"Business was very satisfactory in the first quarter"
Deutsche Post World Net today published its report for the first quarter of 2008. After a solid performance during the first three months, the Group confirmed its full-year EBIT guidance of around 4.2 billion euros before non-recurring effects. In an interview with DPWN News, Chief Financial Officer John Allan talks about the first quarter results and provides an update on the progress of the Roadmap to Value.
DPWN News: Mr. Allan, it is a time of uncertainty and challenges for the global economy. How do you rate the performance of Deutsche Post World Net in light of recent developments?
Allan: The quarter has indeed been characterized by a weak economy in the United States. In Germany, we had two working days less than in the prior-year period due to the unusually early Easter holidays. That given, business was very satisfactory in the first quarter. We succeeded in growing revenue by 1.8 percent to 15.75 billion euros. Excluding negative currency effects, revenue grew around 6 percent.
DPWN News: Reported Group EBIT declined from 998 million euros to 851 million euros. What's your explanation for the decline?
Allan: Our EBIT needs to be adjusted for non-recurring effects to adequately reflect our operating performance. In the first quarter of 2007 we had a non-recurring gain of 59 million euros from the sale of waste disposal company Vfw AG. This year, Deutsche Postbank had non-recurring costs tied to the subprime crisis. On an adjusted basis, our earnings increased by 6.4 percent to slightly more than 1 billion euros.
DPWN News: Does this mean that you are still comfortable with your full-year EBIT guidance of 4.2 billion euros?
Allan: Just like other companies, we don't operate in a vacuum and we're well aware of the economic uncertainties this year. However, at this point, we don't see any reason to adjust our full-year earnings guidance. We still expect an EBIT before non-recurring effects of around 4.2 billion euros and pretax earnings of around 3.2 billion euros for 2008. Earnings per share should range between 1.72 euros and 1.78 euros.
DPWN News: Can you please explain the non-recurring effects that affected Deutsche Post World Net's earnings in the first three months in more detail?
Allan: In the first quarter of 2008, Deutsche Postbank incurred non-recurring expenses totalling 174 million euros. Of this amount, 48 million euros have been incurred in connection with the subprime crisis and a further 126 million euros have been a result of writedowns on embedded derivatives. During the same period last year, non-recurring effects on balance had a positive impact of 35 million euros on our EBIT.
DPWN News: Does this mean that Postbank has not been able to dodge the effects of the subprime crisis?
Allan: It would have been very unrealistic to assume that any major bank can completely avoid the global fallout from the subprime crisis. But compared with most other financial institutions, the impact of the subprime crisis on Postbank has been very limited as the bank benefits from a strong focus on retail banking in its home market.
DPWN News: Currency effects had an impact on your revenue in several segments and this seems to be a bigger issue for you than in the past. What was business like excluding those effects?
Allan: We have been able to outweigh negative currency effects in the Global Mail and Corporate Information Solutions units, where revenues increased by 2.1 percent. In the EXPRESS and LOGISTICS divisions, we succeeded in growing our revenues by 6.5 percent and 6.7 percent respectively on the basis of local currencies. You should note that the currency effects we're seeing are translation effects only and doen't say anything about how the operating business developed - our business is local and in every country we bill and have costs locally - however when the results from that country is translated into euros, the strong euro and weak dollar make for a bigger effect on the accumulated Group numbers
DPWN News: The Roadmap to Value has been a focus of your activities over the past months. Did you record any major achievements?
Allan: The Roadmap to Value has been a major focus for the whole management team, and it will continue be on the top or our agenda in the coming months. We have made clear commitments to our shareholders: improved profitability, cash generation, cash payout, better transparency and organic growth. We are well on track and have achieved first remarkable results.
DPWN News: Can you please provide some highlights?
Allan: We have made excellent progress with the generation of cash proceeds from asset disposals. In April we agreed to sell roughly 1,300 properties to U.S. investor Lone Star for 1 billion euros in cash. In addition to that, we have agreed on further disposals totalling 350 million euros since November. As a result, we expect that proceeds from real estate sales will exceed the targeted 1 billion euros. In addition to that, we are on track with our initiatives to improve profitability and reduce working capital.
I also would like to stress that this quarterly report is a good example of how we work on improving our transparency, most notably through the unbundling of the SERVICES segment. We now have a clean Corporate Center/Other, which provides you with a precise perspective our central headquarters costs. We are also providing cash flow and capex figures by division as well as volume data for the EXPRESS business for the first time.
DPWN News: If you are ahead of plan with asset disposals, when do you plan to return the cash proceeds to your shareholders?
Allan: Although we have already signed the contract with Lone Star we won't receive the bulk of the proceeds before the end of the year. Once that has happened and depending on the other developments this year, we will decide on how and when we will return cash to shareholders.
DPWN News: Let us take a look at the MAIL division. We have now seen the first months of a fully liberalized mail market in Germany. How has this affected your domestic mail business?
Allan: We have held our ground very well. Our Mail Communication unit has seen its revenues decline by 3.8 percent to 1.5 billion euros. Considering a more intense competition, the ongoing substitution of letters by electronic means of communication and the fact that the first quarter of 2008 has been two working days shorter than the previous year's quarter, we do not have a reason to be overly concerned. We are competitive with our products and our pricing and are confident that customers will continue to value high quality and reliable services. Thus we have maintained our position with major key account customers and on balance have gained more customers than we have lost.
DPWN News: The EXPRESS division recorded a further EBIT decline compared with the first quarter of 2007. Can you shed some more lights on recent developments?
Allan: We achieved an organic revenue growth in local currencies of 6.5 percent in the EXPRESS division, fuelled by a very strong performance in the Asia Pacific region and in the Eastern Europe, Middle East and Africa region - our growth engines within the global express business. But there is no doubt that we cannot be satisfied with the development of earnings in the EXPRESS division. Its results have been impacted by two main factors: Fewer working days in most parts of Europe and the economic slowdown in the U.S., which should not come as a surprise given the effects of the subprime crisis on consumer spending. As a consequence of the adverse economic conditions in the U.S., we saw customers shifting from high-margin domestic time-definite products to day-definite products, which had a further negative effect on our earnings.
DPWN News: What is your plan to improve performance in the U.S. Express business?
Allan: As you know, we're very unsatisfied with the current situation. However, we are currently finalizing our plan for the EXPRESS Americas business and the supervisory board is scheduled to meet on the matter on May 28. We are very optimistic our plan will lead to significant improvements for our investors and at the same time meet customer demands. I would like to reiterate how important the U.S. Express market is to us and how important it is as a key part of the global express network - therefore a pull-out is out of the question. With Ken Allen as the new CEO of U.S. Express we have appointed an excellent change manager to implement our plan.
DPWN News: What about the performance of the LOGISTICS division?
Allan: LOGISTICS is in good shape. Revenues grew by 6.6 percent organically, driven by a very strong performance of DHL Global Forwarding where we outperformed the market both in air and ocean freight volumes. DHL Exel Supply Chain has won a major contract from Jaguar and Land Rover in Europe, where it will be in charge of managing in-plant logistics and the sourcing of components. The contract is worth the equivalent of 130 million euros per year over a period of three years, which makes it the largest-ever logistics contract in the automotive sector. This is a clear signal of trust in our capabilities and cutting-edge processes.
DPWN News: The global oil price is hitting new record levels almost by the day. Do you expect any negative consequences for your future operating performance if the upward surge continues?
Allan: So far, the impact of the rising crude oil prices has been limited for the company. Fuel expenses amounted to less than 2.5 percent of our total costs last year and like any airline we are able to pass on rising fuel costs through surcharges. You can also rest assured that we - as always - have prudent and comprehensive hedging initiatives in place to protect ourselves against oil price fluctuations.
DPWN News: Deutsche Post World Net avoided a massive strike by signing a collective bargaining agreement with Verdi at the end of April. What is the price tag attached to this agreement?
Allan: We have very carefully thought about the consequences for our bottom line, for our customers and our employees. I believe that the agreement is good news for everybody including our shareholders. We have negotiated moderate wage increases and additional weekly working time while at the same time avoiding a major strike which might have had significant adverse effects on our business in Germany. So on balance I am convinced that this has definitely been the right thing to do.