PostNord preparing for IPO with major restructuring ahead

Scandinavian postal operator PostNord warned today that it will need further restructuring and is contemplating a possible IPO as it faces up to radical changes in the mail market. The company that is 40% owned by the Danish state and 60% owned by the Swedish state reported financial results for 2011 today, highlighting improved profits for the year.

But while net profits were up 19% to SEK 1.03bn ($155m USD) thanks to cost-cutting efforts, PostNord’s sales showed a 5% decline for the full year compared to 2010, to SEK 39.5bn ($5.9bn USD).

The final quarter of 2011 was characterised by increasing competition from Internet communications and a weak Danish economy.

Chief executive Lars Idermark (pictured right) said the group’s performance was being “strongly marked” by falling mail volumes and the prevalence of digitalisation, particularly at the moment in Denmark.

“We expect mail volumes to continue their sharp decline in coming years, both in Denmark and Sweden,” he said. “Despite improved results, underlying profitability is under pressure and there is a great need to restructure PostNord’s operations in the next few years.”

Expectations are that mail volumes will fall about 5% in Sweden during 2012, but in Denmark the 12% decline seen in 2011 is likely to continue, PostNord said.

As it continues to make significant cutbacks and restructuring moves to cope with the falling mail volumes, the company said today that a major strand of its new corporate strategy is to prepare for a potential stock market flotation, confirming: “The group will lay the groundwork for an IPO and will prepare for possible owner decisions in this regard.”

Divisions

Among the different units within the PostNord Group, its Danish mail unit was particularly pulling down group revenues with a 10% year-on-year drop in its net sales in the final quarter of the year, compared to the 1% decline in net sales in the Swedish mail business.

During the course of 2011, the Danish mail unit saw its net sales falling 14% compared to 2010, to SEK 9.3bn ($1.4bn USD), even with price increases, as letter volumes fell 12% year-on-year. Expenses fell 12%, but operating costs were above sales at SEK 10.7bn ($1.6bn USD) for the year. An operating profit came thanks to internal transactions, but was around half that seen in 2010.

The Swedish mail business saw a 2% drop in its net sales for the whole of 2011, to SEK 15.2bn ($2.3bn USD), with letter volumes reducing 3% compared to 2010. The Swedish advertising market was relatively strong during the year, and along with a 2% cut in operating costs, helped operating profits to increase slightly to SEK 890m ($134m USD).

PostNord’s logistics business saw a 4% increase in its sales in the last quarter of the year thanks largely to its acquisitions, but for the full year sales were flat compared to 2010, at SEK 12.4bn ($1.9bn USD). Sales in Sweden were on a par with the previous year, but increases achieved in Norway were countered by reduced business volumes in Denmark, where operating conditions were tougher thanks to the economy and competition.

During the year profitability improved at PostNord’s loss-making business services unit, Strålfors, which the company is in the process of streamlining. Sales fell 10% to SEK 3bn ($451m USD), as the firm divested its label-producing unit Strålfors Information Systems, but operating losses improved to a SEK 76m ($11m USD) loss compared to the previous year’s SEK 170m ($26m USD) loss.

Post Danmark

With the worst of the group’s performances in Denmark, PostNord’s Post Danmark subsidiary insisted today that it has worked “intensively” to cut its costs, but was struggling to keep up with the loss of mail volumes.

Letter volumes have been falling for 10 years at the Danish postal service, but declines have accelerated in the past few years. Meanwhile, Post Danmark’s parcel volumes also fell during 2011, by 7%, having fallen 10% in 2010.

Post Danmark chief executive KB Pedersen explained that parcel volumes were more affected by the weak Danish economy than letter volumes, which were being affected mainly by digitisation, with declines expected to continue.

Pedersen said his company had only “partially” succeeded in cutting its costs in response to the mail volume declines. Adapting production capacity and administration to smaller volumes, the company saw its operating costs fall from DKK 9.5bn ($1.7bn USD) in 2010 to DKK 8.9bn ($1.6bn USD) in 2011.

“The efficiency measures should continue, but there is a limit to how much more we can reduce costs while maintaining a distribution network that makes it possible to deliver mail to all addresses across the country six days a week,” warned the Post Danmark CEO.

Strategy

PostNord outlined a new corporate strategy last year seeking to cut its administrative expenses by SEK 1bn ($150m USD) a year, on top of cost reductions in its mail and logistics units, which were cut by SEK 2.2bn ($330m USD) last year.

Preparing the company over the next few years, including for a potential public offering, Idermark said “major changes” were on the way, but that cutbacks will come along with “significant investments” in production and infrastructure to improve the company’s flexibility and profitability.

Many of the restructuring of operations will be carried out in 2012 and 2013, but the company is also looking to make more acquisitions to build up its growth areas, namely its logistics and parcel activities. Last year PostNord acquired Norwegian logistics firm Eek Transport and Swedish transport firm NH Logistics.

“Implementation of the strategy means that our operating profit will be burdened with significant non-recurring restructuring costs in 2012 and 2013,” said Idermark.

“The changes that will be needed to adapt the operations to market trends will impact many people.”

PostNord announced today that it has hired a formed McKinsey & Co consultant to lead its newly-established corporate strategy unit.

Annemarie Gardshol, 45, has been leading corporate strategy at Swedish healthcare manufacturing giant Gambro for the past ten years. Taking up her position as head of corporate strategy on May 14, 2012, she will focus on increasing the value of PostNord’s business and improving conditions for its development and innovation, the firm said.