"2016 was a very successful year for us and we are very well positioned to sustainably grow in the future."
Thanks to a strong market position in global growth segments - in particular, e-commerce - and operational improvements in all divisions, Deutsche Post DHL Group met its targets for 2016 and posted record earnings1. In an interview with DPDHL Group News, CEO Frank Appel explains how the company plans to continue growing in the coming years and why it is important to promote open markets.
Mr. Appel, how would you rate the business performance of Deutsche Post DHL Group in the past financial year?
Frank Appel: 2016 was a very successful year for us. The company has never before achieved higher earnings in its current structure. This is an outstanding achievement by our entire team and we can be very proud of it. I'm particularly pleased that all divisions contributed to this good result. At the same time, we further strengthened our market position in all areas. We once again invested heavily in growth and in improving our efficiency, and continued to make great strides toward implementing our .
We are not only well on track to further benefit from the dynamic international development in the e-commerce segment, but are also very well positioned to sustainably and profitably grow in the future.
Frank Appel: They were extremely successful. With operating profit in excess of EUR 1.4 billion, PeP even surpassed our expectations. Revenues in our mail business remained largely stable. Here the postage rate increase implemented at the beginning of 2016 helped to offset the structural decline in mail volumes. eCommerce - Parcel once again registered strong growth. We posted a double-digit increase in revenue and advanced our market leadership in the German parcel business. In the 2016 financial year, we delivered more than 1.2 billion parcels - a new record. We expect to maintain this positive momentum in 2017 and the coming years and are therefore continuously investing in the expansion of our capacity. In 2016, we successfully brought Germany's largest and most modern parcel center on line in Obertshausen. In the middle of the year, we will start building another parcel center of a similar size at the former site of Opel in Bochum.
How is the expansion of the parcel business outside Germany progressing?
Frank Appel: The expansion is progressing smoothly and on schedule. Our vision of the "United Parcel Nations of Europe" is now largely a reality. We already cover 21 European countries and are growing rapidly in all markets. We substantially expanded our presence in the United Kingdom, Europe's largest e-commerce market, through the successful acquisition of UK Mail. The deciding factor is not the number of countries, however, but that we offer the same reliable, high-quality service everywhere - no matter whether parcels are shipped to Portugal, the Baltic states, or northern or southern Germany. We see enormous growth potential particularly in cross-border e-commerce. And not just in Europe, by the way. We are therefore also investing in the expansion of our infrastructure in countries such as the United States, India, Australia, Mexico and Thailand.
Frank Appel: Express continued to develop very dynamically and was our most important profit driver again last year. In contrast to the parcel business in PeP, our global express network transports mainly business consignments such as urgently needed spare parts or urgent documents. We are the global market leader in these time-definite international (TDI) shipments and continued to grow in all regions of the world in 2016. We are also increasingly benefiting from e-commerce at Express - with particularly high value goods, for example - and were thus able to improve the capacity utilization of our network. Together with efficiency measures and pricing initiatives, this allowed us to once again substantially boost the division's profitability in 2016. For the first time, the EBIT margin climbed to 11 percent in a full business year. In addition, we laid the foundation for further profitable growth through substantial investment in our infrastructure, considerably expanding our hubs, for example in Leipzig and Singapore in 2016. We also intend to strengthen our network in the United States, one of the most important growth markets for Express, with a triple-digit million investment.
Frank Appel: Our extensive work on the structures and processes in our forwarding division is paying off. The division's positive earnings trend continued in a competitive market environment that is still posing challenges. Although volumes picked up again significantly for the first time, particularly in the final quarter of 2016, a sharp increase in buying rates weighed on our fourth quarter gross profit. In the long term, we remain committed to our goal of reattaining - and surpassing - the division's profitability of earlier years. The division is also making good progress with its IT renewal. Following successful pilot projects, we will roll out a number of systems this year on a broad scale - including an electronic document management system that will considerably reduce the paperwork that still predominates in the forwarding industry. In addition, we will launch the pilot phase of a unified transport management system in the course of this year.
Frank Appel: Supply Chain also had a good year. The optimization program is clearly taking effect. We increased the EBIT margin to 4.1 percent and reached the target corridor of 4 to 5 percent a lot sooner than expected. As the global market leader in contract logistics, we are focusing Supply Chain even more closely on profitable sectors and fast-growing regions. The success is evident: Last year, we concluded new business wins with a volume of EUR 1.5 billion, particularly in the areas of Consumer, Retail, Life Science & Healthcare and Automotive. Emerging markets account for around one quarter of this business, proof that we have also made good progress at Supply Chain with the implementation of our Strategy 2020.
In other words, a successful year all round for Deutsche Post DHL Group. How is this reflected in the dividend?
Frank Appel: We want our shareholders to have an appropriate share in the company's success over the long term. To this end, we have communicated a clear framework in our finance strategy: We want to pay out to our shareholders 40 to 60 percent of consolidated net profit adjusted for one-time effects. In line with this target, therefore, the Board of Management and the Supervisory Board will propose at the Annual General Meeting that the dividend will be increased by 24 percent to EUR 1.05 per share. This will yield a payout ratio of 48 percent, which would be roughly in the middle of the communicated range.
What are your expectations for 2017 and beyond?
Frank Appel: Economic institutions expect global economic growth to gain some traction. There are also signs that global trade will pick up slightly after a phase of weakness. Overall, however, growth rates will remain below the long-term average. We will maintain our course of growth, even though the economic tailwind remains weak. We plan to raise operating profit from EUR 3.5 billion to around EUR 3.75 billion. With our Strategy 2020, we have focused all divisions on consistently leveraging growth opportunities - particularly through the continued growth in e-commerce. We are therefore convinced that we will reach our communicated medium-term target of an increase in operating profit by an average of more than 8 percent annually between 2013 and 2020. Our success in 2016 has not made us complacent. On the contrary, it serves as an even greater incentive for us.
Deutsche Post DHL Group is also pursuing ambitious targets with regard to climate protection. You have announced zero emission logistics by 2050...
Frank Appel: As a global logistics company, we want to responsibly work with the resources of our planet. Therefore, in 2008, we set the goal of improving carbon efficiency throughout the Group - including transport services performed by third parties - by 30 percent through 2020 over 2007 levels. We have now achieved this goal four years earlier than planned, thanks to numerous initiatives throughout the Group. But our climate protection efforts will by no means stop there. On the contrary: we want to become completely climate-neutral. We have identified the aim of reducing all logistics-related emissions to zero by 2050.
Let's conclude with a look at the world. We are seeing increasingly protectionist tendencies, such as in the United States, and a trend toward populism in a number of countries. How do you assess the overall political situation and its effects on your company?
Frank Appel: We are observing two opposing trends. On the one hand, globalization and international connectivity are constantly on the rise. This is also confirmed by the Global Connectedness Index we publish. On the other hand, developments such as Brexit or the looming withdrawals from multilateral free trade agreements show us that it could become rather more difficult for international companies in the future to conduct business across borders. We are observing this closely, of course, but we are not unduly alarmed. As the world's leading logistics company, we are in a unique position to address such challenges. Our experts know exactly how to deal with trade barriers. We know the complex customs and import regulations in practically every country on earth. Against this backdrop, we believe that in the short term, we are in an excellent position to help our customers deal with this increasing complexity. In the long term, however, we absolutely must not jeopardize the accomplishments of globalization. This would be in the interests of neither our economy nor in our own interests.
In other words you are appealing for more rather than less integration - despite all the criticism?
Frank Appel: History has taught us that nationalist and populist tendencies will ultimately have negative long-term consequences. International exchange, on the other hand, has proven to be a reliable engine of progress and prosperity. Globalization has unquestionably improved the lives of many people around the world. However, these gains in prosperity have not been equally distributed. That's why I can understand that people have the feeling of being "left behind." Yet the answer to this must not be less, but rather more - and above all better - globalization. We must further promote international trade while investing in education and infrastructure so that countries can develop positively over the long term. And in the future, we must better explain the advantages of economic integration and connectivity. By the way, this also brings with it responsibilities for companies like ours.
1 Based on the current corporate structure.