"Implementing the measures of Strategy 2015 should trigger satisfactory returns for shareholders in the midterm"
Deutsche Post DHL today unveiled its Strategy 2015 aimed at turning the Group into a high performing organization with the ultimate goal of becoming provider, investment and employer of choice. In an interview with Deutsche Post DHL News, Chief Financial Officer John Allan talks about the financial implications of Strategy 2015.
CFO John Allan
Deutsche Post DHL News: Mr. Allan, investors and analysts have been criticizing that the Group lacks a clear vision for the future. Do you think Strategy 2015 can provide an answer?
Allan: Yes, we definitely do. With last year's restructuring of our DHL U.S. Express business and the decision to exit the banking industry, we have sharpened our focus on what we do best: mail and logistics. That's why our new claim is to maintain and build on our status as 'Die Post für Deutschland' and 'The logistics company for the world' to become the logistics company for the world. To achieve this, we need to unlock the Group's full potential.
Deutsche Post DHL News: However, don't you think it would have been more credible if you had set clear and measurable financial targets for 2015?
Allan: While we have included our financial aspirations for the coming years in terms of growth and investor returns, Strategy 2015 is not so much about specific financial targets but about laying the foundation for specific programs such as IndEx. It's also about setting up the necessary structural and procedural framework to deliver top performance. Accordingly, every Corporate Division has defined its own strategy to meet the overall objective.
Deutsche Post DHL News: Can you elaborate on the measures of Strategy 2015?
Allan: We are focusing our strengths on two strong pillars: Deutsche Post and DHL. To help foster the cooperation among the different DHL businesses, we will set up an additional governing body - the Executive Committee DHL. Better connecting the DHL businesses will help us improve our customer focus and address industry-specific customer needs better. It will also help us develop solutions for special target sectors such as the Life Science, technology or automotive industries.
Each DHL business unit in itself should be in a position to run profitably on its own - that covers about 80 percent of DHL's business efforts. The remaining 20 percent should be based on collaboration - solutions that only DHL can offer because of the unique mixture of different services. Eventually, we are aiming for each division to meet its profitability benchmark and better leverage the opportunities as 'One DHL.'
Deutsche Post DHL News: Can you break down Strategy 2015 for the different DHL businesses?
Allan: In GLOBAL FORWARDING / FREIGHT we need to focus on expanding our market share in the current economic downturn. We will also decrease operating expenses by reducing complexity, harmonizing processes and improving our systems. In EXPRESS we need to increase flexibility in our time-definite network and capture the growth potential in all regions. In SUPPLY CHAIN we aim to raise the return on capital employed primarily by analyzing the profitability of our existing partnerships, contracts and businesses, by selling assets or by generating profitable business down the road.
Deutsche Post DHL News: What about MAIL? Margins are eroding and there's only limited potential to cut costs due to the large share of personnel costs. What is your strategy to protect your share in the market and stem the decline in earnings?
Allan: Falling volumes and e-substitution will certainly have an effect on revenue in coming years. That's why we have identified new sources of revenue. Those can be found in new services linking physical and digital solutions in Dialog Marketing. In our German parcel business we will integrate sender and receiver services, for example with our state-of-the-art shipping software and our Packstation.
Deutsche Post DHL News: How are you planning to expand these businesses?
Allan: It can be done by both leveraging existing resources as well as making additional investments. We will develop the businesses through organic growth but we will also look at potential cooperation agreements.
Deutsche Post DHL News: Doesn't that contradict your commitment to reducing capex?
Allan: No, it does not. We have always said that we would consider cooperations and make investments if they create additional value. That just makes good business sense. It doesn't change our overall direction of sensibly minimizing capex at the current time.
Deutsche Post DHL News: How about further cost-cutting potential in MAIL?
Allan: You have to see that we have increased productivity significantly over the past few years. However, like all other Corporate Divisions, MAIL has committed to contributing a substantial share to our IndEx program. There's also some potential to raise efficiency in operations, for example in our sorting operations or in transportation.
Deutsche Post DHL News: The Group is also introducing a new strategic performance dialogue. Can you shed some light on what you mean by that?
Allan: There are two aspects to the concept: One is that we need to connect those who create visions and dreams for the future development of the company with those who hold the purse strings, those who plan the funding. The other one is that we will shorten and tighten the planning cycle and introduce clear top-down targets as well as strengthen our systematic review processes.
Deutsche Post DHL News: How are Roadmap to Value and IndEx integrated into Strategy 2015?
Allan: Firstly, I'd like to stress again that we have delivered on our Roadmap to Value targets with profit improvements and cost reductions of 500 million euros achieved in 2008. We have also sold real-estate for 1.4 billion euros and generated another 4.2 billion euros with the sale of a stake in Postbank. Plus, we have held our promise and relentlessly focused on underperforming businesses, which led to the decision to exit the U.S. domestic express market. And we've made good progress in terms of net working capital improvements, capex reduction and organic growth.
Secondly, we have introduced a new cost-cutting program IndEx as part of the Roadmap to Value to take at least 1 billion euros out of 7 billion euros in total indirect costs. Clear programs and initiatives of more than 800 million euros have been identified already with more to come. To assess the progress of our IndEx program, we have implemented a strong governance structure and reporting systems to track bottom-line improvements in great detail.
The second Roadmap to Value focus on cash generation and conversion will also remain at the very top of our agenda, particularly in light of the current economic crisis. So to sum it up, these programs fit seamlessly into Strategy 2015.
Deutsche Post DHL News: Last not least, you have identified financial aspirations as part of Strategy 2015. However, these targets don't seem too ambitious...
Allan: Our financial aspirations reflect the inevitable consequence of the measures we are implementing. If we successfully improve our processes and structure to unlock potential and act as 'One DHL', each of our DHL businesses should be able to reach its profitability benchmark. Moreover, the measures should help us generate organic growth of 1 to 2 percent above the market at all Corporate Divisions. If we further raise our efficiency as we're planning, we should rank in the top quartile of our peer group in terms of profitability, cash conversion and return on capital. And once we have achieved all that, I don't see any reason why we shouldn't be able to reach a satisfactory total shareholder return.