Interview with Herna Verhagen

In 2019, PostNL celebrated its 220th anniversary. An important milestone in our long-standing history of developing and transforming into the company we are today. Our purpose is to deliver special moments, and our ambition is to be “Your favourite deliverer”. Both inspire us to keep working on our strategy to become the logistics and postal solutions provider in the Benelux, while creating long-term value for our shareholders. In this interview, Herna Verhagen reflects on the key developments of 2019 and her views on 2020.

Herna Verhagen

What were PostNL’s special moments in 2019?

"Out of the many special moments we had in 2019, I want to highlight some key developments to provide an overview of the past year. We set ourselves important targets to bend the trend in four key priority areas: employee engagement, customer satisfaction, profits and cash flow. I am proud not only of the tremendous efforts that our people demonstrated to come up with smart, innovative ideas to help us achieve our objectives, but also of their loyalty and engagement with the company. And I am pleased that we improved on almost all our targets during the course of the year. But we are not there yet.

We have completed the divestment of Postcon (Germany) in October 2019 and announced the sale of our Nexive (Italy) today. We have trust in the future of these entities, and these transactions underpin our focus on the Benelux.

We continued to make good progress with our transformation, and now more than half of our revenues are e-commerce related. We presented an updated Parcels strategy during our Capital Markets Day in May. Our main focus is to create more leverage from Parcels in order to improve the balance between volumes, cash flow and profitability.

Through the acquisition of Sandd, we created a single, strong nation-wide postal network in the Netherlands. The additional volumes following the integration, and as a consequence the synergies that we will be able to realise, will create much more stable profits and cash flow within our mail business. This contributes to keeping mail accessible, reliable and affordable, and helps us to create more job and income security. We rolled out the first phase of our new equal-flow business model, the New mail route, during the summer. This was an important prerequisite to be able to integrate Sandd so quickly in our network. Furthermore, this helped us realising cost savings in 2019 and beyond.

And as we push the business forward, we continued to work on becoming more digital and data driven. The expansion of our digital connections with customers, such as through the PostNL app with more than 5.3 million users, is one example. Another is digitising our customer-related processes, which will lead to greater customer satisfaction and cost savings for the company. And we took real steps towards reaching our sustainability targets, successfully issuing a €300 million Green Bond that will help us become an emission-free last-mile delivery service provider in the Benelux by 2030."

How do you look back on the year’s business performance?

"We are proud that we achieved our group financial targets in 2019, as it was a challenging and dynamic year. Revenue grew by 2.6% to €2,844 million and our UCOI of €176 million came in at the top-end of our outlook range. This was a result of our strong focus on our strategy, with a good performance in the last quarter.

The improvements we realised in our net working capital contributed significantly to the increase of our net cash flow in 2019 compared to 2018 by €188 million, and our cash conversion was 79%. In line with our dividend policy, we were able to declare an interim dividend. As already disclosed, due to the acquisition of Sandd our increased leverage ratio does not allow us to pay a final dividend. We expect that we will be able to restore our leverage ratio and recommence payment of dividend within 12 to 24 months of the acquisition date, 22 October 2019.

We achieved a 3% increase on UCOI at Parcels, realising €121 million compared to €117 million in 2018. While parcel volumes grew by a significant 12.4%, to 283 million parcels, this was beneath expectations, impacting margins. This underpins why leveraging more from our Parcels business, to capture growth as well as value while reducing costs, is so important.

Mail in the Netherlands realised an UCOI of €76 million, 18% lower than in 2018 (€93 million). Efficiency gains during the year contributed to cost savings of €48 million (2018: €48 million). And to help us continue to save costs, we rolled out the New mail route.

Our employee engagement level stabilised in 2019 at 65%, an extraordinary achievement considering the massive changes we have made in our operations. We saw an upward trend in the second half of the year, and we are continuing to work hard to increase our engagement with employees to underpin our ambition to be your favourite deliverer.

Quality levels at Parcels were slightly below target in the second quarter, adversely impacting our customer satisfaction scores. Due to our focus, however, we managed to improve quality levels after the summer, and even managed to retain them during the extremely busy peak season. While the share of highly satisfied customers was 27% in 2019, we saw an increase during the year from 26% to 28%, which gives me confidence that we are on the right track.

At Mail in the Netherlands, we delivered 94% of consumer mail by the next delivery day, while we are required to deliver 95%. The decrease in quality occurred mainly in the fourth quarter, which was when we adjusted our sorting processes to accommodate Sandd's mail volumes in our network. We also began receiving increasing mail volumes from Sandd, while the employees needed to process these volumes only started in early February 2020. The labour market shortage remains an ongoing focus point.

While 2019 was an exceptional year, we will do everything possible to improve the delivery quality figure in 2020."

How will you create more leverage from volume growth at Parcels?

"Overall, we saw a slowdown in the growth of e-commerce during 2019, with the domestic fashion and electronics segments in particular growing at a slower pace.

Key elements in optimising our revenues are an updated pricing strategy based on both size and weight, and a greater focus on customer value through better insights. To better manage peaks, we are working with customers to reduce peak pressure in volumes. At the same time, we are changing our pricing policies, for example by building in seasonality variables. Updating our pricing for large parcels is an example of how we can create better balance between revenues and cost, as the share of large parcels was increasing, taking up a disproportionate amount of sorting and delivering capacity.

Operationally, we are focusing on optimising our collection, transport and network control to increase efficiency and reduce costs. One example is the introduction of the small parcel sorting centre (SPSC), which is designed to process parcels up to the size of a shoebox. The SPSC will be fully operational in 2021 and will process a significant share of more volumes in our network. This will have positive effect on our cost per parcel and is a highly efficient way to increase our capacity. And we are investing in our cross-dock structure, where our trucks exchange parcels across the Netherlands and Belgium, which will streamline the transport process.

We will enhance our digital interaction with customers and consumers to improve first-time right delivery and reduce time spent per stop. At the same time, we are accelerating the digitalisation of the customer journey and our logistic networks and processes, using IT and data to help customers better tailor their services to consumer wishes. These are crucial in order to provide a seamless customer journey, create new delivery options, and open up new markets.

For other logistic solutions, our focus remains on the health market, where we continued to develop new propositions and expand existing concepts within the sector throughout the year. And we continue to deliver and install a wide variety of goods and services in the @Home market, and in 2019 opened our first dedicated @Home centre in Rotterdam.

Of course, a growing market means a great deal of interest from existing and new players, and we see industry competition that remains high. And there will undoubtedly be changes to the e-commerce market in the Netherlands in 2020, with Amazon set to enter the domestic market. Together, these actions will help create more leverage and long-term value for shareholders, while we stay our customers' favourite deliverer."

What about developments at Mail in the Netherlands?

"The mail market is continuing to decline in the Netherlands, and we saw volumes drop by around 10% in 2019, excluding Sandd volumes. This, alongside substitution and regulation, is having a profound impact on the structure of our Mail in the Netherlands business. And our business performance reflects the transition we are in.

Yet for all the talk about volume decline, there is still a huge number of customers sending mail in the Netherlands. In 2019, including Sandd volumes, we delivered over 1.7 billion mail items, which is around 6.8 million on an average delivery day. While digital communications will continue to grow, physical mail continues to catch people’s attention, and is always nearby and reliable. The hand-written birthday card, a voting card, your favourite magazines and medical shipments: they’re all delivered by PostNL, five days a week, across the country.

And we are innovating for those customers and consumers that continue to use physical mail, for example by investing strongly in automation to help us increase delivery quality and efficiency. We are also investing in the digitalisation of both our network processes and customer journeys. And we are continually fine-tuning our business to ensure mail remains an important part of their overall communication mix. At the same time, we continued to focus strongly on realising necessary cost savings, such as closing down locations and rebalancing our workforce, to offset the effect of volume decline.

We also introduced a new delivery model across our mail operations, the New mail route. This was a major undertaking, which involved introducing new work schedules for over 22,000 deliverers. This 'equal flow' model removes the sorting and delivery peaks that occurred previously, which will improve efficiency and is fundamental for achieving future cost savings. For customers, it means they now have their mail delivered over two consecutive days instead of one. Which means they can better manage their process flows, for example in the production of mailings.

And we welcomed Sandd to the PostNL family in October. Throughout our journey in recent years we have advocated strongly for consolidation in the mail market, explaining that it is vital if we are to maintain an accessible, reliable and affordable mail service in the Netherlands, while generating sustainable profits and cash flow in the years to come."

Why is consolidation so important?

"Combining the postal networks of PostNL and Sandd means mail in the Netherlands will be delivered by a single, strong nation-wide postal network, enabling it to be sent and received five days a week. The consolidation is also the best option to protect jobs in the postal sector, and it will help cushion the decline of the postal market in a socially responsible way.

I am proud to have welcomed over 4,300 new employees from Sandd. This includes more than 300 employees working in sorting, as drivers and in other roles, who will be joining PostNL either at Mail in the Netherlands or Parcels. We will also continue to collaborate with sheltered workplace companies, protecting 500 jobs for employees who face challenges in the labour market. And all employees who worked for Sandd until 1 February will continue to have priority when applying for jobs at PostNL.

Of course, consolidation has many other benefits. For many people and organisations physical mail remains a vital and relevant way to connect and to stay in touch with others. The integration of both networks means addional volumes in our business and creating economies of scale, which will contribute to more revenues and lower costs. We expect to achieve the financial targets that we set out earlier. We will see substantial synergies from combining the networks into one network, and operational synergies that will result from combining central functions and optimising the sorting processes. Ultimately, one strong postal network is important to generate sustainable cash flows in the years to come."

Can you give some highlights on developments in digitalisation?

"Ongoing digitalisation creates opportunities for us to increase the value we add to customers and consumers. At Mail in the Netherlands, we are able to add customer value by offering a range of digital services, such as the stamp code and Mijn Post, through our app.

At Parcels we introduced a number of new services based on our use of IT and data. One of these is the pick-up receipt, which lets receiving consumers generate a barcode in the PostNL app that can be scanned by the retailer when collecting a parcel. This gives the retailer information on as the parcel’s weight, dimensions, and the consumer's name and address, helping them locate the package faster and reducing the consumer’s waiting time.

And we used artificial intelligence (AI) and data to help us more accurately predict when a second parcel delivery attempt would be successful. Based on these results, we have chosen to reroute parcels directly to retail locations when the receiver is not at home on the first delivery attempt. The change will create a number of benefits, including receivers being able to collect their parcel one day faster, lower logistics costs, and a drop in CO2 emissions."

How does PostNL view sustainability?

"We take our responsibilities within society seriously, so sustainability at PostNL covers a number of different areas. It is about lowering our CO2 emissions, which is why we have set ourselves three ambitious goals. One is emission-free last-mile delivery across the Benelux by 2030. Another is substantially reducing our carbon emissions by 2030 in line with the Paris climate agreement. And before that, our goal is to achieve sustainable, emission and air pollution-free logistics in 25 Dutch city centres by 2025. These goals are inspiring us to find new ways to innovate sustainably. And it's these goals that inspired our decision to issue a €300 million Green Bond in 2019. We will use the proceeds to finance projects dedicated to decarbonising our fleet, increasing the sustainability of our buildings and the use of renewable energy.

Sustainability is also about caring for everyone within society. This is why we provide employment for people with a distance to the labour market. And it's why we have made the commitment to continue cooperating with 25 social workplaces following the Sandd acquisition, and continue to make use of our network to help vulnerable people. It’s important that we challenge ourselves and our partners along the value chain to constantly do better and to be more sustainable. These are some of the ways in which we try to achieve this."

What is your view for the year ahead?

"There are a number of to-dos on our list for 2020. One of our first priorities is to create more leverage within Parcels from continuing volume growth. Therefore, we need to step up our initiatives, which includes further implementing our pricing strategy, improving the operational efficiency of our network and investing in smart parcel sorting. This will enable our Parcels business to achieve a better balance between volume growth, profitability and sustainable cash generation. And we adapt our planning in capacity investments to current growth projections.

Another focus area is our ongoing strategy of offsetting volume decline with cost savings and balanced pricing. For example, realising the synergies from the Sandd integration, which will help us achieve notable cost savings in 2020 and the years to come. We will also further cut costs through the implementation of the next phase of the New mail route, which has created a more flexible model for mail collection, sorting and delivery.

We will also make more money available to invest in accelerating digitalisation across the company, such as in platform integration in our supply chain or improving tracking of parcels in the app. This helps us develop every aspect of the company, from smart logistics enabling to move customers' goods quickly, efficiently and sustainably, to optimising the customer experience. And to automation in our mail operations that increase delivery quality and efficiency.

We want to strengthen our employee engagement in 2020, helping our people maintain fun and energy in their job. While our employee engagement score remained stable in 2019, we are committed to making improvements. For example, we continue to focus on attracting the right people in a tight labour market to help create sustainable operations. And we will work to make those employees who joined from Sandd feel part of the PostNL family.

And, of course, we will concentrate on adding value for our customers. Consumers are increasingly communicating with us on the go, and our digitalisation is focused on making it easier for them to send, receive or collect their mail and parcels when and where it suits them. For e-tailers and web shops we will roll out sophisticated new delivery options, and developing more complex and integrated fulfilment services. This will be supported by our operational excellence, which is a pre-requisite for providing the high-quality delivery that directly impacts customer satisfaction rates. Together, these priorities will help us achieve our ambitions in an innovative and sustainable manner."

And to our highly valued stakeholders: any final words?

"‘Our focus in 2019 was on implementing our strategy to improve our key targets: customer satisfaction, employee engagement, profitability and cash flow. It is a fine line and we are clearly not there yet. We performed well on profitability and cash flow in 2019 and I believe we are on the right track. But we need to remain vigilant and focused to ensure we can make further improvements in 2020. Finding a stable upward trend means accelerating digitalisation across the company, investing in our networks, continue to focus on cost savings and creating more leverage from volume growth to improve margins and cash-flow.

But we can only achieve this with the continued support and strength of our many stakeholders. Our customers, who trust us to deliver on their behalf everyday across the Benelux. Our people, who we want to be happy and motivated to do what is best for our customers and consumers, while being proud to be part of PostNL. Our shareholders and investors, who support us in our drive to produce a healthy financial position and performance, while creating long-term value. And our other partners, with whom we work to contribute to a better society, which is connected, smart and sustainable.

To each and every one of them, I would like to say thank you on behalf of PostNL."

Kind regards,

Herna Verhagen handtekening
Herna Verhagen