Ukrposhta –Reform Proposal

Proposal Submission

Igor Smelyansky

March 12, 2016

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

1

40

50

60

70

80

90

100

110

120

91 96 01 06 11

Base year

1991 = 100

-

50

100

150

200

250

91 96 01 06 11

Base year,

1991 = 100

Internal mail

International mailNational mail

International mail

Letter volumes will continue to fall across the world Parcels have pockets of growth, but not everywhere

� Africa

� Latin America and

Caribbean countries

� Asia and Oceania

� Eastern Europe and CIS

� Middle East

� Developed Countries

-17.0 %

-2.9 %

-10.6 %

-8.1 %

-21.5 %

-1.4 %

Change for 2013 - 2014

-30.3 %

18.0 %

-10.1 %

- 6.8 %

-13.7 %

3.7 %

� Africa

� Latin America and

Caribbean countries

� Asia and Oceania

� Eastern Europe and CIS

� Middle East

� Developed Countries

Change for 2013 - 2014

According to most forecasts,

mail (letter) volumes will

continue to fall across all the

segments

1 – Current assessment

and industry overview

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

2

These market trends make situation even more difficult for Ukrposhta, as Ukraine belongs to a number of countries with low postal services volumes

18

2

301

2

27

6

115

3

7482

4

112

80

Number of letters per capita (2014) Number of parcels per annum per 1000 (2014)

Historical analysis shows that these numbers rarely drastically change (if ever) as they are

based on local customs, model of government services provision, etc.

Джерело: 1) United Postal Union, 2014 statistics.

1 – Current assessment

and industry overview

3

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

0

20

40

60

80

100

120

USPS

(США)

Deutsche

Post

UK Post

office

La Poste Canada

Post

Australia

Post

Poste

Italiano

Postal income structure in the

developed countries

Letters Parcels Logistics Financial services Other

Income in2014

(Mln. HRV)%

• Letters (2)

• Parcels

• Advertising and subscription mail

• Pensions

• Money transfers

• Payments

753

218

245

1,243

189

269

19%

5.6%

6.5%

32%

5%

7%

Per financial report for 2014 - ~ 44 % of

Ukrposhta’s income comes from financial services

~44%

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

1 – Current assessment

and industry overview

4

… lately Ukrposhta is losing its position to banks and other postal operators in the most profitable segments…

In financial services Ukrposhta is losing retirees…

13.7 13.7 13.7 13.8 13.6 13.512,1

8.1 7.9 7.4 7.1 6.7

6.1 5.45.6 5.8 6.3 6.7 6.9

7.46.7

UkraineUkraineUkraineUkraine

UkrposhtaUkrposhtaUkrposhtaUkrposhta

BanksBanksBanksBanks

Number of retirees (without Crimea) in mln.

… and payment business to banks and fin. companies

IncomeIncomeIncomeIncome

((((MlnMlnMlnMln. HRV. HRV. HRV. HRV))))

Volume Volume Volume Volume

((((MlnMlnMlnMln. Units. Units. Units. Units)))) 22.1 22.2 22 20.9 20,3 14,7 14,5

207.4 223.1 237.7 245.0

274.5217,3

189,7

2009 2010 2011 2012 2013 2014 2015

(план*)

*

Money transfers (without Crimea)

Ukrposhta’s share in parcel segments

fell by 5% over the past 3 years

30%

25%

26%

22%

23%

24%

25%

26%

27%

28%

29%

30%

31%

2013 2014 2015

Ukrposhta’s share in parcel

segment

Nova Poshta – 60%

«Mist - Express»,

Postman and «In-Time» -

10%+

In e-comments Ukrposhta also losing

out to other postal operators and

private couriers

37

21

20

12

3

4

2 1

How did you get your e-commerce

orders?

Picked up at courier services

Picked up at or delivered by Ukrposhta

Courier delivery to the door

Picked up at the seller's facility

Picked up from terminal (poshtomat)

Courier delivery to front porch

Did not use delivery service

Others

Nova Poshta, In-

Time, …

Source: 1) GFK Research. 2) Ukrposhta

1 – Current assessment

and industry overview

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… while using extremely heavy “soviet” infrastructure with very limited investment in IT and new technologies

$67.8

$60.2

$20.9

$15.1

$12.8

$7.5

$6.5

$5.4

$5.4

$3.2

$0.3

$0 $20 $40 $60 $80

United States Postal…

China Post

Deutsche Post

La Poste

Royal Mail

Brazil Post

Swiss Post

Poste Italiane

Canada Post

Austrian Post

Укрпошта

Total postal income for 2014 (B USD)

Ukrposhta has more extensive “rich” infrastructure

than postal operators in the developed world…

… while losing to them by a mile in

terms of income…

… and investment in the future (IT

and infrastructure)

29%

15%

7%6%5%

4%4%

3%2%

2%2%

1%

1%1% 18%

Total IT expenses in postal sector for 2015

- EUR 20.1B

USA Japan

China Germany

UK France

Canada Australia

Italy Brazil

Middle East Spain

Sweden Russia

Other countries

Ukrposhta -

$ 100К?

For all the companies – only income from postal

operations (letters and parcels). For Ukrposhta –

total income. Postal income is around 65% or $

0.2В

• The smallest service area per 1 post-office in the

world – 53 км2 vs. 195 км2 in developed countries

• The smallest number of people served per 1 post-

office 3,930 vs. 5,305 in developed countries

• 1.7% from the world’s postal employees with

substantially smaller income share

• One of the smallest in the world number of

serviced population per 1 postal employee - 539

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

1 – Current assessment

and industry overview

Africa

Lat.

America

and

Caribbean

Middle

East

Asia and

Oceania

Developed

Countries

Eastern

Europe

and CIS

Ukraine

% of postal offices 2% 7% 2% 47% 26% 16% 1.7%

Service area (in km 2) per

1 postal office 1,520 421 969 72 195 229 53

Population per 1 postal

office 67,900 12,831 25,950 12,106 5,305 4,555 3,930

% of postal workers 1% 4% 2% 32% 46% 14% 1.6%

Number of people

(population) per 1 postal

worker 15,607 3,034 3,350 2,317 381 643 539

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

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

• … investment in IT and technology at a minimum

• … all major procurement purchases are less than 10% of total expenses

• … all major postal volumes (except parcels) and pension volumes will continue to drop in the near future

• … concentration of corporate business among top-5 clients exceed over 50% in some segments

Pure cost cutting will not help to finance reforms and improve financial results over the next 1-2 years as

A. It will be “eaten” by at least small increase in salaries and

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

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

Touch internal reforms require financial and legislative support from the government

and Verkhovna Rada, especially in “unpopular” steps

How would I propose to pay for the reforms?

1. Improve current operations, with particular focus on

sales increase and commercial function

2. Review of Universal Service Model with potential

radical changes in delivery standards, especially in

remote locations (covered on the next slide)

3. Debt financing from international institutions (IMF,

EBRD, …)

4. Bond issuance

5. Consider sale of 25% shares on exchange or to

strategic investors

6. Commercial and state bank financing

7. Introduction of postal tax on post operators not

delivering across the country (i.e. 0.5% from revenue

like in Brazil to maintain Universal Service Model )

2 – reform proposal for

Ukrposhta

Source: 1) Ukrposhta

• Substantial increase in financial income

• Creation of the postal bank with focus on communal payments, retirement payments, consumer loans, as well as SME loans and factoring

• Share increase in express and courier delivery segment

• Focus on corporate segment (take share from private couriers)

• Outsourcing partner for internal and external mail for corporate customers

• Defense and increase of market share in parcel deliveries Утримання та зростання долі посилок

• Partner programs with e-commerce operators and e-stores

• Logistical support for SME segment

• Center of government services (why built new centers when poshta has substantial unused offices and personnel)

• Center for e-government services

• Center for various services requests (government note, potentially passports in the future, etc.) and document receipts

• Collection, analysis and sale of marketing data (big data)

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4

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I propose 5 major levers to increase Ukrposhta’s income2 – reform proposal for

Ukrposhta

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

2. Change in organization structure and corporate hierarchy (delayering)

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

3. Personnel reduction (including management) given personnel costs ~ 68-70 %

• However, substantial increase in salaries for key positions, i.e. commercial function, IT, logistics, etc. Average salary at 1900 hrivnas substantially increase operational risks

4. Optimization of price, terms and conditions of delivery

• Sensitivity analysis in terms of costs vs. tariffs (tariffs in general must reflect real costs, if someone if willing to wait, let’s use it) –potential move from Universal Service Model to “Selective” service model

• Implementation of new technology, including sensors (if postal box is empty, no reason for pick up)

5. Increase in efficiency for mail sorting and routing

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

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

• Ukrposhta has over 5 000 offices in small cities and villages, Oshadbank ~ 2 300

• Use of partnership network, as done by top companies, such as UPS, USPS, FedEx, TNT

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7 major steps to cut costs

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2

3

5

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4

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2 – reform proposal for

Ukrposhta

1. Implement immediate financial control measures to assure safety and optimization of the company’s financial assets

2. Within first 3-5 months, with participation of independent consultants, clients, government and Rada officials, develop and approve long-term Ukrposhta’s strategy (including realistic financial plan and model and and IT strategy)

3. Complete all the necessary corporate procedures, including appointment of independent members and experts, and consider privatization of 25% of Ukrposhta

4. Undertake full independent audit of financial results, real estate assessment and IT and infrastructure assessment

5. Begin negotiations with various government, private and international lenders (EBRD, IFC) as to the potential financing of Ukrposhta reforms

6. Register Postal Bank (or acquire banking license) and undertake necessary steps to begin its work in 2017

7. Change organizational structure and top management (where necessary per assessment results), especially in commercial function, finance, security and IT

8. Develop and implement by the end of 2016 new compensation and motivation system

9. Review tariff structure and service model and implement necessary changes

10. Develop and implement “quick wins” as for new product launch, sales growth, cost cutting measures, as well as rent agreement and real estate optimization

9

What must be done in 2016 – first 10 steps2 – reform proposal for

Ukrposhta

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

Key position requirements My qualifications

Education: Higher education, MBA preferred • Bachelor of Business Administration, Pace University, USA, Certified

Public Accountant – CPA

• Juris Doctor, George Washington University Law School, USA, NY and NJ

Bar Admission, Member of American Bar Association

• МВА with honors (top 5%), Georgetown University, USA

Main qualification requirements: Candidates must show top management experience in all 5

categories:

1. Ability to manage change (Strategic vision)

2. Result oriented

3. Communication:

4. Ability to build and manage teams

5. Business skills (Financial management, HR, Management of production processes)

• Over 5 years experience in top management consulting firms (KPMG,

BCG). Over 10 large scale strategy and operational efficiency projects for

top companies in CIS. Development of change and project teams, most of

which continued to successfully function after my departure.

• Manage most successful M&A projects in a banking sector in Ukraine and

Russia.

• Most of the people I worked with are ready to do it again

Professional experience:

• Over 5 years in the top position, managing large companies (over 500 FTEs). Experience with

international companies a plus.

• Experience in change management and efficiency improvement projects

• Knowledge of postal industry and its key trends;

• Experience in business development in an online segment a plus;

• Knowledge of key enterprise’s financial and economic drivers;

• Experience leading negotiations at the highest level as well as conflict resolution experience

.

• 3 years as Chairman of the Board for 3 regional banks (1500 FTE), as well

as 4.5 years as Director of M&A and Asset Management. Over 8 years (4

as a Director) with international companies such as BCG and KPMG in CIS

and USA

• Crisis management o troubled banks: cut costs by 40% while increasing

assets and liabilities by 200%

• Experience in development and implementation of online, IT and

operational strategies

• Experience working with and presenting to top management and high

level government officials

This is how my colleagues write about me in social media in 2016 – 5 years after the end of the project: Alexander Turchin, IT Director for one of the banks

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

Like · Reply · 2 · February 27 at 2:22pmDiscussion of an article “How new top managers destroy companies” This is about risks of changing top management in large companies and

consequences of ignoring rules of effective management10

3 – candidate

competitive advantages

THANK YOU!

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