"Successful start to the new year"
Deutsche Post DHL released its results for the first quarter of 2014 today. Adjusted for inorganic effects, revenues rose significantly from the previous year's level. The positive earnings trend seen in recent years continued at the beginning of 2014 as well. In an interview CFO Larry Rosen discusses the first-quarter figures, the performance of the individual business units and the Group's outlook.
Chief Financial Officer Larry Rosen
Mr. Rosen, the first quarter of the new year is over. How would you assess the performance of Deutsche Post DHL during this three-month period?
Larry Rosen: We had a successful start to the new year and are satisfied with our overall performance. We knew that 2014 would be a challenging year - both for us and for the entire industry. That certainly turned out to be the case during the first three months of the year. The continued lack of meaningful economic tailwind negatively impacted the forwarding and freight business in particular. In addition, substantial negative exchange-rate effects impacted DHL's revenues and earnings during the past quarter. In such an environment our Group, with its four high-performance pillars, is positioned so that we can continue to grow even when facing challenging business conditions. In organic terms - that is, adjusted for exchange-rate and consolidation effects - our revenues rose by more than 5 percent. Our EBIT continues to grow as well - despite the significant negative exchange-rate effects. As a result, we are confident that we will continue to perform well throughout the rest of the year.
One noticeable feature of your first quarter result were the quite different levels of performance among the DHL divisions. What caused this?
Larry Rosen: I would first like to point out that DHL as a whole continued to perform well in challenging - that is, highly competitive - markets. This is particularly true for our EXPRESS business. Organic revenue growth totaled more than 8 percent - as volume rose significantly in all regions. We continue to win market share particularly because our customers really appreciate our capabilities, reliability and services. Another positive sign is that the moderate price increases that we introduced recently have been accepted by the market. All of these factors helped generate a very pleasing EBIT increase of more than 14 percent at EXPRESS and another significant improvement in the operating margin, which amounted once again to nearly 10 percent in the first quarter.
But things did not run so smoothly at GLOBAL FORWARDING, FREIGHT and SUPPLY CHAIN .
Larry Rosen: At first glance, the numbers here may not appear to be so good. But it pays to take a closer look at them in both cases. At GLOBAL FORWARDING, FREIGHT, the sluggish economy of many regions of the world and altered customer usage patterns - the ongoing substitution of air freight with lower-priced ocean freight - are the main reasons for muted revenue trends. Added to this are strong exchange-rate effects that turned an organic revenue increase into a small decrease on a reported basis. Other key reasons for the earnings decline were the planned increase in investments in the division's new IT infrastructure and the tough margin environment. The good news: Both volumes and revenues showed significant improvements towards the end of the quarter. For this reason, we are confident about the rest of the year. For SUPPLY CHAIN: Exchange-rate effects and last year's sale of some non-core activities almost completely offset the impressive rise in organic revenues of nearly 7 percent. We slightly increased the divisional EBIT, and we continue to gain many new customers - even though the first quarter new business wins were lower. The decline from last year's figure is the result of an exceptionally high number of contracts signed at the end of 2013. And the annualized contract-renewal rate remains high.
And what about MAIL, i.e. your new "Post - eCommerce - Parcel" or "PeP" division?
Larry Rosen: In this division, whose new name better reflects the strategic orientation of the business in the future, a number of important developments are contained in the figures. First of all, revenue growth of 3.6 percent is really impressive for a business going through continued structural change. And, the traditional mail business played a significant role in this gain. However, these increases cannot be viewed as a trend reversal as there are several one-time effects reflected in this development: the latest increase in postal rates, the SEPA switch and an approximately half working day more compared with the same quarter in 2013. The challenges that the PeP business continues to face - despite continuing dynamic growth in the parcel business - are reflected in EBIT: It was virtually unchanged in the first quarter despite the positive effects I mentioned. This was primarily the result of increased material and labor costs. This will remain important in the future together with the momentum being generated by the dynamic eCommerce trend. Our positioning creates great opportunities for us in eCommerce-related logistics, both in Germany and elsewhere. But we must ensure that future revenue gains do in fact result in higher earnings - this will be the only way that we will be able to afford the investments that we need to make in order to reach our long-term goals.
In addition to focusing last year on your operating business, you kept your eye on the Group's ability to generate cash. Is this issue still one of your priorities?
Larry Rosen: Yes, definitely. This year, we want to pay the dividend for financial year 2013 that has risen by 14 percent from our free cash flow once again. Providing that the shareholders will approve our dividend proposal we are talking about an amount of almost EUR 1 billion here! And we continue to make good progress here - even if it may not appear so when you glance at the first-quarter figures. You need to keep two points in mind: First, we already stated during the announcement of our results for 2013 that some payments for investments capitalized in the final quarter would be made at a later time. These payments have now been made at the beginning of the year and thus impacted our cash position in the first quarter. Furthermore, our cash flow is impacted at the beginning of each year by the annual prepayment for civil servants' pensions that we make to the German Federal Post and Telecommunications Agency. This year, the payment totaled EUR 535 million. In short: We have our eye firmly fixed on our goal and are making progress step by step, as planned.
Is this also the case for your earnings targets? Or is your guidance for the year on slippery ground following the rather moderate rise in the first quarter?
Larry Rosen: Not at all. Our earnings guidance is unchanged. The first quarter was on target, and we will stay on course as the year progresses. For the full year, we expect consolidated EBIT to reach between EUR 2.9 billion and EUR 3.1 billion. The PeP division is forecast to contribute about EUR 1.2 billion to this result. And the DHL divisions are expected to grow their earnings to between EUR 2.1 billion and EUR 2.3 billion. In addition, we intend to reduce expenditures in the Corporate Center/Other segment to below EUR 400 million in 2014. We are aware that these targets are ambitious. Reaching them will definitely not be a walk in the park. But we also know that our strategy is paying off. Our success is sustainable because it is built on a solid foundation. For this reason, we are confident that we will be able to continue this positive earnings performance beyond our previous planning horizon: With our interim EBIT target of between EUR 3.35 billion and EUR 3.55 billion for 2015 unchanged, we expect that the Group will produce annual average growth in operating earnings of more than 8 percent between 2013 and 2020.
You plan to achieve this with the help of your new "Strategy 2020: Focus.Connect.Grow." that you announced at the beginning of April. What will change and when will you be able to describe your plans in greater detail?
Larry Rosen: With our "Strategy 2020" we are building on proven practices and are drawing on our existing strengths. At the same time, we are seizing new opportunities to accelerate organic growth. In this effort, we will concentrate in particular on expanding our business in emerging markets and building on our leading position in eCommerce-related logistics - in Germany and internationally. At the same time the key features of our finance strategy will remain in place: strict investment discipline, a clear dividend policy and a very selective M&A policy. We have just begun to implement our "Strategy 2020". And while we will inform you on a step-by-step basis about the specific measures we are introducing to reach our goals one point is already clear: We have tied our new "Strategy 2020" to a clearly articulated commitment to assume a leading role: We intend to be the driving force in the logistics industry - and to define the industry around the world. In future, when people think about logistics, we want them to think of Deutsche Post DHL.