"We are further laying the groundwork for the success of Strategy 2020"
Deutsche Post DHL Group has today presented its figures for the third quarter of 2015. While revenues increased slightly, operating results were below 2014 levels, mainly due to one-time effects and investments in the long-term strategy of the Group. In an interview, CEO Frank Appel discusses the latest developments and explains how the company will make progress on the path to a sustainably profitable future.
CEO Frank Appel
Mr Appel, how do you evaluate the performance of Deutsche Post DHL Group in the third quarter of 2015?
Frank Appel: As planned, 2015 is a year of transition. After the successful implementation of our Strategy 2015, we are laying the foundations for the success of Strategy 2020. To achieve this, we are making significant efforts in all our divisions and have also recorded some short-term effects in our results. This is why we announced at the end of October that we would be recognizing a substantial one-off charge in relation to our IT renewal roadmap at Global Forwarding. We are also recognizing additional charges this year within several business divisions, related to an updated assessment of primarily legal and regulatory exposures. These one-off effects should not distract from the otherwise very solid operating performance in several divisions, not just in the third quarter, but overall in the first nine months of the year. Taking this into account, the statement we made earlier this year still stands: we are working hard to lay the foundations for the success of our Strategy 2020 and, with that, to ensure the long-term profitable growth of our Group. And we are convinced that we will see the fruits of these efforts from next year onwards.
Let's talk about the Post - eCommerce - Parcel division, or PeP for short. How do the results look here?
Frank Appel: First of all, we welcome the fact that PeP has achieved a more than respectable revenue increase of 2 percent in the face of a challenging economic environment. The Parcel business is still the number one growth driver here and is delivering significant revenue growth quarter over quarter. Thanks to this, we have been able to more than make up for the decline in our Post business from July to September 2015, despite the fact that letter volumes have fallen faster than usual against the backdrop of the fallout from the strike. The strike has cost us business during, and even after the tariff agreement was reached, which has impacted the operating earnings of the PeP division in the third quarter as well. We are sure, however, that the strike impact is now behind us, and that volumes will return to the normal growth rate that we saw before the strike. Alongside these developments, we have also booked part of the one-off effects foreseen already for this year to cover mainly regulatory exposures in the PeP division in the third quarter. We have factored in a EUR 42 million provision for an increase in expected payments for the federal administration of civil servant pensions. Further factors that impacted us were rising personnel costs - among other things, we have already booked in the third quarter the one-time October payment to employees that we committed to in the tariff agreement - and higher investments in the development of our parcel network in Germany and selected overseas markets. As the engine of e-commerce, we want to play a central role in many more markets. This will involve start-up costs, such as in Austria, where we will build our own parcel network by 2016. At the same time, however, we are sure that the further internationalization of our highly successful parcel business will pay off considerably over the mid- to long-term.
At DHL, we continue to see a mixed picture in the third quarter - with Express as the stand-out performer, as before. What is driving this success?
Frank Appel: First of all, our Express business is very well-balanced globally. When the dynamic in one region of the world trends downwards, as we have recently seen to some extent in China (albeit with an overall growth level that is still high), for example, then we can bring our strengths in other regions, where things are going better, into play. We are positioned in such a way that we can take advantage of growth opportunities wherever they may arise. On the other hand, we are not putting on hold our investments to further optimize the division. We are continuing to invest significant funds in the development of our hubs and the modernization of our air fleet. That can be seen again in the strong growth in investments in the third quarter. In addition, our comprehensive employee development program, which enables every Express employee to qualify as a Certified International Specialist, has been a true success and an important driver of our growth. The numbers speak for themselves: in a tough, competitive market, achieving revenue growth of 7 percent and EBIT growth of 19 percent is no mean feat. We have lifted our margin in this business significantly and consistently over 10 percent.
You have mentioned the efforts made in other DHL divisions. What progress are you making in Global Forwarding, Freight?
Frank Appel: First of all, at Global Forwarding, Freight, we have done a great deal in previous months to bring about a turnaround in the operating business. The first small successes, as we announced, will be visible this year. We have now seen the rate of decline in operating earnings in the third quarter slow compared to the prior year period on an adjusted basis. And this was despite weaker demand and a very selective approach to new business, which drove revenue lower. We are confident that this trend towards stabilization of our operating performance will continue with increased strength in the coming months and that we will see further improvements in earnings in the coming years. This also includes the potential direction of our IT renewal, which envisages a flexible IT architecture and a step-by-step implementation. The aim would be to have a business-centric IT renewal, which enables enhanced shipment visibility through better capture, management and display of operational milestones, and reduction of paper work through greater use of a document management system which has already been proven in our U.S. business. We are currently still in discussion with vendors, including the NFE implementation partner and remain committed to allowing the NFE implementation partner the opportunity to fulfill its contractual obligations.
How do you evaluate the situation at Supply Chain, which is implementing an optimization program this year?
Frank Appel: First of all, our day-to-day business continues to perform well. We are winning attractive new business, above all in developed markets and particularly in the attractive growth sectors of Retail, Consumer Goods and Automotive. The strengths of our operating business can be clearly seen in the healthy revenue growth of the division. The fact that Supply Chain has nevertheless recorded a slightly reduced EBIT in the third quarter is solely due to planned restructuring costs. Our optimization program is progressing well - we have introduced further improvement measures and we are very confident that the division can deliver a strong contribution to the goals we have set for DHL within Strategy 2020.
Speaking of the goals: you have adjusted your 2015 EBIT forecast. Will this have any effect on the dividend?
Frank Appel: With the adjustment to our EBIT guidance for 2015 to minimum EUR 2.4 billion, we have accounted for the combined one-off effects that we mentioned earlier. However, the picture hasn't fundamentally changed. Deutsche Post DHL Group is still solidly positioned and profitable. With regard to the dividend, our policy is well known. In accordance with the finance strategy that remains valid, the Group aims for a payout ratio of between 40 and 60 percent of consolidated adjusted net profit. It is still too early to say anything in detail about our 2015 dividend. We will announce our decision, as usual, once we know our full-year earnings.
Looking beyond the current year, what are your expectations for the coming year and beyond?
Frank Appel: We are working on the assumption that we will return to the anticipated growth path in the coming year and we are confident that this will be the case. First of all, we have seen significant non-recurring effects that have led us to adjust our guidance this year. Secondly, we have strengthened the foundations in 2015 for future success in all divisions. We have taken important steps towards the internationalization of our Parcel business, with more still to come. With the tariff agreement, we were able to secure a more competitive wage structure for our German parcel business. And the new pricing formula will give us some additional room to maneuver with our letter prices from January 2016. In the Express division, targeted investments have created the conditions for sustained growth in volumes and for improved margins. In Global Forwarding, Freight we have initiated the turnaround in our operating business and are reassessing the IT renewal roadmap. Finally, in Supply Chain, with the implementation of our restructuring efforts, we have laid the groundwork for significant margin improvements in the coming years.
And what does all this mean for your earnings targets?
Frank Appel: We are standing by our prior forecasts for the period beyond 2015. In 2016, we will significantly improve the operating earnings of the Group to between EUR 3.4 billion and EUR 3.7 billion. For the period between 2013 and 2020, we continue to forecast an average EBIT increase of more than 8 percent per year - with PeP EBIT increasing by an average of about 3 percent per year and DHL expected to contribute an average increase of around 10 percent per year. This is all ambitious but achievable and we have a robust strategy and important strengths in each of our divisions to achieve these targets. Our strategic agenda defines everything we do - and everything we have already done this year. With this, we will look back on 2015, as challenging as it is today, as a year in which we put in place the necessary foundations that helped us on the way to achieving our goals.