TNT customers are “generally positive” about the planned takeover by FedEx, the Dutch company said today as it unveiled a Q1, 2015 loss and cautioned that it faces a “challenging” year.
Under the agreed €4.4 billion all-cash deal announced on April 7, FedEx will offer €8 per share for all TNT shares. Assuming that the recommended offer is accepted by shareholders and is approved by the European Commission and other regulatory authorities, the two companies expect the offer to close in the first half of 2016.
TNT CFO Maarten de Vries told journalists on a Q1 results call that FedEx was expected to make the formal offer in the second quarter and it would be voted on at an Extraordinary General Meeting of TNT shareholders in the second half of the year. He had no comments “at this stage” to make about the European Commission and stressed that TNT “will follow the timeline”.
In response to a CEP-Research question about how customers had responded to the planned takeover, de Vries said: “We have been in very close contact with our customers. In general the reactions are pretty positive. Customers see the complementarity (of FedEx and TNT) and the opportunity … for them”. The CFO reiterated that FedEx, with its strong businesses in the Americas and Asia, complemented TNT’s strong position in Europe.
For Q1, 2015, TNT reported a 1.3% rise in revenues to €1,622 million, and there was an underlying 1.5% drop adjusted for disposals and foreign exchange. However, adjusted for lower fuel surcharges and one trading day less, the overall underlying growth was 2.1%.
However, the company made a reported operating loss of €11 million compared to a profit of €15 million in the first quarter last year. This included €12 million of restructuring and other charges. The underlying operating profit dropped from €43 million last year to €1 million, reflecting €20 million worth of costs related to the Outlook strategy implementation, lower volumes from international accounts and pricing pressures, particularly in Western Europe.
De Vries explained that TNT did not fully benefit from the substantial drop in dollar-dominated fuel prices as this was offset by the stronger dollar against the euro and the continuing cost of commercial airline capacity.
TNT reported an overall net loss of €19 million for the quarter compared to a breakeven 12 months previously. The company invested significantly more in the first quarter, with investments of €78 million (4.8% of revenues) compared with €26 million (1.6% of revenues) the year before. Most capital expenditures went to sorting equipment, hubs, depots, vehicles and IT. Service performance, measured by on time delivery, continued to improve in all segments, the company said.
CEO Tex Gunning stated: “Good progress is being made with the execution of the Outlook strategy. Service performance and revenues from SMEs further improved, supported by ongoing investments in infrastructure and IT. During the FedEx offer process, we will continue to focus on our customers and operational efficiency. The first quarter results were impacted by transition costs associated with the Outlook strategy. Our guidance is unchanged: we expect 2015 to be a challenging year of transition, followed by year-on-year improvements from 2016 onwards.”
International Europe revenues and profits drop
TNT’s largest business area, International Europe, saw Q1 revenues drop 1.3% to €663 million. There was an underlying 2.5% decline when adjusted for foreign exchange but an overall 1.4% rise when taking the adverse trading day and lower fuel surcharges into account. Volumes (average daily consignments) dropped 0.4% and average prices (revenue per consignment) weakened 0.2%.
The International Europe division’s adjusted operating income dropped by 74% to €8 million due to a mix of lower revenues and higher costs. These included €6 million worth of Outlook-related costs for IT outsourcing and other projects, €4 million of costs for improved air and road connections in several countries, such as Germany, Italy, Turkey and Israel, and €6 million of higher air network costs resulting from the stronger US dollar.
The revenue figures reflect weaker sales in large Western Europe markets, partly offset by growth in most other markets. Revenues from large accounts declined, but the segment again achieved higher revenues from SMEs.
De Vries told journalists that TNT still sees difficult trading conditions in Western Europe, especially in its top five markets (UK, France, Germany, Italy, Benelux) but is growing in Eastern Europe and Southern Europe.
“We will focus on driving sales in our major markets,” he underlined. TNT already launched an extensive sales promotion campaign in February, offering new customers 20% off the price of export shipments (up to 250kg) to nine so-called ‘Blue Banana’ core markets in Europe. In addition, the division is restructuring its salesforce to improve sales and revenue management.
Higher revenues and profits for International AMEA
In contrast, revenues in Asia Pacific and other overseas markets climbed 17% to €233 million. This was largely the result of positive currency effects from the appreciation of local currencies against the euro which more than offset the drop in fuel surcharge revenue and adverse trading day effect. Adjusted for these external factors, the segment’s underlying revenue grew by 3.5% and adjusted operating income increased 80% to €9 million.
The International AMEA division had a 6.8% drop in average daily volumes but transported heavier consignments with higher prices. As a result, revenue per consignment rose 7.3%, driven by increased average daily weights (8.3%), a result from the growth in Express Freight, Economy Parcels and Economy Freight shipments.
Discussing Asia trends, the CFO commented that sales had slowed compared to previous quarter and it appeared that some exports from China to Europe had been affected by the stronger local currencies, which increased their prices in euro terms. But this trend would first be confirmed during the second quarter and later in the year, he added.
Domestics drive into the red
In the Domestics segment, covering domestic operations in various European countries as well as Australia/New Zealand and Brazil, revenues increased 4.4% year-on-year to €621 million. Foreign exchange effects increased first quarter revenues, compensating for the negative trading day and fuel surcharge impacts. Adjusted for these factors, the underlying revenue growth was 2.2%.
TNT delivered 4.1% more consignments per day than in the first quarter of 2014. However, revenue per consignment declined 2.6% due to pricing pressures and decline in fuel surcharge. Revenues from SMEs again improved year-on-year, supported by better service performance.
De Vries said that the French domestic business had seen “quite some price pressure” that outweighed higher volumes and put pressure on the overall margin. The UK Domestic unit improved during the quarter, according to the company.
In Australia, where Q1 revenues declined, the CFO noted that “the trading climate is not very favourable, especially in the mining industry”. In Brazil, where the economy has taken a sharp downturn over the last year, the domestic business had a “flat performance” in the first quarter “but it has not been affected by the economic trends”, he added.
Overall, the Domestics division’s adjusted operating income fell by €19 million to a €4 million loss, reflecting the pressure on yields, especially in France and Australia, as well as €4 million of operating costs related to the execution of the Outlook strategy (IT transition and Outlook project costs). In addition, the Pacific unit incurred transition costs related to the ramp up of the new hub in Sydney (€3 million). The segment is implementing its plans to increase productivity through new or upgraded facilities and to reduce indirect costs further.
Revenues in the Unallocated segment, which consists of Other Networks (TNT Innight), Central Networks and the corporate head office, declined by 22.5% to €107 million, as a result from the sale of the fashion business in 2014. The segment’s operating loss increased 50% to €12 million due to a €3 million negative impact from higher pension costs.
Looking ahead, the company reiterated its current financial year and longer-term guidance, including expected restructuring and other charges of between €25 million and €30 million in the second quarter of 2015.
“For 2015, TNT expects a continuation of adverse trading conditions, particularly in Western Europe. TNT expects 2015 to be a challenging year of transition marked by the progressive ramp-up of new and upgraded facilities and other transformation projects, such as the outsourcing of IT,” the company stated.
