Reflecting on 2023 with our CEO

Can you reflect on 2023?

Overall, 2023 was a difficult year for many people around the world. We once again witnessed the terrible impact of war, as the conflict in Ukraine continued and hostilities in the Middle East flared up. First and foremost, we have to acknowledge the profound human impact of these conflicts.

Across our markets, high inflation levels caused a decrease in the purchasing power of companies and consumers, leading to low consumer confidence and consumer spending. In the Netherlands, the impact of shortages in the labour market continued, which has led to greater competition for employees among companies. Taken together, this impacted our company and led to a disappointing year financially despite the hard work of our team.

What did this volatile world mean for PostNL in 2023?

At Parcels, volume growth was essentially flat. We saw a shift to more international parcels, negatively impacting the average price per parcel. In order to balance our network with volumes, we consolidated our sorting activities in parts of our network and optimised delivery routes as a way to reduce costs and to more efficiently process lower volumes. And we finalised our plans to reduce 200-300 staff FTEs at our head office and at Parcels, helping us bring down costs.

Meanwhile, at Mail in the Netherlands, we saw wage increases, the growing impact of labour market shortages and high sick leave, which also impacted quality levels. All of which was set against the backdrop of operating in a declining mail market and a continuing shift from ‘next day’ delivery to the lower yield of non-24-hour mail. The number of letters being sent decreased by 8 percent in 2023, positively helped by election mail. Simultaneously, inflationary pressures have increased our operating costs.

And of course, we continued to transform our mail operations in 2023. We implemented major cost-saving plans, different ways of working for our people, and reduced overheads by a total of €39 million. And we will continue to do so.

How do you maintain course in these uncertain times?

We are focused on our long-term strategy: to deliver distinctive customer and consumer experiences to be the leading e-commerce and postal services provider in, to and from the Benelux. And in a volatile environment you have to stay the course and identify a mixture of short-term actions and longer-term activities that steer you towards your goal.

In 2023, we made our Parcels’ network more flexible, meaning we are better able to respond to fluctuations in volume. We are focused on accelerating the success of our business customers, the web shops, and are executing a full-funnel strategy geared especially towards small- and medium-sized enterprises, making it easier for them to connect to our services and, therefore, enabling them to better help their customers. This is one of the many fully digitalised customer journeys that we created in 2023.

We are also zeroing in on consumers’ needs, and in 2023 expanded the out-of-home options available to consumers by adding more automated parcel lockers. And we are always nearby, also digitally. By the end of the year, there were almost 9 million PostNL accounts.

At the same time, we made sure that sustainability is fully embedded in our strategy. Throughout the year, we remained focused on combatting climate change by steering on greenhouse gas (GHG) emission reduction initiatives, which decreased by 10 percent in 2023, enabling us to further progress towards our long-term, science-based reduction targets. Once again, we were ranked as one of the most sustainable companies in the transport sector worldwide by the Dow Jones Sustainability Index (DJSI), scoring the highest in the Environment & Climate section within our sector.

Being around for 225 years means that we are able to transform, to adapt to the needs and preferences of our customers, to take courageous steps to innovate, and to be resilient in testing circumstances.

How do you view PostNL’s financial performance over 2023?

Our team has dedicated itself persistently to navigating the volatile environment, but we have to recognise that the financial performance was not good enough. We implemented several measures to reduce costs and improve our cash position and were also able to increase prices. But this was not sufficient to mitigate the severe cost pressures in a tight labour market with rising wages, and the impact from the unfavourable development in our customer and product mix.

While normalised EBIT came in below our expectations, we were able to create a substantial increase in free cash flow. Our focus on capex and strict working capital management contributed to a strong cash flow performance, well above our outlook. With an expected leverage ratio of around 1.7 at year-end 2023, our financial position is solid. This provides a good base for the €0.09 dividend per share to be proposed to the AGM, in line with our long-term strategy and our dividend policy.

Looking ahead, what are the trends that impact the e-commerce market?

Let me start by saying that the circumstances we saw in 2023 will transfer into 2024. When it comes to the e-commerce market, we are ready to capture future growth. In that respect, we identify two main market drivers: online penetration and longer-term economic growth. And we believe that there are a number of societal trends that will shape e-commerce positively. The consumer is front and centre, even more so in the future of e-commerce. We believe that out-of-home delivery options will increase. In many markets, but especially e-commerce, digitalisation will accelerate, and with this comes the further growth of networks and platforms. And, as I said before, the entire e-commerce logistics sector has the obligation to operate in the most sustainable way.

And what are your focus areas in 2024?

We aim to structurally deliver a return that exceeds its cost of capital.

As our Parcels strategy is geared towards capturing growth in e-commerce, we are dedicated to improving profitability towards the average margin over the 2019-23 period in our Parcels business over time. We are focused on a number of specific actions to balance volume, value and capacity for our company, our people and our customers.

For instance, further simplifying our product and pricing policies will enable us to pass on actual costs to customers and enhance the attractiveness of specific parcels by reflecting their true value in the prices we set. Additionally, we are further adjusting our operational network to make sure that we are able to both scale up and down in a cost-effective way. The improvement of our network includes opening a sorting centre in the Dutch city of Alphen aan de Rijn and a mini hub in the city of Utrecht. Both locations are essential to handle peak moments and ensure we can offer the right quality in set moments. And we are redesigning our range of delivery options, such as same-day and Sunday delivery, to better balance customer demands and financial feasibility. Also, we are exploring new opportunities, such as the integration of our transport services, to further improve our collection and sorting processes.

As inflation levels are still high and consumer spending is down, we know that volumes in our domestic markets will take time to recover. We are taking further cross-border initiatives to attract volumes by retaining and acquiring e- commerce clients from Asia and Europe. For CBS Europe specifically, we will develop additional propositions, such as expanding fulfilment options for our cross-border clients.

Exploring additional opportunities is crucial given our position as an integrator in the e-commerce value chain, and is therefore on our roadmap for 2024. For example, by opening up our automated parcel lockers to third parties. We’ve seen that digitalisation has shown a significant step-up in EBIT contributions, and this will only develop going forward.

For Mail in the Netherlands, our focus will be on realising our cost-saving plans and tariff increases. This will be alongside the new programmes we have started to fill as many mail deliverer vacancies as possible.

Mail in the Netherlands faces a challenging situation, with a continuous annual volume decline of 7 to 9 percent. Furthermore, the demand for mail to be delivered within a day has decreased even more significantly. This trend, combined with the sharp increase in labour costs, means that the universal service obligation (USO) will be loss-making from 2024 onwards, which will eventually apply to the entire mail business. Despite these challenges, it is our mission to keep postal services accessible and reliable, while maintaining realistic quality. After all, mail still plays a relevant role in our society.

This situation requires a fundamental change in our service framework, enabling PostNL to continue adapting to the declining volumes and changing customer demand in a socially and societally responsible manner. To make this necessary transformation possible, a change in the current regulations is needed. We ask the ministry and politicians to address this issue and to engage in dialogue about changing postal services. Together, we can ensure that we can sustainably maintain postal services in the Netherlands in the future. Through these changes, the postal company can achieve a return that is higher than the costs of capital for Mail in the Netherlands, ensuring that mail remains reliable and accessible for everyone in the Netherlands.

Any concluding thoughts you would like to add?

A birthday card for your special day brought to you by your well-known mail deliverer. A welcome home present delivered by our parcel deliverer. Your PostNL app that is always on hand and allows you to choose how and where you want your parcel delivered. These are all special moments that PostNL – a company that has been at the heart of society for 225 years – delivers every day. Being around for so long means that we are able to transform, to adapt to the needs and preferences of our customers, to take courageous steps to innovate, and to be resilient in testing circumstances.

On behalf of the Board of Management and the entire Executive Committee, I would like to thank our employees, customers, shareholders and all other stakeholders that are part of our company and our journey to shape the next phase of postal services and e-commerce.

Kind regards,

Herna Verhagen