"We are preparing the Group for rough times"
Following the release of a trading statement on October 27, Deutsche Post World Net today published the full set of figures for the third quarter of 2008 and presented a comprehensive set of measures to improve profitability across the Group. In an interview with DPWN News, Chief Financial Officer John Allan talks about the third-quarter results and comments on the Group's performance in the challenging economic environment.
DPWN News: Mr. Allan, Deutsche Post World Net has announced sweeping measures to improve profitability today. What are the reasons for this decisive action?
Allan: We are well on track with our most important initiatives: The U.S. restructuring plan as announced in May is ahead of plan, we have negotiated the Postbank sale at favorable conditions, and the implementation of our Roadmap to Value capital markets program has made excellent progress. But the world is not the same as it was during the first half of this year.
Economic conditions have deteriorated in major markets across the globe, and in the U.S. in particular. We have therefore decided to exit the U.S. domestic air and ground business of DHL Express to reduce risks to a minimum and to intensify our Roadmap to Value initiatives to prepare the Group for the rough times ahead.
DPWN News: Is today's announcement a sign that the economic downturn is putting more pressure on your business?
Allan: The measures we have announced today have been designed to prepare Deutsche Post World Net for the economic challenges ahead. We have decided to address these issues better now than later with a very realistic approach on where we stand as a Group.
This will enable us to emerge as a leaner, more efficient group which is focused on its core competences. With our global footprint, our strong positions in growth regions, our comprehensive portfolio of services and our solid financial base we will be in an excellent position to exploit opportunities for profitable growth once the economic framework becomes more favorable again.
DPWN News: You said you will step up your Roadmap to Value capital markets program. How does that fit into the picture?
Allan: We are very pleased with the progress we've made so far. We are on track to meet the projected 500 million euros in efficiency improvements this year, and by early 2009 divestments of non-core assets will have generated more than 4.4 billion euros in cash, which is way ahead of our original target. We've also made good progress reducing our working capital.
However, given the highly volatile market environment and the rather dim economic outlook, we have decided to step up our Roadmap to Value program by targeting a further reduction of operating and non-operating spending by 1 billion euros by the end of 2010. Following a thorough internal benchmarking, we will work on improving efficiency at the Corporate Center as well as in the operating divisions and Global Business Services.
DPWN News: What progress have you made with regard to the other elements of the Roadmap to Value?
Allan: We have pledged that we would relentlessly focus on underperforming businesses. Today's announcement on the U.S. Express business shows that we are committed to taking tough decisions on underperforming units.
We've also said we would improve transparency, which we've done by untangling our former SERVICES Corporate Division and by providing more detailed figures. Transparency will be further improved by moving returns on pension plan assets from Group EBIT into the financial result and by deconsolidating Postbank once the transaction has been closed.
DPWN News: The Roadmap to Value also emphasizes the focus on organic growth. Is growth still possible in the current market environment?
Allan: Our third-quarter results demonstrate our ability to grow organically even in challenging conditions. We have achieved organic revenue growth of 7.2 percent, which I believe is a solid performance. Our strong positions in the developing countries clearly pay off: At more than 20 percent in the third quarter, organic revenue growth in those regions has been much higher than the group average, mainly driven by Eastern Europe, the Middle East and Asia.
Our commitment to organic growth is also reflected in the very low M&A spending during the first three quarters. We have an excellent global logistics platform, and we are clearly committed to leverage its potential.
DPWN News: You have reduced the full-year underlying EBIT guidance for the Group in October. Can you explain the main trends which have influenced underlying year-to-date profitability?
Allan: We have increased our year-to-date underlying EBIT by 1.3 percent to 1.65 billion euros. The main positive effect came from the FORWARDING/FREIGHT division, which registered strong underlying EBIT growth of 26 percent in the first nine months. Underlying EBIT in the SUPPLY CHAIN/CIS division also grew by a very satisfying 11 percent if adjusted for negative currency effects.
Although underlying EBIT in the MAIL division has decreased due to cost increases and the current market environment, the division continued to deliver the largest contribution to earnings. Profitability in the EXPRESS division deteriorated, which should not come as a surprise given the situation in the U.S.
DPWN News: What is the picture for the third quarter?
Allan: Looking at divisional profitability we have basically seen the same trends in the third quarter as in the first nine months with FORWARDING/FREIGHT and SUPPLY CHAIN/CIS contributing to underlying earnings growth. On total Group level, however, underlying EBIT for the quarter was down 8.5 percent, reflecting quite a significant deterioration in customer demand on a fairly broad basis.
DPWN News: Has Postbank contributed to your EBIT in the first nine months?
Allan: The Financial Services division is now accounted for under discontinued operations. Its results are not reflected in the EBIT anymore, they only affect net income for the period.
DPWN News: What's your outlook for the fourth quarter?
Allan: We are rather cautious in regard to the fourth quarter and we don't expect to see the strong quarter that we see in normal years. Take, for example, Supply Chain: Here we expect longer shutdowns by a number of industrial customers, particularly in the automotive industry, over Christmas. In forwarding, airfreight volumes are declining slightly, while ocean freight is still growing strongly, However, we may also see a slowdown in ocean-freight volumes in the fourth quarter.
DPWN News: Which regions are affected from the current economic downturn?
Allan: I think we are talking about a worldwide phenomenon here. We see a linkage between the so-called developed markets such as the U.S. and Western Europe and fast-growing markets such as China. The only region where we haven't seen a slowdown is the Middle East. However, that may change following the decline in oil prices.
DPWN News: Why are you now expecting a net loss for the full year given that net profit amounted to 1.46 billion euros after nine months?
Allan: This is clearly anything but good news for our shareholders, however, it's really just a reported loss. It's a consequence of our decision to take a radical approach to the restructuring in the U.S., which will lead to increased costs in the total amount of 3 billion euros. We accept that it comes at a cost today but it will improve returns in the future.
The second reason for the negative swing in net profit have been one-off charges in other businesses of between 400 million euros and 500 million euros and potential non cash goodwill and intangible writedowns of as much as 1 billion euros within the SUPPLY CHAIN/ CIS division. DHL Exel Supply Chain may write down the value of the Exel brand after completing its integration as well as some intangible assets in light of the economic prospects for the business. CIS has been adversely affected by the collapse of former customers in the U.S. financial services industry.
DPWN News: Let us finally revisit the macro environment. Your announcement today suggests that you fear for the worst. Is this true?
Allan: The current economic environment is characterized by high volatility and low visibility. What is clear is that Deutsche Post World Net, as its peers and companies in many other sectors, is facing challenging times. Besides analyzing our own forecasts we have closely observed the developments in other industries, and we have been concerned about the speed with which demand deteriorated in some of them.
This has made us very cautious and led to the decision to thoroughly prepare Deutsche Post World Net for the slowdown - and to do it fast. This does not come without a price. But we are confident that we will be stronger than before when the market turns back into fundamental growth mode. In the long run we are operating in one of the most attractive industries.