Risk management
The global macroeconomic downturn of 2008 which was accompanied by significant uncertainty within the financial markets has created an environment in which risk management processes have also had to adapt to the changing dynamics.
TNT recognises that risk remains as an intrinsic component of doing business, however a structured and transparent risk management process facilitates management to identify, manage and prepare for risks in an informed, controlled and transparent manner. TNT’s enterprise-wide risk management systems are therefore designed to identify principal key strategic, operational, legal and regulatory, and financial risks facing the group in the pursuit of its Focus on Networks strategy.
Since 2008 the risk profile within TNT changed significantly with many previously reported inherent risks becoming specific within a very short period of time. TNT management has reviewed the risk profile regularly throughout the year and will continue to do so regularly during 2010. Regular status reports of risk mitigating actions are provided to the Board of Management to further strengthen the company’s risk management processes. The outcome of the risk management process is shared and discussed with the audit committee of the Supervisory Board and the Supervisory Board.
For those risks deemed to be material, comprehensive mitigating action plans are developed and reviewed regularly by the Board of Management. All operational units worldwide continued to participate in the comprehensive risk identification process, the outcome of which is reported to the relevant divisional, group and functional management.
Whilst continuous emphasis has been placed on the identification of risks at all levels of the organisation and in particular risks to the deployment and execution of the Vision 2015 strategy going forward, the speed of onset and the development of mitigating actions as well as the uncertainty and changes in the economic environment have made it challenging to keep abreast of the rapidly evolving situation.
Understanding strategic, operational, compliance and financial risks is a vital element of TNT's management decision making processes. TNT's risk management and control programme is not a means to an end, but a process to support management. No matter how good a risk management and control system may be, it cannot be assumed to be exhaustive nor can it provide certainty that it will prevent negative developments in TNT's business and business environment from occurring or its mitigating actions to be fully effective. It is important to note that new risks could be identified that are not known currently. However, any of the following known specific key risks could have a material adverse effect on TNT's financial position, results of operations, liquidity and the actual outcome of matters referred to in the forward-looking statements contained in this half year report.
The Board of Management have reviewed TNT’s risk profile as at 3 July 2010 and confirms that the following specific key risks originally disclosed in Chapter 20 of the 2009 Annual Report (pages 198 – 199) have been updated but remain and continue to require focused and decisive management attention in the second half of 2010:
- Continued (sharp and rapid) declines in the weight per consignment and shifts in customer preferences from premium to economy products as well as changes in customer mix in TNT Express and/or pressure on yield and prices, which are among other things directly related to the macroeconomic situation, could lead to the need to further rationalise TNT's express operations and might impact results negatively.
- Another downturn in the capital markets and/or a decline in interest rates may decrease the coverage ratio below 105% of TNT's defined benefit pension fund obligations in the Netherlands, which in turn could require significant, multi-year additional funding by TNT. The coverage ratio was 101% as at 3 July 2010 however as at 2 August 2010 the coverage rate has increased to approximately 105%. Given the volatility in the capital markets and the fact that the coverage ratio remains around the minimum prescribed level the Board of Management will continue to monitor and take any necessary action on managing this risk in the coming period.
- Changes in the universal service obligation conditions might have a significant negative impact on TNT's profitability and cash flow ambitions.
- The loss of key suppliers, particularly in the subcontractor and commercial linehaul sectors, due to insolvency/bankruptcy in a worsening macroeconomic environment or significant further decline in volumes could have a significant impact on TNT's cash flows and operational capabilities.
In addition to these risks, the Board of Management has also identified another two specific key risks that will require focused and decisive management attention in the second half of 2010 also:
The implied changes to group structure as required to execute the Vision 2015 strategy could bring about disruption to the day to day management of operations which could negatively affect revenues and profitability.
The announcement of 2 August 2010 of TNT’s intended decision to separate fully Mail and Express requires management time, advisory costs and attention to ensure a high quality of execution. Although the Board of Management believes that these strategies contain manageable execution risks as they are based on TNT’s core strengths, it is possible that the speed of execution and complexity of the challenges the new strategy brings could cause some temporary disruption and may impact the day to day management of TNT’s operations.
The recently announced final Master plan restructuring in TNT Mail could have a significant impact on TNT's profitability and cash flow ambitions.
The restructuring programme recently announced for TNT Mail is estimated to run for four years and current estimates indicate the need for an additional provision with an net impact of an initial € 168 million on top of existing provisions will be required to cover the costs of the programme (for full details of the composition of this provision please refer to page 24 of this 2 August 2010 press release). This additional provision is based on assumptions and information currently known and may change if the assumptions made today are no longer applicable. TNT will continue to carefully monitor the costs associated with using this provision and will make adjustments as and when applicable.