Speech Klaus Zumwinkel and Edgar Ernst
At the H1 2006 earnings press conference on August 1, 2006, in Bonn
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Ladies and Gentlemen,
I would like to warmly welcome you to the earnings press conference for the first half of 2006 at Deutsche Post World Net in Bonn.
Each of our corporate divisions completed the first six months of the year according to plan. We were able to increase revenue in each division. The integration of Exel, BHW and Williams Lea, a document and mail services provider that we acquired this year, is also progressing as planned.
I will now give you a brief overview of our business environment:
In the first half of the year, many areas of the global economy developed favorably.
In Asia, China once again recorded strong growth of nearly 11%, making it an irreplaceable driver of the global economy. Japan has been experiencing a solid economic recovery for some time now. Since last year, this recovery has increasingly been fueled by stronger domestic demand.
The U.S. economy grew by an impressive 3.4% in the first half of the year.
Fortunately, the European economy also gained momentum in the first six months of 2006, even though Germany, our important domestic market, still lags somewhat behind this development.
All in all, global gross domestic product will probably grow by about 5% for the third year in a row. The past few years have shown us that global trade, which is strongly correlated to our international business, generally grows nearly twice as fast as global GDP.
How did Deutsche Post World Net develop in the first half of this year?
First of all, I would like to point out the highlights before elaborating on some of the details.
Consolidated revenue rose to EUR 29.3 bn. with all corporate divisions contributing to this increase.
Profit from operating activities amounted to EUR 1.6 bn. in the first half. The cost of integrating our two major acquisitions, Exel and BHW, made its mark on earnings from operating activities as well as net profit, which amounted to EUR 736 mn.
The integration of these two companies is making good headway and progressing as planned.
Consolidated key figures for 2005
Ladies and Gentlemen, I will now take a closer look at the development of revenue and earnings in yearly comparison, and shed some light on the decisive factors influencing this development.
Business developed as expected in the first half of the year. With last year's acquisitions of Exel and BHW and the takeover of Williams Lea this year, we have sowed the seed for our future success. These additions are already contributing disproportionately to our revenue growth. At the same time, we can report organic growth from all of our corporate divisions. Taken together, both of these developments enabled us to raise our revenue by 36.4% to EUR 29.3 bn. from EUR 21.5 bn.
A little more patience is needed on the earnings front, where we are still waiting to reap the rewards of our investments. The investment and integration costs related to our new acquisitions are still having a negative impact here. Overall, we recorded EBIT of EUR 1.56 bn., down 6.8% from EUR 1.67 bn. a year earlier.
Consolidated net profit declined by 22.3% to EUR 736 mn. from EUR 947 mn.
All in all, the positive effects of our consistent strategy of internationalization and the related acquisitions are mirrored by the growing share of international revenue in all corporate divisions. Our international share of revenue has risen to 59%. This means that, as of this year, we are generating considerably more than half of our revenue outside our German domestic market.
As a result, we are in a better position to profit from the development of growth markets in Asia and eastern Europe, and to reduce our dependence on developments in individual markets. We regard this as yet another confirmation of our strategy and believe that we are on the right track - even if it takes a certain amount of patience before we will see visible proof of this.
Milestones in the first half of 2006 at DPWN
Ladies and Gentlemen,
let me now turn to the milestones reached in our corporate divisions during the first half of 2006. I will then go into detail about them.
We managed to stabilize revenue in our Mail division at a high level in an increasingly difficult environment. In the past, we have repeatedly stressed that we must expand our international business to protect our revenue. In line with this strategy, we acquired a British provider of value-added services, Williams Lea, which was integrated into our Group as of April 1, 2006. With 15,360 employees in 26 countries, this company strengthens our international mail activities.
Our activities in the Express division remain focused on the United States. We have launched several programs here and have made special efforts to boost our service quality. The very positive customer response to these programs confirms that we are heading in the right direction.
Our Logistics business is doing exceedingly well. Integration is progressing according to schedule, and we have managed to jointly acquire new customers. I will return to this issue later.
Business developments remain positive in the Financial Services division. The integration of BHW is progressing as planned, and key steps have been initiated, such as the creation of one of Germany's major mobile financial sales organizations, Postbank Finanzberatung AG.
After this brief overview I will now shed more light on the individual results of our corporate divisions in the first half of 2006.
Revenue of our MAIL corporate division exceeded the high year-earlier level by an additional 1.7% and reached EUR 6.5 bn. As expected, revenue in our domestic market declined. But this was more than offset by organic growth and the acquisition of Williams Lea.
The trend in mail communication continues to point slightly downward. This is due mostly to heightened competition and the persistently sluggish domestic economy.
Meanwhile, the hesitancy of mail-order companies continues to have a strong impact on the direct-marketing business. In addition, the soccer World Cup caused the advertising industry, which traditionally invests relatively little in direct-marketing activities during the second quarter, to reduce its direct-marketing activities even more drastically than expected.
Our international business, in turn, developed very favorably. The revenue contribution from newly acquired Williams Lea had a positive impact here. But we also achieved substantial organic growth.
Earnings in the Mail division fell by 7% as heightened competition left its mark on this segment. On Jan. 1, 2006, Deutsche Post’s exclusive license for letters up to 100 grams was reduced to letters up to 50 grams. As a result of the lower weight limits, an additional 4-5% of our mail revenue has been opened to competition. In addition, we lowered the price of our mail products as of Jan. 1, 2006. This has resulted in cost savings of EUR 30 mn. for our customers over the previous year. But it also has had a negative impact on our earnings.
Given our increasingly difficult parameters, we are generally content with the stabilization of our mail business and think that our efforts to strengthen our international activities are the correct response to this development.
Revenue in the EXPRESS division rose by 4.7% to EUR 9.2 bn.
Revenue in the Europe region rose slightly above the year-earlier level. All countries contributed to this development. We are facing increasingly aggressive competition in Germany and are taking concrete steps to counter it: We lowered our package prices and reduced the number of weight categories from three to two as of July 1, 2006.
The expansion of our Leipzig air hub is moving ahead. Worth EUR 300 mn., this investment is currently the Group's largest new building project. Experts from other locations such as Wilmington, Hong Kong and the East Midlands lend their expertise in support of the Leipzig team. A large number of the planned 3,500 employees will be hired next year. Those already deployed at the Leipzig hub are currently undergoing training in preparation for their future tasks.
We have managed to stabilize our revenue in the Americas region. We have spent the past few months working hard to sustain our high level of service and have already obtained very positive customer feedback as a result. We therefore expect a strong increase in revenue in the second half.
I am happy to report today that DHL Express has just closed a two-year deal with Electrolux, the world's biggest manufacturer of household and other appliances in the United States. DHL will be Electrolux's exclusive air express service provider and will transport goods from 250 locations to end users. DHL's global network combined with its proven track record with this customer in Asia and Europe helped DHL win this contract.
At 19.2%, growth was very strong again in Asia and China, in particular, where we successfully defended our undisputed market leadership.
Positive business developments in the Emerging Markets were reflected by double-digit growth of 15.9%. Russia, a growth market where we plan to make substantial investments, made a particularly large contribution to this development.
EBIT fell to EUR 5 mn. from EUR 237 mn. However, thanks mostly to the contribution from the Americas region, our earnings improved by about EUR 80 mn. in the second quarter compared with the first.
The activities of our new acquisition Exel were integrated into the Logistics division at the beginning of the year. We are happy to report that revenue here jumped by 179% to about EUR 9.9 bn. At 144%, operating profit growth also was markedly stronger than a year earlier.
This development, however, is not all due to our new acquisitions. Indeed, we have achieved sustained organic growth. We boosted transport volumes both in our ocean-freight and air-freight businesses. DHL Global Forwarding Asia Pacific and Europe posted double-digit growth.
Exel Supply Chain also recorded organic growth. Revenue rose in particular in the key segment of textiles/fashion, electronics and telecommunications across all regions.
A case in point here is the contract with EMI in France. DHL Exel Supply Chain will handle this company's entire logistics operations related to the CD and DVD business as well as advertising material for sales outlets over the next five years. The seven-year contract with Unisys is another example. Under this deal, DHL Exel Supply Chain handles Unisys' global replacement part and after-sales business, which was previously handled by 100 service providers. These are only two examples that strengthen our conviction that we are indeed making progress in our efforts to bolster our position.
Earnings also developed very favorably. Here, too, the positive acquisition effect was complemented by a positive contribution from organic growth. As expected, integration costs and write-downs on customer contracts had a negative effect on earnings.
As of Jan. 1, 2006, Postbank took over 850 retail outlets from Deutsche Post AG and acquired the financial services group BHW. As a result of the takeover of BHW, Postbank has the biggest customer base of all domestic banks, 14.5 mn. private customers. As a result of the takeover of the 850 large retail outlets, which generate 87% of new customer business, and access to Deutsche Post's 9,000 outlets, Postbank now has the most tightly knit branch network in the German banking market.
The integration of both acquisitions is progressing according to schedule. I will share some of the details with you in a minute.
The Financial Services corporate division generated earnings of EUR 464 mn. in the first half of 2006. That corresponds to an increase of 7.4% compared with the same period a year earlier.
At the end of July, the annual general meeting of BHW resolved a squeeze-out value of EUR 15.11 per share. Following the successful implementation, Postbank will hold 100% of BHW Holding and will therefore be able to close this stakeholding.
I will now hand over to Mr. Ernst who will present you the details of our key financial figures.
Ladies and Gentlemen,
since Mr. Zumwinkel has already given you an overview of our first-half development, I will initially provide some more details on the most recent developments in the second quarter.
If we look only at the second quarter, we see that our revenue rose 32.3% to EUR 14.4 billion compared with just under EUR 11 billion a year earlier. The increase is due mostly to the first-time consolidation of Exel, BHW and Williams Lea.
At EUR 641 million, profit from operating activities was 19.1% lower than the previous year's level of EUR 792 million. Considering the one-time gains included in the previous year's result and the integration costs we have faced this year, profit from operating activities is clearly better than it may appear to be at first sight.
Consolidated net profit fell to EUR 254 million from EUR 488 million. The key reason for this drop is in the financial result: interest costs from the first-time consolidation of Exel. In addition, the previous year's item "net income from associates" included earnings from the sale of trans-o-flex.
Let's take a look at the next slide, which sheds light on the individual business areas.
All corporate divisions increased their revenue in the first half of the year.
The MAIL corporate division raised its revenue by 1.7% to EUR 6.5 billion from EUR 6.4 billion. Williams Lea has been included in the Mail International / Value-added Services subdivision since April 1. As a result, we were able to more than offset the expected revenue losses in our domestic business with our international business.
Revenue in the EXPRESS corporate division rose by 4.7% to EUR 9.2 billion from EUR 8.8 billion. Revenue trends have stabilized in the Americas regions. All other regions showed growth.
Business in the newly restructured LOGISTICS division continued to show good progress in terms of the integration process, profitability and growth. Revenue rose strongly to EUR 9.9 billion from EUR 3.6 billion. The acquisition of Exel contributed EUR 5.7 billion. The two business divisions DHL Global Forwarding and DHL Exel Supply Chain experienced sustained organic growth.
The FINANCIAL SERVICES division generated revenue and income from banking transactions of EUR 4.6 billion during the reporting period. These exceeded the previous year's value of EUR 3.4 billion by 32.6%.
The SERVICES segment increased its revenue by 6.3% to EUR 2.9 billion.
At EUR 1 billion, operating profit of the MAIL corporate division was 7.1% lower than a year earlier. Strong growth in our international mail business helped us counter the downward trend in our domestic market.
EBIT in the EXPRESS corporate division totaled EUR 5 million. This corresponds to an increase of EUR 79 million in the second quarter of this year compared with the first quarter of 2006, when we posted a loss.
The LOGISTICS division raised its EBIT to EUR 324 million. Aside from the acquisition of Exel, organic growth contributed to this increase.
Despite costs related to the acquisition of BHW, the FINANCIAL SERVICES corporate division boosted its EBIT by 7.4% to EUR 464 million.
At minus EUR 259 million, the results of the SERVICES segment in the first six months of this year were 28.9% lower than a year earlier. The previous year's figure included higher positive one-time effects.
Investments in property, plant and equipment, totaled EUR 785 million in the first half-year. Investment activities focused on the expansion of our international network structures, and the development of customer-specific transportation and logistics solutions.
Compared with a year earlier, cash flow declined from EUR 1.6 billion to EUR 1.3 billion. The main reason for this is the operating result.
As of June 30, net financial debt rose from just under EUR 4 billion to EUR 5.3 billion compared with the end of 2005. The key contributing factor here were the dividend payout for 2005 and the purchase price for Williams Lea.
Shareholder structure today
A few weeks ago, KfW announced the sale of Deutsche Post AG shares worth up to EUR 1.5 billion. This transaction, which addressed institutional investors, raises the freefloat share of Deutsche Post to about 64% from 58%.
KfW still holds about 36% of Deutsche Post AG if one also factors in the two exchangeable bonds that may still turned in for Deutsche Post stock. 56% of the company are owned by institutional investors, mainly based in the US, Germany and Great Britain.
Let me now hand over again to Mr. Zumwinkel.
Ladies and Gentlemen,
I now would like to say a few words about our share price. Unfortunately, the Deutsche Post stock has lost considerable value over the past four weeks for a variety of reasons. This development has affected both our share and that of the entire logistics sector.
We are, however, confident that the market will reward the steps that we have taken and their positive effects on our business - from the continued internationalization of our mail business to the stabilization of our U.S. activities.
We are pleased to note that the Postbank share outperformed the DAX blue-chip index in the first half of 2006 and thus remains a success story in our Group.
Integration Exel and BHW progressing as planned
We are pleased to report that the integration of Exel and BHW is progressing as planned.
We are very happy with the progress that has been made so far. We will continue to forge ahead with the integration measures until the end of the year and continue to enhance the quality of our services. The management positions at Exel have been occupied, and the structures are clearly delineated.
At Exel, the integration process has now been concluded in a number of regions, including Latin America.
We are making good progress with our IT integration, where the major part of will start in the second half of 2006. A total of 900 integration projects are under way, and a large number of them will be completed each quarter.
We also are making good progress with the integration of BHW and are putting all our efforts into becoming the premier financial services provider for private customers in Germany. Integration is progressing according to plan; all management positions have been filled.
An important integration milestone was the balance of interest reached with employee representatives in May of this year. This agreement entered into force on June 1, allowing work duplication to be reduced and activities to be consolidated in competence centers such as Postbank Finanzberatung AG. We also adopted comprehensive measures for job changes within the Postbank group along with the corresponding mobility subsidies.
Ladies and Gentlemen,
in March, I presented our next goal for the period through 2009 to you: to be No. 1 for customers. Or, to put it another way, we want to be their first choice worldwide. The achievement of this goal is the top priority for our company.
Our newly launched corporate program, First Choice, covers all corporate divisions and regions, and focuses on improving our service quality and customer orientation. This comprehensive approach is unique in our industry. First Choice has enormous significance to our company.
We have three clearly defined goals:
1. We want to become the first choice for our customers - worldwide.
2. We will engage all of our 500,000 employees to delivering world-class quality and productivity across the board.
As a result,
3. We want to boost our organic growth and lift our operating profit above EUR 5.2 bn.
First Choice and the brand
We want to clearly position DHL as the one-stop shop for easy transportation solutions. We want to ensure that a customer looking for a transportation or logistics provider will think first of DHL. Our goal is to make our DHL brand the customers' first choice around the world, from the express business through contract logistics, air and ocean freight, and the international mail business.
Our identity as a logistics company should be marked by the personal commitment of our employees, a proactive approach to our customers with innovative solutions and our local strength in a global network.
The attributes that represent this brand are closely related to our First Choice program. In the context of the First Choice Program, these attributes are translated into concrete operative goals and programs that are targeted toward the market and our customers.
The First Choice Program got off to a good start in the first half of this year. We will be testing the practical application of the method in eight pilot countries across all corporate divisions and regions. We will then refine our method in line with the feedback from the corporate divisions.
Starting in 2007, the First Choice Program will be rolled out step by step. We are expecting more than 5,000 projects, which will mean that 80% of our business will be covered by First Choice in the end.
With First Choice, we are set a decisive milestone in our company history. We are confident that our progression from the biggest to the best will lead us to where we want to be in 2009: the No. 1 for our customers and the undisputed premier brand in all matters related to transportation.
Group mid-term forecast for 2009
Ladies and Gentlemen,
I will conclude with an overview of our reported targets for 2006 and 2009.
We confirm our total target for 2006 of EUR 3.9 bn. and of at least EUR 5.2 bn. in EBIT for 2009.
The Mail corporate division is operating in an increasingly liberalized environment. However, we expect stable earnings of EUR 2 bn. this year and only project a potential downside risk for EBIT of 10-20% for 2009.
We project unchanged EBIT of EUR 450 mn. in the Express division in 2006. The Logistics and Financial Services divisions are projected to post EBIT of EUR 700 mn. and EUR 900 mn. respectively.
We expect the Express and Financial Services divisions to contribute at least EUR 1 bn. each to consolidated EBIT in 2009, while the Logistics division should generate EBIT of EUR 1.2 bn.
Ladies and Gentlemen,
The first half of 2006 was marked by a great number of steps taken with regard to the integration of our acquisitions, in particular, as well as important milestones. With the launching of our First Choice Program, we are charting an important course for our company that will make us the undisputed No. 1 for our customers worldwide.
We are committed to the implementation of our long-term Group strategy and will tackle upcoming challenges with determination. Our current investments will ultimately benefit our global customers and investors, and solidify our leading brand position.
Thank you for your attention.