"Our efforts have delivered further success''
Deutsche Post DHL Group has today reported a successful start to the 2016 financial year. All four divisions of the company contributed to a significant increase in Group earnings in the first quarter. In an interview, Chief Financial Officer Larry Rosen talks about the factors behind the company's good performance and the progress made in the implementation of Strategy 2020.
Chief Financial Officer Larry Rosen
Mr. Rosen, how do you assess the performance of Deutsche Post DHL Group in the first quarter of the current financial year?
Larry Rosen: After a year of transition, during which we worked hard to create the foundations for long-term profitable growth, our efforts have delivered further visible success. The increase in EBIT of more than 20 percent is a good result - especially since each division contributed to the result. This shows that the measures we took last year are working. And the core priorities that we set for our Strategy 2020 are valid and that our most important growth drivers remain intact. The positive picture seems optimistic due to the revenue decline, but only at first glance. By taking a closer look you can see that this was caused by lower fuel surcharges caused by falling oil prices, negative currency effects and an accounting change in one of the Supply Chain division's key accounts, so it does not reflect the underlying good top-line performance of most of the businesses.
Let's take a look at the individual divisions. How did the first three months go in the Post - eCommerce - Parcel (or PeP) division?
Larry Rosen: PeP had a good first quarter. That applied especially to the eCommerce - Parcel business unit. Here we are increasingly reaping the benefits of having recognized at an early stage the enormous opportunities of e-commerce and for having invested consistently in the infrastructure, and with that the growth, of our parcel and eCommerce business. After a strong fourth quarter in 2015, we also began the new year in full swing: almost 300 million parcels were delivered in Germany between January and March. That is once again an increase of more than 5 percent compared with the previous year - and that despite the fact that we had one less working day. Clearly, we are succeeding in convincing our customers of our service quality in a tough competitive environment. We are increasingly using the know-how gained in Germany to further promote the international expansion of our parcel business - which is also reflected in more growth in our Parcel Europe business. However, the ongoing decline in volume in our letter business remains a constant challenge. The price increases at the turn of the year almost fully offset this volume decline in the first quarter. Overall, the PeP division's EBIT rose by 3.3 percent to EUR 412 million. With this result, we proved once again that we have not only successfully stabilized the division through the strategic decisions of recent years, but that we have also opened up new opportunities for sustainable and profitable growth.
Among the DHL divisions, Express is once again the most profitable by far. How do you explain the ongoing success of the business?
Larry Rosen: Indeed, Express turned in another very good quarterly performance - even though the impact of the aforementioned currency effects was particularly visible in this division. The main driver of the sustained positive development was once again significant growth in the time-definite international delivery business, or TDI for short. In this area, we can play to our great strength - DHL's efficient and extensive global infrastructure - particularly well. In the first three months, the Express division's operating margin rose to a record 11.0 percent, compared with 10.2 percent a year earlier. We are very pleased with this and feel encouraged to continue along the path we have taken and to further invest in our Express network.
You also aim to restore the Global Forwarding, Freight division to profitable growth. How far are you in achieving this?
Larry Rosen: The cost-cutting, organizational and commercial measures that we undertook last year for our forwarding business have been effective. We have improved the business's EBIT for a second consecutive quarter now, in fact significantly. That shows we are heading in the right direction. With the renewal of our IT systems, we are in line with our plan. We have already initiated the global rollout of some state-of-the-art internal systems that we have so far used only in a part of the organization. But a lot of work still lies ahead in order to bring the division back to its previous levels of profitability. We will approach this task step by step.
How are things going with the third DHL division, Supply Chain?
Larry Rosen: We are also on the right path with Supply Chain. In the first quarter, we increased EBIT, despite ongoing restructuring measures. With the proceeds from the sale of the remaining share of the King's Cross real estate project we could direct more resources towards the long-term development of the division, further building on the measures that we implemented in 2015. At 3.7 percent, the EBIT margin in the first quarter is moving toward our medium-term target range of 4 to 5 percent. The Supply Chain division's efforts to win new business has also continued to develop well: we concluded additional contracts with a total volume of EUR 276 million in annualized revenue with new and existing customers.
In the first quarter, you were able to not only increase earnings significantly, but also to reinforce the financial foundations of the company through two bond placements. What was the background to this move?
Larry Rosen: The historically low interest rates in the capital markets present opportunities for companies to raise funds externally on very favorable terms. In 2012, we already took advantage of this and issued EUR 2.0 billion in bonds, which was a great success. At the end of March this year, we again made use of the favorable interest-rate environment and issued two senior bonds worth EUR 1.25 billion. In so doing, we have secured very attractive interest rates for the next five and ten years respectively. We have mostly used the funds to significantly increase the pension assets covering our pension obligations to employees in Germany. Furthermore, we expect these transactions to improve the Group's operating cash flow in future years and also to have a small positive effect on our financial result and net income.
Let's talk about cash flow, how has it developed in the first quarter?
Larry Rosen: First of all, the decline in free cash flow relates to a typical seasonal development, which we see at the start of every financial year. One important factor is the annual advance payment that we have to make to fund civil-servant pensions. The payment this year amounted to EUR 517 million. On top of this, we also invested heavily in the expansion of our business in the first quarter. Additionally, the working capital phasing effect following the strong year end performance had an impact. However, all of this is within our expectations. Over the years, we have gradually improved our ability to generate free cash flow. We expect to continue that trend again in 2016. The improved cash flow performance and our positive expectations about our future business development are precisely the reasons behind the share buyback program that we announced for this year, and which we have already successfully launched.
Back to business performance: What do you expect for the full year after the good start to 2016?
Larry Rosen: The global economy continues to grow moderately, albeit with recent forecasts indicating that the increase will be less than previously expected. The International Monetary Fund expects growth in the current year to be at around 2015 levels. We therefore can't expect too much of a tailwind for our business. Irrespective of that, we have created favorable preconditions in all our divisions to be able to achieve our long-term strategic and financial goals. We are therefore fully confident after the good start that we saw in the first quarter that we will achieve this year's targeted increase in Group EBIT to between EUR 3.4 billion and EUR 3.7 billion.