Government Operations Committee on May 31st, 2022

[The Chair (Mr. Robert Kitchen (Souris—Moose Mountain, CPC)), Conservative, Robert Gordon Kitchen]

Welcome to meeting number 22 of the House of Commons Standing Committee on Government Operations and Estimates. We'll be hearing today from representatives of Canada Post. We will also discuss committee business during the last 30 minutes of the meeting.

Today's meeting is taking place in a hybrid format pursuant to the House order of November 25, 2021. Members are attending in person in the room and remotely using the Zoom application.

Regarding the speaking list, the committee clerk and I will do the best we can to maintain a consolidated order of speaking of all members, whether participating virtually or in person.

I would like to take this opportunity to remind all participants to this meeting that screenshots and taking photos of your screen are not permitted.

Given the ongoing pandemic situation, in light of the recommendations from public health authorities as well as the directive of the Board of Internal Economy on October 19, 2021, to remain healthy and safe the following is recommended for all those attending the meeting in person.

Anyone with symptoms should participate by Zoom and not attend the meeting in person. Everyone must maintain two-metre physical distancing, whether seated or standing. Everyone must wear a non-medical mask when circulating in the room. It is recommended in the strongest possible terms that members wear their masks at all times, including when seated. Non-medical masks, which provide better clarity over cloth masks, are available in the room.

Everyone present must maintain proper hygiene by using the hand sanitizer at the room entrance. Committee rooms are cleaned before and after each meeting. To maintain this, everyone is encouraged to clean surfaces, such as the desk, their chair or their microphone, with the provided disinfectant wipes when vacating or taking a seat.

As the chair, I will be enforcing these measures for the duration of the meeting, and I thank members in advance for their co-operation.

With that, I would like to welcome our witnesses here today. I appreciate your bearing with us, as we had to deal with the votes. At this point, you have seven minutes to make some opening statements.

[Rindala El-Hage, General Manager, Financial Controller, Canada Post Corporation]

Good afternoon.

Thank you to the chair and to the committee members for inviting us to join you today to talk about Canada Post finances.

I know that my colleagues, Manon Fortin and Serge Pitre, appeared before the committee in February of this year to answer many of your questions about service.

My name is Rindala El-Hage. I am the general manager and financial controller at Canada Post. I am joined by my colleague Nathalie Séguin, general manager, finance business partner. Together, we hope to answer your questions regarding Canada Post financing and the important investments our company is making.

First, I would like to share some important context that will be helpful for our discussion today.

Our company understands the important role we play in the lives of Canadians. Over our long history, we’ve constantly evolved to meet the changing needs of Canadians and businesses.

We proudly serve all corners of the country—the urban centres, the rural towns, remote communities and the far north. We’re the only delivery organization with the network, and the commitment, to serve all Canadians.

We have a retail network of nearly 6,000 post offices and an incredible team of more than 68,000 employees, who are dedicated to serving the communities they live and work in. But to truly serve all Canadians, we know the postal service must also respond to the changes in society and reflect the country we serve.

This requires us stretching beyond our traditional role and viewing our responsibility to the country through a wider lens.

In 2021, Canada Post built an ambitious transformation plan. It strategically positions us for the future by putting the needs of Canadians first. This new plan has one purpose: a stronger Canada—delivered.

Our new plan is designed to respond to the fundamental changes that we’ve seen across the country over the last two years.

Canadians are buying more online than ever before. It went from a necessity during lockdown to a lifestyle game-changer. The needs of Canadians are quickly changing, and businesses are working hard to adjust to this new reality. We're responding to this urgent need by boosting our capacity, improving service and much more. Our plan means that we will play a meaningful role in their lives for years to come. At the same time, we're committed to showing leadership on key issues, helping make Canada greener, stronger and more inclusive.

Above all, we're investing in our employees. Canadians see them as an essential part of their communities. They do an incredible job, and we are focused on their safety and other needs.

Our transformation plan demonstrates leadership that Canadians expect, and it includes important investments that our country needs. Some of these critical investments are reflected in our 2021 financial results, which I will now discuss.

In 2021, the Canada Post segment recorded a loss before tax of $490 million, as higher costs partially offset revenue growth across all lines of business. The loss for 2021 was an improvement from a loss before tax of $779 million in 2020.

It’s important to note that year-over-year comparisons for our 2021 results are affected by COVID‑19, which had different impacts on the lines of business the previous year.

In 2021, revenue for the Canada Post segment increased by $407 million, or 6.3%, compared to 2020.

Our cost of operations increased by $127 million, or 2%, in 2021, compared to the previous year. Cost increases were largely driven by higher labour costs and an increase in non-labour collection, processing and delivery costs.

We also invested in operational capacity to support the growth in online shopping and modernize our retail network of post offices.

I'll now share a bit more detail on the results for each of our lines of business. In 2021, parcel revenue increased by $238 million, or 7.4%, while volumes fell by 28 million pieces, or 7%, compared to the prior period, when volumes surged. The reopening of stores for in-person shopping also had an impact on domestic parcel volumes in the second half of 2021.

Transaction mail revenue grew by $10 million, or 0.8%, as volume fell by 62 million pieces, or 2%, compared to the previous year. The 2021 revenue growth was atypical, partly due to the mailings for the federal election and census. Overall, transaction mail continues to erode as consumers and mailers migrate to digital alternatives.

Due to COVID-19, Canada Post maintained regulated stamp prices at 2020 levels through 2021.

Direct marketing partially recovered in 2021 following significant declines in our personalized mail and neighbourhood mail services in the prior year, when customers postponed or cancelled marketing campaigns due to COVID-19. In 2021, direct marketing revenue grew by $113 million, or 14.4%, while volumes increased by 595 million pieces, or 18.4%, compared to the previous year. While some retailers experienced global supply chain issues in the second half of 2021, personalized mail and neighbourhood mail revenue and volumes began to recover in 2021 with the gradual return to in-person shopping.

Canada Post has a long-standing mandate to maintain financial self-sustainability while serving all Canadians. We believe that our new transformation plan will help build Canada Post for the future and put us on a path to financial self-sustainability.

The needs of Canadians have changed dramatically during the pandemic. Online sales in Canada nearly doubled in the last two years. Canadians expect more, and businesses of all sizes need us to be there for them.

We’re responding by investing to expand capacity, improve service and innovate our operations. Our plan will see us increase parcel capacity by more than 50% over the next seven years to manage the forecasted growth in online shopping beyond 2030.

Our immediate focus must continue to be on the investments and improvements needed to meet the changing needs of Canadians and support businesses of all sizes. Financial self-sustainability remains our goal, and we fundamentally believe that our transformation plan—along with our amazing people—will help get us there.

In closing, I want to say how proud Canada Post is to serve the people, businesses and communities that make this country strong. Their needs are at the heart of everything we do. We are the only organization serving all 17 million residential and business addresses across Canada.

It's a tremendous responsibility, and one we have never felt more than in the past two years. Canadians from coast to coast to coast have changed, and we are changing with them. As Canada continues to evolve, so will Canada Post.

Thank you, and we look forward to our discussion.

[The Chair, Conservative, Robert Gordon Kitchen]

Thank you very much for your presentation.

We'll now go into some questions, and we'll start with Mr. McCauley, for six minutes.

[Kelly McCauley, Conservative, Edmonton West, AB]

Thanks, Mr. Chair, and welcome, witnesses.

In the first quarter for Canada Post, your loss was $100 million compared to $19 million last year. What's happening to make the results worse from last year, considering the country is coming out of the pandemic and switching back to a more open corporate environment?

[Rindala El-Hage]

We recently released our quarter results for Q1 of 2022. You are right that the Canada Post segment reported a loss before tax of $129 million. That loss deepened by $52 million compared to 2021. Really, the main difference was revenue falling by about $125 million versus the first quarter of 2021.

The larger component is parcel revenue. To better appreciate that, we know that in the first quarter of 2021 we still had exceptionally high volume levels in our parcel line of business due to post-holiday online shopping and returns, because stores were still closed due to the pandemic.

The volumes were a lot higher in the first quarter of 2021 compared to this year. We are also facing limited inbound air transportation capacity and global supply chain issues, which also negatively impact our parcel volume and revenue.

[Kelly McCauley, Conservative, Edmonton West, AB]

Most of the loss was from a drop in addressed mail, was it not?

[Rindala El-Hage]

Most of the revenue difference year over year is really in the parcel line of business. We did see a decrease in our inbound parcel revenue, as well.

When we look at our—

[Kelly McCauley, Conservative, Edmonton West, AB]

Sorry, I'm going to interrupt and move on, because I have a bunch of questions.

Your executive summary states that Canada Post's long-term financial sustainability is at risk. Can you expand on that a bit?

[Rindala El-Hage]

Our mandate is always focused on financial sustainability. However, we are very well aware that we need to make significant investments to create capacity and modernize our operation to enhance our cost competitiveness. We need to increase our service to Canadians in order to remain a competitive player in a very fierce market. We definitely need to focus, and our focus more than ever is on the transformation plan that we launched in 2021 to get us to a path of financial self-sustainability.

[Kelly McCauley, Conservative, Edmonton West, AB]

Right. I appreciate that, but I don't think I've seen before in the executive summary that you've been so blunt about the sustainability being at risk. Is there a reason it's been put in this executive summary?

[Rindala El-Hage]

It's because we launched our transformation plan at the end of 2021. This is the first time that we are committed. We are very well aware that without this transformation plan.... It is really geared around our service and capacity, providing environmental and social leadership, and doing right by our people. We are very keenly aware that we need to invest in this plan and execute on it in order to—

[Kelly McCauley, Conservative, Edmonton West, AB]

Let me get into the details a bit more. What is the plan to address the risk and increase the financial sustainability?

Some of the items you mentioned are more of the soft, ESG-type issues, but they don't help competitive, they don't help cost and they don't help increase the business or the cash flow. What exactly is the plan to increase the long-term sustainability financially?

[Rindala El-Hage]

We are investing $4 billion over the next five years in improving service and increasing capacity. We are planning to increase our parcel capacity by over 50% over the next seven years.

One example is the $470-million investment that we've made into our Albert Jackson processing centre in Toronto, which will be able to process one million packages a day. That is 50% more than Gateway. It is the largest industrial project in Canada with a zero-carbon building.

We realize that online e-commerce is going to increase. The online sales in Canada—

[Kelly McCauley, Conservative, Edmonton West, AB]

Let me interrupt you on that point. You're investing in what is, according to all your reports, the low profit margin areas of the business, and we understand that's where the growth is.

What is the forward-looking reduction that we're going to see in the high-profit addressed mail? How is that going to correspond with your planned 50% increase in parcel capacity? Would the increase in the low-margin parcel capacity make up for the losses in the addressed mail?

[Rindala El-Hage]

According to our 2021 annual report, in which we publish our annual cost study, the contribution margin for our exclusive privilege—you mentioned transaction mail as part of that—was 39%. The contribution margin for our competitive services, to your point, is lower, at 25%. The competitive services include parcels.

If I were to give you some historical volumes, parcel volumes in 2019 were—

[Kelly McCauley, Conservative, Edmonton West, AB]

I'm more interested in moving forward and looking forward, and what the numbers will be or what you're projecting looking forward for how they're going to offset.

[Rindala El-Hage]

At this point, what I can tell you is that the contribution margin for competitive services is lower than our exclusive privileges. However, let's not forget that it is still profitable. It is absolutely a profitable business, and it is an area in which we need to capitalize on the growth we are expecting to see in Canada.

Online sales are expected to top $100 billion in 2025, so we need to ensure that our capacity increases in order to be able to grab those increased market shares. We want to improve our service. We want to modernize our operations and, with that, ultimately improve our margin performance.

[The Chair, Conservative, Robert Gordon Kitchen]

Thank you.

We'll now go to Ms. Thompson for six minutes.

[Joanne Thompson, Liberal, St. John's East, NL]

Thank you, Mr. Chair, and thank you to the witnesses.

I'm going to switch to the “think small” campaign. In 2020, you launched this to support small businesses during the first wave of COVID-19. You won two Canadian Marketing Association awards.

I'm really interested to hear about the supports that were offered to businesses, when it ended and what you feel are the outcomes from the “think small” campaign.

[Rindala El-Hage]

We are very much focused on our small and medium businesses. They are part of the clients we serve across our network, and most often, that's the first face they see at Canada Post. We are seeing extremely positive results. We did a lot with them in 2021.

I'm going to turn to my colleague, Madame Séguin, so she can help me answer specifically the questions around our small and medium businesses.

[Nathalie Séguin, General Manager Finance Business Partner, Canada Post Corporation]

Thank you so much, Rindala.

To echo your thought—again, I don't have all the details—with our small businesses, we're also piloting what we call a small “community hub” to improve access and help local small businesses connect with their customers. It's not cookie-cutter, but we've worked with all the communities and the union to determine how we can best serve local customers and small businesses.

It's part of Canada Post's ongoing effort to meet Canadians' changing needs and expectations, and to continue to build a stronger Canada together.

[Joanne Thompson, Liberal, St. John's East, NL]

As a follow-up, how many businesses were supported through the campaign?

[Rindala El-Hage]

It's a great question. I don't have that information at my fingertips, but we are very happy to follow up with the committee with that information.

[Joanne Thompson, Liberal, St. John's East, NL]

Thank you.

I could switch to staffing, for whichever one of you would like to answer.

In February 2022, the interim CEO told this committee that, “Staffing and coverage have often been a challenge, but more at the local level—not widespread.” In April 2022, Canada Post indicated that it was “experiencing a limited impact on staffing” as a result of COVID-19, and while it was implementing a contingency plan, “customers may experience delays.”

Would you like to update us on this, please? What is the current status of staffing impacts, and what is your contingency plan? Moving forward, do you have a plan to mitigate any challenges into the future?

[Rindala El-Hage]

Throughout COVID and earlier this year, I understand that we experienced situations in which some local post offices were impacted due to staffing issues. Those were in pockets and not necessarily across our network. They were short-term, localized situations. I don't have specific numbers about any particular area, but we understand that it is a relatively small number overall. However, it is unfortunate that it happens. Every impact to service is very important to us.

With a national network of over 6,000 post offices, local staffing issues can occur for myriad reasons. We are therefore experienced at responding and providing services, and we have contingency plans in place. We often look to ensure that we are providing the service that the particular community needs. I'm very well aware that the retail team works very hard to ensure that we can maintain services to communities when they are impacted by staffing.

We are therefore regularly hiring. We undertake a constant hiring process to ensure that we have the proper staffing levels, but let's not kid ourselves: We are facing the same challenges as every other employer in Canada. We are doing our best to mitigate any negative impact that this could have on service. If you have a particular area of concern in mind, please let us know. We'll be happy to follow up with specific details.