PSTNY - PostNL N.V. (TNTFF) Q4 2022 Earnings Call Transcript
PostNL N.V. (TNTFF)
Q4 2022 Earnings Conference Call
February 27, 2023 5:00 A.M. ET
Company Participants
Jochem van de Laarschot - Director Communications and Investor Relations
Herna Verhagen - Chief Executive Officer
Pim Berendsen - Chief Financial Officer
Conference Call Participants
Frank Claassen - Degroof Petercam
David Kerstens - Jefferies
Stefano Toffano - ABN AMRO-ODDO BHF
Henk Slotboom - The IDEA!
Marco Limite - Barclays
Presentation
Operator
Good morning ladies and gentlemen. Welcome to the PostNL Q4 and Full-Year 2022 Analyst Call. [Operator Instructions]
Now, I would like to hand over the conference call to Mr. Jochem van de Laarschot, Director, Communications and Investor Relations, PostNL. Please, go ahead, sir.
Jochem van de Laarschot
Thank you, operator. Good morning everyone. Thank you for joining us today. With me here in the room are Herna Verhagen, our CEO; and Pim Berendsen, our CFO. As usual, we will start with a presentation and take you through the slides also available on our website and in the webcast. After which we will open the floor for your questions. Herna, over to you.
Herna Verhagen
Thank you, Jochem and welcome to you all. I’ll start on Slide 4. The year 2022 turned out differently then we had all expected it at the end of 2021. After a few years that were dominated by the pandemic, we expected to start to see recovery and to gradually return to more normal situation, macro economically and of course also our operating environment.
The war in Ukraine changed everything, as well as creating terrible human suffering it has raised safety risks and uncertainty within Europe to levels not yet seen this century. The war, now ongoing for more than 12 months also deeply impacted local, regional, and global markets. High inflation and deteriorating macroeconomic conditions put real pressure on consumer spending through the year. Meanwhile, most countries were recovering from the pandemic and its impact on the global supply chain. The combination of the two negatively impacted e-commerce, putting great pressure on the sector and also on PostNL, leading to lower results than we had expected and hoped for.
We saw labor and fuel cost increase to levels we did not see before with total organic cost increases of around [€185 million] [ph]. That's around €138 million, [185 relates] [ph] to 2023. While overall Parcel volumes were down by over 10%. In this environment, we took swift and firm mitigating actions throughout the year to navigate this turbulent environment.
We skilled our network capacity and optimized routes staffing and fleet. We also reduced indirect cost at Parcels and looked critically at overhead costs by delaying projects and feeding staff vacancies. By this, we were able to mitigate about €45 million of the impact.
Bottom line, however, we delivered a normalized EBIT of 84 million, significantly below our initial outlook range. Through strict cash control, free cash flow came in at €40 million. And based on the leverage ratio of [1.9] [ph] and our dividend policy, we have proposed a dividend for the year 2022 of [€0.10] [ph].
Then over to the challenging macroeconomic environment and industry dynamics. And some of the elements I mentioned, of course, are related to 2022, and we will see them back in 2023 as well. 2022 was a year with challenging macroeconomic and operating environment, impacted by many factors. Already mentioned the war in Ukraine, which impacted local, regional, and global markets.
On the other hand, we also saw rapid high levels of inflation, putting real pressure on consumer spending throughout the year and in the end, also real pressure on the e-commerce market volumes. With the slowdown in e-commerce volumes, we're now operating in a market that is characterized by overcapacity and that is highly competitive, while consumers continue to demand high quality and evolving service offerings. These dynamics continue to impact our operating environment going forward. And also for the year 2023, we expect ongoing volatility and uncertainty.
If we look a little bit further ahead and look into the fundamental drivers of the e-commerce, the expectation of growth is unchanged or in other words, the e-commerce market has a strong potential for future growth. Particularly if you look into online presentation, online penetration, which is an important driver behind e-commerce growth, 19% at the end of 2022 shows that the market is still immature and offers a lot of potential, and the trend going forward is upwards.
In the graph on the right side of this slide, you see the [Euro monitor] [ph]. Based on their extensive research, assumes that the growth part in online presentation will resume going forward. Of course, we saw a peak in e-commerce penetration at the time of the pandemic, and we were in lockdown. And after that, when society was opened, levels have come back a bit, but overall levels are still significantly above the level we've seen before the pandemic and show an upward trend.
The second important driver is retail spending. And once the macroeconomic environment starts to turn and the timing of this is, of course, an uncertain factor that will be an extra growth factor for the upward trend in e-commerce. These are the main drivers behind growth in the market that underpins our confidence in future growth going forward and underpins our strategy.
If we then look into our strategy. That strategy remains to be the leading logistics and postal service provider into and from the Benelux with three important pillars. Of course, Parcels, which is managed for sustainable growth; Mail, which is managed for value; and Digital Next, which will support our business performance in cost and revenue, but also is an important factor in increasing customer satisfaction.
The year 2022 did show on our strategic objectives, important improvements, and important elements. In customer value, we saw 33% of highly satisfied customers. We had 98% of delivery quality Parcels in the Netherlands and 91% with Mail in the Netherlands. By this time, we have around 600 automated parcel lockers by the end of 2022, 517, and 66% of the users – 66% are active users of the PostNL account, an almost 8 million unique users of that PostNL account at this moment in time.
In employee engagement, we saw a [light] [ph] decline to 81%. The absenteeism in 2022 was higher, partly because still of COVID, partly because of people needing to go to the hospital which they couldn't do during COVID. And that's what you see in absenteeism. As you do know, we had, of course, we made a pension agreement just before the end of 2022, which is positive for PostNL, and Pim will come to the highlights of that, but also positive to our employees with 10% pension indexation. And of course, the CLAs are secured, which was important for PostNL.
In the environment, we did lots of goods. We did see that 22% of our last mile is now emission-free. We had a 25% improvement in our carbon efficiency. And of course, we offset annual remaining emissions. So, we are net zero. That was also seen by externals, for example, in the prices we received around environment.
As said, 2023 is expected to be a difficult year, partly because of the lack of Parcel growth, partly because of the still expected high organic cost. Nevertheless, we do expect that market continues to grow, when economy recovers, and hopefully, that's as of 2024. That means that we're well-positioned to resume our growth trajectory at Parcels and maintain our solid performance at Mail in the Netherlands.
For the year 2023, we expect a normalized EBIT of €70 million to €100 million. There are a few important elements underneath. As said, we still expect high organic cost, Pim will come back to that. We expect a slight decline in the amount of Parcels. On the other hand, we do see continued growth after 2023 and that makes the year 2023 for us so important to set the organization totally right. And that's the reason why we also announced an additional plan to do 25 million to 30 million cost savings as of 2024 by the reduction of 200 to 300 full-time equivalents in overhead and other indirect costs, mainly at Parcels.
These will deliver a saving of 25 million in 2024, which will grow to 30 million in 2025. And of course, we will continue to adapt our organization with price adjustments. We'll give you some insights in what we did for the year 2023, scaling our organization to volumes, and of course, also further efficiency programs.
Beyond 2023, with all the actions taken in 2023, we expect a gradual margin improvement, mainly at Parcels, partly because of the e-commerce growth with, of course, our flexible investment program. Secondly, we keep our mill accessible, reliable, and affordable. And we're building on our digital platform, our integrating customers, consumers and solutions to simple and smart digital journeys.
What the exact gradual margin improvement will be in 2024 will be detailed later in the presentation. A very difficult year, by far, not what we expected it to be. Still a difficult year ahead of us in 2023, while we took the necessary actions to be fully ready and fit the moment the market will start growing again.
And now, I’ll hand over to Pim to give you the highlights of 2022 and make a first step to 2023.
Pim Berendsen
Thank you, Herna. And we move to Slide 11. And quite clearly, the year turned out different than we expected at the outset. And where we did expect growth, it turned into volume decline in Parcels. Obviously, fundamentally changed market circumstances as of 24th of February of last year. And I think we dare to say that we've made the most of the very, very demanding market circumstances, and I'm going to talk you through the elements to indicate that.
If you look at the organic cost developments. When we were at the outset of the year, we expected 70 million of organic cost increases, part of which we were already not expecting to be able to put through in prices. That 70 million turned into 135 million of organic costs, which is a 65 million additional impact, which basically in the year 2022 had an effect of 80 million gap between organic cost increases and price increases. Obviously because of the fact that prices were fixed prior to the steep increases in inflation, fuel prices as of February 24.
In the beginning of the year, coming out of COVID, we did expect growth in Parcels on the back of the same market drivers that Herna just discussed. Consumer spending was going to be up. Online penetration was going to continue in the right direction, and that projected growth. Well, that growth turned into a 10% volume decline with roughly speaking, 60 million items less than we predicted at the beginning of the year, amounting to 100 million of assumed EBIT impact. Obviously, that decline is completely driven by lower consumer spending as a consequence of the uncertain market circumstances.
Mail in the Netherlands, we projected an 8% to 10% volume decline, which ended up at 8% at the better end of the range. And I think all-in-all, Mail did a very good job also realizing the cost savings plans as we projected them to be. Clearly, we've done our utmost to offset and to compensate those negative elements in our business model throughout the year.
And we managed to mitigate 45 million of these elements through different measures within Parcels predominantly scaling back operations, reducing the routes, taking out sorting capacity, and all different type of measures also focused on indirect costs in the year to mitigate as much as we could the elements of lower volume and higher organic costs.
That amounts to 45 million of mitigating actions, obviously, separately from the cost savings within [Mail] [ph]. And that then all-in-all, resulted in the normalized EBIT for 2022 of 84 million that you've surely seen.
If we then look at the fourth quarter, we look at it as a solid big peak season operationally very well executed against very good quality turned in 60 million of normalized EBIT and 79 million of free cash flow, where free cash flow is up in comparison to last year. And normalized EBIT, given the elements we just discussed is down.
I think in Mail, the volumes were more or less in-line with expectations. Ex-COVID elements in 2021, it is actually a flat result in comparison to Q4 last year. Parcel volumes were down, but from an operational perspective, we delivered strong performance, but we're not able to fully scale down the organization as labor markets remain to be tight, and we had to ensure our flexibility and service levels remain high in peak season.
From a labor perspective, we reached an important milestone by reaching the agreement with the new collective labor agreement from April 2022 until March 2024. And that has been applied retroactively, meaning that the full impact for 2022 also from April 1 to December 31 is visible in the Q4 numbers with a total impact of 35 million.
In order to further de-risk the balance sheet and improve the position, the financial position of PostNL, we've managed to conclude a very important pension agreement with the pension fund further de-risking the pension position, which means that as of the first of January, there's no top-up payments anymore changed into a defined contribution scheme, which also means that from now on, what we will account for in the P&L and the balance sheet will actually be the cash cost of the pensions and no specific IFRS component anymore.
Furthermore, that deal resulted in an improvement of PostNL's financial position of roughly speaking 20 million because of the reduction of the – on the unconditional funding obligation. Well, there's also some technical accounting classification elements related to the pension deal that I'll discuss a little bit later on.
On Slide 13, we'll look at the segment of Parcels in the fourth quarter, realizing 24 million of normalized EBIT in comparison with [55 million] [ph] the year before. As said, on the back of a [5.4%] [ph] volume decline corrected for COVID that was 3.8%. Cross-border activities still suffered from difficult market circumstances in Asia in comparison to Q4 2021. But we're on a more positive run rate basically throughout Q3 and Q4 of 2022 in comparison to the first part of 2022. And as such, indicates some positive momentum in that area. Those were the key points on Parcels.
If we move then to the Parcels bridge on the next slide, Slide 14. There you see the move from the 55 million of last year to the [24 million] [ph]. The big driver there is the 21 million volume development, positive price/mix increases and favorable mix effects as well. Organic cost increase is very, very significant in this quarter and actually the entire year, 27 million. Volume-dependent costs obviously goes the other way.
Other cost indicates the savings that we've realized by taking operational efficiency improvements and basically on all operational efficiency drivers, we've done better than last year. And in other results, also you see that the other businesses, not the volume-related elements, but logistics, Belgium and transportation units have also been hit quite significantly by the changing market circumstances.
If we then move over to Mail, then we are actually quite happy about Mail performance in the fourth quarter, strong performance the way we look at it, a result of 60 million in comparison to 66 million last year, but also with the delta related to nonrecurring [COVID] [ph] of 6 million, so actually contributing a flat result ex-COVID, which is, in our view, a good result, also driven by the step-up in cost savings, realizing the total ambition of 27 million of cost savings in the year of which 11 million are saved in the fourth quarter.
Volume declined by 8.1%, corrected for nonrecurring [COVID] [ph] items, the volume development was 6.5%, obviously driven by ongoing substitution. The bridge of Mail on Slide 16. The impact of volume decline is 25 million on the EBIT, slightly negative price mix effect.
Obviously, positive price effect offset by less favorable overall mix. Organic cost increase is also quite high within Mail. And in other cost, you find the cost savings, including the positive results on bilaterals and nothing specific in other results. So, down 6 million or 7 million, but as a corrected for nonrecurring profit flat in comparison to last year and we're happy with the performance of Mail operationally and financially in the fourth quarter.
If we then move to the second financial business driver, that's the cash flow in the fourth quarter. Our free cash flow in Q4 came in at 79 million, which is an increase of 14 million, compared to Q4 last year. Let's say, there is no pension deal elements in the cash flow bridge up to the point of the free cash flow before exceptionals. So, there's the settlement payment transitional plans.
There, you find the 28 million because part of the pension deal led to a change in the payment schedule by which we've now paid 28 million in the fourth quarter rather than the [16 million] [ph] per year that you might recognize from the past. And there are still one payment to be made in the first quarter of 2023, and then that is all done and settled.
If we look at the full-year cash flow. The bridge from normalized EBIT to free cash flow from 84 million towards a 40 million free cash flow for the full-year. Obviously, also there, you find the settlement payment, transitional plans of 28 million. So, the bridge actually goes business-wise from 84 million to 68 million, a fair amount of normalizations in EBIT in this year that we do not expect to see back in 2023.
Depreciation amortization more or less in-line with last year, CapEx the same, I think, again, much focus was said on strict working capital management, which helped protecting the balance sheet. And all-in-all, a good performance on cash, I think.
Slide 19, it's kind of a technical explanation of the accounting elements related to pensions because on profit for the period, you might have seen – and also on operating income, a quite significant loss. That loss is completely because of accounting elements related to pensions. That does not affect the equity nor does it affect the total normalized comprehensive income because, let's say, the hit on operating income is reversed in other comprehensive income. But at first glance, operating income looks a bit strange. So that's why we've included the reconciliation of that on this specific slide.
If we then go and look at the balance sheet, there you'll find in a similar setups before the composition of the balance sheet, but also the development of adjusted net debt. Our debt went up, roughly speaking, by 260 million, obviously, as a consequence of lower performance, but also because of the first tranche of the share buyback and the dividends paid within the year 2022. Pension liability showed the impact of [6 million regular soft] [ph] pension settlement, 12 million additional payments, and 20 million release of the liability, which is actually the real improvement of the pension deal on the balance sheet.
Obviously, next to the fact that going forward, we'll only have the pension cash out as pension costs reported. And as such, by managing the cash flow, the balance sheet carefully also during the year, within that very difficult market circumstances, we managed to keep the leverage ratio below the 2x and ended up at [1.9 billion] [ph]. And from there, it is a logical step to the dividends, the dividend policy.
Obviously, the financial framework indicates that we steer for a solid balance sheet, aiming at a leverage ratio of adjusted net debt over EBITDA not exceeding [2] [ph], while we managed to stay within those boundaries. And that's also why, given the dividend policy, we propose a dividend of [€0.16] [ph] per share, of which [€0.14] [ph] have already been paid. So, final dividend will be [€0.02] [ph] if approved at the AGM.
In 2022, we executed a first tranche of the share buyback program with the objective to dilute the impact – to mitigate the dilutive impact of dividends over 2021, 2022, and that's been done. Obviously, given the more uncertain circumstances, particularly in 2023, we have decided to postpone the second tranche at least for now. And again, we'll reconsider whether or not we can do something about it on the back of the capital allocation funnel that we shared with you before.
First and foremost, we need to be able to invest in the business to focus on realizing our strategy, making sure our businesses are in the best possible place in relation to competitive tensions, accelerate our digital transformation, make sure that we pay a good dividend that is a function of the operational performance. We'll consider M&A portfolio, if there's room left. And if there's excess cash again, we'll consider and make the same judgments as we've done when concluding the share buyback in the first time around. So, for now, it's postponed to uncertain circumstances take data from us.
And then I think, Herna, we go back to you for a first view on 2023, and then I'll take over with more financial details later.
Herna Verhagen
Yes. Thank you. Move on to Slide 24. We already explained why we're confident in that growth path will resume and that we are well-positioned in the strategy we're executing at this moment in time and the extra plans also have a positive improvement or have an improvement on the performance as of 2024. 2023 remains a year with a volatile macroeconomic environment and therefore prolonged uncertainty. That also means that we've taken additional measures to strengthen our foundation.
As said, the fundamental growth drivers of the long-term upward trend in e-commerce are unchanged. And therefore, we're confident that that long-term e-commerce growth perspective, and also our position as market leader in the Benelux can be maintained. Our strategy helps us to navigate through these challenging times on the one-hand and on the other hand prepare for the future.
In getting – in strengthening our foundation, we invest further in sustainability in digitization, in labor model, in quality, and of course, also in our network. At the same time, we take all the necessary adaptive measures in which we, of course, align our organization to the volume we expect in which we make the organization more efficient and effective.
On top of that, we announced today an additional plan, an additional plan to make sure we are well-positioned for once the economic conditions improve and to secure our position in a competitive landscape that also resumes – to resume our growth past with, of course, an improvement of our margin as of 2024.
To give you a little bit of insight in that additional plan to reduce costs, we're on Slide 25. What we did say this morning is we will add to the plans we already have in our budget, a reduction of 200 to 300 full-time equivalents in overhead and other indirect costs mainly at Parcels. The result in additional cost savings are on top of our regular cost-saving program we run at Mail in the Netherlands, and on top of all the other adaptive measures we have implemented will be 25 million of cost savings in 2024, and expect it to have its full run rate in 2025 with a cost saving of 30 million at that moment in time.
For this, a total of €20 million in costs, mainly restructuring provision is necessary, and that is what you will see back in the results of 2023. In addition, we will increase CapEx in 2023 by 10 million to invest and secure our customer value and quality. A year, 2023, a year with volatility, which we take lots of extra actions, including reduction of full-time equivalents, delivering cost savings and therefore, margin improvement as of 2024.
To give you more insight in the bridge from 2022. First, I'll do the outlook, and then we'll go to the bridge. On [Slide 26] [ph], you'll find the outlook of 2023. What you find over there is that we have a normalized EBIT is of €70 million to €100 million. Next to that, a normalized comprehensive income, the basis for our dividend policy of €40 million to €70 million and a free cash flow of €10 million to €40 million.
We assume that the current challenging and volatile macroeconomic environment continues in 2023, that we, of course, resume our growth path after 2023. We expect economic conditions to improve over time, and this together underpins the longer-term upward trend in e-commerce. The additional plans we have announced today will ensure that we are well-positioned to resume that growth trajectory.
Through our strategy and proactive approach, including all the additional plans focused on head office and indirect costs at Parcels, we expect a step-up in performance beyond 2023. For 2024, that means a margin improvement of at least 200 basis points that will be visible, particularly at Parcels with further upside potential dependent on economic conditions.
With this, we expect a step-up in EBITDA that will be around 20 million higher than normalized EBIT as a result of the increase in demonetization and amortization. Our dividend policy remains unchanged. And we aim to pay a dividend that develops substantially in-line with our operational performance. Then do the transition from 2022 to 2023. Pim?
Pim Berendsen
Yes. And there, we look at, kind of how do we end up with the composition and with the outlook – bless you, Herna. And there, we, let's say, from the normalized EBIT of 2022 towards the outlook range of [70 million to 100 million] [ph] there are a few important markers that I want to spend a bit of time on. Here you see the improvement of the pension agreement of lower pension expenses that is visible in PostNL [order of 75 million] [ph]. That also means that we are still – and that's all driven by the very complicated market circumstances, assume business performance of Parcels, and predominantly Mail to go back, compared to the levels of 2022.
In Parcels, that is driven by a low single-digit volume decline that we expect also taking into account some potential loss of market share in-line with what we've seen in 2022. Obviously, also, there is price adjustments. About the price adjustments that we've managed to put through to our clients, don't compensate the entire organic cost increases. I'll show you later how big of an effort we've done to up the prices and compensate as much as possible of that organic cost increase.
You see a far bigger step-down in Mail performance. And that might seem bigger than expected, but I think it's important to understand here that price increases within Mail normally help to offset volume decline. Roughly speaking, half of price increases, half of volume decline is compensated by price increases in-line with our moderate price policies.
Now that entire price increase is used to offset organic cost increases and as such, does not contribute to part of the volume decline. That drives specifically from 2022 to 2023, this step down in performance, which we obviously won't see back from 2023 to 2024 again. Then the cost element of the restructuring plans that Herna just talked about is 20 million for the combination of restructuring costs and additional costs in relation to the changes that you also see. And then you'll end up with the 70 million to 90 million outlook range as we just presented to you.
I think important to look at Slide 28. To get a better understanding of the big impact of organic cost increases from inflation and those will continue from 2022 to 2023 and actually increase in comparison to 2022. So, all-in-all, we expect organic cost increase of 185 million, roughly split between labor and other cost elements like transportation, electricity, and cost developments in other businesses than our Mail and Parcel businesses. By huge commercial efforts, we're able to offset a very big component of that 185 million, but not fully.
And the not [absorb component] [ph] is roughly speaking, around about the 30 million mark, that also obviously impacts the EBIT forecast for 2023 and is included in the outlook we just discussed. So if you look back at the combination of 2022 and 2023, we're actually looking at an impact on EBIT of more than 100 million of organic cost increases that could not be offset by pricing policies. And that's obviously a function of how contracts are set up.
The moment that those inflationary elements kicked in, and also the competitiveness in the market in which we operate. We believe it's actually a huge fit to have that impact on prices as this slide indicates. At the end of the day, get short of the impact of organic costs and as such, an explanation of a step down in profits.
On Slide 29, there is the quarterly split that you also recognize. So, it is a year in which the fourth quarter will be very important, but at the same time, business-wise, we'll be able to show positive comparables in comparison to last year as of Q2 onwards. That's what the dotted line indicates with Q2 because of the fact that we – in terms of the planning of the restructuring expect to be able to take a restructuring provision by Q2, the actual expected number is down, but business-wise, we're able to see improvements as of the second quarter in comparison to last year.
Then to the last slide. As said, 2022 is completely different than we expected on the onset to be with serious implications on PostNL, but also on our competitors and clients in this e-commerce market space. 2023 will be a challenging year. At the same time, we're confident that we have the right strategy. We're confident that longer-term growth will continue on the back of GDP growth and online penetration.
And in the meantime, we're doing everything we can to mitigate as much as we can, those negative elements to protect the balance sheet, to take all necessary measures between the right place, competitive wise, and as an employer to benefit from the growth when it will return. And as I said, there's no doubt in our minds that it will come back at some point in time. And in the meantime, we're taking all adaptive measures that we can think of.
Thanks for now. Jochem, I think we go back to you.
Jochem van de Laarschot
Yes. Thank you. Operator, please open the floor for Q&A.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from the line of Frank Claassen from Degroof Petercam. Please go ahead. Your line is open.
Frank Claassen
Yes, good morning. Two questions, please. First of all, on the assumption of low single-digit volume decline for Parcels. Could you roughly indicate how much you think the market overall will do and how much is due to market share loss? And could you also elaborate why you've lost market share? And then secondly, could you help us on the Mail savings, the programs you've already installed? How much is still to come in 2023 and 2024? Thank you.
Pim Berendsen
On the first point, Frank, thanks for your questions. I think overall, we do expect a market growth of well, zero to middle single-digit increase. If we look back at market share development in 2022, we've seen a market share loss of around about 2% for the full-year, and that's also what we expect to continue going into 2023.
Obviously, on the back of fierce competition, temporarily overcapacity in the market because all parties, we're expecting growth to come that overcapacity is looked for to be utilized sometimes with price points that we don't think are appropriate for the longer-term and that drives a little bit of market share loss, obviously, not fundamentally impacting the market position that we have still being, by far, the biggest in the market. So, that's how you end up with kind of the low single-digit volume decline number.
Herna Verhagen
And when it comes to Mail savings, we expect significant savings in 2023 of around €47 million. And what we – we didn't give that number for 2024 going forward. What we normally do, and that's what we will do this year as well is, of course, we develop our cost-saving plans. Those cost saving plans are partly, of course, already implemented in 2023 will partly be implemented in 2024. You can think about a few of the big programs this year or still, for example, reducing demand of locations.
We're also working on a reduction of how we steer our organization within Mail Netherlands, but also looking into increasing our hours – the amount of hours in contracts of our employees, which in the end makes it more easy for us to do it efficiently. So, part of the programs of 2023 will continue in 2024. Some new ones will be added, and those will be developed in year 2024 and then will help, of course, the savings in 2024 and probably also the years ahead.
Frank Claassen
Okay. Thank you very much.
Operator
Thank you. We’ll now move on to our next question. Our next question comes from the line of David Kerstens from Jefferies. Please go ahead. Your line is open.
David Kerstens
Thank you. Good morning everybody. I also have two questions, please. First, on the pension agreement. Can you explain how that actually came about? I think you highlighted that the pension went up by 10%, you go from [define benefit to define contribution] [ph]. So, I was wondering what is the cash payment that is now included in EBIT and in your cash flow guidance for 2023? I think initially, you guided for roughly unchanged payments. But given that you've now come up much lower than what everybody was expecting, does that cash payment has that increased, compared to previous expectations given the fact that you paid 10% more? And also that you go to a DC scheme, which I think is less attractive than [DB] [ph].
Then the second question is around the share buyback. You put it now on hold. I was wondering to what extent are you limited by the large shareholding of your largest shareholder, close to the 30% threshold. And how will that situation change going forward that will lead to a return of share buybacks in the future? Thank you very much.
Pim Berendsen
Thank you, David. A few points on pensions. How did it come about? And what are the implications? I think how did it come about is that, let's say, for many reasons, the specific accounting treatment of the setup of the fund and all the arrangements from an IFRS point of view has been complicated. It has been complicated also for you as an analyst community as an investor to understand, it makes comparisons with other companies more cumbersome. And that's also why we, over time, have been very explicit, okay, what is the cash component of the pensions, what is the IFRS charge of the expense, what are the differences and all of those differences you can find in the PostNL [order lines] [ph].
There was momentum to try to do this given the fact that the pension fund had a very high coverage ratio. From that coverage ratio, there was from a coverage ratio point of view, room to index the pensions and the entitlements of active people more than what we agreed to in contract. So, on the back of the arrangement that was in place, there was a maximum indexation possible of 4%. If that 4% needed to move up without the scheme being changed to defined benefit, then would have had huge implications for PostNL's EBIT.
Obviously, I didn't want to accept those and I try to find the momentum to fundamentally change the agreement, which we successfully done, leading to an indexation for the pensioners of 10% becoming defined contribution, getting rid of the top up payments and getting back 20 million that immediately limited the net debt position or net debt position of PostNL's balance sheet.
And from now on, our pension expense will be the same as pension cash out more or less in line with the pension cash out that you've also seen over 2022. So, we're not going to pay more because of this change. To the contrary, we've gained 20 million and we've de-risked future top up payments.
And lastly, in order as a change in pensions in the Netherlands going on and that needs to be implemented by the first of January 2027, and we've also made a principal arrangement on how we would do that pension transition, also on a cost-neutral point for the employer.
David Kerstens
That's amazing, but can you explain why the pension cash out will be more or less in-line with 2022? Because it sounds like it should become more expensive, right?
Pim Berendsen
No, because, let's say, the pension arrangement has – is the same. So, the threshold on which the salary given pension is the same. The contribution levels are the same. We've just taken out some of the DB elements that made it a defined benefit arrangement, they are no longer there. So, also the employee has not suffered anything from this nor are we going to pay more. We're going to pay the same per individual as we've done in 2022.
David Kerstens
Yes, plus the 10% indexation?
Pim Berendsen
No, that is not an indexation on, let's say, future payments. That is an indexation on the entitlements that are built up over the period to the first of January 2023. To simplify things, if I was a pensioner in the pension fund, and I did get in January 2023 a pension, which basically was 10% higher than the pension I got in December 2022 funded by the coverage ratio of the funds, obviously, going back then from 140% coverage ratio [to 132%] [ph] or something like that.
Herna Verhagen
We can't see your face. So, is it clear or still questions?
David Kerstens
I probably still have more questions. What is the actual contribution now then?
Herna Verhagen
Around [80] [ph].
Pim Berendsen
Around 80 million. I think in the back [indiscernible], there's the reconciliation of the pension expense with the pension cash and there you can find it. So hopefully, I got the number right. The second question was about share buyback and whether or not there is a limitation because of the size of the [indiscernible] stake, well, that did not play any part in our considerations, honestly. That was already a factor at the first tranche when they already also had a quite a significant market share – sorry, shareholding.
So, the arguments to postpone this are given the fact that we've ended the year at [1.9] [ph] leverage ratio in very uncertain markets. And it's, in our view, not the right time to start that second tranche of share buyback, but nothing to do with the [indiscernible] share.
Herna Verhagen
And what is important for us in 2023 and the years ahead is to stay, of course, below the limit of the 2.0 leverage ratio and with all the actions taken, a share buyback doesn't fit into that important element.
David Kerstens
Thank you very much, Herna.
Herna Verhagen
Welcome.
Operator
Thank you. [Operator Instructions] Our next question comes from the line of Stefano Toffano from ABN AMRO - ODDO BHF. Please go ahead. Your line is open.
Stefano Toffano
Yes, good morning everybody. So actually, quite a few questions, but I will try to be limited to say, three. So, maybe the first question is on the 200 to 300 FTE. So that's obviously quite a big gap to 200 or 300, but we have a fixed restructuring number. So, maybe the first question is, what would it make – will it be more towards 300, more towards 200 or [indiscernible] keeping it flexible dependent on how the macro and the market and your business will develop? So that's the first question.
The second question is, maybe looking out towards 2024 and the margin improvement because obviously, you say we assume that the market at some point will go back to grow, but how are we to think about your margins, let's say, assuming a stable market. So, not assuming an improvement of the market, how do we have to look at your margins going forward after 2023 so for let's say, 2024 and 2025.
And maybe the last question is, I mean you're having very be very close to the 2.0x net debt-to-EBITDA and if I look at the outlook for 2023, I mean, I fully appreciate the bottom-up explanation. But just – I mean, thinking about, okay, so 2023 will have pressure on the top line. We'll have higher costs, additional CapEx of 10 million, additional cost and you still get to a free cash flow or 10 million to 40 million.
It seems you have to run a very, very tight ship not to get over that 2.0x on your leverage right. So, I don't know if you can maybe help us to understand what kind of flexibility you have to make sure that you do not reach that? And maybe related to this one, apologies, but related to this one. So, the reason of the 40 million cash flow this year was also because you didn't pay any taxes due to deferred DTAs. If you can remind me how much of the DTAs, unutilized DTAs are left. So, maybe assuming this, kind of normalized EBIT, we won't see any tax cash out for this year as well? And is that this included in the 10 million to 40 million cash flow? Apologies for all the questions, but thank you for your patience.
Herna Verhagen
I'll take the first, and then Pim will take over. When it comes to the 200 to 300 full-time equivalent, it's a big gap, and we do have a fixed restructuring number in the sense that the positive impact of 25 million. The reason for having that bandwidth is that not all of the cost savings will come through the reduction of full-time equivalents. The biggest part will come through the reduction of full-time equivalents, but not all. And that's the reason why we gave a bandwidth.
We still have to develop the plans. Of course, we know the directions in which we – where we want to find the full time equivalents. Nevertheless, plants still have to be made, need to be ready before the end of May to have the reorganization fully implemented by the end of the year, but the reason for the gap is the fact that not all will come from restructuring biggest [part well] [ph].
Pim Berendsen
Then on, kind of the number of basis points increase what we have said as part of the outlook slide, is that we expect more than 200 basis points increase on the back of the measures that we take and gradually improving market circumstances. If you look at the 200 basis points, it's actually 300 basis points roughly in Parcels, 100 basis points in Mail. And because of the mix, that turns to a 200 basis point improvement in total.
So, both segments will contribute to the improvement of margins. Mail, as said, because of the fact that the big gap between organic cost and price increases will not be there in [2024] [ph] the step-up in cost savings, we're comfortable about – and in the Parcel side, there is the element where the biggest impact of the cost savings will land. And as such, they contribute from the margin contribution is driven by those cost-saving measures as well.
So that is assuming a level of growth to return. We're confident that, that growth will return. If it is all a status quo and let's say it stays at the level of [23 million] [ph] then roughly speaking, other things being equal, you can calculate that it's actually a little bit more, roughly speaking, 100 basis points of contribution coming from the measures alone. So that is, I think, the answer on question two.
The leverage ratio, yes, we're running a very tight ship, and we have been doing that already for quite a while. If it is about the balance sheet, working capital phasing of investment decisions and that's why we've ended up with [1.9] [ph] because that also was not a given the big impact on costs and loss of volume that we just talked about. So, we continue to monitor that. We continue to manage quite rigidly our working capital positions.
And yes, we expect on the back of the numbers that we've discussed to be able to maintain a debt position below the 2x. If market circumstances deteriorate, we'll obviously look at all the elements that make up adjusted net debt, which also includes lease additions and what have you, and we'll find ways to offset or compensate if profit numbers drop through the balance sheet to try to keep it under [2x] [ph]. So, we're running a tight ship. It is, well, 1.9 is close to the 2, but we still expect it to improve a little bit in 2023.
And on the tax side, I think the easy answer is that, roughly speaking, all tax losses in relation to Germany and Italy have been used to the extent that we could use them over the past period. And that's also why we do expect a tax payment, tax cash out in 2023 as part of our free cash flow expectations, which is obviously included in the free cash flow guidance that we've given. If I've not missed one, I think those were the four questions, Stefano, that you’ve asked.
Stefano Toffano
Yeah, exactly. Thank you very much.
Operator
Thank you. We’ll now move on to our next question. Our next question comes from the line of Henk Slotboom from The IDEA! Please go ahead. Your line is open.
Henk Slotboom
Good morning, Pim and Herna. I'm trying to break my mind on something where you need to explain me how it works. If I look at Mail, you've done a fantastic job there in keeping the underlying results more or less unchanged, if we filter out the COVID impact. There was a volume decrease of 8%. There was no room at least as far as the [USO] [ph] is concerned to increase tariffs. So, the only tariff increases we've seen are in the, call it, the nonregulated part of your business. And still, they managed to keep their results unchanged.
If I look at Parcels, where roughly 80% of the parcels are still being delivered by subcontractors, but much more flexible setup there, I almost see a one-for-one relationship in the development of your sales and volumes and what it does to your operating level? What am I missing here? Is it the fact that Mail has a more centralized setup in comparison to Parcels or are there any other things? So, that's my first question.
The second question, well, you could have expected that some price adjustments. The price adjustments you've penciled in on Page 28 of the slide deck is that something that has already been implemented or are there – is that still a significant chunk of the quality offers you've made to your clients underway?
The third question is on the competitive environment. Could you be a little bit more specific? What are you seeing there, the in-sourcing by ball the increased competition in the field of tariffs you referred to? And maybe a quick word on [ DHL's] [ph] intention to move into not only the letterbox Parcels, but also the top end of the Mail segment. Is that something that is a concern to you? Those were my questions. Thank you.
Pim Berendsen
Okay. Thank you, Henk. Herna, there was a couple of questions within one question. So, I try to go at the first one and then maybe...
Herna Verhagen
Yes. And then we'll do two and three, yes.
Pim Berendsen
I think Henk tried to make a comparison in the leverage between Mail and Parcels. I think in the Mail's performance, it's flatline in Q4. It's not completely flat for the year. And Mail is also impacted by higher organic cost increases than originally impacted. So, if you take out the full-year non-recurring COVID element, then there is still a bit of a gap. Price increases also increased there, but also not only for business Mail, but also for [indiscernible] within 2022 at the beginning of the year.
By Parcels, you say 80% is delivered by subcontractors or delivery partners. So, there should be more flexibility there. I think there's one fundamental difference. The entire Mail business has been set up and has been running a year-over-year declining business. And as such, I don't know, this [7%, 8% down] always works to mitigate those volume decline elements.
Parcels in the beginning of the year coming out of 2021 was focused on growth and growth expectations were legitimate at that point in time, but that growth turned into a minus [10] [ph] quite quickly because of deteriorating market circumstances. And then you've got a big network with very many different locations that over time have been added, that is also adding a bit of complexity and part of the cost base is much more fixed than only the 20% of delivery that we do ourselves.
The infrastructures, the [indiscernible] routes, support around transportation units. So, it's not strange that in a year where there so fundamentally different perspective on volume developments that you are going to get hit on margins. So that is my attempt on the first question.
Herna Verhagen
And your question on price adjustments, Henk, almost all of those price adjustments are already implemented because they were part of the contract negotiations at the end of 2022. The competitive environment, I think the competitive environment in the Netherlands became of course, more competitive over the last few years. And the reason for that already mentioned by Pim, is the fact that there is overcapacity in the market.
When we think about the market in 2021, not only PostNL, but also competitors and customers were thinking that after COVID market would grow further, and that means that capacity is built by everybody to, of course, be able to deliver those volumes. We didn't have the volumes in 2022, nor our customers nor PostNL nor competition. And that means that there is, of course, overcapacity and overcapacity brings more, I would say, a stronger competitive situation with also a price competition.
Next to that, of course, you do see other competitors. And some of those competitors disappeared in 2022 because of the issues like Instabox and some of them, of course, were there and stay there, like, for example, own delivery by Amazon, but also the in-sourcing bolded when it comes to [Cyclone] [ph]. But in our view, it's part of the Parcel market going forward.
And it's what we've said many times before, when we think about parcels in the future, the way a parcel will be delivered will be more diverse than it was 5 to 6 years ago. I think the importance for PostNL is to maintain our leading position. And the only way to do that, the only way to maintain that leading position is by the investments and we do by the digitization by, of course, also creating the product customers want or would like to have and by staying competitive also on the side of our cost.
DHL, moving into the top end of the Mail segment, we've seen that communication as well. So far, we didn't see any action at that front. Of course, they are active in the domain of the letter box parcels. And there, competition is the same as it is in, I would say, Parcel market, but we didn't see any action into the Mail – into the real Mail market or the market top end Mail segment markets.
Henk Slotboom
Can I ask for some clarification on what Pim said about the cost structure of Parcels. Is it fair to assume that with the decentralized structure you have right now, that it makes that the structure in itself makes it more difficult to bring down costs, if we are talking about a prolonged period of stagnating economic growth or stagnating demand? I probably share your view on the growth of e-commerce and on e-commerce penetration, but I'm – what happens if this period of no growth or slightly negative growth goes on for a longer period of time? How flexible are you really there?
Pim Berendsen
Well, I think on one of the first slides we've indicated, let's say, we've mitigated for 45 million cost per parcel. So, roughly speaking, [€0.30] [ph] per parcel by changing within year, the key operational elements here. So, it's not unflexible, but it is completely different if you set it up for growth and then all of a sudden, growth turns into a minus [10%] [ph] volume development.
So, I think there is flexibility. At the same time, there's also changes to the network additions to the network on the back of customer requirements to be able to do Sunday delivery or morning in feed early in the day. And those elements also lead to some increases of the cost per parcel element.
Obviously, if you were to know for sure, that you are in a period of prolonged standstill, then you could make different choices. We're not making those because we are confident that, let's say, when GDP improves, consumer spending will come back to the levels we've seen before and online penetration will continue and then growth will be there again. And we want to be ready to capture that growth when that moment in time is there. And we just cannot afford to kind of gamble by not investing in those elements, not being in a position to deliver that growth when it’s back again.
Herna Verhagen
And why do you think, Henk, that a decentralized structure is more difficult to bring back costs because we're giving you lots of arguments with why do you think that?
Henk Slotboom
I think it's easier to bring back costs in a centralized environment. For example, if you have a sorting center with, let's say, 100 million Parcels capacity, the average sorting center Parcels has is, what is it, 12 million, 15 million or so Parcels per annum? You can reduce the number of shifts, for example, if I were to close a – an [indiscernible], I would have to reroute the whole system. And just when you add – analyze, you have to change the routes, you have to make alterations in the cross talks and that sort of things. It works the same way the other way around. That's [indiscernible] question.
Herna Verhagen
But in my view, Henk, then you look into too much, I think you're only looking into the sorting center and forgetting that in the end, you also have lots of distribution. And when you have only a few sorting centers, you do have lots of depots where you do, of course, the further sorting before it is delivered. You can – from a big sorting center, you cannot deliver on, for example, 5,000 routes in the Netherlands daily. That's impossible. So, there is a structure behind the big sorting centers, which are the depots where you have to, sort as well from which part the deliverers will depart.
So, in my view, the structure we have is as flexible as any other structure to be honest because also in the smaller sorting centers, you can, of course, change the amount of shifts you need to make sure that the buses of our Parcel deliverers are filled. You have to change routes anyway because of the volume you have or because of other reasons.
So, that's what we anyway do quite regularly to change the routes. So, I don't see big differences, to be honest between a little bit more centralized sorting infrastructure and a more decentralized sorting infrastructure because in the centralized sorting infrastructure, you have lots of depots, which are a burden in case of a decline of Parcels as well.
So, I don't see that different. I see much more the difference Pim is explaining, which is about you have to turn around an organization which is used to growth to decline. And the way you do that and the speed with, you can do that depends, of course, also partly on your future perspective. And the future perspective still is that we will return to growth.
So, can you do more in the flexibilization of your cost? The answer is, yes. But you always have to ask yourself the question, am I then hurting my future growth potential or am I still in the right balance? And I think that's the balance Pim and I tried to strike to do, of course, the cost savings we need to do and to create more flexibilization but not limiting our further growth opportunity going forward. And when it takes longer than 2023, then of course, you have to review that balance again. So, it's a review which you have to do every few months to see are we still on the track we expect to be. So that is a more detailed answer to your question.
Henk Slotboom
That's a very detailed answer indeed. Thank you very much, Herna. Can I – without [monopolizing] [ph] the call, one quick question on the delivery score in [indiscernible], the 91%. When do you expect to have that back at the required 95% and are you risking a [find there] [ph]?
Herna Verhagen
I think the 91% of quality at Mail is, of course, by far not what we would like to have. And it's mainly caused by the fact that within Mail, we do have quite some vacancies in delivery routes. As long as we have so many vacancies as we have today, it is difficult to significantly improve. Of course, you can improve, but to significantly improve. So, we're working day and night, and I think we're running at this moment more than 10 projects to get in the right amount of people for those delivery routes, but in this current labor market, it is not easy to do so.
If it will be [fined] [ph] or not, in my view, too early to say. We have to deliver, of course, our numbers, I think, in May or June, together with the argumentation around the Mail delivery quality, and that is the starting point of a discussion with our regulator. And from that moment in time, we will first start the discussion Henk.
Henk Slotboom
Thank you very much.
Herna Verhagen
More than welcome.
Operator
Thank you. We have time for one more question. Our final question comes from the last line of Marco Limite from Barclays. Please go ahead. Your line is open.
Marco Limite
Hi, morning. Thanks for taking my question. The one question I have is on your Slide 9 where you're showing that all of the profit in your guidance is coming from Q4. So, just trying to analyzing the moving parts. I guess, pricing won’t be able to offset the cost pressures? I assume Mail would be flat at best year-over-year. So, just trying to understand why you are expecting Q4 2023 to be quite above Q4 2022? Thank you.
Pim Berendsen
Well, the fourth quarter, it basically follows the same pattern that excluding the COVID years, you can recognize because of the seasonality. On the Parcel side, obviously, because of Black Friday growing into [Santa Claus] [ph] and Christmas, obviously, contributing the most. And in the Mail side, the Christmas cards that still contribute quite significantly towards the December results. So, you'll always see whatever market circumstances, growth or decline, a fourth quarter that will always be the biggest at PostNL, just by the nature of the markets we're in.
I think the point that I was trying to make is that business-wise in comparison to last year, we always had that discussion, yes, but we have to compare against a very high COVID 2021 year. And so, your comparables will always be difficult, and that's also why we were transparent to try to detail out what was the non-recurring component of COVID. And the point I wanted to make is that business-wise, from Q2 onwards, you can see improvement. So, you don't need to wait until you see improvement until the fourth quarter. We can show that earlier on in the year, but nevertheless, the fourth quarter will be by far the biggest.
Marco Limite
Sure. But if I think about the different moving parts. In Parcels, we are expecting, let's say, a flattish volume growth. We're not expecting pricing to offset costs. So, Parcels, I guess...
Pim Berendsen
Well, I'm not expecting a flat line for Parcels. And definitely, I do not expect that for the first quarter, given the fact that the beginning of 2022 is still had January, February, at pre-crisis growth level. So, for Q1, you would see a quite significant volume decline that for the full-year turns into a low single-digit decline as well.
Marco Limite
Okay. So, the assumption is for volume growth in Q4 in Parcels?
Pim Berendsen
Yes.
Marco Limite
Okay. Thank you very much.
Operator
Thank you. There are no further questions at this time. So, I'll hand the call back to Jochem for closing remarks.
Jochem van de Laarschot
Thank you, operator, and thanks for all the questions. I think we covered a lot of ground. And during the call, if you have any other questions or remaining issues to discuss, please reach out to the IR team. You know where to find us. Thanks again, and see you next time. Thank you. Bye-bye.
Operator
This concludes today's conference call. Thank you for participating. You may now disconnect. Speakers, please stand by.
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PostNL N.V. (TNTFF) Q4 2022 Earnings Call Transcript