Dr Frank Appel (CEO) about the first nine month of the year 2013
Reporting January to September 2013
Letter to our shareholders
Dr Frank Appel
Chief Executive Officer
Deutsche Post AG
11 November 2013
First nine months of 2013
In the first nine months of the current financial year, Deutsche Post DHL succeeded in holding its ground despite the fact that the economic tailwind proved to be weaker than economists had anticipated.
Whilst consolidated revenue declined slightly, we increased profit from operating activities by 7.5% to around €2.0 billion. I would like to draw particular attention to the fact that the most important growth trends for our business – those of the parcel business and the international express business – remain intact.
Revenue in the MAIL division saw an encouraging rise. However, major currency effects led to the reported revenue trend for the DHL divisions creating a more negative impression than was actually the case: revenue in the EXPRESS and SUPPLY CHAIN divisions was down slightly on the previous year, even though the operating business performed well.
Operating cash flow again improved markedly, totalling around €1.4 billion. Furthermore, the Group’s good financial position is also demonstrated by the favourable refinancing conditions we are being offered on the capital market. Thus, in the third quarter we renewed a long-term credit facility early and at more favourable terms, and at the start of October we issued two bonds with a total volume of €1 billion.
Against the backdrop of our solid operating business and financial position, we are optimistic about our future performance even though the economy is still sending mixed signals. We continue to expect consolidated EBIT to reach between €2.75 billion and €3.00 billion in financial year 2013.
We are confident that this will allow us to achieve a key step on the way to reaching our targets for the year 2015.
Selected indicators for results of operations
|Profit from operating activities (EBIT)
|Return on sales1||%||4.5||4.9||4.4
|Consolidated net profit for the period2||€m
|Earnings per share3||€||0.91||1.09||0.31||0.33|
- After deduction of non-controlling interests. Prior-year amount adjusted, see Note 4.
- Basic earnings per share.
Changes in reporting and portfolio
The amendments to IAS 19 (Employee Benefits) have been required to be applied since 1 January 2013. This has in some cases significantly impacted the recognition of pension plans and partial retirement arrangements in the balance sheet and income statement. Detailed information can be found in the Notes. The prior-year amounts have been adjusted.
To improve the transparency of the balance sheet, we broke down the receivables and other current assets item on the assets side into trade receivables and other current assets. We also added the capital reserves item under equity on the liabilities side. The prior-year amounts have been adjusted.
We disposed of our domestic express business in Romania by selling our subsidiary Cargus International S.R.L. with effect from 31 March 2013. In future, our focus there will be on international business.
In the SUPPLY CHAIN division, we sold our interests in DHL Fashion (France) SAS, US company Exel Direct Inc. and ITG GmbH, Germany, together with their subsidiaries in the second quarter. All of the companies’ assets and liabilities had previously been reclassified as held for sale.
In the MAIL division, we acquired optivo GmbH, a leading German e-mail marketing services provider, on 28 June 2013. This acquisition enhances our range of services and will allow us to develop our business in this area.
We sold 50% of our shares in Deutsche Post Mobility GmbH to Allgemeiner Deutscher Automobil-Club (ADAC) in the second quarter. We have been jointly operating a coach network since October 2013 and have entered the deregulated coach market with the “ADAC Postbus”.
We acquired RISER ID Services GmbH, the market leader in electronic address registration information services, at the end of July. The company will complement the range of digital address verification services offered by the MAIL division.
Consolidated revenue down slightly on prior year
Consolidated revenue decreased by 0.8% to €40,591 million in the first nine months of the 2013 financial year (previous year: €40,935 million). The proportion of consolidated revenue generated abroad declined from 70.0% to 69.3%, primarily due to negative currency effects in the amount of €1,131 million. Changes in the portfolio reduced revenue by €193 million.
At €13,498 million, revenue was down by 2.5% in the third quarter (previous year: €13,839 million). This figure was negatively impacted by currency effects (€713 million) and changes in the portfolio (€100 million).
Other operating income declined by €156 million to €1,394 million. Provisions relating to the US express business that were no longer required had been reversed in the comparable prior-year period.
Development of revenue, other operating income and operating expenses, 9M 2013
• Growth trends in the German parcel and international express
• Air and ocean freight volumes negatively impacted by lower
|Other operating income
||• Previous year also included income from the reversal of provisions
for the US express business
||• Lower transport costs
||• Increased number of staff, mostly in the SUPPLY CHAIN division
• Higher labour costs in the MAIL division
and impairment losses
||• On a par with the previous year
|Other operating expenses
||• Previous year also included the additional VAT payment|
Lower transport costs
Materials expense decreased by €611 million to €22,925 million, primarily due to lower transport costs.
In contrast, staff costs rose by €195 million to €13,316 million. This was mainly attributable to higher labour costs in the MAIL division and the increase in the number of employees in the SUPPLY CHAIN division.
At €993 million, depreciation, amortisation and impairment losses were on a level with the previous year (€990 million).
Other operating expenses declined by €225 million to €2,775 million. The prior-year figure had been pushed up, amongst other things, by the additional VAT payment.
Consolidated EBIT improves by 7.5%
Profit from operating activities (EBIT) improved compared with the first nine months of 2012, rising by 7.5% to €1,976 million. It increased by 7.0% in the third quarter to €646 million.
Net finance costs also improved by 36.9% to €181 million. The prior-year figure was impacted by the interest expense associated with the additional VAT payment, amongst other things, whereas the gain on the Postbank disposal made a positive contribution. Interest expenses for provisions for pensions and other provisions declined during the reporting period due to lower interest rates.
Profit before income taxes improved by 15.7% to €1,795 million.
Income taxes increased from €369 million in the previous year to €395 million in the reporting period.
Consolidated net profit and earnings per share up considerably
Consolidated net profit for the period rose sharply by 18.4% to €1,400 million. €1,319 million of this amount is attributable to shareholders of Deutsche Post AG and €81 million to non-controlling interest holders. Basic and diluted earnings per share also increased, up from €0.91 to €1.09 and €1.05 respectively.
Revenue grows by 3.6%
In the first nine months of 2013, which included 0.6 fewer working days, revenue in the division was €10,484 million and therefore 3.6% higher than the prior year’s figure (€10,121 million). The figure for the reporting period includes negative currency effects of €16 million. Our operating business saw a positive development, specifically in the Mail Communication, Parcel Germany and Global Mail business units. As reported, in the first half of the year we reversed some of the provision recognised for postage stamps, which resulted in a positive effect of €50 million.
Increase in business customer letters
In the Mail Communication business unit, we delivered more letters on behalf of business customers than in the prior year. Last year, we were required by the Bundesnetzagentur (German federal network agency) to adjust the qualifying conditions for the delivery of identical invoices. As a result, we discontinued our Infobrief product. Consequently, customers have now, in part, reverted to traditional letters. Revenue in the Mail Communication business unit was €4,143 million, exceeding the adjusted prior-year figure by 6.5%. This was driven mainly by the postal rate increase at the beginning of the year, the reversal of some of the postage stamp provision as well as growth in volume owing to the discontinuation of our Infobrief product.
Mail Communication: volumes
|mail items (millions)||9M 2012
|Business customer letters
|Private customer letters
Volume declines as a result of discontinuation of Infobrief product
In the Dialogue Marketing business unit, volumes and revenue suffered in the first nine months of 2013 following the discontinuation of our Infobrief product and continued restraint in advertising expenditure amongst traditional mail-order businesses. In addition, the insolvency of our customer Neckermann had a negative impact. Revenue in the business unit decreased by 8.0% to €1,709 million in the first nine months (previous year, adjusted: €1,857 million). In the third quarter, revenue was at the prior-year level, primarily due to advertising in association with the parliamentary elections in Germany.
Dialogue Marketing: volumes
|mail items (millions)||9M 2012
|Addressed advertising mail
|Unaddressed advertising mail
Press services revenue down
In the reporting period revenue in the Press Services business unit was €540 million, 2.7% below the prior year’s figure (€555 million). The German press services market is on the decline, due mainly to lower consumer magazine circulation.
Parcel business sees sustained strong growth
In the third quarter, too, the parcel business continued to grow on account of the e-commerce market; compared with the third quarter of 2012, volumes increased by 8.7% to 238 million parcels. Revenue in the Parcel Germany business unit was €2,638 million from January to September 2013, exceeding the high prior-year figure of €2,439 million by 8.2%. We are modernising our production network continuously and improving services for our customers: advance notification of parcel delivery is now provided and customers may even choose a courier delivery window, which includes evening hours.
Parcel Germany: volumes
|Business customer parcels1||591
|Private customer parcels
- Including intragroup volumes.
Retail outlets increase revenue
In the first nine months of 2013, our network, which now includes around 23,000 retail outlets and sales points, generated revenue of €643 million, representing a 3.5% increase over the prior year’s figure (€621 million).
Sustained positive performance in international mail business
In the Global Mail business unit, revenue was €1,303 million in the first nine months of 2013, exceeding the prior year’s figure (€1,216 million) by 7.2%, due mainly to strong growth in the B2C business in the United States and consistent growth in the export business. Year-on-year volumes in Europe were down, which was due mainly to the discontinuation in the previous year of our domestic business in the UK.
Mail International: volumes
|mail items (millions)||9M 2012
Earnings improvement slowed by rising costs
EBIT in the division was €866 million for the first nine months of 2013, 28.1% above the adjusted prior-year figure (€676 million). This figure includes a positive effect from the reversal of some of the provision recognised for postage stamps. In addition, the previous year was affected adversely by the additional VAT payment of €151 million. Higher material and, above all, labour costs slowed an improvement in earnings noticeably. Return on sales was 8.3%, exceeding the prior year. Operating cash flow increased sharply from €–30 million to €612 million, which, in addition to improved EBIT, was due mainly to a lower change in the provisions and a one-time effect from the termination of a factoring programme in the prior year. Working capital was €–396 million and therefore above the prior year’s figure (€–489 million).
Operating business continues to perform well
In the first nine months of 2013, revenue in the division was €9,386 million, slightly below the prior year’s figure of €9,436 million, which still included revenues of €70 million related to the divested domestic express business in Australia, New Zealand and Romania. Excluding these divestments and considerable negative currency effects of €341 million, revenue grew by 3.8%.
In the Time Definite International (TDI) product line, per-day shipment volumes rose further by 8.4% compared with the first nine months of the previous year. Growth in the third quarter amounted to 8.0%. Daily revenues for the first nine months of the year increased by 6.3% and by 6.7% in the third quarter.
We also saw continued encouraging growth in the Time Definite Domestic (TDD) product line: per-day shipment volumes for the first nine months of the year increased by 9.2% and in the third quarter by 8.7%. Daily revenues rose by 7.1% in the period from January to September.
For reasons of materiality, we have no longer reported the Day Definite Domestic (DDD) product line separately since the first quarter of 2013.
EXPRESS: revenue by product
|€m per day1
|Time Definite International (TDI)||33.3
|Time Definite Domestic (TDD)2||4.2
- To improve comparability, product revenues were translated at uniform exchange rates. These revenues are also the basis for the weighted calculation of working days.
- The daily revenues of the previous year were adjusted to reflect the divestment of the domestic express business in Australia and New Zealand.
EXPRESS: volumes by product
|thousands of items per day1
|Time Definite International (TDI)||580
|Time Definite Domestic (TDD)||736
- To improve comparability, product revenues were translated at uniform exchange rates. These revenues are also the basis for the weighted calculation of working days.
Sustained revenue and volume growth in the Europe region
Revenue in the Europe region increased by 4.8% to €4,330 million in the reporting period (previous year: €4,132 million). The figure still included revenues of €10 million related to the domestic express business in Romania, which was sold in the first quarter. Excluding this sale and negative currency effects of €55 million related mainly to our business activities in Switzerland, the UK, Russia, Turkey and several countries in Eastern Europe, revenue growth was 6.4%. In the TDI product line, our customers sent 8.7% more shipments per day than in the prior year.
International shipment volumes up again in the Americas region
In the Americas region, revenue was €1,666 million in the first nine months of 2013, a slight decrease of 0.5% on the previous year (€1,674 million). The figure for the reporting year includes negative currency effects of €83 million related mainly to our business activities in Venezuela and the United States as well as those in Canada and other central and south American countries. Excluding these effects, revenue in the region increased by 4.5%. The per-day shipment volumes in the TDI product line increased by 6.3% in the first nine months of 2013.
Stable growth momentum in the Asia Pacific region
In the Asia Pacific region, revenue totalled €3,171 million in the first nine months of 2013, almost on a par with the prior-year level of €3,180 million. In the previous year this figure still included revenues related to the disposals mentioned above in the amount of €60 million. Excluding these divestments and significant negative currency effects of €169 million, which related mainly to Japan and India, revenue grew by 6.9% year-on-year. The per-day shipment volumes in the TDI product line were up by 9.1% in the reporting period.
Volumes in the MEA region increase again
In the MEA region (Middle East and Africa), revenue in the first nine months of 2013 was €695 million and thus 3.7% below the prior year’s figure of €722 million. The figure for the reporting period includes negative currency effects of €39 million. Excluding these effects, the business grew by 1.7% on the previous year. The per-day shipment volumes in the TDI product line grew by 8.4%.
Third-quarter EBIT improves by 13.9%
EBIT in the division was €813 million for the first nine months of 2013, 2.0% below the adjusted prior-year figure of €830 million. The prior-year figure included one-time effects, making a positive impact on earnings to the tune of €113 million. The EBIT figure for the reporting period includes a €12 million deconsolidation gain on the divestment of the domestic express business in Romania. Excluding these effects, earnings in the first nine months of 2013 improved considerably by 11.7%, even increasing by 13.9% in the third quarter to €263 million (previous year, adjusted: €231 million). Improved cost management contributed significantly to this.
Return on sales in the first nine months of the year amounted to 8.7% (previous year, adjusted: 8.8%) and in the third quarter 8.5% (previous year: 7.3%). Excluding the one-time effects mentioned above, return on sales for the period from January to September 2013 increased to 8.5% (previous year: 7.6%).
Thanks to increased profitability and further optimised working capital management, we increased the division’s operating cash flow in the first nine months of 2013 by 45.5% to €883 million.
Freight forwarding business remains in decline
Revenue in the division decreased by 5.4% to €11,049 million in the first nine months of 2013 (previous year: €11,677 million). This figure includes negative currency effects of €307 million. The freight forwarding business continued to experience a decline. In the third quarter, revenue was €3,712 million, 7.6% below the prior-year period (€4,018 million). The third-quarter figure includes negative currency effects of €207 million.
In the Global Forwarding business unit, revenue decreased by 7.7% to €7,996 million in the first nine months of 2013 (previous year: €8,662 million). Excluding negative currency effects of €297 million, the decline was 4.3%. Gross profit decreased by 4.5% to €1,882 million (previous year: €1,970 million).
Our strategic New Forwarding Environment (NFE) project continues to make good progress. The aim is to introduce a forward-looking operating model with efficient processes and state-of-the-art IT systems in the near future. The project will be rolled out in the first country in the current financial year.
Revenues and volumes decrease in air and ocean freight
In the Global Forwarding business unit, revenues and volumes declined year-on-year in the first nine months of 2013. Fuel prices remained high whilst freight rates increased slightly on the market.
Our air freight volumes in the first nine months of 2013 were 5.7% below the prior-year figure, due primarily to a decline in demand from several large customers in both the Technology and Engineering & Manufacturing sectors. Although higher freight rates were announced, short-term purchases on the spot market kept rates stable. Airlines are expanding their passenger capacities by putting new aircraft into operation. However, freight capacities are being reduced significantly and selectively in order to drive up the rates. Our air freight revenue in the period from January to September 2013 declined by 11.3%. Gross profit decreased by 11.9% as a result.
Ocean freight volumes decreased by 1.8% in the first nine months. The intra-Asian routes continue to record the highest volumes, although they declined slightly year-on-year. Exports from Europe remain stable, whilst demand on the north-south routes is increasing. The rates on the east-west trade lanes remain volatile. Ocean carriers are responding to supply and demand by putting new ships into operation, limiting the effective capacity and adjusting travel speed. Our ocean freight revenue in the first nine months of 2013 declined by 4.7%; gross profit decreased by 1.4%.
The industrial project business (reported as part of Other in table "Global Forwarding: revenue") saw somewhat weaker development compared with the first nine months of 2012. Discontinuing the unprofitable part of our ship charter business in China last year resulted in a drop in revenue, which could, however, be offset partially by the addition of new profitable business. The share of revenue related to industrial project business and reported under Other was 38.3% and therefore on a par with the prior-year figure of 38.4%. Gross profit improved by a single-digit percentage compared with the prior year.
Global Forwarding: revenue
Global Forwarding: volumes
| of which exports
- Twenty-foot equivalent units.
- Q1 2013 adjusted: 658 TEUs.
Slight revenue growth in European overland transport business
In the Freight business unit, revenue increased by 1.4% to €3,153 million in the first nine months of 2013 (previous year: €3,111 million), in spite of negative currency effects of €11 million and 0.9 fewer working days. Business grew primarily in Germany, Turkey, France, the Netherlands and Belgium, as well as in some eastern European countries. As a result, we were able to more than offset revenue declines in Scandinavia, Italy, Austria, Portugal and Switzerland. Gross profit improved slightly by 0.6% to €861 million in the reporting period (previous year: €856 million).
EBIT at prior-year level despite lower gross profit margins
EBIT in the division was €344 million, nearly on a par with the adjusted prior-year figure of €347 million. Whilst gross profit margins declined, efficiency increased and the relationship between gross margin and EBIT improved. As in the previous year, earnings included expenses for the NFE project. Return on sales improved slightly to 3.1% (previous year: 3.0%).
In the third quarter of 2013, EBIT reached €127 million, exceeding the prior year’s figure by 4.1%.
Net working capital increased in the first nine months of 2013, leading to an operating cash flow of €275 million (previous year: €410 million).
Revenue growth impacted by negative currency effects
In the first nine months of 2013, revenue in the division decreased slightly by 0.4% to €10,565 million (previous year: €10,607 million). In the reporting period, we disposed of our investments in three businesses (see Earnings), which were no longer considered to be core activities. This reduced revenue by €123 million. Excluding these disposals and considerable negative currency effects of €481 million, revenue grew by 5.3%. The main currency effect came from the appreciation of the euro against the pound sterling. In the third quarter, revenue decreased by 3.8% year-on-year to €3,532 million (previous year: €3,670 million). Excluding the effects mentioned above, revenue growth was 6.6%.
Asian supply chain business continued to record highest revenue growth
In the first nine months of 2013, revenue in the Supply Chain business unit was €9,596 million and on a par with the prior-year level (€9,609 million). Excluding business disposals and high negative currency effects, growth was 5.7%. The largest revenue increases were seen in the Life Sciences & Healthcare, Automotive, Consumer and Technology sectors along with significant growth in Airline Business Solutions. Revenue from the top 20 customers increased by 4.8%.
In the Americas region, revenues in all focus sectors improved on the prior-year period. Additional volume and new business increased revenue in the major sectors Consumer, Life Sciences & Healthcare and Automotive. The strongest revenue growth was seen in the Technology sector – principally in Latin America.
The largest percentage revenue increase was achieved again in the Asia Pacific region, primarily in Australia, China and Thailand. Revenue growth in Australia resulted from additional volumes and new business, above all in the Consumer, Life Sciences & Healthcare and Technology sectors, as well as from Airline Business Solutions. In China, revenue increased significantly in the Consumer and Technology sectors. We grew in Thailand as a result of new business and higher volumes in the Automotive, Consumer and Retail sectors.
In Europe, volumes in the Automotive sector and in Airline Business Solutions increased on account of higher end-customer demand. Revenue in the Life Sciences & Healthcare sector improved due to additional business with the UK National Health Service. The economic environment adversely affected business in other parts of Europe.
Revenue in the Williams Lea business unit was €974 million in the first nine months of 2013, a decrease of 2.6% on the previous year (€1 billion). Excluding negative currency effects, revenue increased by 1.7%. Additional activity and the start of new contracts were partly offset by lower volumes in the banking and legal sectors as well as some contract losses.
New business worth around €1,130 million contracted
In the first nine months of 2013, the Supply Chain business unit concluded additional contracts worth around €1,130 million in annualised revenue with both new and existing customers. Substantial signings were secured with major customers in the Consumer, Retail, Life Sciences & Healthcare and Technology sectors. The annualised contract renewal rate remained at a consistently high level.
Earnings impacted adversely by business disposals and one-time effects
EBIT in the division was €263 million in the first nine months of 2013 (previous year, adjusted: €303 million). This figure includes expenses associated with the business disposals as well as initiatives aimed at reducing indirect costs and improving future margins predominantly in Europe. Earnings suffered from contract losses and the first-quarter charges associated with the Chapter 11 insolvency filing of a major Williams Lea customer based in the United States. The further improved management of our contract portfolio and strong performance in the Americas and Asia Pacific regions offset lower volumes and margin pressure in other markets. The EBIT margin declined to 2.5% (previous year: 2.9%) due to the one-time charges mentioned. In the third quarter, EBIT amounted to €100 million (previous year, adjusted: €110 million), the highest quarterly performance of the current financial year. Operating cash flow for the first nine months of 2013 increased from €157 million in the previous year to €261 million.
Revenue and earnings forecast
Expectations regarding how the global economy will perform in 2013 remain cautious and at the lower end of the long-term trend. Overall, growth is likely to be similar to that of the previous year. The global trading volumes relevant to our business are expected to perform similarly. We are therefore anticipating a corresponding trend, with increasing revenue, particularly in the DHL divisions.
We continue to expect consolidated EBIT to reach between €2.75 billion and €3.00 billion in financial year 2013. The MAIL division is likely to contribute between €1.15 billion and €1.25 billion to this figure. Compared with the previous year, we expect an additional improvement in overall earnings to between €2.00 billion and €2.15 billion in the DHL divisions. At around €–0.4 billion, the Corporate Center/Other result should be on a par with the previous year.
In line with our Group strategy, we are targeting organic growth and anticipate only a few small acquisitions in 2013, as in the previous year. In 2013, operating cash flow will recover from the one-time charges of the previous year and benefit from the expected earnings improvement.
Even in the face of an uncertain economic climate, particularly in the western economies, we believe that the Group will experience good earnings momentum. We expect a similarly positive business trend in 2014 as another step towards the earnings targets we defined for 2015. The cost reduction measures and growth programmes initiated in the MAIL division are expected to keep EBIT stable at €1 billion at the least, even though letter volumes are likely to continue their slow decline due to electronic substitution. For the DHL divisions, we expect EBIT – taking the earnings contribution in 2010 as the baseline – to improve at an annual average of 13% to 15% in the period from 2011 to 2015 as trading volumes continue to recover.
Our finance strategy calls for paying out 40% to 60% of net profits as dividends as a general rule.