"We remain on track"
In the third quarter of the year, Deutsche Post DHL remained on its long-term growth path even as the world economy continued to slow. Revenues climbed above the previous year's level, fueled in particular by the continued dynamic performance of the international express business as well as the national parcel unit. But operating earnings slipped below the previous year's level. Nevertheless, the world's leading postal and logistics group has confirmed its guidance for the entire year. In an interview CEO Frank Appel talks about the company's year-to-date performance and the outlook and priorities for the coming months.
CEO Frank Appel
Mr. Appel, some of your competitors have lowered their guidance for this year as a result of the economy's weakness. You, on the other hand, have confirmed your guidance once again. Is Deutsche Post DHL immune to the crisis?
Frank Appel: First of all, I would like to note that we can be pleased about our company's performance in the first nine months of 2012 and about the third quarter - especially when you consider the economic conditions we are facing right now. Our growth trend remains firmly intact even as market conditions have become more challenging. In particular, our international express business continues to perform strongly. And our parcel unit in Germany has lost none of its momentum - aside from a temporary cooling during the summer months. Of course we too see and feel the effects of the generally slowing economy. But we have been able to deal with them very well thus far.
It is when times get tough, that you can really see just how sustainable and robust a company truly is. Our solid performance underscores the robustness of our business model. It demonstrates that the successes we achieved in recent years are sustainable because they are the result of structural competitive advantages. And there are two reasons for this: first, we have a particularly strong position in the markets that are still producing the most growth, including the dynamic markets of Asia. No other logistics group can match our leading global market position in terms of breadth of coverage. This is really paying off for us right now. Second, we are profiting from the efficient structures that we have created in the Group over the past few years. We are simply better positioned than we once were, and we can now react more quickly to changes in market conditions.
Taken together, this means that we are affected at a later point in time and to a lesser extent by the economic slowdown than some of our competitors apparently are. One thing is also clear right now: particularly in this business environment, we cannot afford to rest on our laurels but need to continue to work hard in all areas. This is the only way that our current competitive edge can become a long-range success factor.
Even if you have effectively dealt with the slowdown up to now, how and where are you feeling it?
Frank Appel: As a global company, we have one fundamental edge: we can offset temporary industry or regional slumps with growth in other areas. But when the entire global economy slows down, as it is doing right now, this drives down trade and transport volumes - and then we as the global leader are naturally impacted by it. You can only offset this effect so much by gaining market share, as we have been able to extensively do in our Express business this year. Added to this is the fact that the crisis symptoms are increasingly unsettling our customers.
Furthermore, price-sensitive customers are more frequently and more quickly switching to lower-cost shipping options than is normally the case. In recent months, we have noticed a shift from air to ocean freight. We are adjusting to such shifts by delivering better services in order to retain our customers as well as gain new ones. We also respond by employing sophisticated instruments to flexibly plan and adjust our capacities. In a more and more challenging environment it will be critical to intensify our efforts in all of these areas in order to meet the needs of our customers and to further improve our efficiency.
For the first time in years, the economic locomotive China is slowing down. Is this a cause for concern? After all, you have poured a large amount of money into China.
Frank Appel: I would like to make one point upfront: even though China's growth has slowed somewhat, the country is still growing at a pace that is more than twice as fast as the world economy. Logistics plays a key role in this development. Just consider the network needed to supply the current population of more than 1.3 billion people with a rapidly growing middle class. Our decision to systematically invest in this market and to continuously expand our presence there is based on a long-range assessment of the country and will not be thrown off course by the moderate, short-term decline in growth. Over the past few decades, we have created a unique platform in China and now have an exceptional position from which we can generate profitable growth in the entire region for many years to come.
Are there any other markets where you see such good long-range business opportunities like those in China?
Frank Appel: China is, without a doubt, a really attractive market. But it is hardly the only one. Asia has much more to offer, and we have definitely not forgotten about the other countries in the region. We also have many growth opportunities in traditional markets. Consider the United States. We have invested heavily in our air hub in Cincinnati. We already have a much stronger position in North America than is widely recognized. And we are intensively working to exploit the huge potential that we see in international express shipments to and from North America.
Let's return to today's situation for a moment. Your third-quarter results were not as strong as the overall results have been in the recent past. Group revenues did indeed grow. But you were unable to maintain your third-quarter EBIT at the previous year's level. Why?
Frank Appel: In operational terms, the third quarter went satisfactorily overall, even if some areas were not as strong as they were in past quarters. In particular, the summer months were somewhat weaker, even at DHL. Nonetheless, we were still able to significantly increase our EBIT there. By contrast, we saw an EBIT decline in the MAIL division. While the general trend - strong growth in the parcel business and moderate declines in letter mail - remained intact, the third quarter is traditionally the weakest one each year. And this seasonal effect is being further intensified by the growing role of the parcel business.
In addition, our MAIL division's profitability was impacted by the new wage agreement, the loss of one workday compared with the previous year and the impact of the Neckermann bankruptcy. All in all after nine months, our Group is still slightly above the previous year's level and is well on its way to hitting its earnings target for the year.
Following the rather weak third quarter, you still have a lot of work to do if you are to hit this target. Are you placing all of your bets on the holiday season?
Frank Appel: It's no secret that the fourth quarter is particularly important and traditionally profitable for the MAIL division and, above all, its parcel business. We expect that this will again be the case in 2012. And for the DHL divisions we also project a strong fourth quarter. However, with the economic conditions becoming increasingly challenging, we will have to further intensify our efforts to reach our earnings target. But knowing what our company and our people are capable of accomplishing, I am able to confirm our guidance - which we have of course carefully reviewed in the wake of economic developments. The MAIL division is making good progress toward generating an EBIT of EUR 1 billion to EUR 1.1 billion. And for DHL, we continue to forecast earnings of about EUR 2 billion.
For the first time since 2009, you are not reporting any net liquidity. Rather, you have net debt. What do you plan to do about it?
Frank Appel: I would like to first note that the Group's financial situation remains very solid. The options at our disposal for financing our planned growth have not been restricted or reduced. When you examine our liquidity this year, you have to keep in mind that we ratcheted up our investments and that our cash position is being impacted by two special factors: a repayment of state aid totaling EUR 298 million and a subsequent VAT payment totaling EUR 482 million. Adjusted for the latter figure, our third quarter liquidity position would have climbed by around EUR 450 million. This demonstrates that our ability to generate funds from operations is fundamentally intact.
Because our fourth-quarter business is generally very strong, we expect to see a significantly lower level of net debt at the end of the year. Regardless of this, we will keep a close eye on this issue and increasingly focus in the months ahead on boosting the Group's cash generation. In the third quarter, we saw that improvements had already been made in working capital management. But there is still more room for improvement.
In 2012, you have been able to remain on course despite the headwinds. Where are you heading in the future?
Frank Appel: We expect our generally positive earnings trend in 2012 to continue in 2013. And that's why the goals we formulated in our "Strategy 2015" remain unchanged despite the volatile market environment: thanks to the cost-cutting measures and growth programs we have put in place, EBIT in the MAIL division should stabilize at at least EUR 1 billion, even though letter volume will continue to erode. In the DHL divisions, we expect EBIT to increase to between EUR 2.7 billion and EUR 2.9 billion by 2015. This adds up to an annual average growth rate of 13 percent to 15 percent between 2010 and 2015.
Taking into account the Corporate Center costs, which we plan to reduce to around EUR 350 million, we are working to generate Group EBIT of EUR 3.35 to EUR 3.55 billion by 2015. This is indeed ambitious, especially if the global economy does not accelerate again. However, even in this situation it is a stimulus for us to strengthen further to ensure success on the second half of our journey.