Speech by Dr. Klaus Zumwinkel and Prof. Dr. Edgar Ernst
At the Annual Press Conference for 2006 on March 20, 2007, in Bonn
Check against delivery
Ladies and Gentlemen,
I would like to welcome you to the Annual Press Conference 2006 of Deutsche Post World Net here in Bonn. Our company successfully concluded the year of 2006 and kept the commitments we made to you in terms of revenues and earnings.
After having integrated the acquired companies last year, we now have created an excellent platform as the world's market leader. The conditions under which we do business are very positive for our company at the moment. With 5% growth, global GDP climbed more than in the previous year. Just like previous years, world trade flows rose at an even higher level, namely between 8% and 9%.
The Asian economy remains the driving force of the global economy. With growth of nearly 11%, China holds the top spot once again. In the United States, business investment and private consumption were the engines of a 3.4% growth rate. In Europe, too, the economy expanded by 2.7% thanks to an increasing domestic demand. Here in Germany, the economy also rose by 2.7%, exceeding expectations. The reasons were continuing high levels of exports and strengthening domestic demand.
Now, I would like to give you a brief overview of 2006 from the perspective of Deutsche Post World Net. Revenues rose from EUR 44.5 bn. to EUR 60.5 bn. All divisions contributed to this increase. As far as revenues and earnings go, we made a perfect point landing, achieving the announced goals of at least EUR60 bn. in revenues and EUR3.9 bn. EBIT.
The year of 2006 was a year marked by major challenges. With Exel, we had to complete the largest integration process of our industry and of our Group. At the same time, we incorporated BHW into Postbank. Our goal was to merge the companies in a way that was quick, efficient and invisible to our customers. I am proud to say that we successfully achieved that. Postbank even finished its integration work in September - three months ahead of schedule.
Our revenues grew by about 36 % in 2006. This increase resulted primarily from the major acquisitions made in 2006: BHW, Williams Lea and, most of all, Exel. In addition, we succeeded to organically grow by 5.3 %. during this year of intensive integration work.
We boosted EBIT by about 2.9 % to EUR 3.9 bn. Operative profit before extraordinary effects rose from EUR 3.4 bn. to EUR 3.5 bn., which also amounts to an increase of 2.9 %. Positive one-time effects in 2006 amounted to about EUR 400 mn.
Now, I would like to take an in-depth look at the individual divisions, starting with the MAIL division. Revenues climbed in the MAIL division. I'm particularly proud to tell you that we succeeded in keeping our EBIT stable at EUR 2 bn.
We have maintained our quality at the world's highest level and offer our customers a unique service in terms of mail transit times and transit-time reliability.
In our core business, mail communication, the trend pointed downward - just like in previous years. This is a result of the shrinking overall market. Substituting letters with faxes, e-mail, text messages and the Internet is a fact of life. This trend will grow, further pushing the traditional letter into the background.
One other reason was that our key sectors, like mail order, could not profit from the strengthening economy. In direct marketing - that includes advertising materials - we had to accept a small drop of 1.9 % in 2006 for the first time.
In the past year, we further improved our strategic positioning by acquiring Williams Lea, the world's leading company for mail and document management, and created a new international platform for value-added services. We now have a global network for cross-border data transfers and for business process outsourcing. Our national business with value-added services will also benefit from this expertise.
At the beginning of the year, we integrated Parcel Germany into the MAIL division. We expect this reorganization to improve customer service through such changes as further standardization of IT platforms. Today, Mail and Parcel are already working together within the context of combined delivery and serve 85 % of the area together. We see cost-cutting potential in IT and overhead costs. For example, we will combine the 13 parcel branches with the 33 parcel centers and the mail branches.
To make the Parcel Germany business even more profitable, we are also working to improve customer service. In one project, we intend to strengthen complaint handling and provide better and faster information about the location of a person's shipment. We also cut parcel prices on July 1, 2006, and reduced the number of weight classes from three to two in order to create additional transparency for our customers.
Now, let's take a look at the EXPRESS division, which was recently put under the unified managerial leadership of John Mullen. We have assigned the European land operation DHL Freight to the logistics area. The EXPRESS division can now concentrate totally on the expanding international business after the German parcel business was removed from it.
We remain the clear market leader in Europe and were able to slightly increase revenues in the region. A key contribution came from our cross-border transport business, fueled by the significant increase in trade with the growth regions of Asia and eastern Europe.
In the Americas region, we saw revenues fall by nearly 2% to about EUR 4.4 bn. even though we gained additional contracts, which confirmed us in the measures we have taken in this market. The decrease was due primarily to developments during the first six months in the United States, where we experienced a revenue and volume decline in our "Domestic Air" product. We stabilized our revenue situation during the second half of the year and recorded a positive earnings trend.
The United States is the world's biggest express market, serving as our global network's largest recipient and source of global shipment streams. This is why a presence in this market is critical for our Group.
We continued our strong growth in Asia and remain the biggest international provider in that region. We have invested $ 1.7 bn. over the past few years and offer our regional customers a unique network. At 33%, we have maintained our year-long market leadership.
We are the only international logistics provider to offer our customers domestic services in China and India. In cooperation with our partner Sinotrans, we reach 95% of the Chinese population through our network.
In the growth regions of the emerging markets, we also boosted revenues. We are the leader in all important emerging markets, including Russia, the Middle East, Turkey and South Africa.
Boosting our earnings strength remains our fundamental goal. We will do this through such means as an efficient network that is based on our customers' requirements and trade flows. We intend to invest heavily in this network. These investments will include six 767 planes for use in the United States.
The LOGISTICS division managed by John Allan performed exceptionally well last year. We quickly, professionally and efficiently integrated. I would like to emphasize at this point that the LOGISTICS division exceeded its revenue and earnings targets of EUR 20 bn. and EUR 750 mn., respectively. This was accomplished despite the difficult parameters created by the integration process.
We are also right on schedule in our drive to achieve synergies worth EUR 220 mn. Following the reorganization, the Logistics division now consists of three businesses: DHL Global Forwarding, DHL Exel Supply Chain and DHL Freight.
We remain the market leader in the intercontinental freight business. The global rise in trade flows creates positive business conditions for our air and ocean freight services. Both business units nearly doubled their volumes during the past fiscal year.
DHL Exel Supply Chain is also by far the leading provider in the contract logistics market. Revenues increased in nearly all industry sectors. The strongest growth was recorded in the fast-moving consumer goods segment, where we also maintain a leading position in all major markets. We expect the integration of DHL Freight into the LOGISTICS division to produce increased efficiency. Here, we see untapped potential from volume bundling and joint procurement of freight capacities across all our freight activities.
We are exceptionally pleased that we won some large, long-term contracts last year. I would like to mention two of them:
- A 10-year contract with the National Health Service, the biggest contract ever in the Logistics division at EUR 1.4 billion.
- Saudi Aramco: Here, we also received a 10-year contract valued at half a billion euros from the leading company in the gas and oil industry based in Saudi Arabia.
The year of 2006 was a significant one for Postbank. In terms of employees and partners, Postbank nearly doubled from 9,240 to 21,696.
At the turn of the year, Postbank took over 850 retail outlets from Deutsche Post. At the same time, the acquisition of BHW represents a quantum leap for the company. As a result, we expanded our leading position as Germany's biggest retail bank and are now Germany's major provider of private home financing.
Through the acquisition, we strengthened our sales activities. We are now a well-positioned multi-channel bank with
- an extensive network of 850 of the bank's own retail outlets and thousands of Post retail outlets,
- one of the largest adviser organizations - 4,400 mobile advisers,
- a leading position in telephone banking
- and in online banking
The integration process progressed very smoothly and was completed three months ahead of schedule. We are particularly proud of this achievement. During the year, revenues climbed by 35.3 % to EUR 9.6 bn. during the integration phase. I would like to stress the fact that the new Financial Services division reached and even slightly exceeded the one-billion EBIT threshold. This corresponded to an increase of about 16%.
As announced last week, Mr. von Schimmelmann will give up his positions as chairman of the board of management of Deutsche Postbank AG and a member of the Board of Management of Deutsche Post AG as of June 30, 2007. We very much regret this decision. Under his leadership, Postbank has developed into Germany's leading retail bank and a successful member of the DAX blue-chip index. Fifteen million customers and a doubling of the Postbank share price since the public listing in 2004 speak for themselves. I would like to take this opportunity to sincerely thank Mr. von Schimmelmann.
Wolfgang Klein, previously the board member in Postbank's retail customer segment responsible for product marketing and mobile sales, will succeed him in both positions. Under his leadership, Postbank will continue its successful strategy within Deutsche Post World Net.
I will now ask my colleague Edgar Ernst to shed some light on our Group's key figures.
Ladies and Gentlemen,
Dr. Zumwinkel already has covered the key developments during 2006. The revenue threshold of EUR 60 bn. was surpassed, and EBIT rose by 2.9 % to about EUR 3.9 bn. compared with the previous year.
Adjusted for non-recurring items in 2005 and 2006, the underlying EBIT rose from about EUR 3.4 bn. to EUR 3.5 bn.
A total EUR 276 mn. came from the early redemption of the Postbank exchangeable bond in July 2006. In addition, we saw a positive non recurring-item of EUR 89 mn. from an arbitration proceeding with Deutsche Telekom.
Group net profit declined by 14.3 % to about EUR 1.9 bn., reflecting, in particular, the higher minorities. The early redemption of the Postbank exchangeable resulted in a reduction of our stake in Postbank to 50 % plus one share.
All divisions showed higher revenues in 2006. The MAIL division boosted its revenues by 3.2% from EUR 12.8 bn. to EUR 13.3 bn. The activities of Williams Lea and organic growth in international business offset the decline in revenue from the domestic business. The fourth quarter, in particular, was exceptionally good, even though we had one working day less than last year.
EXPRESS raised its revenue by 2.2 % to EUR 17.2 bn. Especially in Asia and the Emerging Markets, double-digit growth rates were achieved. Business developments in the LOGISTICS division remained favorable. Revenue increased strongly from EUR 9.9 bn. to EUR 22.7 bn. Aside from the acquisition effect from Exel, the division experienced strong organic revenue growth. Ocean freight posted strong volume growth in the fourth quarter of 2006.
In the FINANCIAL SERVICES division, we also boosted revenues, primarily as the result of the acquisition of BHW. The SERVICES segment posted 4.5 % higher revenues of EUR 4.1 bn.
Now, let's examine the divisions' EBIT. We are happy to report that MAIL slightly increased EBIT. Once again here, we could offset decreases in the traditional Mail business in Germany through organic and unorganic growth in international mail. We also made progress on the cost side.
The EXPRESS division achieved EUR 325 mn. of EBIT after suffering a loss of EUR 23 mn. in the previous year. Earnings grew in all regions. In the United States, a turnaround was achieved in the middle of the year, producing substantial improvement in the results for the second half of the year. The results of the EXPRESS division was impacted by around 50 million costs related to the setup of the new hub in Leipzig.
LOGISTICS showed a significant improvement due to acquisition effects. Hence we could reach organic growth as well. This also applied to the FINANCIAL SERVICES division, which reached an EBIT of EUR 1 bn. for the first time.
Group capex in 2006 was about EUR 2 bn. and remained largely unchanged from the previous year's level - despite the first-time inclusion of Exel. Our investment activities focused mostly on the Express network infrastructure, including the setup of our new European air freight hub in Leipzig. In Logistics we invested mainly in our DHL Exel Supply Chain business.
Cash flow from operations improved to EUR 2.8 bn. As a result of significantly smaller, non-cash income, we achieved an increase of 41 % over the previous year. Net debt declined to about EUR 3.1 bn. in 2006 from EUR 4.2 bn. in 2005. This, too, was due mostly to the redemption of the exchangeable bond on Postbank, which reduced our liabilities by EUR 1 bn.
Our share price developed favorably during the past fiscal year. During the first few weeks of 2006, our share followed the positive market trend. After our annual meeting, our share went down - in line with the market - and reached its low for the year on Aug. 15. After that date, however, the trend pointed consistently upward. The Deutsche Post share closed the year at EUR 22.84, a gain of 11.5% since the start of the year.
Compared with the company's main competitors, Deutsche Post's share was a clear outperformer.
Ladies and Gentlemen,
Our shareholder structure changed again during the past fiscal year. We moved closer to our goal of a 100 % free-float ratio. A exchangeable bond on Deutsche Post AG shares issued by KfW in December 2003 matured in January 2007. About 56 million shares from KfW's holding were placed in the capital markets as a result of the exchange of the KfW bond for Deutsche Post shares. Our share's free-float ratio rose to 69.4 % as a result.
Considering another KfW convertible bond on Deutsche Post shares, KfW's stake in Deutsche Post AG amounts to about 31 %. Most of the company's shares are held by institutional investors based in the United States, Germany and the United Kingdom.
Ladies and Gentlemen,
I have just described to you how international the stockholder structure of Deutsche Post World Net is. We invest considerable energy into maintaining a dialogue with our investors around the world. And, of course, investors want to participate to an appropriate degree in the company's business success. They do so through dividends. And we have consistently increased them - ever since we have been listed on the stock exchange. For fiscal year 2006, the dividend is to rise again. The proposed dividend increase is EUR 0.75, which results in a CAGR of 19 %.
I would now like to discuss the outlook for 2007 and our mid-term guidance. For the Group, we expect EBIT of at least EUR 3.6 bn. The MAIL division should reach this year again around 2 billion Euros and maintain its earnings level of 2006.
For EXPRESS, we expect an EBIT of at least 400 million Euro. Adjusted for extraordinary costs of 100 million Euro for the new hub in Leipzig, we will achieve an EBIT of more than EUR 500 mn which is an increase of over 50 % compared to 2006.
The LOGISTICS and FINANCIAL SERVICES divisions will continue to proceed down their successful path. We expect an increase of 15 % and at least 5 %, respectively.
The SERVICES division is expected to complete the year with an earnings loss of around EUR 0.7 bn. This EBIT figure does not include any one-time effects - unlike the previous year.
We have not changed any of our expectations for 2009. The target remains at least EUR 5.2 bn. We will provide more specific information about our targets when we have a more stable basis for the mail business.
I will now turn the floor back over to Mr. Zumwinkel.
Ladies and Gentlemen,
In conclusion, I would like to make a few comments about the current state of mail and liberalization. As technology has advanced, consumer behavior has changed. Business and retail customers are increasingly turning to electronic media when they communicate. Bills and, increasingly, bank transactions are being conducted through electronic media as well. As a result of these developments, the core market for mail communication is shrinking.
In Germany, we are feeling the increased competition. With a competition share of 10 %, Germany is the leader in Europe. As entrepreneurs, we welcome this development, but are increasingly concerned by the fact that these new market players use a business model based on low wages. Falling amounts of letters mean less work and fewer jobs. We have been preparing to face all of these challenges with a clear strategy for a long time.
1. Quality leadership
- Our business operations are subject to continuous improvement processes, ensuring that we maintain our global leadership in quality.
- We have designed our sales to meet customer needs and created tailored solutions for both major business customers and industrial customers.
- In the private customer area, we are also moving closer to the customer. For example, we will offer - at first in a pilot project beginning in April in Bonn and Dortmund - additional sales outlets in cooperation with retailers. The project involves two retail-outlet models that, working under the name of Postpoint, will offer the highest-demand postal products.
- As part of this pilot project in Dortmund, we will test special points of contact for our small and mid-sized business customers. Using a "business mail drop-off," we will address the special needs of customers who desire a place where they can drop off their letters and parcels quickly and easily.
- In Germany, we have created unique quality. Our customers can count on reliable delivery, a professional network and highly qualified employees.
2. Value-added services for mail customers.
We view e-substitution as an opportunity and are working on ways of meeting this demand. As one example, I would like to mention the document service online and the digital postal in-box service that we offer to such customers as insurance companies.
We are working at the moment on the introduction of large mail-sorting systems that will be set up in all mail centers by 2009 in an efficiency-boosting program. With our employment compact, we have achieved greater flexibility with costs and our employees' work hours.
In past years, we have expanded our international mail business. Under the DHL Global Mail brand, we have earned a leading position in the cross-border mail business. We have a global network that encompasses 200 countries.
You see we are well prepared for the opening of the mail market. But our success will depend largely on the way that political leaders in Berlin and Brussels address the issue of market opening.
We all know one thing: Germany is just months away from the complete liberalization of its mail market on Jan. 1, 2008. Today, competition is already a fact of life. It is one that we welcome and have always supported. Personally, I have been and remain a strong supporter of the free market and fair competition.
Fair competition means a level playing field for all market players, both in Germany and outside Germany. What I see, though, is an uneven playing field. I would like to outline three points of this troubling development.
1. We have completely unequal conditions in Europe
I have always said that we at Deutsche Post are ready to move forward on liberalization if this is done in a harmonized manner in Europe. We realize that some countries will follow no later than one year afterward. But, there is no sign of this at the moment.
Clear indications show that our western and southern neighbors are not trying to achieve complete liberalization in the foreseeable future. I view this development as troubling. There is no majority for liberalization in Europe that would start on Jan. 1, 2009.
2. The postal law is not being consistently followed, and wage dumping is the result
We are particularly pleased that our competitors in Germany are active and are also creating jobs here. But lawmakers clearly defined the conditions under which new suppliers could do business on the German market and linked the issuance of licenses to compliance with minimum social standards.
The aim was to block the creation of socially uninsured jobs with little job security, insufficient pay, mini-jobs and poor social benefits.
- At the moment, we are facing a development that is absurd. Some of our competitors are paying carriers such low wages that the employees need transfer payments from the state. This is creating the competitive distortions that lawmakers wanted to avoid.
- At the same time, these suppliers are winning delivery contracts from the public sector because they offer the lowest-priced services. That means one thing: A government agency saves on transport costs but has to pay jobless benefits or make other transfer payments to people who work 40 hours a week at a wage-dumping supplier. Deutsche Post, on the other hand, pays its workers wages set by collective bargaining that enable them to live from their work without having to accept transfer payments.
3. Deutsche Post offers high-quality, national universal service at affordable prices.
After 2007, we are no longer legally required to offer this service. The law requires that all competitors should provide this service jointly. We are not checking to see what our competitors are doing and which contributions they are making to universal service. I am convinced that we will remain the only universal service provider for a long time to come.
We want to continue to justify the trust that our customers have shown in us. I say clearly right here and right now: Universal service for our customers is important to us, and we will guarantee it at today's standard.
As I previously mentioned, we have introduced a variety of measures designed to keep us competitive. But as the largest private employer in Germany, we have an obligation to our employees.
The math is really simple. The mail market is shrinking every year. We have handled the resulting job losses in a socially acceptable way. We will do that in the future as well. If we, for example, lose 20% market share through wage dumping, we will have 20% less work for our 160,000 employees in Mail. As a result, 32,000 of our jobs are endangered. Each year, our employees pay EUR 1.6 bn. in social insurance payments to public funds and, as a result, subsidize the transfer payments and our competitors' low wages. This equals to the number of employees in the German hard coal industry.
Ladies and Gentlemen, this turns the rules of a free economy on their head. I think Germany's minister for labor and social affairs, Franz Müntefering, summed up the position on mail liberalization quite well: "Leader - but not dumb." It just can't be that we Germans will open our market to international companies but that we do not have comparable market conditions either in the home market or in international markets.
Let me say it clearly once more: Yes, we are in favor of free competition and customers' freedom of choice. But we want this to be done under the same fair conditions for all competitors. As a result, we call for:
- A complete market opening only if the same market-entry conditions exist for all competitors
- The application of binding minimum standards on work and social conditions for all suppliers.
Competition is good for customers and for companies but only if political leaders create conditions that offer equal and fair opportunities to all competitors and their employees. Only fair competition is good competition.
Ladies and Gentlemen,
In addition to the mail topic, people regularly ask me how well balanced the Group is and how well positioned internationally it is.
My answer is: We have built an excellent platform with a large network and economies of scale. For the first time we created more than 50% of our 2006 operating profits outside the mail division.
But also outside the German domestic market we are well positioned with our international business. In almost all markets we are active in we are the market leader.
Our goals in First Choice are:
- To become our global customers first choice in the world's rapidly growing logistics market.
- To mobilize our 500,000 employees and to enable them to increase quality and productivity to a world-class level.
- To organically boost revenues and to lift EBIT above EUR 5.2 bn by 2009.
Ladies and Gentlemen,
In overall terms, Deutsche Post World Net is well organized and balanced around the world. We are addressing the challenges of the future and the growing demands of our customers. We are working with and for our customers on innovative logistics solutions. For this purpose, we have built our technology and innovation center in Troisdorf near Bonn. The opening ceremony will be held in the coming week. I warmly invite you to attend this event.
Thank you for your attention.