Canada Post business model ‘unsustainable’ despite strong Q3 parcel growth

Strong parcel growth and postal price rises enabled Canada Post to achieve a small revenueincrease in its third quarter to 28 September, despite a further 7.3% decline in transaction mail

The growth of online shopping helped boost parcel revenues by $32 million or 11.2% in the thirdquarter, as volumes increased by 4.2% compared to the same period last year. Domestic parcels, thelargest category, saw revenue growth of 10.5%, or $21 million, with a volume increase of 8.4%. Overthe first three quarters, total parcel volumes increased by 2.8%, year on year, and parcel revenuesincreased by 6.2% or $51 million. For domestic parcels, revenues increased by 6.1% and volumes wereup by 5.2%, compared with the first three quarters of 2012.

Significant labour-cost savings and the “encouraging” parcel growth also helped limitthird-quarter pre-tax losses within the Canada Post segment of the group’s business to $129million, an improvement on the $161 million pre-tax loss in the third quarter of 2012. Meanwhile,another solid performance from the organisation’s Purolator express business also helped tominimise losses at the wider Canada Post group, which posted a pre-tax loss of $109 million for thethird quarter, compared to a loss before tax of $145 million in the third quarter of 2012.

Purolator generated revenues from operations of $393 million in the third quarter, a slightdecline from the $394 million the previous year. But cost reductions meant that its profitsimproved by $2 million to $17 million, an increase of more than 20%. For the first three quartersof 2013, Purolator’s revenues were down by around 1.4%, year-on-year, mainly driven by reducedvolumes due to increased competition and an uncertain economy, the company said.

For the first three quarters of 2013, the Canada Post group’s pre-tax loss stood at $134million, compared to a loss before tax of $298 million in the first three quarters of 2012,although this improvement was largely due to a $109-million gain from the sale of the group’sdowntown Vancouver mail processing plant in January 2013. Without the sale, the group loss beforetax for the first three quarters would have been $243 million.

The company said that “as encouraging as the parcels growth is”, this alone was “not enough tooffset larger declines in transaction mail volumes”. Mostly made up of letters, bills andstatements, this part of the business generates approximately 50% of the Canada Post segment’srevenue. In the first three quarters, volumes declined by 184 million pieces or 5.1% compared tothe same period last year. Direct marketing mail volumes in the third quarter were down by 0.7% anddown by 1.3% for the first three quarters, compared to the same periods last year.

Meanwhile, productivity improvements and a reduction in headcount contributed to reducing theCanada Post segment’s labour costs by $22 million or 2.9% in the third quarter and by $65 millionor 2.7% in the first three quarters compared to the same periods in 2012.

Nevertheless, the company said it would need additional liquidity in 2014. “With the historicshift away from paper-based communications, the corporation’s current business model does not allowit to achieve sufficient profitability and cash flow to support its operations,” the company said. “ Based on current financial projections, Canada Post believes it will require additional liquidityby mid-2014, and is exploring with its shareholder options to address the liquidity challenge.”

The company said it was looking for support to restructure its business model and pension planframework to assure long-term financial sustainability, while continuing to meet the changing needsof Canadians and Canadian business. Options under consideration include asking the federalgovernment for additional pension regulatory relief and new financing for 2014.

“Given its financial position and outlook, Canada Post believes changes must be implemented asquickly as possible,” the company said.