"Our efforts are paying off"
Deutsche Post DHL released its first-quarter results of 2010 today. Following the crisis-driven drop in the first quarter of 2009, consolidated revenue was up again from last year's level. From January to March, underlying EBIT almost doubled compared to the three-months period of 2009. In an interview with Deutsche Post DHL News, CFO Larry Rosen discusses the drivers of the company's positive performance and his outlook for the rest of the year.
DP DHL News: Deutsche Post DHL grew again in the first quarter of 2010 and significantly increased its earnings. What generated this growth?
Larry Rosen: The recovery of the world's economy that began to appear in the last part of 2009 has so far continued this year. It even picked up a little speed in the first months of the year. Being truly global and the world's leading provider of postal and logistics services, we are profiting from increasing transport volumes and the rising revenue being generated by this recovery. Another major factor for our growth in the first three months of the year was our ability to gain new business with important customers. But this is only half the picture.
There is another factor that is at least as important: Our efforts to successfully manage the crisis are really paying off. Our margin has risen markedly since we significantly reduced the cost base in all our divisions. This is the reason why the increase in earnings was so much higher than the revenue growth. This does not mean, however, that our job is finished: We will press forward with the implementation of Strategy 2015 and unlock the Group's full potential step by step.
What is the primary driver of revenue growth?
In terms of our divisions, it is clearly being fueled by DHL. Air and ocean freight is generating particular momentum. This also applies to our express business, that significantly contributed to this development. In geographic terms, the strongest growth rates are being generated in the Asia-Pacific region. We are also seeing satisfying gains in transport volumes in North and South America as well as in the Middle East. Thanks to our global positioning, we are already in the very areas where the economy is producing strong growth and where much manufacturing has shifted. Right now, we clearly see how important and far-sighted it was in recent years to systematically develop Deutsche Post DHL into the world's No. 1 logistics company.
At the same time, though, the MAIL business in Germany continues its creeping decline...
The MAIL division also performed well during the first quarter. We have put the sharp decline in revenue caused by the economic crisis behind us. We stabilized revenue at the beginning of the year and kept earnings nearly at the previous year's level. We consider this to be a clear success. But you are right: The market for the traditional letter will continue to shrink as use of electronic communications increases. Unlike last year, though, this effect will not be compounded by a recession.
We also began a long time ago to prepare for this market trend: by fine-tuning our capacities and adding flexibility to them as well as by offering new products like the new "Letter on the Internet" that we will introduce in July as planned. The MAIL division has its own growth drivers as well. Take the parcel business as an example. No one is better positioned than we are to profit from the growth in Internet retailing. For this reason, we see no reason to talk about a creeping decline - even though we remain realistic about the general direction of the market. Nevertheless, further steps will have to be taken to assure long-term profitability.
If you project the Group's quarterly earnings over the entire year, you end up with underlying EBIT of much more than EUR 2 billion. Why are you sticking to your guidance of EUR 1.6 billion to EUR 1.9 billion?
Because we are cautious business executives. It is much too early to judge how strong and, above all, how stable the economic recovery will actually be this year. Think about the potential drag on growth that can be created by high government budget deficits or the unpredictable direction of oil and energy prices. As a result of these considerations, we prefer to maintain our guidance - and are willing to accept the fact that some individuals may think it is too conservative. Given the solid overall performance in the first quarter, though, we do think there is a good chance of finishing at the upper end of our announced range of EUR 1.6 billion to EUR 1.9 billion.
You have not mentioned one other risk factor yet: the partial end to the exemption from value added tax that has applied to postal services in Germany. How hard will the MAIL division be hit by this change?
You cannot really put an exact number on it. But we think it will be in the low triple-digit millions, for an entire fiscal year. We have decided that we will not fully pass on the new value added tax to our business customers. Instead, we will offer them higher discounts. This means: We are sharing the burden and are surrendering a significant amount of earnings - primarily to avoid losing volumes and customers so that our capacity utilization is maximized. I would like to mention one other important point in this regard as well: We have already calculated the negative impact expected during the ongoing fiscal year into our EBIT guidance of EUR 1.0 billion to EUR 1.2 billion for the MAIL division.
For the first time, the DHL divisions are to make roughly the same contribution to underlying EBIT as the traditional MAIL business. This was not the case during the first quarter. What makes you think that you will reach this target for the entire year?
Let me make one point first: We are very satisfied with DHL's results in the first quarter. Remember that we - particularly in the Express business - have just put a challenging phase of restructuring behind us. All three DHL divisions are now profitable, and the earnings trend is clearly pointing upward. We assume that this trend will continue for the rest of the year and will gather strength - if the economy plays along. One fact is clear to us: In the future, DHL will be the driver of future growth in our consolidated net profit. We still have a lot of potential here.
Non-recurring items were rather low in the first quarter. As a result, reported EBIT was not far behind underlying EBIT. Will that remain the case for the rest of the year?
In the first quarter, we did indeed have non-recurring items of only EUR 54 million, and most of those resulted from the restructuring of the Express UK business. You cannot project this number over the whole year. As we have already announced, we will have significantly lower extraordinary expenses this year than last year. Today, we expect the total will be around EUR 350 million compared with well above EUR 1 billion in the previous year.
These numbers make one other clear point: Most of the restructuring is over. With the exception of the two key projects in 2010 - EXPRESS UK and France - we are now positioned with the portfolio that we want. We have created the best foundation ever to organically expand our business and dynamically improve performance in future years.