"DHL and parcel drive further growth"
Deutsche Post DHL remained on its profitable growth path during the second quarter of this year. In the period, the Group's operating earnings grew much stronger than revenue once again. In an interview with Deutsche Post DHL News, CFO Larry Rosen closely examines recent business and earnings trends and discusses the outlook for the rest of 2011.
Mr. Rosen, economic uncertainty, particularly in Europe and the US, remains widespread, and the world economy appears to be slowing. But you are still optimistic. How do you accomplish this balancing act?
Larry Rosen: The economic environment might no longer appear as rosy as it did a few months ago, but this doesn't come as a surprise to us. For some time now it has been clear that global economic activity would slowdown at some point in the course of the year. And this is exactly what we are seeing right now. By nature this is - just like the turbulence sweeping through the euro zone - not necessarily helpful.
But in this very economic environment we can demonstrate just how well Deutsche Post DHL is positioned. We are continuing to grow, and this growth mainly stems from our own strengths. And the really satisfying development is this: our earnings continue to grow faster than our revenue does. This demonstrates that the steps we took in the past are increasingly paying off. We will also profit from our significantly improved efficiency in the second half of the year. For this reason, we remain optimistic about our business prospects.
You have improved your EBIT guidance for the entire year. You now expect earnings to reach the upper end of the projected range of EUR 2.2 billion to EUR 2.4 billion. Since you have already produced about half of that amount in the first half of the year, isn't there still more potential here?
Larry Rosen: We remain confident - in terms of both the performance of the Group during the remainder of this year and the mid-term development of the company. At the same time we are well advised to be somewhat cautious, given the economic environment. After the very strong growth observed over the last few quarters, worldwide economic growth will return to a more normalized level.
In addition, we will also accelerate our investments in the future growth of our business, particularly in the Express division. Therefore, we are very comfortable about our guidance. We take a rather careful approach to our guidance and calculate it conservatively. We try to promise only what we are confident to deliver. From today's perspective and given our assumptions about more normalized economic activity in the second half of the year, we are well on our way to achieving our target for the full year.
What will be the drivers of growth and earnings in the second half of the year?
Larry Rosen: We think that the DHL divisions will continue to perform well in the second half of the year and continue to contribute the majority to the Group's earnings. The MAIL division is also performing well. We have made major strides in our effort to stabilize earnings, thanks in particular to the continuing dynamic growth in the parcel business, and our efficiency measures.
Still, even at Deutsche Post DHL not everything looks bright at first glance. At DHL, for instance, you grew at a significantly slower rate in the second quarter, and very little growth in revenue was generated on a Group level. Why?
Larry Rosen: If you adjust for the effects from currency fluctuations and the divestment of smaller, non-core subsidiaries, revenue growth - for both the Group and the DHL divisions - was much higher and well above the growth rate of the world economy. Furthermore, a base effect comes into play during the year: The respective quarters of 2010 against which we are currently measuring ourselves were very strong quarters as a result of the economic upswing. It thus becomes much more difficult to maintain the high growth rates. But this is not causing us to lose any sleep at night because we are not pushing to generate the highest-possible volumes. We are more interested in producing sustainable, high-quality growth. This means: we are very selective and only take on business that will generate adequate profits. The very positive earnings development shows that this is the right approach.
At DHL, you continue to make your commitment to Asia and the opportunities offered by the region a top priority. Given this commitment, why are you pulling out of the domestic express business in China?
Larry Rosen: Because we have determined that we cannot profitably operate this niche business over the long term under the current and projected market conditions. It was, in any case, not a major business for us since it generated far less than 10 percent of our total Chinese revenue in the EXPRESS division.
Of course, we will continue to operate our core international business in China. We are expecting powerful growth here in years to come. We are already the leading express service provider in China and the Asia-Pacific region, and we will systematically expand our position here, thanks in part to the opening of our second regional hub in Shanghai, which is currently being built. No other provider of logistics services is positioned as well as DHL is in Asia. We will profit more and more from this in the future.
The MAIL division doesn't look as rosy. Stagnating revenue and lower earnings. Not a good mixture...
Larry Rosen: It may appear like this at first glance. But a closer look reveals that the situation in the MAIL division is respectable. Our goal is to sustainably stabilize contribution from this business in spite of the ongoing structural volume declines in the traditional letter mail segment. We are making good progress in this effort. Revenues in the MAIL division have remained nearly stable. This is largely the result of our very successful parcel business, which remains very dynamic and continues to pick up momentum. As far as earnings in the MAIL division go, we were not surprised by the decrease, and the reasons for it are well known: one of them is our investment in the digital transformation of the business - particularly in the introduction of the E-Postbrief. Another factor is the impact of new value-added tax regulation that took effect in July 2010. In response to this change, we are providing discounts to our major customers and fully realize that this will have a negative impact on our earnings. Beginning in the third quarter of 2011, this effect will no longer skew the year-on-year comparison.
You just mentioned the massive investments in the E-Postbrief. How is it developing?
Larry Rosen: From the very start, we said it would take several years for the E-Postbrief to pay off in business terms. However, we are quite patient and we will be successful with this product, which we will use to raise digital communication to a new level of quality and security. With all due respect to the E-Postbrief, I must remind you that even though it is an important component in our strategy for the MAIL division, it is not the only one by far.
Particularly in the parcel business, we are doing everything we can to build on our leading position by introducing such innovations as our Packstations and a superior service concept for our customers. Our growth rates of 8 percent in revenue and 10 percent in the number of transported parcels demonstrate just how successful we have been. Generally speaking, we expect that these growth-oriented segments will considerably increase their share of the MAIL division's earnings in years to come and that we will be able to offset the structural decline in the traditional mail business.
Mr. Rosen, despite your positive assessment of the first half of the fiscal year, your stock price is more or less stagnating. Can you at least hold the prospect of a higher dividend to your shareholders?
Larry Rosen: Generally, we would refrain from commenting on the share price valuation and focus on what we can control, namely, implementing our Group strategy, expanding our market position and increasing our earnings in future years, as promised. As far as the dividend goes: it is still too early to make any specific statement. However, an important cornerstone of our financial strategy is a reliable dividend policy with a distribution ratio of 40 percent to 60 percent based on the consolidated net profit adjusted for any non-recurring items. And I see no reason at the moment why we should deviate from this course in 2011.