"Clear focus on our targets"
Deutsche Post DHL announced its 2013 results today. The company developed well amid challenging market conditions in 2013 and further improved its profitability. In the following interview, CEO Frank Appel talks about the factors that led to the strong results and outlines his expectations for the current year and beyond.
CEO Frank Appel
Mr. Appel, for the first time in several years, revenues generated by Deutsche Post DHL did not increase during the past year. Are you nonetheless satisfied with your performance in 2013?
Frank Appel: Absolutely. First, you have to recognize that our organic growth trend remains intact. Excluding negative exchange-rate and other inorganic effects, we boosted revenues by nearly 3 percent. This is satisfactory, particularly when you consider the sluggish economic development in the second half of the year. Second, our earnings grew disproportionately once again. This was evident both on the EBIT line, which rose more than 7 percent, and in net profit, which jumped by more than 25 percent - an increase that also benefited from positive tax effects. Third, we can confirm that we met our guidance for 2013, just as in past years. We also took an important step forward to reach the goals of Strategy 2015. This is the case for both our financial targets as well as the other metrics against which we measure ourselves.
What are you referring to in particular?
Frank Appel: We do not simply look at our financial results and, thus, the value that we create for our shareholders. We consider two other goals to be equally important: We want to be our customers' provider of choice and the employer of choice in our sector. We firmly believe that progress in these two areas is ultimately necessary to drive long-term value creation. That's why it is even more pleasing that we have made good progress in both areas during 2013. This development can be seen in both customer satisfaction studies and in our regular employee opinion survey, which have revealed a high and steadily increasing approval rating for our company. The progress that we continue to make here is the result of the very hard work that we have detailed in the Corporate Responsibility Report that we also released today. We are determined to combine customer benefits and environmental protection, to assume responsibility for our planet and to equip our most important asset, our employees, for further growth. Corporate responsibility in this broader sense is an integral part of our strategy - and we also view it as a fundamental contributor to sustainable success.
It would appear that this approach is also paying off for your investors. The stock price performed exceptionally well last year, and you are planning to significantly increase the dividend.
Frank Appel: On May 27, the Board of Management and the Supervisory Board will propose a dividend of EUR 0.80 per share to the Annual General Meeting. This is an increase of EUR 0.10, or 14 percent, over last year's dividend. Based on the underlying net profit, which has been adjusted for positive and negative one-time effects, the payout ratio will be right in the middle of our declared target corridor of 40 percent to 60 percent. As a result, nearly EUR 1 billion will be distributed to our shareholders. This, too, demonstrates how well the Group has matured in recent years by focusing on strategy execution, in particular further exploiting growth opportunities.
What were your key growth drivers last year?
Frank Appel: We continue to profit from our decision to focus at an early stage on those key trends that also significantly shaped our performance in 2013: first, the ongoing boom in e-commerce, which continues to generate high growth rates for us as the market and innovation leader in the parcel business. Second, the powerful growth in the international express business, an area where we are better positioned than any of our competitors. And, finally, the growing importance of emerging markets, those regions of the world where we are greatly benefiting from dynamic growth thanks to our far-reaching international presence. Added together, these factors produce a very satisfying picture of our Group across all divisions, as a major force in those markets that are expanding most rapidly.
One area of the company, in particular, produced some surprising positive results this year. And this is an area that you have regularly expressed concerns about: the MAIL division. Have you been understating the case here in the past few years?
Frank Appel: Not at all. The structural shift from physical letter communication to electronic communication is a fact of life and continues to move forward. Our ability to boost revenues and increase EBIT in 2013 resulted in part from the hard work that the MAIL division has done in recent years to offset the impact of this transformation by increasing efficiency and adding new products and services. We are also getting a boost from the aforementioned strong growth of the parcel business, an area that now generates more than 25 percent of MAIL revenues and that cleared the 1 billion parcel barrier for the first time last year. And, finally, we had a number of one-time effects that made the comparison with the previous year look better than it actually is. In this regard, I am thinking about the utilization of part of the provision for stamps and the special lift we got from mail related to Germany's parliamentary elections and the switch to SEPA last year. Furthermore, a one-time VAT payment also reduced MAIL earnings in 2012. Looking at the total picture, we have to conclude that it will become increasingly tougher to offset the basic trend of declining mail volumes by boosting productivity. This is a fact that has also been acknowledged by the Federal Network Agency in the now revised price formula for regulated products. To blunt the impact of this change and to generate additional revenue, we will continue to press ahead with our strategic projects. Our E-Post offering is a good example here. With revenues of 100 million euros we have achieved our goal in 2013 and quintupled revenues within a year. Despite success stories like this one, we must nevertheless become even more cost conscious to ensure that the higher revenues will also lead to increased earnings.
DHL is running into an economic headwind in certain areas. Is this a cause for concern?
Frank Appel: We have never claimed to be immune to economic chills. But we can say that we have been mostly successful so far in managing our way through the weak economic environment. The impact of weakening demand in the air- and ocean-freight business on the profitability of GLOBAL FORWARDING, FREIGHT remains limited thanks to our selective market strategy and our continued strict cost controls. As a result, we were even able to maintain our operating margin at the previous year's level. Exchange rate and other inorganic effects were solely to blame for the marginal decrease in reported revenues at EXPRESS and SUPPLY CHAIN. Adjusted for these factors, revenues rose in both divisions. We also continued to increase operating earnings in both divisions. In this context I would like to point out two particular achievements at DHL: first, the very strong growth in new business wins at SUPPLY CHAIN, which set a new record at EUR 1.5 billion and once again impressively demonstrated the success of our business model. Second, the continuing strong margin trends in the EXPRESS business. Here, we are seeing the benefits of far-reaching investments that were made over the past few years in employees, the brand and our networks as well as the impact of improved efficiency. This trend is underscored by a margin of almost 9 percent and an underlying improvement of more than 100 basis points compared to 2012.
For 2013, you set one other clear goal in addition to your usual EBIT targets: generate more cash. How did you fare?
Frank Appel: Our focus clearly paid off. Let's look back for a minute: in 2012, one-time effects - particularly the continued very large funding of pension obligations - totaling EUR 2.6 billion resulted in negative free cash flow of EUR 1.9 billion. By contrast, we had EUR 1.7 billion in positive free cash flow during the past financial year. As a result, we clearly exceeded our target of generating sufficient free cash flow to cover the dividend of EUR 846 million that we paid in 2013. We attribute this very pleasing development to increased operating earnings power on the one hand and positive timing effects on the other. By the way, the strong cash flow was also accompanied by a sharp drop in our net debt - this, too, was an important achievement of the past year.
Can the positive trend in cash flow continue?
Frank Appel: In principle, yes, it can, even if not as dramatically as last year. This remains a top priority for us. I also mentioned the timing effects that helped us in 2013. These include the delayed cash outflow for investments that will not affect our cash position until this year. However: In 2014, we will again be in a much better position than we were in the years preceding 2013. In this regard, our success in cash generation is sustainable. As a result, this year, we are again determined to cover the - higher - dividend payment for 2013 with our 2014 free cash flow.
What are your general expectations for 2014?
Frank Appel: The economy may improve a bit. But we think that a strong global recovery will take more time to materialize. Nonetheless, we intend to continue our positive earnings momentum. We expect operating profit to be between EUR 2.9 billion and EUR 3.1 billion in 2014. The MAIL division is likely to contribute about EUR 1.2 billion to this goal. There is one important development that needs to be mentioned in this context in order to understand our guidance correctly: at the beginning of the year, we transferred the parcel activities in several markets outside Germany from DHL to MAIL. This will enable our divisions to focus even more closely on their respective core competencies. In the future, the earnings from these activities will be attributed to MAIL and not to DHL. Nonetheless, we are still planning to boost EBIT at DHL, to between EUR 2.1 billion and EUR 2.3 billion. And we intend to reduce Corporate Center/Other expenditures to below EUR 400 million in 2014.
And what about your goals for 2015?
Frank Appel: We have a clear focus on these targets. They remain unchanged - with the exception of the minor adjustment to the projected composition of consolidated EBIT for 2015 of between EUR 3.35 billion and EUR 3.55 billion, which is related to the shift from DHL to MAIL that I just mentioned. We know that our Strategy 2015 is working and that Deutsche Post DHL is stronger today than it has ever been. The goal now is to keep up the momentum that has brought us this far and to continue working hard to reach our goals.
And what will come after you have reached the end of your Strategy 2015?
Frank Appel: We still have a good way to go yet, and what lies ahead will not be the easiest leg of the trip by any means. But we would not be a far-sighted management team if we were not already thinking about how we can address the next phase in the company's evolution and how we can remain successful beyond 2015. I am confident that we will be able to share some details with you soon.