Driving transition

We are steadily realising our strategy to be the postal and logistics solution provider in the Benelux. Our target of having 50 percent of revenues coming from e-commerce is within reach, ahead of time. Our Parcels business progressed to the next growth phase by investing in infrastructure, innovation and an efficient, value-creating delivery model. We continued to adapt the business model of our Mail operations, which will help us save costs and further manage volume decline. We also took several steps towards consolidation of mail networks in the Netherlands. And by growing our presence and expanding our retail network, we can ensure that we are always close to our customers and consumers, creating one customer experience across PostNL.

At the same time, we dealt with a number of challenges during the year. Our customer satisfaction and employee engagement in 2018 were not where we want or need them to be.
Sometimes for reasons within our control, and in those cases we have started working on improvements. And sometimes external circumstances, such as a tight labour market and the regulatory environment, tested us. While these things will not go away, we are confident that the steps we are taking will create a platform for further growth and sustainable value.

Yet what has not changed is how vital our people are to the success of our great company, and how much we value them. Our diverse, dedicated and innovative people make this company successful. Because of the trust I have in them, I am confident that we will be able to continue our accelerated transformation and take the necessary steps to make improvements.

Value creation for our shareholders remains a key priority for us. Our share price in 2018 did not develop as we had hoped, which was disappointing. However, it is important to focus on our long-term prospects for value creation. Next to the strategic developments mentioned above, we have delivered an underlying cash operating income at the top-end of our guidance for the year. Our aim continues to be to offer shareholders a sustainable, progressive dividend based on the performance of our business. We are confident that we will continue to find the right balance between adjusting our mail operations in the challenging Dutch postal market and expanding our footprint as an e-commerce solutions provider, creating long-term value for our shareholders and other stakeholders.

As a company in transformation, we believe that focus is key to achieving our goal. In line with our strategy to be the postal and logistics solution provider in the Benelux, we have decided to divest Nexive, our mail and parcels activities in Italy, and Postcon, our mail business in Germany. We are making good progress with the divestment process and we expect to make further announcements before the summer.

Driven by strong volume growth, revenue at our Parcels business increased by 19.8%. Price increases above inflation for all customer categories were more than offset by a shift in customer mix, as large e-tailers gain market share and grow faster than smaller players. Business performance improved on the back of increasing volumes, leading to higher efficiency. At the same time, we faced additional capacity costs, partly explained by a tight labour and transport market and increasing IT costs related to the ongoing development of our digital services.

During the year, we opened three new parcel sorting centres in the Netherlands, which is the pace we plan to maintain in 2019. We are very pleased with the development of our parcels business in Belgium, where we plan to further expand our parcel sorting and delivery capabilities.

We keep pace with e-commerce growth by expanding our network, hiring more people and constantly innovating our parcel collection, sorting and delivery models. In 2018, parcel volumes increased by more than 20%. On an average day, we now deliver over 800,000 parcels. On peak days, such as Black Friday and Sinterklaas, the daily volume increased to 1.4 million parcels per day.

While the enormous success and growth of e-tailers creates opportunities, there are also challenges. The high pressure on peak days requires us to accelerate our investments. This is an industry issue, which we will have to tackle together with our customers. Increased awareness among stakeholders of the positive and negative impact of a growing e-commerce market is vital to create a sustainable model for the future. Through a number of commercial initiatives, we will continue to ensure that volume and revenue growth translate into bottom-line growth.

As we transform, we actively seek to develop new growth domains close to our core logistic propositions, which can also serve as a feeder of volumes to our Mail and Parcels networks. We have chosen food and health as specific areas where we can truly add value for customers and where societal trends offer real growth opportunities. Specialist activities within logistic solutions, such as fulfilment, @Home and Mikropakket, further broaden our capabilities and offer customers the right solution.

At Spring, our international provider of mail and parcels solutions to businesses worldwide, we saw a fierce competitive environment in 2018, especially in Asia. This put pressure on our margins and resulted in a drop in performance year-on-year. Going forward, our goal is to further leverage our local presence and our customer capabilities, resulting in an even faster, more customer-centred approach. We continue to believe in the opportunities our broker business has in a fast growing, global e-commerce environment, and as a source of inbound and outbound flows for our Benelux networks.

The performance at our Mail business was characterised by volume decline of 10.7% and autonomous cost increases, which could not be fully compensated by price increases and cost savings. After a delay at the beginning of the year in the implementation of important change projects, the run-rate of cost savings improved in the second half of 2018. Revenue decreased by 5.9%. Fourth-quarter results were very good, with the December stamp again contributing significantly to our performance.

The decline of mail volumes in the Netherlands continued to develop in line with our guidance. For the first time, we saw trends towards similar levels of decline in other European countries, specifically in Belgium and the United Kingdom. The decline underpins the urgent need to consolidate the mail networks in the Netherlands, to change regulation and to transform our mail activities towards a more flexible model for mail collection, sorting and delivery. With this model, we create synergies and cut costs in parallel with the volume decline. This is important in any scenario, but it will also leave us in a better position to add additional volumes that result from potential consolidation of networks, if and when it happens.

For a number of years, we have consistently argued that consolidation of mail networks is the best solution for affordable postal delivery, available for all age groups, including the elderly, and accessible in cities and rural areas. Furthermore, it is the best way to manage volume decline in a socially responsible manner. In the first half of 2018, a commission led by Ms Oudeman researched the postal market and held a dialogue with all relevant postal stakeholders. In June, the state secretary of Economic Affairs and Climate Policy, Ms Keijzer, sent her conclusions on the postal dialogue to parliament.

We welcomed the outcome, which recognised that regulation should reflect the strongly declining postal market. The state secretary concluded that adjustment of regulation is required, in order to safeguard the future accessibility and reliability of postal delivery for everyone in the Netherlands. A debate in September showed vital, broad parliamentary support for consolidation. Due to anti-trust regulation and the involvement of several stakeholders, the road to consolidation is, as predicted, not straightforward and will take time.

On the day of publication of this Annual Report, we have made a joint announcement with Sandd regarding our intention to create one strong national postal network in the Netherlands. PostNL and Sandd have filed a request for approval with the regulator, which is the formal start of this process. Combining the two postal networks of PostNL and Sandd is essential, in order to ensure that the postal market remains reliable, accessible and affordable for everyone. It also builds a stronger basis for long-term employment for mail deliverers. The combination, which is conditional upon approval and other conditions, will secure the foundation for a sustainable postal service in the Netherlands.

In September, a verdict by the Dutch Trade and Industry Appeals Tribunal (CBb) annulled a market analysis decision by Dutch market regulator ACM on 24-hour business mail. The CBb ruled that the ACM had insufficiently substantiated that digital sending is not part of the market for 24-hour business mail. Following this positive outcome, PostNL now offers postal operators access to its network based on fair tariffs and conditions that have been accepted by the market.

Despite the broad political support for consolidation, the ACM continues to promote competition, regardless of the negative consequences this will have for the financial viability of the mail business, for the people working in the postal sector and potentially for millions of senders and receivers of mail in the Netherlands. At the end of December, the ACM announced a new draft market analysis decision, in which it set potential new tariffs and conditions for postal operators to access PostNL’s postal network.

The approach of the regulator creates new uncertainty and falls short of reflecting the reality and the impact of the rapidly declining mail volumes on the sector and on PostNL. At the time of writing this report, the ACM had not yet published its final market decision. If the regulator does not change its initial approach, our guidance of the negative impact of regulation may have to be adjusted upwards.

Five days a week, thousands of our postal deliverers walk and bike the streets to deliver mail to every household in the Netherlands. They are supported by colleagues collecting and sorting mail, while over 3,000 retailers offer post office services. Thousands of thriving webshops and e-tailers depend on our parcel deliverers and sorters to deliver their promise to the customer. Our drivers are the backbone of our logistic efforts, on the road day and night ensuring we can deliver over 7 million letters per day, five days a week, and 800,000 parcels each day. Our people working in support and staff roles are as vital, making sure that the machinery runs like clockwork.

As one of the largest employers in the Netherlands, PostNL offers thousands of people the certainty of having a job, a stable income, security and opportunities for personal development and growth. We aim to offer more people a contract based on PostNL’s solid working terms and conditions. The people working with and for PostNL can rely on a safe, healthy and diverse work environment where they are respected and enjoy a positive and cooperative culture. We work hard to create an atmosphere where people are passionate and proud to be part of PostNL.

In 2019, we will continue to build on a strong platform created to deliver growth and value, as we continue to focus on the potential of our business. At Mail, we will introduce a more flexible model for sorting and delivery. For Parcels, we will take further steps to strike the right balance between higher volumes, profitability and higher cash flow.

We will continue to focus on transforming to an e-commerce logistics company by strengthening the range of customer solutions we offer and further developing our digital offering. And of course we will continue to invest in activities that make our business more environmentally sustainable, as we believe sustainability is our license to operate. We are working towards the ambitious goals of emission-free delivery in 25 Dutch cities by 2025, and emission-free last-mile delivery across the Benelux by 2030. To help achieve this, we are working with our employees, our customers, our partners and our suppliers to develop innovative solutions to reduce our environmental impact.

Despite the challenges, we have a lot to be proud of looking back at 2018. Throughout this report you will find many examples of how we are improving the customer journey, innovating our business processes and introducing smart cost-saving measures. I would like to take this opportunity to thank our key stakeholders – customers, employees, shareholders, suppliers and other relations/partners – for their support and loyalty to PostNL. Striking the right balance between the interests of our stakeholders is at the heart of what we do every day.

We are proud of our history of 220 years, and what we stand for. Our ambition is to be the favourite deliverer, and our purpose is to deliver special moments to everyone. In 2018 we redefined our purpose and the principles that guide our behaviour. These ensure that everyone within PostNL moves in the same direction and focuses on the same targets. They give guidance on what we do, the customer experience we aim for and how we work together. Please refer to chapter 3 of this report to learn more about it.

We strongly believe that PostNL has proved, and will continue to prove, that our long-term strategy is right for all of our stakeholders. It offers value to our customers and to consumers as we deliver special moments for everyone, everywhere, every day. It offers jobs, income, security and development opportunities for our people. It creates sustainable value for shareholders. And as a company, we aim to contribute to a better society, which is connected, smart and sustainable. This is what we have done since 1799, when the first national postal service was founded. And this is what we will continue to do in the future.

Kind regards

Herna Verhagen, CEO