Deutsche Post World Net takes strong action to reduce U.S. Express loss, improve Group performance in light of economic downturn
- DHL Express to focus on international competencies in the U.S. and exit U.S. domestic air and ground business
- Roadmap to Value program intensified amid challenging economic environment - savings of 1 billion euros targeted
- Group 9-month underlying EBIT from continuing ops rises 1.3 percent
The international express offering in the U.S. will be maintained on today's levels and the region will remain an integral part of DHL's global Express network. Deutsche Post World Net also plans to accelerate its Roadmap to Value measures aimed at improving profitability throughout the Group by reducing operating and non-operating expenses in order to prepare the company for the economic challenges ahead.
The Group today also reported results for the first nine months of the year. Nine-month underlying EBIT from continuing operations rose 1.3 percent to 1.6 billion euros, with revenue in the period increasing by 2.3 percent to 40.5 billion euros. About 70 percent of revenue in the first nine months was generated outside of Germany.
"I dedicated my first nine months as CEO to tackling urgent legacy issues and laying a foundation for the company's future that is strong enough to resist even the hardest economic storm," Chief Executive Officer Frank Appel said at a press conference in Bonn. "By taking a realistic view and defining clear actions towards reducing costs, I am confident we are now on the right track to secure the Group's long-term growth."
DHL U.S. EXPRESS restructuring
In order to minimize future uncertainties at its DHL U.S. Express business to a minimum, the Group will discontinue U.S. domestic-only air and ground products on January 30 to focus entirely on its international offering. Annual operating costs at DHL U.S. Express will be reduced from the current $5.4 billion (4.2 billion euros) to less than $1 billion (770 million euros). In order to reach this target, DHL U.S. Express will close all ground hubs and reduce the number of stations from 412 to 103.
A total of 9,500 jobs at DHL Express in the U.S. will be cut as a result of the measures on top of the approximately 5,400 positions already reduced since the beginning of the year. The Group expects to spend an additional $1.9 billion (1.5 billion euros) on the restructuring, bringing the total Group costs to $3.9 billion (3 billion euros) over two years, the majority of which will be booked in 2008.
As a result of the restructuring measures, losses at the DHL U.S. Express business are now likely to amount to $1.5 billion (1.2 billion euros) in 2008 before one-off costs. For 2009, the loss is expected not to exceed $900 million (692 million euros) and to stabilize at an annualized level of below $400 million (308 million euros) in the fourth quarter of 2009. By ceasing domestic Express offerings in the U.S., DHL retains an operating business in the country with a more predictable performance going forward. The value the U.S. Express business generates for the global Express network will clearly exceed the annual losses. The Group still aims for the global DHL Express business to generate its cost of capital in 2010.
John Mullen, responsible for Express on Deutsche Post World Net's Management Board, commented: "This is the right move for our U.S. Express operations given the current economic climate and for the long run. Focusing our U.S. Express efforts on what we do better than anyone else - international shipping - serves the best interests of our customers, employees and shareholders around the world."
The retained U.S. international express network with a total of 3,000 to 4,000 employees will be tailored to the needs of the Group's international express service customers. All international shipments into the U.S. will still be delivered, while 99 percent of the outbound shipments will be picked up.
The U.S. remains a key market for Deutsche Post World Net. The service of DHL's other business in the U.S. - Supply Chain/CIS, Global Forwarding/Freight and Global Mail - will be unaffected by the restructuring measures at Express. The Group will continue to invest in these successful U.S. units, which together employ more than 25,000 people in the country, and remains committed to developing their businesses in the future.
Roadmap to Value
The Group has made sound progress with its Roadmap to Value initiatives aimed at improving profitability and strengthening its focus on cash generation throughout the company. Deutsche Post World Net is on track to achieve the targeted 500 million euros in profit improvements and cost reductions in 2008. Good progress has also been made in reducing working capital with an improvement of 380 million euros year-on-year, putting it on track to meet its target of cutting 700 million euros in net working capital by the end of next year.
Transparency has been improved over the past year by providing more detailed figures and will improve further. For example, the Group intends to change the way it reports pensions: Starting in the first quarter of 2009, expected return on plan assets will no longer be included in EBIT but booked in the financial result. The change will have no impact on profit before taxes.
To prepare the business for a more challenging economic environment, Deutsche Post World Net has stepped up its Roadmap to Value program with additional initiatives. Putting a strong focus on strict cost reduction, the Group now aims to reduce operating and non-operating spending across all businesses by 1 billion euros by the end of 2010. This target replaces the previous profit improvement target of another 500 million euros in 2009. These programs will substantially underpin the Group's ability to make profit progress in the challenging economic times it expects to lie ahead.
Deutsche Post World Net reiterated the Group's 2008 underlying EBIT target of 2.4 billion euros. The company also confirmed that it expects underlying EBIT to grow in 2009, however, the management board will only give a specific outlook for 2009 once the economic prospects have become sufficiently clear. Due to increased costs for the U.S. Express restructuring, now totaling 3 billion euros, one-off charges of between 400 million euros and 500 million euros in other businesses and possible write-downs on goodwill and intangible assets of around 1 billion euros within the Supply Chain/Corporate Information Solutions Corporate Division in anticipation of a further economic downturn, the Group will probably see a full-year reported net loss for 2008.
Nine-month revenue from continuing operations (excluding Postbank) gained 2.3 percent to 40.5 billion euros, with reported EBIT gaining 27 percent to 2.1 billion euros, mainly due to the 572-million euro repayment from the German government following a subsidies decision on EU level. Excluding this gain and other non-recurring effects, underlying EBIT rose 1.3 percent in the first nine months.
Net income after minorities rose 29 percent to 1.47 billion euros in the first nine months, with earnings per share amounting to 1.21 euros compared with 94 cents in the year-earlier period. Operating cash flow added 49 percent to 1.9 billion euros. In the third quarter alone net income more than doubled to 805 million euros, or 66 cents a share, from 350 million euros, or 29 cents.