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Ukrposhta – Reform Proposal Proposal Submission Igor Smelyansky March 12, 2016


Difficult conditions and volume reduction in the world’s postal sector will continue its 1990 – 2015 trend in coming years Letter volumes will continue to fall across the world

Change for 2013 - 2014

120

Parcels have pockets of growth, but not everywhere

1 – Current assessment and industry overview

Change for 2013 - 2014 250

110 100 90

91

96

01

06

11

80 70 60 50 40 Base year 1991 = 100

Internal mail International mail

Africa -17.0 % Latin America and -2.9 % Caribbean countries Asia and Oceania -10.6 % Eastern Europe and CIS -8.1 % Middle East -21.5 % Developed Countries -1.4 %

200 150 100 91

96

01

06

50 Base year, 1991 = 100

11

Africa Latin America and Caribbean countries Asia and Oceania Eastern Europe and CIS Middle East Developed Countries

National mail International mail

According to most forecasts, mail (letter) volumes will continue to fall across all the segments

1 Source: 1) United Postal Union, 2014 statistics. 2) Main Developments in a Postal Sector. Study for the European Commission, WIK Consult

-30.3 % 18.0 % -10.1 % - 6.8 % -13.7 % 3.7 %


These market trends make situation even more difficult for Ukrposhta, as Ukraine belongs to a number of countries with low postal services volumes Number of letters per capita (2014)

Number of parcels per annum per 1000 (2014)

27 301

112

7482

80

6

2

1 – Current assessment and industry overview

4 2 3

18

115

Historical analysis shows that these numbers rarely drastically change (if ever) as they are based on local customs, model of government services provision, etc. 2 Джерело: 1) United Postal Union, 2014 statistics.


At the first glance Ukrposhta’s income structure corresponds to the best international benchmarks in terms of diversification of sources, however … Postal income structure in the developed countries

1 – Current assessment and industry overview

Per financial report for 2014 - ~ 44 % of Ukrposhta’s income comes from financial services

120

Income in 2014 (Mln. HRV)

100

%

80 60 40 20

• Letters (2)

753

19%

• Parcels

218

5.6%

• Advertising and subscription mail

245

6.5%

1,243

32%

• Money transfers

189

5%

• Payments

269

7%

• Pensions

0 USPS Deutsche UK Post La Poste Canada Australia Poste (США) Post office Post Post Italiano Letters

Parcels

Logistics

Financial services

~44%

Other

3 Source: 1) United Postal Union, 2014 statistics. 2) Main Developments in a Postal Sector. Study for the European Commission, WIK Consult. 3) Ukrposhta


… lately Ukrposhta is losing its position to banks and other postal operators in the most profitable segments… 1 – Current assessment and industry overview

In financial services Ukrposhta is losing retirees…

Ukrposhta’s share in parcel segments fell by 5% over the past 3 years

Number of retirees (without Crimea) in mln.

Ukraine

13.7

13.7

13.7

13.8

13.6

13.5

Ukrposhta’s share in parcel segment

12,1 31%

30%

Ukrposhta8.1

7.9

5.6

Banks

7.4 6.3

5.8

30%

7.1 6.7

7.4

6.7 6.9

6.1

6.7

29%

In e-comments Ukrposhta also losing out to other postal operators and private couriers How did you get your e-commerce orders? 3

Nova Poshta – 60% «Mist - Express», Postman and «In-Time» 10%+

… and payment business to banks and fin. companies

Nova Poshta, InTime, …

4 12

28%

5.4

2 1

37

20

27%

21

26% 26% 25%

Money transfers (without Crimea)

Income (Mln. Mln. HRV) HRV)

237.7 245.0 207.4 223.1

217,3 274.5

189,7

25%

Picked up at courier services

24%

Picked up at or delivered by Ukrposhta

23%

Courier delivery to the door Picked up at the seller's facility

22% Volume (Mln. Mln. Units) Units)

22.1 2009

22.2 2010

22

2011

Source: 1) GFK Research. 2) Ukrposhta

20.9 2012

20,3 2013

14,7 14,5 2014*

2015 (план*)

2013

2014

2015

Picked up from terminal (poshtomat) Courier delivery to front porch Did not use delivery service Others

4


… while using extremely heavy “soviet” infrastructure with very limited investment in IT and new technologies 1 – Current assessment and industry overview

Ukrposhta has more extensive “rich” infrastructure than postal operators in the developed world…

Africa % of postal offices 2% Service area (in km 2) per 1 postal office 1,520 Population per 1 postal office 67,900 % of postal workers 1% Number of people (population) per 1 postal worker 15,607

• • • •

Lat. America and Caribbean 7%

… while losing to them by a mile in terms of income…

Total IT expenses in postal sector for 2015 - EUR 20.1B

Total postal income for 2014 (B USD) Middle East

Asia and Oceania

Developed Countries

Eastern Europe and CIS

2%

47%

26%

16%

Ukraine 1.7%

United States Postal…

421

969

72

195

229

53

12,831 4%

25,950 2%

12,106 32%

5,305 46%

4,555 14%

3,930 1.6%

China Post

$60.2

3,350

2,317

381

643

539

The smallest service area per 1 post-office in the world – 53 км2 vs. 195 км2 in developed countries The smallest number of people served per 1 postoffice 3,930 vs. 5,305 in developed countries 1.7% from the world’s postal employees with substantially smaller income share One of the smallest in the world number of serviced population per 1 postal employee - 539

1% 1% 1%

$20.9

La Poste

$15.1

Royal Mail

Ukrposhta $ 100К?

$67.8

Deutsche Post

3,034

… and investment in the future (IT and infrastructure)

$7.5

Swiss Post

$6.5

Poste Italiane

$5.4

29%

2% 2% 2% 3%

$12.8

Brazil Post

18%

4%

15%

4% 5%

6% 7%

Canada Post

$5.4

USA

Japan

Austrian Post

$3.2

China

Germany

Укрпошта

$0.3

UK

France

Canada

Australia

Italy

Brazil

Middle East

Spain

Sweden

Russia

$0

$20

$40

$60

For all the companies – only income from postal operations (letters and parcels). For Ukrposhta – total income. Postal income is around 65% or $ 0.2В

Sources: 1) United Postal Union, 2014 statistics. 2) Upheaval in the Global Postal Market. PAC White paper 2014. 3) Ukrposhta

$80

Other countries

5


What do all these factors mean for Ukrposhta? – the company needs radical internal reform with substantial legislative and government support to remain profitable in the years to come

2 – reform proposal for Ukrposhta

• When salary expense comprise around ~ 70% from total operating expense1 …,

How would I propose to pay for the reforms?

• … with average salary ~ 1,900 hrivnas (~ $ 74) per month

1. Improve current operations, with particular focus on sales increase and commercial function 2. Review of Universal Service Model with potential radical changes in delivery standards, especially in remote locations (covered on the next slide) 3. Debt financing from international institutions (IMF, EBRD, …) 4. Bond issuance 5. Consider sale of 25% shares on exchange or to strategic investors 6. Commercial and state bank financing 7. Introduction of postal tax on post operators not delivering across the country (i.e. 0.5% from revenue like in Brazil to maintain Universal Service Model )

• … investment in IT and technology at a minimum • … all major procurement purchases are less than 10% of total expenses • … all major postal volumes (except parcels) and pension volumes will continue to drop in the near future • … concentration of corporate business among top-5 clients exceed over 50% in some segments Pure cost cutting will not help to finance reforms and improve financial results over the next 1-2 years as A. It will be “eaten” by at least small increase in salaries and B.

necessary investments in IT and Logistics (potentially M&A to make up technology gaps)

Touch internal reforms require financial and legislative support from the government and Verkhovna Rada, especially in “unpopular” steps Source: 1) Ukrposhta

6


I propose 5 major levers to increase Ukrposhta’s income 2 – reform proposal for Ukrposhta

1 • Substantial increase in financial income

• Creation of the postal bank with focus on communal payments, retirement payments, consumer loans, as well as SME loans and factoring 2 • Share increase in express and courier delivery segment

• Focus on corporate segment (take share from private couriers) • Outsourcing partner for internal and external mail for corporate customers 3 • Defense and increase of market share in parcel deliveries Утримання та зростання долі посилок

• Partner programs with e-commerce operators and e-stores • Logistical support for SME segment 4 • Center of government services (why built new centers when poshta has substantial unused offices and

personnel) • Center for e-government services • Center for various services requests (government note, potentially passports in the future, etc.) and document receipts 5 • Collection, analysis and sale of marketing data (big data)

7


7 major steps to cut costs 1.1

Transparent purchase and tender procedures (including commission agreements, etc.)

2.2

Change in organization structure and corporate hierarchy (delayering)

2 – reform proposal for Ukrposhta

• Example: cutting a number of directorates from 26 до 5-6

3.3

Personnel reduction (including management) given personnel costs ~ 68-70 % • However, substantial increase in salaries for key positions, i.e. commercial function, IT, logistics, etc. Average salary at 1900 hrivnas substantially increase operational risks

4.4

Optimization of price, terms and conditions of delivery • Sensitivity analysis in terms of costs vs. tariffs (tariffs in general must reflect real costs, if someone if willing to wait, let’s use it) – potential move from Universal Service Model to “Selective” service model • Implementation of new technology, including sensors (if postal box is empty, no reason for pick up)

5.5

Increase in efficiency for mail sorting and routing

6.6

Real estate optimization in order to increase rent payment and sale of unnecessary buildings

7.

Optimization of postal network, potentially with Oshadbank, Ukrtelecom, etc. Potential use of mobile offices

7

• Ukrposhta has over 5 000 offices in small cities and villages, Oshadbank ~ 2 300 • Use of partnership network, as done by top companies, such as UPS, USPS, FedEx, TNT 8


What must be done in 2016 – first 10 steps 2 – reform proposal for Ukrposhta

1.

Implement immediate financial control measures to assure safety and optimization of the company’s financial assets 2. Within first 3-5 months, with participation of independent consultants, clients, government and Rada officials, develop and approve long-term Ukrposhta’s strategy (including realistic financial plan and model and and IT strategy) 3. Complete all the necessary corporate procedures, including appointment of independent members and experts, and consider privatization of 25% of Ukrposhta 4. Undertake full independent audit of financial results, real estate assessment and IT and infrastructure assessment 5. Begin negotiations with various government, private and international lenders (EBRD, IFC) as to the potential financing of Ukrposhta reforms 6. Register Postal Bank (or acquire banking license) and undertake necessary steps to begin its work in 2017 7. Change organizational structure and top management (where necessary per assessment results), especially in commercial function, finance, security and IT 8. Develop and implement by the end of 2016 new compensation and motivation system 9. Review tariff structure and service model and implement necessary changes 10. Develop and implement “quick wins” as for new product launch, sales growth, cost cutting measures, as well as rent agreement and real estate optimization 9


Why me? – solid reputation and successful experience as a crisis manager Key position requirements

My qualifications

3 – candidate competitive advantages

Education: Higher education, MBA preferred

• Bachelor of Business Administration, Pace University, USA, Certified Public Accountant – CPA • Juris Doctor, George Washington University Law School, USA, NY and NJ Bar Admission, Member of American Bar Association • МВА with honors (top 5%), Georgetown University, USA

Main qualification requirements: Candidates must show top management experience in all 5 categories: 1. Ability to manage change (Strategic vision) 2. Result oriented 3. Communication: 4. Ability to build and manage teams 5. Business skills (Financial management, HR, Management of production processes)

• Over 5 years experience in top management consulting firms (KPMG, BCG). Over 10 large scale strategy and operational efficiency projects for top companies in CIS. Development of change and project teams, most of which continued to successfully function after my departure. • Manage most successful M&A projects in a banking sector in Ukraine and Russia. • Most of the people I worked with are ready to do it again

Professional experience: • Over 5 years in the top position, managing large companies (over 500 FTEs). Experience with international companies a plus. • Experience in change management and efficiency improvement projects • Knowledge of postal industry and its key trends; • Experience in business development in an online segment a plus; • Knowledge of key enterprise’s financial and economic drivers; • Experience leading negotiations at the highest level as well as conflict resolution experience .

• 3 years as Chairman of the Board for 3 regional banks (1500 FTE), as well as 4.5 years as Director of M&A and Asset Management. Over 8 years (4 as a Director) with international companies such as BCG and KPMG in CIS and USA • Crisis management o troubled banks: cut costs by 40% while increasing assets and liabilities by 200% • Experience in development and implementation of online, IT and operational strategies • Experience working with and presenting to top management and high level government officials This is how my colleagues write about me in social media in 2016 – 5 years after the end of the project: Alexander Turchin, IT Director for one of the banks

Alexander Turchin What is interesting is that only once I could observe a top-manager, who was not a specialist in any of the mega-project’s areas, however, was highly effective in achieving its goals. Why I am writing here – this was a project with total demolition of existing management structure and building new one from scratch for integrated companies. That M&A was brutal and without any compromises. Igor Smelyansky, respect for your work. Like · Reply · 2 · February 27 at 2:22pm

Discussion of an article “How new top managers destroy companies” This is about risks of changing top management in large companies and consequences of ignoring rules of effective management

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THANK YOU! 12

Ігор Смілянський  

Ігор Смілянський  

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