"We have continued on our profitable growth trajectory"
After another very good year, Deutsche Post DHL Group - the world's largest mail and logistics company - remains on track to attain its strategic and financial targets for 2020. In an interview with DPDHL Group News, CEO Frank Appel explains why the company expects further profitable growth in the coming years and why sustainable corporate success requires more than just good numbers.
Mr. Appel, what is your assessment of the 2017 financial year that just came to a close?
Frank Appel: 2017 was another very good year for Deutsche Post DHL Group. We continued on our profitable growth trajectory with very good performances in all four divisions. Our revenue increased considerably, with growth once again being driven primarily by the international express business and the rapidly expanding e-commerce business. Even more important to us, however, is that operating profit once again improved substantially, advancing by more than 7 percent to EUR 3.74 billion. We thus attained our EBIT target for 2017 - while at the same time taking another major step on the road to achieving our financial goals for 2020. We once again posted a particularly strong fourth quarter. Briefly put: our team has every reason to be proud of what we achieved in 2017.
Do the shareholders also have reason to celebrate?
Frank Appel: We of course want our stockholders to appropriately share in our company's success again this year - in keeping with our long-term finance strategy. The Board of Management and the Supervisory Board will therefore propose a EUR 0.10 increase in the dividend to EUR 1.15 per share to the Annual General Meeting, representing a payout of 52 percent of net profits. What makes this possible is that we didn’t just post good earnings in the past financial year but also generated strong cash flow. That puts us in a position to pay out more money while at the same time continuing to invest strongly in future growth.
Earnings before taxes rose much more significantly than after-tax earnings. What was the reason for this?
Frank Appel: We expected from the outset that we would report a higher tax expense in 2017 than in the previous year. In 2016 the tax rate was especially low due to one-time factors. Furthermore, the US tax reform had a negative one-off effect for us last year: due to the lower US tax rate, tax loss carryforwards from the past won't diminish our tax burden as significantly from now on. This had a negative one-off effect in the fourth quarter that accounts for most of the expected effects of the tax reform.
Frank Appel: PeP was able to seamlessly continue the positive performance of previous years. We posted further significant growth particularly in the German and the European Parcel businesses, as well as in eCommerce. For years, we have been continuously investing in service quality and infrastructure, and that is paying off. We delivered 1.3 billion parcels last year in Germany alone - a new record. Yet we are also making further good progress with the establishment of our "United Parcel Nations of Europe." We now operate in 26 countries. One thing we're particularly pleased about is that we are also performing as planned in terms of profitability, and we are confident that our international investments will contribute to the division's earnings in the medium term.
Will the importance of the traditional letter mail business therefore continue to decline?
Frank Appel: The Post business remains an important cornerstone of PeP, but the division's revenue mix is increasingly showing a clear shift toward Parcel and eCommerce. Parcel now accounts for nearly 50 percent of our revenue in this division, compared with just 20 percent in 2010. Nevertheless, 2017 was a good year for our letter mail business, too. Mail volumes remained largely stable overall. However, one-off effects such as the German parliamentary election had a very clear positive impact. All in all, we have to continue to keep costs in mind at PeP - particularly in Germany. That is the only way this business will be successful going forward.
Frank Appel: DHL Express did indeed continue its success story again last year: revenue was up by 9.5 percent, operating profit by 12.4 percent, and operating cash flow by 14.7 percent - these impressive figures show that we set just the right focus at Express by targeting the highly-profitable international time-definite (TDI) delivery business. We increased volumes in the TDI business by nearly 10 percent in 2017 and are steadily improving the capacity utilization of our network. At the same time, we have been keeping a close eye on costs, allowing us to improve the EBIT margin to a very good 11.5 percent. Of course, we are not resting on our laurels. We expect the e-commerce boom to result in further growth in volumes. We therefore continue to invest in the expansion of our capacity - for example in our hubs and in new aircraft.
Frank Appel: With the sale of services subsidiary Williams Lea Tag last year we focused DHL Supply Chain even more closely on its core business, the management of global supply chains. The division generated considerable new business in 2017 as well. Overall, we concluded contracts with a total volume of around EUR 1.5 billion with both new and existing customers, and once again matched the record level of the previous year. The division's operating profit saw a negative one-off effect from the write-down of customer relationship assets. Adjusting for this effect, earnings improved by 2.6 percent. We believe Supply Chain is on the right track with a clear focus on fast-growing sectors such as Life Sciences & Healthcare. This is why we acquired Brazilian company Olimpo Holding, a leading supplier of temperature-controlled transport in Brazil, in mid-2017.
Frank Appel: Overall, Global Forwarding, Freight made good progress in 2017, although it was a year of two very different halves for this division. After the decline in prices in the previous year, freight rates recovered noticeably in 2017. However, we only succeeded in passing on these increases to our customers with a delay, which is why the EBIT margin initially remained under pressure in the first six months, at 1.5 percent. We were better able to pass on the increased rates in the second half, and therefore increased the margin to 2.6 percent. But it’s not just the margin that is trending positively. In Tim Scharwath, we brought on board a recognized industry expert as CEO of Global Forwarding, Freight. He and his team are driving the division forward at full steam. For example, DGF has now begun rolling out its new IT system after a successful pilot phase.
Following a good year in 2017, what are your expectations for 2018?
Frank Appel: We are very confident that 2018 will be another good year for Deutsche Post DHL Group. The indicators for global economic development are better than they've been in a long time. Further growth is expected in all major regions of the world - in other words, the conditions are good for robust development of global trade and by extension also for us as the world's largest logistics company. What's more, our leading growth driver, the booming e-commerce sector, remains intact. The business environment is therefore positive, and we have also laid the foundations for a further substantial improvement in earnings by implementing measures to enhance our operating performance. We are projecting an increase in Group EBIT to EUR 4.15 billion in 2018. This includes around EUR 150 million resulting from the transition to the new financial reporting standard IFRS 16, as previously announced. Yet even without this positive effect, we will see similarly robust growth in EBIT over the previous year based on our forecast.
In connection with the transition to IFRS 16, you also specified medium-term targets. What are these targets now?
Frank Appel: With our Strategy 2020, we have set the goal of increasing Group EBIT by at least 8 percent per year on average from 2013 until 2020. This target continues to apply, without factoring in the positive effects resulting from IFRS 16. In addition, we have now announced a specific figure for the first time. Including the IFRS effect, we want to increase Group EBIT to more than EUR 5.0 billion by 2020. This goal is ambitious yet realistic in view of our growth momentum.
Sustainable corporate success requires more than just a good balance sheet. What kind of progress have you made beyond the numbers?
Frank Appel: Good financial figures are important, but this is not an end in itself. We pursue this holistic approach with all our activities. As a provider, we want to be the first choice for all customers and in every country. We want to be the most attractive employer in our industry, with satisfied and highly qualified employees. And we want to manage our business in such a way that we make a positive contribution to society. We made good progress in all these areas in 2017, as evidenced by our regular customer and employee surveys. And we are also making good progress with our climate protection program. A year ago, we announced that we would reduce our net logistics-related carbon emissions to zero by 2050. We are resolutely pursuing this goal: in 2017, for example, we doubled production capacities for our electric StreetScooter fleet. And we planted more than one million trees together with external partners. I am convinced that true value for society can only ultimately be created through this vision of growth that includes both prosperity and social progress. In this respect, I think our company is on a very good path.