ANNUAL REPORT 2006 THE POST DANMARK GROUP

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1 ANNUAL REPORT 2006 THE POST DANMARK GROUP

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3 MANAGEMENT S REVIEW CONTENTS Preface Company Presentation Highlights and Ratios The Year 2006 De Post La Poste Expectations for 2007 Customers and Market Business Customers Private Customers Courier, Express, Parcels International Post Production and Processes Employees and Management Risks Shareholder Information Financial Review Accounting Policies Consolidated Financial Statements 2006 Parent s Financial Statements 2006 Principal Companies in Post Danmark Organisation of Post Danmark Board of Directors and Executive Board Management s Statement Auditors Reports 3

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5 MANAGEMENT S REVIEW PREFACE I regn og slud skal posten ud ( Sleet or hail, we never fail ) is a slogan that we all know in Denmark. Everybody deals with and has dealt with Post Danmark in their everyday lives ever since the Danish postal service was born in 1624 the year when King Christian IV issued the socalled Ordinance on Postmen, established nine mail routes and appointed the country s first postmaster. According to the directives, the postmaster was to be a sober and hard-working man, and his noblest responsibility was personally to look after the mail that went to and from the stock exchange in Copenhagen. Many years and billions of letters later, Post Danmark s staff is our most important asset. At the same time, Post Danmark plays a very important role in society. The company ensures that all citizens and enterprises in Denmark can entrust Post Danmark with the responsibility for on-time delivery of mail. Relations are created between people and information is shared. At Post Danmark we have several hundred years of experience in performing this primary task. However, it is not only postmen and women who contribute to the Group s growth. Post Danmark is to a great extent a technologically based business which is highly dependent on knowledge staff. We are very proud and happy about the results we have achieved. Fortunately, our employees are also pleased with Post Danmark. We regularly measure staff satisfaction, which has shown positive results. But, we can, of course, become even better. A labour market under pressure has contributed to a higher staff turnover in 2006, especially among delivery staff. However, we are constantly working to create the best possible frameworks and conditions that modern people feel comfortable in. This helps us retain our competent staff. The 2006 financial year was an eventful year. We acquired a substantial ownership interest in the Belgian postal service, carried out significant efficiency improvements and developed our activities further in many areas. The net profit for the year of DKK 892 million reflects good and targeted work and is highly satisfactory. Developments in the postal market have moved in line with recent years trend, with a falling volume of conventional letters as a result of the technological development. Despite this development, Post Danmark has managed to improve net profit for the year by focusing on, for example, new business areas and developing existing ones. The market for postal services is undergoing constant development, and so is Post Danmark. We are continuously aware of the growth opportunities through acquisitions, and continuous efforts are being made to develop new business areas and products. We have carried out strong profiling of our customer service and sales efforts. At the same time, our customer-oriented activities were improved in 2006, reflecting our efforts to streamline our internal processes. These activities will continue was a prosperous year for Post Danmark, and a year of major changes. Post Danmark is still strongly positioned to meet customer needs and requirements based on a broad platform of products. In the coming years, focus will remain on developing the existing business. However, we will also be forward-oriented, searching the market for potential business partners and acquisitions, which can help create growth and support our visions. Enjoy the reading! Fritz H. Schur CHAIRMAN OF THE BOARD OF DIRECTORS Helge Israelsen CHIEF EXECUTIVE OFFICER 5

6 MANAGEMENT S REVIEW COMPANY PRESENTATION Post Danmark is the country s leading supplier of postal services to the Danish people and business community. The company has always played a central role in society and is an important part of the Danish society. What would our everyday life be like if we didn t have postcodes, postmen and women, stamps and post offices, not to mention the personal communication between people? Post Danmark is not just a business it is a Danish institution. Post Danmark strives to create the best possible environment for modern people we are, of course, referring to its customers and employees. For centuries, Post Danmark has built up a modern, competent organisation, the object of which is to provide postal services and to carry on business within distribution, communications, transport and logistics. In recent years, its activities have been expanded to include facility service, scanning and ecommunication. The company also has an ownership interest in the Belgian postal service De Post La Poste. Today, Post Danmark is a modern undertaking undergoing constant change. The provision of postal services includes an obligation to maintain an efficient nationwide service within collection, transport, sorting and distribution of letters, periodicals and parcels up to 20 kilos. In return for the universal service obligation, Post Danmark has the monopoly of distributing letters weighing up to 50 grams. This monopoly, which is expected to be abolished in 2009, is accompanied by an obligation to maintain a high service level defined as a target where 95 per cent of ordinary letters are delivered on the following weekday. In 2006, the European Commission presented a proposal for an amended directive concerning liberalisation of the postal services in the EU. In addition to the removal of the abovementioned monopoly of distributing letters below 50 grams, the proposal also provides that requirements as to uniform tariffs cannot be established generally for letters. If the proposal, which has been submitted to the Member States for consultation, is adopted, it is expected to become effective in Post Danmark is in favour of the planned liberalisation provided that the company is secured fair and efficient framework conditions and provided that all significant countries are liberalised simultaneously. In this connection, it is important that a position is taken on the implementation of the directive in Denmark concurrently with the considerations taking place in the context of the EU. In accordance with the object established by law, Post Danmark s mission is to provide basic postal services to all customers in Denmark senders and recipients alike. These postal services must be the best in Europe measured in terms of service level, quality and price combined. Post Danmark s vision is to become the most excellent postal company in Europe, i.e. to produce results at level with the best to provide Europe s best postal customer services to all senders and recipients in Denmark to make a profit from the letter segment despite a considerable decline in volumes PARENT POST DANMARK A/S CONSOLIDATED SUBSIDIARIES 100 PER CENT 100 PER CENT POST DANMARK LEASING A/S BUDSTIKKEN TRANSPORT A/S 100 PER CENT DATA SCANNING A/S 51 PER CENT TRANSPORTGRUPPEN A/S *) ASSOCIATES AND JOINT VENTURES 50 PER CENT 33 1/3 PER CENT PAN NORDIC LOGISTICS AB E-BOKS A/S 49 PER CENT MORGENDISTRIBUTION DANMARK A/S **) 50 PER CENT MIE GROUP S.A. *) Transportgruppen A/S was acquired in January 2007 and is therefore not included in the consolidation **) Morgendistribution Danmark was sold in February PER CENT POST INVEST EUROPE S.A.R.L. 50 PER CENT DE POST N.V. / LA POSTE S.A. 6

7 MANAGEMENT S REVIEW to successfully develop and provide new customer services to senders and recipients to gain market shares in competing markets to cooperate with a major international operator to develop the most skilled and committed postal workforce in Europe. The framework for achieving the objectives is good. A unique network of parcel and letter sorting centres, intelligent registration of changes of addresses, state-of-the-art solutions in production, etc., ensure a high level of reliability of delivery (service level), as a result of which Post Danmark is ranked among the best postal operators in Europe, for the benefit of the customers. To ensure efficient and targeted operations, Post Danmark s organisation is divided into eight business units and a number of staff and support functions. Four customer-oriented business units are responsible for sales to their respective customer segments while four production-oriented units operate as subsuppliers of production, distribution, IT and service. This division is based on a desire to ensure transparency in the contributions made by the various activities to Post Danmark s total economic value added. The eight business units are therefore measured by their economic performance. The impact of electronic substitution is expected to continue in the domestic letter market, and the entry of new competitors will intensify the competitive situation. However, Post Danmark expects overall to retain a solid market position. The total market for newspapers, magazines and periodicals has changed significantly in recent years, driven by the abolition of the state subsidy for most weeklies and monthlies which has changed publishers preferences. As a result, most weeklies and monthlies have been transferred to magazine mail. The size of the market for the remaining newspapers, magazines and periodicals is expected to grow in 2007 thanks to the increase in the number of free newspapers. Conditions are also changing in the newspaper market. The passing of a new law on subsidised distribution of daily papers (lov om tilskud til distribution af dagblade) implies that from 1 January 2007 the subsidy will be paid directly to publishers instead of Post Danmark. An increase is expected in the domestic parcel market and for light goods. The market for outgoing international parcels is also expected to grow. At the same time, market share should improve. In a forward-oriented approach, Post Danmark will search the market for potential business partners and acquisitions, which can help create growth and underpin its visions. Over several hundred years, Post Danmark has developed a unique know-how within postal services, which we expect to be able to introduce into adjoining markets. REVENUE 2006 BY PRODUCT INCOME 2006 BY BUSINESS UNIT NUMBER OF STAFF MEMBERS LETTERS, MONOPOLY OTHER INTERNATIONAL POST OTHER NEWSPAPERS, MAGAZINES, PERIODICALS AND UNADDRESSED MAIL COURIER, EXPRESS, PARCELS PRIVATE CUSTOMERS (POST OFFICES) PARCELS LETTERS, COMPETITION PRIVATE CUSTOMERS BUSINESS CUSTOMERS LETTER PRODUCTION AND TRANSPORT DISTRIBUTION (POSTMEN AND WOMEN) 7

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9 MANAGEMENT S REVIEW HIGHLIGHTS AND RATIOS AMOUNTS IN DKKM INCOME STATEMENT Revenue Other operating income Total income Operating expenses Profit before depreciation, amort. and impairment losses (EBITDA) Dep., amort. and impairment losses, excl. amort. of goodwill Profit after dep. and amort., but before amort. of goodwill (EBITA) Amortisation of goodwill Operating profit before non-recurring items Non-recurring items Operating profit (EBIT) Financials, incl. profits/(losses) of associates and joint ventures Profit before tax Tax on profit for the year Net profit for the year BALANCE SHEET Non-current assets Current assets Total assets Equity Provisions Non-current liabilities Current liabilities Total equity and liabilities CASH FLOWS Operating activities Investing activities Financing activities Change in cash RATIOS Operating profit margin, per cent Return on equity, per cent Solvency ratio, per cent Dividend as a percentage of profit before tax *) Dividend per share, DKK/Euro *) Number of full-time employees ECONOMIC VALUE ADDED Economic value added, per cent Economic value added POST DANMARK GROUP , ,718 (10,065) 1,653 (588) 1, , , ,187 (295) 892 5,424 2,263 7,687 2,731-2,010 2,946 7,687 1,226 (1,154) (127) (55) , , ,462 (9,778) 1,684 (560) 1, , ,124 (91) 1,033 (295) 738 4,910 2,115 7,025 2,471-1,700 2,854 7,025 1,304 (696) (1,088) (480) , ,227 10,605 10, ,295 10,648 10,833 (9,492) (9,103) (9,427) 1,803 1,545 1,406 (597) (586) (525) 1, (261) (260) 1, (160) (466) 1, (60) (72) (103) 1, (357) (169) ,839 4,245 4,220 2,483 2,436 2,437 7,322 6,681 6,657 2,519 2,080 1, ,726 1,777 1,559 3,077 2,510 2,684 7,322 6,681 6,657 1,402 1, (999) (939) (691) (154) (261) (1,350) (1,204) ,838 21,847 23, EURO 1, ,572 (1,350) 222 (79) (39) , , (154) (17) (7) , The financial statements are prepared in accordance with the international financial reporting standards, IFRS. The accounting policies are described on pages The financial statements are not directly comparable. For the years 2006, 2005 and 2004, they are prepared in accordance with the IFRS standards. For the years 2003/2002, they are prepared in accordance with the provisions of the Danish Financial Statements Act. DKK has been translated into Euro at Danmarks Nationalbank s quotation rate of at 31 December *) The extraordinary dividend of DKK 451 million paid in 2005 is not included in the figures. 9

10 MANAGEMENT S REVIEW THE YEAR 2006 In 2006, the Post Danmark Group achieved a profit after tax of DKK 892 million against DKK 738 million in Consolidated results were at the level stated in the Interim Report for the Third Quarter of 2006 and the best ever in the history of the company. Consolidated results were generated through maintenance of the earnings level of domestic operations combined with a positive result of the activities in the Belgian postal service, De Post La Poste, in which Post Danmark acquired an ownership interest of 25 per cent in The increase in revenue for the year was in particular the result of growth in domestic and international parcels, but revenue also improved for letters and magazine mail as well as for newspapers, magazines, periodicals and unaddressed mail. As in the previous years, volumes dropped slightly for letters, mainly caused by the technological substitution to electronic mail. In the public sector, this development was driven by Projekt Digital Forvaltning (Project egovernment), which increasingly transfers the written communication exchanged between the public authorities to digital form. The growth in expenses was moderate and almost in line with the increase in revenue. Staff costs rose only slightly, while other operating expenses showed a somewhat more substantial rise. The lower operating profit was furthermore due to higher amortisation and depreciation charges resulting from the relatively high investment level in recent years. Consolidated results were affected positively by the purchase of the ownership interest of 25 per cent in the Belgian postal service, De Post La Poste. The acquisition was made in January 2006 on payment of just over DKK 2,200 million (300 million euros). The purchase took place through a holding company (MIE Group S.A.), which is owned by Post Danmark and CVC Capital Partners in equal shares. The Belgian State is still the majority shareholder of the company. In 2006, De Post La Poste comprehensively modernised its production facilities, and Post Danmark has supported this modernisation process through expatriation of experts in key areas. The profit from Post Danmark s investment in De Post La Poste is recognised under profits or losses of associates and joint ventures. The economic value added (EVA) in Post Danmark rose from DKK 471 million in 2005 to DKK 552 million in 2006, driven mainly by the positive results of the investment in De Post La Poste. Of the net profit for the year it is recommended that DKK 669 million be paid as dividend to the shareholders and that DKK 223 million be transferred to equity. The proposed dividend of DKK per share is in accordance with Post Danmark s dividend policy. In 2006, Post Danmark had positive cash flows from operations which after deduction of cash requirements for investing activities totalled DKK 72 million. Financing activities, including ordinary dividend paid of DKK 550 million as well as a capital contribution to associates and joint ventures of DKK 535 million net, affected cash flows negatively. Consequently, cash was reduced by DKK 55 million, amounting to DKK 201 million at year-end In 2006, Post Danmark improved its high level of on-time delivery rates for letters compared with For 2006, the on-time delivery rate was 94.1 per cent against 93.9 per cent in The on-time delivery rate for non-priority mail was 98.0 per cent against 98.3 per cent in Following an unsatisfactory first quarter, the on-time delivery rate increased over the rest of the year. The on-time delivery rate was considerably above the minimum requirement of 93 per cent as specified in the present concession and again close to the quality target of 95 per cent. In 2006, Post Danmark continued to expand its activities through company investments. The most important activity was the acquisition of De Post La Poste. In addition, Post Danmark was involved in the formation of Morgendistribution Danmark A/S as a result of the opening of an entirely new market for household distribution of free newspapers etc. early in the morning. However, this activity was disposed of in February 2007 as it was concluded that the restrictions the competition authorities put into their approval of the cooperation would, among other things, eliminate the strategic prospects of the cooperation. At year-end 2006, negotiations were conducted concerning the acquisition of a stake in the transport company Transportgruppen A/S and, in January 2007, 51 per cent of Transportgruppen A/S was acquired. Post Danmark has built up a source of finance for, for example, being able to make company investments. As part thereof, Post Danmark listed a bond loan on the Swedish stock exchange in Stockholm in May The listing gives Post Danmark the right to issue bonds for up to one billion Swedish kroner with a maturity of up to 15 years. During the year, bonds were issued with a nominal value equal to DKK 388 million (SEK 200 million and EUR 30 million). In 2006, Post Danmark implemented a sharebased incentive programme for the Executive Board and managerial staff. The programme, which comprised 0.5 per cent of the share capital, involved partly the sale of shares at market price and partly the granting of options exercisable in the period from 31 March 2009 to 31 March

11 MANAGEMENT S REVIEW DE POST LA POSTE With effect from early January 2006, Post Danmark acquired together with CVC Capital Partners 50 per cent less one share of the share capital of the Belgian postal service, De Post La Poste. Prior to the acquisition of the shareholding in De Post La Poste, Post Danmark, the Belgian State and CVC Capital Partners thoroughly discussed and adjusted a five-year development plan for the company. The aim of the plan is to carry out a major modernisation and development of the business into a first-rate postal service provider. In 2006, Post Danmark and De Post La Poste cooperated on modernising product offerings and production facilities. Post Danmark s main contribution was its expertise in the areas of production planning (letter sorting centres) and development of the markets for parcels and unaddressed mail. As part of this contribution, Post Danmark has a minor team of expatriate staff working temporarily on assignments in Belgium. In addition, significant financial progress was made already during the first year after the acquisition, reflecting competent management of De Post La Poste. De Post La Poste is the national postal service provider in Belgium. The company provides all kinds of postal solutions to the 4.5 million households and approx. 1 million businesses in Belgium. The company s activities are divided into three main business areas: Postal products Branch network Postal solutions. POSTAL PRODUCTS Postal products are De Post La Poste s largest business area, comprising domestic collection, sorting and distribution of letters, small packets (weighing up to 5 kilos), magazines/newspapers and printed advertising mail. De Post La Poste s international business, which comprises both postal products and parcels, is organisationally connected with the business area postal products. Like Post Danmark, De Post La Poste has experienced pressure in the market for physical letters as a result of the electronic development. However, the company improved its revenue by 7 per cent in 2006 through growth in other products. The company s management has prepared a detailed plan for the continued expansion, and Post Danmark is confident that this plan will be implemented with expectations of growth in revenue. BRANCH NETWORK The branch network operates as a sales channel for both postal products and financial services. The branch network distributes bank and insurance services for Banque de La Poste, which is a bank owned jointly with the insurance and banking business Fortis. The branch network also provides a number of services such as payment handling on behalf of the Belgian State. The approx. 1,300 branches are marketing a wide range of services, which are continuously adjusted to match demand. De Post La Poste has carried out experiments on developing new types of branches placed with business partners. The introduction of Post Points like Post Danmark s post shops is expected to enhance both customer satisfaction and profitability. In 2007, a large number of branches operated by the company will be converted into Post Points. POSTAL SOLUTIONS Postal solutions include the parent s businessoriented activities and a number of subsidiaries providing services within courier transport, unaddressed mail, facility service and electronic communications. 11

12 MANAGEMENT S REVIEW EXPECTATIONS FOR 2007 TOTAL INCOME is in 2007 expected to be on a par with the year before. The ongoing development of electronic communications continues to put pressure on the market for physical letters. In addition, the letters market is subject to intensified competition. The fall in letters volume is expected to continue, while growth is expected in the other main products, especially parcels. TOTAL EXPENSES, inclusive of amortisation and depreciation charges, are expected to rise slightly compared with 2006 as a result of generally higher wages, salaries and prices. In addition, amortisation and depreciation charges should be slightly higher than in 2006 as a result of investments made. OPERATING PROFIT is expected overall to show a fall. THE RESULT OF NET FINANCIALS INCLUDING ASSOCIATES AND JOINT VENTURES is expected to rise, due mainly to the investment in De Post La Poste. PROFIT BEFORE TAX is expected overall to be somewhat lower than in Expectations for 2007 are summarised in the table below. EXPECTATIONS FOR 2007 DKKBN EXPECTED 2007 FINANCIAL STATEMENTS 2006 FINANCIAL STATEMENTS 2005 Income Expenses, incl. depreciation and amortisation Operating profit (EBIT) Profit before tax

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14 MANAGEMENT S REVIEW CUSTOMERS AND MARKET Post Danmark offers its customers a number of products based on the basic postal service provided, thereby meeting many customers demand for transport of messages and goods. The main product is the carriage of letters and other forms of written, paper-based communications, which account for about 79 per cent of total revenue. In the past five years, the volume of letters has gone down, and the composition of the product portfolio has been changed towards an increase in non-individualised mail (direct mail and magazine mail). In addition to letters, Post Danmark offers transport of parcels and express mail. Post Danmark operates a branch network, which also provides other services as a supplement. In recent years, Post Danmark has offered new types of services such as internal mail handling (Facility Services) and electronic communications solutions, all originating from Post Danmark s core area letters. During the year, Post Danmark launched new services such as sending letters via the Internet, SMS messages about delivery of parcels and a pilot test of self-service stations at post offices. Post Danmark has the monopoly of distributing letters weighing up to 50 grams. In 2006, approx. 34 per cent of Post Danmark s revenue was comprised by this monopoly. Thus, most of the revenue was generated in free competition. Post Danmark is an important supplier and business partner for commerce and industry. Post Danmark s customers cover the entire spectrum of businesses in Denmark, from large wellestablished groups to small newly established entrepreneurs. A very substantial part of Post Danmark s revenue is derived from Denmark s largest businesses and public institutions, which are also important business partners in connection with Post Danmark s efforts to optimise and further develop its product portfolio. Even though the basic service is the same, the needs of the various groups of customers vary greatly. Customer responsibility is therefore divided into four customer-oriented business units. LETTERS, MAGAZINE MAIL, NEWSPAPERS, MAGAZINES AND PERIODICALS, MILLION ITEMS PARCELS MILLION ITEMS UNADDRESSED MAIL AND LOCAL WEEKLIES MILLION ITEMS 1,750 1,500 1,250 1, ,000 1,750 1,500 1,250 1, BUSINESS UNIT ACCOUNTS COURIER, UNALLOCATED AMOUNTS IN DKKM BUSINESS CUSTOMERS PRIVATE CUSTOMERS EXPRESS, PARCELS INTERNATIONAL POST AND ELIMINATION POST DANMARK TOTAL Total income 6,631 6,537 2,149 2,166 1,310 1,222 1,529 1, ,718 11,462 Expenses, incl. depreciation and amortisation (5,447) (5,164) (2,052) (1,998) (1,419) (1,412) (1,287) (1,192) (448) (572) (10,653) (10,338) Operating profit/(loss) (EBIT) 1,184 1, (109) (190) (349) (484) 1,065 1,124 Assets 3,172 3,184 1,248 1, ,018 1,041 1, ,687 7,025 Liabilities 1,412 1, ,886 1,356 4,956 4,554 14

15 MANAGEMENT S REVIEW In addition, there are four internal business units. For internal management purposes, follow-up is carried out in relation to the eight business units, based on the accounts of each business unit. The results of the business unit accounts are consolidated in the segment financial statements of the four customer-oriented business units. In addition, there are a number of activities that cannot be allocated to the customeroriented segments. These activities mainly concern support and staff functions. The objective of preparing segment financial statements is to show the profitability of Post Danmark s customer-oriented activities. The four customeroriented business units draws on resources in production-oriented business units are settled by means of transfer pricing. The segment financial statements are based on a model, which is updated regularly. Comparative figures for 2005 have been restated accordingly. common access to all products and services provided by Post Danmark, Business Customers is responsible for all sales efforts aimed at large and medium-sized business customers in all product areas. PRIVATE CUSTOMERS The Private Customers business unit is responsible for domestic products from private and small business customers. This group of customers is mainly offered standard solutions, which are primarily provided by the branch network for whose operations Private Customers is responsible. COURIER, EXPRESS, PARCELS The Courier, Express, Parcels business unit is responsible for domestic courier, express and parcel solutions and light goods for large and medium-sized business customers as well as for international courier solutions. In addition, Courier, Express, Parcels handles the operations of the parcel centres, which are responsible for sorting parcels. INCOMING AND OUTGOING PAYMENTS AT POST OFFICES, MILLION ITEMS BUSINESS CUSTOMERS The Business Customers business unit is responsible for domestic products, except courier, express and parcel solutions, from Post Danmark s large and medium-sized business customers. This group of customers is characterised by expecting more individualised solutions which require knowledge of the customer s business and needs. To ensure that large customers gain INTERNATIONAL POST The International Post business unit is responsible for international products and cooperation with foreign business partners within all product areas. International Post is responsible for the operation of Post Danmark s international mail centre located at the Copenhagen Airport. The centre is responsible for incoming and outgoing international mail

16 MANAGEMENT S REVIEW BUSINESS CUSTOMERS The Business Customers business unit is responsible for domestic letters, newspapers, magazines and periodicals, unaddressed mail, facility services and electronic communications solutions. Business Customers also operates as Post Danmark s common sales organisation for Courier, Express, Parcels and outgoing international mail in relation to major and mediumsized business customers. The sales organisation is working systematically to obtain fresh orders from existing customers and to procure new customers offering a great revenue potential. The total number of customer calls made by sales staff every month is just under 1,500, and the impact of the sales efforts is monitored using a number of Key Performance Indicators. In 2006, income from Business Customers was DKK 6,631 million (DKK 6,537 million in 2005), or 57 per cent of Post Danmark s total income. The number of people employed by the business unit was 237 (translated into FTE), which is unchanged from The segment financial statements of Business Customers show a negative development in the segment s operating profit despite higher income. The higher income was driven mainly by growing revenue from newspapers, magazines and periodicals as well as unaddressed mail and to a smaller extent from magazine mail. Compared with 2005, the growth in expenses was relatively higher as a result of increasing volumes of newspapers, magazines and periodicals as well as unaddressed mail and magazine mail, which led to a corresponding rise in expenses. The increasing volume of unaddressed mail furthermore involved higher expenses in relation to multi-packing by Distribution Service of unaddressed mail. LETTERS Business post is Post Danmark s main product, comprising four main types of letters: mail by series, classical mail, distribution mail and prepaid reply items, with the first two letter types accounting for most of the revenue. Post Danmark has the monopoly of collecting, transporting and distributing letters weighing up to 50 grams. This limit is expected to disappear BUSINESS UNIT ACCOUNTS AMOUNTS IN DKKM Total income 6,631 6,537 Expenses, incl. depreciation and amortisation (5,447) (5,164) Operating profit/(loss) (EBIT) 1,184 1,373 Assets 3,172 3,184 Liabilities 1,412 1,497 INCOME 2006 BY BUSINESS UNIT REVENUE 2006 BY PRODUCT AREA ecommunication FACILITY SERVICES NEWSPAPERS, MAGAZINES AND PERIODICALS MEDIA POST The accounting figures are reproduced from the internal business unit accounts described on page 14. BUSINESS CUSTOMERS BUSINESS POST 16

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18 MANAGEMENT S REVIEW within a foreseeable number of years as the European Commission has proposed that the EU countries should abolish the monopoly by 1 January 2009 at the latest. Letters are expected to contribute a very significant amount to the company s revenue and earnings for many years to come even though the number of letters continues to decline. The growing use of electronic communications in the form of, for example, and home banking has greatly affected the volume of letters in recent years. Electronic substitution, including the public sector s digitalisation project, has also contributed to the decline. A special category of letters conveys a marketing message targeted at the recipient, thereby gaining higher attention value and greater measurability than other advertising media. Direct Marketing (DM) competes primarily with other targeted media such as and secondarily with mass marketing media such as TV, radio and cinema commercials, newspapers, and billboards. In cooperation with its customers, Post Danmark is striving to make DM even more attractive by continuously developing, differentiating and adapting the physical letter to the customers specific needs based on the strengths of the letter compared with other media. In early 2006, was launched. This service makes it possible to develop a DM distribution online and subsequently automatically print, pack and distribute the physical letters. In the year under review, Post Danmark also launched DialogPortalen, providing DM customers with a flexible and user-friendly campaign management tool, which can help customers plan, design, implement and follow up on their DM activities. In 2006, Post Danmark also joined a broad advisory services partnership (IVÆKST) comprising a number of the country s most competent advisers of small and medium-sized enterprises. Post Danmark s role is to give the partnership s customers advice on, among other things, sale and marketing. NEWSPAPERS, MAGAZINES AND PERIODICALS Conditions are rapidly changing in the newspaper market, reflecting, among other things, the introduction of new household-distributed free newspapers. The passing of a new law on subsidised distribution of daily papers (lov om tilskud til distribution af dagblade) also contributes to changing market conditions because from 1 January 2007 the subsidy will be paid directly to publishers instead of Post Danmark. Post Danmark s share of the market for the distribution of newspapers is relatively modest because Post Danmark has no early morning distribution. Due to the new competitive situation, Post Danmark expects this market share to become subject to additional pressure in 2007, with a resulting slightly declining market share. The abolition of the state subsidy for the distribution of weeklies and monthlies in 2004 and 2005 has led to quite substantial price increases for the publishers. This is due to the fact that these papers in addition to being subsidised for Post Danmark involved a substantial loss, which was lawfully financed by the letter product. The removal of the subsidy also removed the possibility of cross-subsidising the products. Instead of the weekly and monthly newspaper products, Post Danmark has introduced magazine mail, which provides customers with more options than the previous paper product, and a distribution service covering all households and business enterprises in Denmark. At the same BUSINESS POST MAIL BY SERIES is mail produced in series for many recipients. Mail by series comprises statements of account, financial information and other individual messages which typically are not signed. CLASSICAL MAIL is mail that is not mass-produced. This mail is normally individual messages, private letters and ordinary business post, typically signed. DISTRIBUTION MAIL is mail containing products, specimens, etc. Distribution mail generally weighs more than 100 grams. PREPAID REPLY ITEMS comprise all types of mail that can be categorised as Postage paid by recipient. This type is characterised by senders receiving feedback in writing from their customers and by recipients paying for the postage. 18

19 MANAGEMENT S REVIEW time, a competitive price is ensured through more efficient production. The efficiency improvement is the result partly of an adaptation of posting and distribution periods to optimise the utilisation of the production and distribution facilities and partly of enhanced automation of production. UNADDRESSED MAIL AND LOCAL WEEKLIES The market for unaddressed mail (householddistributed printed advertising material) is growing, driven by growth experienced by the retail trade. Unaddressed mail is especially competing with other mass marketing media including advertising in dailies, local weeklies and periodicals. Despite the growing volume of advertising material in the letter box, unaddressed mail is a popular medium amongst consumers. Only approx. 12 per cent of Denmark s households have declined ads, a rate whitch is slightly higher than in Measurements show that no less than 89 per cent of all recipients read their ads, and 93 per cent of these respond to the bargains in fliers. One of Post Danmark s major customers, the COOP retail chains, has signed a contract with one of Post Danmark s competitors concerning the distribution in 2007 and 2008 of unaddressed mail for the retail chains operated by COOP. As a direct result of this, Post Danmark s annual volume of this segment will fall by approx. 400 million items. Post Danmark offers three distribution periods every week. This gives the customer a greater choice of when the ad is to be delivered to the recipient. Furthermore, Post Danmark offers, as the only distributor in Denmark, distribution to second homes as well as offices and shops. Unaddressed mail is packed mechanically for distribution in the first and the last distribution period of the week. In 2007, the mechanical multipacking option will be extended to include mail distributed mid week. The market for local weeklies is relatively stable and Post Danmark expects to be able to maintain its position, which was strengthened in FACILITY SERVICE Post Danmark offers customised solutions within three main fields: Internal services within office support Company logistics including special logistics and transport solutions Document scanning. Facility Service covers services such as the delivery of mail as well as sorting, internal distribution, collection and subsequent processing of the individual business customer s internal and external mail. A newer and rapidly growing element of the overall Facility Services concept is the scanning of the contents of letters and documents and electronic delivery to business customers. Facility Service is one of Post Danmark s growth areas. Value-adding customer solutions are being developed in close cooperation among the producing units and a specialised sales organisation in Business Customers. Post Danmark is constantly developing its service offerings, e.g. the distribution of patient test samples by Budstikken s bicycle messengers from doctors to a large hospital. Another example of a new Facility Service solution is logistics where free newspapers are placed in distribution boxes. The service, which is offered OTHER PRODUCT AREAS UNADDRESSED MAIL is fliers and advertising material, etc. DIRECT MAIL is targeted mail with a specific marketing message and characterised by close attention by recipients and a high level of ability to measure response. Direct Mail competes primarily with other targeted media such as , response media and secondarily with mass marketing media such as TV, radio and cinema commercials, advertisements in newspapers, magazines and periodicals, and billboards. NEWSPAPERS, MAGAZINES AND PERIODICALS are dailies, weeklies and monthlies, magazine mail and local weeklies. FACILITY SERVICE covers services such as the delivery and collection of mail as well as the sorting, distribution, collection and processing of the individual business customer s internal and external mail. A new element of the total Facility Services concept is the scanning of the contents of letters and documents and electronic delivery to the customer. ecommunication comprises the electronic post office (eposthuset) and services from the associate e-boks A/S. eposthuset is an integral part of Post Danmark s website eposthuset provides, for example, self-service facilities for the choice between receipt of letters electronically or physically, online notice of change of address, purchases of stamps and tickets and other postal services such as the calculation of postage rates, postcode searches as well as Track & Trace for parcels. ecommunication offers business customers a total solution for handling electronic and physical communications. The business customer can supply the total data basis for the mail to ecommunication, which will distribute the letters electronically to recipients based on their registrations with eposthuset, e.g. a wish to receive the letter in e-box or by . The rest of the letters are as hitherto sent as physical letters. 19

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21 MANAGEMENT S REVIEW to all free newspapers, ensures collection of the free newspapers at printers and transport to, for example, selected post offices at which the free newspapers are placed in distribution boxes. In response to the previously mentioned declining volume of physical letters, Post Danmark has moved into new areas, and is now a significant actor in the market for digitalisation of documents. Post Danmark s subsidiary, Data Scanning A/S, has been certified by the Danish state as a Read-in bureau and Post Danmark is now the largest supplier of scanned invoices to public authorities. The general digitalisation of both the private and the public sectors continues its strong growth. The conversion of paper files into electronic files in particular is undergoing rapid growth. One example is the Danish Court Administration s new electronic title registration system, which is to be put into use in Before that time, approx. 70 million pages concerning about 2.2 million properties are to be scanned and digitalised. In early 2007, Data Scanning A/S commenced cooperation with three other undertakings on the scanning of approx. 50 million of these pages. The interest in receiving letters, invoices, etc. in electronic form is generally great amongst large recipients of letters. Post Danmark s scanning solutions convert paper-based documents into electronic documents adapted to the customers IT systems. This growing interest in the scanning of documents has caused revenue of Data Scanning A/S to rise by 26 per cent from 2005 to ecommunication With the ecommunication business area, which is cooperating with e-boks, Post Danmark is well established in the market for electronic processing, distribution and storage of mail (primarily mail by series such as invoices, statements of account and pay slips). ecommunication offers business customers a total solution for handling electronic and physical communications. The business customer can supply the total data basis for the mail to ecommunication, which will distribute the letters electronically to recipients based on their registrations with eposthuset, e.g. a wish to receive the letter in e-box or by . The rest of the letters are sent as physical letters. In 2006, ecommunication achieved very high growth rates by developing both the cooperation with existing customers and by focusing on new segments. By way of example, supplementary value-adding solutions have been developed for a public agency and the tele segment. ecommunication has also experienced a large increase in the entry of pension companies and has set up in business in the market for electronic pay slips. Post Danmark supplies, by the ecommunication solution and the registration with e-boks, a number of other services which together provide the sending business with a total solution for electronic and paper-based distribution to customers, employees, etc. e-boks has more than one million users, representing an almost 0.3 million increase in This significant growth was also reflected in revenue rising by just over 80 per cent compared with For the first time, e-boks therefore achieved a profit, which was just over DKK 4 million, against a loss of DKK (10) million reported in Post Danmark owns the company e-boks A/S together with PBS A/S and KMD A/S. CUSTOMER SATISFACTION AND LOYALTY Loyalty and satisfaction among Post Danmark s business customers have been falling slightly in 2005 and The Business Customers business unit has therefore prepared specific action plans in significant areas, including development of sales staff s product competencies, based on the level of customer satisfaction with the design of the individual products. Systematic measurements of the attitudes of a representative section of customers to various aspects of Post Danmark s business are being carried out on a continuous basis. Customer statements on Post Danmark are reflected in, among other things, the key figures customer satisfaction and customer loyalty. The results for 2006 show a customer satisfaction index for business customers of 61 compared with 64 in Business customers loyalty fell from index 64 in 2005 to index 61 in Please note that the figures for 2006 relate to the first half-year as no figures are available yet for the full year. CUSTOMER SATISFACTION INDEX BUSINESS *) 2006: 1ST HALF-YEAR *) SATISFACTION LOYALTY 21

22 MANAGEMENT S REVIEW PRIVATE CUSTOMERS The Private Customers business unit is responsible for servicing Post Danmark s private customers and small business customers. Private Customers is also responsible for post office network operations and for the production and sale of stamps and philatelic products. In 2006, Private Customers reported income of DKK 2,149 million (DKK 2,166 million in 2005), or 18 per cent of Post Danmark s total income. The number of people employed by the business unit in 2006 was 1,258 (translated into FTE) against 1,395 in Private Customers reported lower earnings compared with Compared with 2005, revenue from the sale of branch products showed a fall, which was simultaneously counterbalanced by growing revenue from postal parcels. The growth in revenue from postal parcels was attributable to increasing volumes despite lower average prices. Overall, revenue was on a par with The increasing volume of postal parcels led to a corresponding rise in expenses compared with The maintenance of a nationwide network of branches is an important element of Post Danmark s concession. The nationwide network consists partly of 184 post offices owned by Post Danmark, all of which are full-service outlets, and partly of 605 post shops operated by other retailers. The branches main products are stamp sales, receipt and delivery of mail products such as parcels and registered letters as well as sales of various letter items, stationery and office supplies. Stamps are being sold by post offices and post shops in addition to a number of stamp outlets and increasingly through the electronic post office, eposthuset, on Post Danmark s website. The branches also receive and deliver parcels. Other important activities are payment handling service primarily giro forms in cooperation with Danske Bank and ticket sales, etc. on behalf of BILLETnet. Revenue from stamped letters in 2006 was at the 2005 level. The number of stamped letters is expected to drop, but, in 2006, this trend was BUSINESS UNIT ACCOUNTS AMOUNTS IN DKKM Total income 2,149 2,166 Expenses, incl. depreciation and amortisation (2,052) (1,998) Operating profit/(loss) (EBIT) Assets 1,248 1,250 Liabilities The accounting figures are reproduced from the internal business unit accounts described on page 14. INCOME 2006 BY BUSINESS UNIT PRIVATE CUSTOMERS REVENUE 2006 BY PRODUCT AREA STAMPS FOR FRANKING PHILATELY AND OTHER BRANCH PRODUCTS PAYMENT HANDLING PARCEL MAIL OF PRIVATE CUSTOMERS SMALL AND MEDIUM- SIZED BUSINESS CUSTOMERS 22

23 MANAGEMENT S REVIEW offset by general price increases so that revenue remained unchanged. In 2006, the number of giro inpayment cards dropped by 15 per cent compared with 2005 slightly more than in the preceding years. The downward trend mainly reflects electronic payment service and home banking. This trend is expected to continue in The need to adjust costs increases as the branch network s revenue from payment handling service and stamp sales drops. This adjustment takes place partly by replacing post offices with post shops and partly by reducing the total number of service outlets. The changes are made within the framework defined by the concession, based on a dialogue with local stakeholders. In addition, the size of the individual post offices and post shops is adjusted to match needs, and the efficiency of operations is increased on an ongoing basis. Also the range of other products and services at post offices are undergoing continuous adjustment. In 2006, Post Danmark focused on making it even more attractive to carry on a post shop by providing management and staff with, among other things, information and training. This effort will continue in Furthermore, the IT platforms of most of the country s post offices and post shops were replaced by new equipment and software during the year. In September 2006, Post Danmark initiated a pilot test of two new self-service facilities (PostSelv and Pakkepostkassen). Customer surveys have shown that self-service is in demand among customers, and provisional indications from the pilot tests seem to suggest that young customers in particular (customers of the future) have welcomed PostSelv. Pakkepostkassen covers two purposes partly the opportunity to post parcels bought through PostSelv and partly general self-service posting of parcels at post offices and post shops. In 2006, efforts were also made to increase traffic at the country s post offices. For example, POSTSELV ENABLES CUSTOMERS TO: Measure and weigh letters and parcels Send letters as Standard, Large or Maxi Letters, or Registered Buy parcel or address labels for parcels (both domestic and international) Buy self-adhesive postage labels in any desired value Inform recipient ( or SMS) that a parcel is underway Be informed ( or SMS) when a parcel has been delivered to the recipient Use flexible delivery Track letters and parcels via their consignment number Pay by various types of cards and get a receipt for purchases 23