"We will make further progress"
Deutsche Post DHL increased its underlying EBIT by 50 percent and beats its own earnings guidance. In this interview CFO Larry Rosen closely examines the quality of the company's earnings development and discusses the financial foundation that the Group can build upon to pursue its growth plans in future years.
CFO Larry Rosen
Mr. Rosen, you announced a very good set of results for this past financial year today. How satisfied are you with the achievements?
Larry Rosen: There is no doubt about it - 2010 was a very good year for the Deutsche Post DHL Group. We hit all of our targets and earned considerably more than we have expected at the beginning of the year. We are seeing that the efficiency-boosting steps we took during the economic and financial crisis are paying off now. And we are really pleased about the success of the range of products and services that we offer our customers, as the sharp rise in our revenues demonstrates.
Altogether, we certainly have reason to look back at the year with a certain sense of satisfaction. But I am more interested in looking at the future as it provides great opportunities for us.
One more word about 2010. How sustainable are the earnings improvements? After all, you also profited to a large extent from the effect of the Postbank sale and the significant reduction of non-recurring restructuring expenses.
It is true that earnings from the past financial year included some non-recurring items that slightly distort the picture. But this does not change the fact that our underlying performance improved dramatically. You see it most clearly when you look at our underlying EBIT, which climbed nearly 50 percent. Beginning this year, our actual performance will be even easier to judge because there will be no seperate reporting of an underlying EBIT since the restructuring measures have largely been completed.
For this reason, we will only report the actual EBIT for 2011, which will reflect the true earnings strength of our Group. And this has significantly and sustainably improved in 2010, as last year's figures clearly show.
The increases are all well and good. In terms of profitability, though, you cannot keep up with major competitors such as UPS or FedEx. How do you intend to catch up?
In recent years, we laid the foundation for sustainable profitable growth. We made considerable progress in this effort during 2010 and can now claim to have the second best margin in the express industry. Going forward, we will make further progress as we continue to systematically implement our Strategy 2015. This is essential, if we want to reach our goal of being the investment of choice in our industry.
Investors do not seem to have really gotten the message. People have been waiting for a long time for the stock price to take off. Why is this the case and how do you intend to attract investors?
We can do this primarily by continuing our hard work and continuing to improve our performance. And there are two other points that are equally important to me: transparency and reliability. We can still do a better job of explaining what we do. And, by all means, we must be a reliable player in the capital market. One critical factor in this effort is our dividend policy. The proposed increase of the dividend to EUR 0.65 per share for the past financial year represents a payout ratio of 59 percent - based on the consolidated net profit adjusted for non-recurring items - and is within the targeted corridor of 40 percent to 60 percent.
In terms of reliability, how do you explain the fact that you continuously correct your own guidance? Aren't you worried that the capital market will no longer listen to you in this context at some point?
Our guidance always reflects what we consider reasonable at the particular time that we issue it. And I think we need to recall the circumstances as they were at the beginning of last year: the strength and sustainability of the global economic recovery were anything but clear back then.
In these terms, how should your guidance for 2011 be viewed? Should the market expect you to again successively raise your forecasts as the year progresses?
On the one hand our guidance for 2011 of a Group-EBIT of between EUR 2.2 billion and EUR 2.4 billion reflects our fundamentally positive outlook for further market growth - after all, reaching the upper end of our expectations for the DHL divisions would mean a rise in operating profit of more than 15 percent. At the same time, we take into account that there are still significant uncertainties. In this respect, it reflects our balancing of the risks and opportunities we face this year. Just as before, we are always ready to adjust our guidance if this appears necessary during the year. But, of course, I cannot predict whether this will occur or not.
Will you also invest more in 2011? In 2010, your investments fell below your original announcement!
The Group's capital expenditure totaled EUR 1.3 billion last year, about EUR 100 million above the previous year's level. But - you are right - it was slightly below the originally planned level of EUR 1.4 billion. Nonetheless, I think this deviation falls within the range of normal fluctuations and can be largely attributed to timing effects. This year, we plan to invest more due to the need to further support growth in our businesses. I expect capital expenditures will total up to EUR 1.6 billion, with the largest share flowing into continued optimization of the network and the global presence of our EXPRESS division and into property, plant and equipment at the MAIL division, both aimed at further increasing the productivity and capacity of our operations.
A year ago, you presented your new finance strategy. Could you give us an interim report on it?
We are right on track here as well. Our liquidity is very sound: despite restructuring expenses recognized in cash flow of EUR 800 million, our liquidity only decreased by EUR 300 million in 2010 - even though we paid a dividend of more than EUR 700 million to our shareholders. This emphasizes the strength of our operating cash flow, which should considerably improve further this year as a result of significantly lower restructuring costs. Today, Deutsche Post DHL stands on a very stable and flexible financial foundation.
The EUR 2 billion revolving credit line completed for the first time in the company's history at the end of 2010 is a good example therefore, as it also strengthens our financial footing. In taking this step, we took advantage of favorable market conditions and set up a financially attractive liquidity reserve. At the same time, we continued to optimize our financing structure and by doing so implemented a significant component of the Group's new finance strategy.
And how is the future supposed to look like?
For the next few years, we will be focusing on growth and performance optimization, both in terms of revenues and earnings. The Group will profit from the continuing buildup of momentum at DHL where we intend to grow our revenues faster than the market. At the same time we expect to generate an average increase in the operating profit at DHL of 13 percent to 15 percent each year through 2015. At MAIL our goal is to stabilize our profitability at a level of around EUR 1 billion. Our guidance range for 2011 for the MAIL division - we are aiming at between EUR 1.0 and EUR 1.1 billion - should be seen as an important step in that direction.