"On track in a challenging environment"
Deutsche Post DHL released its results for 2012 today. The world's leading postal and logistics group once again boosted revenues and produced strong increases in operating earnings. In an interview, CEO Frank Appel talks about the reasons for the Group's good performance and outlines his priorities and goals for 2013.
CEO Frank Appel
Mr. Appel, 2012 was not an easy year given the weak economic environment in important markets and persistent political uncertainty. How would you sum up the year for Deutsche Post DHL?
Frank Appel: We are very satisfied with our performance in 2012. Faced with challenging conditions, we continued to generate profitable growth and achieved all of our targets. The revenue increase we generated is primarily the result of the exceptional market position of our three DHL divisions globally and in particular in the emerging markets. This is complemented by the ongoing strong growth in our domestic parcel business in Germany where we were able to further expand our market leadership in 2012. One development is particularly satisfying: Our EBIT improved by nearly 10 percent and, as a result, grew significantly faster than our revenues did. This was especially evident in our fourth-quarter performance. These developments demonstrate that today, Deutsche Post DHL is not just considerably more flexible than a few years back, it is also more robust. This enables us to remain on track even in the face of a challenging environment.
One striking development is the good result produced by the MAIL division. What are the drivers for this performance?
Frank Appel: In 2012, we continued to make strides in our efforts to stabilize the MAIL business. We are very pleased about this. Volumes in the letter business are still slowly dropping and we expect this trend to continue. But our ability to use the growth in the parcel business to compensate for these structural declines is paying off. In 2012, the revenue gains produced by the parcel business almost matched the revenue losses recorded in the traditional mail business. As the market leader in the German parcel sector, we are strongly benefiting from the current e-commerce boom. One reflection of this was that we exceeded for the very first time the 7 million mark in parcels handled per day during last year's Christmas season. This is an outstanding accomplishment of our parcel unit, which contributed once again to the stabilization of the MAIL division's profitability. And while the reported EBIT did indeed decline slightly, underlying earnings - excluding the negative effects of the subsequent VAT payment - actually improved. This is a pleasing bit of news for the moment - but it does not change the general situation: We must continue to work hard if we are to stabilize the current level of profitability over the long run.
Let's talk about DHL. While competitors continue to bemoan the global economic slowdown, DHL seems unaffected. What is your secret to success?
Frank Appel: There is no question about it: We, too, are feeling the effects of the economic challenges. But we are coping quite well overall, perhaps even better than some of our competitors. We are profiting from our significant investments in the modernization and expansion of our infrastructure as well as our strong, lasting presence in the dynamic growth markets that continue to flourish. But presence and infrastructure alone are not enough. Efficient processes and a systematic focus on the customer are further key factors for success. Together, these factors helped us expand our leading market position, for example, in the global express business and generate record earnings in this division. The SUPPLY CHAIN division once again concluded new contracts totaling EUR 1.2 billion. And the GLOBAL FORWARDING, FREIGHT division produced profitable growth despite challenging business conditions. All three DHL divisions generated double-digit growth and reached an EBIT level of more than EUR 2 billion for the first time.
You said it - the Group earned a lot last year. In light of this, wouldn't a dividend increase have been possible?
Frank Appel: Our proposed dividend of EUR 0.70 per share amounts to a total pay out of nearly EUR 850 million. Based on the consolidated net profit adjusted for one-time effects, this represents a pay out ratio of 53 percent, which is well in the range of 40 percent to 60 percent that we set as a target corridor in 2010 as part of our new finance strategy. In previous years, we were at the top end of the range primarily because the operational improvements resulting from the restructuring program were not as visible as they are today. At that time, we wanted to signal to our investors that we fully believed in our strategy and the effectiveness of our restructuring program. And let me add that the recommendation for 2012 still represents an attractive dividend yield of more than 4 percent.
You have ended the last year with a net debt position. What was the reason behind that?
Frank Appel: There were a number of reasons. Above all, a series of one-time effects totaling EUR 2.8 billion negatively impacted our liquidity last year. These one-time effects included the repayment of state aid to the EU and the subsequent VAT payment I mentioned earlier. The biggest impact resulted from the further funding of pension obligations in the amount of around EUR 2.0 billion. In turn, we expect this move to produce a noticeable improvement in our operating cash flow in coming years and have a positive effect on our earnings. If you take these effects into consideration when you examine our liquidity position, it quickly becomes clear that the company's fundamental financial strength has not changed. This is also evident when we look at the free cash flow: Without the various one-time effects, the company's free cash flow would have remained close to the previous year's level. Taken as a whole, this development is no ground for concern. At the same time, we intend to focus intensively on cash generation. Our goal is to at least cover this year's dividend payment for fiscal year 2012 with the free cash flow generated in 2013.
What are your other priorities for 2013?
Frank Appel: In principle, they are the same as last year. In 2013, we will continue to do everything in our power to solidify and expand our market position in all business segments. In this work, we will continue to be guided by our overarching goal: to make our customers' lives easier. To do this, we must defend our innovation leadership in our businesses and recognize at an early stage such trends as the increasing tendency of our customers to outsource, and systematically exploit these opportunities.
What economic trends do you expect to see in 2013?
Frank Appel: Although the first signs of economic stabilization are emerging, we expect at least the first half of the year will remain very challenging. Although it is still too early to make a definitive statement, we do expect an improvement in the second half of the year. We believe there is a good chance for the global economy to gradually recover in 2013.
That sounds quite optimistic. Why then is your guidance so cautious?
Frank Appel: Even though we are generally optimistic about the current fiscal year, 2013 will not be easy. One thing is clear, though: We intend to and will continue to grow. We aim to boost Group EBIT to between EUR 2.7 billion and EUR 2.95 billion. Currently, this is a realistic target. If we achieve it, it would be another strong sign of the continued improvements in the company's earnings power.
But at first glance, your earnings guidance for DHL, in particular, seems to be a bit less ambitious.
Frank Appel: In order to put our forecast in the proper perspective, you first must adjust last year's result for the positive one-time effects in the EXPRESS division related to the reversal of provisions and the sale of the domestic business in Australia and New Zealand. At the same time, you need to take into account that we will significantly increase the investments into a new IT infrastructure for the GLOBAL FORWARDING division in 2013. Expenditures in this area will increase by a high double-digit million amount compared to last year's level. So looking at the underlying business, we are once again aiming at a significant EBIT improvement at DHL, which will keep us fully on course to meet our mid-term targets.
You've been talking about stabilization in the MAIL division for years, but now you're expecting growth for 2013. How did that happen?
Frank Appel: Here, too, the actual trend is apparent with close analysis of the result in 2012 and the forecast for 2013. The fact that we slightly increased postage rates at the beginning of 2013 for the first time in more than 15 years will indeed help us. We expect the increase will generate additional revenue this year that will total about EUR 100 million and have a positive impact on operating earnings. But if you exclude this effect, we expect to reach a profitability level close to last year. If you also factor in the subsequent VAT payment of EUR 151 million that had a one-time negative impact on MAIL EBIT in 2012, you can see that we do not expect an overall fundamental improvement to the situation in the MAIL division in 2013. Instead, we have to continue working hard to compensate for the structurally caused declines in the traditional mail business.
Your parcel business played a key role in this, but you yourself have pointed out that market growth is slowing in this area. Are the good times over?
Frank Appel: Not at all. For some time now, we've been saying that we expect annual market growth of 5 percent to 7 percent over the mid-term. That's still quite significant. Especially since we, as the market leader, will benefit above average from this growth. At the same time, everyone needs to keep in mind that we do not expect that we are able to continue growing at double-digit rates in the future. Nevertheless, the parcel business remains a cornerstone of our stabilization strategy for the MAIL division. We have gained an exceptional market position, made major investments and are constantly tapping new growth potential.
Speaking of growth: You've now reached the halfway point for implementing your Strategy 2015. How are things looking?
Frank Appel: We're doing very well in terms of meeting the mid-term targets of our Strategy 2015. The steps we have taken to reach our objectives so far have been successful. At the halfway mark, we are benefiting from having adjusted our structures: We are more flexible, robust and efficient than before. This is reflected in our earnings performance, which is on course to reach our planned Group operating earnings target for 2015 - EUR 3.35 billion to EUR 3.55 billion. But earnings only tell one part of the story. We are also making good progress in terms of the other objectives. One of our goals is to become the Provider of Choice - that is, the first choice of our customers. Our surveys show that our efforts in this area are being recognized by customers. We are also making significant strides in becoming the Employer of Choice - that is, the first choice among current and potential employees. We have been receiving very positive feedback from our employees. And by consistently delivering the results we promise, we are laying the groundwork to meet our third objective, becoming the Investment of Choice.
You can look back on a successful share price performance in 2012. Do you think this upward trend will continue in 2013, too?
Frank Appel: We generally do not comment on the future performance of the share price, but we certainly aim to continue to please our shareholders. The best way to safeguard the lasting trust and credibility gained on the capital market is to continue with the systematic implementation of our strategy. We know that it is paying off. The past three years have proved that. But we also know that the second half of the journey will be no less challenging than the first. With our unique products and services and exceptional position in the growth markets of the world, we have an excellent foundation for generating further profitable growth. We will build on this strenghts and lead the Group - step by step - to its next milestones.
As a final question, let's look beyond the company for a moment. In his State of the Union address, U.S. President Barack Obama raised the prospect of a free-trade agreement between the United States and Europe. What do you think about his proposal?
Frank Appel: Since Barack Obama made those comments, the discussion has primarily focused on the positive economic effects such an agreement would have - for instance, new jobs and a projected surge in economic growth of 1.5 percent. Both aspects are, of course, important and very welcome, but there's actually much more at stake here. A free-trade agreement with the United States would be a significant milestone for two reasons: To begin with, it would give companies on both sides of the Atlantic new opportunities as the potential streamlining of regulations would mean a substantial drop in trade costs. This would strengthen the most important economic partnership in the world. Furthermore, such an agreement would create a new dynamic between the United States and Europe. An even stronger foundation would be laid for joining together to address the most pressing global challenges of our time: climate change and ensuring sustainable globalization that generates participatory opportunities for an increasing number of people in the world. The rapid implementation of the free-trade zone would therefore strengthen the chances of creating a better world.