Deutsche Post DHL first-quarter earnings, revenue decline – cost reductions to be accelerated05/06/2009, 08:01 AM CEST
- Underlying EBIT falls from 539 million euros to 312 million euros; reported EBIT at 27 million euros
- Net income jumps to 944 million euros due to valuation of Postbank put options
- MAIL Corporate Division reports 25.5 percent drop in underlying EBIT amid lower volumes, higher wages
- CEO Appel: “We need to act now in order to minimize job cuts.”
Bonn: As a result of the global economic crisis, Deutsche Post DHL, the world’s largest provider of logistics services, recorded a 12.9 percent drop in revenue to 11.5 billion euros in the first quarter of 2009. Underlying EBIT fell by 42.1 percent to 312 million euros. The decrease was primarily caused by the unprecedented plunge in demand across all regions and sectors as well as reduced volumes and higher wages in the MAIL Corporate Division. Reported EBIT on Group level totaled 27 million euros compared with 539 million euros in the previous year mainly because of non-recurring charges tied to the restructuring the Group’s DHL Express business in the U.S.
“We have to act now to secure our profitability and jobs over the long term. There can’t be any sacred cows,” said Chief Executive Officer Frank Appel. “While the latest data seem to indicate that we have reached a bottom in terms of shipping volumes, we are preparing to deal with a longer period of weak demand all across the world and therefore will relentlessly focus on reducing our cost base – particularly in MAIL and EXPRESS – as well as securing our solid cash position. For us, the crisis is also an opportunity: We are the global market leader and therefore have the necessary size and financial muscle to present ourselves very aggressively in the market.” In that context, Appel referred to 1 billion euros of new business that the Group secured in the first quarter.
Challenges being tackled
The global economic crisis has uncovered weak spots in the company, which will be tackled systematically over the coming weeks and months. To that end, the Corporate Division EXPRESS is planning a wide-ranging reorganization to create a leaner and more streamlined business by eliminating layers within the organization while leveraging synergies on the global and regional levels. The current five geographical regions will be combined to form three. This will be complemented by a new governance model with a six-member Global Management Board. One of the first things the new team will be looking at is finding solutions for loss-making domestic businesses and sharpening the focus on the Group’s profitable international Express business and on further cost reductions.
In addition to that the Group plans to further raise efficiency at its Corporate Division MAIL to make the business fit for the future in light of declining volumes. In order to do so, Deutsche Post DHL plans to make structural adjustments in addition to further cost cuts. The Group plans to discuss topics such as an extension of the weekly working hours, or a postponement of planned salary increases with the social partners. On an operating level, the Group plans to further boost productivity. Mail that is currently being shipped by air will in the future be shipped in a more environmentally friendly and less costly manner by ground transportation, without compromising on quality. Together, all measures are expected to underpin EBIT at the MAIL division by around 300 million euros this year.
Net income and cash flow
In the first quarter, net income after minorities rose from 383 million euros to 944 million euros. The key reason for this increase was the valuation of put options for 26.4 million shares of Deutsche Postbank stock that had a positive impact on the financial result. Accordingly, earnings per share rose from 32 cents to 78 cents. Operating cash flow was at minus 275 million euros compared with 141 million euros in the previous year. The main reasons for this drop were the lower EBIT and the increased use of provisions, particularly in connection with the restructuring of DHL’s U.S. express business. At the same time, further progress was made in the Group’s effort to reduce net working capital. Still, free cash flow was also negative with 1.4 billion euros as the Group invested part of the cash received from the sale of Postbank in short-term capital market instruments. Net cash from financing activities amounted to 3.29 billion euros after Deutsche Bank subscribed to mandatory bonds exchangeable into Postbank shares and paid for the collateralization of the put options for the remaining Postbank shares. Cash and cash equivalents amounted to 3.51 billion euros at the end of the first quarter.
MAIL Corporate Division
As in past quarters, the MAIL Division was able to maintain its relationship with important customers and expand its market position in Germany in the first quarter. To further strengthen its quality leadership and boost productivity, Deutsche Post invested during the first quarter in new sorting equipment for standard and compact letters as well as for oversized letters that will replace older equipment over the next three years.
Revenue in the MAIL Division fell by 4.5 percent to 3.49 billion euros even though the reporting period had an additional 0.6 working day. Here, too, the global economic crisis was the main reason for cutbacks in advertising spending initiated in particular by mail-order companies. EBIT in the MAIL Division dropped from 546 million euros in the previous year’s reporting period to 407 million euros. The decrease was caused by lower demand in cyclical business units and higher wage costs.
EXPRESS Corporate Division
Revenue in the EXPRESS Division dropped by 25.9 percent to 2.5 billion euros in the first three months of the year. The global economic crisis caused daily shipping volumes in the product area of time definite international to plunge 13.3 percent. Outside the United States, shipping volumes for the same product dropped 10.6 percent.
Since the beginning of February, DHL no longer offers national express products within the United States. Combined with the weak economy, this change resulted in a 35.7 percent decrease in daily shipping volumes in the product area of time definite international in the United States. This decrease, just like the restructuring costs totaling 243 million euros, was fully in line with the Group’s planning. As a result, Deutsche Post DHL is confident that, despite the economic crisis, it will achieve its desired goal of cutting losses on an annual basis to below $400 million beginning in the fourth quarter of 2009.
In Europe, revenue fell by 16.9 percent, due to reduced shipping volumes. In the Asia-Pacific region, revenue dropped by 6.7 percent. Here, exchange rate trends involving the euro cushioned the decrease in revenue. The euro exchange rate also had a positive effect in Eastern Europe, the Middle East and Africa, enabling revenue in this region to remain stable.
During the first quarter, the underlying EBIT loss totaled 120 million euros in the EXPRESS Division. Outside the United States, underlying EBIT decreased from 229 million euros to 66 million euros. As a result of restructuring costs at DHL U.S. Express, the reported EBIT loss totaled 392 million euros. In the same quarter last year, earnings before and after non-recurring items totaled 8 million euros.
GLOBAL FORWARDING, FREIGHT Corporate Division
The first-quarter results of the forwarding business also reflected decreasing trade volumes. As a result, revenue in the entire division dropped by 18.2 percent to 2.66 billion euros. The business unit Global Forwarding experienced a similar drop in revenue at 18.6 percent to 1.92 billion euros. Air-freight volume in the export area sank by 26.2 percent – the marked drop in the technology area had a particularly negative effect here. Ocean freight volumes outperformed the market: While the Group experienced a 10 percent drop in ocean freight volumes, the overall market fell by 16 percent. In the Freight business unit, revenue decreased by 15.5 percent to 762 million euros amid currency effects.
In the first quarter, EBIT in the GLOBAL FORWARDING, FREIGHT Division dropped from 78 million euros in the previous year to 45 million euros.
SUPPLY CHAIN Corporate Division
Considering the weak economic environment, the development of the Group’s contract logistics business was rather pleasing in the first quarter. Revenue in the entire division fell by 6 percent primarily because of negative exchange-rate effects. Adjusted for these effects, the decrease amounted to only 2.4 percent. In particular, Williams Lea performed extremely well considering the current market environment with a 6 percent increase in organic growth. In terms of additional contracts with current and new customers, business was better than the previous year. As a result, orders with a total volume of about 300 million euros on an annual basis were recorded despite the difficult market environment. The share of contract extensions remained stable at more than 90 percent.
Thanks to reduced overhead costs, reported EBIT remained stable at 34 million euros during the first quarter. If restructuring charges of 8 million euros are excluded, EBIT even rose by 23.5 percent.
Following the significant drop in volumes around the Group in the first quarter 2009, Deutsche Post DHL may now be reaching the bottom in terms of volume declines. If this were the case, the Group would expect to see increasing benefit in the second half of the year and in 2010 from its cost-cutting program. In November, Deutsche Post DHL set a target of cutting at least 1 billion euros in non-operating costs by the end of 2010. The EXPRESS Corporate Division, which contributes the lion’s share with 460 million euros to the program, expects to reach its target by the end of 2009 already. The other corporate divisions – MAIL with 180 million euros, GLOBAL FORWARDING, FREIGHT with 160 million euros, SUPPLY CHAIN with 130 million euros and Corporate Center with 70 million euros – will also strive to reach their cost-cutting targets earlier than planned.
In particular in the EXPRESS Corporate Division, the good progress in the restructuring of the DHL U.S. Express business will support the improvement in the second half of the year. This should lead to underlying group EBIT showing significantly lower reductions relative to 2008 than the Group has seen in the first quarter and expects to see in the second quarter of the year.
The positive effects as a result of the Postbank transaction should lead to a return to a positive net profit in 2009 as a whole – a substantial improvement on 2008.