"We are fully committed to generating more value for our shareholders"
Deutsche Post World Net today released its report for the first nine months of 2007. As announced in August, the Group also presented a comprehensive new capital markets program for improved value creation throughout the Group. This "Roadmap to Value" includes an extensive set of measures targeting higher cash generation, increased payouts to shareholders and improved transparency. In an interview with DPWN News, Chief Financial Officer John Allan talked about highlights of the "Roadmap to Value" and about the third quarter results.
DPWN News: Mr. Allan, you have presented the "Roadmap to Value" which is supposed to address recent investor criticism of Deutsche Post World Net. Are you sure that this is going in the right direction?
Allan: Yes, we are absolutely convinced that we are doing the right thing. During the past months we have listened very carefully to what our investors had to say. Besides using our own Investor Relations function, we had assigned Boston Consulting Group with the task of doing an independent perception study among our shareholders. This gave us a fairly accurate picture of investor opinion and provided an excellent basis for the "Roadmap to Value".
DPWN News: Is the "Roadmap to Value" the expected big step towards increased value generation?
Allan: We have stressed during the past weeks that the Roadmap will consist of an extensive set of measures which are all meant to generate more cash, increase returns for our shareholders and improve transparency. Some of them may seem rather technical from the outside, but in sum they will have a substantial impact on value generation throughout the Group. Take the introduction of EBIT after Asset Charge as the new key performance indicator: This is a major change which will have a huge effect on the way our executives manage their businesses. Their main interest will now be to maximize value. In combination with our other measures, I definitely think that this sets the future direction of the company. But I will leave the final judgment to the market.
DPWN News: "EBIT after Asset Charge" sounds like a rather abstract concept. Can you shed some more light on how this is supposed to work?
Allan: EBIT after Asset Charge will be introduced as the new performance metric for the Group. The main difference to the usual EBIT is that it accounts for the capital employed in generating those earnings and charges for it at the cost of capital. This latter element is the "Asset Charge", which will focus management's attention on the efficient use of corporate resources and thus on maximizing value for Deutsche Post World Net.
DPWN News: What are the expected effects?
Allan: By introducing the new key performance indicator on January 1, 2008 managers at Deutsche Post World Net will be incentivized for the portion of earnings which contribute to value. It will be in their own personal interest to align their actions and decisions with the interests of our shareholders. This will be a trigger for a profound cultural change: Deutsche Post World Net as a whole will be run on the principles of value based management.
DPWN News: What are the most important results of the other elements of the "Roadmap to Value"?
Allan: It has been one of our main objectives to provide tangible benefits to our investors. The "Roadmap to Value" therefore has a strong focus on generating more cash, which will enable us to return more cash to our investors. We have set ourselves quantifiable targets: We have started a 1 billion euro profit improvement program, we plan to reduce our net working capital by 700 million euros, and we target EUR 1bn from disposals of real estate and other non-strategic assets, all within the next two years. Those measures will free up cash which we intend to return to our shareholders through increased payouts and potential other measures. Raising the 2007 dividend by 20 percent to 90 cents is a first step in this direction.
DPWN News: Where do you plan to generate the targeted 1 billion euros to underscore EBIT growth?
Allan: We have already identified the key levers for our profit-improvement program. The Corporate Center and overheads will be one area where we are targeting significant cost reductions of around 230 million euros by 2009. In addition, we expect to generate 350 million euros in savings in the Express division and another 200 million euros in Logistics. 250 million euros shall be generated in other areas.
DPWN News: Speaking of profitability, let us have a look at the nine months results. EBIT is slightly below the prior year figure. How do you comment on that?
Allan: We have achieved an EBIT of 2.54 billion euros during the first nine months of 2007. The prior-year figure of 2.59 billion euros included one-off effects of 375 million euros, while we had only minor one-off items this year. Adjusted for one-off effects, we increased our EBIT by 10 percent on a year-on-year basis. This is in line with our expectations. What is most important to me though is that LOGISTICS and EXPRESS achieved the strongest growth in earnings.
DPWN News: What were the main drivers in the LOGISTICS segment?
Allan: LOGISTICS benefits from strong demand in key business areas and from the successful integration of Exel. DHL Global Forwarding showed excellent revenue growth in the sea freight business. At DHL Exel Supply Chain, the main positive impacts came from the NHS contract in the UK and a general growth in revenues in nearly all regions. We also had some proceeds from an asset sale, but EBIT has definitely been driven by organic growth. This shows that our clear focus on organic growth, which is a basis of the "Roadmap to Value", is paying off.
DPWN News: Is this also true for the EXPRESS segment?
Allan: Yes, EXPRESS continued with its positive development during the first nine months. Despite significant negative currency effects EBIT in this segment rose by 59.7 percent to 246 million euros, with all regions improving their profitability. We are certainly not yet where we want to be in terms of margins, but we are making good progress. Our strong presence in high-growth markets such as Asia Pacific and Eastern Europe, Middle East and Africa (EEMEA) fueled organic revenue growth. Our US business improved as well, although we must say that the positive development came to a stop during the third quarter. The macro-economic conditions in the US had an adverse impact on the Domestic Air business in this region, which - given the widespread discussion about the US economy - should not be too much of a surprise. Major US competitors also suffered from a weaker US economy.
DPWN News: Is this one of the reasons why you scrapped the break-even target for EXPRESS Americas business?
Allan: Our products Ground and International are further improving in the US. However it would be foolish not to account for the fact that macro conditions have changed over the past few months and affect our domestic business in the States. Our investors may not like it at first sight, but we believe that we should provide them with a realistic perspective.
It is important to remember however that the domestic business in the US is a crucial part of our global logistics network. We must be able to provide coverage on a door-to-door basis. But our shareholders can be sure that we will continue to relentlessly work on improvements of the profitability at EXPRESS Americas.
DPWN News: Looking at the big picture again, why does Deutsche Post World Net change its guidance policy?
Allan: We will provide the financial community with one-year earnings guidance instead of a medium-term earnings goal. This near-term earnings guidance will be more detailed than before, and we will also add indicative corridors for profitability for 2009 as an exception to the rule. In sum, we believe that it is in the best interest of analysts and investors to receive a more precise outlook with a higher degree of confidence. This is also fully in line with the practice of our peer group. Again, our philosophy behind this is: Be realistic, consistent and transparent.
DPWN News: Transparency is one of the main elements of the "Roadmap to Value". How do you plan to improve it?
Allan: Due to a series of major acquisitions during the past years, Deutsche Post World Net has a history of reshuffling businesses and changing the reporting structure. Investors and analysts had a point when they said that the Group's results were difficult to track over time and suffered from limited comparability. We commit ourselves to significantly improving transparency and comparability by keeping the reporting structure stable after one final re-organization of the Services division. If for whatever reasons we cannot avoid to reshuffle a business, we will restate our results for two full business years. Equally important, we commit to providing more details in our financial reporting. Investors, analysts and the financial media will be able to assess effects on our EBIT development both on group and on segment level, for example.
DPWN News: If you sum it up - what is your message to your investors?
Allan: Expect us to relentlessly work on generating value throughout the whole Group, and look forward to increased returns.
DPWN News: On a more personal note - how have the first weeks in your new position been?
Allan: Incredibly busy, which I guess is not surprising. But besides being quite familiar with the whole Group from my previous function on the Board, I am in the wonderful position to have a fantastic team which goes a lot of extra miles to bring me fully up to speed.