Lawrence Rosen (CFO) about the first half of 2013
Reporting January to June 2013
Letter to our shareholders
Dr Frank Appel
Chief Executive Officer
Deutsche Post AG
5 August 2013
First half of 2013
As expected, the economic environment generated no real impetus in the first half of 2013. For this reason, I am all the more pleased that Deutsche Post DHL increased its profitability, which is also reflected in an improvement in operating cash flow.
Although revenue in the first half of 2013 remained on a par with the prior year at €27.1 billion, consolidated EBIT grew by an encouraging 7.8% to €1.3 billion.
Operating cash flow – to which we have been paying particular attention since the beginning of the year – improved significantly to €621 million. I regard this as a very positive development and indeed evidence of the Group’s good financial position.
In the MAIL division, our operating business performed well overall and the growth trend in the parcel business continues uninterrupted. In the EXPRESS division, we saw an encouraging increase in volumes in our global network. Revenue growth in the other DHL businesses was affected adversely – as a result of the decline in demand in certain sectors in the GLOBAL FORWARDING, FREIGHT division and currency effects and portfolio adjustments in the SUPPLY CHAIN division.
It remains to be seen whether the economic recovery forecast by economists will actually materialise in the second half of the year. In principle, we are maintaining our earnings forecast for financial year 2013; however, we are raising it slightly due to the one-time effect recorded in the MAIL division in the second quarter from the reversal of some of the provision recognised for postage stamps: we now expect consolidated EBIT to reach between €2.75 billion and €3.00 billion.
We are confident that we shall achieve the goals we have set by building on our sustained solid financial foundation.
Selected indicators for results of operations
|Profit from operating activities (EBIT)
|Return on sales1||%||4.6
|Consolidated net profit for the period2||€m
|Earnings per share3||€||0.60
- 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. In future, we plan to jointly operate a coach network and enter the deregulated coach market with the “ADAC Postbus”.
Consolidated revenue on a par with prior year
Consolidated revenue was €27,093 million in the first half of 2013 and therefore on a level with the prior year (€27,096 million). The proportion of consolidated revenue generated abroad declined from 69.5% to 69.1%, with negative currency effects accounting for €418 million of this decrease. The figure for the previous year included €93 million related to the divested activities in the EXPRESS and SUPPLY CHAIN divisions.
At €13,649 million, revenue in the second quarter was €83 million lower year-on-year (previous year: €13,732 million). Currency effects had a negative impact of €333 million, whilst changes in the portfolio had a negative effect of €60 million.
Other operating income declined by 18.3% from €1,139 million to €930 million in the first half of the year. 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, H1 2013
• Growth trends in the German parcel and international express
• Decline in demand in certain sectors had a negative impact on
|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
||• Slight increase due to higher investments in the past
|Other operating expenses
||• Previous year also included the additional VAT payment|
Lower transport costs
Materials expense decreased by €249 million to €15,239 million, due especially to lower transport costs.
In contrast, staff costs rose by €207 million to €8,994 million. This was mainly attributable to the increase in the number of employees in the SUPPLY CHAIN division and higher labour costs in the MAIL division.
At €655 million, depreciation, amortisation and impairment losses were €8 million higher year-on-year.
Other operating expenses declined by €274 million to €1,805 million. The prior-year figure had been pushed up in particular by the additional VAT payment.
Consolidated EBIT improves by 7.8%
Profit from operating activities (EBIT) improved compared with the first half of 2012, rising by 7.8% to €1,330 million.
Net finance costs also improved by 53.9% to €83 million. The previous year’s 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 18.3% to €1,247 million.
Income taxes decreased from €283 million in the previous year to €274 million in the reporting period.
Consolidated net profit and earnings per share up considerably
Consolidated net profit for the period rose sharply by 26.2% to €973 million. €920 million of this amount is attributable to shareholders of Deutsche Post AG and €53 million to non-controlling interest holders. Basic and diluted earnings per share also increased, up from €0.60 to €0.76 and €0.73 respectively.
Revenue grows with fewer working days
In the first half of 2013, revenue in the division was €7,045 million and therefore 2.9% higher than the prior year’s figure of €6,845 million, despite 1.6 fewer working days. Negative currency effects of €4 million were recorded in the reporting period. Our operating business performed well overall, driven by the Mail Communication, Parcel Germany and Global Mail business units. In addition, 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 our business customers than in the first half of 2012. 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. Instead, customers now partially send classic letters. Revenue in the Mail Communication business unit was €2,804 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 volumes owing to the discontinuation of our Infobrief product.
Mail Communication: volumes
|mail items (millions)||H1 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 half 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 11.5% to €1,121 million in the first half of the year (previous year, adjusted: €1,267 million).
Dialogue Marketing: volumes
|mail items (millions)||H1 2012
|Addressed advertising mail
|Unaddressed advertising mail
Press services revenue down
Revenue in the Press Services business unit was €371 million in the reporting period, 2.9% below the prior year’s figure of €382 million. The German press services market continues to decline, consumer magazine circulation, in particular.
Growth trend in parcel business uninterrupted
In the second quarter of 2013, the parcel business again saw solid revenue growth of 8.8% year-on-year, which even surpassed the strong start to the year. Revenue in the Parcel Germany business unit in the first half of 2013 was €1,770 million, exceeding the high prior-year figure of €1,641 million by 7.9%. We are continuously improving services for our customers. In order to be available almost everywhere, we are significantly increasing the number of parcel drop-off points: by the end of 2014, we shall open around 20,000 additional Paketshops and as a result offer more than 50,000 parcel drop-off points nationwide in Germany in future.
Parcel Germany: volumes
||H1 2012||H1 2013
||Q2 2012||Q2 2013
|Business customer parcels1||398
|Private customer parcels
- Including intragroup volumes.
Retail outlets increase revenue
In the first half of 2013, our current network of around 20,000 retail outlets and sales points generated revenue of €428 million, which represents a 3.4% increase over the prior year’s figure of €414 million.
Positive performance in international mail business
In the Global Mail business unit, revenue was €877 million in the first half of 2013, exceeding the prior year’s figure of €813 million by 7.9%, due mainly to increased volumes in B2C business in the United States and the continued positive trend in exports. In Europe, year-on-year volumes were down, which was due mainly to the previous year’s sale of our domestic business in the UK.
Mail International: volumes
|mail items (millions)||H1 2012
Rising costs impact earnings
We were unable to fully compensate for the negative impact on operating earnings resulting from increased material and labour costs, the expansion of our parcel network as well as the loss of 1.6 working days. EBIT in the division was €605 million in the first half of the year, 40.7% above the adjusted prior-year figure of €430 million. However, 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. Return on sales was 8.6%.
Operating cash flow increased considerably from €26 million to €385 million, which, in addition to improved EBIT, was due, in part, to the one-time effect from the termination of a factoring programme in the prior year. Working capital was €–413 million and therefore above the level of the prior year (€–774 million).
Revenues and volumes up year-on-year
In the first half of 2013, revenue in the division grew slightly to €6,274 million (previous year: €6,264 million), although there were 1.4 fewer working days compared with the previous year. The prior-year figure still included revenues of €65 million related to the divested domestic express business in Australia, New Zealand and Romania. Excluding these divestments and negative currency effects of €123 million, revenue grew by 3.2%.
In the Time Definite International (TDI) product line, per-day shipment volumes rose further by 8.7% compared with the first half of 2012. Growth in the second quarter amounted to 7.8%. Daily revenues for the first half of the year increased by 6.3% compared with same period last year.
We also saw continued encouraging growth in the Time Definite Domestic (TDD) product line: in the first half of 2013 our customers sent 9.6% more shipments per day than in the previous year. The increase in the second quarter amounted to 8.7%. Daily revenues rose by 7.0% in the first half of the year.
For reasons of materiality, we no longer report the Day Definite Domestic (DDD) product line separately with effect from the first quarter of 2013.
EXPRESS: revenue by product
|€m per day1
|Time Definite International (TDI)||33.5
|Time Definite Domestic (TDD)2||4.3
- 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)||583
|Time Definite Domestic (TDD)||742
- To improve comparability, product revenues were translated at uniform exchange rates. These revenues are also the basis for the weighted calculation of working days.
Revenue growth in Europe region continues
Although the economic situation in the euro zone remained weak, we increased revenue in the Europe region by 4.5% to €2,902 million in the first half of 2013 (previous year: €2,778 million). The figure still included revenues of €5 million related to the domestic express business in Romania which was sold in the first quarter. Excluding this sale and negative currency effects of €21 million related mainly to our business activities in Switzerland, the UK, Russia, Turkey and several countries in Eastern Europe, revenue growth was 5.4%. The per-day shipments in the TDI product line grew by 9.9%.
Revenue and volumes increased in the Americas region
In the Americas region, revenue rose by 1.8% in the first half of 2013 to €1,106 million (previous year: €1,086 million). This figure includes negative currency effects of €25 million related mainly to our business activities in Venezuela as well as those in the United States, Canada and Central and South America. Excluding these effects, revenue in the region increased by 4.1%. In the TDI product line, we made 6.7% more deliveries per day than in the prior-year period.
Business trend in the Asia Pacific region remains positive
In the Asia Pacific region, revenue grew slightly by 0.5% to €2,102 million in the first half of 2013 (previous year: €2,091 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 negative currency effects of €59 million, revenue grew by 6.2% year-on-year. The per-day shipment volumes in the TDI product line were up by 8.6% in the first half of 2013.
Volumes in the MEA region increased again
In the MEA region (Middle East and Africa), revenue in the first half of 2013 was €466 million and thus slightly below the prior year’s figure of €482 million. The figure for the reporting period includes negative currency effects of €20 million. Excluding these effects, the business grew by 0.8% on the previous year. Per-day shipment volumes increased again, by 7.4% in the TDI product line and by 4.6% in the TDD product line.
Prior-year EBIT benefited from high positive one-time effects
EBIT in the division was €550 million in the first half of 2013, 8.2% below the adjusted prior-year figure of €599 million. The prior-year figure included one-time effects, which had a positive impact on earnings 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 half of the year improved considerably by 10.7%; in the second quarter the figure was even higher at 16.5%. Significantly higher revenues and specifically targeted cost management contributed to this.
Return on sales in the first half of the year amounted to 8.8% (previous year, adjusted: 9.6%) and in the second quarter 9.1% (previous year: 11.3%). Excluding the one-time effects mentioned above, return on sales in the first half of 2013 improved from 7.8% to 8.6% and in the second quarter notably to 9.1% (previous year: 7.8%).
Increased operating earnings and further optimised working capital management significantly increased the division’s operating cash flow in the first half of 2013 by 67.6% to €461 million (previous year: €275 million).
Freight forwarding business declines in cautious market
Revenue in the division decreased by 4.2% to €7,337 million in the first half of 2013 (previous year: €7,659 million). This figure includes negative currency effects of €100 million. As expected, the market trend has generated no real impetus in a cautious macroeconomic environment. The freight forwarding business has experienced a decline.
In the Global Forwarding business unit, revenue decreased by 5.8% to €5,306 million in the first half of the year (previous year: €5,635 million). Excluding negative currency effects of €106 million, the decline was 4.0%. Gross profit decreased slightly by 1.4% to €1,269 million (previous year: €1,287 million).
Our strategic project NFE is making good progress. The aim is to develop and promptly introduce a forward-looking operating model with efficient processes and state-of-the-art IT systems.
Declines in air and ocean freight impact gross profit
During the reporting period, revenues and volumes decreased year-on-year – less noticeably in ocean freight but more so in air freight. Fuel prices remained high whilst freight rates increased slightly.
Our air freight volumes in the first half of the year were 5.8% below the prior-year figure, due primarily to a decline in demand in both the Technology and Engineering & Manufacturing sectors. Freight rates increased slightly; on the short-term spot market, fewer options became available than in the prior year. Airlines expanded their passenger capacities by putting new aircraft into operation; however, freight capacities were reduced significantly in some cases. Our air freight revenue in the first half of 2013 declined by 9.9%, which resulted in a 9.0% decrease in gross profit.
Ocean freight volumes fell slightly by 1.5% compared with the first half of 2012. Whilst demand stagnated on the traditional east-west trade lanes, it rose further on north-south and intra-continental routes. Ocean carriers continued to put new ships into operation, although at the same time they strictly managed the effective capacity on the market by either adjusting travel speed or limiting services. Our ocean freight revenue in the first half of 2013 decreased slightly by 0.9%; gross profit improved by 1.2%.
The industrial project business (in table Global forwarding: revenue reported as part of Other) saw stable development compared with the first half of 2012. Discontinuing 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 37.8% in the first half of 2013 and therefore slightly below the prior-year figure of 38.8%. 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.
Revenue in European overland transport business up slightly
In the Freight business unit, revenue increased slightly by 0.4% to €2,096 million in the first half of 2013 (previous year: €2,087 million), in spite of the fact that there were 1.6 fewer working days. Business growth, primarily in the Netherlands, Germany, France and the Czech Republic, contributed to this as well as a positive currency effect of €6 million. As a result, we were able to more than offset revenue declines in Scandinavia, Italy, Slovakia, Austria and the Iberian peninsula. Gross profit in the first half of the year was €579 million, which was slightly above the prior-year figure of €577 million, and driven in part by higher productivity.
EBIT declines as a result of narrower gross profit margins
Despite strict cost management and a further improvement in the relationship between gross margin and EBIT, lower gross profit margins pushed EBIT in the division down slightly in the first half of 2013, from €225 million in the previous year to €217 million. As in the previous year, this figure includes expenses for the NFE project. Return on sales improved slightly to 3.0% (previous year: 2.9%).
Net working capital improved in the first half of 2013, leading to an operating cash flow of €169 million (previous year: €164 million).
Revenue growth impacted by negative currency effects
In the first half of 2013, revenue in the division increased by 1.4% to €7,033 million (previous year: €6,937 million). In the reporting period, we disposed of our investments in three businesses, which were no longer considered to be core activities. This reduced revenue by €28 million. Excluding these disposals and negative currency effects of €196 million, revenue grew by 4.6%. In the second quarter, revenue improved by 0.6% year-on-year from €3,528 million to €3,550 million. Excluding the effects mentioned above, revenue growth was 5.6%.
Revenues and volumes up in Supply Chain’s focus sectors
In the Supply Chain business unit, revenue in the first half of the year grew by 2.0% year-on-year to €6,407 million (previous year: €6,284 million). Excluding disposals and negative currency effects, growth was 5.3%. The largest revenue increases were seen in the Automotive, Life Sciences & Healthcare and Consumer sectors along with significant growth in Airline Business Solutions. Revenue from the top 20 customers increased by 4.6%.
In the Americas region, revenues in all focus sectors improved on the prior-year period. Additional volume and new business generated 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 in the Asia Pacific region, primarily in Australia, China and Thailand. Revenue growth in Australia stemmed 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, Automotive sector and Airline Business Solutions volumes 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. Business in other parts of Europe was affected adversely by the economic environment.
Williams Lea revenue was €629 million in the first half of the year, a decrease of 4.1% on the previous year (€656 million). Excluding negative currency effects, revenue declined by 1.7%, due primarily to lower volumes in the banking and legal sectors as well as some contract losses.
New business worth around €780 million concluded
In the first half of 2013, the Supply Chain business unit concluded additional contracts worth around €780 million in annualised revenue with both new and existing customers. Substantial signings were secured with major customers in the Consumer, Retail and Technology sectors. The annualised contract renewal rate remained at a consistently high level.
Business disposals and one-time effects adversely impact earnings
EBIT in the division was €163 million in the first half of 2013 (previous year, adjusted: €193 million). This figure includes expenses associated with the business disposals as well as programmes aimed at reducing indirect costs and improving future margins. Earnings suffered from lower volumes 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 the strong performance in the Americas and Asia Pacific regions offset lower volumes and margin pressure in other markets. The EBIT margin declined to 2.3% (previous year: 2.8%) due to the one-time charges mentioned. In the second quarter, EBIT amounted to €79 million (previous year: €101 million). Operating cash flow for the first half of 2013 increased from €–60 million in the previous year to €47 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 revenue trend, with increasing revenue, particularly in the DHL divisions.
Against this backdrop, we are raising our forecast slightly for financial year 2013 due only to the one-time effect recorded in the MAIL division in the second quarter: we now expect consolidated EBIT to reach between €2.75 billion and €3.00 billion. The MAIL division is now likely to contribute between €1.15 billion and €1.25 billion to this figure. Compared with the previous year, we continue to 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 2013, we plan to invest a maximum of €1.8 billion. 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 in 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. In 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.