"We are well on track to achieve our 2016 targets"
Deutsche Post DHL Group continued its strong business performance in the second quarter of 2016, and once again significantly increased EBIT. In an interview, Chief Financial Officer Larry Rosen talks about the factors behind the positive performance, the expectations the company has for the current business year, and - just before his retirement - his own personal reflections on more than seven years as Group CFO and CEO of the Global Business Services division.
Chief Financial Officer Larry Rosen
Mr. Rosen, how was the second quarter of 2016 for Deutsche Post DHL Group in your opinion?
Larry Rosen: We are very satisfied with developments in recent months. In the second quarter, we were able to build further on the strong start to the year. Compared with the prior-year period, EBIT rose by exactly 40 percent to EUR 752 million. That is the best result we have ever achieved in a second quarter. After the third such record in a row now, it is becoming more and more clear: First, we made the necessary decisions and investments in the transition year of 2015 to significantly increase our profitability this year and in the coming years. We clearly set the right priorities with our Strategy 2020. Our growth drivers - in particular, the domestic and international parcel business, as well as the Express business - remain fully intact. The fact that the Group revenue reported for the second quarter doesn't reflect this dynamic is attributable to factors such as: an accounting change in one of the Supply Chain division's key contracts, again lower fuel surcharges caused by falling oil prices and negative currency effects. Excluding all these factors, Group revenue rose by 4.1 percent, so adjusted revenue growth accelerated noticeably compared with the first quarter.
In the Post - eCommerce - Parcel (or PeP) division, the increase in revenue and earnings was particularly strong compared with the previous year. What can this be attributed to?
Larry Rosen: PeP turned in an excellent second quarter. The divisional EBIT of EUR 247 million was more than triple that of the prior-year period. As a result, the months of April to June 2016 represented the best second quarter for the division since 2008. This demonstrates that our strategy for the division continues to be the right one. The strong EBIT increase in the second quarter can, however, be partly attributed to the fact that the strike in Germany had a substantial impact on the prior-year period. But even without this prior-year effect, a strong earnings increase was achieved. As a result, PeP contributed significantly to the positive development of the Group in recent months.
How much more potential do you see for future growth in the parcel business after the substantial increases of recent years?
Larry Rosen: The boom in online retail continues unabated. As a result, the growth potential for us as the leading postal and logistics service provider remains high for the foreseeable future. This particularly applies in Germany, where we continue to make targeted investments in the expansion of our capacity. In the town of Obertshausen, for example, our PeP-division recently opened the largest and most modern parcel sorting center in Germany. With productive and efficient facilities like this, we are becoming increasingly successful in converting volume growth into an above-average rise in earnings. At the same time, we are continually expanding our service offerings for customers. In more and more regions, we now offer same-day delivery. Even though same-day delivery has been a niche product in Germany until now, we successfully positioned ourselves early on as an innovation and market leader in this segment.
And how are you progressing with the international expansion of the parcel business?
Larry Rosen: This is working out very well. On the basis of the know-how we already have in Germany and our tailored approach to each market, we are expanding our respective activities to more and more markets in which we see great potential. We want to participate in, and by virtue of our presence and investments help to maximize, that potential, while capturing the dynamic growth in the markets where we are already present. So, for example, we are currently investing tens of millions of Euros in two new distribution centers in Vienna and Graz in Austria. In the United States as well, we announced the expansion of our capacity for domestic and international parcel and e-commerce services just a few days ago. With these investments, we are creating the necessary conditions to expand our leading position in this business over the long term.
Let's take a look at the DHL divisions. Once again, Express stands out.
Larry Rosen: Indeed, the Express success story continues. The division was able to increase its EBIT by more than 11 percent in the second quarter - even though the previously mentioned negative currency effects had their biggest impact here. As the global market leader for time-definite international (TDI) shipments, we are superbly positioned wherever growth is to be found. Each working day, we now transport more than 800,000 TDI shipments worldwide. Increasingly, e-commerce providers are also using our efficient network for fast international delivery of higher value items. In this area, we still see great potential for the future. Having invested heavily in the expansion of our unique global infrastructure in recent years, we are now in a position to better utilize its capacities. Subsequently, the division's operating margin is increasing further as well. In the second quarter, it once again reached a new record of 11.9 percent.
What progress are you making in the realignment of the Global Forwarding, Freight division?
Larry Rosen: We have worked hard to put the division back on track. We can now say that the turnaround program in the forwarding business is bearing fruit. The division is recovering step by step - despite the persistently subdued market environment. In the second quarter, we increased EBIT by almost 75 percent to EUR 69 million. This represents the third quarter in a row with a significant year-on-year improvement in earnings and demonstrates that the measures introduced to boost profitability are gaining traction. We will proceed systematically further down this path. There is still much to do. But we are confident that we can return to the division's earlier profitability in the medium term, and in the long term gradually close the gap that still exists today with regard to efficiency and, with that profitability, compared with the industry leaders.
And how do you assess the business performance in the Supply Chain division?
Larry Rosen: Supply Chain's new business again developed very positively in the second quarter. The division concluded additional contracts totaling almost EUR 300 million, particularly in the Automotive and Consumer sectors. This shows that we continue to perform very well in our markets, although currently this isn't reflected in the division's revenues. The top-line decline is mainly attributable to the contract change with NHS in the United Kingdom, as we saw in the previous two quarters. The division's EBIT remained largely stable - excluding the planned additional restructuring expenditures, through which we are laying the groundwork for margin increases in the coming years.
After the generally encouraging performance in the first half-year, what are your expectations for 2016 as a whole?
Larry Rosen: After two strong quarters, we are well on track to reaching our goals for 2016. That means, we continue to expect an increase in Group EBIT to between EUR 3.4 million and EUR 3.7 million. We are almost half way there. And the usually seasonally strong fourth quarter is still ahead of us.
Mr. Rosen, you are stepping down from your post as Chief Financial Officer and CEO of the Global Business Services division of Deutsche Post DHL Group at the end of September after more than seven years. How would you summarize your own personal record?
Larry Rosen: To be a board member and CFO of the world's leading postal and logistics group was an exciting, challenging and rewarding role for me - not least due to the very different phases of DPDHL Group's development that I experienced during this time. When I came to the company in 2009, the main focus was on steering our way safely through the turbulence of the global financial and economic crisis. After that, we were able to steadily improve performance by focusing on our Strategy 2015 initiatives. And, in the last couple of years the development of Strategy 2020 and its first successes set the stage for continued very solid development. I would like to thank all employees in the Finance and Global Business Services organization for their commitment and team spirit.