Tuesday, February 21, 2012

TNT announces new strategy to remain independent

TNT announced earnings on Tuesday. The company outlined a new strategy for profitable growth including pursuing partnerships in Asia and South America. Perhaps if a UPS acquisition does not occur, pursuing a partnership opportunity with TNT may be an option?

Ti's CEO, John Manners-Bell discusses TNT's latest earnings and new strategy below:

With negotiations between TNT and UPS on-going, the release of TNT’s annual results had more-than-usual significance.

As it turned out, its 2011 performance was affected once again by its Brazilian operations, an on-going thorn in the side of management and one of the reasons behind shareholder discontent. Overall the company saw modest revenue growth with operating income significantly impacted by impairment charges. TNT’s management also highlighted what it called ‘challenging’ Asia-Europe trading conditions.

On the bright side, Europe & Middle East Africa region turned in a robust performance, though there was increasing pressure on revenue and profits as the year progressed.

Management said that its priority throughout the year was the turnaround of the Brazilian operations, optimising capacity in Asia Pacific and countering falling yields as a result of unfavourable customer and product mix changes in the EMEA region.

Overall reported revenues rose by 2.7% to €7,246m. Reported operating income was a loss of €105m although adjusted operating income (at constant foreign exchange and excluding one-offs) was €228m profit. This represented a drop of 29.4% over the previous year.

·         Europe & MEA reported operating margin of 7.9% (down from 8.3%) on revenue growth of +1.6%. The reported operating income was €356m (compared with a profit of €371m 2010).

·         In Asia Pacific revenue increased to €1,797m from €1,656m, an increase of 8.5%. However operating income dropped from €14m to a loss of €76m – a very worrying state of affairs for the company, given that another of its regions has now fallen into loss.

·         In the Americas, revenue dropped by 7% to €467m and operating loss (including the one off impairment) fell to a staggering €360m loss. Even without the impairment, the loss would have been €125m, a margin of -26.4%.

TNT’s CEO, Marie-Christine Lombard, also announced a new corporate strategy, focused around its European operations. Speaking in a webcast , she said that she wanted Europe to be connected to the rest of the world with an asset light model, reducing its exposure to fixed intercontinental capacity through cooperation agreements with leading airlines. TNT, she said, must also reduce its financial exposure to China and Brazil. To this end the company was pursuing ‘partnership opportunities’ in these markets although she did not elaborate on what these could be. One interpretation could be that the disposal of the loss-making operations is on the cards, to be replaced by looser agreements with local players.

She went on to stress that, ‘Medium to long term, I believe in Europe’ and she highlighted the growing B2C market as a major opportunity for the company. She also identified the potential for TNT to develop more value adding solutions for its customers.

Lombard then announced a programme of cost reduction which amounted to €150m by the end of 2013. She said that this could be achieved in three key ways. Firstly, by optimising its air network to reduce numbers of aircraft; secondly, by out-sourcing non-customer interfacing processes and thirdly, addressing employee costs. She said this latter part of the programme would necessarily have implications on the workforce.

TNT’s ultimate goal is to increase operating margin in Europe to between 10-11% from the present 8%. Outside Europe she was targeting a return to profitability.

Although Lombard says she is confident that TNT can reach these targets, it is highly debatable whether she will get the chance. Although she stresses the opinion that TNT can survive as a strong, independent, Europe-focused player, most analysts believe that it is only a matter of time before the company acquiesces to an increased bid.