"Satisfied with our business performance"
Deutsche Post DHL announced its results for the third quarter of 2013 today. The company continues to perform well in a challenging business environment, and its most important fundamental growth trends remain intact. Earnings rose once again and Deutsche Post DHL is making further progress toward achieving its 2013 and medium-term targets. In an interview CEO Frank Appel discusses the reasons behind the company's continuing good performance, outlines his upcoming priorities and talks about the Group's latest initiatives.
CEO Frank Appel: "We are increasingly profiting from the competitive strenghts that we have created in recent years by investing significant amounts in our infrastructure."
Mr. Appel, how would you describe the performance of Deutsche Post DHL in the third quarter and the current financial year as a whole?
Frank Appel: We can be satisfied with our performance in financial year 2013 so far. We still do not have much economic tailwind. Originally, we thought the economy would recover somewhat more moving into the second half of the year. But that has not been the case up to date. Against this background, it is reassuring that we were able to boost our revenues - adjusted for exchange-rate and other inorganic effects - and add market share in some areas. This is further evidence of the fundamental strength of our business model. Our most important growth drivers - the parcel business in Germany and the international express business - remain intact. We are increasingly profiting from the competitive strenghts that we have created in recent years by investing significant amounts in our infrastructure. And the impact on our bottom line is clear: Our earnings continue to climb noticeably.
In other words, hitting your earnings targets for the entire year will be a piece of cake, won't it?
Frank Appel: Nine months into the year, we are indeed in a good position to hit our ambitious targets for the current financial year. And we remain committed to them. This means: We plan to generate operating earnings of between EUR 2.75 billion and EUR 3.0 billion. The MAIL division should contribute an EBIT of between EUR 1.15 billion and EUR 1.25 billion to this total, and the DHL divisions between EUR 2.0 billion to EUR 2.15 billion. However, this success is not a foregone conclusion. During the final quarter, we will have to work in a hard, disciplined manner if we are to optimally exploit the opportunities presented to us by a less than friendly economic environment.
What does this mean in particular for the MAIL division? It performed very well during the past quarter. Was this better than expected?
Frank Appel: You are right. The MAIL division's performance was good. But if you look more closely, you will notice that the quarterly earnings have benefited from some transitory factors: There was one more workday than during the same quarter last year. We do not have to deal with any more write-offs related to last year's Neckermann insolvency, and the German parliamentary election gave us some additional volume in September. You should also not forget about the positive effect of the postal rate increase that took effect at the beginning of the year. We can certainly say that we remain firmly focused on achieving our goal of generating earnings of at least EUR 1 billion in the MAIL division. But we also have to acknowledge that it will become increasingly difficult to reach this goal only through productivity gains. I would like to remind you that also the Federal Network Agency noted in its intended decision on the new formula for the price regulation that there is little improvement potential in the area of productivity left following the intense and successful effort that we undertook in recent years.
If there is little potential for productivity gains left, how do you intend to stabilize the MAIL division's earnings in light of the general rising nature of costs, including those resulting from collective wage agreements?
Frank Appel: This will be a major challenge in years to come. After all, the fundamental trend of falling mail volume will continue and our revenues in the traditional core business will continue to shrink. We will of course continue to drive our strategic projects in order to compensate for this general trend and generate additional revenues. But it will be a fine balance. We will have to focus even more closely than before on strict cost discipline to significantly improve the conversion of revenues into earnings.
You just mentioned additional revenues in MAIL - what will be your top priority here?
Frank Appel: The parcel business is and will remain a cornerstone of our Group strategy and the No. 1 growth driver in the MAIL division. We intend to further expand this business, and not just in Germany. In other regions, we can also profit much more than before from the continuing boom in e-commerce. To take advantage of this potential, we will transfer the existing businesses in the Benelux countries, the Czech Republic and Poland from EXPRESS and FREIGHT to the MAIL division, which will launch additional efforts to drive the end consumer business in these markets.
What do you think of DHL's performance? It appears as though you are increasingly being slowed down in some businesses by the weak tailwind being produced by the economy.
Frank Appel: We have never said we are immune from macroeconomic influences. But we have been able to limit the negative impact of the unfavorable exchange-rate trends we have experienced and of the sluggish economic environment in many regions of the world. For instance, GLOBAL FORWARDING, FREIGHT generated good earnings once again, even though weakening demand drove down volume. At SUPPLY CHAIN, we have a real opportunity to set a new record in new business volume this year - this has already been the case during the first three quarters of 2013. The clear top performer during the past quarter was our EXPRESS division. Third quarter volumes in the international express business climbed sharply once again over last year's period. The really pleasing margin trend in EXPRESS remained in place as well. Compared with the previous year's quarter, the operating margin rose from 7.3 percent to 8.5 percent. During each quarter this year, we achieved significantly higher margins than we did during the comparable period last year. In this regard, you can truly see the operational improvements produced by the extensive investments we have made in the expansion of the division's global network, employee training and the range of services. We will continue on this path and expand our business even further.
But you have scaled back the volume of your capital expenditures for 2013 from EUR 1.8 billion to EUR 1.7 billion. Does this mean that you have decided to invest less beginning right now than you have in recent years?
Frank Appel: No. The timing of individual projects is the reason our capital expenditures will be somewhat below the level we originally expected. But we are not changing our investment strategy. We know that we must continue to invest if we are to maintain the lead that we have on competitors. However - just like in the past - we will take a prudent approach to future investments and carefully consider each project to determine whether it is really necessary and will help us reach our strategic goals.
You said at the beginning of the year that you intended to generate more cash. What progress have you made?
Frank Appel: Very good progress. From January through September 2013, cash flow from operating activities totaled more than EUR 1.4 billion. That was more than three times the previous year's level. This increase primarily reflects the Group's continued good operating earnings strength and working capital improvements. And the swing in free cash flow is even more impressive: During the first nine months of the year, free cash flow improved by more than EUR 1.3 billion. As a result, we are making very good progress toward our goal of at least covering the dividend we paid this year with the free cash flow.
The market appears to appreciate this and other successes. After all, your shares have recently been among the top performers in the DAX.
Frank Appel: Indeed, we view the positive performance of our shares - as well as their inclusion in the Euro-Stoxx index of the 50 top stocks in the euro zone - as a salute to the hard work we have done in recent years. You can also see this in the very positive response we had to our latest bond issues. Investor confidence and a strong performance by our shares are also an incentive for us to not let up and to remain on our path to success. We will be able to maintain the good reputation we have gained in capital markets only by promising what we can deliver and delivering what we promise.
To keep their spirits up, do you plan to treat investors to a higher dividend for 2013?
Frank Appel: It is much too early to start talking about the dividend for the ongoing financial year. One thing is clear, though: In line with our Finance Strategy communicated in 2010, we intend to continue to pursue a long-range dividend policy and to target a dividend payment within a corridor of 40 percent to 60 percent of net profit adjusted for one-time effects. We will do everything we can in the future to be an attractive investment for our shareholders: with a solid dividend and a strong and sustainable business performance.