"Attractive investment for shareholders"
Deutsche Post DHL has just released its results for the first six months of 2013. The world's leading mail and logistics group once again reported gains in revenues and earnings. This development was driven by a solid performance of the international express business and the parcel segment in Germany. The Group's focus on cash flow is increasingly paying off as well. Following the successful first half of 2013, the Group has - driven by a positive one-time effect in the MAIL division - slightly raised its earnings guidance for the entire year. In the following interview, CFO Larry Rosen discusses the company's results for the first half of 2013 and explains why Deutsche Post DHL is confident about the rest of the year.
Chief Financial Officer Larry Rosen
Mr. Rosen, the first six months of the year are over. It's time to take stock again. How has the financial year gone for the company?
Larry Rosen: Overall, we are satisfied with our performance in the first half of the year. As expected, the economy presented some challenges. And we had no global economic tailwind to speak of. For this reason, we are that much more satisfied about performing well once again and being able during the past six months to continue with the successful development we have been achieving over the past quarters. Our revenues have grown organically once more, even if the pace was moderate, and our operating profit rose again. This means one thing: We further improved our profitability amid challenging business conditions. We have also significantly improved our cash flow performance. In a nutshell: We succeeded in keeping the company on its stable growth path amid difficult market conditions.
Let's talk about growth for a moment: Some of your competitors have been rather subdued in their guidance. In contrast, you have adjusted your earnings guidance for the year upward. What makes Deutsche Post DHL better than the rest?
Larry Rosen: Of course, we are not immune to the weak global economic environment. There has been very little evidence of a stronger global economic recovery that was forecast by many people - including us - for the second half of the year. But: We prepared for the situation in recent months, and we have the flexibility we need to continue meeting our targets. In recent years, we invested heavily in our market position in the most important growth areas and regions. We are now benefiting from this in today's challenging business environment. And this is also one of the reasons for our confidence about remaining on course. But I want to make one other point as well: A one-time effect is solely responsible for the slight increase of EUR 50 million in our EBIT guidance to a level of between EUR 2.75 billion to EUR 3.0 billion. This resulted from the reversal of a portion of provision for sold, but not yet used postage stamps in the MAIL division. As a consequence, we only increased the EBIT guidance for the MAIL division. The outlook for DHL remains unchanged.
You already mentioned this point: The rise in revenues was somewhat lower. Is your growth now slowing down?
Larry Rosen: If you adjust for exchange-rate and other inorganic effects, revenues rose by nearly 2 percent in the second quarter. This is not a bad result in today's economic environment. One point is particularly important to us: The growth drivers of our business remain in place. The parcel business continues to generate growth. And the EXPRESS division once again produced significant gains in volume, revenues, profitability and margins. For these reasons, we are confident that Deutsche Post DHL will remain on its growth path in the future - and that growth should accelerate when the economy rebounds.
Momentum seemed to slow somewhat during the second quarter, particularly at DHL. Is the engine of your most critical growth producer sputtering?
Larry Rosen: We are currently seeing mixed trends for the divisions. We can be very satisfied with the performance of the EXPRESS division. Adjusted for negative currency effects and the disposal of domestic express businesses in Australia, New Zealand and Romania that were not part of our core activities, revenues climbed by 4 percent in the second quarter. And one other point is also important: If you remove the one-time effects that resulted in a positive impact of EUR 113 million on the division's EBIT in the second quarter of last year, you will see that EXPRESS produced a double-digit EBIT growth and an improvement of the operating margin to more than 9 percent. Here, we are reaping the fruit of the extensive investments we have made in the EXPRESS operation over the years.
And what about the two other DHL divisions?
Larry Rosen: In the GLOBAL FORWARDING, FREIGHT division, we are definitely feeling the challenges in the marketplace - in both air and ocean freight. In the sea freight business we were able to produce slight volume gains on trade lanes between the north and the south and within the continents. But east-west trade lanes are still going through a period of weakness. At the same time we have been able to hold the division's operating margins constant thanks to the selective market strategy that we chose to pursue. At the current time, we think it makes more sense to be flexible on volumes than to take on unattractive business. By taking this approach, we are able to limit the impact that market developments have on our profitability and working capital position. We have also more than doubled the division's operating cash flow during the second quarter. The road we are on might be a bit bumpy at times - but that's in the nature of any transformation process. Ultimately our GLOBAL FORWARDING, FREIGHT division will be a much stronger player in the market with a sustainable competitive advantage.
And what is your view on the development of the Group's SUPPLY CHAIN division over the past months?
Larry Rosen: Here too we need to take a closer look at the figures in order to evaluate the true performance of the division: Adjusted for exchange-rate and portfolio effects, second-quarter revenues climbed by nearly 6 percent. At the same time the drop in EBIT resulted largely from a series of company disposals. And there was also one other bit of very good news: At about EUR 350 million, the volume of new business has never before reached such a high level in a second quarter. In the first half of the year, we even generated EUR 250 million more in new business than we did last year. This clearly shows that the positive trend in this division is continuing, and that our value proposition is very attractive to both new and existing customers.
The MAIL division performed surprisingly well. Have you been too pessimistic in the past about the division's future?
Larry Rosen: The e-substitution trend affecting the letter business is continuing as expected. However, we continue to aim to offset the decrease in mail volume. One approach we are taking is our successful development of our own electronic communications activities. This year, we expect that our E-Post offerings will generate a significant increase in revenues to approximately EUR 100 million. At the same time, the parcel business remains very dynamic - thanks in particular to continuing growth in e-commerce. This is the positive side of the internet for us, and we are actively contributing to this trend by introducing our own innovative products and services. For these reasons, we remain optimistic about our ability to stabilize the division's EBIT at a minimum of EUR 1 billion in the medium-term. It will probably be slightly more this year thanks to the postal rate increase that took effect at the beginning of the year, the reversal of the provision I mentioned earlier and to overall very good cost management.
At the beginning of the year, you set the goal of generating more cash. What sort of progress are you making?
Larry Rosen: Very good progress. At one-half billion euros, we more than doubled operating cash flow in the second quarter compared with the same period last year. During the first half of the year, we generated net cash of EUR 621 million from our operating business. By contrast, in the previous year we had still reported a cash outflow of EUR 142 million. This represents a swing of more than EUR 750 million, particularly as a result of our continued good operating performance and the strong progress we have made in working capital management. Free cash flow increased by approximately EUR 850 million compared with the same period last year. So we are making very good progress towards our goal to at least cover the dividend we paid in May for the past financial year from the free cash flow produced this year.
Speaking of the dividend: Will it increase as a result of the strong rise in consolidated net profit for 2013?
Larry Rosen: It is much too early to give an indication about the dividend for the ongoing financial year. However, we intend to continue to pursue our long-range dividend policy that we announced as part of our Finance Strategy in 2010 and that targets a dividend payment within a corridor of 40 percent to 60 percent of the consolidated net profit adjusted for non-recurring effects. We are convinced that we will continue to be an attractive investment for our shareholders in the future: by offering an appropriate dividend and a vibrant, growing and profitable business.