"The positive trends were confirmed in the first quarter"
Deutsche Post World Net published its interim report for the first quarter 2007 today. The Group got off to a good start in 2007 with higher revenues and earnings. Revenues rose by 4.4 percent to 15.5 billion euros, while EBIT increased by 8.7 percent to 998 million euros. In comparison to the prior-year period, the first-quarter figures for the first time included Williams Lea, which was acquired effective April 1, 2006, as well as The Stationery Office, a British company purchased in January 2007. In an interview with DPWN News Chief Financial Officer (CFO) Prof. Dr. Edgar Ernst explained how business developed during the first three months.
DPWN News: Prof. Ernst, the first quarter's figures indicate that business is developing favorably at Deutsche Post World Net. Is this your impression as well?
Edgar Ernst: We did in fact start the new fiscal year on a good note and posted strong gains in revenues and EBIT, meeting or exceeding analysts' expectations. This confirms a series of favorable trends that became visible at the end of 2006.
DPWN News: Which areas of business contributed the most to the growth in revenues?
Ernst: We are delighted that all business areas - MAIL, EXPRESS, LOGISTICS and FINANCIAL SERVICES - posted higher revenues. We noted particularly strong growth in the international mail business, which includes our activities in the Corporate Information Solutions area - previously known as value-added services. Particularly the consolidation of Williams Lea, whose revenues were not included in the prior-year quarter, led to a 40 percent increase in revenues in this business area. In the LOGISTICS segment revenues generated by our collaboration with the British National Health Service were mainly responsible for the significant increase in growth posted by DHL Exel Supply Chain.
DPWN News: How did the EXPRESS segment develop in the first quarter?
Ernst: During the first quarter we were able to continue the favorable earnings trend we had noted previously in the EXPRESS segment. During the period under review EBIT rose by 120 million euros to 62 million euros. In addition to strong growth in the two regions of Europe and EEMEA, which includes Eastern Europe, the Middle East and Africa, our growth rates also increased in the U.S. In terms of volume we recorded increases in both the international and domestic business, which reflects the fact that we were able to either maintain or expand our positions in the markets.
DPWN News: Nevertheless, despite recording greater volumes, revenue growth in the EXPRESS segment was fairly moderate. What were the reasons for this?
Ernst: We generate more than half of our revenues in the EXPRESS business in countries outside of Europe. Business developed favorably in all regions; however foreign currency effects of about 150 million euros had a negative impact on our results. But if you look at revenues in the individual local currencies our organic revenues in the EXPRESS business area increased by 6.5 percent over the same period last year.
DPWN News: Despite increased revenues, EBIT in the MAIL division declined by almost 11 percent in the first quarter. What was the reason for this?
Ernst: This is correct, but allow me to point out that we achieved an ongoing high EBIT margin of 15.7 percent in the MAIL division. Our strategy of offsetting the anticipated decline in domestic revenues with international growth in the mail business continues to pay off. Two factors have to be taken into consideration when looking at the EBIT figure: first, in comparison to the prior-year period there were 0.7 fewer work days in the first quarter of 2007. Secondly, last year we significantly reduced prices in our German package business and the results of our German package business are reported as part of the MAIL segment since the start of this year. Intensive competition in this area of business had an adverse impact on the earnings situation in the first quarter in this segment.
DPWN News: You noted that the first-time consolidation of Williams Lea made a major contribution to growth in the first quarter. What do you anticipate for the remaining quarters?
Ernst: The impact on growth arising from the consolidation of Williams Lea is certainly going to be most apparent in the first quarter. Revenues generated by Williams Lea were also included in last year's performance as of the second quarter 2006, so that the effects of this acquisition will be less evident over the entire year. Our forecast for the entire Group, however, remains unchanged and we anticipate that revenues will increase moderately in fiscal 2007 in comparison to the previous year. The favorable developments seen in all areas of business confirm these expectations.
DPWN News: Let us stay on the subject of expectations. During the first quarter Deutsche Post World Net earned almost one billion euros. Isn't your EBIT forecast of at least 3.6 billion euros for the entire year a bit too conservative?
Ernst: We indeed significantly improved our EBIT in the first quarter by 8.7 percent to 998 million euros. This is even more impressive when you consider that the figure for the previous year's quarter, which was 918 million euros, contained non-recurring income of 99 million euros. However, you must also take into consideration the fact that the EBIT figure for the first quarter of 2007 contains a non-recurring income of 59 million euros from the sale of Vfw AG, a waste management firm. Deutsche Post World Net certainly has an overall favorable business outlook, and yet we feel comfortable with our current guidance indicating an EBIT of at least 3.6 billion euros for the entire year.
DPWN News: The German federal government has confirmed its plans to fully liberalize the German mail market at the start of 2008. Are your expectations influenced by those statements?
Ernst: We haven't changed our position regarding this issue and we continue to state it quite clearly to German and European political decision-makers: we believe it is necessary to deregulate all European mail markets more or less at the same time, and to act against competitive distortions, for example in the form of below-market wages paid by other market participants. We anticipate that we will see first indications, also at the European level, regarding the next steps in this area before the summer recess. At this time I would like to again emphasize that we are totally prepared - strategically and operationally - for the discontinuation of the exclusive license. Even more so: We take our role as the sole universal service provider in Germany very seriously and will reinforce this claim during the coming months by introducing further service improvements, for example distribution on Sundays which is currently being tested, and customer-oriented communications measures.
DPWN News: What was the main emphasis of Deutsche Post World Net's investment strategy in the first quarter?
Ernst: We invested in the modernization and expansion of our platforms in all of our business areas. One of the biggest current investment projects is the construction of a new European hub for DHL at the Leipzig/Halle airport. In addition, we also invested in renewing our vehicle and aircraft fleets, in our IT infrastructure as well as in customer-specific transportation and storage solutions in the LOGISTICS division.
DPWN News: Investors are always looking at the cash flow. How has this figure developed during the first quarter?
Ernst: We have further improved the cash flow. Accounting for Postbank "at equity", which excludes the operations in banking, the cash flow from operating activities more than quadrupled to 250 million euros. This was mainly due to higher earnings before taxes and a lower net change in provisions.
DPWN News: Let's look ahead. Business is booming in many regions. How do you view the current market situation?
Ernst: We see that the global economy is currently on track to continue its solid growth. Above all, we are seeing dynamic growth in the eurozone, including Germany, as well as in Japan and China. In the USA the slowdown in growth since the second half of 2006 is still noticeable. We are recording higher volumes in our EXPRESS and LOGISTICS business areas, which is an indicator of the ongoing boom in global trade. For these reasons we still anticipate that we will see business develop favorably over the entire course of the year.
DPWN News: What are the implications for the future expansion of Deutsche Post World Net?
Ernst: Our priorities remain unchanged for the current year: we want to optimally leverage our unique global platform and grow our business organically. A main focus of our activities will be the further sustainable improvement in customer service to become our customers' first choice worldwide. We're committed to achieving this goal.