"In current economic environment our business model is paying off"
Interview with CFO John Allan
Deutsche Post World Net today published its report for the second quarter of 2008. In a period of uncertainty about the development of the global economy, the Group remains on track to reach its full-year EBIT guidance of around 4.1 billion euros before non-recurring effects.
In an interview with DPWN News, Chief Financial Officer John Allan talks about the second quarter results and provides an update on the progress of important Group initiatives.
Mr. Allan, we are seeing high oil prices, rising inflation in some regions and an on-going financial markets crisis. Are you concerned with regard to Deutsche Post World Net's business prospects?
Allan: It is certainly a time of high uncertainty for everyone. But so far we are on track with regard to our financial targets for the full year. Looking all around us, we are now benefiting from our global presence, with strong positions in high-growth regions, as well as our well-balanced portfolio with EXPRESS, MAIL and our two logistics divisions. Our performance in the first half of 2008 has been very solid. We have grown our organic revenues by 8 percent and improved our underlying EBIT by 11.7 percent.
Which divisions have driven revenue growth during the first six months?
Allan: First of all, revenues of the MAIL division remained stable, which is very good news considering the full liberalization of the German mail distribution market on January 1. On balance, our MAIL business has won more customers than it has lost since the market was fully opened. Revenues of the EXPRESS division were slightly up by 1.9 percent, and adjusted for currency effects the division increased its organic revenues by 7.4 percent.
We also saw an excellent performance of our new FORWARDING/FREIGHT division, which grew reported revenues by 8.3 percent and organic revenues by 13.3 percent. Those are very satisfying results, especially in light of the economic slowdown in some regions of the world.
You have changed the segment reporting and introduced two new divisions. What is the rationale behind that decision?
Allan: This move should not come as a surprise since we already separated responsibilities within the former LOGISTICS division on the management board level. We have already explained the reasons for doing this. It is both sensible and necessary to reflect those changes on the operating level in the segment reporting. We have therefore decided to introduce the two divisions FORWARDING/FREIGHT and SUPPLY CHAIN/ CORPORATE INFORMATION SOLUTIONS and adjusted our prior-year comparables accordingly.
Why did you combine Corporate Information Solutions in one division with DHL Exel Supply Chain?
Allan: This is quite easy to explain: DHL Exel Supply Chain and Corporate Information Solutions offer customer-specific solutions, so their way of doing business and of approaching clients has some important similarities.
Let's go back to the financials and have a look at your earnings. Can you shed some light on the main factors which had an impact on the underlying EBIT development?
Allan: In the first six months we have seen a strong organic growth of the EBIT in FORWARDING/FREIGHT division, which increased its underlying EBIT by 38 percent. SUPPLY CHAIN/CORPORATE INFORMATION SOLUTIONS also performed well with an EBIT increase of 12 percent adjusted for foreign exchange and one-off effects.
The EXPRESS division has been in the spotlight for quite some time. How has it performed in the first half?
Allan: Economic conditions are currently very different across the globe, and therefore you need to look separately at the performance of EXPRESS in the various regions. The EEMEA region, which includes Eastern Europe, the Middle East and Africa, remains a growth engine with a 25.3 percent increase in organic revenues, driven in particular by strong growth dynamics in Russia and the Middle East. We also continued to see strong organic growth in Asia Pacific despite a slight slowdown in China. In Europe and the Americas, organic growth has been lower but still positive.
What about the restructuring of the US Express business - have you seen any progress?
Allan: We have announced the plan at the end of May. As you know, we plan to reduce costs across our ground transport infrastructure and intend to co-operate with UPS with regard to air transport. We have started to implement the plan immediately after announcement and achieved first results: An important step has been the closure of low volume service centers in low contribution areas of our network. We have also changed pick up and delivery routes and are seeing early positive results. Furthermore, we have completed the reorganization of the corporate office.
Is the oil price increase hitting your Express business?
Allan: We have limited the impact of rising fuel costs by imposing a surcharge on our clients. This is a standard practice in our industry, and it has not come as a surprise to our customers.
As part of the Roadmap to Value, you have promised to deliver on organic growth. Have you made any progress?
Allan: Of course we have. As I have mentioned earlier, we are seeing strong organic growth in non-mature markets, especially in Eastern Europe, Middle East and Asia. I am also very satisfied with the development of our business with large key accounts managed by Global Customer Services.
Airbus is a good example: The Company has chosen DHL as its main provider of transport services starting September 1, 2008. We have successfully marketed an integrated solution across the full value chain and won this business. DHL Exel Supply Chain alone has won new contracts worth in excess of 550 million euros per annum during the first six months.
Further on the Roadmap to Value - what is the current status on cash generation and payout?
Allan: We have delivered very quickly on our promise to generate 1 billion euros in cash from asset disposals. With effective disposals of real estate assets totalling 1.35 billion euros, we have actually exceeded our forecasts by a significant margin. The agreement with Lone Star in April about the sale of a property portfolio has been a major step.
In terms of payout we have paid the dividend of 90 cents for 2007. This was an increase of 20 percent on the previous year. We intend to keep increasing the dividend very positively in the years ahead. We also said earlier this month that we'd preferably earmark a 1 billion euros repayment by the German government for return to investors, pending the solution to other cash-relevant issues.
What are the results of the targeted improvement of working capital?
Allan: We are making good progress. Working capital has been reduced by 125 million euros. At the same time, capex was on last year's level and limited our spending on acquisitions to a minimal level. Overall Deutsche Post World Net has generated a positive Free Cash flow of 289 million euros, which has been significantly above the prior year level. I think that this is good news for our shareholders.
What are your next priorities with regard to the Roadmap to Value?
Allan: We have indeed made significant progress on the implementation of the Roadmap to Value. However there is still a lot of work to do, especially in the area of operating improvements. The nature of those improvements is that you have a lot of discrete actions across the whole organization finally adding up to a quite considerable amount of savings. We achieved improvements of 70 million euros in the second quarter, and year-to-date total savings amount to 140 million euros.
You cannot be very happy with the share price development. How do you comment on that?
Allan: My guess is that you will only find very few people who are happy with their current share price development during this very volatile period. Of course Deutsche Post World Net is no exception. The concerns about the global economy are putting pressure on the capital markets, and the logistics sector as a whole has suffered from the general sentiment and some profit warnings by our peers. Our job is to deliver our promised performance to the market. If we do that consistently and well then the share price will respond.