TNT Express expects to announce the sale of its China domestic business by the end of this quarterand its Brazil domestic activities by the end of the year, as the company returns to a revised “
flexible” stand-alone strategy focusing on Europe and international, following the failedacquisition attempt by UPS.At the announcement today of fourth-quarter and full-year results, the company said theexploration of “partnership options” for its Brazilian domestic activities had been suspendedfollowing the announcement of the planned merger with UPS, “based on the interest of UPS inretaining these businesses”, but following the breakdown of the UPS acquisition last month, adecision had been taken to sell those Brazilian activities.
“While the losses in our Brazilian operations were reduced, we did not realise the level ofimprovements we had aimed for,” commented interim CEO Bernard Bot.
Meanwhile, TNT Express had started to explore divestment opportunities for its domesticactivities in China (Hoau) in 2012, and these are now close to completion.
Responding to questions from CEP-Research, interim CFO Jeroen Seyger said: “The outcome ofthe China process we’re expecting this quarter, so on the shorter term. The Brazil divestmentsopportunities we froze in light of the UPS transaction and we have just re-launched that processwith the announcement today. So in general it will take as long as a divestment process takes. Itis always very difficult to exactly predict, but I would expect that we will conclude on thatprocess before the end of this year.”
He declined to say how much the company hoped to raise from the Brazil sale. Bot insistedthat the China and Brazil divestments were not primarily about raising money, but a reflection ofthe company’s focus on European and international operations, and the need to direct the company’sinvestments on these core areas. He said TNT Express would retain a full international capabilityto and from China and Brazil, and although he insisted TNT’s China and Brazil business were “wellpositioned”, they no longer fitted with TNT Express’s European and international strategy.
“If you look at where the focus of our strategy is, it is on developing activities in Europeand connecting Europe internationally to the rest of the world,” he said. “As part of thatstrategy, the developments of domestic operations in emerging countries is no longer a priority,and if you look at synergies between those emerging domestic with the rest of the business, thereare some, but they are not strong enough to warrant the continued investment in those platforms.”
This was the reason the company last year completed its exit from domestic activities inIndia. “We’ve started the process in China and hope to hear about that this quarter. The Brazilianbusiness is a great business: it has a fantastic footprint, with 140 depots in Brazil, great marketpresence, but it is less of a fit with TNT as a company.”
Bot said companies had to make choices and set priorities. “And to some extent also financialpriorities,” he said. “And while TNT could bear those losses, that is not the issue. There is thequestion of allocation of funds to those areas where you have put the priority of your strategy.”
Bot said he “regretted” the failure of the merger with UPS, as he firmly believed that themerger would have been beneficial for all stakeholders. In accordance with the merger protocol withUPS, he confirmed that TNT had received last week the payment from UPS of the €200 million breakfee. “So that’s done, and we go forward,” Bot added. “We have confidence in our operations, people,and commercial propositions, and in our strategy.”
Bot denied that TNT Express was now a “break-up target”, and said the pursuit of the company’s strategy under the current interim executive management had the full support of the group’ssupervisory board.
“What we are charting is the continuation of the stand-alone strategy that we announced lastyear,” he said. “That is fully supported by the supervisory board and obviously by the team inplace, and we are executing on some of the elements that we had anticipated last year, one of whichwas put on hold last year with the divestment of Brazil. Strategy doesn’t change every six months.”
He said the company’s supervisory board was now reviewing the possibilities regarding theexecutive board, and would come up with its conclusions “in the immediate future”.
The company said TNT Express’s fourth-quarter results continued the trends seen in previousquarters. Europe, Middle East and Africa volumes grew but yields declined “in challenging tradingconditions”, although cost control lessened the negative impact on profitability. In Asia Pacific,revenue declined by 10 per cent due to the termination of low-margin customers and services andcontinuing weak demand. Operating income, however, increased by around 2 per cent “because ofimprovements in the business portfolio and cost reduction measures”.
Reported fourth-quarter revenues declined by 0.5 per cent to €1.864 billion, but €120m inbusiness one-offs, including “impairments” due to the re-assessed value of its China and Indiadomestic businesses and adjustments for the declining value of its two B747 freighters, led to areported operating loss of €71 million. Adjusted operating income, adjusted for currency exchangeeffects and excluding one-offs, stood at €47 million, down from €58 million the previous year.
Bot commented: “If we look at the fourth quarter, trading conditions remained difficult. InEurope, our key challenge was yield decline, both because of price and mix pressure. Andunfortunately, we expect the environment also to be difficult in 2013.”
He said performance in Asia-Pacific and the Americas “improved as a result of actions taken.Overheads were also well controlled and we ended the year and a solid capital position.”
Full-year revenues grew by 1.1 per cent to €7.3 billion, while the company made a full-yearoperating profit of €89 million, a substantial improvement on last year’s €105 million operatingloss – boosted by a substantial drop in the company’s Brazil operating losses. However, theprofitability of its main profit-generating business, EMEA, slipped almost 19 per cent to €289million.
Bot said TNT Express’s strategy as a standalone was essentially the same as the “Building onStrengths” strategy announced around this time last year. “While a number of actions following fromthe strategy were suspended as a result of the UPS offer, we did make good progress on manyfronts,” he said. “For example, we further strengthened our position in Europe with positive volumeand customer growth. We also improved the international offering with better collection times andfaster deliveries by connecting inbound and outbound flows through Dubai and Liege.”
He said the search for a “more structural solution for our air capacity” that was suspendedin light of the UPS merger had now been restarted. In the meantime, €50m via the company’s indirectcost savings programme launched in May 2011 had been fully realised; and nearly two thirds of a “re-scoped” €100m further cost savings programme had also been realised in 2012.
Bot commented: “Although a lot has been achieved in 2012, we are keenly aware that furtherurgent improvements are required. This is also why we got to work immediately after the mid-Januaryannouncement and we are currently actively and intensively engaged in a process that has a primaryobjective to find concrete actions and projects that will improve the performance in 2013 and2014.”
He said some of the areas of improvement “include how to make sure we get the most from thebest parts of our business. We have the broadest service range and best European coverage and astrong customer focus, and we should leverage that. We are also looking to reduce exposure to highfixed costs assets while still providing best-in-class service. Finally we want to achievesignificant cost savings and organise ourselves for success.”
Bot said more details on these subjects would be provided at a strategy update on 25 March.But he said this would be a question of details rather than “a flashy new strategy”. “We alreadyhave a strategy announced last year, and today we’re giving some updates regarding Brazil andChina. So on 25 March, expect straightforward solutions to challenges.”
Nevertheless, it would include a significant additional cost-improvement plan, along withother measures. “We will be looking at the company as a whole, with the basis of the strategy thatwe announced last year, but there are some refinements that we can bring there, both in terms of,particularly, more clearly in which market segments we want to compete and think we can besuccessful; how we can enhance our execution of a number of areas; and making our operations moreflexible.
“So there are quite a few things we are looking at, but at the same time we are also lookingat cost-reduction measures to improve the performance in the immediate term.”
Bot acknowledged that the programme would be likely to lead to some job losses. “We arelooking at all areas of spend, which includes operational activities and overhead activities, andwe’re looking to make significant cost reductions, so job reductions can certainly not beexcluded,” he observed. “But as always we will look at it in a careful way and manage anyreductions in a responsible manner.”
Part of the changes would involve further moves towards a more flexible operating model, bothin terms of long-haul aircraft capacity and other areas of the business. “We would like to lowerthe number of our own aircraft and have more commercial line-haul in the balance,” said Bot. “ Ifyou look today, we have five long-haul aircraft, but we also buy in quite a lot of capacitycommercially on the market. You always need a mix, but we think the mix is too much towards our owncapacity, which means that if you are in a downward cycle and there is less demand, you’rebasically stuck with capacity and have to fill it with less attractive volumes.”
So “flexiblising” the operating model in terms of air capacity means reducing the company’sexposure to its own fixed capacity, intercontinentally. “But what it also means is that in otherareas, for example in operational areas, where we already use quite a lot of subcontractors, thatallows us to scale up and down more easily than if it were done by our own operations.” Forexample, in Europe, a majority of pickups and deliveries are done by subcontractors. “We believethere are also other areas in the business where we can realise that, and that assessment this partof the update we will give on 25 March,” said Bot.
