Lawrence Rosen (CFO) about the first quarter of 2014
Reporting January to March 2014
Letter to our shareholders
Dr Frank Appel
Chief Executive Officer
Deutsche Post AG
14 May 2014
First quarter of 2014
Deutsche Post DHL had a good start to the year, in a continued subdued economic environment. In the first quarter of 2014, we were able to increase revenue to around €13.6 billion and profit from operating activities to €726 million, despite the fact that our business continued to suffer from significant currency effects.
As announced previously, we transferred parts of the domestic parcel business outside Germany from the DHL divisions to the renamed Post - eCommerce - Parcel division at the beginning of the year. This represents an initial strategic initiative integral to the further implementation of our medium-term Group strategy. We are already the market leader in the dynamically growing parcel business in Germany. We intend to transfer this know-how to other European and non-European markets in order to become one of the leading e-commerce logistics providers globally.
The dynamic growth in the German parcel business played a key role in the encouraging increase in revenue within the Post - eCommerce - Parcel division in the first quarter of 2014. We are also witnessing continued strong growth in the international express business – with EBIT even recording double-digit growth. In the SUPPLY CHAIN division, where we have recently generated a high level of new business, revenue growth continued to be impacted by severe currency effects. As expected, revenue and earnings in the GLOBAL FORWARDING, FREIGHT division declined in a sustainedly weak market. The planned higher expenses for the NFE project played a role in this.
We are confirming our forecast for full-year 2014 and we continue to expect consolidated EBIT to reach between €2.9 billion and €3.1 billion. The Post - eCommerce - Parcel division is likely to contribute around €1.2 billion to this figure. In the DHL divisions, we expect an additional improvement in earnings to between €2.1 billion and €2.3 billion compared with the previous year.
On April 2, we presented our 2020 strategy and we shall report on its progress in detail in the coming years. We shall continue to work hard to achieve our goals for the year 2015.
Results of operations
Selected indicators for results of operations
|Profit from operating activities (EBIT)
|Return on sales2||%||5.3
|Consolidated net profit for the period3||€m
|Earnings per share4||€||0.41
- Note 4.
- After deduction of non-controlling interests.
- Basic earnings per share.
Changes in reporting and portfolio
The amendments to IFRS 10 (Consolidated Financial Statements) and IFRS 11 (Joint Arrangements) have been required to be applied since 1 January 2014. This had a minor overall impact on a number of items in the balance sheet and income statement. Detailed information can be found in the Notes.
Our domestic parcel business in Belgium, the Czech Republic, India, the Netherlands and Poland was consolidated in the Post - eCommerce - Parcel (PeP) division at the beginning of the year. This business was previously part of the EXPRESS and GLOBAL FORWARDING, FREIGHT divisions.
In addition, the US company Sky Courier Inc. was reallocated from the EXPRESS division to the GLOBAL FORWARDING, FREIGHT division in the first quarter.
The prior-year amounts have been adjusted. We refrain from repeating this remark in the following explanations to the interim group management report.
Consolidated revenue up slightly on prior year
Consolidated revenue rose slightly by 1.2% to €13,569 million in the first quarter of 2014 (previous year: €13,403 million). Due to negative currency effects of €461 million, the proportion of consolidated revenue generated abroad declined from 68.3% in the prior-year period to 67.8%. In addition, changes in the portfolio reduced revenue by €90 million.
Other operating income was €389 million in the reporting period, down €51 million year-on-year. The prior-year figure included deconsolidation gains on the sale of the Cargus International domestic express business in Romania, amongst other things.
Higher staff costs
Materials expense rose by €51 million to €7,529 million, primarily due to the increase in goods purchased and held for resale for the business with the UK National Health Service in the SUPPLY CHAIN division.
Staff costs rose by €83 million to €4,537 million. This was mainly attributable to the increase in the number of employees in the SUPPLY CHAIN division and higher labour costs in the PeP division.
At €321 million, depreciation, amortisation and impairment losses were on a level with the previous year (€320 million).
Other operating expenses declined by €36 million to €845 million, largely due to lower consulting costs.
Development of revenue, other operating income and operating expenses, Q1 2014
• Currency effects reduced consolidated revenue by €461 million
|Other operating income
||• Prior-year figure also included €12 million in deconsolidation gains
on the sale of the domestic express business in Romania
||• Increase in cost of goods purchased and held for resale in
SUPPLY CHAIN division
||• Increased number of staff, mostly in SUPPLY CHAIN
• Higher labour costs in the PeP division
and impairment losses
||• Virtually unchanged
|Other operating expenses
||• Lower consulting costs|
Consolidated EBIT improves by 2.3%
Profit from operating activities (EBIT) improved compared with the previous year, rising by 2.3% to €726 million in the first quarter of 2014.
By contrast, net finance costs widened from €43 million to €79 million due in particular to lower interest income. The prior-year figure included interest income from the reversal of a provision for interest on tax liabilities.
Profit before income taxes declined from €667 million to €647 million. Income taxes also decreased, falling €24 million to €123 million.
Slight increase in consolidated net profit
Consolidated net profit for the period improved slightly from €520 million to €524 million in the reporting period. Of this amount, €502 million is attributable to shareholders of Deutsche Post AG and €22 million to non-controlling interest holders. Basic earnings per share rose from €0.41 to €0.42; diluted earnings per share remained unchanged at €0.40.
EBIT after asset charge increased
EAC improved from €367 million to €380 million in the first quarter of 2014, due primarily to the company's increased profitability. The imputed asset charge rose moderately by 0.9%, mainly because provisions declined during the previous year and net working capital increased.
EBIT after asset charge (EAC)
|– Asset charge
- Note 4.
Revenue witnesses positive trend
In the first quarter of 2014, revenue in the division was €3,953 million, 3.6% above the prior-year figure of €3,815 million, which is partially attributable to 0.6 additional working days in Germany compared with the prior-year period. After parts of the domestic parcel business outside Germany had been transferred to the Post - eCommerce - Parcel (PeP) division effective 1 January 2014, the figures for the current financial year and the prior-year were adjusted accordingly. Overall, negative currency effects amounted to €21 million in the reporting period.
The Post business unit comprises the domestic mail business, retail outlet business as well as the import/export business. It also includes new services such as E-POST and Postbus.
The eCommerce - Parcel business unit bundles all domestic parcel activities. This includes, in addition to our home market Germany, existing business in the United States and the transferred domestic business in Europe and Asia.
Increased revenue and volumes in the Post business unit
Overall performance in the Post business unit was encouraging. Revenue in the first quarter of 2014 was €2,610 million, 3.3% above the prior year’s figure of €2,526 million. In addition to the increase in price for a standard letter at the beginning of the year, this is attributable to the overall rise in volumes. A driver was the letters sent out in advance of the Single Euro Payments Area (SEPA) migration.
Revenue and sales of addressed advertising mail benefited in the reporting period from increased advertising expenditures from mail-order businesses and the public sector. Although the volumes of unaddressed advertising mail declined in the same period, overall both revenue and sales were above the prior-year level.
The press services market remains in decline. Daily newspaper and consumer magazine circulation, in particular, continue to decrease. Over the reporting period our revenue and sales in this business were below the prior-year level.
The international import/export business in the reporting period also fell slightly on the prior-year level. Export volumes declined slightly due to the increasing use of electronic communication.
|Mail items (millions)||Q1 2013
eCommerce - Parcel business unit continues to grow
In order to take advantage of the opportunities that the strong growth in e-commerce presents us, the Group bundles its domestic parcel business and cross-border parcel dispatch in the PeP division. We intend to expand our dominant market position in e-commerce logistics in Germany and gradually transfer this expertise to further parcel markets. This includes, above all, offering DHL Parcel’s established recipient services in other European countries in the medium-term in order to make the process of sending and receiving goods more convenient for customers. Furthermore, we aim to capitalise on the opportunities offered by providing e-commerce services in selected markets around the world. Over and above this, we want to become the market leader for cross-border e-commerce services on the most attractive international trade routes.
In the first quarter of 2014, revenue in the eCommerce - Parcel business unit was €1,343 million, exceeding the prior-year figure of €1,289 million by 4.2%. Business in Germany, in particular, recorded a successful start to the year with both revenue and sales witnessing a further significant increase. Revenue and sales in the transferred domestic parcel business in Europe were slightly above the prior-year level. Negative currency effects of €19 million had a small impact on revenue performance in the United States and Asia. Sales were slightly below the prior-year figure as a result of measures to streamline the customer portfolio in the United States.
Earnings at prior-year level
As in previous quarters, increased material and labour costs as well as the continued expansion of our parcel network impeded an improvement in earnings, although revenue saw an encouraging increase. EBIT in the division was €398 million in the reporting period and therefore on a par with the prior year (€397 million). The return on sales was 10.1%.
Operating cash flow increased from €117 million to €135 million, which was attributable mainly to a significantly lower net cash outflow from working capital. The annual prepayment to the Bundesanstalt für Post und Telekommunikation was due in the first quarter. This payment was €477 million for the PeP division. Working capital was €–167 million, remaining significantly above the prior-year level (€−382 million).
International business continues to grow
In the first quarter of 2014, revenue in the division increased by 2.3% to €2,879 million (previous year: €2,813 million). Excluding considerable negative currency effects of €157 million and the effect from the sale of the domestic express business in Romania in the first quarter of 2013, revenue growth was an encouraging 8.1%.
In the Time Definite International (TDI) product line, daily revenues rose by 9.2% compared with the first quarter of 2013. Year-on-year, our customers sent 7.6% more shipments each day.
In the Time Definite Domestic (TDD) product line, daily revenues in the reporting period declined by 2.6% compared with the prior year. Shipment volumes increased slightly by 0.8%.
Effective 1 January 2014, we transferred the Indian subsidiary Blue Dart as well as the domestic express business in the Netherlands, Belgium and Poland to the PeP division. The subsidiary SkyCourier Inc. in the United States was transferred to the GLOBAL FORWARDING, FREIGHT division. In future, our focus in the EXPRESS division in these countries will be on our core competence, the international business.
EXPRESS: revenue by product
|€m per day1
|Time Definite International (TDI)||32.6
|Time Definite Domestic (TDD)||3.9
- To improve comparability, product revenues were translated at uniform exchange rates. These revenues are also the basis for the weighted calculation of working days.
EXPRESS: volumes by product
|Thousands of items per day1
|Time Definite International (TDI)||615
|Time Definite Domestic (TDD)||357
- 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 and volumes grow in Europe region
Revenue in the Europe region increased by 3.4% in the reporting period to €1,354 million (previous year: €1,310 million). The figure included negative currency effects of €22 million, which related mainly to our business activities in Russia and Turkey. Excluding these effects and the effect from the sale of the domestic express business in Romania in the first quarter of 2013, revenue growth was 5.4%. Daily revenues grew by 5.4% in the TDI product line, due primarily to the increase in shipment volumes which rose by 3.7%.
Operating business in the Americas region demonstrates sustained growth
Revenue generated in the Americas region was €517 million in the first quarter of 2014 and therefore at exactly the same level as in the prior period. The figure for the reporting period included considerable negative currency effects of €52 million, which occurred mainly in Venezuela, the United States and other South and Central American countries. Excluding these effects, revenue in the region grew by a double-digit figure of as much as 10.1%. In the TDI product line, daily revenue in the reporting period rose by 10.4% due largely to the 9.3% increase in per-day shipment volumes.
Momentum in Asia Pacific region continues
In the first quarter of 2014, revenue in the Asia Pacific region increased by 5.3% to €986 million (previous year: €936 million). The figure included negative currency effects of €72 million, which related primarily to our business activities in Japan, India and Australia as well as other countries in the region. Excluding these effects, the year-on-year revenue increase was an encouraging 13.0%. In the TDI product line, both daily revenues and per-day volumes saw double-digit growth of 12.4% and 11.3%, respectively.
International business in the MEA region remains stable
In the MEA region (Middle East and Africa), revenue in the reporting period was €220 million and thus 3.9% below the prior year’s figure of €229 million. The figure for the reporting period included negative currency effects of €12 million; excluding these effects, revenue grew year-on-year by 1.3%. In the TDI product line, daily revenues increased by 10.2% and per-day volumes by 11.0%.
EBIT witnesses double-digit growth
In the first quarter of 2014, EBIT in the division improved by 14.1% to €275 million (previous year: €241 million). Increased revenues, the higher operating profitability of our network and strict indirect cost management in particular contributed to this improvement. The EBIT figure for the first quarter of the previous year included a €12 million deconsolidation gain on the divestment of the domestic express business in Romania. Return on sales rose significantly in the reporting period from 8.6% to 9.6%. Thanks mainly to the improved operating profit and continued working capital management, we increased our operating cash flow in the first quarter of 2014 by 96.6% to €285 million.
Freight forwarding business remains in decline
In the first quarter of 2014, revenue in the division decreased by 2.2% to €3,529 million (previous year: €3,610 million). The figure included negative currency effects of €173 million. The freight forwarding business also declined in the first quarter of 2014. Excluding currency effects, revenue saw a 2.5% year-on-year increase. Reduced prices also had an impact on revenue.
In the Global Forwarding business unit, revenue declined by 4.1% to €2,523 million (previous year: €2,630 million). Excluding negative currency effects of €156 million, however, revenue grew by 1.9%. Gross profit decreased by 7.6% to €574 million (previous year: €621 million).
With our strategic project New Forwarding Environment (NFE) we are continuing to make good progress.
New business won in air and ocean freight
In the reporting period, revenues in air and ocean freight declined year-on-year. Whereas air freight volumes remained stable, ocean freight volumes increased. Fuel prices remained high whilst air freight rates rose slightly and ocean freight rates remained stable.
Our air freight volumes in the reporting period were on a par with the prior year despite lower demand from several large customers who also switched partially from air to sea. Although higher freight rates were announced, short-term purchases on the spot market kept rates stable. Airlines continued to expand their passenger capacities whilst reducing their freight capacities resulting in further pressure on rates. In addition, several large airlines adjusted the basis for calculating fuel surcharges, which also had a negative impact on margins. In the fourth quarter of the previous year, we won several larger contracts that will be implemented in the current financial year. Our revenue in the first quarter of 2014 declined by 5.0%; gross profit decreased by 12.4%.
Ocean freight volumes were up 4.7% year-on-year. The main driver for this increase was new business won in the previous year, which was booked in the first quarter of 2014. The ex-Asian routes continue to record the highest volume developments. Whilst exports from Europe remain stable, demand on the north-south routes is increasing amidst stable rates. However, spot market rates are declining on the east-west trade lanes in particular. Ocean carriers have already announced rate increases. Our ocean freight revenue in the reporting period was down 3.1%. The very noticeable pressure on margins is the reason for the opposing development of volumes and revenue. Gross profit declined by 4.3%.
Our industrial project business (in table "Global Forwarding: revenue", reported as part of Other) performed on a par with the previous year. The share of revenue related to industrial project business and reported under Other remained stable at 37.4% (previous year: 37.5%). Gross profit declined by a single-digit percentage compared with the prior-year period.
Global Forwarding: revenue
Global Forwarding: volumes
|of which exports
- Twenty-foot equivalent units.
Revenue in European overland transport business up
In the Freight business unit, revenue increased by 2.6% to €1,040 million in the reporting period (previous year: €1,014 million). Negative currency effects of €18 million were offset by business growth in Eastern Europe, Germany and Scandinavia. The persistently high pressure on margins in the highly competitive European transport market as well as negative currency effects reduced gross profit slightly by 1.5% to €271 million in the reporting period (previous year: €275 million).
EBIT includes significantly higher expenses for NFE
EBIT in the division declined to €48 million in the reporting period (previous year: €87 million). As anticipated, expenses for NFE rose significantly. At the same time, gross profit margins declined again despite continued strict cost management. The return on sales declined to 1.4% (previous year: 2.4%).
Net working capital in the first quarter of 2014 remained on a par with the prior year. Operating cash flow decreased to €–97 million (previous year: €73 million), primarily in response to the development of working capital in the fourth quarter of 2013.
Revenue growth continues to be impacted by negative currency effects
Revenue in the division increased by 1.0% to €3,506 million in the first quarter of 2014 (previous year: €3,472 million). Growth was impacted by negative currency effects of €115 million and the loss of revenue from prior-year disposals of €85 million. Excluding these effects, revenue growth was 6.7%.
Revenue in the Supply Chain business unit was €3,177 million, a slight increase of 0.5% (previous year: €3,160 million). Excluding business disposals and negative currency effects, growth was 6.7%. On this basis, growth in the emerging markets was better than that of the business unit as a whole. The Automotive and Life Sciences & Healthcare sectors represented a higher proportion of revenue compared with the previous year, offset by a slightly lower share in the Consumer and Retail sectors. Revenue from the top 20 customers increased by 5.2%.
In the Americas region, growth was impacted primarily by currency effects: the Brazilian real as well as the Canadian and US dollars weakened against the euro. Moreover, revenue no longer includes Exel Direct Inc., which we disposed of in the second quarter of 2013. Excluding negative currency effects the highest revenue growth was generated in Canada and Brazil, the latter being driven by improved transport volumes.
In the Asia Pacific region, we achieved substantial revenue growth from additional volumes and new business, particularly in Japan and China. In Japan, we benefitted from new business in the Technology sector that was gained in the second half of 2013. Revenue growth in Australia, which stemmed primarily from the Life Sciences & Healthcare sector, was offset by a negative currency effect.
In Europe, volumes in the Automotive sector 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.
Williams Lea revenue increased by 5.4% in the reporting period to €331 million, driven mainly by increased retail banking business, higher volumes in the public sector and the ramp-up of new Marketing Solutions sourcing business in Asia.
New business worth around €175 million secured
In the first quarter of 2014, the Supply Chain business unit concluded additional contracts worth around €175 million in annualised revenue with both new and existing customers. The Consumer, Retail, Life Sciences & Healthcare and Automotive sectors accounted for the majority of the gains. The slower start to new business gained in the reporting period reflected the high level of signings achieved at the end of 2013. The annualised contract renewal rate remained at a consistently high level.
Solid first quarter performance
EBIT in the division was €84 million in the first quarter of 2014 (previous year: €83 million). The previous year included charges associated with the Chapter 11 insolvency filing of a major Williams Lea customer based in the United States. In the reporting period we also bore additional start-up costs in the Americas and Asia Pacific regions, related to the higher level of new contract signings in the previous year. EBIT was also dampened by negative currency effects in the reporting period. The return on sales was 2.4% (previous year: 2.4%). Operating cash flow was €28 million (previous year: €77 million).
Revenue and earnings forecast
Forecast for 2014 confirmed
As described in our 2013 Annual Report, we expect slight economic expansion at best in 2014. 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 continue to expect consolidated EBIT to reach between €2.9 billion and €3.1 billion in financial year 2014. The Post - eCommerce - Parcel (PeP) division is likely to contribute around €1.2 billion to this figure. Compared with the previous year, we expect an additional improvement in overall earnings to between €2.1 billion and €2.3 billion in the DHL divisions. The Corporate Center/Other result should be better than €–0.4 billion.
In line with our Group strategy, we are targeting organic growth and anticipate only a few small acquisitions in 2014, as in the previous year.
We still intend to achieve the goals we set for the year 2015. Due to the allocation of parts of the parcel business outside Germany to the PeP division which took effect on 1 January 2014, we expect the PeP division to contribute at least €1.1 billion and the DHL divisions to contribute between €2.6 billion and €2.8 billion to earnings in 2015.
Our finance strategy calls for a payout of 40% to 60% of net profits as dividends as a general rule. At the Annual General Meeting on 27 May 2014, we intend to propose to the shareholders that a dividend per share of €0.80 be paid for financial year 2013 (previous year: €0.70).