TNT Express' (TNTEF) CEO Tex Gunning on Q2 2014 Results - Earnings Call Transcript

Jul.28.14 | About: TNT Express (TNTEF)

TNT Express NV (OTCPK:TNTEF) Q2 2014 Earnings Conference Call July 28, 2014 8:00 AM ET

Executives

Huub Popping - IR

Tex Gunning - CEO

Maarten de Vries - CFO

Analysts

Stephen Furlong - Davy Research

Philip Scholte - Rabobank

Chris Combe

Matthew O'Keefe

Damian Brewer - RBC Capital Markets

Dominic Edridge - UBS

Mark McVicar - Nomura

Marc Zwartsenburg - ING

Penny Butcher - Morgan Stanley

Neil Glynn - Credit Suisse

Scott Ryall

Huub Popping

Good morning, good afternoon or good evening, to all of you, and welcome to the TNT Express second quarter results presentation. My name is Huub Popping, and I'm joined here today by Tex Gunning, our CEO; and Maarten de Vries, our CFO, who will be introduced by Tex shortly. The agenda for today is, as always, first, presentation followed by Q&A. And you can follow the slide deck presentation on your website. A recording of the presentation will be made available shortly afterwards, again on our website. So now, without further ado, over to Tex.

Tex Gunning

Thank you Huub. I am very pleased to have with me today our new CFO Maarten de Vries who have joined us on the 1st, July. You may have noticed that early today we have also announced that on the 18th of September there will be an extraordinary meeting of shareholders where we will official propose to our shareholders to appoint Maarten as member of executive board of TNT Express.

Maarten’s arrival at TNT completes the management changes that have taken place in the last couple of months and which gives me great confidence that we can continue to build the sustainable future for our TNT.

Then to the results, the overall message for the second quarter results is one of an improved performance supported by various restructuring initiatives. Whilst we have continued to see some pressure on our top line reported revenues, if these are restated for the disposal of China domestic and the sale of our Dutch TNT fashion business, adjusted revenues are up by 1.1% in the quarter. We have also generated a positive operating income of 8 million which compares with the loss of 287 million in the same period last year and higher adjusted operating income of 82 million, which is an increase of 37% versus previous year.

At a segmental level, we are able to report better results in all areas of the business apart from the U.K. domestic where we found ourselves significant competitive pressures. While this is perhaps not surprising and ambitious to diversify this TNT to see uneven economic growth across the various markets a combination of solid yield improvement, targeted cost initiatives and judicious investments to support areas of growth, our trend setting into improving performance in the majority of our areas.

Our ample strategy also remains on track with a further 33 million of cost savings delivered in the second quarter. I am very much looking forward to giving you a much more detailed update on both our progress with the outlook initiative and also our plans for the new operating units, domestics, international Europe and International EMEA at our Capital Markets Day that will take place on the 18th of February 2015.

Then let’s have a look at the outlook agenda. On the left we can see the three priorities. Focus on profitable growth, investing in performance productivity and organize to win supported by the 10 separate but inter-related individual initiatives. On the right there are number of encouraging update that illustrate continued progress with the implementation of this strategy.

We have a defined plan as we are executing against supported by substantial CapEx in highly targeted areas. During quarter two, further investments were made in our unique roadmap noted network and we also approved substantial infrastructure developments in Australia, Italy, U.K. and the European air hub in Liege.

Progress has also been made with our SME sales focus and a new digital channel. A broad range of initiatives has also been launched to improve the service that we provide to our customers which in turn will help to drive profitability for the Group. Overall restructuring related charges and the implementation cost were 74 million during the quarter. However, with a new management Board, and top structure now in place, we are on track to create a much more focused business with clear value creation plans. Again, more of this at the Capital Markets Day on the 18th of February.

I will now hand over to Maarten, who will take you through both the overall group financials and the segmental performance in more detail. Maarten, over to you.

Maarten de Vries

Thank you Tex, and good afternoon everyone. I’m very pleased to be here today and to help to present these numbers. Because personally I was not at TNT during the period it’s good to be able to begin by reporting an improving overall turn and I’m looking forward to being part of this evolving story going forward. Let me start with the overall group second quarter financial highlights.

Whilst at the headline label we saw reported revenues followed by 5.9%, this comparison with the second quarter 2013 includes revenues for Brazil domestic that were previously reported discontinued and for which we have restated. However, comparable numbers also include China Domestic and Fashion which we have now divested. Excluding these, adjusted revenue growth increased by 1.1% instead of the negative 5.9%. At an adjusted level, operating income increased by 37% from 60 million to €82 million in the second quarter this year.

Moving onto the statement of income. During the half year we saw a fall in revenues of 6.3% however, adjusting for both disposals and currency, revenues increased by 1% before this operating income improved from a negative 68 million to a profit of 25 million.

Slide six shows the impact of the accounting changes on the comparison with the second quarter 2013 numbers. Before it’s reclassification as a separate segment during 2013 Brazil Domestic has been reported as a discontinued operation. Similarly, no depreciation was charged on the 27 for 7s since they were reported as an asset held for sale. At the adjusted level we can see the improved performance across all segments apart from Europe Main that was broadly flat.

Moving onto cash flow now. Net cash from operating activities was impacted this quarter by tax payment of 50 million for the UPS termination fee. Conversely, net cash from investing activities included a receipt of 39 million for the sale of Fashion. We said at the first quarter that the number of major investments have been improved in order to drive productivity across the Group. CapEx therefore increased during the second quarter and sits at 1.9% for the half year. Trades working capital in the second quarter was 8.8% and the Group retains a very solid net cash position of 395 million.

I will now move on to look at the current five business segments in more detail. Europe Main continues to be impacted by uneven economic growth and competitive pressures. However, despite these challenges, operating income improved in all units with the exception of UK Domestic. Our UK business in particular is being impacted by competition and we are all seeing pressure on revenue quality. Despite contract pruning the Italian market also remains challenging. Although the cost reduction measures that we have been implemented as part of outlook have already begun to have a positive impact.

Following on from a strong first quarter, performance in Europe and Americas during the second quarter was also better than during the prior year in most units. Overall, adjusted revenues were up 4.6% and adjusted operating income up 27%. Our success in securing higher yielding shipments for the network continues and supports the ongoing revenue developments. We continue to reposition away from lower yielding customers and have seen improvements in all three KPIs of revenue per consignment, average daily kilos and revenue per kilo.

Pacific, whilst underlying economic conditions remain challenging near term fixes have supported profitability. On flat revenue, the 3 million loss in the first quarter has improved to a 3 million profit in the second. However, please do remember that whilst we have aggressive recovery plans in place, some of the structural improvements especially our infrastructure investments will only benefit our performance in the longer term.

In EMEA, year on year revenue comparisons remained distorted by the sale of China Domestic in 2013. Excluding the disposal of China Domestic, adjusted revenues increased by 6.3% with both higher volumes and stable revenue quality. We also saw good intercontinental capacity utilization. Profitability once again improved in all units and overall adjusted operating income increased by 40%.

During the second quarter the recovery that we have been seeing in Brazil continues with the segment moving to profitability for both the second quarter and for the half year as a whole, as in the first quarter adjusted revenues once again increased by more than 11%. In Brazil, we continue to focus on high quality business which you can see coming through in significant increases in revenue per consignment and revenue per kilo.

We are pleased to have completed the sale of our Dutch TNT Fashion business for 39 million. However, performance in our Innight units remains under pressure. As part of strengthening of the management across the Group, a new management team has also been appointed here. Our aim remains to achieve a turnaround in performance of this unit and ultimately to drive much improved profitability.

Finally, let me briefly highlight that we will be paying an interim dividend of $0.049 per share. This represents a payout of about 40% of normalized net income over the first half of 2014 and is therefore fully in line with our stated dividend policy. The optional pro forma dividend is payable at the shareholders’ election either wholly in ordinary shares or wholly in cash.

And with that I will now hand you back to Tex.

Tex Gunning

Thank you, Maarten. Lastly, a brief comment on our expectations for the rest of 2014. At the macro level whilst economic activity and growth will likely remain uneven across the Group’s various markets, we do expect to see improvements in trading conditions in many areas. Overall, whilst operating results in Pacific are likely to continue to remain under pressure, results elsewhere should show positive development. We also expect to make further progress with our outlook initiative and as part of this we’ll be increasing our investments in our European marketing brands by a further 15 million to 20 million.

And that concludes the presentational aspect of today’s call. We’ll now be happy to take any questions that you may have.

Huub Popping

Operator, please could you take us through the procedures to ask questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And your first question comes from the line of Stephen Furlong.

Stephen Furlong - Davy Research

Good afternoon. I was wondering, could you just talk about the investment in the marketing and brand, at 15 million to 20 million. Maybe you just might talk about the marketing campaign for the -- to capture the SME businesses and how is the sales drive going in terms of your four priority industries that you’ve indicated on outlook? Thank you.

Tex Gunning

Yes, the SMEs we want to increase our penetration in the SME market. Now you have a choice to do that either through a sales force but then I think your cost to serve will go up quite dramatically or you chose to do it through marketing campaigns and so in fact you get a better mix between your push strategy and between your pull strategy. And then my experience is that your marketing investment is more efficient than investing in the sales force. So that’s why we decided in the fourth quarter to have a promotional brand campaign and that’s where the investment comes from.

Stephen Furlong - Davy Research

Okay. And in terms of the sales and in terms of the four priority industries, are they performing in line with what you would be expected at this point in time? Or I guess they're long-term strategic aspirations.

Tex Gunning

Yes, to be fair I mean the outlook strategy was declared in March, we’ve been cascading it in the second quarter. We’re developing our vertical plans, we’re developing our SME plans. You should expect to have that growth in these verticals only comes in line with the development of your capabilities and in line with your investments. So there is no such thing in the growth strategy that you a put switch on and you push a button and then you start to grow just because you declare that as a strategy.

So, we have to have patience here. We have to develop the capabilities. We have to develop the SME strategy properly and then we should see the growth of course coming in line with the capabilities that we develop and with the investments that we develop. But there is no instant success in the growth strategy.

Operator

(Operator Instructions) Your next question comes from the line of Philip Scholte. Please ask your question.

Philip Scholte - Rabobank

Yes, that is Philip Scholte from Rabobank. A couple of questions, your current long-term targets are actually still talking about 2015 and the famous 8% margin for the European activities combined. Do you still consider that as being an appropriate target? Or should we actually forget about that pending your new outlook reporting lines?

And secondly is on the UK, which seems to be the real problem of the Europe main activity. Can you talk a little bit more about what exactly is happening? I understand, indeed, that the market is becoming a bit more competitive. But I also have the impression that internally, maybe things are not really running according to plan.

Maarten de Vries

Yes, Philip, this is Maarten speaking. Let me first talk about the 8% target. So the 8% target is indeed for Europe Main and other Europe including Americas. We have set the target for the end of 2015. We are now at the middle of 2014 and we have a number of initiatives under the way to realize these targets. And these initiatives are all under the (belt) [ph] of the outlook strategy. These contain commercial initiatives specifically where we were just talking about to drive growth in the SMEs. These initiatives are around our service quality to drive customer satisfaction under the umbrella of the perfect transaction and as well as initiatives to drive investments in our Liege Air Hub, our road network and as well as in specific countries like Italy and the U.K.

And those investments need to drive operational excellence and specifically better productivity and on top of that we continue to drive our cost reduction programs. So, those initiatives are all underway to support our target by the end of 2015 and as we have communicated we will give a comprehensive update during the Capital Markets Day in February on the 18th of February where we will go in detail through all the financial metrics and of course to share the progress vis-à-vis the started.

So, just on the first question, let me then go to your second question on the U.K. it’s true that’s we see in the U.K. a competitive pressure and it’s bodes down to pricing pressure so top line and margin pressure and indeed we have actions underway to address this and the two key actions are related to our service quality, our customer satisfaction in the U.K. as well as investments we are doing investments into depots to improve our performance and also to drive productivity in the U.K. as well.

Philip Scholte - Rabobank

Right, right. But if I may, is it just then it sounds like just a matter of pricing? Or do you also -- or is there an issue logistically in terms of your service quality?

Maarten de Vries

That’s what I mentioned that’s indeed our -- we have issues with our service quality in the U.K. And we need to bring that deck on par and of course you can imagine if your service quality is not on par, it translates in your revenue quality translates into pricing pressure.

Philip Scholte – Rabobank

Right. And sorry to bother you, but may I ask why the service quality is suffering?

Maarten de Vries

The service quality is directly linked as well to our performance in the depots and that’s exactly why we do a number of investments in the infrastructure in the depots to improve our operational excellence and to basically create the perfect transaction.

Philip Scholte – Rabobank

Right. And very finally, did the U.K. then suffer a big loss, or is that exaggerated?

Maarten de Vries

No, what we say is that compared to last year Q2, we basically had a deterioration of the results in the U.K. and that’s what you see be coming back in the segment reporting on the Europe Main.

Philip Scholte – Rabobank

Right, but it’s still positive?

Maarten de Vries

Yes, correct.

Philip Scholte – Rabobank

Right. Okay, thanks.

Operator

And your next question comes from the line of Christopher Combe. Please ask your question.

Chris Combe

First of all, just a follow up on the marketing investments. In light of what you just said in terms of still intending to hit your 8% target by the end of ‘15, should we assume that this incremental marketing spend is part of sort of a step change in your marketing budget or is this the one time effort in the second half?

Tex Gunning

Christopher, this is Tex. I think for this year we have said, look, we've got to tell the world that we are back and we got to give quite a message to the market and to our customers that we are back in the market. I think an SME strategy obviously needs to find the right balance between having a sales force which TNT uniquely has in Europe but also where the sales force ultimately be the cost of service becomes too high and then you switch into more marketing cost. So, ultimately I think for me the balance is an issue of adding up your sales, your cost to serve for the SME market plus your marketing spend for the SME market set it against your growth targets and then make the right tradeoffs.

Now we haven’t yet for the next few years said what that tradeoff should be. I think, you should expect on the Capital Markets Day that we will outline our SME strategy and in that SME strategy we will indicate to the market clearly how much will come through a push driven sales strategy and how much will come through a pull driven strategy including e-commerce and all the digital tools that we nowadays have.

Christopher Combe

Okay, thanks. And then another topic, the language in today's results talks about small growth in Europe Main versus, I think, moderate in the first quarter when you strip out the U.K. and Italy. Does that imply underlying slowing on an adjusted basis? Or is that closer to a stable trend?

Tex Gunning

No, on the lines basically what we say the uneven growth we see in Europe where indeed the main topics we raised here is the UK and I talked about UK just now as well as Italy. In Italy we have moved away from lower yielding customers and we have basically improved our revenue quality and that’s coming back in the top line.

Chris Combe

All right. And very last one, can you give us a bit more color on the nature of the 6%-type implied revenue growth in EMEA, which verticals you're seeing at which trade lanes?

Tex Gunning

I don’t think there is a particular vertical there but we do see a steady intra-Asia trade lanes are improving so we see an uplift in consignments. We also saw an uplift in consignments to and from Europe and we believe it’s a sustainable uplift and that’s why we’re confident to expect that the improvements that we see both in volume and in margin, they’ll continue to in the second half of this year.

Operator

And your next question comes from the line of Matthew O'Keefe. Please ask your question.

Matthew O'Keefe

Yes, thank you. Two questions from me, please. On the Pacific business, you've mentioned again revenue protection as an issue. I wonder if you could just remind us all how it is that revenue occasionally can slip through your fingers in this sort of business and, indeed, what the measures you are taking to recoup that might be. And then just on Brazil, I think the last time we spoke you were anticipating there might be something of a paralysis in the business around the World Cup. I wonder what you can tell us today with the tournament over. Those are my two questions. Thank you.

Tex Gunning

Yes, first on Pacific for us indeed trading conditions remain difficult in Australia and I think that has been kind of in recurring fee. By the way you have to remember that our business in Australia is essentially a domestic business but the initiatives has helped to basically stabilize the top line and the cost reduction initiatives have helped and supported an improving trend in the bottom line.

On Brazil and World Cup, I mean first of all I think it’s important to mention that Brazil is basically a turnaround story where we have been moving into profitability in the second quarter and for the half year as a whole. On the impact on a specific impact on the World Cup, obviously we have seen some impact because of these disturbances around the World Cup event but I would not call this as very material.

Matthew O'Keefe

And can you just say a few words on how the -- just a bit more background on how it is that the revenue issue in Australia has arisen, just to remind me?

Tex Gunning

Yes, Australia is Australia, let me start there. So in this game of this industry to get the balance right between your weight, between your distances, between your customer mix, big customers, small customers seems to be all the time a game that you have to understand it very well. And what’s interesting that you use the words how is it that it slipped through your fingers again. My own guess is that these things happen. And we saw it happening at the end of last year. We jumped on it. We took corrective measures. We did with the help of outsiders immediately a profit analysis on (them) [ph], on customers. And that’s what I think you see the effect of in the second quarter.

So we will continue to see the effect I think of that analysis of that assessment. Having said that Australia as a country is always in enigma I think. It has massive distances. It has a very small local economy and I think it will be tough for quite a while I think in Australia.

Operator

And your next question comes from Damian Brewer. Please ask your question.

Damian Brewer - RBC Capital Markets

Got two questions please first one around the UK and one more generally about one-off charges. First, on the UK could you give us an idea of what kind of products were hit by this sort of quality effect? Was it B2B and B2C? Was it deferred more expedited products or is this something across the Board? And then if it is across the board and the quality issues that were mentioned, both on the press call and earlier in this call, will those be resolved in time, even if this is due to personnel loss, say due to the UPS bid, in order for the quality to be right when you put this SME marketing exercise in or would you risk compounding the problems you've already got if people get disappointed when they try TNT? And I'll save the second question for after that one.

Tex Gunning

So let me take this one and then Maarten can step in as well. I should say that the quality issues had a lot to do with the pressure that was on this business to get its volumes in. So what they did this time to take a lot of volume in and that the operations in the network couldn’t handle, recall that early. We spotted that that has normally a very negative effect on your total operations. And we have taken that out. The last few four or five weeks the service performance has been excellent in the U.K., so has been really top of the market. So I think that issue we should be able to get behind us quite quickly.

On your issue of let’s say the brand activities and the promotional activities, that will be in selected countries in the fourth quarter and they’ll not be in the U.K. So that will be in other parts of Europe first and they’ll only be next year in U.K. So by that time the service improvement that we have seen over the last few weeks should be sustainable.

Damian Brewer - RBC Capital Markets

Okay, thank you. And then my second question was about one-offs, which is really -- if I look back to Q1 2009, so over, what, 22 quarters, there have been 21 where you have had one-offs, albeit, obviously, under a different management team. But you've had about 1.4 billion of clean EBIT in total, but about 1.05 billion in aggregate one-offs. Now this might be wrong, because we've had restatements and changes, but broadly it's a very heavy amount of one-offs. When you look at what you're thinking about for next February, how much more in the way of one-offs will the business potentially require to get there? Are you going to try and minimize those or are we going to be looking at something similar in future?

Tex Gunning

Shall I start Maarten? We should not put the burden of the past on Maarten yet. Yes, in February you can but not yet.

Damian Brewer - RBC Capital Markets

Or you, Tex to be fair.

Tex Gunning

Well, so I mean I cannot agree more with your, let’s say, statement and with the meaning of your statement. How I look at it is businesses have good times and bad times and this business obviously has gone through a bad time over the last few years. We have under the wisdom of our supervisory board installed a new management board the new management board obviously is being charged to create a sustainable future for this business. Obviously we will look again and again and again how we can make this business more productive and more efficient which means more investment, which could mean more restructuring. We continue to upgrade our management at all layers of the business and I think I'm pretty sure that in February we will be able to outline to you a very detailed guidance about what we want to do with the business in the next three years and how we believe we can turn this business around.

Damian Brewer - RBC Capital Markets

Okay. And you won't be clear on one-offs until we get to that?

Tex Gunning

Yes, we will be.

Damian Brewer - RBC Capital Markets

Okay, thank you. I’ve got one other question but I’ll jump back in the queue. Thank you.

Operator

And your next question comes from the line of Dominic Edridge. Please ask the question.

Dominic Edridge - UBS

I just had a couple of questions, please. Could you just discuss sort of the developments in premium versus economy products within Europe? Has that sort of improvement continued? And then the second question is slightly more technical and I was just wondering if you'd just discuss how we should be thinking about the cash flow for the remainder of this year. Obviously, you've taken a number of charges. It looks as though they've been taken as provisions thus far. And the second thing is, on the CapEx side, you're clearly running well below sort of your full-year guidance of 3% of revenue. Could you just discuss how we should be thinking about the remainder of the year? Thanks very much.

Maarten de Vries

Shall I first take your last question on cash flow and CapEx. Yes, so as I stated earlier for the first half of the year we had CapEx of 1.9% of sales and we indicate that we expect that we have a higher CapEx going forward in the second half of the year, we will maintain our guidance at the end of Q1. So we will see an uptick of CapEx in Q3 and Q4 and that’s all on the back of the announced investment programs in the year in our road network as well as in Italy, UK, and Australia. And that will have some impact on our cash flow for the second half of the year. On the other hand of course we will be very tightly managing our working capital going forward as well.

Tex Gunning

Dominic if to come back on your question about premium economy we do see an uplift in our air volumes which normally is a premium product obviously. So at the moment I don’t see a major shift between economy and premium.

Dominic Edridge – UBS

Okay, thank you very much.

Operator

And your next question comes from the line of Mark McVicar. Please ask your question.

Mark McVicar - Nomura

Yes, good afternoon. I had two questions. First of all just absolutely clarify the 2015 targets, you're now talking about hitting the 8% in the two European businesses at the end of the year. So the run rate in the year, whereas the previous target was to deliver that 8% in 2015, am I correct?

Tex Gunning

Maarten is looking at me and I’m looking at Maarten. The 8% I always understood was a run rate and but again I think what we will do is come back to you in more detail in the Capital Market Day. Realized of course that we will present a new segmentation in domestics, in international and AMEA and therefore you will see the numbers quite differently. It wouldn’t change the guidance that we gave now but it will be presented in a very different way.

Mark McVicar - Nomura

Okay. I'm just looking at the presentation from last March, where the slide very clearly says view on 2015, 8% operated margin.

Tex Gunning

I know and to deliver management team that of course presented that and we committed to that number as I’m not walking away from that commitment. But you have to realize that we are here with a management board, with a new segmentation coming up and new management structure coming up and therefore I ran our way till February giving you proper guidance on the total company and gave you proper guidance in all metrics.

Mark McVicar - Nomura

That's fine. I just wanted to understand exactly what you were saying. My second question is very straightforward. So far you've taken €95 million worth of one-offs in the first half. What should we expect that number to be for this year?

Tex Gunning

Yeah, so correct. We took some major run offs in the second quarter, 74 million, which includes restructuring amount of 61 million. We don’t expect to have this kind of run rate for the second half of the year and we basically will stick to the numbers originally also indicated under the -- for the restructuring, for the outlook program.

Mark McVicar - Nomura

And that's what in the second -- and what's that for the year?

Tex Gunning

So, we have under the outlook program we have basically mentioned the restructuring amount of 90 million and one-offs as part of implementation cost of 30 million. So total 120 million and that is more or less the number for restructuring an implementation cost we will be looking at.

Mark McVicar - Nomura

So there's about another 25 to go in the second half then?

Tex Gunning

Yes.

Mark McVicar - Nomura

Lovely, okay thank you very much.

Operator

Your next question comes from Marc Zwartsenburg. Please ask your question.

Marc Zwartsenburg - ING

Yes, good afternoon gentlemen. Couple of questions left. First of all, could you provide us with an update on the investigations in France, please? Then the second question. The phasing of your cost savings. Year-to-date, we're at 63 million, target is 120 million for the year. How should we expect the cost save to develop over the next couple of quarters and into 2015? And then lastly, just checking the sales of fashion Netherlands, the revenues in 2012, can you remind us the number for that? And I assume that we have excluded for sake of the targets for 2015, is that correct as well? Thank you.

Maarten de Vries

Okay Marc. This is Tex. I'll take the French issue. And so what we have, we received a multicolor statements of objections from the French authorities that is currently being studied by our lawyers and then comes a moment in time in the next few weeks or months where we have to decide what to do with that. So there is very little news to tell you on that.

Marc Zwartsenburg - ING

Is there anything of a time line, when you have to…

Tex Gunning

I would this year that we will have -- a next step is either way right, it is that you settle or that you reject and that you’re going appeal. Maarten?

Maarten de Vries

Maarten, so let me come back to your question on the cost savings, yes. So, in the first half we did 63 million in cost savings. The target for this year is 120 million and I expect that we will deliver on this in the pace as we are right now. So, you could expect in order 30 and 30 million for Q3 and Q4. For 2015, I suggest that we compare on the base of the savings in the Capital Markets Day in February we can give you further details on the further cost reduction program. You also had a question on fashion, I think first of all be aware that fashion is reported in an allocated and if I take the number of the top line of this business and it represents a roughly 110 million to 120 million top line.

Marc Zwartsenburg - ING

Thank you. Maybe a final one, if I may, on the U.K. Can you give us any feel for the step change in profitability in the quarterly year-to-year basis? Whether the impact is 10 million to 15 million or 5 million to 10 million on a year-on-year basis?

Maarten de Vries

You mean U.K. for Q2?

Marc Zwartsenburg – ING

Yes, Q2 versus last year in Q2, what the impact is from just isolating the U.K to get a feel for the underlying business excluding the U.K.

Maarten de Vries

The delta was more in the range of just below 5 million.

Marc Zwartsenburg – ING

Thanks very much.

Operator

Your next question comes from the line of Doug Hayes. Please ask your question.

Penny Butcher - Morgan Stanley

Hi there, it’s actually Penny Butcher from Morgan Stanley, just two quick follow-up questions. With regard to I guess the pricing experience you're facing in the UK. It is something that we hear is occurring in other markets other than the UK. I believe it was recently cited also in Germany and perhaps other markets such as the Netherlands as well. Could you give I guess a bit of clarity that you're not experiencing these same types of pricing issues in other country markets besides the UK? And how you might go about combating them if you are? And my second question is just to follow up on the cash flow. I think I was calculating on your second quarter basis that without the benefit of the sale of the Dutch fashion business, you were actually almost 50 million free cash negative versus the EBIT performance that you cited sort of 82 million on an underlying basis. Yet, you say CapEx is rising into the second half. I mean could you give some color of when we could see the free cash perhaps more emulating the performance in reported EBIT? Thanks.

Maarten de Vries

So let me start with your last question first I think you need to look at if you look at the Q2 cash you need to look at two elements there is one is fashion which you already mentioned but I think it’s also important to look at tax cash out for the UPS termination which was 50 million. So, those two elements you need to take into account when you look at the cash for Q2. On pricing in Europe there are key issues and those two key issues we mentioned specifically on the UK as well as how we drive revenue quality in Italy through contract pooling in Italy. And overall, we’re driving two core initiatives is one is to focus on our margin with our strategic accounts and the other one is clearly two improve our customer portfolio with the focus on SME customers.

Penny Butcher - Morgan Stanley

Okay, that's helpful. Can I ask a follow-up though on the cash flow? I guess if I also take into account, as you say, the tax outflow, it would still mean, I think, with the benefits of the inflows from the sale of the business, which we're not assuming to repeat, that you're broadly neutral on free cash flow versus a quite clear positive at the EBIT level. I mean that's a pretty large gap with rising CapEx and your other investments in marketing to phase. So, should it be something that we expect to progressively catch up, as you complete these CapEx investments and the restructuring initiatives? Is that something more that we would see perhaps then in 2015?

Maarten de Vries

No, what you saw so in Q2 is a little bit an uptick in working capital. And that’s why I mentioned earlier that for the second half there will be an renewed focus to make sure that our continuous improving trends in working capital which we have by the way seen over the past years, that we pick up on that again and that we’ve managed this fight going forward.

Penny Butcher - Morgan Stanley

Okay, that’s helpful. Thank you.

Operator

Your next question comes from the line of Neil Glynn. Please ask your question.

Neil Glynn - Credit Suisse

Good afternoon, just following up really with respect to the pricing. You're obviously focused on sales and marketing and growing network quality. But in a highly competitive environments I would assume cost is going to be absolutely crucial being a structural winner. So I'm just interested in how you think about your costs competitiveness relative to your key peers and the work you've done on that with a view to influencing your ability to win on the pricing over the long term?

Tex Gunning

So let me start there Neil. Obviously if you look at the outlook strategy we’ve identified cost as a major issue. Customer research tells you that reliability in price are the single most important attributes to choose the provider as a conditio sine qua non. So we know that our cost has to come down continuously that is why we invest in productivity that’s why we are restructuring our overheads. That’s why we will start to use technology much better to increase our productivity. So you should expect in the next 3 to 5 years and we will tell you more in the Capital Day that we will spend enormous amount of efforts and attention to becoming a low cost provider.

Neil Glynn - Credit Suisse

Understood. Just maybe a follow on to that; you obviously highlighted I think back at the full year, you've clearly placed a lot of emphasis on the uniqueness of your network. That, I guess, would generally fit with a view that you might be able to charge a price premium relative to at least some competitors. Is that still the way you think about it? Or do you need to be the most price-competitive operator around to properly safeguard your own future earnings?

Tex Gunning

We don’t see our network as a means to for premium pricing. We see it as a quite a unique asset that allows us to be in the industry, that allows us to be in business, it defines us. It allows us to share SME customers in Europe but also large customers in Europe. But I can’t see at the moment that, that would allow any premium pricing. We have to realize that the kind of competitors in this industry is both domestic, always domestic competitors and you have the big voice in international networks. So, I think the competitive intensity is quite high and that in fact ask from all of us to do continuous improvement and to continuously be sharp on pricing and margins and cost.

Neil Glynn - Credit Suisse

Understood, that's great. Thank you, Tex.

Operator

Your next question comes from the line of Damian Brewer. Please ask your question.

Damian Brewer - RBC Capital Markets

Thank you. I just wanted to touch on the unallocated headcount, because it looks like it's crept up, but I assume that's got to do with the shared service centers. So could you tell us a little bit more what's going on there and how much progress you are? And how much the way through you are in terms of reallocating costs to those? Thank you.

Tex Gunning

If you look at the headcount picture then let me take a step back, we announced an overall redundancy program of 4,000 headcounts and if you have a look where are we today then we basically are at a reduction of 2,500, mostly coming from efforts last year and broadly this year Q1 and Q2. And again out of those 2,500 mostly is obviously in Europe and yes, there are some effects of moving more to shared services and therefore some reallocations of headcounts, but the broad picture is a reduction of 2,500 people versus the original 4,000 target. So, we are on the way there.

Damian Brewer - RBC Capital Markets

And in terms of the shared service center plan, is that now up to full speed? Or is that more to come from that? Or are the other 1,500 redundancies just positions where technology will replace?

Tex Gunning

Still more to come.

Damian Brewer - RBC Capital Markets

Okay, thank you.

Tex Gunning

We as well noted as we have started the second zone of questions so I think there is time for one more question. Operator?

Operator

Thank you. And your next question comes from the line of Scott Ryall. Please ask your question.

Scott Ryall

Thank you, I'll keep you very short. It's a follow-up question on the Pacific. I was wondering if you could comment whether the pressure you're seeing in the local market is more due to competitive pressure or customers themselves, please, and the change of behavior of customers?

Tex Gunning

I think it has a lot to do first with the economy, that is the catalyst for competitive pressure. You saw that the mining industry was heavily affected by the economy, therefore that affects of course the whole market and then you get typically macroeconomics behavior that you get pressure on margins. People then start to run for volumes which increases the pressure on margins and I think our team in Australia in that pressure concurrent probably didn’t take all the right actions that they should have taken. But as I explained earlier in the end of the call we saw that at the fourth quarter last year by the indicators have jumped on it, I would expect therefore again as I said in the second half of the year that we will be able to continue to improve performance at the same time we are at the moment having a structure review at the business, how we can improve it. As you know we are investing in new hubs and depots both in Melbourne, Brisbane and Sydney. Sydney hub will be open in January to February. So, that should bring ultimately productivity gain that should make us more competitive in that market.

Scott Ryall

Okay, great thank you.

Huub Popping

Okay, thank you all. That concludes this presentation. See you next time, have a good day.

Maarten de Vries

Thank you, thanks a lot.

Operator

That does conclude our conference for today. Thank you for participating. You may all disconnect.

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