"Making a strong company even better"
Today, Deutsche Post DHL announced its results for the second quarter of 2014. Revenues continued to climb and earnings saw another significant increase. Six months into the year, the company remains in a good position to achieve its targets for 2014. The company's guidance for the upcoming financial year has been revised. At the same time, the Group has issued specific earnings targets for 2016 for the first time. In the following interview, CEO Frank Appel explores the background of these themes and discusses the company's intensified effort to boost the profitability of the Group and its divisions on a long-term basis.
CEO Frank Appel
Mr. Appel, what do you think of Deutsche Post DHL's performance thus far this year?
Frank Appel: Given the very challenging business conditions faced by some of our divisions, we are satisfied with our overall performance. Once again, we have posted some robust numbers without getting any appreciable help from the economy. Our revenues continued to increase - even though significant exchange-rate effects experienced in particular by the DHL divisions continue to mask the full extent of the organic growth we are generating. Our earnings are also continuing to grow steadily. In each of this year's first two quarters, the Group EBIT has exceeded the previous year's level. And when you adjust these numbers for several one-time effects witnessed last year, you clearly see that our profitability is actually even better than the reported numbers imply. This tells me: we are right on track. At the same time, we have to acknowledge that the challenges are substantial. We will really have to throw ourselves into the task and continue to improve our structural positioning in some areas if we want to remain as successful in the future as we have been in the past. Our job is to make a strong company even better.
When you talk about "challenges," you are probably thinking in particular about the situation of the GLOBAL FORWARDING, FREIGHT division. What is happening at DGF?
Frank Appel: From the very start, we knew the forwarding business would definitely not be a sure-fire success this year - and we are not the only ones who have to face this problem. With its direct impact on volume, the sluggish economy has a bigger impact on this business than it does on other areas. We also have to deal with negative exchange-rate effects - and, to make matters even more challenging, the difficult market situation has toughened competition even further. This, in turn, has really hurt margins. Of course, we cannot completely sidestep these conditions. On the other hand, I would like to note that our volume increased over the second quarter figures of 2013, both in ocean and air freight. And the decline in EBIT recorded in the freight business in the second quarter slowed considerably in comparison to the drop seen during the first three months of the year - despite the negative exchange-rate effects I mentioned.
But it is still too early to start talking about a far-reaching turnaround at DGF. How do you intend to tackle this issue?
Frank Appel: We cannot influence the direction of the global economy, which is only slowly picking up speed right now. But we certainly can influence our own positioning. For this reason, we are continuing to intensively work on our transformation initiative called New Forwarding Environment (NFE). In this project, we are redefining a large portion of our processes and procedures. The pilot phase has shown us that NFE works and can deliver the expected results. We have now begun the next phase of the rollout and are introducing NFE in larger markets, across different time zones. But the implementation process is very time consuming and costly. NFE-related expenses will have a negative impact on earnings also next year. But we firmly believe this huge effort will pay off and we will reap the benefits. We think NFE can put us well ahead of our competitors.
How would you describe the situation of the other DHL divisions?
Frank Appel: In terms of earnings growth the major driving force at DHL continues to be EXPRESS. In the second quarter, the operating profit increased by 17.7 percent, a slightly higher growth rate than we were able to achieve in the first quarter. And at 10.7 percent, our operative margin reached a record level. Our business in time-definite international shipments continues to be very dynamic. In this business, we can really apply the competitive edge we created in recent years by having invested significant amounts into the network. Our unique geographic footprint is also a key contributor to the double-digit volume growth that we achieved in all regions outside Europe in the second quarter and the further gains in market share we generated around the world.
And what about SUPPLY CHAIN?
Frank Appel: The SUPPLY CHAIN business has become a solid and reliable profit contributor in recent years. This remains the case today: Revenue growth exceeded the first-quarter level, and we won a healthy amount of new business once again. EBIT rose only slightly in the first quarter. But it improved significantly in the second quarter. But we know that there is much more potential here. For this reason, we will focus once again on systematically improving our structures and processes, and we will increase investments to do so. In the future, we will focus even more intensively on particularly profitable sectors and regions - which in turn can mean that we will sell off or close less profitable activities. In the end, these steps will enable us to significantly boost SUPPLY CHAIN performance in coming years.
Your newly organized division PeP (Post - eCommerce - Parcel) is performing surprisingly well. Or am I mistaken about that?
Frank Appel: We are generally satisfied with the recent performance of PeP, which has existed in its present form only since the beginning of April. We have succeeded in stabilizing the former MAIL division, a goal we set in our Strategy 2015. The division's performance in 2014 thus far has clearly demonstrated this. Revenues rose slightly and EBIT, adjusted for one-time effects, remained at the previous year's level - despite the fact that the division had to absorb increased wage costs and higher materials expenses as well as substantial investments for the further expansion of its parcel business. These strong results show that our strategy of securing the division's existing business and seizing new opportunities is starting to pay off.
But isn't PeP overly dependent on the parcel business?
Frank Appel: The postal business unit boosted revenues in the first quarter thanks to higher postal rates. But its revenues slipped slightly in the second quarter due in part to a work-day effect. By contrast, our parcel business got off to a good start in 2014. It also produced significant gains in volume and revenues as the year progressed. This shows that we were right on track when we made the strategic decision to invest aggressively in the parcel business, which is being fueled by the e-commerce boom, first in Germany and then in selected international markets. We also have to point out one other fact: the higher personnel and material costs still prevent the revenue gains being generated by the parcel business and successful new products like E-Post from being reflected in higher earnings. This is the reason we have to keep focussed on efficiency in the PeP division - and that competitive labor costs cannot be a taboo issue in this context.
Two quarters with moderate EBIT gains are over. During the second half of the year, will you generate the earnings you need to hit your targets for the year?
Frank Appel: We continue to believe we will. For this reason, we have confirmed our guidance: The Group's EBIT should rise to between EUR 2.9 billion and EUR 3.1 billion this year. However, we slightly adjusted our expectations regarding the contributions to be made by the respective divisions: The PeP division is performing well and we have therefore increased the forecast to about EUR 1.3 billion, instead of the previously expected total of around EUR 1.2 billion. On the other hand, DHL faces very difficult business conditions in some areas as well as significant costs related to the NFE project. These one-off expenses will strengthen our long-term earnings growth. Therefore, for the ongoing financial year, we now anticipate a rise in DHL EBIT to between EUR 2.0 billion and EUR 2.2 billion. We had previously expected the total would be about EUR 100 million higher. As previously announced, we intend to reduce expenses in the Corporate Center/Other segment to below EUR 400 million.
And what about future years?
Frank Appel: We will remain on our growth path and continue to generate a significant EBIT improvement next year. We are certain of this. However, the extent of this growth has become less certain due to necessary investments in NFE as well as streamlining and restructuring measures in SUPPLY CHAIN. We have consciously decided to accept these additional one-time expenses in order to strengthen the business for the long-term. The exact amount of these costs is currently under review. In 2016, when we will have largely completed this task, we expect consolidated EBIT to climb sharply, to between EUR 3.4 billion and EUR 3.7 billion. PeP is expected to generate more than EUR 1.3 billion of this total and the DHL divisions between EUR 2.45 billion and EUR 2.75 billion - with expenses for the Corporate Center amounting to about EUR 350 million. In terms of our profitability targets for 2020, we expect to see increasing momentum in subsequent years. In short: We will generate record results in 2014 as well as in 2015 and 2016.
Let's take a look at the Group's financial situation. How is Deutsche Post DHL doing in this regard at the midpoint of 2014? And what is the outlook?
Frank Appel: The Group remains in good financial health. Starting with last year, we are sustainably generating significantly higher cash flow than we did in past years. As of June 30, our net debt does look less favorable on paper than it did at the end of 2013. But the increase of nearly EUR 1.5 billion is solely the result of seasonal factors: Pension payments that are always made in the first quarter amount to more than EUR 500 million, and the dividend paid in the second quarter resulted in cash outflow of nearly EUR 1 billion. The picture will again improve in the second half of the year. Our finance strategy is firmly in place and will facilitate our strategy to expand our operating business and achieve our Strategy 2020 objectives.
You introduced your "Strategy 2020: Focus.Connect.Grow." about four months ago. What sort of progress have you made in implementing it?
Frank Appel: Our Strategy 2020 is our master plan for coming years. It builds on our strengths and is designed to accelerate our organic growth - particularly by expanding business in emerging markets and by fueling international expansion in e-commerce-related logistics. The fundamental direction has been set, and the work to identify specific measures and initiatives designed to carry out the new strategy has begun in every division. Our progress will become visible, step by step, over the coming quarters and years.