"We deliver as promised"
In the first three months of 2011, Deutsche Post DHL increased both its revenues and profitability. The company's EBIT grew by 23 percent. In an interview with Deutsche Post DHL News, CFO Larry Rosen takes a closer look at the quality of the company's earnings performance and explains its growth opportunities in detail.
Mr. Rosen, today you presented some very good results for the first three months of fiscal year 2011. Are you satisfied with these results?
Larry Rosen: We have gotten off to a dynamic start in 2011, and the results from the first quarter have taken us a long way toward reaching our targets for the year. Revenues rose significantly, and our profitability took a major leap forward. And we accomplished this in a business environment that is, indeed, characterized by the recovery of the world's economy, but that has also had to deal with the turbulence in northern Africa and in Arab countries as well as the devastating earthquake in Japan.
As far as our company goes, you can make one clear statement: after the first three months of the year we are delivering as promised. This is really a reason to be satisfied. But the more important aspect is that we have created an excellent foundation from which we will be able to deliver further good results in the future as well.
This shouldn't be too hard to accomplish over the short term - as a logistics company, you are really profiting from the recovery of world trade. But will this continue over the long term?
Of course, we are benefiting from the positive trends in global trade. But it would be an oversimplification to attribute our good performance only to the economy's recovery. It would also overlook the hard work being done and the improvements achieved by our employees. Rather, a major reason for our improved earnings is the homework we did in recent years. We are positioned in such a way today that we can profit above average from the market's continuing momentum.
You can particularly see this in the growth of our profitability. Since the beginning of the year, we are no longer adjusting our EBIT for one-off items because we do not expect any major non-recurring effects anymore. Operating earnings rose 23 percent over the previous year's level. And even if compared to last year's results that had been adjusted for restructuring charges, our EBIT still increased at a double-digit rate and, above all, faster than our revenues did. This makes one point very clear: the restructuring and efficiency-enhancing measures we took in recent years are paying off. Our Strategy 2015 is working.
But the net profit fell sharply...
... which was solely the result of derivative valuation effects related to the sale of Postbank. While the valuation of the financial instruments significantly increased last year's financial result, expenses of slightly more than EUR 50 million were incurred in this context in the first quarter of 2011. In aggregate, this results in a - non-cash - earnings decrease of about EUR 1.5 billion. A closer look at the earnings comparison clearly demonstrates: adjusted for this effect, our net profit and earnings per share would have risen by nearly 30 percent. So overall we continue to achieve - as expected and predicted - a very stable and satisfying upward trend.
And what about the MAIL division? Are you making progress in your efforts to stabilize the business?
The first quarter clearly demonstrates that we have made great strides in stabilizing the division. This is all the more remarkable in light of the fact that the market continues to shrink due to the increasing use of electronic forms of communication and that we have increased our discounts to our business customers after the value-added tax was applied last July. Nevertheless, we were – mainly thanks to our dynamic parcel business – able to slightly increase revenues in the division compared with the prior year. We are seeing very positive trends with our growth products in Germany.
What are those?
As already mentioned, the stable revenue and earnings trends seen in the MAIL division are largely the result of our parcel business, which again performed very well in the first quarter. The mail-order business continues to pick-up momentum, and Internet retailing is booming. We see this particularly in the double-digit volume growth with our business customers. As a result, we are reaping the fruits of our decision to integrate the parcel business into the MAIL division in 2007, exploit operational synergies between the mail and parcel businesses and pursue a long-term market-focused strategy that included simplifying the product portfolio and pricing.
This really paid off: since 2007, revenue in the parcel business has risen by an average of 3.5 percent a year. In the current quarter, the increase was nearly 9 percent. As a result, this growth driver - the parcel business - is already generating about one-fifth of total revenues in the MAIL division. Combined with our e-products, such as the E-Postbrief, this share will rise significantly in future years. As a result, we are in a good position from which we can maintain the MAIL division as one of the Group's two pillars with an EBIT of around EUR 1 billion over the long term.
How is DHL's business performing? On the occasion of the annual results release, this part of your business was celebrated as the Group's growth driver. Do you still think this is the case?
More than ever. In the first quarter of 2011, we saw strong growth in all three DHL divisions. This is true for the top line and even more so for the earnings produced by each of the three units: In the EXPRESS division, earnings nearly doubled. In Global Forwarding/Freight, they rose by nearly one-third. In the Supply Chain business, they climbed by almost 40 percent. The word “growth driver” is exactly the right description.
What is fueling these earnings improvements?
Naturally, this is the result of our restructuring efforts in recent years and of our far-reaching steps to improve efficiency. But, above all, these gains reflect our systematic focus on customer benefit. Thanks to our special range of services and products tailored to meet our customers' needs, we were not just able to expand our business with our customers in recent months as a result of the economic recovery. Moreover, we were able to extend our working relationship with existing customers to other areas and to attract a considerable number of new customers. In the Supply Chain division alone, this effort generated business wins worth around EUR 320 million in the first quarter.
This figure is particularly pleasing as it represents an increase of 30 percent over last year’s level. Yet, there is one other point that is nearly even more important: the profit margins of the newly concluded contracts have improved significantly in the last 12 months. In addition, there is one other major reason for the success of DHL: we are where growth takes place.
Look at Asia: the Asian countries - particularly China and India - are the growth drivers of the world economy. With DHL, we have gained an exceptional market position in these very countries over the past years. Each of DHL's three divisions is the clear market leader in Asia. We generate double-digit revenue growth in this region - last year alone, we increased revenue by more than 35 percent. And we were able to continue this positive development in the first quarter of this year. We intend to build on this position of strength in years to come and have identified the region as a strategic focus for DHL. China and India are the two focal points of our growth strategy in Asia. And we are taking exactly the same approach in other growth markets like Latin America and Africa.
This sounds as if the Group had no more problem areas to address. Are all parts of Deutsche Post DHL now heading in the right direction?
We can certainly say that the work on the major problem areas of the past has now been completed. With our first quarter results, we have made significant headway in hitting our targets for 2011: Achieving an EBIT of between EUR 2.2 billion and EUR 2.4 billion for the Group, with earnings in the MAIL division of between EUR 1.0 billion and EUR 1.1 billion, and an EBIT at DHL of EUR 1.6 billion to EUR 1.7 billion. And we are also fully on track to reach our mid-term goals. Provided the world economy continues to recover, the positive earnings trend should continue in the years to come.
Also provided that the Group’s financial situation remains good…
It is good. Take our liquidity for example: irrespective of the pension payments we have to make each January and that totaled more than half a billion euros this year, our liquidity fell by only EUR 300 million in the first three months. We are still enjoying a net liquidity position of more than EUR 1 billion! This underscores once again the strength of our balance sheet. As the CFO of this company, I think this is one of the key indicators demonstrating our Group's financial stability. You must keep one other point in mind: the past few years have clearly shown just how important strong, continuous cash generation is. As a result, we can justifiably say that Deutsche Post DHL has a very stable and flexible financial foundation.
In summary: How would you describe the first three months of the year?
We had a successful, dynamic start into this year, and our strategy is bearing fruit. As a result, I am very confident that we will achieve the things that we have set out to accomplish and promised for this year - to generate revenue and earnings growth.