PostNL mail business problems drag down Q2 results

Problems in the reorganisation of PostNL’s letter business has caused its domestic mail division to slip into a loss for the second quarter of the year, wiping out gains from parcels growth.
The Dutch postal operator issued results today showing underlying revenues down 0.2% compared to the same period in 2011, to EUR 1.02bn, with profits down 15% to EUR 46m for the quarter.

Good performances in the company’s parcels business and international units saw growth countered by the weaker performance in the domestic mail division, Mail in the Netherlands.

The company had to call a halt to its major network transformation programme in the Netherlands back in April after receiving complaints about delivery quality in areas that had been restructured.

Today PostNL said the restoration of delivery quality and the lack of savings – resulting from the delay to the transformation plan – cost it EUR 10m and EUR 6m respectively. It meant Mail in the Netherlands saw its operating result for the quarter turned from a positive EUR 12m in Q2, 2011, to a loss of EUR 24m in the latest quarter.

PostNL said today that new arrangements are now being piloted, and that a decision on restarting the network reorganisation would be taken in the fourth quarter of 2012.

The company’s parcels business saw “very good” growth during the quarter, according to executives, with revenues up EUR 32m, partly thanks to the acquisition of the Belgian and Dutch businesses of Austrian Post’s trans-o-flex courier business.

PostNL’s international divisions, mainly in the UK, Germany and Italy, turned a EUR2m loss in Q2 2011 into a EUR 5m profit, with good volume growth from national clients in the UK, a big turnaround in Germany and a successful business mail service in Italy, Formula Certa.

Looking ahead, the company said it was not changing its previously stated outlook, but it said the rest of the year would likely turn out to be at the bottom end of expectations.

Mail in the Netherlands

Partly thanks to its quality problems and e-substitution, PostNL saw its domestic addressed mail volumes decline 8.3% in the second quarter compared to the same period last year.

The Mail in the Netherlands unit saw its underlying revenues down 3.8% to EUR 555m.

PostNL had been working to transform its letter network to respond to ongoing declines in mail volumes, with plans to centralise sorting and delivery operations into nine sites, closing around 300 local delivery offices.

Herna Verhagen, who took over as PostNL CEO in April after the abrupt resignation of Harry Koorstra, said the company had underestimated the learning curve needed for the new operational structure, and also underestimated the impacts that restructuring would have on other areas of the delivery chain.

Verhagen also told analysts today that in switching to part-time labour, more people than expected had been needed to deliver mail to the company’s quality standards.

The company is now piloting a revised approach to restructuring its letter network, which Verhagen said would lead to a decision on restarting the full rollout “at the latest” in the fourth quarter of 2012.

“We are now taking action to improve the efficiency with a better management focus, better reorganisation process strengthening the implementation and setting clear targets for management,” she said.

During the quarter, PostNL revealed that the Dutch government should be introducing legislation later in this year to allow it to eliminate Monday deliveries, as part of its continuing cost-cutting efforts. The legislation could also include extra powers for the Dutch regulator, OPTA, to monitor PostNL’s service quality.

Proposals to look at PostNL’s dominant market share – “not necessary” according to PostNL – are also being considered by government and regulators in the Netherlands, the company said today. But, Verhagen said this was at an early stage, and was expected to take quite a while.

Parcels

PostNL said its parcels business showed strong growth in the second quarter, with parcel volumes on a comparable basis were up 6% in the quarter, boosting revenues by 22% to EUR 178m and underlying cash income up 66% to EUR 35m.

The acquisition of trans-o-flex Belgium and Netherlands in March brought in EUR 29m of the EUR 32m increase in revenue, but the company saw its new logistics infrastructure and efficiency saving EUR 3m from the quarter’s parcel operational costs.

As with the mail business, PostNL is also transforming its parcels network, with a EUR 240m plan to convert 37 depots and seven hubs into 18 hybrid sites, changing 2,600 daily routes and increasing capacity from 100m to 150m parcels a year.

Today the company said about 20% of its parcel volumes are now flowing through the new infrastructure, and that the changes are actually achieving higher than expected efficiency and cost saving levels.

The lower price per parcel comes as PostNL sees its price mix for parcels changing at the moment, with more growth from large customers than SMEs, and smaller online retailers consolidating into larger businesses.

International

PostNL’s international business also showed growth that helped counter domestic mail problems in the company’s overall results.

PostNL said it saw growth in all countries in its TNT Post international divisions, with revenues up 5.4% to EUR 371m, cash income turning around from a EUR 2m loss last year, to positive EUR 5m in the latest quarter.

In the UK, executives said volumes were up 5% with good growth among national clients, although regional clients were bringing lower volumes. Thanks to Royal Mail price increases, TNT Post UK saw its underlying revenues up 11% in the second quarter in 2012, compared to the same period last year. Executives also noted that the company’s end-to-end collection pilot programme was going well.

In Germany, the company said its operations were seeing volume growth, with revenues up to EUR 123m for the quarter. Cost saving efforts were “on track”, as the company worked towards break even point in 2013.

In Italy, the company said it was seeing continued success with its business mail platform, Formula Certa, which has seen volumes up 22% thanks to an increased focus on direct mail, registered mail and SME customers, with coverage now extending to 66% of the country.