"A satisfying start"
Deutsche Post DHL announced its results for the first quarter of 2013. Revenues increased slightly compared with the same quarter last year, particularly due to the ongoing growth momentum in the international express business as well as in the German parcel unit. The Group's operating earnings grew faster than revenues once again. In light of its solid start in 2013, the world's leading postal and logistics group confirmed its earnings guidance for the full year. In an interview, CFO Larry Rosen discusses the company's results in the first quarter of 2013 as well as its priorities and outlook for the coming months.
Chief Financial Officer Larry Rosen
Mr. Rosen, the first quarter of the new year is behind you. How did the company perform?
Larry Rosen: We have gotten off to a solid start in the current year and have built on last year's growth trend. And we were able to do this in a challenging economic environment. Nonetheless, we boosted consolidated revenues slightly, and Group operating earnings again rose at an even higher rate. During the first quarter, we also made very good progress toward achieving another important objective, improving our cash performance. All in all, we had a satisfying start to an ambitious year and proved once again just how robust our business model is. Our growth trend is intact, and we are fully on track to achieving our short- and mid-term targets.
Still, the company is growing at a slightly slower pace than it did in the previous quarters. Has the crisis finally reached Deutsche Post DHL?
Larry Rosen: If you take a closer look, you will see that actual growth is stronger than the reported figures indicate. Adjusted for exchange-rate effects and other inorganic factors, Group revenue would have grown by EUR 200 million instead of only EUR 80 million. In addition, there were about 2.5 fewer work days in Germany in the first quarter compared with the same quarter last year. Nevertheless, the sluggish global economy has naturally not bypassed us. We are feeling the downturn in our air-freight business, where volumes continue to decline. But overall, we are still dealing quite well with the challenging business climate. There are primarily two reasons for this: First, our exceptional position in dynamic growth markets that continue to flourish. Our parcel business in Germany and the international express segment are primarily profiting from this. Second, the efficiency improvements we have achieved in recent years and our efforts to continuously simplify our processes enable us to generate steady profitable growth. By the way: Volume alone is of secondary importance to us. Particularly in today's climate, we have made a conscious decision to pass up some business opportunities if they fail to live up to our profitability requirements. Our priority is quality - and thus the result.
How would you describe DHL's performance against this backdrop?
Larry Rosen: DHL continues to be the Group's growth driver. This is true in terms of revenues, but even more so in terms of earnings. All three DHL divisions performed well in the first quarter despite the lackluster economy. Take the express business: Adjusted for various one-time effects - including the sale of the domestic business in Australia and New Zealand - and negative exchange-rate factors, revenue growth was at about 2.5 percent. And the impact from the loss of two working days is not even considered in this calculation. In addition, we generated above-average growth in an area that is especially important to us: the Time Definite International segment. Daily shipment volumes here climbed by 10 percent compared with the same quarter last year. As a result, we were able to further expand our position as the world leader in this market. But one thing is even more important to us: the extensive investments we made in recent years in our global range of services, our international network, our employees' training and customer service are increasingly paying off: operating earnings in the EXPRESS division grew significantly. This improvement was accompanied by a corresponding increase in the operating margin.
The picture is mixed in the other DHL divisions. Why?
Larry Rosen: The industry-wide decline in air-freight volumes that I mentioned earlier is impacting the GLOBAL FORWARDING, FREIGHT division. But we are successfully offsetting this decline with an intelligent combination of air and ocean freight as well as with our industrial project business. In addition, due to our selective market strategy, and continued strict cost management we were able to produce a slight increase in operating earnings despite the continued high level of IT investments. In the SUPPLY CHAIN division, revenues grew, and the slight decline in earnings is due to insolvency proceedings involving a customer in the United States. Excluding this effect, EBIT would have increased. We are extremely pleased with the division's new contract wins, which, at nearly EUR 430 million, more than doubled over the same quarter last year. This is an impressive sign of how well our high quality services are perceived around the world.
The MAIL division's first-quarter figures look quite robust. What is the reason for this good performance?
Larry Rosen: We are making good strides toward stabilizing the MAIL division. Although there were about 2.5 fewer working days in the first quarter, total revenues rose slightly. This can be attributed in part to the postal-rate increase that took effect at the beginning of the year. But it is also the result of our continued success in the domestic parcel business. Revenues and volume generated each workday climbed by 11 percent. This strong growth is primarily fueled by the booming online retail business, an area in which we are continuing to make large investments. The parcel business is also increasingly evolving into an earnings pillar for the division. Together with strict cost management, these trends were largely able to offset the impact of the reduced number of working days and increased labor costs resulting from last year's collective-bargaining agreement - the pay raises took effect at the beginning of the second quarter 2012. Overall, the MAIL division is on the right track. But success won't just fall into our lap. In the years to come, we will have to continue working very hard to offset the structural changes in the mail market.
What is your assessment of this year's collective-bargaining agreement?
Larry Rosen: First of all, an important point is that we were able to reach the agreement without any significant impact on our customers. That does not, however, change the fact that it will certainly not be easy to absorb the additional costs involved. Furthermore, the deal intensifies the existing structural disadvantage we face in a shrinking mail market because it compounds the disparity with the competition in terms of employee compensation. At least we now have planning security and clarity for wage costs over the next two years.
As CFO, you are not just interested in the operating performance of the individual divisions. You have to be especially interested in the development of other key financial figures, too. For this year, you have placed particular focus on improving cash flow. What progress have you made in this area?
Larry Rosen: To begin with, the Group's financial situation was and is rock solid. We have the necessary flexibility in terms of both our operating business and our financial situation to continue to be able to implement the global growth plans tied to our Strategy 2015. Nonetheless, we have identified considerable improvement potential, particularly when it comes to generating cash. At the end of the first three months of this year, I can say this: We have made good progress in beginning to tap into this potential. In the first quarter of last year, we saw a cash outflow from operating activities of EUR 357 million. But, from January to March 2013, we generated a positive cash flow of EUR 120 million. This substantial improvement of nearly EUR 500 million is primarily due to our improved EBIT as well as our enhanced working capital management. Free cash flow also improved by EUR 0.5 billion in comparison to last year. After this successful start, we are very confident that we will be able to pay the 2012 dividend - as forecast - entirely from the free cash flow of 2013.
Let's take a look at the future now. What do you expect for the rest of 2013?
Larry Rosen: In principle, our strong position as the market leader in the German postal and parcel business as well as in international logistics lays the best groundwork for continued growth. It was clear to us from the beginning, however, that 2013 would not be easy because of weak economic growth in key markets. And while it remains to be seen if the global economy can pick-up speed in the course of this year we continue to be confident to be able to meet our earnings targets in 2013. We project an operating profit of between EUR 2.7 billion to EUR 2.95 billion for the Group. The MAIL division should contribute EUR 1.1 billion to EUR 1.2 billion to this amount. For the DHL divisions, we expect an operating result of between EUR 2 billion and EUR 2.15 billion. As you can see, we remain - despite existing economic uncertainties - optimistic that fiscal year 2013 will again be a successful one for Deutsche Post DHL.
And what are your expectations for the mid-term?
Larry Rosen: The latest figures clearly show that our strategy produces results even in a difficult market environment. We benefit from applying our undivided attention to producing profitable organic growth with unique products and services on the basis of our excellent market position in the world's growth markets and, not least, on the basis of our systematic customer orientation employed throughout the company. Our success is sustainable because it is built on a solid foundation.