TNT Express NV (OTCPK:TNTEF) Q4 2015 Earnings Conference Call February 16, 2016 8:00 AM ET
Tex Gunning - CEO
Maarten Vries - CFO
Gerard Wichers - Director IR & Corporate Communications
Damian Brewer - RBC
Neil Glynn - Credit Suisse
My name is Clarke Hurst [ph] I would like to welcome you to TNT’s Fourth Quarter Analyst Call. Joining me here today to discuss the results, CEO, Tex Gunning and our CFO, Maarten Vries. Before we begin I would like to inform you that we have published our annual report for financial year 2015 which will be available on investor relation section on TNT's website at tnt.com/corporates. During the course of this call we will mainly focus on our fourth quarter results. We will start with few remarks from both Tex and Maarten and then we will put the call for questions. This conference call is being broadcast web, a replay will be available on this site. With that I would like to turn it over to our CEO, Tex Gunning.
Thank you so much. Good afternoon, good morning everyone and welcome to today's conference call. I must say that I'm very pleased with our quarter four results and let me tell you why. It's only in February 2015 we presented the outlook strategy at our Capital Markets Day in London [ph]. We’re now one year later and we really see tangible results from our focus on our customers and on our service. Revenue growth already started to pick up during the year but really accelerated in the fourth quarter. We saw high single digits, small and medium enterprise growth both in International Europe and in our domestic businesses. We saw a step change in service, leading to the highest customer satisfaction scores we ever had a TNT. So this is a real turnaround from the past. We also said we had to catch up regarding operational productivity and operational excellence by making significant investments in automation as well our new hubs and depots. I can report you that we’re on schedule. New hubs and depots are now operating in Australia, U.K, the Netherlands and Spain, in [indiscernible] air hub that has also made a step change in automation in countries like Italy. We announced that we would start outsourcing our IT infrastructure and other global business services.
During their year, we signed partnerships with Accenture, Infosys, HP and Verizon and we are therefore on schedule to simplify and transform our basic transactional processes. Of course, another important reason to be happy with the quarter four result is that our adjusted operating profit nearly doubled compared to the fourth quarter of 2014 as a result of higher revenue growth, very good cost control and improved revenue management. So all in all outlook is gaining momentum and we started to turn the corner as we predicted.
Now before I hand over to Maarten, a little bit background on the Intended Sales Team TNT to FedEx, the deal has received unconditional competition clearance from the European Commission and from the Brazilian regulator. We have sold our airlines to a European Aviation Group, conditional on closing of the FedEx offer. This will ensure obviously service continuity for TNT Express, for TNT Airways and Finnair in compliance with European Airline ownership rules. Closing of the offer is anticipated in the first half of 2016. The pre-integration work is progressing very well and in a very collaborative way. We are all very excited about the FedEx deal and we're looking forward to joining forces with FedEx in the near future.
So now I will hand over to Maarten who will take you through the details of the financial results. Maarten over to you.
Thanks, Tex and good afternoon and good morning to all of you. I'm happy to report that the fourth quarter is our best quarter since I joined TNT midst of 2014. And let's start with the statement of income for the fourth quarter. Revenues of $1.86 billion were up 4.1% from the prior year. They're benefited from currency effects and from a working day effect, but were negatively affected by lower fuel surcharges, as a result of the drop in fuel prices. Excluding these three items, we recorded to healthy underlying revenue growth of 3%, supported by an 8.1% increase in revenues from SMEs in all segments. One-off charges were €39 million less than in the prior year which also contributed to the positive operating income of €57 million. When corrected for one-off charges, our adjusted operating income almost doubled from a year earlier to €96 million. This is due to higher revenues and successful efforts to reduce indirect costs. We ended the quarter on a positive net results of €14 million.
Let's now turn to cash flow. Our net cash position of €231 million at quarter end did not change from the third quarter of 2015. The decrease from the prior year reflects the investments made on our outlook strategy. In Q4, we invested €73 million in our transport and IT infrastructure. For example, we put new equipment into operation in our [indiscernible] hub, including a fully automated parcel sorter, extra X-ray machines and open special areas to process pillets. We are also progressing with investments in our IT systems.
The fourth quarter investments brings our total CapEx for 2015 to €309 million in line with the outlook strategy. Trade working capital was 8.1% of revenues compared to 8.3% in the third quarter of 2015.
Let's now move on to the segments. International Europe, International Europe had a good fourth quarter with a revenue increase of 9.1%. If we adjust for currency effects working day effect and a negative impact of lower fuel surcharges underlying revenue growth accelerated to 8.2% compared to 6.5% in the third quarter of 2015. Higher revenues from SMEs contributed to the increase. In the fourth quarter, [indiscernible] increase with 9.5% over the prior year but International Europe also posted higher revenues from large customers.
Another point of satisfaction is that all operating units in Europe posted revenue growth with a particularly strong increase in Eastern Europe and South Eastern Europe. The full year revenues went up both in terms of number of consignments and weight. Average nominal revenue per units decreased slightly as a result of lower fuel surcharges.
The segments adjusted operating income more than doubled year-on-year to €52 million to facilitate comparisons, it's good to remember that International Europe spend €30 million in the fourth quarter of 2014, as part of the re-launch of the TNT brands. That being said, most of the increase in the segment's operating income is still due to higher revenues, improved revenue management and strict cost control.
Let's now move over to International AMEA. The segments reported revenue growth of 4.7% is entirely attributable to positive currency effects. Underlying revenue growth was negative 1.6%. This decrease reflects the continuing trend of lower exports from China to Europe which also affected to number of consignments handed over to TNT in the fourth quarter. However, the revenue decrease in China and Hong Kong was partly offset by revenue growth in India and Middle East and Africa.
From a customer mix perspective, revenues from SMEs grew faster than that from large customers which is exactly what we are after. Service quality, measured in terms of on-time delivery performance further improved over last year and revenue per consignment rose by a healthy 6.9% year-on-year, International AMEA transported fewer, but heavier consignments than the prior year. Overall, International AMEA's adjusted operating income increased by €5 million to €26 million supported by goods cost control. All operating units posted the higher operating income than the prior year.
Now over to domestics, domestic saw a significant progress in the fourth quarter. Revenues were €690 million flat with the fourth quarter of 2014. Obviously, the recession in Brazil affected our revenues, so did the challenges facing the commodity industry in Australia. But this was offset by revenue growth in all our European units. Underlying revenue growth, excluding currency effects working day and a negative impact of lower fuel surcharges, was 0.9% plus.
Revenues from SMEs increased with 7.7% faster than in the previous quarters. Service quality further improved over last year. Average daily consignment increased with 0.9%, revenue per consignment declined 2.6% year-on-year due to pricing pressures, lower fuel surcharges and customer mix effects.
The fourth quarter showed good progress from a profitability standpoint. Despite flat revenues, the segment's adjusted operating income increased by €23 million to €31 million as a result of cost reductions. The Pacific unit started to benefit from productivity improvements brought by the new hubs in Sydney, Melbourne and Brisbane. Profitability in Brazil yield declined year-on-year due to lower sales attributable to the recession. Management pursued cost reductions to mitigate the decrease.
The non-allocated, as a reminder, the non-allocated segments consist of all auto networks, central networks and corporate head office functions. The segment's revenues were €150 million, down 4.2% year-on-year. Adjusted operating income was minus €13 million, compared with minus €1 million in the fourth quarter of 2014.
Dividends, considering FedEx offer to acquire TNT, the Executive Board has decided with the approval of the Supervisory Board, not to pay a dividend for 2015. If TMT were to pay a dividend, the dividend amounts would be anyway subtracted from the offer price of €8 per share, upon FedEx actually purchasing the shares from TNT's shareholders.
Now over to the last slide, with the guidance, a few words about the first quarter and longer-term prospects. We reiterate our outlook agenda and guidance for 2018-2019 as presented during our Capital Markets Day on February 18, 2015. We expect to achieve structural improvements from 2016 onwards and to see the full benefits of the outlook strategy from 2018-2019. For the first quarter, we expect continued economic selectivity in some markets outside Europe, especially in Brazil. And we anticipate restructuring charges of about €10 million in the first quarter. Closing off the FedEx offer to acquire TNT is anticipated in the first half of this year.
Thanks Maarten and Thanks Tex. Operator, could you please take us through instructions for the Q&A.
[Operator Instructions]. And the first question is from Mr. Damian Brewer of RBC.
A couple questions from me. Just want to get a feel, first of all on the net domestic business versus the improvements in Q4 profitability. How much was the year-on-year change in the Brazilian domestic i.e. how much would the domestics have looked like if they hadn't been for Brazil? And then the other question, just want get a feel of the [indiscernible] key divisions, you're now doing a sort of 40% to 60% incremental margin, despite that your running costs, I suspect you've still got it there. How much of that is indicative of what you could be capable of achieving in 2016?
Okay. Let me first talk about domestics. If you look at domestics, it's basically according with two sites, on one hand growth in Europe and improvements in terms of bottom-line in the European units and then on the other hand a very challenging environment in Brazil and revenue decline in Brazil and also our profitability decline in the fourth quarter in Brazil. And that is basically from a total point of view, bringing the domestics picture out of balance, I would say. We didn't mention the Australia yet. Australia was more or less flat versus last year and what we see there is that, we have progressed over the year, over the subsequent quarters in terms of bringing up the new hubs and bringing productivity in the system. So yes, Brazil had an impact on the domestic results and they would have looked better, if we would have progressed further with Brazil.
The second question is a question, if I understand you well in terms of operating leverage. So I think, you need to look at it in two ways; the operating leverage in our international business, international Europe as well as international AMEA, is obviously higher compared to the domestic business. In the domestics, volume grows with the quite some extra costs, in terms of pickup and delivery, while and the international business relatively our fixed costs are high.
Now, as we grow and as we implement outlook, we still are continuing to invest in our infrastructure and these investments we obviously do to a create much higher productivity than we are today. And as we flexed earlier, this whole infrastructure investment plan takes up at the end of 2016, so the real productivity improvements and therefore the real operating leverage we will only see kind of from 2017 onwards. But we see kind of the first signs now in Q4 with all the actions we have been taken already.
And can I just ask as a follow-up are you able to tell us what the absolute change in the rate of profitability in Brazil in Q4 was?
No. We don't share the profitability in the specific countries. But just to give you an overall view, in 2014 we have made a lot of progress in Brazil and basically came pretty close to no profit or loss and over 2015 we are moving backward in fact. But on the other hand, the team in Brazil is taking a lot of actions to take cost out of the business and to basically cope with the lower topline, the pressure on the margins.
And the next question is from Neil Glynn of Credit Suisse.
The first with respect to your regaining of market share seemingly in the fourth quarter in Europe, you had obviously some very impressive run rates there, but I'm interested in terms of the competitive response you're seeing to that as we move into 2016. Has there been anything significant in terms of competitor response? And then the second question, I'm wondering whether you're seeing attempts to raise pricing in the market; whether it be Europe, Asia, Brazil; given the sustained stronger U.S. dollar? Has that changed the dynamic in terms of general price increases this year relative to any other years in the past?
This is Tex. Let me take the first question on market shares. It's very difficult to assess whether you gain or lose market share in the overall market because the overall market is made up of course of domestic businesses, international businesses, strategic accounts, large accounts and small to medium enterprise accounts. We have in our outlook strategy said that we will focus primarily or intensely on the small to medium enterprise market being the backbone of the European economy and we believe that with our European road network of course that we have a service that we can offer to the small and medium enterprises that is very competitive.
Now you're right to say that given the growth numbers that we have seen in the fourth quarter and particularly if you compare it with GDP growth of course in Europe, that you start to think hey, maybe we are gaining share particularly in that segment.
But I don't think we can conclude from that that we gained market share in the overall market because our competitors of course are taking also into account the strategic accounts. And that brings you then also to the second question which I will pass on to Maarten soon, about price increases. Obviously in a period like this from the announcement in April last year to now, you have seen or we have seen a very fierceful competitive intensity on our customers. You can imagine that our competitors say look, this is a chance for us to do some bashing and to undercut us.
So whilst price increases have been holding on very well since December, January; we do see that competitive intensity is quite high and that of course has all to do with let's say our competitors taking advantage of the fact that we're still not merged with FedEx. But I leave it over to Maarten to give his wisdom on this.
I think if you look at this and we also all the way said it on the outlook that one of the focus areas for us was revenue management and also pricing discipline. And what you see is that we have implemented price increases across the board in the in the December, January timeframe and despite kind of the tax we get from our competition, I see that we have much higher pricing discipline right now than if I would take it a year ago. So also in this area, we've made progress and we see it coming through partly in the margins as well.
If I could just follow-on to your comment in terms of price discipline. From what you said, is it fair to assume that you're also actually having to let a little bit more volume go that doesn't match your price discipline criteria?
Particularly we have chosen, you see very strongly in AMEA for instance where the profitability goes up despite that revenue doesn't go up, to let go certain commodity type customers where the margins are really squeezed as you can imagine and to focus far more on the value-added small and medium enterprises. That is at the basics I think of the whole outlook strategy that we feel that we can be very competitive in the small and medium enterprise segment. We can also deliver a service that the small and medium enterprises really appreciate and with that, we are improving let's say the gross margin per consignment.
Thank you very much for dialing into our conference call, very much appreciated. If you have any further questions, do not hesitate to call otherwise we'll speak to you the next time.
Thanks a lot.
Thank you. Bye, bye.
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