An Post was right with prudent view of SDS prospects

Opinion: On Budget Day, SDS, the haemorrhaging parcel delivery side of An Post, terminated business with 3,000 of its credit customers. That marked the beginning of the plan to close SDS and transfer some 80 per cent of its business to An Post, with integration scheduled to be implemented by next February. But this plan has led to threats of strikes and/or go-slows over the so-called tranquil Christmas festival period.

Anyone looking at the "who cooked the books" placard carried by an SDS employee, pictured in last Friday's Business This Week, must wonder what is going on. Is there deception? Or are the SDS figures being deliberately manipulated, by the unions and/or the management, for their own separate agendas?

The Casey McGrath draft report, addressed to the Communications Workers' Union, (CWU) pointed to "discrepancies" in the projected SDS sales for 2004.

It noted that the forecast in February was €69 million, and that this was revised downwards to €63 million by An Post's board in July.

Fine so far, but here is the crunch: the report further noted that SDS on July 13th forecast sales of €68.2 million - or a €5 million difference.

On the basis of these figures, Casey McGrath understandably concluded that the board's forecast required a further review of its underlying assumptions. Further, if that SDS forecast is used, then the projected losses for 2004 should be reduced from €10 million to €4.8 million.

That information was sufficient to send SDS employees into orbit with the battle-cry of "who cooked the books?"

Further, it deepened the CWU's distrust of the An Post management, culminating in the strike threat if it goes ahead with the closure of SDS.

An Post, in response, has threatened to sue the CWU for damages if there is industrial action.

So how valid are Casey McGrath's conclusions? An Post contends that the €68.2 million forecast was an internal management figure, that SDS in the past has had over-optimistic forecast figures, and that the imminent closure of SDS put a negative mantle on the business.

Does the contention of over-optimism stand up? Very much so. SDS had budgeted revenue of €93.7 million for 2003. By August, this forecast was reduced to €76.1 million, and the actual turnout was lower still, at €73.9 million. It had budgeted for losses of €3.7 million. In contrast, the actual loss for 2003 was €12.1 million.

A similar pattern is building for 2004. SDS had budgeted €72.9 million. The forecast was €63 million in July, and now it is a little better, at €65 million. And the forecast loss is now €9.3 million, compared with a budgeted loss of €5.5 million.

Clearly, there was no cooking of the books, and An Post was right to take a prudent view of SDS's prospects. And this appears to be backed up by a KPMG report commissioned by An Post.

That report is understood to have concluded that the forecast of revenue of €63 million and loss of €10 million was a realistic one. KPMG is also understood to have backed An Post's projected losses of €8 million to €10 million, saying this should not be reduced to the Casey McGrath figure of €4.8 million. Curiously, the CWU in a statement had contended that if "additional discrepancies" had been taken on board when the forecasts for 2004 were being made, the original €4.8 million forecast loss would have been "significantly reduced". KPMG is likely to have addressed that woolly contention and rightly dismissed it.

It is a great pity that the focus has been on the €5 million difference in the forecasted revenue. It would have been much more fruitful had it been on the unsustainable losses by a featherbedded company and on the need to close SDS and integrate its business into An Post.

This move was vigorously resisted by the five worker directors on the 15-member board (their relations with the other 10 members are strained to the extreme) who are seemingly unprepared to accept the unpalatable fact that SDS is not viable.

With potential bidders expressing a total lack of interest in the business, the route now being planned is the only logical alternative. The fact that SDS accounts for just 10 per cent of the group turnover, but is responsible for 28 per cent of the losses, must ring the obvious alarm bells.

Under the planned closure involving 270 voluntary redundancies and the retention of 180, SDS's turnover is estimated to fall to €49 million in 2005, with losses reduced to €0.3 million. Even in 2007, when sales are projected to rise to €55 million, a profit of only €2 million is envisaged, pointing to a very low-margin business, but at least the losses would be erased.