Business strategies

• Group strategy
• Mail strategy
• Express strategy
• Social responsibility strategy
• Financial strategy

Mission statement

TNT’s mission is to exceed its customers’ expectations in the transfer of their goods and documents around the world. TNT delivers value to its clients by providing the most reliable and efficient solutions through delivery networks.

TNT aims to lead the industry by:

• instilling pride in its people,
• creating value for its shareholders, and
• sharing responsibility for the world in which it operates.

Social Responsibility (SR)

“An important part of our mission is our commitment to sharing responsibility for the world in which we operate. Through our international operations and the nature of our business, TNT benefits from globalisation and the resulting increase in international goods flows. As perceived distances between the continents decrease, we are all becoming neighbours. This creates responsibility.”

TNT’s mission states among other things that TNT seeks to share responsibility for the world in which it operates. The Board of Management is actively involved in developing SR policies across the company, including setting SR targets for management and linking them to their incentive schemes.

Planet Me, launched in January 2007, is a CO₂ reduction programme. Planet Me consists of three projects: Count Carbon, Code Orange and Choose Orange.

Within Count Carbon, TNT will install a system to manage, measure, and report on CO₂ throughout TNT.
TNT’s operational commitment is called Code Orange. TNT is working hard to reduce CO₂ emissions in every segment of its operations. To achieve this TNT is in the process of formulating a set of practices.
The third and most innovative part of TNT’s initiative is the way in which it wants to involve its employees in TNT’s CO₂ reduction efforts. TNT wants to strike a deal with its people: TNT will show them what TNT as a company is doing and then TNT wants to challenge them to take this approach at home as well. This approach TNT calls Choose Orange.

Business description

TNT is in the business of transferring goods and documents around the world tailored to its customers’ requirements with a focus on time and/or day certain pick up and delivery. It is TNT’s business to deliver the “business” of its customers at the right time and at the right place.

TNT picks up, transports, sorts, handles, stores and delivers documents, packets, parcels, and freight by combining physical infrastructures such as depots and trucks, electronic infrastructures such as billing and track-and-trace systems, and commercial infrastructures to attract and retain customers.

Goods and documents have different weights, shapes and sizes. They can be as light and small as a postcard or they can be as heavy and as big as the engine of a jumbo jet. They can also change shape, such as when several parcels are combined into a single pallet, and they can have different requirements in terms of speed of delivery, security and point of delivery. Goods and documents can have very different distance characteristics, ranging from domestic to cross-border/regional to intra-continental to intercontinental.

In general, weight and speed are most commonly used to characterise different kinds of customer requirements. This is illustrated in two-dimensional charts such as the one shown below, where the weight categories are below one kilogramme (documents), between one and 30 kilogrammes (parcels) and above 30 kilogrammes (pallets, full loads and bulk) and the speed categories are same day, time (and day) certain (e.g. 10:00 next day), day certain/1-2 days, day certain/3-5 days and day uncertain.

All these different types of requirements need different delivery networks and are served by different operators (see the chart below). These range from very efficient and time-sensitive (air and road) express networks operated by integrators to less expedited sea carriers. Freight forwarders operate virtual networks, using block space on other operators’ planes, ships and (to a lesser extent) trucks, and their own (small) depots and sites in harbours and at airports. Couriers focus on same day delivery. Finally, in the widest sense, peripheral operators such as infrastructure providers (port authorities, airport operators, motorway owners), consultants and software companies can also be considered as actors in this sector.

Global revenues US$ 3,500 billion
(Source: R.W. Baird, report “Global Integrators”, January 2007)

Group strategy

Focus on Networks strategy
TNT’s strategy is to focus on providing delivery services by expertly managing delivery networks. Thus, TNT calls its strategy Focus on Networks. This strategy was first presented in December 2005, contains manageable execution risks, and is based on TNT’s core strengths, with the objective of achieving profitable growth.

In the first phase of its Focus on Networks strategy, TNT concentrated on transforming its foundations by exiting its logistics and freight management activities, concentrating on (Mail and Express) networks and optimising its capital structure. With the start of the second phase (“Grow and Build Value”) in December 2007, the emphasis is now on further strengthening both the core of the portfolio (Mail Netherlands and Express Europe) and the emerging platforms such as European Mail Networks, parcels and Express emerging businesses.

TNT manages a portfolio of networks with different speed characteristics, ranging from same-day to some day, and different weight characteristics, ranging from letters to heavy parcels and pallets. TNT’s Express business focuses on transferring documents, parcels and pallets that require time or day certain delivery, whilst TNT’s Mail business focuses on transferring documents with day uncertain delivery (however, in practice, in the Netherlands almost 100% of deliveries is next day). Due to the further optimisation of its network strategy, TNT introduced in 2007 the segment “Other networks” in which TNT reports its Innight business. Formerly, this business was reported as part of the Express division and prior to the sale of the Logistics division as part of Logistics. Consequently, TNT reports its Express business as of 2007 without the Innight business and has adjusted the 2006 comparatives accordingly.

TNT’s networks are in different development phases and offer a plethora of growth opportunities. TNT’s most mature business is its Mail network in the Netherlands, where TNT actively seeks to maintain its market leadership in a declining market with increasing competition. TNT’s Express networks in Asia, in particular in India, China and South-east Asia, and in selective other emerging markets, such as Brazil, are at the other end of the spectrum and are among the least mature networks in its portfolio. In these geographies TNT can shape the market, strongly grow its networks and attain market leadership. In Europe, TNT continues to grow its Express and Mail networks by building on its existing strong position. TNT aims to accelerate growth in its networks organically, as well as through selected acquisitions.

The chart below reflects an analytical and conceptual view on the relation between strategic focus and financial focus. It does not represent a management segmentation. From this chart TNT has derived 10 strategic priorities which it manages.

The combination of Express and Mail networks in TNT’s current portfolio has several strategic advantages. TNT believes the combination of business-to-business and business-to-consumer deliveries, for which it has unique expertise in its Express and Mail divisions respectively, becomes increasingly relevant in an era where e-related deliveries are growing exponentially and megacities, which require complex high density citizen services, will emerge. TNT also believes that over time, certain operational and strategic synergies can be achieved across its portfolio, for example in linehaul activities. Having both Express and Mail in its portfolio gives TNT unique cross-selling opportunities. And finally, the fact that Express and Mail require comparable management capabilities, such as network design, execution and planning, customer focus, market segmentation and brand awareness, allows TNT to optimise management and competence development across the company.

Mail strategy

In Mail, TNT’s strategic intent in phase 1 was twofold: to actively maintain its market share in its home market the Netherlands and to capture growth opportunities outside its home market, in the Netherlands, TNT is faced with continuing competitive pressure and substitution. TNT believes that without new commercial and cost initiatives a volume decline of up to 40% by 2015 compared to 2006 would be inevitable.

In the first phase of the Focus on Networks strategy, successfully completed at end of 2007, TNT’s Mail division thus prepared itself for full liberalisation of the Dutch mail market, whilst outside the Netherlands platforms were established to become the number one challenger to incumbent European mail operators. In the second phase Mail Netherlands will further detail and execute the cost and commercial initiatives and continue to monitor, evaluate and respond to regulatory developments. Outside the Netherlands it will focus on optimising and growing market positions and realising growth in profitability.

At the end of 2006, TNT launched a number of initiatives along two tracks: commercial initiatives to limit volume decline to 30% by 2015 compared to 2006 and cost initiatives to save €300 million of annual costs. In 2007, TNT took restructuring costs of €110 million for the efficiency projects that its Mail division will start in 2008 to standardise the collection, preparation, and delivery of mail as much as possible. TNT is now in the process of negotiating with trade unions to enable expeditious implementation of the latter. At the same time, TNT has made substantial progress in growing its Mail activities outside the Netherlands. TNT has continued to significantly expand its regional networks in Germany and the United Kingdom. TNT believes the combination of cost and commercial initiatives in the Netherlands and growth initiatives outside the Netherlands will contribute to Mail being able to continue to deliver a strong cash flow going forward. However, barriers to competition (such as value added tax (VAT) exemption, hidden state subsidies, and, as recently adopted in Germany, a generally binding minimum wage) may hamper TNT’s ambition to grow its Mail activities outside the Netherlands.

Express strategy

In Express, TNT’s strategic intent in phase 1 was fourfold: to strengthen the number one position in Europe in national and intra-European flows, to build uplift capacity from China to fuel its European network and establish an intra-China network, to build the number one position in rest-of-the-world selected emerging markets and to expand its position in the broader market through offering special services. Underpinning TNT’s Express networks is a strong focus on key customer interfacing processes, by understanding customer needs, winning and keeping profitable customers, delivering excellent customer service and delivering on time and in perfect condition. In all four strategic intent areas TNT made excellent progress in 2007.

TNT has continued to strengthen its position in Europe by, amongst others, finalising the integration of Trespertrans S.L. (TG+), a Spanish company acquired in 2006, and capturing high growth in Eastern Europe. In China, TNT is integrating Hoau Group of China (Hoau) to build the leading domestic network in that country, and it has implemented its own Boeing 747 freighter service between China and Europe to capture the strong growth on this intercontinental flow. TNT has acquired domestic networks in India and Brazil and extended the reach of its South-east Asian road network. Lastly, TNT has expanded its position in special services by further growth in its same-day business and continued fast growth in time-critical freight.

TNT’s Express division thus created a strong platform by delivering on all four strategic intents mentioned above. In the second phase the emphasis will be on network optimisation to further strengthen leading positions of the Express division, to strengthen the Europe-Asia connectivity and to transform the newly-acquired domestic platforms in China, India and Brazil into integral international Express operations.

Social responsibility strategy

The abovementioned trends, alongside our growth ambitions that focus on emerging markets, confront us directly with related social and environmental issues. The way we work and operate our fleet will need to be adjusted in accordance with the stricter legislation related to climate change and air pollution. With each company we purchase, social responsibility is part of our due diligence questionnaire. Once acquired, new TNT entities must in time adhere to our social responsibility policies and practices, including the implementation of the five certified management systems.

Moreover, we develop and implement policies and practices to promote a positive and sustainable environmental and social contribution to each community in which we operate. Factors that will influence our decision-making in the near future and over the long-term include matters such as globalisation, liberalisation of the postal markets and changes in the environment.

In 2006 and 2007 we purchased Boeing 747s. This increased accordingly the number of consignments delivered by our own aircraft, which were previously outsourced. Although it increased our CO2 emissions, it also enables us to take ownership of our environmental impact. The decision has increased our insight into the effect of our air fleet. In order to manage this environmental impact, we are investigating closely our growing fleet that we need to ship the goods and satisfy our customers.

Our social responsibility strategy is captured in the TNT Group Social Responsibility Policy. In this policy we refer to our subscription to the United Nations Global Compact, which embraces, supports and enacts a range of values in the areas of human rights, labour standards and the environment that we can influence. We refer also to our Business Principles in which we underpin our commitment to integrity, legal compliance, continued improvement and sustainability. We strive continuously to comply with the OECD and ILO agreements regarding the societal impact of multinational corporations.

Financial strategy

TNT’s financial strategy is based on three pillars:

• driving business performance by using value-based performance measures and standardisation of business processes,
• maintaining the right financial flexibility to support growth platforms via capital expenditure and mergers and acquisitions, and
• keeping the capital structure efficient, at an investment grade long term credit rating of “around BBB+”.

These three key components of the financial strategy directly relate to:

• effective risk management, internal control and compliance,
• financial risk management and risk insurance structures,
• aligned legal and funding structures, and
• a balance in short and medium term shareholder returns through profitable growth, dividends and incidental share repurchases or other shareholder returns from medium term excess cash.

TNT’s current capital structure is based on and managed along the following components:

• maintaining a credit rating at investment grade “around BBB+”,
• availability of at least €500 million of undrawn committed facilities,
• structural funding via a combination of public and bank debt, with a risk-weighted mix of fixed and floating interest,
• cash pooling systems facilitating optimised cash requirements for the group by facilitating centralised funding and surplus cash concentration at group level, and
• a tax optimal internal and external funding focused at optimising the cost of capital for the group, within long term sustainable boundaries.

TNT’s current long term credit ratings are BBB+ (stable outlook) for Standard & Poor’s Ratings Services (S&P) and A3 (stable outlook) for Moody’s Investors Services (Moody’s). These credit ratings result from an evaluation and analysis of many different factors. As mentioned, TNT focuses on maintaining an investment grade credit rating of “around BBB+”. For this purpose it monitors the development of the key credit ratios which are used by the rating agents and which may vary from time to time:

• FFO / Debt, whereby Funds From Operations (FFO) is based on operating profits from continuing operations, after tax, corrected for, amongst others, depreciation and amortisation and other major non-cash items, and Debt is defined as total interest-bearing borrowings of the company, adjusted for on and off-balance sheet debt-like components and surplus cash.
• Debt / EBITDA, whereby EBITDA is defined as operating profits before interest and taxes, corrected for, amongst others, depreciation and amortisation as well as operating leases.
• FFO / Interest, whereby Interest is corrected for, amongst others, pensions and leases.
• RCF / Debt, whereby Retained Cash Flow (RCF) is defined as FFO less dividend.

The weighted mix of the four ratios above forms an important building block in TNT’s financial parameter framework, whereby the current credit ratings are roughly based on the following ranges: an FFO / Debt between 30%-35%, a Debt / EBITDA of 2.0x-2.5x, an FFO / Interest around 5%, and an RCF / Debt around 17%. These ranges per ratio may change over time, depending on market conditions and analytical considerations.

For its financial requirements in the context of its capital structure components, TNT works with approximately ten relationship banks. This number is influenced by financial service requirements of TNT related to its global spread in activities, businesses and legal entities.

TNT aims to grow its free cash flow in the medium term. TNT defines its free cash flow as the net cash from operating activities minus net capital expenditure on property, plant, equipment and intangible assets, and proceeds from sale of smaller assets.

Part of free cash flow is used for dividends after the appropriation to reserves of (part of) the profit. TNT tries to meet shareholders’ return requirements through growth in value of the company’s shares, dividends, and incidental share repurchases. As part of its dividend guidelines, TNT intends to pay interim and final dividends in cash annually. The TNT Reserves and Dividend Guidelines can be viewed on TNT’s corporate website, group.tnt.com. During 2007, TNT announced its intention to increase the dividend pay-out from around 35% of normalised net income currently to around 40% by 2010. Normalised net income is defined as “profit attributable to the equity holders of the parent” adjusted for significant one time and special items. Remaining free cash flow will be allocated to strategic profitable growth of the group.

In case of medium term excess cash other forms of value creation for its shareholders will be evaluated, including tax exempt share buy-backs.
As with any global organisation, operating cash flows are affected by economic and business trends. A significant portion of TNT’s operating cash flows is derived from TNT’s Mail division, particularly from operations in the Netherlands. Amongst other factors, the impact of electronic substitution on mail volumes, postal regulations in the Netherlands, and the pace of postal liberalisation in Europe continue to affect those cash flows, although it is not possible to predict what the long term cash flow effects will be.

Cash requirements for capital expenditure fluctuate from year to year, depending on the extent of strategic capital projects, but have been well covered by operating cash flows. The ratio of cash from operating activities to net capital expenditure was 2.3 in 2007, 2.7 in 2006 and 3.7 in 2005. This ratio is calculated as follows: net cash provided by operating activities divided by the sum of capital expenditure on other intangible assets, disposals of other intangible assets, capital expenditure on property, plant and equipment and disposals of property, plant and equipment, all as stated in TNT’s consolidated cash flow statements. TNT expects these operating cash flows to continue to cover its capital expenditure requirements in the foreseeable future. TNT believes its working capital generates sufficient liquidity to cover its requirements.

For any acquisitions or buy-back of shares that exceed the company’s immediate cash resources, the company would seek to raise capital in the financial markets by means of bank borrowings and private or publicly traded debt. For very substantial transactions, if required TNT would also consider issuing hybrid debt or equity in order to maintain an investment grade “around BBB+”. Given the strength of TNT’s financial position, credit ratings, and bank relationships, TNT currently does not foresee an inability to access a wide range of capital markets including equity, public debt, private debt and bank borrowing. TNT monitors and manages key financial ratios that are consistent with a strong credit rating. There are no aspects of TNT’s current capital structure that TNT believes would trigger a material increase in the cost of its debt or the inability to access to capital markets.

For details on the interest rates charged on TNT’s more significant long term loans as well as the maturity of TNT’s long term loans and commitments, see notes 13 and 30 to TNT’s consolidated financial statements.

TNT does not hold or issue financial instruments for trading purposes, nor does TNT allow its subsidiaries to do so. For details on TNT’s use of financial derivatives for hedging purposes, see notes 3, 6, 13, 30 and 31 to TNT’s consolidated financial statements.

TNT implements a comprehensive insurance policy covering its operational risk profile as appropriate, using a mix of self insurance, re-insurance, and direct external insurance.
As frequency losses (such as cargo and vehicle claims) are of an operational and customer service nature, TNT believes that self insurance is the best method to motivate operational units to address the underlying causes of these losses. Improved risk management then has an immediate positive financial effect. TNT’s total self insured frequency claims are structured via an in-house captive insurance company and capped on an annual basis via re-insurance. During 2007, TNT’s total annual retention cap on these losses was €6 million.

TNT’s “catastrophe exposures” are insured in the traditional insurance markets. These include aviation, property and business interruption, general liability, fraud, and director and officers’ liability insurance. TNT has a strict policy to transfer risks only to insurers with a rating of A- or higher, and this is monitored on an ongoing basis.

Attention is being given to adjust TNT’s insurance protection to the ever changing legal and regulatory environment in which it operates, and all insurance policies are therefore tailor-made to TNT’s unique requirements. In addition, current insurance arrangements also need to support strategic developments and the changing risk profile of the company.

All of TNT’s financial strategies and actions will take into account the key components of its financial solidity requirements as mentioned.