"We are laying the foundations for the successful implementation of Strategy 2020"
Deutsche Post DHL Group released its results for the first quarter of 2015 today. The company posted solid growth in revenue after adjusting for currency effects, while earnings remained largely stable. DPDHL Group reaffirmed its forecasts for the full year and beyond following moderate business growth in the first three months of the year. In an interview, Chief Financial Officer Larry Rosen reviewed the most recent development of the Group's business and explained how it is addressing current challenges in order to safeguard its long-term success in a demanding market environment.
Chief Financial Officer Larry Rosen
Mr. Rosen, how would you assess the performance of Deutsche Post DHL Group in the first quarter of 2015?
Larry Rosen: First of all, we knew in advance that 2015 would be a year of transition for us. We continue to see only a slight increase in the pace of global economic growth. Competition in many of our markets remains intense, but above all we have been quite open about the fact that we still have to address a number of challenges and opportunities. Overall, we can be quite satisfied with our start to the 2015 fiscal year. Consolidated revenues climbed further - even when adjusted to reflect the substantial positive currency effects from the recent weakness of the euro. Our operating profit held steady despite non-recurring expenses related to restructuring within our Supply Chain division and the deep-rooted transformation program at Global Forwarding, Freight. This shows that our business model is robust and viable even in challenging times.
Nonetheless, it looks like DHL - usually your most reliable earnings driver - posted a somewhat weaker performance this time.
Larry Rosen: The respective performances of the DHL businesses have indeed been mixed at the beginning of the year, which is as we expected. Express was once again the stand-out performer, with double-digit growth in revenues - thanks in part to favorable currency effects - and a more than 20% increase in EBIT. The EBIT margin improved further over the prior-year period - to 10.2%. We continue to benefit from the fact that we have the best global network and are very well positioned in our Time Definite International product line. At the same time, we continue to invest in our network in order to further strengthen this position. Incidentally, the strong position of Express today should also be considered within the context of possible future consolidation in the express market. While we are not unduly concerned, we will watch these developments closely and will capitalize on any short-term opportunities that arise by remaining absolutely focused on our customers.
But you yourselves are facing a number of internal challenges.
Larry Rosen: That is true. While we believe Express is already well positioned for growth, within the other two divisions we are working hard to optimize our structures and processes. With that, we are setting the foundations for the successful implementation of our Strategy 2020. We clearly recognize the considerable effort that this entails.
What is the status of your transformation program at Global Forwarding, Freight? The results for the division in the first quarter don't seem very encouraging.
Larry Rosen: Our Global Forwarding, Freight division actually registered a weak performance in the first quarter against the backdrop of its ongoing, complex transformation. Despite the fact that the overall market environment is still challenging, we are naturally not satisfied with this development. The new management team will therefore be strongly focusing on improving the operating performance of the business. At the same time, there will be a thorough review of the transformation program, in particular looking at the results from the pilot countries and the impact of the organizational alignment. This will allow us to carefully map out the right implementation approach and decide on our next steps.
What about Supply Chain? You have also announced investments in optimization here.
Larry Rosen: The situation at Supply Chain is quite different, although we are indeed investing in the future of this business as well, which will have some impact over the short term. However, we're not targeting a fundamental transformation at Supply Chain. Instead, we are aiming to leverage the division's potential to grow and increase profitability. For example, we are working to streamline our organizational structure, standardize and improve the utilization of economies of scale in our global business. In other words, we want to better exploit our competitive advantage as the leading global provider within a fragmented marketplace.
The first three months appear to have gone well for Post - eCommerce - Parcel, or PeP. How would you assess the performance of that business?
Larry Rosen: As with DHL, you need to take a closer look at PeP, beyond the headline numbers, to understand the full story. Here as well, revenue growth was slightly inflated by currency effects - although revenues were also quite healthy on an adjusted basis. Our EBIT remained at around the level of last year. Negative factors, such as the ongoing decline in mail volumes at Post, higher staff and purchased goods and services costs, as well as expenses related to the international expansion of eCommerce - Parcel impacted earnings. At the same time, this was counterbalanced by the price increases for postal products in Germany and, in particular, by strong growth in the German parcel business. This shows that we are absolutely backing the right horse with our strategic alignment: Our growth driver, e-commerce, is very much intact and we will continue to invest in infrastructure to maintain our lead here. To enable this, however, we have to concentrate more than ever on having a competitive cost structure in place in this dynamic market. For this reason, we have established the DHL Delivery entities in Germany. This move is intended to provide our parcel business with a robust and viable foundation for the future with a more competitive wage structure that maintains our status as an attractive employer.
Does the situation at PeP really call for changes now?
Larry Rosen: There is no alternative to having a competitive wage structure in this market. If we do not modify the cost structure, our EBIT will come under sustained pressure sooner or later, which will mean that we quite simply will no longer be able to afford to further invest in the future. Cost discipline is not a means in itself. This is often quite difficult for outside observers to understand, because the situation at the moment is not yet visibly critical. We are determined to act today to avoid the situation where we find ourselves under pressure tomorrow. Once we are at a competitive disadvantage, it becomes very difficult to change structures and regain the advantage. This needs to be clear to everyone who has an interest in the future of our company.
Now let's take a look at the current year. EBIT is up slightly at PeP and down slightly at DHL. What does this mean for your full-year forecast?
Larry Rosen: Following a moderate performance in the first quarter, we remain confident and committed to the forecast published in March. Even though the challenges are substantial, we continue to expect that 2015 will be another growth year for Deutsche Post DHL Group. We are targeting operating profit of between EUR 3.05 billion and EUR 3.2 billion. PeP is expected to contribute at least EUR 1.3 billion of this figure. For the DHL divisions, we forecast a further increase in EBIT to between EUR 2.1 billion and EUR 2.25 billion - despite investments for optimization and transformation and the very demanding market and competitive environment. We reaffirm our previous statements that we anticipate a much more dynamic earnings trend after the current year.
Which external factors will impact the Group's performance?
Larry Rosen: Our revenue already benefited from currency effects at the end of last year, and this trend further intensified in the first quarter. Should exchange rates remain roughly at the current level, these positive effects will likely continue in the second quarter of this year. Basically, we are still focusing on our own strengths and on organic growth. We don't rely on external drivers to deliver results. This is where the fundamental strength of Deutsche Post DHL Group lies: We achieve solid earnings year after year through organic performance and execution against a proven strategic plan, even under difficult external conditions.