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UPDATE: NZ Post flags competition, economic and GST headwind

UPDATE: NZ Post flags competition, economic and GST headwinds to flailing mail business

(Recasts and updates with CEO comment throughout)

By Suze Metherell

Aug. 28 (BusinessDesk) - New Zealand Post Group says it faces "structural and permanent decline" and further headwinds from increased competition, a fragile global and domestic economy and higher costs on the back of proposed introduction of GST on online purchases.

Net profit was $143 million in the 12 months ended June 30, which includes a $46 million gain from the sale of its Australian business for A$95 million. That compared with $107 million in the previous year, the government-owned mail business said. Revenue slipped 0.5 percent to $1.6 billion, while underlying profit rose 3 percent to $128 million. It paid an unchanged dividend of $5 million.

NZ Post's banking subsidiary, Kiwibank, increased profit 27 percent to $127 million in the year ended June 30, as revenue gained 17 percent to $560 million. Stripping out sales from its finance and banking unit, sales declined to $700 million in the year, from $730 million the previous year. Its mail business reported an annual loss of $4 million.

Earlier this month, rival Freightways, the listed logistics and courier business, said annual profit rose 4 percent to $43.3 million on increased sales from express packages, business mail, and information management. It said growth in its DX Mail business came from customers who still require overnight delivery for their standard priced letters, in particular the district health boards.

"Competition does drive you and when you read about your competitors, on the face of it, doing better than you, that's a call to action," said NZ Post chief executive Brian Roche speaking at a media briefing in Wellington. "Competition is frustrating but it actually is the right answer for the consumer so that's the world we live in. The Freightways comments were interesting because a lot of their mail actually gets carried by our network. I think mail, irrespective of who carries it, is in decline and we are actually pretty comfortable where we sit."

The SOE is two years into a five-year transformation plan as it contends with shrinking mail volumes in an increasingly digital world, laying off staff and reducing its physical store footprint. In July it pared back traditional letter-delivery services, moving to alternate day delivery for standard letters in urban areas, which it expects will save it between $25 million and $35 million annually. At the same time, the group has targeted earnings growth from Kiwibank, which was established 13 years ago.

NZ Post starts $30 million behind each year from the "structural and permanent decline" of the mail business. Last year mail volume declined 10 percent.

While the mail delivery sector was shrinking, private mail operators, like Freightways and Mainfreight, don't have the same demands on their services as NZ Post does, Roche said.

"We actually have the obligation of carrying mail everywhere in the country, our competitors have the luxury of picking those areas where there is density - we make money out of density," Roche said. "So the term is often used that they cherry pick, that's just the way it is."

Courier companies are focusing on capturing rising parcel deliveries as more consumers shop online and require delivery, but the government is currently weighing a proposal to introduce GST on those incoming goods. Imports of goods and services worth less than $400 are currently exempt from GST, but the total cost of GST avoided is estimated to be around $180 million, of which some $140 million is physical goods, with that total estimated to be growing at around 10 percent annually.

Roche said changes may see a dent in consumer demand, but the price gap between offshore and domestic goods was still appealing to consumers. NZ Post's major concern would be any further administrative costs it might incur to ensure the GST payments.

Looking ahead the decline of mail was a reality, and would be further impacted by "quite a fragile economy globally and domestically", he said.

NZ Post was about 75 percent through the sale of its last peripheral Australian business, Converga, the mail and record management outsourcing unit. In the six months ended Dec. 31, it wrote down the value of its investment in Converga by $23 million to $26 million after the business lost a major customer.

Roche expected the company would announce in the next two to three months whether they would sell or retain it.

"We're an interested seller, but we're not a desperate seller," he said. "It's a very good asset but it's just not core to us."


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