"Focus on continuous improvement in all divisions"
Deutsche Post DHL Group announced its results for 2014 today. During the past year, the company increased both its revenues and earnings and met its stated financial targets. In an interview, CEO Frank Appel talks about the company's continuing solid performance. In addition, Appel explains why in 2015 the company will focus on investing in further improvement of the Group's structures and processes as a way of bolstering its long-term success while still generating further growth.
CEO Frank Appel
Mr. Appel, how would you assess the performance of Deutsche Post DHL Group during financial year 2014?
Frank Appel: Overall, 2014 was another good year for us. We achieved solid growth in revenues despite the lack of a significant tailwind from the economy and an uncertain political environment in many parts of the world. Furthermore, we boosted our operating earnings to nearly EUR 3 billion. In doing so, we met the target we set for ourselves. Given the challenging business environment, it took a lot of hard work to achieve these goals, but once again we have demonstrated to the market that we keep our promises. Our shareholders invest in our growth and therefore we intend to share the fruits of our success with them, in line with our dividend policy. In light of this, we will propose to the Annual General Meeting in May that our dividend should be increased by EUR 0.05 to EUR 0.85 per share, which is in the middle of the targeted payout corridor of 40-60 percent.
Why is Deutsche Post DHL Group able to stay on its profitable growth path year after year while facing business conditions that can hardly be described as favorable?
Frank Appel: More than ever before, we are profiting from the timely decisions of the past. The leading growth drivers in our business are - and will remain - the booming E-Commerce business and the dynamic growth of emerging markets. We are better positioned to take advantage of both megatrends than any other company in our industry. This paid off once again last year. Our international express business hit its EBIT margin target of 10 percent a year earlier than planned, thanks to a strong rise in volume and revenues, supported by strict cost discipline. In our domestic parcel business, we leveraged our superior infrastructure and innovative solutions to further extend our market leadership. When you add everything together, you can say that we are performing very well in many key markets thanks to our clear strategy and our strong, diversified portfolio of products and services. But we can't afford to be complacent. And if you take a closer look at the fundamental challenges facing each of our business divisions, you can clearly see why: We still have a lot of work to do.
Does that mean you anticipate some obstacles to growth?
Frank Appel: We will definitely remain on our growth track. We have to work hard on this though and address a number of structural challenges in order to remain successful in the years to come. Our task is to focus on strategic priorities, while investing and working on our costs to remain ahead of the game. This counts for all four divisions. In Supply Chain we need to work on standardization and use our potential as a global company by increasing efficiency and leveraging skills on a world-wide level. In Post - eCommerce - Parcel (PeP) we have to invest in infrastructure and keep an eye on our costs - especially in Germany. In Express we will also have to continue to invest to stay ahead of the game, and in Global Forwarding - Freight we are working on our major transformation program New Forwarding Environment (NFE), which is currently very challenging. Let me be clear: Delivering profit and being successful today is by no means a guarantee for the future.
In this regard, your freight forwarding business seems to face the biggest challenges.
Frank Appel: That's correct. Rate and margin pressure remains high throughout the entire forwarding industry and our transformation program NFE is very demanding. The small rebound that we saw in volume and revenues in 2014 provided limited help here. Earnings fell sharply in the Global Forwarding business, and we, of course, cannot be happy about this decline and need to work hard on returning to a better earnings performance. The resources and manpower invested in our transformation program NFE were the key reasons for this decrease. This transformation effort not only entails significant financial investment but also requires detailed attention from our management team and workforce within the Global Forwarding organization. In short: It is a challenge that requires considerable focus. At the same time, we recognize that NFE is absolutely essential to our long-term success. We are systematically implementing NFE in order to offer even better service quality by combining cutting-edge IT infrastructure and optimized processes with more cost efficiency. We are confident that it will give us a competitive edge and with this boost our operating profit once again over the mid-term. However, in 2015, NFE will again weigh on earnings.
Besides the forwarding business, you are working on changes in Supply Chain as well. It appears that Express is the only sure thing at DHL.
Frank Appel: It's true that we are very pleased with the performance of our Express business. We have the world's best international express network, an excellent market position and are reaping the rewards of our past structural changes. At the same time, we need to keep our nose to the grindstone and continue to invest in the future - for example, in areas such as the further modernization of our air fleet - and laying the foundation for future growth and additional margin improvements. But it would be unfair to say that the success of DHL rests solely on the shoulders of Express. Supply Chain generated a solid EBIT gain of more than 5 percent in 2014. The ability of Supply Chain to generate new business is still incredibly healthy - newly concluded business contracts totaled comfortably more than EUR 1 billion again last year. This is a clear reflection of the strong demand for our products and services that you see in the market. And we have a clear strategy to leverage the division's potential further, for example through standardization and leveraging skills on global scale. Our ongoing efforts to optimize Supply Chain really are about making something good even better.
While you have been busy working to transform DHL, your Post - eCommerce - Parcel division has developed really positively. How did that happen?
Frank Appel: The things I have said about the Group as a whole apply to PeP in particular: We made the right decisions at the right time. These decisions include our diversification into electronic communications. Despite some initial skepticism in the market, our E-Post product is doing well. But there is much more to it than this: The earnings contribution generated by the parcel business, for example, is consistently growing, fueled by the boom in E-Commerce. Building on the foundations laid in Germany, where we are the clear market leader in terms of service as well as volume and revenue share, we have also taken the first steps to deliver our know-how in the parcel business to other promising international markets in 2014. Thanks to these efforts as well as to postal rate increases, we were able to offset the negative impact generated by the continuing structural volume decline in the traditional mail business and to generate a slight overall gain in EBIT at PeP. This, without a doubt, is really good news, but we cannot relax, as the market will simply not allow us to.
What do you mean in particular?
Frank Appel: This all comes down to our ability to compete and lead sustainably in the face of a rapidly evolving market place. Above all, I am saying that we need to continuously renew our efforts to deliver cost efficiency and to remain competitive - not only in the traditional mail business, which still continues to produce a large share of PeP's revenues, but also in a fiercely contested parcel market, where we recently took an important step toward bolstering our long-term success by establishing DHL Delivery GmbH. We cannot underscore the point enough: Competitive cost structures are not a means unto themselves. Rather, they are the foundation on which PeP will be able to earn the money that it needs to finance investments in the quality of our postal and parcel infrastructure and to create innovations that we require for the company's long-term success. Continuous improvement is the basis for sustainable business operations.
For 2014 you have achieved your financial targets. What do you expect for 2015?
Frank Appel: First of all, our overall business environment is unlikely to change very much this year: The political uncertainties we face seem to be increasing, and the global economy will only see moderate growth. With such conditions, you cannot take further positive development for granted and you cannot rely on external factors to drive results. Furthermore, we see 2015 as a year, in which we shift gears as well as execute the last steps of Strategy 2015, and at the same time, the first steps of our Strategy 2020. Despite these efforts we expect the Group's EBIT to increase to between EUR 3.05 billion and EUR 3.2 billion. In this regard, PeP should generate at least EUR 1.3 billion. DHL's divisions should boost their contribution to about EUR 2.1 billion to EUR 2.25 billion. The increase in 2016 should accelerate further: We continue to expect consolidated EBIT to total between EUR 3.4 billion and EUR 3.7 billion in 2016.
In light of your company's key financial figures, do you see any possibility of returning even more capital to your shareholders than you are already doing with your regular dividends?
Frank Appel: In our financial strategy, we have clearly stated how we would deploy excess liquidity that we might have: Options would be to provide additional funding of our pension obligations, and/or share buybacks or special dividends. We will weigh all interests when we consider these options. It is too early to say what route, if any, we will take. By the way: we produce the greatest and, above all, most sustainable value for our shareholders when we apply our strengths in truly dynamic market segments and focus on implementing our long-term strategy. We have a clear roadmap leading to continued profitability improvements in all divisions and, thus, to sustainable overall profitable growth. We are now taking meaningful steps to reach this goal. Our solid performance in 2014 confirms that we are moving in the right direction.