Lawrence Rosen (CFO) about the first nine months of 2014
Reporting January to September 2014
Letter to our shareholders
Dr Frank Appel
Chief Executive Officer
Deutsche Post AG
11 November 2014
First nine months of 2014
We are satisfied with our company’s overall performance in the first nine months of 2014. Deutsche Post DHL succeeded in increasing consolidated revenue slightly by 2.0% to €41.3 billion, with profit from operating activities rising even further by 4.2% to €2.1 billion. Moreover, we achieved this in the midst of a continued weakness in economic momentum in Germany and Europe. Even in the emerging markets, growth has been significantly slower than in previous years.
In the Post - eCommerce - Parcel division, we are benefitting from the unflagging trend whereby goods of all kinds are increasingly purchased online. Indeed, the parcel business in Germany picked up again in the third quarter in particular. The international express business also continues to grow strongly, with earnings growth in the double digits.
As announced in August, one of our top priorities is to improve efficiency and increase earnings in the other two DHL divisions. The SUPPLY CHAIN division generated a solid improvement in earnings thanks to the good new business and continuing restructuring programmes. Third-quarter revenues grew in the freight forwarding business, which had been weak of late. In the GLOBAL FORWARDING, FREIGHT division, industry-wide pressure on margins and high expenditures for the NFE project continued to impact EBIT. However, I am certain that NFE and other measures will allow us to substantially improve our competitive standing.
We are confirming our forecast for full-year 2014 and 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 €1.3 billion to this figure. In the DHL divisions, we expect a year-on-year improvement in earnings to between €2.0 billion and €2.2 billion.
Our solid performance attests to the fact that our business model remains robust even in times of uncertainty. We now look forward to the upcoming Christmas business. In addition, the fourth quarter has nearly one more working day than in the previous year, which should have a positive effect given the volumes we handle each day.
Results of operations
Selected indicators for results of operations
|Profit from operating activities (EBIT)
|Return on sales2||%||4.9||5.0||4.8||4.8|
|Consolidated net profit for the period3||€m
|Earnings per share4||€||1.09||1.18||0.33||0.38|
- 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 reassigned from the EXPRESS division to the GLOBAL FORWARDING, FREIGHT division in the first quarter.
The Belgian company Speedpack NV was transferred from the GLOBAL FORWARDING, FREIGHT division to the PeP division effective 1 April.
The prior-year amounts have been adjusted. We have not drawn attention to this again in the following explanations to the interim group management report.
DHL Global Forwarding & Co. LLC, Oman, has been consolidated since May 2014 due to contractual changes. The company had previously been accounted for using the equity method.
In the GLOBAL FORWARDING, FREIGHT division, we sold activities not forming part of the core business of Hull Blyth Angola Ltd. and the company Hull Blyth Angola Viagens e Turismo Lda. in July. The assets and liabilities had previously been reclassified as held for sale.
Increase in consolidated revenue
Consolidated revenue rose by €803 million to €41,265 million in the first nine months of 2014, although negative currency effects reduced this item by €729 million. The proportion of revenue generated abroad remained on a level with the prior year at 69.6% (previous year: 69.4%). Changes in the portfolio reduced revenue by €152 million. At €14,001 million, revenue was up by €547 million in the third quarter of 2014. This included positive currency effects of €99 million.
Other operating income increased by €71 million year-on-year, to €1,465 million. The prior-year figure included deconsolidation gains on the sale of several companies, amongst other things. Income increased by €117 million in the reporting period, also as a result of the reversal of a provision for restructuring the express business in the USA.
Higher depreciation, amortisation and impairment losses
Materials expense rose by €541 million to €23,339 million, primarily due to higher transportation costs and 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 1.2% to €13,465 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.
Impairment losses on aircraft and aircraft parts amounting to €106 million led to an increase in depreciation, amortisation and impairment losses from €990 million to €1,048 million.
At €2,821 million, other operating expenses were up slightly on the previous year (€2,785 million).
Development of revenue, other operating income and operating expenses, 9M 2014
• Growth trends in the German parcel and international express
• Pressure on margins weighs on freight forwarding business
• Currency effects reduce consolidated revenue by €729 million
|Other operating income
||• Restructuring provisions of €117 million reversed|
• Higher transportation costs
• Higher cost of goods purchased and held for resale in
• Increased number of staff, mostly in the SUPPLY CHAIN division
• Higher labour costs in the PeP division
and impairment losses
||• Includes impairment losses on aircraft of €106 million|
|Other operating expenses
||• Slightly above prior-year level|
Consolidated EBIT improves by 4.2%
Profit from operating activities (EBIT) improved compared with the previous year, rising by 4.2% to €2,057 million in the first nine months of 2014. It increased by 4.8% in the third quarter to €677 million.
By contrast, net finance costs widened from €180 million to €256 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.
At €1,801 million, profit before income taxes was on a level with the previous year (€1,795 million). In contrast, income taxes decreased sharply, falling by €107 million to €288 million.
Increase in consolidated net profit
Consolidated net profit for the period rose from €1,400 million to €1,513 million in the reporting period. Of this amount, €1,431 million is attributable to shareholders of Deutsche Post AG and €82 million to non-controlling interest holders. Earnings per share also increased, with basic earnings per share up from €1.09 to €1.18 and diluted earnings per share rising from €1.05 to €1.14.
EBIT after asset charge increased
EBIT after asset charge (EAC) improved from €947 million to €1,005 million in the first nine months of 2014, mainly as a result of the company’s increased profitability. The imputed asset charge rose by 2.3%, driven primarily by the increase in net working capital.
EBIT after asset charge (EAC)
|– Asset charge
- Note 4.
Revenue increases with fewer working days
In the first nine months of 2014, revenue in the division was €11,333 million, 2.0% above the prior-year figure of €11,108 million, despite 0.4 fewer working days in Germany than in the same period last year. After parts of the domestic parcel business outside Germany were transferred to the Post - eCommerce - Parcel division effective 1 January 2014, the figures for the current financial year and the prior year were adjusted accordingly. Negative currency effects of €30 million were recorded in the reporting period.
Revenue and volumes in Post business unit at prior-year level
In the Post business unit, revenue and sales remained stable at the prior-year level. In the first nine months of 2014, revenue was €7,333 million, exceeding the prior-year figure of €7,310 million slightly by 0.3%. This is attributable mainly to the price increases for both a standard letter at the beginning of the year and our Infopost product at the beginning of the third quarter. Revenue in the third quarter was €2,379 million (previous year: €2,397 million).
The domestic mail business performed well, driven mainly by the postage increases. Volumes remained at the prior-year level. However, revenue in the international import/export business in the reporting period declined noticeably below the prior-year level due to changes in mix.
In the Dialogue Marketing business, revenue and sales in addressed advertising mail declined in the reporting period. The previous year included a positive effect from Germany’s parliamentary elections. In addition, advertising expenditures from mail-order businesses remained low. Revenue generated from unaddressed advertising mail in the reporting period was approximately equivalent to the prior-year level. Sales of this product increased on account of the expansion of the delivery area for our “Einkauf aktuell” product.
The press services market remains in decline. Daily newspaper and popular magazine circulation, in particular, continues to decrease. Over the reporting period, our revenue and sales in this business were slightly below the prior-year level.
|Mail items (millions)||9M 2013
| of which Mail
| of which Dialogue
eCommerce - Parcel business unit continues to grow
In the first nine months of 2014, revenue in the eCommerce - Parcel business unit was €4,000 million, exceeding the prior-year figure of €3,798 million by 5.3%. The parcel business in Germany continued to grow in the third quarter in particular; cumulative revenue and sales significantly exceeded the previous year. Volume also grew further year-on-year – by 6.5% over the nine-month period and by 8.5% in the third quarter.
The transferred domestic parcel business in Europe was integrated successfully into the division. In international business, we recorded strong volume growth and a slight increase in revenue.
Our worldwide e-commerce activities continue to develop well. Although our project to streamline our customer portfolio, which began in the first quarter of 2014, has had an impact on sales, revenue in the reporting period exceeded the prior-year figure when adjusted for currency effects.
Parcel Germany: volumes
|Parcels (millions)||9M 2013||9M 2014||+/– %||Q3 2013||Q3 2014||+/– %|
Earnings at prior-year level excluding one-time effects
Although revenue rose, increased material and labour costs as well as the continued expansion of our parcel network hindered, as in previous quarters, an improvement in earnings. EBIT in the division declined by €39 million, from €912 million in the previous year to €873 million in the reporting period. However, the prior-year figure included a positive effect of €50 million from the utilisation of some of the provision recognised for postage stamps. The return on sales in the first nine months was 7.7% (previous year: 8.2%). EBIT in the third quarter of 2014 was €288 million (previous year: €277 million).
Operating cash flow in the first nine months of 2014 decreased from €672 million to €607 million, which was attributable mainly to the lower EBIT and a net cash outflow from working capital. Working capital was €–260 million, remaining significantly above the prior-year level (€–414 million).
Revenues and volumes in international business continue to grow
In the first nine months of 2014, revenue in the division was €9,080 million, exceeding the prior-year figure of €8,721 million by 4.1%. Excluding negative currency effects of €298 million and the effect from the sale of the domestic express business in Romania in the first quarter of 2013, revenue in the reporting period grew by 7.6%. In the third quarter, revenue growth was 7.6%, a further increase compared with the previous year.
In the Time Definite International (TDI) product line, daily revenues rose year-on-year by 8.3% in comparison with the first nine months of the prior year. Our customers sent 7.7% more shipments each day. In the third quarter, revenues increased by 6.9% and shipment volumes by 7.0%.
In the Time Definite Domestic (TDD) product line, daily revenues were unchanged from the prior-year level in the first nine months of 2014. Daily shipment volumes went up slightly by 0.6%. In the third quarter, revenue and volumes in this product line remained at the prior-year level.
The Indian subsidiary Blue Dart and the domestic express business in the Netherlands, Belgium and Poland were reassigned to the PeP division, effective 1 January 2014. Our focus in the EXPRESS division in these countries is now directed towards our core competence, international business. The subsidiary Sky Courier Inc. in the United States was transferred to the GLOBAL FORWARDING, FREIGHT division.
EXPRESS: revenue by product
|€m per day1
|Time Definite International (TDI)||33.7||36.5||8.3||33.3||35.6||6.9|
|Time Definite Domestic (TDD)||3.8||3.8||0.0||3.7||3.7||0.0|
- 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)||626||674||7.7||618||661||7.0|
|Time Definite Domestic (TDD)||355||357||0.6||344||344||0.0|
- To improve comparability, product revenues were translated at uniform exchange rates.
These revenues are also the basis for the weighted calculation of working days.
Sharp rise in revenues and volumes in Europe region
Revenue in the Europe region improved by 3.9% to €4,142 million in the first nine months of 2014 (previous year: €3,988 million). The figure for the reporting period included negative currency effects of €30 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 in the reporting period was 4.7%. Daily revenues in the TDI product line grew by 4.6% in the first three quarters, due primarily to the 4.4% increase in shipment volumes. The encouraging growth continued into the third quarter: revenues in daily international shipments increased by 4.1%; shipment volumes increased by as much as 5.8%.
Operating business in the Americas region continues to grow
Revenue in the Americas region amounted to €1,632 million in the reporting period – slightly above the previous year’s figure of €1,628 million. The figure for the reporting period included considerable negative currency effects of €131 million, which occurred mainly in South America (especially Venezuela and Argentina) as well as the United States. Excluding these currency effects, revenue improved by 8.3% in the first nine months. In the TDI product line, daily revenue increased by 9.2% in the same period, driven largely by the 9.6% rise in per-day shipment volumes. In the third quarter, growth in daily revenue was 5.7%, whilst the number of daily shipments in the TDI product line increased by 8.0%.
Considerable revenue growth again in Asia Pacific region
Revenue in the Asia Pacific region grew by 7.1% to €3,219 million in the first nine months of 2014 (previous year: €3,006 million). The figure for the reporting period included negative currency effects of €116 million, which related primarily to our business activities in Japan, China and India as well as other countries in the region. Excluding these effects, revenue witnessed a substantial increase of 10.9% year-on-year. In the TDI product line, both daily revenues and per-day volumes in the reporting period rose by 11.4% and 10.2%, respectively. Growth in the third quarter amounted to 10.1% and 7.8%, respectively.
International volumes grow in the MEA region
In the MEA region (Middle East and Africa), revenue in the first nine months of 2014 was €678 million and thus 2.4% below the previous year’s figure of €695 million. Excluding negative currency effects of €25 million, revenue grew year-on-year by 1.2%. In the TDI product line, daily revenues increased by 8.7% and per-day volumes by as much as 10.7% in the reporting period.
EBIT and return on sales demonstrate clear positive trend
In the first nine months of 2014, EBIT in the division improved considerably by 18.3% to €912 million (previous year: €771 million). Increased revenues, the higher operating profitability of our network and strict cost management contributed to this improvement in particular. The EBIT figure for the first nine months of 2013 included a €12 million deconsolidation gain on the divestment of the domestic express business in Romania. Return on sales in the first nine months of 2014 rose from 8.8% to 10.0%. In the third quarter, EBIT climbed by 23.0% to €305 million, which improved return on sales from 8.6% in the previous year to 9.8%.
The 35.0% rise in operating cash flow to €1,111 million in the first nine months of 2014 was supported by the improved operating profit.
Currency effects impact freight forwarding business
In the first nine months of 2014, revenue in the division decreased by 0.4% to €10,964 million (previous year: €11,013 million). Excluding negative currency effects of €354 million, revenue increased year-on-year by 2.8%. In the third quarter, revenue was up year-on-year by 2.7% to €3,803 million (previous year: €3,702 million). The third-quarter figure included negative currency effects of €29 million. Reduced prices also continued to impact our revenue.
Revenue in the Global Forwarding business unit was €7,974 million in the first nine months of 2014, a decrease of 1.1% (previous year: €8,059 million). Excluding negative currency effects of €308 million, revenue increased by 2.8%. Gross profit declined by 5.7% to €1,790 million (previous year: €1,899 million).
We are continuing to implement our strategic project New Forwarding Environment (NFE).
Air and ocean freight volumes up
In the first nine months of 2014, our air freight revenues increased slightly year-on-year, whilst those in ocean freight declined slightly. Excluding negative currency effects, ocean freight revenue was also up. Volumes in both air and ocean freight increased compared with the previous year. Fuel prices remained stable. Air freight rates increased whilst ocean freight rates remained almost unchanged.
Our air freight volumes grew in the first nine months of 2014 by 2.3% compared with the previous year. Third-quarter volumes climbed significantly by 4.8% thanks to new business gains in the first half of the year. At the same time, however, margin pressure increased, primarily because airlines are reducing their capacities and indirectly increasing rates as a result. Rates on the spot market are also increasing, particularly in anticipation of demand from Asia. Our revenue in the reporting period went up by 0.6%; gross profit declined by 9.9%.
Ocean freight volumes in the first nine months of 2014 were up by 5.0% year-on-year, driven mainly by new customers acquired in the first half of the year. Asia remains the largest growth engine; the intra-Asian, trans-Pacific and Asia-Europe routes have performed the best. At the same time, however, our revenues have declined by 1.2% as a result of negative currency effects. Despite the fact that new, larger vessels are being put into operation, ocean carriers continued to reduce effective capacity. In light of the increase in freight volume and limited capacities, margins remained under pressure. We are responding to this market situation with stricter operational cost control. Gross profit declined in the reporting period by 4.5%.
The performance of our industrial project business (in table "Global Forwarding: revenue", reported as part of Other under the Global Forwarding business unit) fell slightly below that of the prior year. In the first nine months of 2014, the share of revenue related to industrial project business and reported under Other was 35.9% and therefore down year-on-year (previous year: 37.5%). Gross profit declined by 12.9% 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 continues to grow
In the Freight business unit, revenue was up by 1.3% to €3,098 million in the first nine months of 2014 (previous year: €3,058 million) despite negative currency effects of €47 million. Business grew primarily in Central and Eastern Europe, Turkey, Sweden, France and Germany. Gross profit declined in the reporting period by 1.8% to €807 million (previous year: €822 million). This can be attributed almost exclusively to negative currency effects but pressure on margins also remains significant in the highly competitive European transport market.
EBIT impacted by high NFE expenses
EBIT in the division was €221 million in the first nine months of 2014 (previous year: €340 million). The high NFE expenses continue to have an impact. At the same time, gross profit margins decreased again due to higher pressure on margins, despite strict cost management. The return on sales declined to 2.0% (previous year: 3.1%). In the third quarter of 2014, EBIT fell considerably year-on-year, from €126 million to €72 million.
Moreover, net working capital in the first nine months of 2014 worsened due to increased outstanding receivables, leading to a negative operating cash flow of €24 million (previous year: €269 million).
Revenue growth impacted by currency effects and disposals
In the first nine months of 2014, revenue in the division increased by 2.4% to €10,784 million (previous year: €10,528 million). Growth was impacted by both the loss of revenue from prior-year disposals of €147 million and negative currency effects of €52 million. Excluding these effects, revenue growth was 4.3%. In the third quarter, revenue increased year-on-year by 4.0% from €3,519 million to €3,660 million. Excluding favourable currency effects, revenue growth was 0.6%.
Revenue in the Supply Chain business unit was €9,765 million in the first nine months of 2014, an increase of 2.1% (previous year: €9,560 million). Excluding business disposals and negative currency effects, growth was 4.3%. 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 2.2%.
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 in the reporting period. Moreover, revenue no longer includes Exel Direct, which we disposed of in the second quarter of 2013. Excluding negative currency effects, we generated the highest revenue growth in the USA and Brazil, with the latter driven by new business and improved transport volumes. Our revenues in Canada were impacted negatively by the loss of a contract in the Retail sector at the end of the second quarter.
In the Asia Pacific region, we achieved substantial revenue growth from additional volumes and new business, particularly in Japan and Australia. In Japan we benefited from new business in the Technology sector that was gained in the second half of 2013. Revenue growth in Australia came primarily from the Life Sciences & Healthcare sector. However, overall revenue growth in the region was offset partly by negative currency effects.
In Europe, volumes in the Automotive and Retail sectors increased on account of higher end-customer demand. Revenue in the Life Sciences & Healthcare sector grew due to additional business with the UK National Health Service. Prior-year disposals and the strong pound sterling also affected revenue growth.
Williams Lea revenue increased by 5.1% in the reporting period to €1,024 million, driven mainly by stronger retail banking business, higher volumes in the public sector and the new Marketing Solutions sourcing business in Asia.
New business worth around €795 million secured
In the first nine months of 2014, the Supply Chain business unit concluded additional contracts worth around €795 million in annualised revenue with both new and existing customers. The Consumer, Automotive, Retail, Life Sciences & Healthcare and Technology sectors accounted for the majority of the gains. The annualised contract renewal rate remained at a consistently high level.
Continued EBIT improvement
EBIT in the division was €303 million in the first nine months of 2014 (previous year: €262 million). The previous year included charges associated with the Chapter 11 insolvency filing of a major customer and expenses associated with business disposals. The improved EBIT can be attributed to the high level of new business and to continuing restructuring programmes. The return on sales was 2.8% (previous year: 2.5%). In the third quarter of 2014, EBIT increased from €100 million to €110 million.
Operating cash flow for the first nine months of 2014 was €236 million (previous year: €259 million).
Revenue and earnings forecast
Group forecast for 2014 confirmed
We continue to expect a backdrop of slight economic expansion in 2014. The global trading volumes relevant to our business are expected to perform similarly. We are 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 division is likely to contribute around €1.3 billion to this figure. Compared with the previous year, we expect an improvement in EBIT to between €2.0 billion and €2.2 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.
The earnings forecasts for the following years are also unchanged: we expect the earnings generated by the Group in 2015 to significantly surpass the figure for 2014. For 2016 we expect consolidated EBIT of between €3.4 billion and €3.7 billion. The PeP division is likely to account for more than €1.3 billion of this. The earnings contribution of the DHL divisions is expected to range from €2.45 billion to €2.75 billion. The Corporate Center/Other result should be around €–0.35 billion.
Our finance strategy calls for a payout of 40% to 60% of net profits as dividends as a general rule.