"Investors appreciate our focus on shareholder value creation"
In an interview with DPWN News, CFO John Allan looks back on 2007 and talks about his expectations for 2008. Key topics include the investor feedback following the "Roadmap to Value" announcement, recent developments in the German mail market, and an outlook on the general economic situation as well as the logistics industry in 2008.
DPWN News: Mr. Allan, in November you presented the "Roadmap to Value," a program designed to boost investors' confidence in Deutsche Post World Net. What were their initial reactions?
Allan: We went on a roadshow right after the announcement to explain the Roadmap to Value to our investors. Their feedback was very positive. My impression is that they trust our strong commitment to focus on shareholder value, and that they believe that we are doing the right things. Especially U.S. investors were very interested in our program, which is partly due to the strength of the euro, which makes European companies even more attractive. Of course, there are always people who would have wanted even more, but this is just natural. All of our shareholders now want to see our progress in the implementation of the "Roadmap to Value."
DPWN News: What is the most attractive feature of the Roadmap from the investors' perspective?
Allan: The whole program was received very well. As expected, our goal to improve cash generation and to increase payouts to shareholders resonated very well with our investor community. Many of them also highlighted our decision to introduce EBIT after Asset Charge as a value-based performance metric across the Group.
DPWN News: The share price has rebounded since early November. Do you attribute this mainly to the Roadmap to Value announcement?
Allan: The Roadmap to Value announcement certainly played a significant role in the recent share price increase. Frankly, we would have been quite disappointed if the market had ignored it. But there were certainly other factors as well, in particular our third-quarter earnings and much more clarity with regard to the future market regime for the liberalized mail services in Germany.
DPWN News: Did the federal government's compromise on the minimum wage for postal workers help to boost the share price?
Allan: The minimum wage which has now been agreed on has no immediate effect on Deutsche Post World Net's cost structure. We pay at least this wage level throughout the German mail services business. We have said before that it cannot be right if our employees in the mail service division pay full social security, which is then used to subsidize dumping wages at our competitors. This has now been straightened out, and we have all seen the first reactions.
DPWN News: Some politicians now call for an abolition of Deutsche Post World Net's VAT exemption. How likely is this from your point of view?
Allan: There is a good reason for the VAT exemption of Deutsche Post World Net: We are legally obliged to provide a universal mail service in Germany. We have to service every household from the smallest North Sea island to the highest mountain village - while our competitors can pick the cherries if they want. There are also strict regulations about the number of branch offices and mailboxes we have to make available. This is widely understood in political circles, and I do not see any serious attempt to abolish our VAT exemption.
DPWN News: What would the consequences be if you lose the VAT exemption?
Allan: There is no reason for us to speculate about any consequences as there's no evidence whatsoever, that we would lose the exemption.
DPWN News: Some of your larger competitors seem to be in turmoil now. Are you more optimistic with regard to the MAIL earnings guidance for next year?
Allan: We have said in November that there is a maximum downside risk of 10 to 20 percent for our EBIT in the MAIL division until 2009. Given the recent developments we continue to feel very comfortable with this guidance.
DPWN News: Are you on track with regard to the introduction of EBIT after Asset Charge (EAC) as the new key performance metric?
Allan: We are fully on track with the implementation of EBIT after Asset Charge across the Group, and we have a project group which is working hard to enable the introduction of the concept on January 1, 2008. With EBIT after Asset Charge we will commit the whole Group to value-based management. It is vital that we help everyone to become familiar with the concept. We have therefore decided on a two-step approach in which we tie 50 percent of the incentives to EAC during the first year, until EAC will fully replace EBIT as the key performance metric in 2009.
DPWN News: Do you already have any guidance with regard to business development in the fourth quarter?
Allan: We are in the last days of the Christmas season which is usually the busiest time in the year. From what I can see, there is no reason for us to be concerned about our outlook. But please take this as a very preliminary statement.
DPWN News: Looking back on 2007, what do you think were the most important developments in the operating business?
Allan: Personally, the most important success in 2007 has been the fast and smooth conclusion of the integration of Exel. On the Group level I would highlight the earnings improvement in the EXPRESS business, the strong performance of the international mail businesses and the excellent results of Postbank. We also made several strategic moves such as the foundation of a joint cargo airline with Lufthansa. Overall, we succeeded in delivering organic growth, which remains at the heart of our strategy going forward.
DPWN News: Let's look at the framework for next year. What is your expectation for the growth regions in Asia? Do you expect that they will be able to maintain their strong growth rates in 2008?
Allan: There is no reason for us to doubt that the major Asian economies will continue to deliver strong GDP growth. Japan's economy is in a robust shape, driven by investment and consumer spending. China is expected to continue with double-digit growth rates. As the No. 1 express and logistics service provider in the Asia-Pacific region, DHL should continue to benefit from those developments. There are of course some uncertainties with regard to the oil price, interest rates and the dollar, but we are quite optimistic for Asia.
DPWN News: How would a further economic downturn in the U.S. affect your business?
Allan: I believe that it is quite a challenge to predict the further course of the U.S. economy at this moment. We do not yet know the full scale of the effects of the subprime mortgage crisis. If the banking system is cleaning up the mess thoroughly and rapidly, the current slowdown in GDP growth might be a temporary effect, and we might see the economy picking up again over the course of the next year. But I would prefer to stay on the cautious side for the moment.
DPWN News: Are you concerned about the current level of the oil price?
Allan: It's slightly different for each of our businesses but all in all the impact of rising fuel prices is quite modest. In MAIL, fuel costs account for about 1 percent of our cost base and we have actually been able to drive fuel costs down by optimizing our routes and training our drivers. This is actually a real competitive advantage: Because of our scale, because of our expertise in transport management we are able to offer our customers better solutions in times in which they are more cost-conscious.
In EXPRESS we have fuel surcharges, which enable us for the vast majority of our customers to recover fuel price increases very quickly. The same is true for Forwarding.
DPWN News: The climate change is one of the world's primary issues. As the world's largest logistics service provider, Deutsche Post World Net should take responsibility. What is your response?
Allan: As the world's largest logistics company we fully accept our responsibility and are pioneering many approaches in this area. For example, with our GoGreen product and services range we are the first company in our industry that offers customers the option to reduce their carbon footprint. And believe me, with the public debate intensifying, more and more customers are asking for sustainable solutions. We also do a lot to make our fleets more energy-efficient. One thing is clear, the issue will be very high up on our agenda next year.
DPWN News: What is the first thing you'll start working on on January 2nd?
Allan: I'll take a look at the starting share price, and then I'm doing what a CFO should do at that time of the year: work on delivering the full-year figures as fast as we can.