonable amount if you

take this into account and it is under control on average certainly during the year.

Koen, do you want to talk about Alpha?

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A. The Alpha plan, first of all, there is not a plan yet. We started off early September. It is

an analysis of the type of activities and the type of organization that we have of what we call

our support structures, which are located in the headquarters. The reasons why we started

off this analysis is basically two reasons.

First of all, we have built this organization some ten years ago and actually of course we

tweaked over time a little bit left and right but ten years later both the world and the

organization have changed profoundly and we thought that it was the right moment to take a

step back and to make a profound analysis and to rethink the structure that we need going

forward. Not only in the type of design of the organization but also because we think that the

organization should prepare for another environment as we already discussed previously.

With the challenges ahead of us, we have to think on the lean organization and the more

agile and more accountable organization, so that's the analysis we started off.

By far and large, if we take the population that we have currently in our headquarters support

services then we count between 3,200 and 3,500 people. So this is the scope that we

address. What we agreed with our people is that we are going to do it in full transparency

and that's why we actually, we gave the information of this analysis before we started. We

want to do it in full transparency and we need people to build this new organization, and of

course after this we will need to have to buy in.

This analysis will be done by the end of the year and then, of course, the Executive

Committee will decide on the directions we will take and we will start rolling out as from early

next year. So we should see the first signs as from next year on.

DIETER FURNIERE: Okay and how are the reactions or negotiations with the unions, because

it’s for the whole of Belgium, of course, a lot of social unrest with a lot of social action being

announced for the third quarter and how are you heading in those discussions and what are

the main concerns you believe that there are with the unions?

A. Well, basically, I think that you have to make the distinction between two things. First of all, as

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you have already indicated, there is this global situation with the new government and we are

going to have a number of social actions as far as that is concerned. Of course if they make

a translation to accompany them, they pick a number of items that they like and although we

are in full transparency in what we do in Alpha with the unions too, and there is nothing to

discuss because there is nothing we decided and they are aware of that, but one union, and

I have to stress in particular there is one union, who, on the long list of what they want to talk

about is of course Alpha.

A. The strike action of for instance last Friday there was a small strike action on transport which is

not in the scope of Alpha. So we're sure there is not a direct link between the unrest and that

particular plan.

A. Correct.

DIETER FURNIERE: Okay, clear, thank you very much.

THE OPERATOR: Thank you very much and moving on to Andy Jones from RBC. Please go

ahead.

ANDY JONES: Good morning, all. I just had three questions. The first one is following on from

the Alpha plan and I was just wondering if it's possible to kind of get your thoughts around

the costs of your new measures on the parcel side, Saturday delivery, grocery delivery,

parcel lockers. Is the Alpha plan comparable in magnitude to the additional costs you will

incur there?

Secondly on the mail side, I noticed in Q3 there was a strong price mix effect. Is there

anything noticeable going on there; is it something we should expect to go away in Q4?

Finally on the parcel side of things, I remember back to the IPO, you talked about doubling

your share of B2B. Can you update us on how that is going? Is this a reason why we are

seeing a limited price mix effect which accompanying a relatively strong volume growth in

parcels? Thank you.

A. Yes, so in terms of the additional costs in parcels. We are indeed incurring additional costs for

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Saturday deliveries and for the parcels lockers. In terms of the Combo initiative we had

already been spending quite a lot of money in the past. So that doesn't really change

anything. The commercial launch we are doing now doesn't change anything in that

element.

In terms of the Alpha savings, again, no decision has been taken but I should stress that the

additional costs for Saturday delivery and for the parcels lockers are relatively limited in the

great scheme of things. So there is no direct link between the two in terms of one trying to

offset the others and since we don't know what we are going to do in Alpha, I don't know if it's

going to be more, a lot more or whatever than what we spent on the other.

On the second, the price mix, I didn't quite understand if it was on what? If it was parcels

or mail?

ANDY JONES: On transactional mail in Q3, the positive price mix effect of nearly 4 per cent.

A. Okay, I think what happens in those things is that it depends a little bit on the customer mix, it

depends on the product mix which is being used but there is no long term trend as you've

noticed there, some better quarters and worse quarters. We look on a year-to-date and on a

multiyear basis and there, there is no particular big trend emerging there, so it was positive

this quarter but it could very much be a negative in another quarter but the trend, longer term

trend is okay.

A. As far as B2B is concerned, we continue to roll out what we already discussed in the past. So

our ambition, as you stated, remains correct, doubling the share by 2017. Therefore, we had

to tweak somewhat at our existing product, add a number of features what we did, a number

of them within the first release. It was about proof of collection, proof of delivery, multi-colli

and things like that. This release is up and running. We did point out or we did put out

a dedicated sales force and they are out in the market and they start signing contracts, so

I think today, it's fair to say today that it’s still early days but there are no signs that we are

not on our route to meet our ambition by 2017.

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ANDY JONES: Okay. Thank you very much. Could I have one cheeky follow-on: I notice from

the notes to report the mention of continuing from the auxilliary work force who want to have

equal treatment. Is there any date when something will happen with that claim or is it

something that will be ongoing and a risk factor for quite some time? Thank you.

A. It is going to be ongoing because what happens is that there are several different claims and

they all have different times for coming and then there are, you know, interim decisions and

there will be appeals, et cetera et cetera, so I think it's going to be going on for quite a while.

For quite a while, yes.

ANDY JONES: Thank you very much.

THE OPERATOR: Thank you very much and moving on to Christopher Combe from JP Morgan.

Please go ahead, your line is open.

CHRISTOPHER COMBE: Good morning. Just to follow-on to Andy's questions, if we look at the

incremental costs in parcel services, along with the volume you expect, overall would you

think it's accretive to the current margins? That's my first question. Second, with respect to

Chinese development. We are seeing a peak at current levels and also if and when those

revenues fade we see a 35 per cent conversion of revenue to EBIT. Should we expect the

reverse is true as those revenues diminish? Thanks.

A. I think on the parcel side, indeed, what we try to do is make sure that the additional parcels

that we get are accretive to margin, both in absolute terms and in relative terms. Of course,

as you know, our business as a whole, it's the combination of the evolution of domestic mail,

domestic parcels, international parcels, but just one point to mention, in the, on the P&I

segment, there’s about 2.6 million of restructuring costs that affect there. If you exclude that

I think the evolution is even better, so in spite of the money we are spending on the Saturday

and what we are spending on other initiatives, we always try to make sure that at the end of

the day this is profitable growth and not growth which is destroying value for the company.

In terms of the Chinese, I have been saying for quarters upon quarters now that we should

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expect one day to, for it to stop, to disappear. There is quite a lot of rumble in the jungle in

that kind of thing but I have been proven wrong in the past. I fully expect that it will stop one

year and when it does stop it will indeed mean that the contribution that it generated will

disappear, which will be sad but won't be terminal for the company. In particular because the

costs are variable and therefore it will not mean basically ongoing inefficiencies.

CHRISTOPHER COMBE: Okay, thanks. Just one last quick one. With respect to the settlement

payments phasing, drag in the third quarter and uplift in the first quarter, can you remind us

to which period you would describe those payments, is that for a quarter back in 2013, the

half of the year? Just to get some sense, thanks.

A. It relates to the settlement of the previous year, if I'm correct. So it's normally relating to

settlement of 2013, I would assume. What happens is that sometimes there is an agreement

when what countries is structurally positive that they pay also a pre-payment, in a way to

avoid the total money they have to pay, you know, that the other player has to pre-fund a lot

of the activity. So it's always a mix of finalizing the settlement of the previous year and

getting a pre-payment for the ongoing year to, in anticipation of the fact that it is expected we

are a net receiver in that case.

CHRISTOPHER COMBE: Thank you.

THE OPERATOR: Thank you very much. And our next question is from Doug Hayes with

Morgan Stanley. Please go ahead. Your line is open.

DOUG HAYES: Thank you. Good morning, gentlemen. Three questions, please. First, on the

parcel side of the business, excellent growth in the domestic market but we know that some

of your peers have been ramping up their competitive -- their competitive offer in the Belgium

market. Can you comment a little bit on what you see in the competitive environment in the

Q3 going into the peak season in Q4?

A. So, indeed, there is a lot of competition in the market. We know that Deutsche Post, DHL has

targeted Belgium. We know that they intend to shift some of the volume for which we do the

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last mile through our interpostal agreement or through direct agreement with DHL. We know

that they intend to move that towards their own network. They're doing it but very slowly for

the moment. I think nobody wants to make big movements just prior to the holiday season,

so in reality what's happening is that customers do not switch supplier brutally in the last

quarter of the year because they want usually to make sure that the holiday season is as

protected as possible.

So is it going to impact us really that activity and other activities from our competitors in the

fourth quarter, it's probably the worst quarter for big change to happen for a customer. So the

activity there we would expect is more in terms of negotiations and possibly the next year,

again, our reaction to that is to continue to try to improve our offering. Koen indicated, you

know, if we open commercially the Saturday delivery, we are looking at other, the Sunday

delivery and things like that to see if it makes sense or not to do it, so we constantly review

our offering to make sure that we can meet the demands of our existing customers and

potential customers.

A. I think that the only right answer we can have, in of course a changing competitive

environment. We have a nice stake. We know how we have to remain strong in this last mile

delivery, in this excellent best last mile. So we will continue to work on that and to monitor on

the market what's going on over there and to respond swiftly. We already did what we

described earlier. We are going to Saturday delivery and if the necessity is over there, we

are willing and we will consider even going to Sunday delivery to stay ahead of the

competition in this country.

DOUG HAYES: Okay, great. Thank you. Secondly, when we look into the Q4, I realize that there

were about 11 million of one-off charges in the parcels division in Q4 last year. Presumably

this will roll off in Q4 2013, so are there any other cost pressures that maybe we are not

aware of that could impact the Q4 results?

A. No, nothing in particular. Again, we will do what we need to do at the end of the year but there

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is nothing particular. We continue to do some cleaning up in the international division and

that will mean some one-off costs. For Alpha, it would be much too early to record anything

because no decision will have been taken and announced. So there is certainly no massive

plan or massive amount foreseen for the last quarter.

DOUG HAYES: Great, thank you. Finally, you guys, you know, flag that, the limit on your ability

to pay out any special capital returns is on the balance sheet side rather than the actual cash

side. Are you happy to have cash just build up on the balance sheet then while you restore

reverses or are there other things you will think of doing for deploying the extra cash?

A. One of the things, we look at potential to strengthen our business, to develop new activities.

We have been doing that regularly. It's in that light as Koen said that we are looking in

potentially replicating what we have done in Belgium, in Romania but it's still very early days.

We look also at ways to strengthen our international parcels division. If we find the right

acquisitions, I think we will do them but we are not going to rush into acquisitions just

because we have got cash on the balance sheet and it's available. So we will continue to

apply the same standards that we have always applied. But if an opportunity arises, the fact

that we have got cash for both potential returns to shareholders within the limits of our equity

and for acquisitions, will mean that we will make sure we take those opportunities but only if

they are the right ones.

DOUG HAYES: Okay, great. Thank you very much, gentleman.

THE OPERATOR: Thank you very much. Moving on to Matthew O'Keefe with Berenberg.

Please go ahead, your line is open.

MATTHEW O'KEEFE: Thank you. Two questions from me, one on the revenue line and one on

the costs side of things. On the revenue, you set out an interesting chart a few weeks ago

on your prices and stamp still looks quite cheap for 20 grams and pretty cheap for 50 grams

too. So my first question is can you remind us what scope you have to increase your stamp

prices further in the future and perhaps remind me how that mechanism works?

19

And then moving to the costs side of things, you flagged the increase in transport costs in the

current quarter. I wonder if you could give us some sense of whether fuel prices might

represent a tailwind for your transport costs as we look forward and what might become of

fuel costs if current fuel prices stay where they are today? Those are my two questions.

A. Okay, as far as our price system is concerned, you know that we have this framework where

we can increase our price on a yearly basis. That's an agreement that we have with the

Government and it's a price increase that is inflation, inflation plus something that is

dependent on the quality and that we can either immediately use or accrue for the years to

come. Actually, this is the framework that we have. What we did apply in the past is that we

did always inflation plus something and the plus something is, can’t be too big, has to be

reasonable, in order not to tip off the elasticity, so if the price increase is too important that

people start to decrease their volumes. That's why in the past by far and large, we have

inflation plus, a kind of a 1 per cent. That's what we did some years. Of course if inflation is

higher then, you can top up a little bit more than what we can do in the situation of low

inflation.

What we did last year, then the price increase was around 2 per cent, 2 and something,

which was inflation plus 1 per cent. Of course this year the inflation is fairly low and what we

did, well, we kept, the next year inflation or we will keep inflation plus by far and large again

this 1 per cent. So all together the price increase next year will be around 1.5 per cent which

is of course lower than the one we experienced this year which was 2.3 per cent. So this is

the short answer or long answer on what we are going to do.

As far as the reserve that we still have this concerned, there you have to know if you take the

accrual of what we did accrue in the past, then we still have a reserve of 5.3 per cent, so

there is still some room left but we are convinced that it would not be very good and

reasonable to use this reserve at a speed that is too high, especially with this low rate of

inflation.

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MATTHEW O'KEEFE: Okay, understood.

A. On transport costs there, the main components in the transport costs for transporting,

effectively a parcel, one is freight, with air freight, some ground freight. The second is the

terminal dues that we pay to other postal operators for effectively doing the last mile in their

territories and there is the payment we make to alternative distributors, so non-postal

operators for also doing the last mile in their respective countries.

So if you take terminal dues and distribution fees we pay to the alternative, their, you know,

the cost of fuel is a very, very small part of their overall cost structure. So, yes, that will not

give them an excuse to increase but that's not how it's going to work in there. In terms of

freight, you have got two components in there: air freight and road freight. And as you know,

air freight, it's a mix of the pressure on fuel costs or the lack thereof but also on capacity,

economic activity, et cetera et cetera. So it's not just the price of oil, which means that, you

know, as the price declines, they have got one excuse less to jack up the price but on the

other hand you know, capacity in freight, becomes more utilized. That could be an element in

the other direction. So overall, we don't see big impacts on our cost base, whether it goes up

or down or whether the price of oil goes up or down because there are so many factors in

there that usually it's not that noticeable. There is no direct correlation, let's put it that way.

I'm sure if it was to go up enormously there would be some impact but that's not the case

and it's not going to be a massive saving for us either.

MATTHEW O'KEEFE: Okay, got that. Thank you.

THE OPERATOR: Thank you very much. Moving on to David Vagman, BNP. Please go ahead,

your line is open.

DAVID VAGMAN: Yes, good morning. Two questions left on my side. First about the Q4

guidance in terms of mail volume. You implicitly, you stick guiding to a 6 per cent decline.

Why, what does it imply, what does it mean for 2015? And then on the parcel growth. If you

could please break it down, the growth, between e-commerce and the rest?

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My third and last question, how do you think that margins are going to evolve in the coming

years? Thank you?

A. Indeed, the implicit guidance is up to 6 per cent since our guidance is up to 5 per cent in

decline. We have no specific elements that would indicate that we should be much higher

but it's simply going back to the previous two quarters where we had seen an increase due to

specific actions of customers. This quarter was better but we don't have a crystal ball in

terms of volume. We see no new actions, but on the other hand we cannot exclude that that

could happen, hence the caution on the volume and the fact that -- but on the other hand the

fact that we are able to go back to 5 per cent coming from 5.5 per cent.

For 2015, we are not quite ready to provide an outlook on any of the elements on which we

usually give an outlook. That will be done in a later date but I would like to remind you what

Koen has said, which is that in terms of our customers trying to save money and saving

money among other places in mail costs through e-substitution and other forms of

rationalization, we expect it to continue, certainly, into 2015. And certainly not go down

because the economic situation in the country and the help in a way of our big customers

make it that they are very focused on their costs and not quite ready to spend more in

advertising mail and on the other hand willing to find savings in there. So those trends are

there to stay and we do not see any macro-economic reason why it should be different in

2015 and we don't see any indication from them that it should be different, so those trends

are still there underlying.

In terms of the parcels, first thing, the margin evolution. Parcels is a competitive market. We

have been able so far to manage reasonably well, we think, the price and mix, which shows

a small positive whereas in some other countries there are more negatives in there. I think

that's what we will strive to continue to do. We do not see massive price pressures when we

discuss with customers or with potential customers. It is about service. It is about new

features. It is about quality, et cetera. But, of course, you can never exclude the fact that one

22

of our competitors decides that they want to go against us on price. So far they have not

really done it, but you cannot ever exclude that in there.

In terms of growth on the various components, quite clearly, the vast majority of the growth is

coming from e-commerce. The traditional distance sellers are still declining and declining

heavily. The C2C is getting better, as Koen has said, still declining a little bit, so the vast

majority of the growth is coming from e-commerce as one could expect, with some of the big

accounts accounting for a large element of the growth. But we are not really splitting in our

figures, really, between the two.

DAVID VAGMAN: If I may add, do you expect an acceleration because of VPC) going down, so

a positive basis in the coming let's say quarter?

A. As we said, the VPC, not all the VPC (distant sellers), there is some doing much better than

others. I think well known in the industry, it's not so specific but some are doing well and

that's fine. Others are declining very heavily. They're still there and still represent significant

volumes, so even if you lose 15 per cent per year or high double digit, it takes a few years

before you get to zero. So I think we will still have some impact going forward unless they

manage to turn around their business model.

DAVID VAGMAN: And what is it implying terms of growth going forward? Is it fair to assume that

growth might accelerate going forward for parcels specifically?

A. If you take a pure mechanical view, the segment which is declining heavily is getting smaller

and smaller. If all things remain equal, meaning those which are growing very strongly

continue to grow strongly, yes, it will help the growth. But on the other hand, you know, to

what level can e-commerce grow and the catch up which is happening some areas of

Belgium in some parts like clothing etc, which is well documented. There is a moment when

that bit in itself will also start slowing down. We don't know but, indeed, if all things being

equal, the fact that the distance sellers are getting smaller should mean there is less of

a drag. But I repeat it would mean also that all the others are growing at the same rate now

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and it's difficult to forecast.

DAVID VAGMAN: Okay, thank you. That's very clear.

THE OPERATOR: Thank you very much and moving on to Marc Zwartsenburg, ING. Please go

ahead, your line is open.

MARC ZWARTSENBURG: Thank you for taking my questions. A couple of questions left. First

of all, when back on the milk powder impact, can you give us an indication on the impact

year-to-date for milk powder in 2014 on your revenues and your EBITDA? So whenever it

falls away, what amount is involved? That's my first question.

My second question is, can you give us a bit of a feel for the real estate proceeds to be

expected for Q4? Should we expect a bigger number there than last year; can you give us

a bit of guidance there? The results you have shown in the slide for October 2013, the

25 million Belgian GAAP net profit, anything exceptional in there or should we take last

year’s Belgian GAAP net profits for Q4 to be equally spread around months?

Then a last one. Can you give us some feel for what government initiatives are out there that

potentially might be positive or negative? Those are my questions.

A. In terms of not in particular order, I would need to check for real estate. I think it's reasonably

in line with last year. There is no big sale foreseen in this year and there was no big sale in

last year's figures but, you know, it depends sometimes on timing. Sometimes it's a question

of weeks between one year and the other, but there should be no massive impact in there.

In terms of the results per month, we don't disclose results per month. The only one which in

some was discloses is the October figure because it's sandwiched between September and

the dividends element. There were no particular elements in the October of last year, no

particular item in there but, you know, we are not making a forecast for the results of October

this year. It will depend on a variety of factors as usual and on the volume development etc

etc etc. And as you know everything is reasonably long term. We don't have yet an

indication and we don’t give --

24

MARC ZWARTSENBURG: So the October result might be a good proxy for this year, though?

A. I repeat, there is nothing exceptional in the results of last year. In terms of milk powder, I don't

think we have ever gave the profitability. I think we gave the total volume that it was in 2013.

It was what 21 million or something like that, so this year should be a bigger amount because

of that and I think some of your colleagues have done some estimates on what could be the

impact in terms of contributions. I have heard a figure of 35 per cent. We are not confirming

or saying anything but it's, you know, it's slightly higher than what it is in reality. But we are

not giving an exact figure on the contribution of a particular product line.

MARC ZWARTSENBURG: In volume or revenues?

A. Revenues, so 21 million last year. As you know, we have reported that it was growing less fast

this year but it was growing this year and then, you know, if you take the gross margin

contribution, the 35 per cent is on the high side, but it's not completely ridiculous either.

MARC ZWARTSENBURG: And the Government initiatives?

A. Yes, that's of course a quite impressive list. The first thing next to that, it's very early days and

we have to admit that we understand a number of them. Some others are not very clear or

are in between revised already but it's not clear how and when they will be executed.

I can give you a number of them that potentially could impact us, for example, the index

jump. As you know in Belgium we have an automatic increase of the wages if the index of

the consumtion prices hits somewhere a point and normally spoken for next year we expect

to have this indexation which is 2 per cent increase of wages at that time by April. In the

Government agreement it's assumed there will be a jump and so this indexation will not

place next year but the conditions and the why and the how, but actually this could be good

news for us and this is one example.

Another example of an ambition of this laid down in the Government declaration is that there

is the ambition to decrease the employer's contributions for social security to, from 33

per cent to 25 per cent, but that's an ambition that of course is not going to be realized in one

25

year, neither by 2015 so I think somewhere the ambition is set by 2018. So these are the two

things that of course will have potentially an impact on our cost structure.

On the other side of course there are a number of reflections on retirement and retirement

age. That potentially can impact our attrition plans and so that if it becomes clear when and

how that we will have to take into account in our plans. So this is a number of things which

have to do with HR.

Next to that there are a number of decisions or at least indications on our governance but,

again, there, you know that we have kind of a particular governance because we are public

enterprise and I think that the ambition is to bring this type of company completely in line with

what other companies have in terms of governance but I understand that there still is a lot of

work to do before we can reach this what I would call completely level playing field with other

companies that are stock listed.

These are a number of things that we have read in the government declaration but, of

course, we will come back on that when it becomes clear and we will include it in the things

that we do.

MARC ZWARTSENBURG: Did you say that the index jump, so the 2 per cent inflation would not

take place?

A. That is right. At least that's what's announced. But you never know with politicians.

MARC ZWARTSENBURG: Okay, clear. Thank you very much.

THE OPERATOR: Thank you very much and our next question is from Peter Testa with One

Investments. Please go ahead, your line is open.

PETER TESTA: Thank you, just to follow up on that point on the wage indexation, what is your

own expectation; do you think there will be some sort of compromise and to what extent does

that wage indexation also be reflected in other union conversations you had?

A. I think the position of the Government is currently that they want to do what we call an index

jump, so they will pass on indexation. They are quite clear on that and so far it has been

26

wavering from the political comments of the Government. I think it's fair to say that the

unions are in general, and we are not talking about our unions in particular, but unions are in

general extremely hostile to the Government in general and to the measures announced by

the Government in general and I am sure that part of the hostility is also that increase, but it's

much wider than that and there are no negotiations for the moment as far as we know but we

are not part of that discussion of course between the unions and the Government.

The only thing we can say is that from the beginning they would do this index jump and the

current, what is said in the media, is still that there will be a jump of index, the avoidance of

one index jump, basically.

PETER TESTA: Okay and then on the Alpha plan, I was wondering if you could give us some feel

as to what the scope of the cost base under review is. I.e., that you're reviewing that the cost

base is defined as HQ and central functions but just in euros, the gross amount of that cost

base on annual basis.

A. We mention that actually it's -- probably the most important part of the cost structure is the

salary costs. We talk about 3,200 to 2,500, if my last figure is correct, people that are in

scope.

A. Talking about a cost base, depending on, again, 150 million of something like that, to

200 million, depending on what you include in there.

PETER TESTA: Okay and that's more I'd say the salary component --

A. You know, you've got all the elements linked to salaries that would, infrastructure and things

like that. cars and company cars, so those that benefit from company cars and insurance,

et cetera.

PETER TESTA: Right and then on overall costs understanding. You have your annual attrition.

You have the plan on Alpha. If you look over time, do you think it's a general goal to try to

have a similar attrition on your costs base regardless as to what is the source of the Alpha

plan or the attrition of retirement or whatever it may be? Because you are also working on

27

other various levels of efficiency which go outside of these plans as well.

A. Yes, so the plan for the period of the previous business plan which was five years from 2013

was basically a thousand FTEs on average over the five-year period in productivity

improvements and savings and with big years and small years, what we call the big year was

1,200 or more and a small year was around 800 FTEs and, again, what makes the difference

between big years and small years is partially the development of Vision 2020 and the

specific actions that are planned in advance in there and additional measures that we could

take from there. So that's basically our five-year commitment in terms of FTE reductions.

Again, we constantly review those plans to take into account external circumstances in terms

of volume evolutions and other aspects but also, you know, things like evolution of the

technology, et cetera that would help us sometimes accelerate, sometimes find other

solutions, et cetera, so within still the overall framework that we determined last year.

PETER TESTA: Okay, I guess the question was, I understand the thousand on average with

some big years and small years. If you go through the series of small years, I think the end

of this year through to 2015 qualifies in that camp. What do you expect to make up the

difference, are there other efficiency measures, 2020 or outside the group?

A. If need be, we will continue to review that. We always said that Vision 2020 was a little bit

backward weighted, because basically some of the savings would come when all the

components of Vision 2020 are together and, for instance, be able to completely reorganize

the rounds you need not only sequencing of the large format but you also need to have the

mail bag operation or the basic mail bag preparation, et cetera, so Vision 2020 is a little bit

backward weighted and so far, you know, we have taken actions if and when necessary to

make sure we have sufficient productivity improvement to sustain our profits and our

dividends.

PETER TESTA: And the last question, please, is just on the periodical and newspaper distribution

contracts which is delayed as new government considers what it wants to do. Is there

28

a point at which the delays would mean that you would shift out your likely date for actual

impact of this? For example, you said previously that it wouldn't be impacting until 2016 but

given we are now probably delayed until the end of this year, do you think it's likely it will be

delayed until the beginning of 2017?

A. Well, actually, our contract runs to the end of 2016, as you know, so over 2015 there is no

problem whatsoever; we will continue to deliver at the agreed price. As far as the process is

concerned, of course it will be picked up, I presume, by the current government in the days

and weeks to come and they will restart it. Probably it will be almost or it will be possible to

come to a conclusion and a decision before the end of the year, so I presume that in parallel

the Government will start negotiations with the European Commission to see how they can

handle whatever they have to do but it's not due to us how they are going to proceed on that.

PETER TESTA: Yes, I was thinking more in the a worst case scenario they had a transition to

another player, that player would need time to set up and given that delay is going on and

the need for a certain steps at the European Community there may be some lag required of

the contract itself, officially expires at the end of next year.

A. Well, I think it's too early to get any deal on that. I can imagine that a number of parties are

really interested and it's very important and keen for them that this distribution continues to

run smoothly and correctly and that of course at due time they will have discussions about

that and of course we will keep you updated on that.

PETER TESTA: Okay, very good. Thanks for the answers.

THE OPERATOR: Thank you very much. Our next question is from Joel Spungin, Bank of

America, Merrill Lynch. Please go ahead, your line is open.

JOEL SPUNGIN: Good morning, just a very quick one. I wanted to follow up on Doug's question

earlier about competitive environment. I was wondering if you could just tell me a little bit

more about the final mile delivery you do for DHL, what proportion of volumes it currently

represents and sort of what sort of customers you're doing it for, just to give us a bit more

29

color around there, that's, if you know, if DHL did decide suddenly to in-house it all?

A. So actually we receive parcels from two sources of the Deutsche Post group. Some parcels

which are given to us by Deutsche Post as part of the agreements between postal operators

to provide each other with a last mile. In there, the vast majority of customers are relatively

small customers which represent a certain volume but they are relatively individually small

customers.

In terms of DHL, those are more medium size customers in e-commerce. That is commercial

contract between DHL and us. They give us, they elect to give us some parcels and they

have a commercial price with us for that delivery. Those are more e-commerce customers

and more medium sized customers and in there of course what we are trying to do is to try to

contact those customers and to offer them our service in direct, effectively instead of handing

it first to DHL which is then distributing in Belgium through their own way. So how much of

that volume will go into the DHL network is too early to tell. We are in discussion with the

larger of those customers.

The absolute number of parcels is not insignificant but it's not really a huge number. It would

cost us a little bit of growth but it would certainly not be extremely impactful and would not

affect profitability, really. The best price in terms of revenues, it's not the best margin we

make in our portfolio, let's put it that way.

JOEL SPUNGIN: Understood, less than 10 per cent?

A. Yes, yes, significantly less than 10 per cent.

JOEL SPUNGIN: Okay, understood. Thank you.

THE OPERATOR: Thank you very much. We have a follow up question from Dieter Furniere with

KBG securities. Please go ahead.

DIETER FURNIERE: Firstly, on international parcels we saw that recently UPS acquired iParcel.

Maybe could you comment a bit on the competition you see in the international parcel

brokerage.

30

And secondly, on real estate, it was in the press again that you would be putting around 50

real estate assets up for sale but rent most of those back. Could you provide us with the

proceeds you're looking for to receive from these assets and what the impact would be of the

rent on your costs structure? Thanks.

A. So, indeed, iParcels which was a broker, was purchased and so we looked at it at the time but

the price they were asking was extremely high. I don't know how much UPS paid for that

but, you know, I suspect they paid a lot of money but it's their responsibility. Basically I think

what's happening is that some of the larger integrators are recognizing that their express

solution is great, high quality, high speed, super service, et cetera but relatively expensive

and that a number of retailers are looking for cheaper alternative solutions and I think in

different countries they reacted in a different way.

In the US, FedEx is doing a cheaper option. I think the use of alternative distributors and

postal operators could be an alternative, which is the one we are exploiting, but it means also

that probably it means that UPS can offer those options to their customers next to their

higher options.

That in some way doesn't really change the dynamics because it would have to be

distributed through another network, networks which are probably also available to us, so

I am not entirely sure that this specific acquisition changes the dynamics of the industry

except to say that, you know, there is an express market but there is also a slightly slower,

slightly less sophisticated but quite reliable market next to that and this is where we play.

This is where iParcels played and this is where I expect these will continue to play, having

acquired iParcels. It is a competitive environment. It is about service. It's about offering the

right price for the right service and I think certainly the last few years has been relatively

good for us, so there is no reason that should change dramatically.

In terms of real estate, historically, our policy has always been to sell buildings which are

empty. For the moment, with the reduction in the number of mail distribution offices, towards

31

the 60 mail centres, quite a lot of buildings which are being left by mail operators are

so-called mixed buildings, mixed use buildings where you have a small retail office, a small

postal office in the front of house which use, you know a few hundred square metres and

then a big warehouse type of preparation area where the distribution was prepared, which

was much bigger in terms of surface, so as we close down those distribution offices to go

into big mail centres, this remains empty and so instead of having a lot of empty, at the back

of the house or trying to rent out quite a few thousand square metres, which is not really our

business to try to rent out that space, then the policy is to sell the whole of the building and

rent back the small part which is the front house, if we think it's still a attractive commercial

area, so the rent back is relatively limited with the overall size of the building.

How much proceeds, you know, we will continue to have proceeds as we had in the past and

you know, some years you've got bigger proceeds because you sell bigger buildings and

some other years we have got smaller proceeds because we don't have one of those big

buildings but there is no big huge hub coming in positive or in negative in the next years. We

have one big building on sale which we may sell next year but that one is an empty one, one

which we're leaving completely. If we do sell that one, we might have a few buildings more

than anticipated but, again, we can't predict how much it's going to be. If indeed when you

rent back a few hundred square metres you have a small increase. You have an increase in

your overall rental cost but it's perfectly under control and it's very much in line with our

plans, et cetera.

DIETER FURNIERE: Okay, thank you.

THE OPERATOR: There are no questions in the queue. With that, I would like to return the

conference call pack to the speakers.

A. Thank you very much and I think everything is said. We are happy and we look forward to the

fourth quarter. Thank you very much. Goodbye.

THE OPERATOR: Ladies and gentlemen, this concludes today's conference. Thank you very

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much for attending. You may now disconnect your lines.

(12.27 am)