2005 annual report and Form 20-F
Board of Management
From left to right: Jan Haars, Dave Kulik, Peter Bakker, Harry Koorstra and Marie-Christine Lombard.
From the CEO
STRATEGY REFINEMENT:
- FOCUS ON NETWORKS,
- SALE OF LOGISTICS, AND
- €1 BILLION SHARE BUY BACK PROGRAMME.
DEAR SHAREHOLDERS,
Last year -2005 -was an important year for TNT. Following a strategic review that started end 2004, we decided to focus on what we do better than anyone else: expertly managing transportation networks for providing delivery services. This focus on networks is founded on three fundamental pillars:
- a network-based business is attractive intrinsically because greater volume leads to lower costs and service enhancement for our costomers,
- we -at TNT -have a superior network performance based on strong management capabilities, one of the best network infrastructures in Europe and an intense focus on customer service, and
- we -at TNT -will be in the position to leverage our portfolio of mail and express networks to take advantage of the increasing numbers of customers who are using multiple products.
We believe that this focus will result in faster growth and a higher yield for our shareholders. The refined strategy we announced in December 2005 means we move forward as a mail and express company, with company-owned operations in 60 countries around the world and activities in more than 200 countries. It also means we will exit the logistics business. As the first mail company to roll out mail networks abroad and the first express operator to establish an integrated road and air network in Europe, we have established a firm track record of being first movers in setting up delivery networks. Our networks provide unrivalled service quality to our customers, and have provided industry-leading profit margins for our shareholders. Our focus strategy will make us build on that track record to strive to become the first pan-European mail company. After becoming the number one express company in Europe, in the next few years we will focus on achieving the same in key emerging markets, like Brazil, Russia, India and China.
In our mission statement, we mention four main groups of stakeholders: customers, employees, shareholders and the world. We structure our annual review by looking at what we were able to do for these groups.
OUR CUSTOMERS
As for any company, TNT’s success lies first and foremost in the satisfaction of our clients. That is why we started our first global customer satisfaction survey in 2005, involving a random sample of customers from each of our operations. The results of this satisfaction survey show that 89% of our customers were satisfied. At the same time, the average number of our loyal, active weekly trading customers increased by more than 100,000. The bulk of this increase was in express, where we continue to make customer care a key selling point. In a move from a customer-focused to a customer-centric approach, TNT Express focuses on delighting its customers, because this will lead to doing more business with current customers as well as being more often recommended by them to other potential customers.
Our TNT mail networks in the United Kingdom and Germany gained important new customers as well. We achieved high revenue growth in these areas in 2005, for the second year more than compensating for a drop in domestic mail volume in the Netherlands. Customers are clearly appreciating an alternative to the national mail operator services in these countries. TNT Mail now has operations and is growing in five other European countries, positioning us effectively on the road towards our strategic objective of becoming the first pan-European mail company.
In 2005, we started a rebranding process, bringing our entire company under the banner of the TNT brand. As our mail division’s activities continue to expand in Europe, this single brand will generate marketing synergies as well as an unequivocal face towards our clients.
We remain committed to increasing the value and service options we offer our customers. Last year we expanded our express road networks in Eastern Europe, the Middle East and China, while launching a new road network in South-east Asia. We are also preparing to add two Boeing 747s in 2006 and 2007 to our air fleet, which will connect our European and Chinese networks.
Our new focus on network management has lead us to the planned sale of our contract logistics activities before the end of 2006, excluding our freight management and innight operations, which remain with TNT. In conformity with the new IFRS accounting standards we have adopted for this annual report, this decision means that we report on our non-network logistics as “discontinued operations”. We will do everything we can to prevent the sale from having negative consequences for our customers. We will continue to serve them well, and we are sure that they will benefit from working with a company with logistics as its core business once the sale is completed, which we expect to take place before the end of 2006.
OUR EMPLOYEES
The title of this year’s annual report is Orange on the inside. We have researched the unique characteristics of the TNT brand, talking to customers, suppliers and employees, and we found a personality grouped around the qualities of can-do, in-touch and ordinary people. The employees portrayed in this annual report have all in some way demonstrated these characteristics and all have a story that tells how they, like thousands of their colleagues around the world, live the TNT brand personally. It flows through their veins. In short, they are truly “orange on the inside”.
The satisfaction of our customers is achieved through the dedication of our employees, by their willingness and ability to go the extra mile and to do whatever is necessary to exceed our customers’ expectations. We consider this so important that we have tied the engagement of our employees into our senior management’s remuneration scheme. We will be starting a global engagement study in 2006.
In all likelihood, this year will also be the year in which we say farewell to 37,000 logistics colleagues. We owe them sincere thanks, as they have helped to make this company what it is. For myself and on behalf of all their TNT mail and express colleagues, I would like to express our profound appreciation for their contribution and wish them all the best in the future.
OUR SHAREHOLDERS
Last year was also eventful from our shareholders’ point of view. In January, we completed the repurchase of 13.1 million ordinary shares from the State of the Netherlands. The subsequent sale in July of another 43.4 million shares by the State reduced its shareholding in TNT to approximately 10%.
In the summer, it became clear that the performance of our French logistics business had again deteriorated. We announced the intended sale of all our non-contract logistics activities in France at the time of the publication of our halfyear results. This sale was recently completed. More than 95% of the employees involved have retained their jobs with that business following the sale.
In September, our Supervisory Board audit committee took the lead in our tax investigations analyses. All investigations placed an enormous burden on our company, its management and our Supervisory Board. We are pleased that the integrity investigations are concluded and that the integrity of present and past members of our Board of Management and current senior staff, reporting to the Board of Management, is not in doubt.
In this annual report, we provide clear disclosure of the risks to which our company could be exposed as a result of a range of tax matters. Currently we have concluded that no liability exists beyond what we had already accrued for. Also no assessment by any tax authority related to the matter under the investigation has been received. A contingent liability of between €150 and €550 million has been disclosed as part of our financial statements. It has taken a great deal of time to analyse these issues and their complexity prevented us from estimating their potential impact as soon as we would have liked.
We publicised our refined focus strategy in December. I have already discussed the operational consequences of this refined strategy, but the €1 billion share buy back programme we announced at the same time is likely to be of special interest to our shareholders. We will continue to look for the best capital structure and our aim is to offer attractive returns to our shareholders. The refined strategy was well received by the financial market, as demonstrated by the 36% increase in our share price at year-end. This means that over the course of 2005, TNT’s total shareholder return was up 35.8% from the previous year, well over the AEX average.
Our relative performance to the Euronext Amsterdam (AEX) at closing prices during 2005 (AEX index rebased to our company).
Total shareholder returns in 2005
On 12 December 2005 Exel was taken over by Deutsche Post World Net.
In 2006, we will focus on becoming fully Sarbanes-Oxley 404 compliant. While implementing this set of strict governance rules is far from routine, it will enable us to document and prove our governance is in order.
OUR WORLD
You will have noticed our firm conviction that we do not exist just to generate profits and benefit our customers, our employees and our shareholders. We also wish to operate responsibly in the world in which we live. When we reviewed the results of our stakeholder dialogues we held in cooperation with the World Economic Forum, it was clear that one of the key concerns regarding TNT lies in the impact our activities have on the environment. This has led us to launch a new initiative, Driving Clean, through which we intend to reduce the harmful emissions of our vehicles. We are currently investigating the possibility of retrofitting our current fleet with soot filters, while in the future we intend to only purchase vehicles that conform with Euro 5, years before this environmental standard becomes a legal requirement in 2009.
In September, our efforts in social responsibility led to TNT’s entering the Dow Jones Sustainability Index. We were proud to see that in our first year in this index, which lists the best performing sustainability oriented companies in each industry, we were ranked as industry leader. This is a fine basis and offers encouragement for further improving our social responsibility performance. We are also proud to publish our second social responsibility report on the same day as our annual report.
We completed a third successful year with our partnership with the United Nation World Food Programme (WFP). Our experience with disaster logistics, developed over the years through our work with WFP, enabled us to react quickly when the tsunami struck Asia end 2004 and continuing well into 2005. Our first people were on-scene in the worst-hit area Banda Aceh within a matter of days. In the end, we were involved in relief operations in 10 disaster-struck countries. We were also able to offer assistance in the aftermath of the earthquake in Pakistan.
LOOKING FORWARD
As we go forward as a mail and express company, our focus will be to leverage our skills in managing delivery networks. In December 2005, we revised TNT Mail’s (European Mail Network) long term growth target to €1.7 billion at a 10% margin by 2012, and our mid term growth expectation for TNT Express to 10 to 15% annually. We will do everything we can to meet these goals together with optimising our capital structure.
On behalf of the Board of Management, I would like to thank all our stakeholders, customers, employees and shareholders for their ongoing support.
Kind regards,
Peter Bakker,
CEO