Year 2017

Board of Directors’ Report 2017

Description of the business model

Posti is a service company in the postal and logistics industry that serves both private individuals and business customers as well as the public sector. Posti’s business consists of delivery services for parcels and printed products, e-commerce services, comprehensive supply chain solutions, such as warehousing and in-house logistics services, as well as a broad range of transport services for businesses and organizations, including food logistics and freight services. Posti also provides various digital services, global software solutions as well as home and care services. Posti reports its results of operations for Mail, Parcel and Logistics Services, Itella Russia and OpusCapita segments. Posti’s business is managed in four business groups: Postal Services, Parcel and Logistics Services, Itella Russia and OpusCapita. The company operates in 11 countries. At the end of the 2017 financial year, the number of personnel stood at approximately 20,000. In Finland, the company employed about 16,500 people at the end of the financial year, which makes it one of the country’s largest private-sector employers.

Business environment

Posti’s business environment is undergoing a dramatic transformation. Changes in consumer behavior, accelerated digitalization, the transformation of the retail industry, the rapid growth of e-commerce, intense market competition and the advancement of technology are all challenging Posti like never before. It is very important for Posti to continuously improve the quality of customer satisfaction and customer experience, that are essential for ensuring competitiveness and profitability in a period of industry transformation. Continuous renewal is crucial as traditional mail delivery volumes decline.

The growth of e-commerce picked up speed toward the end of the review period, which was reflected favorably in Posti’s parcel volumes. According to a survey by International Post Corporation, Finns differ significantly from other Europeans in how they prefer to receive their parcels. For example, 22% of Finnish consumers prefer to have parcels delivered to parcel lockers. Posti has increased the number of parcel lockers substantially in recent years. The corresponding figure for consumers in other countries was 4%. The volume of purchases from foreign online stores is growing.

Domestic demand has remained strong as the employment rate and consumer purchasing power have improved. The Bank of Finland estimates that economic growth accelerated and Finnish GDP increased by 3.1% in 2017. Economic growth has also been boosted by a clear positive turn in exports. According to the Finnish Transport Agency, transport volumes in heavy traffic have continued to increase since April 2016. GDP growth was also reflected in Posti’s growing freight volumes in 2017.


However, the decline in traditional mail delivery volumes and the accelerating shift from paper to online communications continued. The trend is particularly evident in the volumes of iPost products and printing services. Competition in mail delivery has also increased. In addition to Posti, there are currently 13 operators delivering mail in Finland.

The Russian economy continued to grow moderately. The Russian Ministry of Finance estimates that the Russian GDP grew by 1.5% in 2017. The IMF forecasts GDP growth of 1.7% in in 2018. The ruble depreciated by 7.9% from the end of the previous year.

A collective agreement for the mail communications and logistics industry was approved on September 28, 2017. The new agreement entered into force on November 1, 2017, and will remain valid for two years. Achieving a two-year agreement is very significant for Posti in the current period of major transformation, and it provides an excellent foundation for the company to continue its essential renewal in a controlled manner. The arbitration committee stipulated by the collective agreement for the mail communications and logistics industry issued a decision on February 1, 2018, on a general increase of 1.31% to the industry’s collective agreement. The increase will apply retrospectively from November 1, 2017.

The Postal Act reform is a continuation of the amendments to the Postal Act that entered into force in 2016 and made letter delivery an activity that is open to free competition and only subject to notification by service providers. The latest amendments apply to universal service products, namely stamped letters and cards. For parcels, the universal service concept covers parcels sent to addresses outside Finland and paid for with stamps. The delivery of newspapers and magazines is not covered by the Postal Act.

Following a change that entered into force on September 15, 2017, five-day delivery of universal service letters will continue in a large part of Finland, namely the areas that do not have early-morning delivery networks maintained by newspapers. In these areas, Posti will be required to arrange competitive bidding for the delivery of universal service letters starting from July 1, 2018. In urban areas, delivery on at least three days per week is allowed if the area in question has an early-morning delivery network for newspapers.

Posti’s goal is to evolve into a customer-oriented and profitable logistics and postal service company by 2020. At the core of the strategy are four main objectives that will see Posti emerge as a winner through this period of transformation: win e-commerce play, keep mail relevant to customers, renew service culture, and digitally powered to secure your service delivery.


Changes in segment reporting

OpusCapita carried out significant restructuring measures during the financial year and divested its Finance and Accounting Outsourcing business. OpusCapita’s sending of documents and invoices as well as the digitizing operations in Finland were transferred to Posti’s Mail, Parcel and Logistics Services segment effective from October 1, 2017. Following the transfer, the OpusCapita segment now consists of the Buyer-Supplier Ecosystem business. Segment reporting has been adjusted to correspond to the new business structure. The changes are also presented retrospectively in the comparison figures for the 2016 financial year. Comparison figures for 2015–2017 are presented as an appendix to this release.

Net sales and operating result in 2017

The number of working days in 2017 was lower than in the previous year by two days. The number of working days affects the Group’s net sales and result.

The Group’s net sales grew by 2.5% to EUR 1,647.0 (1,607.6) million. Net sales increased by 2.4% in Finland and by 3.0% in other countries. International operations accounted for 14.5% (14.4%) of net sales.

The Group’s adjusted EBITDA declined to EUR 118.6 (126.7) million, 7.2% (7.9%). The Group’s EBITDA declined to EUR 83.7 (116.0) million, 5.1% (7.2%).

The adjusted operating result declined to EUR 42.4 (47.1) million, or 2.6% (2.9%) of net sales.

Special items weighed down the result by EUR 69.9 (16.4) million. The special items include a provision of EUR 18.2 million related to lease agreements for warehouses to be closed in Russia.

In connection with the restructuring of OpusCapita and the refocusing of its operations, the future outlook and cash flow forecasts of the cash generating unit were updated. Based on this assessment, the Group recognized impairment of goodwill in the amount of EUR 33.9 million.

The operating result was EUR -27.5 (30.7) million, or -1.7% (1.9%) of net sales.

The operating result before taxes was EUR -36.9 (29.5) million.

The Group’s net financing costs amounted to EUR 9.4 (1.2) million. The change was attributable to exchange rate differences and special items.

Return on equity was -8.0% (3.9%).

Mail items covered by the universal service obligation accounted for 5.5% (5.6%) of all of Posti’s mail items. Operations under the universal service obligation amounted to EUR 136.7 (135.9) million, or 8.3% (8.5%) of the Group’s net sales. 


Key figures of Posti Group

 

 

2017

2016

restated

2015*

Net sales, MEUR

1,647.0

1,607.6

1,649.1

Adjusted EBITDA, MEUR

118.6

126.7

128.2

Adjusted EBITDA, %

7.2

7.9

7.8

EBITDA, MEUR

83.7

116.0

147.2

EBITDA, %

5.1

7.2

8.9

Adjusted operating result, MEUR

42.4

47.1

47.6

Adjusted operating result, %

2.6

2.9

2.9

Operating result, MEUR

-27.5

30.7

54.8

Operating result, %

-1.7

1.9

3.3

Result before taxes, MEUR

-36.9

29.5

42.3

Result for the period, MEUR

-44.3

23.2

35.1

Cash flow from operating activities

96.0

63.1

81.9

Return on equity, % (12 months)

-8.0

3.9

6.2

Return on invested capital (12 months), %

-4.5

5.1

6.4

Equity ratio, %

48.8

54.9

46.9

Gearing, %

-8.8

-13.6

-10.9

Gross capital expenditure, MEUR

73.3

100.4

66.8

Employees on average

20,316

20,632

22,219

Employees on average, FTE

17,912

18,529

20,095

Dividends, MEUR  

40,0**

60.0

18.0

* Restated due to change in the revenue recognition principle

** Board of Directors' proposal to the Annual General Meeting


Mail, Parcel and Logistics Services

The year-on-year development of Posti’s product volumes was as follows:

  • Addressed letters -10% (-7%)
  • iPost products -4% (-9%)
  • Parcels in Finland and the Baltic countries 9% (6%), B2C parcels 12% (8%)
  • Domestic freight* measured in waybills 8% (9%)
  • Warehouse fill rate in Finland on average during the year 78% (68%)

* The reported figure for domestic freight excludes food logistics

The total amount of parcels delivered by Posti in Finland and the Baltic countries was 40 (37) million parcels. The figure does not include letter-like e-commerce items, the number of which is growing. In 2017 Posti delivered more than a million letters from Chinese online stores to Finnish consumers each month. In the Baltic countries, parcel volumes increased by 25%.

The volume of electronic Netposti letters increased by 1%.

The number of digital mailbox Netposti users increased by 16% and stood at 795,000 (686,000) at the end of the year.

The net sales of Mail, Parcel and Logistics Services increased to EUR 1,448.7 (1,416.0) million. Net sales are itemized below.

 

Net sales, EUR million

2017

2016, restated

Change

Mail & Marketing Services

630.2

651.9

-3.3%

Press Services

166.9

171.4

-2.6%

Parcel Services

287.5

276.7

3.9%

Logistics Services

373.4

322.6

15.8%

Other and eliminations

-9.3

-6.7

 

Total

1,448.7

1,416.0

2.3%

    

The net sales of Mail and Marketing Services decreased. The decline in volumes was compensated for by changes in pricing. The net sales of parcel services grew, particularly due to growth in consumer parcels. Parcel Services saw very positive development, particularly in the volumes of domestic consumer parcels and international consumer parcels addressed to Finland. A new record was made in the daily volume of parcels in December. In addition to the boost provided by the improved growth of the Finnish economy, growth in parcel volumes was particularly expedited by record consumer demand during the Christmas season and Black Friday campaigns.

At the end of December, Posti had a total of 1,464 service points in Finland, of which 533 were Posti Parcel Lockers. The number of parcels going through Posti Parcel Lockers grew by 47%. In Logistics Services, the net sales of domestic freight increased, with acquisitions also playing a part in the growth. In the warehousing business, warehouse fill rates improved.

The adjusted EBITDA of Mail, Parcel and Logistics Services declined to EUR 106.3 (109.0) million, 7.3% (7.7%). The adjusted EBITDA was weighed down by a decline in the net sales of Mail and Marketing Services, which was not fully compensated for by cost savings in production. EBITDA improved to EUR 102.2 (93.4) million, with the increase being attributable to non-recurring personnel-related items recognized in the previous year.

The adjusted operating result decreased to EUR 60.4 (61.9) million, 4.2% (4.4%). The weaker result of traditional postal operations was compensated for by the improved net sales and profitability of parcel and logistics services.

Special items recognized during the period weighed down the result by EUR 11.1 (19.4) million. The special items were related to impairment of goodwill and personnel restructuring. Approximately EUR 7.0 million of the total impairment of goodwill of EUR 33.9 million recognized for the OpusCapita business in the third quarter is allocated to the Mail, Parcel and Logistics Services segment under the revised reporting structure.

The operating result improved to EUR 49.3 (42.5) million.

In January, Posti acquired HR Hoiva Oy (now known as Posti Kotipalvelut Oy).

In April, Posti and Solemo Oy established Flexo, a joint venture that provides in-house logistics services.

In the summer, Posti strengthened its early-morning delivery by acquiring the early-morning delivery operations of Kaakon Viestintä and merging Posti’s early-morning delivery operations into a newly established subsidiary, Posti Palvelut Oy.

Also in the summer, Posti acquired the personal assistance business of SOL Henkilöstöpalvelut Oy.

Posti has signed extensive cooperation agreements on Smartpost parcel lockers to be installed in the lobbies of new apartment buildings with YIT, Bonava, Skanska, SRV, Sato, Heka (the housing company of the City of Helsinki), Espoon Asunnot (the housing company of the City of Espoo) and Kojamo. Posti has also signed an agreement with Securitas on parcel lockers to be installed in office buildings.

The digitizing production in Sweden, Norway and Poland was outsourced to the US-based BancTec on October 2, 2017.


Itella Russia

Measured in local currency, Itella Russia’s net sales increased by 1.1%. Euro-denominated net sales increased by 13.8% to EUR 119.1 (104.6) million. Net sales were favorably affected by changes in the ruble exchange rate as well as the growth of the transport business, which was compensated for by the decline in the capacity of the warehousing business.

The adjusted EBITDA improved to EUR 3.7 (2.6) million, 3.1% (2.5%). The improvement was attributable to the optimization of warehouse capacity. EBITDA declined to EUR -14.4 (3.9) million. Profitability continued to be weighed down by currency-denominated leases. To support the focusing of operations, it was decided that leased warehouses would be closed at two locations. As a result of this decision, a provision of EUR 18.2 million related to warehouse lease agreements was recognized as a special item in December.

The adjusted operating result improved to EUR -3.5 (-4.0) million.

The average fill rate for warehouses showed a year-on-year increase in Moscow and a decrease in other regions. The average fill rate was 84.2% (77.4%) in Moscow and 74.4% (85.9%) in other regions. One large warehouse in Moscow was closed down in the first quarter, and three regional warehouses were closed down during the last two quarters of the year.

The Russian ruble depreciated by 7.9% compared to the previous year.

The operating result declined to EUR -21.5 (-2.7) million.


OpusCapita

The comparable volume of OpusCapita’s electronic transactions grew by 31% compared to the previous year.

OpusCapita’s net sales increased by 4.4% to EUR 64.7 (62.0) million. Some 51.5% of the net sales came from Finland, while the remaining 48.5% was from other countries.

EBITDA declined to EUR -3.6 (2.1) million. Adjusted EBITDA decreased to EUR -2.6 (3.1) million, -4.0% (5.1%). The decline in adjusted EBITDA was attributable to significant changes, particularly in the product development and product organization, as well as substantial investments in sales and marketing.

The adjusted operating result declined to EUR -7.9 (-1.2) million, -12.3% (-1.9%).

Special items with a negative effect on the result amounting to EUR 27.9 (1.3) million were recognized during the review period. In connection with the restructuring of OpusCapita and the refocusing of its operations, the future outlook and cash flow forecasts of the cash generating unit were updated. Based on this assessment, the Group recognized impairment of goodwill in the amount of EUR 33.9 million. Of this total, EUR 26.9 million was allocated to OpusCapita under the revised reporting structure.

The operating result declined to EUR -35.9 (-2.5) million.

On July 13, 2017, OpusCapita acquired Billexco AG, a Switzerland-based e-invoicing operator.

After OpusCapita’s new organizational structure became effective in the fourth quarter, its operations are now divided into four product lines: Business Network, Cash Management, Procurement and Invoice Automation, and Product Information Management. The restructuring also involved new arrangements with regard to support functions and interfaces with the Mail, Parcel and Logistics Services segment.


Other operations

The divestment of the Finance and Accounting Outsourcing business was completed in the third quarter.

 

Segments' Key Figures

 

EUR million

2017

2016

Net sales

   

Mail, Parcel and Logistics Services

1,448.7

1,416.0

Itella Russia

119.1

104.6

OpusCapita

64.7

62.0

Other operations

23.5

36.8

Intra-Group sales

-9.0

-11.9

Posti Group

1,647.0

1,607.6

     

Net sales change-%

   

Mail, Parcel and Logistics Services

2.3%

-2.2%

Itella Russia

13.8%

-12.0%

OpusCapita

4.4%

10.4%

Posti Group

2.5%

-2.5%

     

Adjusted EBITDA

   

Mail, Parcel and Logistics Services

106.3

109.0

Itella Russia

3.7

2.6

OpusCapita

-2.6

3.1

Other operations

11.2

12.0

Posti Group

118.6

126.7

     

EBITDA

   

Mail, Parcel and Logistics Services

102.2

93.4

Itella Russia

-14.4

3.9

OpusCapita

-3.6

2.1

Other operations

-0.6

16.7

Posti Group

83.7

116.0

     

Adjusted EBITDA, %

   

Mail, Parcel and Logistics Services

7.3%

7.7%

Itella Russia

3.1%

2.5%

OpusCapita

-4.0%

5.1%

Posti Group

7.2%

7.9%

     

EBITDA, %

   

Mail, Parcel and Logistics Services

7.1%

6.6%

Itella Russia

-12.0%

3.7%

OpusCapita

-5.6%

3.4%

Posti Group

5.1%

7.2%

     

Adjusted operating result

   

Mail, Parcel and Logistics Services

60.4

61.9

Itella Russia

-3.5

-4.0

OpusCapita

-7.9

-1.2

Other operations

-6.5

-9.7

Posti Group

42.4

47.1

     

Operating result

   

Mail, Parcel and Logistics Services

49.3

42.5

Itella Russia

-21.5

-2.7

OpusCapita

-35.9

-2.5

Other operations

-19.4

-6.6

Posti Group

-27.5

30.7

     

Adjusted operating result, %

   

Mail, Parcel and Logistics Services

4.2%

4.4%

Itella Russia

-2.9%

-3.8%

OpusCapita

-12.3%

-1.9%

Posti Group

2.6%

2.9%

     

Operating result, %

   

Mail, Parcel and Logistics Services

3.4%

3.0%

Itella Russia

-18.1%

-2.6%

OpusCapita

-55.4%

-4.0%

Posti Group

-1.7%

1.9%

     
     

Financial position and investments

The consolidated cash flow from operating activities before capital expenditure was EUR 96.0 (63.1) million.

Investments according to the cash flow statement amounted to EUR 77.0 (92.3) million.

Investments were made in relatively small acquisitions during the year. During the financial year, Posti began the construction of a 26,000 mfreight terminal on Suokalliontie in Vantaa, Finland. The terminal will be completed in summer 2018. The Group also invested in information systems, the transport fleet and production projects.

Cash flow of investments recognized at fair value through profit and loss and held to maturity was EUR 54.3 (88.9) million.

At the end of the year, liquid assets totaled EUR 123.7 (159.9) million, and undrawn committed credit facilities amounted to EUR 210.0 (150.0) million. The Group signed two new long-term loan agreements for EUR 60 million each, one of which was withdrawn in the second quarter. The EUR 100 million bond issued in 2011 was paid off in its entirety in December. The Group’s interest-bearing liabilities were EUR 120.0 (132.1) million. The equity ratio was 48.8% (54.9%) and gearing was -8.8% (-13.6%).

Research and development

Expenditure related to research and development activities in 2017 amounted to EUR 5.6 (8.4) million, or 0.4% (0.6%) of the Group’s total operating expenses.

The Mail, Parcel and Logistics Services segment invested in the development of digital services for consumers. Digital services help Posti improve the services offered to private customers as well as the customer experience. For example, Posti’s new mobile application provides consumers with new services that make daily routines easier and fulfill a growing number of customer needs.


During the year, OpusCapita continued to invest in solutions that support the continued development of its Purchase-to-Pay and Cash Management product lines. Research and development expenses increased significantly due to investments in new products and cloud services. The development of the communication platform used for multi-channel invoicing also continued.

Statement of non-financial information

Introduction

Posti complies with responsible business practices in all of its operations. Posti’s responsibility policies take into account the UN Global Compact principles, the UN Guiding Principles on Business and Human Rights and the UN Sustainable Development Goals. The Global Compact principles comprise self-regulation pertaining to human rights, the environment and corruption. The UN Guiding Principles specify a company’s responsibility with regard to human rights and call on companies to respect human rights. The UN Sustainable Development Goals contain guidelines aimed at ensuring sustainable development.

Posti reports on sustainability in accordance with the international Global Reporting Initiative GRI G4 reporting framework. In addition, Posti complies with the reporting requirements of its owner, the Finnish State. The environmental accounting applies the WBCSD (World Business Council for Sustainable Development) Greenhouse Gas (GHG) protocol and the GHG Inventory Standard for the Postal Sector protocol, which includes more detailed instructions for the postal industry. The various aspects of corporate responsibility will be discussed in more detail in the next corporate responsibility report, to be published in March 2018.

Environmental responsibility

Posti identifies, evaluates and manages environmental aspects in its operations and, through its quality and environmental policy, is committed to reducing the environmental impacts of its operations with regard to transport as well as the energy consumption of properties. Examples of identified environmental responsibility risks include traffic accidents, which may cause significant environmental damage. If realized, such a risk can have a negative impact on nature as well as customer property. The risk is managed as part of occupational safety management, through measures such as driver training, appropriate work instructions and careful employee orientation.

Posti’s environmental management is based on the ISO 14001 environmental management standard. Employees’ awareness of environmental issues is promoted through training and employee orientation as part of the ISO 14001 management system. Environmental issues are also regularly discussed in the channels of internal communication. At the end of 2017, certified environmental management systems covered 87% (83%) of the Group’s employees.


Posti’s successful environmental management also helps its customers reduce their environmental impact through the use of Posti’s services. All of Posti’s services in Finland are carbon neutral Posti Green services. The carbon-dioxide emissions arising from transport are reduced by combining transports and using route planning, smooth and safe driving styles and the renewal of the fleet. The remaining emissions are compensated for by participating in certified climate projects.

Posti’s target is to reduce carbon-dioxide emissions in Finland by 30% by 2020, in proportion to net sales, compared to 2007. By the end of 2017, Posti’s emissions relative to net sales had declined by 17% (13%) in Finland. The Group’s absolute carbon-dioxide emissions in 2017 amounted to 196,500 (164,300) metric tons. The increase in emissions is partly attributable to the calculation being expanded to include subcontracted transport in Russia and the Baltic countries, as well as the acquisitions of Kuljetus Kovalainen and Veine Oy in 2016.

Social issues and personnel

For Posti, social responsibility means a commitment to producing reliable and high-quality services for various customer groups. Posti processes all information and product flows in strict confidence and with a high level of information security. The Group deals ethically, openly and transparently with all of its stakeholders.

The EU General Data Protection Regulation (GDPR) sets out new provisions concerning the processing of personal data, effective from May 25, 2018. Posti has prepared for the changes brought about by the new Regulation by carrying out a GDPR preparation project, the aims of which include improving data protection preparedness, the awareness of personnel and the protection of processes and systems, among other things. As part of the GDPR preparations, the Group provided Basics of Data Protection training for personnel. All employees are required to complete the training. More in-depth data protection training was also organized for certain personnel groups. As of the end of 2017, some 61% of the Group’s personnel (excl. Itella Russia) had completed the basic training. The training is intended to prevent potential risks related to data protection, such as personal data ending up in the wrong hands.

Providing a safe and healthy working environment for employees is the key objective of Posti’s people responsibility. This can be achieved by continuously developing the management of occupational safety and well-being at work. In a labor-intensive industry, the successful management of sick leave and the effective and extensive prevention of accidents are extremely important in terms of employee well-being and productivity as well as the Group’s profitability. The long-term goal is to be a zero-accident workplace. To achieve this goal, occupational safety is systematically managed as part of day-to-day management. Personnel competence and awareness related to occupational safety is increased and safety-promoting working methods are systematically developed. All accidents and hazardous situations are investigated. Making safety observations and implementing corrective actions in response to the observations is part of continuous improvement. In 2017, the Group’s personnel made a total of 11,699 (10,401) safety observations. The figure covers Posti’s operations in Finland and Estonia.

Posti revised its work ability management model during the reporting year. The new model emphasises the supervisor’s early identification of, and intervention in, potential work ability problems through the use of well-being at work discussions. The aim is to prevent long-term disability problems. Challenges related to work ability are a key risk in the context of occupational safety and well-being at work.

Posti monitors the frequency of occupational accidents that lead to absences by using the LTA1 indicator (occupational accidents per million working hours). The LTA1 of Finnish operations was 46 (43). For other countries, including Russia, the LTA1 figure was 13. The figures include occupational accidents that occurred during working hours and led to an absence of at least one day. The LTA1 indicators cover more than 90% of the personnel, excluding Flexo and Posti Home Services. Serious occupational accidents leading to an absence of more than one month decreased in the Group by 21% compared to the previous year.

The Group’s sick leave rate was 5.7%, including all countries of operation except Russia and Lithuania. The sick leave rate for Finland turned to a slight decline and stood at 5.9% (6.6%). The figure covers all Finnish operations except Flexo and Posti Home Services.

Posti is facing a major transformation, which creates pressure related to the success of change management. Supervisors play a key role in communication about changes and future direction. Posti measures the success of supervisory work annually at the Group level by an index that includes performance management, fairness, occupational safety and change management in the work of supervisors. In 2017, this index stood at 65% (63%). The goal is for the index to show continuous improvement. The index covers the Group’s Finnish operations excluding OpusCapita, Flexo and Posti Home Services.

Respecting human rights and preventing bribery and corruption

Posti is committed to respecting human rights in all of its operations, and requires the same from partners and suppliers. Posti adheres to the UN Global Compact principles in realizing the Group’s responsibility for human rights. The Group also takes into account the UN Guiding Principles on Business and Human Rights in its key responsibility documents: the Code of Conduct, the Group’s Corporate Responsibility Principles and the Supplier Code of Conduct. Posti has also published and implemented a Group-level policy on gifts and hospitality as part of the Group’s compliance program. Posti has a zero-tolerance policy with regard to human rights violations, corruption and bribery.

Posti’s Code of Conduct and Supplier Code of Conduct cover legal and regulatory compliance, good business practices, principles concerning equality and non-discrimination, the avoidance of conflicts of interest, the prohibition of unethical commercial practices and environmental responsibility. The Code of Conduct also documents the principles concerning the consequences of misconduct. It also specifies the whistleblowing channels established by the Group for employees to confidentially report suspected cases of misconduct or other problems. While anonymous reporting is possible, Posti encourages employees to report problems and shortcomings under their own names to make it easier to investigate the issues.

The risks identified in this area are related to potential human rights violations, supplier management, failure of internal control and corruption. The most significant risks related to human rights and corruption are business-related reputation risks. Posti prevents these risks by providing Code of Conduct training to all employees. The content of the Code of Conduct is the same for all employees and it is included in the employee orientation for new recruits. Training on the content of the Code of Conduct is provided electronically to employees who have access to a computer. For other employees, training is organized separately using either written training materials or classroom training. As of December 31, 2017, some 78% of the Group’s employees had completed the training. More in-depth training on the subject matter is also organized for the most significant target groups, such as management as well as the sales and sourcing functions.

Potential risks related to human rights and the prevention of corruption and bribery in the supply chain are prevented by monitoring suppliers’ sustainability performance by means of a self-assessment tool and also by conducting sustainability audits when necessary. The Group also uses financial management monitoring tools and confirmation processes to support the management of corruption risks.

Share capital and shareholding

Posti Group Corporation is wholly owned by the State of Finland. Its share capital consists of 40,000,000 shares of equal value. The company holds no treasury shares and does not have subordinated loans. No loans have been granted to related parties, and no commitments have been given on their behalf. The company has not issued shares, stock options or other rights with entitlement to company shares. The Board of Directors is not authorized to issue shares, stock options, or other rights with entitlement to company shares.

Parliament has decided that the Finnish State can decrease its ownership in Posti Group Corporation, but its share of ownership must remain at 50.1 percent at a minimum. In accordance with the Government Resolution on Ownership Steering Policy, 49.9 percent of the ownership of Posti Group Corporation can be transferred to Vake Oy, a state-owned development company, with the other 50.1 percent remaining in the State’s direct ownership.

Administration and auditors

Annual General Meeting

Posti Group Corporation’s Annual General Meeting was held in Helsinki on March 27, 2017. In line with the Board of Directors’ proposal, the Annual General Meeting decided to distribute a dividend amounting to 69% of the Group’s adjusted net profit, or EUR 25 million. In line with the Board of Directors’ proposal, the Annual General Meeting further decided that an additional dividend of EUR 35 million will be distributed. The total dividend distribution amounted to EUR 60 million.


The Annual General Meeting also adopted the 2016 financial statements and discharged the Supervisory Board, Board of Directors and President and CEO from liability.

It was decided that the Board of Directors be composed of eight members. The following continued as members of the Board of Directors: Petri Järvinen, M.Sc. (Tech.); Petri Kokko, Director, M.Sc. (Econ.), ; Kirsi Nuotto, M.A.Marja Pokela, BBA, M.Sc. (Adm.); Suvi-Anne Siimes, Licentiate of Political Science, (Econ.); and Arja Talma,M.Sc. (Econ.), eMBA. Markku Pohjola, B.Sc. (Econ.) and Eero Hautaniemi, M.Sc. (Econ.), were elected as new members of the Board of Directors.

Markku Pohjola was elected as the Chairman of the Board of Directors and Suvi-Anne Siimes as the Vice Chairman.

It was decided that the Supervisory Board comprise twelve members. The following continued as members of the Supervisory Board: Maria Guzenina, MP, Social Democratic Party; Rami Lehto, MP, Finns Party; Eeva-Maria Maijala, MP, Centre Party; Sari Moisanen,B Eng.; Mats Nylund, MP, Swedish People’s Party of Finland; Juha Pylväs, MP, Centre Party; Sari Raassina, MP, National Coalition Party; Lulu Ranne, Project and Environmental Expert, Finns Party; Markku Rossi, MP, Centre Party; Satu Taavitsainen, MP, Social Democratic Party; Jani Toivola, MP, The Greens of Finland; and Kari Tolvanen, MP, National Coalition Party.

Markku Rossi was re-elected as the Chairman of the Supervisory Board and Jani Toivola as the Vice Chairman.

The authorized public accountancy firm PricewaterhouseCoopers Oy (PwC) was elected as Posti Group Corporation’s auditor, with Authorized Public Accountant Merja Lindh as the principal auditor.

No changes were made to the Board of Directors’ or Supervisory Board’s fees. Members of the Board of Directors receive a monthly remuneration and a meeting fee. Members of the Supervisory Board receive a meeting fee.

Changes in management

Jussi Kuutsa, M.Sc. (Econ.), was appointed President of Itella Russia and a member of the Executive Board effective from January 1, 2017. In conjunction with the appointment, Kuutsa gave up his membership of the Board of Directors of Posti Group Corporation.

Patrik Sallner, M.Sc. (Tech.), MBA, MA and Managing Director of OpusCapita, was appointed as a member of the Executive Board of Posti Group as of March 1, 2017.

Kaarina Ståhlberg, LL.M. (Columbia University, NY) and General Counsel of Posti Group Corporation, was appointed as a member of the Posti Group Corporation Executive Board as of October 1, 2017.


Employees

The Group’s average number of employees, converted into full-time equivalents, was 17,912 (18,529). On December 31, 2017, the numbers of employees converted into full-time equivalents were:

  • The Group: 16,932 (18,519) employees
  • Finland: 13,592 (14,140) employees
  • Other countries of operation: 3,340 (4,379) employees

The Group’s personnel expenses amounted to EUR 696.6 (730.8) million, down 4.7% from the previous year. The personnel expenses included EUR 5.0 (18.9) million in restructuring costs. Excluding restructuring costs, the personnel expenses declined by 2.8% year-on-year. Salaries and wages paid by the Group decreased by EUR 20.5 (22.0) million from the previous year.

According to the Board of Director’s decision, based on the result for the financial year, a bonus will be paid to the personnel fund.

Group personnel in total

2017

2016

2015

Salaries and wages, EUR million

564.3

584.8

606.9

Employees on December 31

20,014

20,497

21,598

Average number of employees

20,316

20,632

22,219

    

The company entered into 1107 (289) new permanent employment contracts in Finland in 2017. The substantial increase in the number of new employment relationships was due to recruitment particularly in early-morning delivery, basic delivery, sorting and warehouse operations. Personnel reductions amounted to 599 (1,383) person-years. Out of this total, 265 (417) person-years were related to production and finance, 42 (39) person-years were reduced through voluntary resignation and pension plans, 206 (857) person-years were reduced via the Uusi polku (New path) program, and 86 (70) person-years were reduced in relation to corporate transactions.

In addition, 300 new employment relationships began as a result of acquisitions.

The Uusi polku program launched at the beginning of 2014 offers personnel not only financial support, but also training and support for job seeking, retraining or starting a business. By the end of December 2017, 2,823 employees had applied for the program and 1,937 had been approved.


Cooperation negotiations

On January 25, 2017, Posti announced that it will start cooperation negotiations concerning administrative positions. The target group of the negotiations comprised 308 employees and the negotiations led to personnel reductions concerning 33 people.

On March 20, 2017, Posti started cooperation negotiations in the Sorting organization under the Operations unit to support the restructuring of supervisory positions at the sorting centers in Helsinki, Vantaa and Lieto. The negotiations covered 37 employees and led to personnel reductions concerning six people.

On April 24, 2017, OpusCapita announced that it will start cooperation negotiations in the Document and Transaction Processing unit. The target group of the negotiations comprised 69 employees and they led to personnel reductions concerning 15 people.

Posti started cooperation negotiations concerning supervisory positions in the Operations unit’s Southeast Finland regional delivery organization on May 9, 2017, in the Northern Finland regional delivery organization on June 19, 2017 and in the Lakeland region delivery organization on September 21, 2017. The negotiations in Southeast Finland covered 28 delivery supervisors and led to personnel reductions concerning six people. The negotiations in Northern Finland covered 23 delivery supervisors and led to personnel reductions concerning five people. The negotiations in the Lakeland region covered 30 delivery supervisors and led to personnel reductions concerning seven people.

Posti Kuljetus Oy’s transport production unit in Seinäjoki commenced cooperation negotiations on October 18, 2017. The target group of the negotiations comprised 32 employees and they led to personnel reductions concerning 16 people.

Posti Palvelut Oy commenced cooperation negotiations on November 28, 2017, concerning early-morning delivery operations in Vaasa and Mustasaari. The target group of the negotiations comprised 68 employees and they led to personnel reductions concerning 9 people.

Changes in the corporate structure

Posti Group Corporation’s most significant changes in group structure in 2017:

Veine Oy, which was acquired by Posti Ltd in August 2016, merged into Posti Ltd on January 1, 2017.

On January 10, 2017, Posti Ltd acquired HR Hoiva Oy and subsequently changed its name to Posti Kotipalvelut Oy on March 31, 2017.

Kuljetus Kovalainen Oy, which was acquired by Posti Ltd in October 2016, merged into Posti Ltd on March 1, 2017.

Posti Palvelut Oy, was established in April for early-morning delivery operations.

On April 13, 2017, Posti Group Corporation and Solemo Oy established Flexo Palvelut Oy, a joint venture providing in-house logistics services. Posti owns 80% of the shares in Flexo, with Solemo owning the remaining 20%.

OpusCapita acquired the Switzerland-based company Billexco AG on July 13, 2017.

OpusCapita carried out significant restructuring measures during the financial year. During the financial year, OpusCapita divested its Finance and Accounting Outsourcing business and related subsidiaries OpusCapita Regnskap AS, OpusCapita Inkasso AS, OpusCapita IT Solution AS and OpusCapita Accounting UAB.

Regulatory environment

The Government submitted its draft bill for the Postal Act to Parliament on January 26, 2017. Parliament approved the draft bill on June 21, 2017. The Act entered into force on September 15, 2017. Five-day mail delivery will continue in a large part of Finland, namely the areas that do not have early-morning delivery networks maintained by newspapers. In these areas, Posti will be required to arrange competitive bidding for five-day delivery. In urban areas where early-morning delivery networks maintained by newspapers are available, the new Postal Act makes it possible to deviate from five-day delivery by allowing three-day delivery. Universal service letters must be delivered so that at least 50% of the items are delivered by the fourth weekday following the mailing date and at least 97% by the fifth weekday from the mailing date. The delivery speed obligation applies to letters and cards furnished with a stamp. The delivery speeds of all other items are based on commercial agreements and are not regulated. The new Postal Act also includes other amendments that affect Posti’s operations.

Legal proceedings

In 2011 and 2012, seven financial institutions submitted a claim primarily against Posti and secondarily against Posti and the State of Finland in order to receive compensation for the value-added tax charged by Posti on its postal services in 1999–2014. The claim is based on the allegation that the Finnish Value Added Tax Act had been, and would still be, contrary to the EU’s Value Added Tax Directive. Posti has submitted a recourse claim against the State of Finland, demanding it to refund Posti for any sums that Posti may be ordered to pay in the legal proceedings initiated by the financial institutions. The recourse claim is pending until the claims by the financial institutions have been processed and a final ruling issued.

The claims were rejected in their entirety by a decision of the Helsinki District Court on September 18, 2015, and by a decision of the Helsinki Court of Appeal on September 14, 2017. Of the six plaintiffs that appealed the District Court’s decision to the Court of Appeal, one decided to take no further legal action. Five of the plaintiffs have requested the Supreme Court for leave to appeal. The total amount of the compensations claimed by the five plaintiffs is approximately EUR 99 million, and the interest claimed amounted to approximately EUR 61 million on December 31, 2017.

It is expected to take several years until all of the final court orders are rendered in the matter. According to Posti, the allegations made by the plaintiffs are without merit and it has not recorded any receivables or provisions in its financials based on the claims made.

Business risks

The risks and uncertainties related to Posti’s business include strategic risks, operational risks, risks related to the regulatory environment and financial risks.

The key strategic risks are related to the decline in postal delivery volumes, which is progressing more rapidly than expected, as well as the general economic development in Finland and neighboring areas and other changes related to markets and the business environment, including consumer purchasing power, that will be unexpected or more extensive than anticipated. From the Group’s point of view, Russia also involves significant financial risks: the fluctuation and depreciation of the ruble and declining demand affect shareholders’ equity through changes in the value of capital employed in Russia.

Other strategic risks are related to Posti’s competitive ability as competition intensifies in all of Posti’s businesses as well as Posti’s ability to execute the Group’s transformation, implement its strategy and develop new business models and its corporate culture. Operational risks are primarily related to profitability and Posti’s ability to implement the necessary efficiency improvement programs, the ability of personnel to cope with constant change and the expectations of productivity growth, maintaining the quality of delivery operations, the dependence of businesses on functional IT systems, and business interruptions and other disruptions. The risks related to the regulatory environment arise from the fact that Posti and its delivery operations, including the universal service obligation, are subject to regulation and supervision by several public authorities.

Strategic risks

The weaker than expected economic development may have an impact on the activities of companies and consumers and, consequently, on the volumes of products transported by Posti and demand for warehousing services both in Finland and abroad. Turbulent exchange rates and financial markets and any related disturbances may also pose a risk to the Group’s business operations.

Significant market risks include the digitization of postal services at a more rapid rate than expected and other unanticipated changes in this area, such as an unexpectedly fast decline in the volumes of letters, magazines, and newspapers. Posti strives to develop its operations continuously to minimize the impacts of this risk.

Finnish citizens will soon be required to use a digital service platform to transact with the authorities. According to the Ministry of Finance, the shift from paper letters to the digital service platform will primarily take place in 2018. This is anticipated to have a negative impact on Posti’s net sales and profit.

Rigid cost structures slow the improvement of profitability, particularly in production operations in Finland. Special requirements related to the universal service obligation also limit the potential for enhanced efficiency. The decline in volumes further complicates efforts to maintain profitability.

In logistics, unanticipated regulatory changes related to domestic transport and increasing international competition are also seen as risks, as are increasing fuel and energy prices.

In Russia, the development of the economic, social, legislative and other areas of the business environment may pose a strategic market risk for Posti. From the Group’s point of view, Russia also involves significant financial risks: the fluctuation and depreciation of the ruble and declining demand affect shareholders’ equity through changes in the value of capital employed in Russia.

Currency risk is managed in accordance with the financial policy confirmed by the Board of Directors. Equity investments in subsidiaries are not hedged. The Group has discontinued the hedging of the parent company’s ruble-denominated receivables for the time being due to high hedging costs. The aim is to hedge local transaction risk in Russia.

Risks in Russia are managed by continuously monitoring business development, increasing the monitoring of critical processes and by establishing a solid foothold in the Russian market through the Group’s own companies, employees, and effective networking. Posti seeks to prevent reputation risks from materializing through enhanced internal auditing, separate local compliance operations, continuous risk assessment, and regular compliance training for employees.

For OpusCapita, the rapid increase in electronic transactions and intensifying competition make it evident that the average price of transactions will decline more than the volume of business operations will grow. This calls for continuous improvement in cost-efficiency. Financial management software is being increasingly offered as cloud services. This involves the risk of whether OpusCapita is able to develop its operations and service offering quickly enough.

Operational and other risks

Posti’s profitability is affected by seasonal variation in business. Posti seeks to balance its impact through careful planning and business diversification. Profitability is also significantly affected by the company’s ability to implement efficiency improvement programs for achieving cost savings while maintaining high operational quality and carrying out the necessary investments. There are also operational risks related to Posti’s ability to develop new products and services as well as product and service concepts, including digital services, and expand its offering to compensate for the loss of net sales and profit caused by the decline in letter volumes.


The postal industry is undergoing the most dramatic transformation in its history. This requires Posti to continue to adjust its delivery and sorting capacity and strongly enhance the efficiency of its operations in the coming years. Changes may cause disturbances to mail deliveries and processes, which may have a negative impact on Posti’s reputation and customers’ trust in the company. In addition, changes and expectations of productivity growth may have a negative impact on the personnel’s commitment to the implementation of the company’s strategy. Posti seeks to minimize these risks through active cooperation with employees, good change implementation planning, flexibly adjusting plans as needed, training immediate supervisors and carrying out other internal training, the Uusi polku program launched at the beginning of 2014, and professional communication.

The protection and development of key production and warehouse facilities and the continuity of the ICT infrastructure are critical in the management of operational risks related to loss and interruption. If they materialize, for example in a fire, such risks could result in substantial losses of customer accounts and value for Posti.

Any delays in the management of acquisitions and the integration of the acquired businesses and their operations into the Group cause direct financial losses and pose a strategic risk that limits business development. Posti’s goal is to ensure successful integration through careful planning and monitoring.

The Group seeks to insure against all residual risks for which insurance is the best option for financial or other reasons. Insurance policies related to business continuity, property and liabilities as well as certain insurance policies related to personnel are managed centrally at the Group level. In addition to management liabilities, liability risks include risks arising from operations and products. Deductibles are determined based on the Group’s risk-bearing ability.

Financial risks and their management are explained in the Notes to the Financial Statements.

Events after the financial period

Jani Jolkkonen, SVP, ICT and Digitalization and member of the Executive Board, left Posti on January 10, 2018.

On January 15, 2018, Posti announced it will initiate its first sourcing procedure on the five-day delivery of universal service letters in areas not covered by early-morning newspaper delivery. The use of competitive bidding stems from the Postal Act reforms set to take effect in the beginning of July 2018.

The arbitration committee stipulated by the collective agreement for the mail communications and logistics industry issued a decision on February 1, 2018, on a general increase of 1.31% to the industry’s collective agreement. The increase will apply retrospectively from November 1, 2017.


Outlook

The euro-denominated net sales in 2018, excluding possible acquisitions and divestments, are expected to remain on par with 2017. The Group’s adjusted operating result, excluding possible acquisitions and divestments, is expected to remain on par with 2017 or decrease slightly. Capital expenditure, excluding possible acquisitions, is expected to remain on par with 2017.

The Group’s business is characterized by seasonality. Net sales and operating profit in the segments are not accrued evenly over the year. In postal services and consumer parcels, the first and fourth quarters are typically strong, while the second and third quarters are weaker.

The development of exchange rates, especially the ruble exchange rate, may affect the Group’s net sales, result and balance sheet.

Board of Directors’ proposal for the distribution of profits

In the financial statements, the parent company’s distributable funds total EUR 480,292,766.45, of which the loss for the 2017 financial year is EUR 8,671,085.70.

No material changes have taken place in the Group’s financial standing since the end of the financial period, nor does the solvency test, as referred to in Section 2 of Chapter 13 of the Limited Liability Companies Act, affect the proposed distributable profit.

The Board of Directors proposes to the Annual General Meeting that a dividend of EUR 27 million be distributed. In addition, the Board of Directors proposes an extra dividend of EUR 13 million. The total distribution of dividend would be EUR 40 million.

Helsinki, February 28, 2018

Posti Group Corporation
Board of Directors


Alternative Performance Measures

Posti presents alternative performance measures as additional information to financial measures presented in the consolidated income statement, consolidated balance sheet and consolidated statement of cash flows prepared in accordance with IFRS. In Posti’s view, alternative performance measures provide significant additional information on Posti’s results of operations, financial position and cash flows.

Posti presents adjusted EBITDA and adjusted EBIT, which have been adjusted with material items outside of ordinary course of business to improve comparability between periods. EBITDA, adjusted EBITDA and adjusted EBIT are presented as complementing measures to the measures included in the consolidated income statement because, in Posti’s view, they increase understanding of Posti’s results of operations. Also net debt, net gearing, equity ratio, return on equity and return on investment are presented as complementing measures because, in Posti’s view, they are useful measures of Posti’s ability to obtain financing and service its debts. Gross capital expenditure provides also additional information of Posti’s capital expenditure and investment cash flow.

Alternative performance measures should not be viewed in isolation or as a substitute to the IFRS financial measures. All companies do not calculate alternative performance measures in a uniform way, and therefore Posti’s alternative performance measures may not be comparable with similarly named measures presented by other companies.