"Our growth trend clearly continues"
Deutsche Post DHL performed very strongly in the third quarter of 2011 despite the slowdown in global economic growth and major uncertainties in financial markets. Once more, earnings increased at a higher rate than revenues. Following this positive business development in the last quarter the company once again raised its full-year earnings guidance. In an interview CEO Frank Appel explains the reasons for the company's continued positive performance and discusses the opportunities and strategic priorities of the world's leading postal and logistics group.
CEO Frank Appel
Mr. Appel, you posted good numbers in the third quarter and did this in a challenging market environment. What are the reasons for that?
Frank Appel: Our business is indeed very robust, and our growth trend clearly continues. The slight slowdown of global economic activity looming on the horizon had only a very limited impact on us thus far. We are not seeing a deceleration in the growth of our revenues or earnings. This is largely because we are particularly well positioned in those places where the momentum continues to be most dynamic: in the growth markets of Asia, for example, or the rapidly expanding parcel business in Germany. The other key reason for our very positive performance is the efficient company structures we created in the previous years. Today, we are much better positioned to generate profitable growth: we can meet the needs of an increasing number of customers with best-in-class solutions while working much more cost effectively than in the past.
Unlike some competitors, you remain confident, even though the economies of some important countries are slowing. Are you better than they are or is success going to your head?
Frank Appel: We are neither arrogant nor naive. We are not ignoring the possibility that the economic environment could get rougher, especially in developed countries. But our early-warning systems have not given us any indication that our business faces a worrisome slowdown. And until now the forecasts of economic experts have also not provided any grounds for pessimism.
And should the economy nonetheless go into a tailspin, what would that mean for you?
Frank Appel: Our customers are better prepared to face a slowdown now than they were before the crisis in 2009, and we are, too. We are able at any time to flexibly adapt our capacities - for instance our EXPRESS air fleet - and costs to fluctuations in demand. That was one of the core aspects of the structural measures that we implemented over the last couple of years in order to be able to cope with the overall increased level of volatility. What we are seeing right now, will rather be the rule than an exception going forward: a larger degree of uncertainty is part of everyone's business nowadays. We simply have to prepare ourselves for that. And we have done exactly that. We also have a number of long-term contracts, especially in the SUPPLY CHAIN division, that provide us with a stable base of business. Let me make this point one more time: I do not foresee a recession and, as a result, I do not expect business to slump. The most important trends for us - growth in the emerging countries and the Internet-fueled momentum in the parcel business - are firmly in place.
What specifically does that mean for your guidance?
Frank Appel: First, we believe that we will not experience a fundamental reversal of the current trend in the fourth quarter in 2011 and expect to see a healthy holiday shopping season. In light of this and as a result of our strong development over the last couple of months, we have again increased our guidance for the Group EBIT for the full year. We now expect to be able to reach an operating profit of above EUR 2.4 billion in 2011. What's particularly positive about the expected Group performance is the fact that both pillars of the company - MAIL and DHL - are performing significantly better than we expected at the beginning of the year. For our MAIL business we now project operating earnings of around EUR 1.1 billion in 2011. Profits at our DHL divisions should increase at double-digit rates to above EUR 1.7 billion this year. These numbers underscore the solid and very strong foundation upon which Deutsche Post DHL rests. This also leaves me optimistic for the time beyond 2011. In upcoming months, we intend to capitalize on our positive momentum as a way to serve our customers even better than before and to continue preparing ourselves for future market challenges.
You just mentioned that in recent years the Group has made significant progress in a wide variety of areas. Where do you see further room for improvement?
Frank Appel: We really have accomplished a great deal in recent years. Today, all of our divisions are highly profitable. DHL has become the growth driver for our company - just as we had planned and forecasted when we made the acquisitions. And this is not only the case for revenues - earnings in the three DHL divisions are continuously outperforming top-line growth. At the same time, we are making good headway in our work to stabilize the MAIL business. The results achieved so far are indeed really impressive. However: This is no time for complacency. With our Strategy 2015, we have a lot planned and have thus far only taken a few steps down this path. The structural changes in the MAIL division, for instance, are still being made. And we still have a lot of work on our hands in the DHL divisions if we want to achieve our full potential. One focal point of this work will be to further intensify the working relationships among these divisions. Our recent appointment of Bill Meahl to the position of Chief Commercial Officer is specifically designed to strengthen this bond.
What is the exact reason for this appointment?
Frank Appel: All of the DHL divisions are doing a fantastic job and are now working much closer together than they were just a few years ago. But we are still missing some business opportunities because customers experience our company and our product and service offering as just too complex. In other words, we can still do better. For this reason, it is time to launch the next stage: Our goal must be to make it easier for our customers to understand our organization. Working in a cross-divisional manner, we must develop new solutions that enable us to stand out from the competition. This approach will enable us to tap new growth opportunities in all the DHL divisions. But we can achieve this goal only if we share our know-how and take a holistic view of the customer relationship. And this is where Bill Meahl will play a key role.
You mentioned the issue of structural change in the MAIL division. Right now, it seems as if the concerns we've been hearing about for years are baseless. Third-quarter earnings shot up by nearly one-fifth. How does that fit into the general picture?
Frank Appel: For one thing, we are not complaining about structural change. We are adapting to it - successfully. In terms of third-quarter EBIT: This is only one - albeit positive - portion of the picture. A look at the first nine months reveals the rest of it: We have almost reached last year's level. This means that we have achieved our initial objective of stabilizing the company. We consider this a success. But we must not - not even for a minute - rest on our laurels here.
So how sustainable is the stabilization?
Frank Appel: We have to acknowledge that the traditional letter is increasingly being replaced by electronic media and that this general trend can and will not be stopped. We are going to have to continue working hard to maintain the success we are seeing right now in stabilizing the profitability of the MAIL division. In our efforts, we are pushing all levers: We will continue to work on increasing the flexibility of our cost base. In a reflection of this, we have just recently reached agreement with the German services union ver.di on a comprehensive package of measures to ensure the long-range future of the mail business. This agreement sustainably increases our productivity and flexibility, and, at the same time, gives employees more security. We were, indeed, unsuccessful with the German postal regulators in achieving any fundamental change in the postage rate for letters. The new formula introduced in October is, however, a first step in the right direction and paves the way for greater leeway for us to adjust rates in the future. In the parcel business, we are investing EUR 750 million in the modernization of our German-wide network in coming years. This investment will create a competitive platform for the company to achieve further growth as the market and innovation leader and offer customers new, innovative and convenient products. And we will do everything necessary in the future to achieve the objective of stabilizing the MAIL division. But it will certainly not happen on its own.