Management this morning announced its strategy update called “Deliver” which paints a dire picture on Europe stating it is faced with challenging trading conditions and continuing price pressure. Although management launches an extensive set of measures, which should lead to € 220m in structural cost efficiencies by 2015, the EMEA operating margin target of ~8.0% -amid sales growth of 2% over the period (CAGR)- looks bleak. This compares to 10-11% guided before and our forecast of 9%. Management will take the burden of € 150m in restructuring costs (€ 100m KBCSe) while investing € 200m on new infrastructure and IT on top of the 2-3% (of revenues) normal capex program. Trade Working Capital is now seen at ~8% of revenues vs. ~10% before. Domestic China & Brazil will be sold.
Falling back on EMEA:
TNT Express will fall back on EMEA, positioning itself via its local presence and extensive Pan-European coverage, combined with intercontinental connections. Focus will be on higher-margin services and customers segments.
In order to maintain profitability, € 220m recurring savings (at a cost of € 150m) are targeted by 2015 (€ 100-150m consensus) by consolidating services, optimising infrastructure and reducing indirect costs. Still, as trading conditions remain challenging and price pressure continues, management only accounts for an underlying operating margin of 8% by 2015 amid 2% sales growth (CAGR)over the period. This is clearly lower than previous indications of 10-11%, the historical peak of 12-13% and our forecast of 9%.
Exit Domestic China & Brazil
Management confirms that is will focus on Europe and connecting Europe with the rest of the world, but that it proceeds with the process of divesting its domestic operations in China and Brazil. We estimate that an outright sale of Domestic China and Brazil would free-up cash (€ 120m cash-in KBCSe, no extra investments needed), would be Eps accretive and free-up management attention. The sales process for domestic China is well underway and the outcome should be known imminently while preparations for the sale of Brazil Domestic have started. Management is also exploring options to reduce its exposure to intercontinental capacity. Other geographic segments are expected to contribute to profit in 2015 which is in-line with our expectations.
Conclusion:
After the disposals of the loss-making Domestic Chinese and Brazilian activities, TNT Express will be left with an almost pure EMEA operation which grows at “only” 1.0-2.0x GDP (management even expects a CAGR of 2% up to 2015). A weak macro environment and adverse price and customer mix development (partly structural) continue to weigh on EMEA profitability and hold back an immediate recovery. The 8% EMEA margin goal is a reflection of this, despite the € 220m in structural cost savings. Although management could have taken a conservative stance with its 2% sales growth, we believe this is a good reflection of the macro-economic uncertainty. We stick to our Hold rating on TNT Express. A conference call is scheduled at 14.00 CET.