Олександр Перцовський

UKRPOSHTA ‒ DELIVERING CHANGE Transformation program proposal Oleksandr Pertsovksyi Singapore-Kyiv, March 2016

Network – 2020 Optimized and flexible network of ~ 12,000 post offices, 1,000-1,200 parcel lockers, 300-400 parcel shops. This modernized network will serve as example of real changes in state-owned companies to millions of Ukrainians

Quality – 2020 85% D+1 reliability for letters and 90% for parcels

Logistics Operations – 2020 Revamped operational processes: automated sorting hubs, expanded centers for international mail exchange, 5-6 e-fulfillment centers

New services – 2020 35% share in parcel market reached via new e-commerce solutions: e.g., mobile tracking, cash-on-delivery, online payments. Line of services introduced tailored specifically to B2C e-merchants, as well as C2C solution

Summary: As-is diagnostics, transformation program and relevant own experience to execute it 1

As-is Diagnostics • Ukrposhta got back into black with marginal profitability: ~1% • But it lags behind competition in terms of quality and is losing out in most promising markets: - Only 22% share in parcels (Nova Poshta, a private rival, grows 30% p.a., built a network of 3,000 delivery points) - None of top-3 Ukrainian tech e-merchants is integrated • Business segments representing 70% of revenues are at risk: letter correspondence declines by 3-5% p.a., share in pension payments dropped to 50% • Model developed for this analysis shows that if no rapid transformation is executed: in 2017 – Ukrposhta goes into red, 2020 – need of public funding >100 mil. UAH to cover deficit

2

Transformation Program Transformation program developed for 2016-20:  Mail business: B2C push1) to slow down decline  defend 75% market share  Parcels: rollout end-2-end ecommerce service offering  achieve 35% market share  Financial services: support e-commerce solution suite (e.g., Cash-On-Delivery2)); banking partnership  preserve 40% share in pension payments  Retail: 2-3 national partnerships, e.g., direct-2patient pharma delivery offering with administration control  10% СAGR

Sources: Ukrainian Direct Marketing Association (UDMA), Ukrposhta’s financial plan, own modeling; 1) Business-to-customers – segment of delivery market that grows most dynamically; 2) Cash on Delivery solution: often, one of the key pre-requisites for success in e-commerce delivery business

3

Relevant Own Experience  Planned out and executed large-scale transformations in organizations with >10,000 employees  Led modernization programs specifically in postal & logistics sector  Launched new e-commerce logistics businesses in world’s largest e-commerce markets (China and USA)  Restructured operations in challenging conditions of developing markets (e.g., Indonesia, Malaysia)  Built teams, actively recruited (run 5-7 interviews monthly to hire logistics project managers)  Graduated with highest honors from Shevchenko University, Kyiv and U.S. business school majoring in Finance Throughout this document, these callouts provide concrete examples from my own operational experience March 2016 | of executing proposed changes

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1.1

As-Is Diagnostics: Ukrposhta got back into black with marginal profitability (~1%), but is losing its grounds in key markets Ukrposhta’s reporting

Market research results

3.912

3.971 3.697

3.780

Net revenue mil UAH

Market share in postal logistics, % in money terms

-9 p.p.

29

27

Net profit mil UAH, %

2015 data not available yet, but trend is expected to prevail

45.1

42.2

36.1

2012

2013

2014

34 USD 1.3mil

2015

-4 36.1% 0.7%

0.7%

-0.1%

0.9% 20.9%

2012

2013

2014

2015

14.1%

2015 FY results are extrapolated from 9 mo 2015 (based on media reporting profit could have reached >50 UAH mil); results are partially attributed to currency effects

• Profitability is minimal compared to postal operators that have undergone successful modernization (e.g., for Mail division of Deutsche Post DHL: it’s ~7% and ~8% in 2015 and 2014 respectively)

- Market share dynamics

• Consolidation of private players2). Key ones expanded rapidly (e.g., Nova Poshta runs >3,000 delivery points and 37 sorting terminals, has 20,000+ FTEs, access to 1,400 of PrivatBank’s parcel lockers, handled 100 mil. shipments in 2015)

Sources: Ukrposhta’s reporting (Form 1 and 2 for 2013-14 and 9mo 2015), market research; 1) Military actions in the East and economic turmoil – among key drivers (control lost over ~500 post offices in Crimea, and partially – over post offices in temporary occupied areas of Donbas); 2) E.g., MeestGroup acquired Postman and Tochka

2

See Excel annex for detailed modeling results and to-be forecasting analysis

As-Is Diagnostics: As per modeling results, without rapid transformation Ukrposhta may lose >10% of net revenue (2020 vs. 2015)

1.2

Revenue structure, mil UAH

Modeled results for selected key products, mil UAH, CAGR Other players

3.780

Ukrposhta

Mail business

Customer perspective1) • Checked top-3 e-tailers in Electronics – they offer own delivery, Nova Poshta, MeestExpress and PrivatBank parcel lockers as alternatives, but Ukrposhta is absent even as an option • Among top-3 clothing e-tailers – only one is offering Ukrposhta delivery among standard options Parcels

+21%

Postal products

-3% Mail business

26% Print materials

Cross-border

Non-postal products

Parcels, courier delivery

Pensions

9% 7%

44%

1,023

867

73% 2015

Retail Others

7% 8% 2015

Extrapolated from 9 mo. results and 2015 financial plan that contains service breakdown

60%

15%

2020

2015

2020

• Losing position in B2C (e.g., dialogue marketing) that will decline at a lower pace, hence business will fall faster than the market • Regulatory constraints (e.g., needed changes re. flexible price) Pensions

• >20% e-commerce growth is forecasted to resume. # of parcels per inhabitant <2 indicates major growth potential (e.g., >12 in Germany) • Yet, considering major quality hick-ups (e.g., rudimentary D+1 services), Ukrposhta will continue losing our to finance players Cross-border

+3%

Transfers Payments

2.752 1.064 22%

+12%

2.301

2.621

50%

35%

1.172 30%

• Banks are actively promoting their solutions for retirees, leaving to Ukrposhta mostly rural areas • Market will marginally grow due to indexation and growth in numbers of recipients; yet, reduction of market share will lead to revenue losses

Sources: Ukrposhta’s reporting (2014 and 9 mo. 2015), Ukrposhta’s Financial plan 2015, studies by Ukrainian Direct Marketing Association, own analysis; 1) Check covered Rozetka, Fotos, Алло, Bonprix, ModnaKasta, Le Boutique

2.059 20%

• Ukrposhta is already in discussions re. development of cross-border solutions (e.g., in China), but competition will intensify (e.g., launch of Nova Poshta International at the end of 2015 with 3-7 day transit)

My experience of parcel business launch in Thailand  ThaiPost is a traditional postal provider with multiple service inefficiencies. Yet, they created a very active and driven regional sales and solution design team focused specifically on e-commerce 3 merchants and managed to preserve >70% of parcel market  I see launching such a team among “ quick wins” for Ukrposhta

See Excel annex for detailed modeling results and to-be forecasting analysis

2.1

Transformation program: Set of concrete actions outlined to preserve 75% share in Mail and accelerate Parcel growth (towards 35% share) base – base scenario, transform – transformation program results

Priority near-team actions (2016-17)

Mail Business, Print materials

Mid-term actions (2017-20)

• Launch SmartMail solution to push for B2C • Jointly with publishers, re-organize and defend market share: services for newspaper/magazine − Differentiated and guaranteed service levels delivery, e.g. (e.g., D+1 and D+3) − Integration with 3-4 publishing partners − Pre-sort discounts and (potentially) 2-3 price for local printing levels based on committed volumes1) − Bonus system to promote distribution − Functional web/mobile-tracking • Hybrid Mail and dialogue marketing − Consolidated invoicing solution rollout − Flexible pick-up timing − Team (~10-12 members) for key account PrivatBank has already rolled out 1,400 parcel management and solution design lockers (partnering with courier companies)  Ukrposhta has to analytically define optimal • Priority service targeted push locations

Parcels, Courier services, crossborder

• E-commerce solution suite rollout, incl.

- Dedicated sales and solution design team (~7-10 members): focus on top-20 players (85% of electronics and 90% apparel sales2)) - API integration with e-merchants’ OMS3) - Web/mobile tracking - Reliable and fast Cash-on-delivery option • Flexible network development: - Parcel lockers for 24/7 delivery: pilot of ~100, reaching 1000-1200 (~20% urban post offices + additional locations) in 2-3 yrs.

- ParcelShops4) to grow network with minimal fixed costs, parcel boxes in residential areas - Reverse logistics / returns solution - Weekend delivery, late cut-off times 1) - Larger cargo handling (>30kg); “white gloves”

• Cross-border e-commerce solution (direct partnership on 10-12 key trade lanes) • E-Fulfillment integrated with delivery • Potentially: own e-commerce platform (focus on C2C, SMEs small cities, rural) • Omni-channel offering • Partnerships to promote hitech/innovative last-mile solutions to improve costs and positioning, e.g.: - “Same Day” in Kyiv, Kharkiv, Lviv, Odesa, Dnipropetrovsk (e.g., with Ukrainian startup DelFast) - Сrowd-shipping (services similar to Shyp, MyWays)5)

1)Pricing needs to be aligned with regulatory bodies; 2 Largest e-commerce market segments based on UDMA, in particular Rozetka, Алло, Фокстрот, Bon Prix, Le Boutique, among others; 3) Order Management Systems (there are several optional for a limited-budget integrations); 4) Partner drop-off and pick up point typically co-located with a retail outlet (DPDHL build a network to cover 50% of the county within 500m); 5) Dynamic management of logistics personnel, incl. pick periods; 6) Planned results for the launched in Thailand

Success measures (2020) Mil UAH, CAGR

 Net revenue development: -3% -7% 983

692

853

2015

2020 (base)

2020 (transform)

 3-4% profitability  75% market share in Mail (incl., 55-60% B2C / DM, 90-95% in G2X)  85% D+1, 90% D+3 reliability  99.9% non-damage rate

Mil UAH, CAGR

 Net revenue development: +24% +7%

599

848

2015

2020 (base)

 6-7% profitability

1.724 2020 (transform)

 35% market share in Parcel and cross-border (80% out of top-20 Ukrainian e-retailers work with Ukrposhta with share >45%)  

90% D+1, 95% D+3 99.7% non-damage rate From my experience of launching e-commerce parcel business6): 4 • Positive net profit: Year 3 EBIT margin: 8% (Year 5)

See Excel annex for detailed modeling results and to-be forecasting analysis

2.2

Transformation program: Growth of Financial Services and Retail to be driven via 3-4 national partnerships base – base scenario, transform – transformation program results

Priority near-team actions (2016-17)

Financial services1) (+ admin. services)

Retail

• Strategic banking partnership(s) − Pension accounts with flexible cash delivery option − Hybrid financial-retail product (customer financing with installments as deductions from payouts handled by Ukrposhta) - Active sales of banking and insurance products via Ukrposhta’s network • Money transfers: leverage synergy with ecommerce services (e.g., payment solution for C2C transactions) • Payments: automation to speed up processing (e.g., via payment terminals); payment collection at home

Mid-term actions (2017-20)

Success measures (2020)

• Full-scope offering of administrative services at postal offices • In partnership with Ministry for Social Policy, potential involvement of postal workers as social workers (rural areas, small cities) • Italian BancoPosta, French La Banque Postale operate as fully-licensed postal banks • Yet, experience of Deutsche Post (Postbank sale) and agent partnership between ING and PostNL show choice in favor of partnership model • Bank Pocztowy in Poland moves into partnership model with Bank Polski  potentially, optimal model for Ukraine as well

• Establishing 2-3 national retail partnerships • Introducing Private label offering for - Fast modernization of retail operations with selected fast-moving SKUs minimal CAPEX • Potentially: direct partnerships with 2-3 - Professional management of SKU range, pharma producers to develop direct-2purchasing, inventory levels, marketing. etc. patient (DTP) delivery of certain pharma - Synergies with postal & logistics products (consumer health)2) operations (e.g., in distribution, fulfillment, - Suits well Ukrposhta’s aging customers home delivery options) - 5-10% of line personnel to be trained • Catalogue sales services for rural areas and - Medicine administration control/support small cities with low e-commerce penetration - As required: development of temperaturecontrolled offering From my experience of launching DTP solution for one of the world’s major pharma companies: • 20-25% margin recovery from distributor and pharma chain commissions (up to 1/3 can be gain shared with logistics provider) • 5-10% additional sales push • Improved control over order-2-cash cycle

Mil UAH, CAGR

 Net revenue development1): +1%

-4% 1.649

1.329

1.722

2015

2020 (base)

2020 (transform)

 40% share of pension payments via Ukrposhta (decline is slowed down)

 10% revenues from new financial services (relative to commission from pensions)  Net revenue development : +10% +3% 260

301

412

2015

2020 (base)

2020 (transform)

 2-3 national retail partnership launched •

Inventory turns <30 days

•

+50-100% average transaction value growth (plus, shift to higher-margin product groups)

1) Includes delivery of social payments, money transfers, processing utility and other bills, etc., as well as launch of new financial services via banking partnership(s); 2) Regulatory may need to be processed (incl., those from Ministry of Health)

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Transformation program: approach to launch e-fulfillment services is outlined as a concrete illustration of Program’s actions1)

2.3

Positioning and detailed business case

Product development and pre-launch phase

06/2016-10/2016

Target customers (illustrative) Prio A • E-retailers (incl., small & medium) • •

Marketplaces and marketplace merchants

Direct selling players

Phased rollout з 01/2017

08/2016-12/2016

Scope of services Detailing out standard operating procedures (SOPs) for e-fulfillment centers: 1. Product receipt, quality control and storage 2. Inventory management and tracking 3. Order management and packing 4. Dispatch for delivery 5. Returns handling 6. Value-add services (e.g., gift wrapping, triage and scrapping of returns, etc.)

Prio B • Brick & click merchants

Kyiv central hub (1,5002,000 м2), incl. international Kyiv-2 (600-800 м2)

Lviv (800-1,000м2), incl. international

Kharkiv (800-1,000м2) Dnipropetrovsk (600-800м2)

Odesa (600-800м2)

IT •

Offline merchants/big brands

•

•

Business case key metrics • • •

85,8 mil UAH Net revenue (2020) 8-10% profitability (reached gradually), sizeable indirect impact via parcel growth CAPEX requirement: 10-15 UAH mil 1) Services to manage inventory and orders of e-commerce players integrated with delivery

E-fulfillment portal capable to integrate with delivery systems, WMS, marketplaces Leverage an off-the-shelf solution with minimal adaptation to minimize CAPEX

- Phase 1 (01-09/2017), incl. pilot in Kyiv based at existing mail terminal - Phase

2 (09/2017-12/2018)

From my own experience in the world’s 2 largest e-commerce markets: • Cross-border fulfillment (China): it was critical to setup efficient customs processing, incl. leveraging FTZ  Ukraposhta as a state-owned player should leverage customs relationship and trust • In-country fulfillment (USA): fulfillment solution allowed to win significant new business for parcel delivery from small and mid-sized merchants  this is one of the ways for Ukrposhta to restore its position in parcel market

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2.4

Transformation program: fast operating model revamp is critical to enable changes outlined earlier Corporate governance and building a winning team

IT and business processes

 Completing audit and corporatization procedures; development of investment project portfolio, involving technical assistance partners1)  Involving on a team finalists of CEO competition  2016: optimization of Central administration  2017-18: consolidating of regional administrations into 4-5 service areas to reduce management layers  Shared service centers with other SOEs (e.g., HR, support IT, procurement, real estate management)  Outsourcing non-core functions; real estate footprint and rental contracts review

Engaging clients

 Baselining of existing IT solutions and development of holistic IT roadmap; involving a capable CIO2) as a key player on the management team  2016-17: IT solutions with limited CAPEX needs (e.g., track & trace updates, APIs with e-marketplaces)  2017-18: investment projects for a largerscale IT solutions (e.g., ERP rollout, TMS) and sorting automation  Lean-optimization (Central administration Regional administrations  Post offices / operational units)

Standard greeting, appearance & attitude management, “Delivery

by DHL”

Renewed operating model

 Cascading down best practices onto post office level (e.g., dynamic/virtual queue management)  Dedicated client support for key areas (e.g., specialized priority contacts at call centers for e-merchants)  Mystery shopping tools to control quality/reliability (e.g., with UDMA)  Activate feedback channel (“straight to the top” program, preference for low-cost solutions – social networks, local media, sms); monthly reporting on Program progress  Competitiveness among post offices and rewards  Modern СRM system to boost loyalty (Net Promoter Score3) of 8-9) 1) E.g., financing by UPU, investments similar to target investments by Alibaba Group into SingPost to grow ecommerce services (250 mil. USD in 2014); 2) Сhief Information Office: 3) Transport Management System; 3) Method to measure customer satisfaction

Logistics network  2016-17: Operational optimization that doesn’t require major changes in logistics network (e.g., truck utilization improvements via milk-run routing, sorting logic review, fuel spend optimization, etc.)  2017-2018: Logistics network review

• In my experience of logistics operations and network optimization: potential to drive down logistics costs – 8-10% without network changes and from 10-15% - via network review • Optimal network should be modeled separately for mail and parcel volumes (e.g., using tools such as CAPS or SC Guru) • Deutsche Post experience: 1000+ sort. centers down to 82, making high level of sorting automation feasible (increased at Deutsche Post from 25% to 85%)

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To compare: Deutsche Post DHL Group achieved 7-8% profitability for Mail division in 2014-2015 рр.

2.5

See Excel annex for detailed modeling results and to-be forecasting analysis

Transformation program: actions outlined are aimed at bringing Ukrposhta to >6% profitability by 2020 2015 2016 2017 2018 2019 Net revenue 3,780 3,647 3,936 4,216 4,610 Mail business 747 661 646 645 626 Market dynamics n/a -5% -5% -5% -5% Market share 73% 68% 70% 70% 70% Print materials 236 212 222 215 209 Parcels 234 269 382 535 734 Market dynamics n/a 15% 25% 25% 20% Market share 22% 22% 25% 28% 32% Courier services 13 15 20 25 32 Cross-border products 352 308 379 467 627 Market dynamics n/a 5% 10% 15% 15% Market share 30% 25% 25% 28% 30% Social payments 1,151 1,121 1,090 1,078 1,064 Indexation n/a 3% 3% 5% 5% Change in recipient base n/a -2% -2% -2% -2% Market share 50% 48% 46% 44% 42% Other financial services 498 495 560 578 651 Retail 260 286 329 344 412 E-fulfillment 0 0 6 19 32 Others 290 279 302 311 224 Other operating income 529 182 197 211 231 Total operating income 4,309 3,829 4,133 4,426 4,841 Operating expenses (4,277) (3,761) (4,021) (4,269) (4,565) Materials expenses (412) (371) (334) (334) (351) Staff costs (2,674) (2,757) (3,018) (3,226) (3,452) ∆ FTEs in administration n/a -10% -25% 0% 0% ∆ operational FTEs n/a -1% -3% -3% 0% Change in avg. salary n/a 5% 15% 10% 7% Amortization (119) (113) (113) (119) (131) Other operating expenses (1,071) (520) (556) (590) (631) EBIT 32 68 112 157 276 Fin. Income / Expenses 9 11 (9) (9) (9) Profit before tax 41 79 103 148 267 Income tax 1) №№№ (7) (14) (19) (27) (48) Net profit 34 64 84 121 219 Profitability 0.9% 1.8% 2.1% 2.9% 4.7%

2020 ∆ аbs. CAGR 6% 5,039 1,260 -3% 650 (97) -3% 75% -3% 202 (33) 33% 963 729 20% 35% 25% 40 27 15% 721 369 15% 35% -2% 1,048 (102) 5% -2% 40% 6% 674 176 10% 412 152 86 86 -3% 242 (47) 252 (277) -14% 4% 5,291 983 3% (4,879) (602) -2% (368) 44 7% (3,693) (1,019) 0% 2% 5% 4% (144) (25) -9% (674) 397 67% 412 381 (9) (18) -199% 58% 403 362 58% (73) (65) 58% 331 297 6.6%

Mil UAH

Scenario analysis: net profit Base scenario

34 34

2015

57 64

22 84

2016

2017

Modernization achieved 331 219 121 -41

-79

2018

2019

-131 2020

CAPEX needs and sources (2016-20) 228 901

2.276 621

1.148

507

1.148 Mail

Parcel Other CAPEX Amort. Profit External reinv.

CAPEX/Amortization: ~4-5 coefficient at least for 3-4 years to enable active modernizing

Budgets / special funds contribution (2016-20) Soc. Funds

Profit share

VAT

Profit tax 4.407

860 5.760 313 180

Fast-growing services (e.g., 33% СAGR for parcels), based on the experience of other postal operators, allow to overcome loses in declining products resulting in positive dynamics for net revenue (6% CAGR)

Profit growth pace exceeds that of revenue growth due to: - Increase of share of higher-margin products (e.g., e-commerce logistics solutions vs. C2C letters) - Cost optimization measures (e.g., administrative apparatus to reduce by ~30%, while maintaining stable levels for operational personnel with increased 8 productivity)

3.1

Experience to execute the Program: leadership in large-scale postal & logistics transformations Leading large-scale changes  Restructuring of postal operator in the Middle East  One of the largest in transportation industry IT and business process transformation involving operations in 150 countries  Organizational re-design of divisions across 14 APAC markets  Optimization of B2C distribution networks from retail to hi-tech and pharma; implementation of logistics operational changes

Launching postal & logistics businesses  DHL eCommerce launch in Asia with organic and inorganic growth plans to build 600 mil USD business by 2020  Parallel launch within shortest time span of new postal services for cross-border e-commerce in China and USA

Oleksandr Pertsovskyi

Associate Partner, Asia-Pacific region Deutsche Post DHL Group

Negotiations, securing funding, partnership building  Driving relationship and negotiations with Economic Development Board (EDB) of Singapore to setup Logistics analytics center and secure co-funding

Forming and developing teams  Recruiting and mentorship of project leaders in American, European and APAC headquarters  10+ trainings conducted on leading projects, teams and changes for DHL and client management teams 9

3.2

Experience to execute the Program: will leverage management best practices from 10+ countries where I restructured operations Canada

Germany / Netherlands

Pilot rollout coordination for Global ERP (2011)

Coordination of ERP implementation and global business transformation (20112012)

Kazakhstan

Singapore

Partnership building between local and Swedish companies2) (2008)

Regional organizational redesign (2012)

China Partnership building and B2C product launch (2013)

Japan

UK USA Productivity improvement program for customs brokers (2010-2011) New postal product launch (2013) Partnership building with largest mobile manufacturer (2014)

South America Assessment of seaport and port infrastructure (20102011)1)

Global offline-2-online transformation of operations for a specialized retailer (2016)

Ukraine Transformation of transport operations (2013-2014)

Market entry for a Swedish life sciences player2) (2007)

Thailand Middle East Restructuring of a national postal operator (2011-2012) Restructuring of a joint venture company providing logistics services in Oil & Gas upstream (2015)

Malaysia Building up quality control system for transport operations (2014)

Launch of domestic e-commerce deliveries (20142015)

Indonesia Integration of national distribution networks (2012-2013)

• Via extensive personal contacts, will involve subject matter experts from Deutsche Post, SingPost, Royal Mail and others as Ukrposhta’s pro-bono advisors • Contacts with investors into e-commerce logistics will be leveraged to secure publicity and funding for Ukrposhta’s mid-to-long term investment projects

1) This project was done remotely from American HQ in Miami; 2) Experience while representing in Ukraine Zarya Partners AB, a Swedish company that was connecting Scandinavian players with business opportunities in Eastern Europe and Central Asia

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