As we pass the half-way mark of our five-year transformation plan the New Zealand Post Group is in a much stronger position to withstand and respond positively to the challenges faced by our parcels, mail and logistics (postal) and financial services (Kiwibank) businesses.

The ongoing effects of digital disruption and competition in both markets prompted a reset in our strategic thinking in late 2013 and has led to a range of responses since then. The Group is addressing two unique strategic imperatives: the structural decline of our core letters business and the opportunity to take Kiwibank to the next stage in its development.

Kiwibank continued to perform well in 2016 and posted an after tax profit of $130 million, down slightly on the year before. It grew lending and advances to customers by 7.0% from $15.6 billion to $16.7 billion, and customer deposits by 7.6% from $13.7 billion to $14.8 billion. It also saw a 15% reduction in impairment losses on loans and advances to $11 million. The bank’s year-end results are set out in our Group Annual Report that has been published alongside this document.

This remainder of this report focuses on the postal services side of the business.

The postal services business made an operating loss after tax of $11 million reflecting the ongoing fall in revenue from lower mail volumes. The loss would have been greater had it not been for further cost reductions and a 2.9% growth in parcel revenue. Parcel volumes grew by 6.4% overall and international inbound volumes by 15.5%. While margin growth remains difficult in challenging market conditions, the parcel trends are pleasing and we are actively pursuing market opportunities to further grow our parcels business. We made good progress during FY 2016 in continuing to implement the large scale operational, organisational and asset portfolio changes we identified at the outset of the transformation plan as necessary parts of our journey to becoming a profitable modern services business.

From a portfolio perspective, our strategy of selling non-core assets to free up cash for investment in our mail and parcels business took another significant step with the sale of Converga. At the time of writing, the process to introduce new Crown shareholders in Kiwibank was progressing well and nearing completion. The arrangement will allow New Zealand Post to repay debt acquired to grow Kiwibank and provide new sources of capital and investment expertise for Kiwibank. It also allows New Zealand Post to focus on its core packages and parcels business.

We have received the first shipment of the 500 Paxster electric vehicles that will be used to deliver parcels as well as letters to residential areas in New Zealand. They are already in operation in parts of the North Shore, New Plymouth and Oamaru. A brand new integrated parcels and mail hub began operations just outside Hamilton in July, and building got underway on a purpose-built parcels processing and distribution centre at Christchurch Airport. Another highlight was the introduction of three Boeing 737-400 freight aircraft into a shared air network providing services for New Zealand Post, which will carry more parcels, faster and at less cost.

For our processing operations, we selected new machines for the Christchurch site that will sort parcels four times faster and more reliably than they are now. In addition, we have chosen new technology to improve the speed, accuracy and service levels of the letter sorting machines at our mail processing centres.

We are continuing to fund new infrastructure and technology, and develop new and improved online, mobile and delivery services for our large sending, and receiving customers. We introduced the first of several new parcel collection and delivery services into the market to give our customers more options to ensure they can receive parcels the first time, and we’re working closely with large business customers to develop digital services that will help support their growth.

As we modernise and increase the services we deliver for our customers, we are also making fundamental changes to both our organisational and operating models. These changes, which we began last year, are perhaps the hardest part of our transformation. We are significantly reducing our headcount, resulting in a number of people leaving the business, and the changes depend on successfully embedding a completely new way of working.

To be a truly modern services business, we need to instinctively look outwards so that everything we do has the customer in mind. While sounding obvious, it is a different way of operating from the historically more structured and hierarchical New Zealand Post model that has served New Zealand’s communities and businesses well for 176 years and made us one of this country’s most recognised and trusted brands.

Times have changed and we must devolve more accountability and decision-making to the front line by giving customer-facing leaders in operations and sales a strong mandate and more focused support and tools to build strong, mutually beneficial relationships with our customers. It also means we need to shift our deeply ingrained habits and beliefs so that we are able to move our story on from being about a declining letters business to a growing parcels business that embraces the future and can respond quickly and confidently to changing customer needs.

We are making good progress towards meeting these aims. Ultimately, in a highly competitive marketplace we want to be distinguishable from the competition with a reputation for going the extra mile for our customers and for being the best place to work.

Our focus must necessarily be on maintaining and enhancing shareholder value. That has many challenges in our current operating environment but it also one with several opportunities available as we reposition our business to one focused on packages and parcels. Similarly, the financial services business, with the introduction of new owners and availability of capital, will now be able to more actively pursue market opportunities.

Both businesses are focussed on continuing to transform themselves into much more digitally led businesses and, in doing so, improve the customer experience and quality of their respective services to the market.

This is New Zealand Post’s fourth report applying the International Integrated Reporting Council (IIRC) Integrated Reporting Framework. We were a participant in the IIRC pilot programme and produced New Zealand’s first integrated report in 2013.

This year we have made a significant change in focusing our integrated report on the Post part of the business. By not including Kiwibank/financial services in this report, we aim to remove some of the complexity and provide greater clarity regarding the Post business model. To meet our statutory obligations as a Group, we have produced a separate annual report covering all parts of the New Zealand Post Group.

In summary, we are here to create value for our stakeholders, across our six capitals, via our strategy to address our material issues. In an effort to improve the connectivity of information contained in the report we have increased the use of icons and colour-coding (see the glossary on the back cover flap for details), to show how everything is interlinked.

At the start of each of the three performance chapters, namely Grow, Innovate and Serve, and Lower Cost the relevant material issues, capitals and stakeholders are identified. The six capitals provide a holistic view of the range of resources we rely on to run our business and deliver value.