"We now have a unique platform for organic growth"
Deutsche Post World Net is presenting its 2006 annual report at its annual press conference in Bonn today. The Group enjoyed an increase in revenues to over 60 billion euros during the recently completed financial year and reached its EBIT target. Deutsche Post World Net's acquisitions of Exel, BHW and Williams Lea have been consolidated for the first time in 2006. The EBIT improved 2.9% to approximately 3.9 billion euros. Chief Financial Officer Prof. Dr. Edgar Ernst comments on the key figures of the past year and provides some insight into the 2007 financial year.
DPWN News: Prof. Ernst, the fact that business was developing positively was already evident following the third quarter. The preliminary figures for the entire year of 2006 were honored by the stock market with an increase in the share price. How do you personally view the year 2006 in retrospect?
Prof. Dr. Edgar Ernst: We achieved our objectives with respect to current operations and the integration of our acquisitions of Exel, BHW and Williams Lea. Therefore we are quite satisfied with the 2006 financial year. We have made good progress in important group segments and even slightly exceeded our expectations in other areas such as our mail delivery business. On an operating level, we saw quite robust growth during the fourth quarter when you exclude the one-time effects from the previous year.
DPWN News: Twelve months ago you indicated that 2006 would be the "year of integration." How did the year develop in this respect?
Ernst: The integration of three important acquisitions was felt in many parts of the group. You have to keep in mind that the incorporation of Exel is the largest integration that the logistics industry has ever seen. We launched more than 930 projects in conjunction with Exel alone. Almost all of them have now been completed. They included the merging of two independent cargo networks, the merging of the two organizations and the joint use of facilities. In view of the tremendous effort involved, I am all that more pleased that the integration projects did not have a negative effect on current operations. In fact, the contrary is true. The integration of Exel is right on schedule, and we will reap the benefits of the projected synergies of 220 million euros in 2008 - and perhaps even exceed them. We completed the integration of BHW even faster than planned.
DPWN News: Let us take a look at earnings. Despite the strong increase in revenues, your EBIT grew only 2.9%. Is this sufficient in your opinion?
Ernst: You have to take into account that the integration of Exel involved significant costs. The situation in the USA also still had a negative impact on the earnings picture. Nonetheless, our 2006 EBIT of 3.87 billion euros was more or less what we had expected. This is the main thing for us. The capital markets honored the release of our preliminary figures with an appropriate increase in our share price.
DPWN News: What special items affected the 2006 EBIT?
Ernst: A one-time effect was generated by the decision to redeem the exchangeable bonds into Postbank shares and the related sale of shares in Deutsche Postbank in 2006. The favorable decision of the arbitration proceedings with regard to the dispute with Deutsche Telekom also had a positive effect. We already announced this during the course of the year.
DPWN News: Why did Group net income decline despite the improvement in EBIT?
Ernst: The initial integration of Exel resulted in an increase in financing costs. The financial results declined by 319 million euros. Given the fact that the tax rate remained unchanged, this would necessarily be reflected in our earnings after taxes. Group net income after minorities was 1.92 billion euros, thus lower than the previous year's figure. With respect to net earnings, you must also take into account that minority shareholders are entitled to a bigger share of net profit following the sale of Postbank stock. Added to this is the fact that the average number of shares increased as a result of the issuance of shares in conjunction with the acquisition of Exel. This resulted in earnings per share of 1.60 euros as opposed to 1.99 euros for the previous year.
DPWN News: But you are still planning to raise the dividend?
Ernst: That's right. We are recommending to the shareholders' meeting that the dividend be raised to 75 cents per share or 7% more than for the previous year. This will raise the total dividend payout to 902 million euros, which corresponds to a payout ratio of 47.1%. Our net dividend margin climbed to 3.3%, because the dividend for domestic shareholders remains tax free as in recent years.
DPWN News: Which segments of the group contributed the most to the good results?
Ernst: We exceeded our forecasts in three divisions and achieved our target corridor in a fourth division, EXPRESS. Our LOGISTICS division, which became our biggest revenue generator last year, and our FINANCIAL SERVICES division reported very good results. Our MAIL division even slightly exceeded our expectations with an EBIT of 2.05 billion euros.
DPWN News: How did the MAIL division manage to produce such good results?
Ernst: We were able to more than compensate for the anticipated decline in business at home through growth in our international mail delivery operations. Revenues in our global mail and value-added services businesses rose 34.3% to 2.82 billion euros through the acquisition and initial consolidation of Williams Lea as well as strong growth in our existing international business. For example, our U.S. subsidiary DHL Global Mail developed quite positively during the past financial year. We also made progress at home with respect to productivity and costs despite intense competition and a loss in volume due to the higher share of electronic communication. With 15.5%, our profit margin remained unchanged at the same high level as the previous year.
DPWN News: How has the express business developed in North America?
Ernst: We initiated the turnaround in our U.S. express business in 2006 even though revenues were still below expectations in the first half of the year. The earnings situation in this region improved considerably during the course of the year, and the monthly results for the second half of the year clearly show that we are on the right track in the U.S.
DPWN News: Acquisition financing has significantly increased the degree of indebtedness of Deutsche Post World Net. Were you able to improve the Group's financial position during the 2006 financial year?
Ernst: Yes, the key figures pertaining to the Group's assets situation improved. The most important development in my opinion was the decline in net debt. As of year-end 2005, net debt was 4.19 billion euros, accounting for Postbank at-equity. During the 2006 financial year we managed to reduce this figure by 26.5% to 3.08 billion euros. It is also worth taking a look at our degree of dynamic indebtedness. This key figure shows how long we would need to amortize the debt if the entire operating cash flow for the financial year were to be used for this purpose. At the end of 2006 this key figure was 1.4 years. In 2005 it was an entire year more. This improvement is not only an expression of a lower degree of indebtedness but of a higher cash flow as well.
DPWN News: How do you view the economic outlook for 2007?
Ernst: I am quite optimistic abut the economy as a whole. World trade will grow strongly this year - up to 8% according to economic researchers. The U.S. are currently going through a slow phase, but growth is indicated in most of Deutsche Post World Net's other core markets - in Japan and in China, in the Emerging Markets and in the euro zone. And all indications at the beginning of the year show that Germany is coping quite well with the increase in valued added tax.
DPWN News: What are the objectives of Deutsche Post World Net in 2007?
Ernst: We are counting on business developing positively overall. Revenue is expected to rise slightly, and we assume that the EBIT - adjusted for special items in 2006 - will climb from 3.5 billion euros to at least 3.6 billion euros.
DPWN News: And what are your operational priorities?
Ernst: We have, of course, set clear operative goals in every segment. We want to increase the market share of our international mail delivery operations and generate more value added services business in foreign markets. In Germany, key decisions are to be made in our domestic mail market. It is important that we gain the support of the government here. The liberalization of European postal markets must proceed in harmony. It is also important to ensure that wage dumping does not become the rule in the German mail delivery market. Deutsche Post remains determined to provide high-quality services nationwide at reasonable prices. A prerequisite here, however, that we be able to do so profitably. The focus of our express business is also service, service, service. We want to make it even easier for customers to work with us in all important markets and thereby expand our market share. We want to benefit from the growth of the logistics market and continually improve our margins. Postbank has strengthened its marketing activities and for the first time has set a target of attracting over one million new customers in 2007.
DPWN News: How would you formulate your goals in a nutshell?
Ernst: We are the largest logistics group in the world and have a unique platform. It is now our objective to make optimal use of this platform and to grow organically.