"If we want to secure jobs over the long term, there can't be any sacred cows"
Deutsche Post DHL released its first-quarter results today.
The global economic crisis has had a direct impact on the business of the world's largest logistics company, resulting in a 13 percent drop in revenue and a 42 percent reduction in underlying EBIT. In an interview with Deutsche Post DHL News, Group CEO Frank Appel discusses the steps that he and his management team are planning in order to limit the effects of the economic crisis.
Deutsche Post DHL News: Mr. Appel, underlying EBIT plummeted by 42 percent during the first quarter. Is the economic crisis solely to blame for this decrease?
Frank Appel: We have never experienced something like this before. With the beginning of the fourth quarter 2008, shipping volumes plunged dramatically. Because the markets are linked with each other across the globe, there is hardly any sector or region that has been able to escape the impact.
At times, the reactions to the crisis have been and continue to be irrational. Nonetheless, we as the world's largest logistics provider are directly affected by this development, which resulted in a 13 percent decline in revenue. Of course, other factors also had an effect on earnings, including higher wages in the Mail Division.
What's the overall impact of the global economic crisis on your business?
Frank Appel: Well, the effect of the global economic crisis is two-fold: On the one hand it relentlessly uncovers structural challenges - for example in MAIL or EXPRESS. We're tackling those challenges now systematically. Take MAIL: If we want to secure jobs over the long term, there can't be any sacred cows. But the crisis also offers tremendous opportunity. As global market leader, we have the necessary size and financial muscle to present ourselves aggressively in the market. It's no question that we will use the current situation to raise our market share.
What is your view of the current situation? Will the downhill trend continue?
Frank Appel: When you look at shipping-volume trends, you do begin to think that the bottom is slowly being reached. Our international express shipments stabilized in March, and April's figures seem to point in a similar direction. In terms of air-freight volumes, we have been seeing a monthly improvement since January, and we even experienced an increase in March compared with last year in ocean freight. However, momentary developments should not hide the fact that shipping volume still remains far below the previous year's level in most areas.
If we are proven right in our assessment that the bottom may be reached, we will increasingly benefit from our cost cutting program in the second half of this year and in 2010. In EXPRESS in particular the good progress in the U.S. will underpin the overall improvement. As a result the declines in underlying EBIT in the second half should be much smaller than the Group has seen in the first quarter and expects to see in the second quarter of the year.
Do you expect to return to a net profit in 2009 after posting your first full-year loss since the company went public last year?
Frank Appel: Here we expect that as in the first quarter, the valuation of the Postbank transaction will have a positive effect. Due to the valuation mainly of the put options of the remaining Postbank shares and deconsolidation effects our financial result will be affected positively. Thus we expect a net profit for the full year and a significant improvement compared with last year.
Reported EBIT from continuing business operations fell by 95 percent during the first quarter. What were the main reasons?
Frank Appel: In addition to weak demand that hurt results in all divisions, the restructuring of our DHL Express business in the United States continued to play a role. The planned restructuring costs of 245 million euros - we completely pulled out of the domestic American express market at the end of January - made up nearly half of the decrease. Restructuring costs in other divisions added 40 million euros to the total. At the same time, the new focus of our express business on more profitable international shipments was the right step to take, and we see this strategy being confirmed right now.
Your so far most profitable business, MAIL, gave you little cause for satisfaction in the first quarter. Earnings fell by 25 percent. What caused this drop?
Frank Appel: Here too, the weak demand in some of the businesses certainly had a negative effect on earnings. Mail-order companies, in particular, have cut back on their advertising spending. Sales volumes of traditional mail-order companies also fell. In the international mail business, at Global Mail, revenue decreased as well, a development that partially resulted from our decision to drop unprofitable customers. Of course, the discontinuation of the DHL@home product in the United States also hurt revenue.
In terms of costs, we began to feel the impact of the wage agreement we concluded last year for the 130,000 employees in the German mail segment. We were no longer able to offset the higher personnel costs.
What strategy will you employ to stop the decrease in margins being experienced by the MAIL Division?
Frank Appel: It is obvious that people are increasingly using electronic forms of communication and that we must extend our range of products and services in this area. That's why we are working extremely hard to develop new products that combine electronic communication with the security and reliability that Deutsche Post can guarantee like no other. But the objective is not just to enter new business fields. We must also focus very intensely on our costs. As long as we undertake this in times when margins are good, we can do this over an extended period of time without having to make all-too radical cuts.
For this reason, we are considering measures such as extending the weekly working hours, outsourcing or larger delivery sectors. Our challenges in the MAIL business are of structural nature and not a passing decline in demand like for instance the automotive industry is currently experiencing. Therefore, short-time work - the so-called Kurzarbeit in German - wouldn't help us reduce costs in MAIL. Here, other measures, like extending working hours, are necessary. If we don't do anything now, we will be forced in a few years to take drastic steps - and that's something I want to avoid by all means.
You are in the process of changing the direction of the Express business. What are your primary focal points here?
Frank Appel: For our Express business, we are taking a very clear approach: boosting profitability while maintaining our high service quality. For this reason, we are focusing the business on our international services. This is not only profitable but also allows us to gain an edge on our competitors. In the United States, we completely pulled out of the domestic market at the end of January. Outside the United States, we have also turned our attention to countries where our business with domestic shipments and the business with time-definite international shipments are losing money. And we are continuing to reduce administrative costs, just as we are doing in the other divisions.
What sort of specific cost cuts are being made and will they be able to offset the impact of the economic crisis?
Frank Appel: As far back as November 2007, we introduced an extensive program aimed at boosting efficiency in the Group and generating more cash from operating activities. We have already achieved considerable results here: sold Postbank and some real estate, begun to reorganize divisions that do not meet our profitability criteria, cut back on investments and reduced our net working capital. If we had not achieved these successes, we would be in much worse shape in the current crisis.
In light of the economic crisis, we stepped up our cost cutting program and set a goal to take out at least 1 billion euros in indirect costs by 2010. EXPRESS, which will contribute the lion's share with 460 million euros, expects to reach its target already at the end of 2009. The other business units also strive to reach their targets earlier: MAIL with 180 million euros, GLOBAL FORWARDING, FREIGHT with 160 million euros, SUPPLY CHAIN with 130 million euros and our Corporate Center with 70 million euros of indirect costs.
You were just talking about the successes of the Roadmap to Value. But cash flow in the first quarter was negative. Why?
Frank Appel: One point is clear: With the initiatives contained in the Roadmap to Value and our focus on a solid cash position, we are on the right track - this is also something that our investors repeatedly tell us. The numbers prove it as well: At 2.7 billion euros, our net liquidity is very solid. However, as mentioned earlier, we also had additional restructuring costs, and the weak market situation naturally had a negative impact as well. Furthermore, pension payments for civil servants are always due in the first quarter.
Speaking of investors - you ran into heavy criticism at the Annual General Meeting in April because you went back on your previous statements and reduced the dividend and because the stock price has not performed satisfactorily. How do you intend to convince investors that they should buy Deutsche Post DHL stock?
Frank Appel: Right now, we are by far not the only company that cannot be satisfied with its stock's performance. But I firmly believe that our company - and our stock - has enormous potential. If we take the right steps now and vigorously introduce the measures contained in our Strategy 2015, we will be able to reap the results in a few years, and this will also be reflected in our stock price.