"We cannot ease up now and must accelerate our successful cost management."
CEO Frank Appel: "The roadmap to value is a tremendous success."
Deutsche Post DHL released its third-quarter results today. If the Arcandor effect were excluded, underlying EBIT would have exceeded last year's level, even though revenue fell by 18.6 percent to 11.2 billion euros. In an interview with Deutsche Post DHL News, CEO Frank Appel discussed the results and the company's raised guidance for fiscal year 2009.
Deutsche Post DHL News: The situation appears to have improved since the second quarter: Year on year, underlying EBIT fell only 10 percent despite the Arcandor bankruptcy - the second-quarter decrease was nearly 40 percent. What brought about the improvement?
Frank Appel: Our strict cost-cutting strategy has indeed borne fruit in all Divisions. The best example is the EXPRESS Division. The Division's management was able to boost underlying EBIT more than five times. What a remarkable performance! On the Group level, underlying EBIT would have climbed as well if the charges related to the Arcandor insolvency were factored out.
Deutsche Post DHL News: Does this mean that the crisis is over?
Frank Appel: No - it is too early for such talk. We still have to cope with headwinds. Take the Arcandor insolvency as an example. This development resulted in writedowns of 186 million euros in the first nine months of the year. We also do not see any substantial improvement in transport volume. For this reason, I caution against talking about the end of the recession right now.
Deutsche Post DHL News: At the same time you released your quarterly results, you raised your guidance for the entire fiscal year and now expect underlying EBIT to reach at least 1.35 billion. How does this fit in with your pessimistic view of the economy right now?
Frank Appel: I am not a pessimist. But I don't like optimism just for the sake of it. The raised outlook is a direct result of the successful cost management being done in all of the company's Divisions and not the consequence of a sudden tailwind. I will certainly not complain if we happen to get an unexpected boost from an economic recovery in the months ahead. But we cannot count on that. Instead, we must continue to work together and accelerate our efforts.
Deutsche Post DHL News: What does that specifically mean for the next few months?
Frank Appel: That specifically means that we cannot loosen the reins and that we must continue to save money. We will reach our goal of saving 1 billion euros in indirect costs at the end of 2009 already - a whole year earlier than planned. But this does not mean that we have reached our destination yet. In the months ahead, our top priority must be to design our structures more efficiently.
Deutsche Post DHL: Let's talk for a minute about the individual Divisions. You have already mentioned the EXPRESS Division. Besides the progress being achieved in costs, how is business going?
Frank Appel: In EXPRESS too we are still feeling the effects of the economic crisis. Revenue fell 27 percent in the third quarter. At the same time, the rigorous cost-cutting in the Express Division has taken hold. As a result, the margin for underlying EBIT outside the U.S. was 9.5 percent. In the United States, where we completely pulled out of the market for domestic express shipments at the beginning of the year, we were able to cut our losses before special items in half. As a result, we are well on our way to reaching the target of reducing losses from the U.S. express business on an annual basis to below 400 million dollars beginning in the current fourth quarter. In addition, our customers still value our expertise in international express services.
Deutsche Post DHL: At the beginning of the year, you described the MAIL Division as a problem child. How did Deutsche Post perform in the third quarter?
Frank Appel: We are still dealing with a continuously shrinking market as communications increasingly shift to the Internet. For this reason, we are working tremendously hard on the Internet letter because Deutsche Post is the only one that can link letter communications in the Internet with the security Deutsche Post is known for. During the third quarter, the recession once again forced many customers to cut back on their investments. And even as we are seeing some stabilization among business customers following the weak second-quarter performance, revenue still remains below the previous year's level. Underlying EBIT dropped by about 6 percent because cost-saving efforts were unable to fully offset higher costs.
Deutsche Post DHL: At the end of last week, you worked out a deal with Ver.di on a broad package related to the current collective-bargaining agreement following intense negotiations. What do you think of the results?
Frank Appel: With this compromise, we have achieved an important stage win that gives us planning security for the next two years. Nothing more and nothing less. The savings of about 370 million euros will make a major contribution to our efforts to secure profitability and jobs in the MAIL Division over the next two years. But I have to continue stressing one point: To prepare Deutsche Post for the future and to offset falling volume, we must do more over the medium term. With the recent agreement our employees have already done their bit to secure profits in the MAIL division in 2010 and 2011. Now it is time for the government to finally respond to the new business conditions. Or can you tell me of another product besides postal rates whose price has not increased in the last 12 years?
Deutsche Post DHL: Let's now take a look at the Group's second pillar. The logistics business is also being shaken by the weak economy. Has the much-discussed light at the end of the tunnel been seen in this business yet?
Frank Appel: In our freight and global-forwarding business, we can certainly talk about stabilization. Our work to intensify marketing activities in addition to cost measures has paid off in recent months. We have considerably expanded our market position. Unfortunately, freight rates have developed unfavorable, a fact that is reflected in the drop in EBIT. In the supply chain area, we have actually performed quite well if you look at revenue trends. Unfortunately, the bankruptcy of Arcandor led to a loss in underlying EBIT.
Deutsche Post DHL News: It has been exactly two years since you introduced your Roadmap to Value in Frankfurt - one of the program's main goals was to increase the payout to shareholders. Have you lived up to your own expectations as well as those of shareholders?
Frank Appel: The Roadmap to Value is a tremendous success and has been welcomed with open arms by the market. Two years ago, we naturally had no idea that we were about to enter one of the worst economic and financial crises in decades. But thanks to the Roadmap, we put the company on the right track to safely manage the crisis at an early point in time. When we look back at our accomplishments over the last two years, we can say that we have achieved our goals, or even exceeded them to a large degree, in terms of profitability, net working capital, the sale of non-strategic company units as well as transparency and investments. The economy is to blame for the fact that consolidated profits and dividends have not turned out as planned. But you can be certain about one thing: We have not forgotten about this goal.
Deutsche Post DHL News: One final question - you have a new CFO working for you, Larry Rosen, who left a position at Fresenius Medical Care to join Deutsche Post DHL in September. How would you describe your working relationship with him?
Frank Appel: I think we can say after two months that Larry Rosen fits perfectly into the management team at Deutsche Post DHL, and we are happy that we could hire such an outstanding CFO. It was clear after just a couple of weeks on the job that he takes a very level-headed and open approach to his new job. He keeps the interests of our international investors and stakeholders as well as those of our employees in mind.