"Further expanding our leading position"
Deutsche Post DHL released its results for the third quarter of 2014 today. During the period, the company continued to deliver the positive results seen in the first two quarters of the year, producing further gains in revenues and earnings. Nine months into the year, the Group remains well on its way to hitting its targets for 2014. In an interview, CEO Frank Appel talks about the company's year-to-date performance and discusses operational trends and strategic priorities in the coming months.
CEO Frank Appel
Mr. Appel, how would you describe Deutsche Post DHL's performance in the third quarter of 2014?
Frank Appel: We continue to be satisfied with our performance - especially given the challenging business environment. Geopolitical uncertainty is intensifying rather than easing, and the economy is not providing us with any tailwind. Nonetheless, we further increased our revenues. And if you take a look at the absolute numbers, our revenue momentum stands out much more clearly than it does when you just look at the percentage changes: During the third quarter, we generated additional revenues of more than EUR 500 million compared to the same quarter last year - this is a significant achievement in highly competitive markets that are actually growing at a slower pace than most of our businesses. This means that we are gaining market share and further expanding our leading market position - particularly in segments and regions of the world that are showing the strongest growth momentum. We will profit from this also in months and years to come.
Are you able to turn these top-line improvements and market share gains into increased earnings?
Frank Appel: For several years now, we have seen our EBIT rising at an above-average rate exceeding that of our revenues. On the one hand, this reflects the investment that we have made in recent years in the expansion of our network, our infrastructure, the qualifications of our employees and the development of innovative products and tailored services. On the other hand, our sustained good earnings performance mirrors the disciplined business practices that we continue to apply in both good and difficult market phases. Thanks to this firm foundation, we can deliver profitability improvements quarter after quarter. This was also the case between July and September 2014. During this period, both the Post - eCommerce - Parcel (PeP) division and DHL contributed to the EBIT increase of nearly 5 percent. This gain becomes even more impressive when you consider that we invested extensively in additional structural improvements in several areas in order to strengthen the foundation for the Group's sustainable future growth over the long term.
You are clearly referring in particular to your freight forwarding business where you have launched a far-reaching transformation process. What have you accomplished thus far?
Frank Appel: At the moment, GLOBAL FORWARDING, FREIGHT is indeed facing the biggest challenges. No other area is affected as much by the sluggish economy as the freight business. In addition to that, the competition in this business has intensified. The result is continual pressure on rates and margins. Of course we are unable to completely avoid this pressure. But still: The recovery in volume and revenues that we saw in ocean and air freight in the second quarter continued in the third quarter as well. As a result, the division's revenues rose year-on-year for the first time since the end of 2012. This is obviously good news. But I have to add that this growth did not translate into higher earnings. Instead, the divisional EBIT fell sharply compared with the same period last year. But this was expected due to the lower margins and the high costs of structural changes that we have been making in the forwarding business as part of the "New Forwarding Environment" (NFE). Our goal: to create more cost efficiency while boosting service quality.
That sounds something like achieving the impossible...
Frank Appel: ... but it can be done. With our transformation program we want to completely redefine our processes and procedures in the forwarding business. This is a very complex task, no doubt about it. The first pilot projects we conducted in various markets have shown us where the major challenges lie and in what areas we need to further intensify our efforts. At the same time, we feel encouraged to continue on this tough path. Ultimately, NFE will help our route and fleet management to become even more efficient, our processes to gain significantly more speed, and our range of products and services to become even more appealing to customers. As a result, we will gain a competitive edge through NFE. Nonetheless, we still have a lot of work ahead of us. This work will also have a negative impact on the division's earnings next year. We should start to see the first benefits in 2016.
The forwarding business is not your only challenge at DHL. What are you planning to do at SUPPLY CHAIN?
Frank Appel: The starting point at SUPPLY CHAIN is completely different. We are still winning a lot of new business here, even though we are taking a much more selective approach and paying much more attention to profitability when we conclude new contracts. In addition, we are increasing both revenues and - at an even higher rate - our earnings in this division. Our primary objective here is to take advantage of this momentum now and raise the division's performance to the next level. We are convinced that SUPPLY CHAIN has much more potential. We intend to boost its operational margin from 3 percent today to between 4 and 5 percent by 2020. The division's management team has already developed a clear strategy to meet this goal.
At EXPRESS, restructuring has been a thing of the past for a long time now. Aren't you just about to reach the end of the story here?
Frank Appel: Our EXPRESS division has the world's best network, an excellent position in the market, is continuing to grow at a high pace and is thus constantly expanding its market leadership. And we are continuously increasing the operating margin. In the third quarter, it amounted to 9.8 percent. Our goal right now is to sustain this level so that we can reach our target of 10 percent over the entire year 2015. Even if we reach it, you can be sure that we will not rest on our laurels. Instead, we will continue to invest in our infrastructure and, thus, our future growth. Overall, we see no reason why the strong performance at EXPRESS should change any time soon - if we continue to do everything we can to remain one step ahead of the competition. I have no doubts our EXPRESS division has the potential to sustainably increase revenues, volumes and operating margins long term.
And what about PeP?
Frank Appel: We are continuing to make good progress here. PeP is the most innovative player in the marketplace, as the successful test operation of our parcelcopter recently demonstrated. As the market leader, we are of course profiting from the boom in online retailing more than most. And we are continuing to strengthen our position with new, innovative delivery services. Our rapidly growing parcel business is therefore still able to more than offset the negative impact of declining mail volumes. In the third quarter, we boosted revenues in the eCommerce - Parcel segment by more than EUR 100 million to EUR 1.4 billion. The result: The parcel business is now producing more than one-third of PeP revenues - and the trend is clearly pointing upward. In future years, we will see international markets generate a significantly higher share of these revenues. We will tap the most promising of these markets on a step-by-step basis.
After three quarters, though, PeP is still a long way from its EBIT target for the year. Will you make this up in the fourth quarter?
Frank Appel: It will not be easy when you consider the higher personnel and material costs we face here. But we are confident that we will have a successful quarter. First, we are looking forward to the seasonally strong year-end business. Second, the fourth quarter has nearly one work day more than last year. In PeP, this is an important factor.
And what about your Group's guidance for the year? Halfway into the final quarter, you must have a pretty good idea about where you stand.
Frank Appel: We are sticking to our guidance for the year. This means: We are targeting a Group EBIT of between EUR 2.9 billion and EUR 3.1 billion. PeP should generate about EUR 1.3 billion to this figure, and DHL will contribute between EUR 2.0 billion and EUR 2.2 billion to it. As we previously announced, we intend to reduce the costs of our Corporate Center to below the level of EUR 400 million. And I am confident that we will reach all these goals.
Will you also hit your other financial targets?
Frank Appel: Our net debt development follows the typical seasonal pattern this year and is at about the level we expected it to be. And we assume that we will see the usual sharp decrease in the fourth quarter. Equally important is that we are in a good position to generate sufficient free cash flow to at least cover the dividend for financial year 2013 that we paid in May - in spite of the higher level of cash paid for capital expenditures.
After seeing Moody's upgrade your rating, can shareholders begin to hope you will pass along excess liquidity to them?
Frank Appel: It is really too early to talk about such steps. First, we have been upgraded by just one rating agency. Second, we want to wait for the entire year's figures and see what our liquidity looks like then. As a rule, it is true that a pay-out to shareholders is one possible way to use excess liquidity should it arise. We have been saying this ever since we introduced our finance strategy in 2010.
What role does mid-range thinking play in this regard?
Frank Appel: We would not have to think even in theoretical terms about the use of excess liquidity if we were not fundamentally confident about the company's future development. And we have reason to be confident. Deutsche Post DHL has an excellent position in key markets and segments. Our "Strategy 2020" provides us with a clear road map for future years. We have linked our operational targets with a robust financial strategy that we have no intention of changing: We intend to significantly increase our earnings next year, even though we are making significant investments in the future that will impact our profitability in 2015. In 2016, we plan an increase in consolidated EBIT to between EUR 3.4 billion and EUR 3.7 billion. And the average EBIT increase of more than 8 percent we are seeking to generate between 2013 and 2020 will raise our profitability to a completely new level by the end of this period.