"We will continue to focus on improved profitability and cash generation"
Deutsche Post World Net today published its Annual Report for the year 2007. With EBIT before non-recurring effects of 3.8 billion euros, Deutsche Post World Net has slightly exceeded its target. For 2008, the Group confirmed its targeted EBIT before non-recurring effects of 4.2 billion euros. In an interview with DPWN News, Chief Financial Officer John Allan talked about the 2007 results, the recent progress of important Group initiatives and objectives for the current financial year.
DPWN News: Mr. Allan, what have been the three most important achievements of Deutsche Post World Net in 2007?
Allan: We have worked hard in 2007 and achieved significant results. Firstly, we have delivered on our forecast to reach an EBIT before non-recurring effects of 3.7 billion euros and all our divisions have performed on target. Secondly, the regulatory framework for our German mail business has been clarified. Thirdly, we have introduced the Roadmap to Value as a comprehensive capital markets program focusing on improved value generation for our shareholders.
DPWN News: Looking at today's release, however, Deutsche Post World Net recorded a 17 percent decrease in reported EBIT to 3.2 billion euros. How does that fit in?
Allan: When we announced our preliminary results in January, we pointed out that the Group would recognize a non-cash writedown on EXPRESS Americas fixed assets following an impairment review. The exact amount of this writedown is 594 million euros, which is consistent with the figure provided in our January release. In addition, the 2006 reported EBIT of 3.9 billion euros included non-recurring income of 375 million euros. As usual, non-recurring effects should be eliminated to reflect the underlying profitability of the Group. On this basis Deutsche Post World Net has increased its EBIT by 7.6 percent to 3.8 billion euros in 2007.
DPWN News: What does that mean for the underlying profitability of the EXPRESS division?
Allan: The underlying profitability of EXPRESS has improved. Adjusted for the write-down, EXPRESS has increased its EBIT by 46 percent to 420 million euros in 2007 on the back of strong revenue growth in Asia Pacific, Europe, Middle East and Africa. The division thus has outperformed its earnings target by 5 percent despite 76 million euros in costs incurred for the construction of DHL's new European hub in Leipzig.
DPWN News: Investors have been calling for a solution for EXPRESS Americas for quite some time. What should they expect for 2008?
Allan: The U.S. Express business is a key management priority and we said in January that we are looking at a variety of options to improve performance. In doing so, we are committed to maintaining a significant presence in the U.S. market, which remains of strategic importance to the Group. We have now narrowed down our options and are fairly close to reaching a solution to improve performance in the U.S.
DPWN News: LOGISTICS is now the largest division accounting for 40 percent of Group revenues and it is also your former responsibility. Are you satisfied with the results?
Allan: Growth in the LOGISTICS division has been strong with a 5.5 percent increase in revenues. Excluding anorganic effects, e.g. the Vfw sale, the division achieved a 9.1 percent revenue increase. This is an excellent proof that our focus on organic growth is working. Take an example: DHL Exel Supply Chain, the global market leader in contract logistics, has generated a new business volume of 1 billion euros on an annualized basis in 2007. Our air cargo and sea freight businesses have significantly increased their volumes.
DPWN News: The future regulatory framework in Germany has now been determined. What do you expect for the MAIL division in 2008?
Allan: The MAIL division performed well in 2007 and comfortably reached its EBIT target of 2 billion euros. Looking forward, Deutsche Post World Net is well-positioned even in the context of the early full market liberalization in Germany. In addition, we have a strong and growing international business. After adapting our divisional forecasts to the new reporting structure - as you may remember we have unbundled our SERVICES division from Jan. 1 - we are expecting an EBIT of around 2 billion euros for the MAIL division in 2008.
DPWN News: You have proposed to increase the dividend by 20 percent despite a lower net profit. What is the rationale of that proposal?
Allan: One of the key objectives of our Roadmap to Value is to increase the payout to our shareholders. By increasing the dividend to 0.90 euros, which represents a dividend yield of 3.8 percent, we send a clear signal that we intend to keep that promise. Our net profit has only been lower in 2007 due to the write-down at Express Americas, while we have met our targets on the operating level.
DPWN News: A prerequisite for increased payouts to shareholders is improved cash generation. How has Deutsche Post World Net performed in this respect?
Allan: Improved cash generation is indeed one of the core elements of our Roadmap to Value, and one area we are focusing on is the reduction of net working capital. We have already made good progress in the past year. Our operating cash flow has grown by 630 million euros to more than 2.8 billion euros mainly due to a significant reduction of net working capital. On balance, we have increased the positive free cash flow from 1.3 billion euros to 1.9 billion euros despite major investment activity. Improved cash generation and a further reduction of net working capital will remain a priority in 2008, and I am convinced that the introduction of EBIT after Asset Charge (EAC) as the new performance measure will play a crucial role.
DPWN News: Increased transparency is part of your Roadmap to Value. What have you done since your announcement in November?
Allan: We've been making quite good progress on our "Roadmap to Value" capital markets program. The program is already delivering tangible results and we remain heavily focused on its implementation. To increase transparency we have unbundled our SERVICES division and provided restated 2007 figures. In addition to that we have adjusted the divisional forecasts based on the new structure. Beginning with the first quarter, we will then report according to the new structure, meaning that all SERVICES costs will be charged to the divisions. We will report a clean Corporate Center / Others. In addition to that we will provide volume data for EXPRESS and the sub segments such as Air and Ocean in Global Forwarding. We will also disclose cash flow and capital expenditure by division.
DPWN News: Could you shed some more light on the effects of the unbundling of the SERVICES segment?
Allan: The unbundling of the segment is driven by the idea to allocate all costs of Global Business Services to the operating divisions. The segment earnings will thus reflect the actual usage of the services by the divisions, and we will also report a clean Corporate Center / Others segment in the future.
DPWN News: Deutsche Post World Net plans to generate 1 billion euros in cash from asset sales in the next 24 months. Have you made any progress since November?
Allan: Yes we have. Real-estate sales agreed on since the program was announced will total 350 million euros in cash. We believe that this is a good first step considering the challenging market environment in the real estate sector.
DPWN News: When will you start reporting EBIT after Asset Charge?
Allan: We will start reporting EBIT after Asset Charge with the release of our first quarter results.
DPWN News: Looking at 2008, do you see any risks from a potential downturn of the global economy?
Allan: We have seen very robust growth in 2007. While economic risks have certainly increased in the second half, the impact of the financial markets crisis on growth has been relatively limited yet. International trade is still growing at double the rate of industrial production, with imports increasing in emerging markets where Deutsche Post World Net already has a very strong market position.
There are certainly reasons to remain somewhat cautious since we do not yet have very high visibility with regard to the effects of a potential US recession. But many regions across the world, in particular Asia Pacific, Eastern Europe, Middle East and Africa, are expected to continue with their impressive growth. In addition, the fundamental trends driving growth in our express and logistics markets - global trade volume growth and increased outsourcing - remain intact. We are seeing a lot of opportunities out there.
DPWN News: What are your top three priorities for 2008?
Allan: This is very straightforward. First, deliver on our target EBIT before non-recurring effects of 4.2 billion euros. Second, drive organic growth across all our divisions. And third, implement our Roadmap to Value and generate more value for our shareholders.
DPWN News: You have just extended your contract with Deutsche Post World Net until the end of 2010. Don't you miss Great Britain?
Allan: Not at all, I love my job as CFO of Deutsche Post World Net. It is a great team, and I thoroughly enjoy being part of it. And we are planning so many things for the next years that it will remain an extremely exciting task.