TNT breaks even, increases CapEx in Q2

TNT 2Q15TNT Express reported second-quarter net income of €0, down slightly from the €1 million reported in the second quarter of 2014. This breakeven net result came despite a 6.2% increase in revenue to €1.76 billion. Reported operating income for the quarter was €19 million, up from €3 million in 2Q14. However, after taking into account one-time items including “restructuring and other charges”, the company said adjusted operating income for the quarter was down 41.4% to €41 million.

Of particular interest – and not shown in the accompanying charts – TNT said capital expenditure in the quarter was up 160% year-over-year to €96 million, 5.5% of revenue. The company said it “continued to invest in sorting machinery, vehicles, and IT.” In addition to continuing to invest in its main air hub in Liege, TNT is building new sortation facilities in Madrid, Eindhoven, Swindon, Brisbane, and Melbourne, “all of which will enter operations during the second half of this year.”

Why the big investment push when the company is almost certainly going to be acquired by FedEx next year? Apparently because TNT believes it has fallen behind its competitors, and badly needs to catch up. CEO Tex Gunning was quoted in The Loadstar as saying: “In TNT there has been structural under-investment for over 10 years, so we took it upon ourselves to invest in automation, and replace outdated hubs and depots. In Australia, the infrastructure was outdated; in Swindon we needed additional capacity; in Liege it’s about productivity as well as additional volumes – our investment is a mix of catching up, replacement and productivity.”

Regarding the FedEx takeover, TNT’s management seems confident that the acquisition will go as planned, but said that until the formal offer was in hand, “we are refraining from distributing a 2015 (pro forma) interim dividend, to retain cash within TNT.” The company also noted that its Executive Board had “added a new risk” regarding the intended offer by FedEx, developed a mitigation plan accordingly. TNT’s updated risk profile is available here.

Looking ahead, CEO Tex Gunning said: “As for the macro economic backdrop, we have experienced some positive developments in Western Europe, but we remain cautious given the economic volatility in China, Brazil, Australia and Greece.”

Looking at the results by reporting segment…

  • International Europe: adjusted operating income declined 34.9% y-o-y to €28 million, despite a 5.1% increase in revenue to €719 million. The adjusted operating income was affected by Outlook-related transition costs is the , costs of introducing new road and air services, and higher US$-denominated air network costs. (“Outlook” is TNT’s strategy “to create focused and accountable units, with a clearer line of sight on the distinct domestic and international businesses.”) Average daily consignment volume and average daily kilos were up 4.1% and 6.4%, respectively, although revenue per consignment fell slightly (0.3%) and revenue per kilo was down 3.0%
  • International Asia, Middle East & Africa (AMEA): Adjusted operating income was up 16.7% y-o-y to €21 million, as revenue increased 16.3% to €257 million. Average daily consignment volume was down 3.3%, but, interestingly, average daily kilos rose 10.3%, indicating greater weight per consignment. Revenue per consignment was down slightly (0.8%), but revenue per kilo fell 11.1%.
  • Domestics: The Domestics segment (which includes domestic operations in France, Italy and the United Kingdom, as well as Brazil, Chile, Australia and New Zealand) reported an adjusted operating loss of €1 million, down from operating income of €20 million in 2Q14. This decline came despite a 4.0% increase in revenue to €655 million. Average daily consignment volume was up 5.3%, but revenue per consignment fell 3.8%. Average daily kilos, and revenue per kilo, were little changed from a year ago.
  • Unallocated: This segment, which includes TNT Innight, Central Networks, and corporate head office, reported revenues up 5.8% y-o-y to €128 million, but nonetheless turned in an adjusted operating loss of €7 million.
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