"Foundations for the success of Strategy 2020 further strengthened"
Deutsche Post DHL Group released its results for the second quarter of 2015 today. While positive currency effects contributed to a significant increase in revenue, operating profit remained below the prior-year level due to the impact of the postal strike in Germany and investments in further measures to secure long-term business success. The Group reduced its EBIT forecast for the full year by an amount corresponding to the second quarter strike impact on earnings and confirms its targets for 2016 and the following years. In an interview, Chief Financial Officer Larry Rosen discussed recent developments in the Group's business and reviewed its progress toward the successful implementation of Strategy 2020.
Chief Financial Officer Larry Rosen
Mr. Rosen, how would you assess the performance of Deutsche Post DHL Group in the second quarter of 2015?
Larry Rosen: Even though the past few months were very challenging, we were able to strengthen the foundations for the successful implementation of our Strategy 2020. We reached a long-term agreement on working conditions with the trade union ver.di. However, the strike action had a negative short-term impact on our earnings. We also pressed forward with the turnaround at Global Forwarding and accelerated the ongoing optimization program at Supply Chain. Of course, such efforts have a short-term impact on our profitability. While we were able to post a slight increase in revenue, even after adjusting for currency effects, we saw a decline in earnings compared with last year's figures.
Let's take a closer look at the collective bargaining agreement. What is your assessment of the outcome after weeks of negotiations?
Larry Rosen: We're pleased that we were able to reach a long-term compromise in our negotiations with ver.di. In our view, it represents a reasonable solution for all concerned. Three things are especially important to us: First, at PeP we can continue to provide secure jobs with attractive pay for those who have already been with us for a long time - and we can also create new and permanent jobs with competitive conditions for young workers. This means that on the basis of this agreement, we will continue to be one of the most attractive employers in our sector. Second, with the acknowledgment that the DHL Delivery entities are here to stay, we have established the right conditions to ensure that our parcel business will be able to remain competitive in the future. And third, this agreement also affords us planning certainty for our costs in the medium term.
In your estimation, why was the dispute so intense and why did it last so long?
Larry Rosen: As a former state-owned enterprise, Deutsche Post had huge potential for productivity gains following its privatization. Over the years we have been able to exploit these gradually - without having to make substantial adjustments to the salary structure. Now this potential is largely exhausted, but we still have to keep improving our cost efficiency in the face of high competitive pressures, both nationally and globally. Our situation is similar to that of Deutsche Bahn or Lufthansa. In all such cases, the transformation from a state-owned enterprise to a competitive business is unavoidable in the long run, and it often requires difficult compromises and a realistic vision about the future competitive environment from all concerned. In this respect, the dispute was of fundamental importance to us.
How much did the strike cost in the second quarter?
Larry Rosen: On the one hand we suffered revenue losses due to the strike, while some customers shifted to competitors or other means of communication. On the other hand we incurred extra costs to limit inconvenience for our customers to the extent possible. All told, the strike cost us EUR100 million in the second quarter. As a result, the PeP division's operating profit declined by more than 60% year-on-year. Of course this is a significant decline. But the good news is that even under such difficult circumstances, our growth driver eCommerce - Parcel developed well. Revenue in this unit rose sharply once again and was able to compensate for the lower revenue in the Post segment. Our leadership position in this market remains intact.
How would you summarize the second quarter at DHL?
Larry Rosen: It was mixed. The Express division continued to deliver outstanding performance, once again posting double-digit increases in revenue and operating profits, primarily thanks to strong growth in the Time Definite International (TDI) business. The EBIT margin increased to a new high of 10.9%. We continue to benefit from having the best global network, but we're not resting on the laurels of our success. In fact, in order to strengthen our position we have increased our investments in the Express network lately with an eye to the successful implementation of our Strategy 2020.
And how is the situation at Global Forwarding, Freight?
Larry Rosen: Unfortunately, the trend in earnings was again very disappointing in the second quarter. This was partly due to the market environment, which continues to be challenging in light of low growth in air freight volumes and persistent pressure on margins in ocean freight. But also significant for the forwarding business was the comprehensive turnaround program that we launched. As announced previously, we're concentrating on improving our operating performance in the near term. Several important changes have already been initiated here in terms of structure and processes. For instance, we have given more autonomy to local management in the individual countries and freed it from administrative burdens so it can focus fully on the customer. We are also investing in restructuring to become much more competitive with our cost structure. In the coming months, we will address the fundamental issue of the future direction of the transformation program. However, based on the progress observed to date, we're confident that in comparison with the first six months, the second half of 2015 will begin to bring the first successes from the short-term improvements we've initiated. In the medium term, it's up to us to get our forwarding business back where it belongs: on top in terms of quality, customer focus and performance.
There is also an optimization program in progress at Supply Chain. What is the status there?
Larry Rosen: First of all, the business is still going very well. Revenue rose again in the second quarter, and we're still seeing very strong growth in new business - even though we have a sharp focus on profitability when concluding new contracts. As far as the optimization program at Supply Chain is concerned, we were able to accelerate it during the second quarter thanks to the proceeds of positive one-time effects from real estate transactions. All in all, we're on the right path toward our goal of increasing the operating margin at Supply Chain to between 4% and 5% by 2020 with stronger standardization, increased efficiency and better exploitation of economies of scale in our global business.
Due to the effects you've described, the Group's operating earnings after six months are down year-on-year. What will that mean for 2015 as a whole, and for the following years?
Larry Rosen: Following the successful implementation of Strategy 2015, this year is a year of transition for us. We're working hard to position all of our divisions so that they can contribute as planned to the long-term success of the Group. To do so, we're willing to accept lower short-term earnings growth this year - and, of course, we have taken these investments into account in our full-year forecast for 2015. However, we have reduced our target for consolidated EBIT for 2015 only by the one-time impacts related to the postal strike in the second quarter. We are now targeting a year-end figure of EUR2.95 billion to EUR3.1 billion, with the PeP division contributing at least EUR1.2 billion; previously we had been expecting at least EUR1.3 billion. For DHL we still expect an increase in EBIT to between EUR2.1 billion and EUR2.25 billion. We expect earnings momentum to accelerate again in the second half and then strongly again in 2016 as the benefits and lower spending from restructuring begin to materialize. So we confirm our previous forecasts for the years beyond 2015. For 2016 we're aiming for a significant increase in consolidated operating earnings to between EUR3.4 billion and EUR3.7 billion, and for the period from 2013 to 2020, we continue to anticipate an average increase in consolidated EBIT of more than 8% per year.
And what about the other financial targets?
Larry Rosen: We continue to expect that the Free Cash Flow will be high enough in 2015 to cover the dividend of over EUR1 billion that we paid out to our shareholders in May this year. We also reconfirm our target for capital expenditures of around EUR2.0 billion for the year. All told, we can say that Deutsche Post DHL Group is not only right on track strategically - we are also financially well positioned to overcome the challenges of the coming years and make Strategy 2020 a success.