Lawrence Rosen (CFO) about the first half of 2014
Reporting January to June 2014
Letter to our shareholders
Dr Frank Appel
Chief Executive Officer
Deutsche Post AG
4 August 2014
First half of 2014
Deutsche Post DHL recorded a solid performance in the second quarter of the financial year. Although the world economy is still only seeing moderate growth and our business continued to suffer from substantial currency effects, in the first half of 2014 we were able to increase revenue slightly whilst achieving more significant operating earnings growth of 3.8%.
The German parcel business in the Post - eCommerce - Parcel division continued to show encouraging dynamic growth. The international express business also grew strongly – here return on sales even reached 10.7% in the second quarter. We also generated a solid earnings improvement in the SUPPLY CHAIN division. By contrast, the GLOBAL FORWARDING, FREIGHT division was under pressure, particularly the air freight business. Moreover, EBIT in this segment was affected by high expenses for the NFE project. However, I see this project as an important investment in our future competitive position.
Against this backdrop, we have adjusted our expectations with regard to the contributions each division will make to consolidated EBIT. For full-year 2014, we continue to expect consolidated EBIT to reach between €2.9 billion and €3.1 billion. The Post - eCommerce - Parcel division is now likely to contribute around €1.3 billion to this figure and in the DHL divisions we expect a year-on-year improvement in EBIT to between €2.0 billion and €2.2 billion.
We are considering a number of measures designed to strengthen earnings growth in the medium to long term – particularly in the GLOBAL FORWARDING, FREIGHT and SUPPLY CHAIN divisions.
The investments in the planned measures will affect the year 2015 in particular, although consolidated net profit in that year will significantly surpass the figure for 2014. We shall decide upon the exact scope and time frame for the measures as the year progresses. My highest priority is to ensure the long-term success and profitability of the company, even if this leads to slower earnings growth in the short term.
Results of operations
Selected indicators for results of operations
|Profit from operating activities (EBIT)
|Return on sales2||%||4.9||5.1||4.5||4.8|
|Consolidated net profit for the period3||€m
|Earnings per share4||€||0.76||0.80||0.35||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.
Consolidated revenue up slightly on prior year
In the first half of 2014, consolidated revenue grew slightly to €27,264 million (previous year: €27,008 million), weighed down by negative currency effects of €828 million. The proportion of consolidated revenue generated abroad remained on a par with the prior year at 69.1% (previous year: 69.2%). Changes in the portfolio reduced revenue by €152 million.
At €13,695 million, revenue was up by €90 million in the second quarter. This figure was negatively impacted by currency effects (€367 million) and changes in the portfolio (€62 million).
Other operating income was up by €6 million year-on-year in the first half of 2014. The prior-year figure included deconsolidation gains on the sale of several companies, amongst other things. Income increased by €115 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 €85 million to €15,240 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 slightly by €58 million to €9,048 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.
Depreciation, amortisation and impairment losses increased by €83 million to €736 million, largely due to impairment losses on aircraft and aircraft parts amounting to €104 million.
At €1,796 million, other operating expenses were €15 million lower year-on-year (previous year: €1,811 million).
Development of revenue, other operating income and operating expenses, H1 2014
• Currency effects reduced organic growth in revenue by €828 million
|Other operating income
||• Prior-year figure also included deconsolidation gains on the sale of
• Restructuring provisions of €115 million reversed in the reporting
||• Increase in cost of goods purchased and held for resale in
the SUPPLY CHAIN division
||• Increased number of staff, mostly in SUPPLY CHAIN
• Higher labour costs in the PeP division
and impairment losses
||• Figure includes impairment losses on aircraft of €104 million
|Other operating expenses
||• Multiple smaller effects|
Consolidated EBIT improves by 3.8%
Profit from operating activities (EBIT) improved compared with the previous year, rising by 3.8% to €1,380 million in the first half of 2014. In the second quarter, it rose by 5.7% to €654 million.
By contrast, net finance costs widened from €83 million to €174 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 €1,246 million to €1,206 million. Income taxes also decreased, falling by €81 million to €193 million.
Increase in consolidated net profit
Consolidated net profit for the period rose from €972 million to €1,013 million in the reporting period. Of this amount, €963 million is attributable to shareholders of Deutsche Post AG and €50 million to non-controlling interest holders. Earnings per share also increased, with basic earnings up from €0.76 to €0.80 and diluted earnings rising from €0.73 to €0.77.
EBIT after asset charge increased
EBIT after asset charge (EAC) improved from €642 million to €683 million in the first half of 2014, due primarily to the company’s increased profitability. The imputed asset charge rose slightly by 1.5%. This increase is 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 half of 2014, revenue in the division was €7,602 million, 1.8% above the prior-year figure of €7,465 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 €37 million were recorded in the reporting period.
Increased revenue and volumes in the Post business unit
Overall performance in the Post business unit was encouraging. Revenue in the first half of 2014 was €4,959 million, exceeding the prior-year figure slightly by 0.8% (previous year: €4,918 million). In addition to the price increase for a standard letter at the beginning of the year, this is attributable to the overall rise in volumes. Revenue in the second quarter was €2,348 million (previous year: €2,388 million).
The domestic mail business performed well, driven mainly by postage increases as well as the rise in volumes resulting from the European elections and the local elections in Germany. However, revenue in the international import/export business in the first half of the year was noticeably below the prior-year level due to changes in the breakdown of items.
In the Dialogue Marketing business, revenue and sales of addressed advertising mail benefited from the increase in mail related to the introduction of SEPA as sent by financial service providers as well as mail sent by the public sector prior to the elections. The decrease in advertising expenditures from mail-order businesses in the second quarter was thus offset. Whilst revenue generated through unaddressed advertising mail in the reporting period was on a par with the prior-year level, sales 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)||H1 2013
| of which Mail
| of which Dialogue
eCommerce - Parcel business unit continues to grow
In the first half of 2014, revenue in the eCommerce - Parcel business unit was €2,643 million, exceeding the prior-year figure of €2,547 million by 3.8%. After the good start of the year, the parcel business in Germany also performed well in the second quarter. Growth in revenue and sales was recorded in both the second quarter and the first half of the year.
The transferred domestic parcel business in Europe has been smoothly integrated into the division thus far and the first strategic initiatives to expand the business have begun. Revenue in this business area in the reporting period was on a par with the prior-year level, whilst sales increased slightly.
Our e-commerce activities are also developing positively overall. Although our project to streamline our customer portfolio, which began in the first quarter, 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)||H1 2013||H1 2014||+/– %||Q2 2013||Q2 2014||+/– %|
Earnings excluding one-time effects at prior-year level
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 €50 million, from €635 million in the previous year to €585 million in the reporting period. The return on sales was 7.7% (previous year: 8.5%). EBIT in the second quarter of 2014 was €188 million (previous year: €238 million). However, the prior-year figure included a positive effect of €50 million from the utilisation of some of the provision recognised for postage stamps in the second quarter of 2013.
Operating cash flow in the first half of 2014 decreased from €425 million to €325 million, which was mainly attributable to a net cash outflow from working capital. Working capital was €–151 million, remaining significantly above the prior-year level (€–432 million).
International business continues to grow
Revenue in the division increased by 2.4% to €5,968 million in the first half of 2014 (previous year: €5,828 million). Excluding negative currency effects of €301 million and the effect from the sale of the domestic express business in Romania in the first half of 2013, revenue in the reporting period grew by 7.7%.
In the Time Definite International (TDI) product line, daily revenues rose year-on-year by 8.8% in comparison with both the first half of the year and the second quarter of 2013. The number of shipments sent daily by our customers increased by 7.9% in the first half of the year and by 8.2% in the second quarter.
In the Time Definite Domestic (TDD) product line, daily revenues in the first half of the year were on a par with the prior year, whilst shipment volumes improved slightly by 1.1%. In the second quarter, daily revenues in this product line grew by 2.6%.
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. Our focus in the EXPRESS division in these countries is now on our core competence, international business. The subsidiary SkyCourier Inc. in the United States was transferred to the GLOBAL FORWARDING, FREIGHT division.
EXPRESS: revenue by product
|€m per day1
|Time Definite International (TDI)||34.0||37.0||8.8||35.4||38.5||8.8|
|Time Definite Domestic (TDD)||3.9||3.9||0.0||3.9||4.0||2.6|
- 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)||631||681||7.9||647||700||8.2|
|Time Definite Domestic (TDD)||360||364||1.1||363||369||1.7|
- To improve comparability, product revenues were translated at uniform exchange rates. These revenues are also the basis for the weighted calculation of working days.
Revenues and volumes up again in Europe region
Revenue in the Europe region increased by 3.1% in the first half of 2014 to €2,756 million (previous year: €2,673 million). The figure for the reporting period included negative currency effects of €35 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 half of 2013, revenue growth in the reporting period was 4.6%. Daily revenues in the TDI product line grew by 4.8% in the first half of the year, due primarily to the increase in shipment volumes which rose by 3.7%. In the second quarter, daily international shipments increased by 4.3% and shipment volumes by 3.9%.
Operating business in the Americas region remains encouraging
In the first half of 2014, revenue in the Americas region amounted to €1,074 million – slightly below the previous year’s figure of €1,081 million. The figure for the reporting period included considerable negative currency effects of €112 million, which occurred mainly in Venezuela, the United States and in other South and Central American countries. Excluding these effects, revenue in the region rose by 9.7% in the first half of the year. In the TDI product line, daily revenue witnessed a double-digit increase of 11.0% largely due to the 10.5% rise in per-day shipment volumes. In the second quarter, both daily revenue and the number of daily shipments in the TDI product line saw increases of 11.7%.
Momentum in Asia Pacific region continues
Revenue in the Asia Pacific region increased by 4.7% in the first half of 2014 to €2,082 million (previous year: €1,988 million). The figure for the reporting period included negative currency effects of €134 million, which related primarily to our business activities in Japan, China and India as well as other countries in the region. Excluding these effects, the year-on-year revenue increase was an encouraging 11.5%. In the TDI product line, both daily revenues and per-day volumes saw double-digit growth rates of 12.1% and 11.5%, respectively. Growth in the second quarter amounted to 12.0% and 11.9%, respectively.
International volumes in the MEA region on the rise
In the MEA region (Middle East and Africa), revenue in the first half of 2014 was €448 million and thus 3.9% below the prior year’s figure of €466 million. The figure for the reporting period included negative currency effects of €26 million; excluding these effects, revenue grew year-on-year by 1.7%. In the TDI product line, daily revenues increased by 9.6% and per-day volumes by 10.7%.
EBIT and return on sales see clear increases
In the first half of 2014, EBIT in the division improved considerably by 16.1% to €607 million (previous year: €523 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 half of 2013 included a €12 million deconsolidation gain on the divestment of the domestic express business in Romania. Return on sales in the first half of 2014 rose from 9.0% to 10.2%. In the second quarter, EBIT climbed by 17.7% to €332 million, which increased return on sales to 10.7%.
In the United States, restructuring provisions were reassessed and in the second quarter reduced by €104 million. As part of a fleet renewal, we are reducing the number of older aircraft in Europe. This led to an impairment loss of €104 million in the quarter.
The 49.6% increase in operating cash flow to €630 million in the first half of 2014 was supported by the improved operating profit, which is reflected in cash flow.
Freight forwarding business recovers slightly as year progresses
Revenue in the division decreased by 2.1% to €7,161 million in the first half of 2014 (previous year: €7,311 million). The figure for the reporting period included negative currency effects of €325 million. The freight forwarding business recovered slightly in the second quarter of 2014. Excluding currency effects, revenue increased year-on-year by 2.4%. Reduced prices also continued to impact our revenue.
In the Global Forwarding business unit, revenue declined by 3.5% to €5,162 million (previous year: €5,347 million). Excluding negative currency effects of €292 million, revenue increased by 2.0%. Gross profit decreased by 7.7% to €1,183 million (previous year: €1,281 million).
Our strategic project New Forwarding Environment (NFE) continues to make good progress.
More new business gains in air and ocean freight
In the reporting period, revenues in air and ocean freight declined year-on-year. Volumes increased – slightly in air freight and more significantly in ocean freight. Fuel prices remained high whilst air and ocean freight rates remained stable.
Our air freight volumes in the reporting period were again on a par with the prior year despite lower demand from several large customers. We were able to offset this development with new business gains and expanded customer relationships in the months prior. This new business is now gradually being implemented. However, we expect the airlines to further reduce their freight capacities in order to increase pressure on rates and minimise losses. The pressure on margins remains high because, for many customers, an ever increasing share of total costs can be attributed to logistics. In the first half of 2014, we concluded additional large contracts which will be implemented in the current financial year. Our revenue in the reporting period declined by 2.9%; gross profit decreased by 11.0%.
Ocean freight volumes in the first half of 2014 were up 5.2% year-on-year. The main driver for this increase was new business won in the previous year. Routes to and from Asia continue to record the highest volumes, whilst routes from Asia to Europe and those via the Pacific are showing the largest increase. Our ocean freight revenue in the reporting period was down 3.6%. The very noticeable pressure on margins is the reason for the contradictory development of volumes and revenue. Ocean carriers are effectively controlling supply and demand. For example, available capacity is effectively limited by adjusting travel speed, whilst the rates agreed upon are increased. Gross profit declined in the reporting period by 5.6%.
Our industrial project business (in table Global Forwarding: revenue, reported as part of Other) performed on a par with the prior year. In the first half of 2014, the share of revenue related to industrial project business and reported under Other was 36.6% and therefore down slightly year-on-year (previous year: 37.0%). Gross profit declined in the prior-year period by 13.3%.
Global Forwarding: revenue
Global Forwarding: volumes
|of which exports
- Twenty-foot equivalent units.
Revenue in European overland transport business continues to climb
In the Freight business unit, revenue was up by 1.7% to €2,068 million in the first half of 2014 (previous year: €2,033 million). Negative currency effects of €35 million were offset above all by business growth in Central and Eastern Europe, Germany, France and Denmark. Persistent high pressure on margins in the highly competitive European transport market as well as negative currency effects reduced gross profit slightly by 1.3% to €545 million in the reporting period (previous year: €552 million).
EBIT in the division declined to €149 million in the reporting period (previous year: €214 million). High NFE expenses continued to impact on EBIT. At the same time, gross profit margins decreased again despite continued strict cost management. The return on sales declined to 2.1% (previous year: 2.9%).
In the second quarter of 2014, EBIT fell year-on-year by 21.3% to €100 million.
Net working capital worsened in the first half of 2014 due to higher outstanding receivables, leading to a negative operating cash flow of €55 million (previous year: €167 million).
Revenue growth impacted by currency effects and disposals
Revenue in the division increased by 1.6% to €7,124 million in the first half of 2014 (previous year: €7,009 million). Growth was impacted by negative currency effects of €172 million and the loss of revenue from prior-year disposals of €147 million. Excluding these effects, revenue growth was 6.2%. In the second quarter, revenue increased year-on-year by 2.3% from €3,537 million to €3,618 million. Excluding the effects mentioned above, second quarter revenue growth was 5.7%.
First half-year revenue in the Supply Chain business unit was €6,463 million, an increase of 1.3% (previous year: €6,383 million). Excluding business disposals and negative currency effects, growth was 6.2%. 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 4.3%.
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, which we disposed of in the second quarter of 2013. Excluding negative currency effects, the highest revenue growth was generated in the USA, Canada and Brazil, with the latter 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 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 fully 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 improved due to additional business with the UK National Health Service. Prior-year disposals also impacted revenue growth in this region.
Williams Lea revenue increased by 5.6% in the reporting period to €664 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 €510 million secured
In the first half of 2014, the Supply Chain business unit concluded additional contracts worth around €510 million in annualised revenue with both new and existing customers. The Consumer, Retail, Life Sciences & Healthcare, Automotive and Technology sectors accounted for the majority of the gains. The annualised contract renewal rate remained at a consistently high level.
Improved first half EBIT performance
EBIT in the division was €193 million in the first half of 2014 (previous year: €162 million). The previous year included charges associated with the Chapter 11 insolvency filing of a major customer and expenses associated with the business disposals. The improved EBIT can be attributed to the high level of new business and to prior-year restructuring programmes. The return on sales was 2.7% (previous year: 2.3%). In the second quarter, EBIT increased from €79 million to €109 million. Operating cash flow for the first half of 2014 was €22 million (previous year: €46 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. However, we have adjusted our expectations regarding the contributions to be made by the respective divisions. The Post - eCommerce - Parcel (PeP) division is now likely to contribute around €1.3 billion to consolidated EBIT. 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 reduced forecast for the DHL divisions is due to the lower than expected contribution from GLOBAL FORWARDING, FREIGHT due to difficult market conditions and additional investments for the NFE transformation programme. 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 expect the earnings generated by the Group in 2015 to significantly surpass the figure for 2014. However, we have decided not to provide specific guidance for 2015 at this time. Management has still to determine the exact amount of investments required for the NFE transformation programme in GLOBAL FORWARDING, FREIGHT and newly decided strategic restructuring measures in the SUPPLY CHAIN division.
In addition, the earnings projection presented by the Board of Management for 2016 calls for 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.