"We are making good progress in line with our plans"
Deutsche Post DHL Group continued to grow in the third quarter of 2018 and is on track to reach its earnings target for the full year. In particular, the three DHL divisions continued their positive performance. At PeP, the measures to improve profitability and the cost structure are on schedule and making good progress. As previously announced, these measures have weighed on the Group's operating profit in the short term. In an interview with DPDHL Group News, CEO Frank Appel explains the performance of the four divisions and details how the Group is handling the growing global economic uncertainties.
Mr. Appel, what is your assessment of the performance of Deutsche Post DHL Group in the third quarter of 2018?
Frank Appel: Deutsche Post DHL Group, overall, remains in good shape. Our broad portfolio of logistics services and products is proving a clear competitive advantage, particularly in times of growing uncertainty. We continue our dynamic organic growth as the fundamental growth drivers of our business - in particular the booming e-commerce business and the intensive world trade - remain intact. This is evidenced especially by the positive performance of our three DHL divisions and, in particular, the substantial revenue and earnings growth at Express and Global Forwarding, Freight. As we all know, the situation in the Post - eCommerce - Parcel division, PeP, is different: here, it is about the steady implementation of the productivity-enhancing and cost-cutting measures announced in June - which we expected to impact our results. We are fully on track here, and I am confident that the measures will show significant positive effects as early as next year.
Frank Appel: First of all, we were able to maintain divisional revenue on the level of the prior year. In view of the structural declines in volume in the traditional letter mail business and the positive volume effects from the German parliamentary elections in 2017, this is not something that we can just take for granted. Generating revenue on last year's level was made possible by our strong market position in the parcel business, which continues its very dynamic growth. The earnings side at PeP - that is, the operating loss - is characterized by the one-time restructuring charges announced previously, a large portion of which were booked in the past quarter. The majority of the charges were attributable to an early retirement program focusing on civil servants working in indirect functions, with the aim of reducing our cost base over the medium term. Moreover, we have made investments to improve our productivity.
What exactly have you tackled - and achieved - in the PeP division in the past months?
Frank Appel: In terms of our structural repositioning, we are fully on course with preparations to split PeP into two divisions, "Post & Paket Deutschland" and "DHL eCommerce Solutions". We will launch the new structure effective 1 January 2019, and we will then be able to even better address the potential of domestic and international business. At the same time, we have already done much to refocus our attention on our core business. Among other things, we have sold non-core activities such as Allyouneed Fresh and decided to discontinue Deutsche Post Reisen. We are also on schedule and are making brisk progress when it comes to the sustained improvement of our productivity and cost structures. For example, the early retirement program focusing on civil servants working in overhead areas announced previously has got off to a successful start. It constitutes one of the key measures for an effective and sustained cost reduction. In addition, we have initiated a wide range of other measures, including those aimed at optimizing our processes. For example, we have made significant investments in training our employees and in tools to improve the predictability of incoming volumes as well as route planning. It's the fact that everyone on the team is doing their bit that is making me feel optimistic. Our employees have realized that we need to make changes, and everyone is contributing. This is also underlined by the positive results of our annual Employee Opinion Survey.
In addition to the internal challenges at PeP you are also facing risks in the global economic setting. The global political and economic climate seems to be clouding over, the number of uncertainties is on the rise, including those connected with the further development of world trade. What is your assessment of the current situation?
Frank Appel: It is true that we are seeing a rise in external risk factors, which find expression in an increased volatility of exchange rates and a ramp-up of protectionist rhetoric, for example. Of course, as a company with a global footprint, we are watching these developments, such as tensions between the USA and China, very closely. The potential impact on the world economy must not be ignored. At the same time, we should not rush to overdramatize the situation. Global trade is still growing, albeit not as dynamically as it was at its peak. A similar picture emerges for global economic growth: although forecasts have been scaled back most recently, expected growth rates remain of a size that does not warrant a bleak outlook. It is very important for us as a company that we keep a close eye on uncertainties and prepare so that we can respond to changes quickly when needed.
And how exactly are you preparing for the changes in a global economic context?
Frank Appel: Of all our competitors, we have the broadest base in terms of geography, our business profile and our infrastructure. To put it in a nutshell: Deutsche Post DHL Group is the most global company in the world. This makes us more resilient to risks in individual countries or regions. In recent years, we have systematically enhanced our ability to react dynamically to changes in the environment, for example by managing our investments and capacities with flexibility. However, just like any other company with global operations, we are not, of course, immune to any deteriorating macroeconomic setting.
Are these global economic risk factors already having an effect on your business? Your DHL divisions in particular should be the first to feel them ...
Frank Appel: So far we have not seen any slowdown in world trade reflected in our figures, measured, for example, by the volumes that we transported in the third quarter via our international networks. This applies in particular to Express, but we are also satisfied with volume development at Global Forwarding, Freight, given its very strong performance in 2017. And these are the two divisions that are most closely correlated with the development of the global economy and the global flow of goods.
Frank Appel: Express is continuing its dynamic growth, particularly in its core product TDI (Time-Definite International). In the third quarter we increased volumes in this business once again by more than 5 per cent compared with the previous year. This way we realized economies of scale which - together with our strict yield management - were also reflected in earnings. As a result, the division's operating profit grew by round 10 per cent, despite negative currency effects, and the EBIT margin is also hitting high after high.
Air, ocean and road freight transport are the business of Global Forwarding, Freight. What is your assessment of the third quarter?
Frank Appel: In the freight business, we also continued the positive performance of the previous quarters. Our selective approach of focusing on high-margin business is paying off: we increased revenue by 4 per cent while growing operating profits by more than 50 per cent in the third quarter. We generated substantially higher gross margins in air freight, in particular. The freight division has improved its EBIT margin significantly to 2.9 per cent, almost regaining the profitability of previous years. The steady uptrend shows that our measures aimed at improving cost efficiency are bearing fruit. At the same time, we are making good progress with the rollout of our new transport management system, which will provide us with further efficiency gains. We are on track and are moving closer to our goals, step by step.
Frank Appel: Supply Chain also had a good third quarter. We raised operating earnings further, the EBIT margin improved to 4.7 per cent. This means that in contract logistics we are in the upper half of our medium-term target range of 4 to 5 per cent. Although reported revenue remains below the previous year following the sale of subsidiary Williams Lea Tag, the division has grown in organic terms. Only a few days ago, we entered into a strategic partnership with the leading premium logistics service provider S.F. Holding in China. Based on this agreement, we will receive an up-front payment of EUR 700 million as well as a partnership fee over the next ten years. In return, S.F. Holding will have access to our Group's best-in-class supply chain services and management expertise. In this way, we will continue to benefit from the strong growth in China's supply chain market.
In summary, the picture after the first nine months is a mixed one. What does this mean for the Group's full-year targets?
Frank Appel: In the first nine months of the year we worked hard to make Deutsche Post DHL Group even more efficient and to improve the competitiveness of all our divisions on a sustained basis. The fourth quarter, which is traditionally the busiest but also the most profitable for our company, will be fairly demanding for our employees, and I already want to thank them today for their hard work in the peak season. I am confident that we will reach our earnings targets, not only those for 2018 but also beyond. The measures initiated at PeP will already be showing marked positive effects next year. In this way we are laying the foundations for an increase in the Group's operating profit to more than EUR 5 billion by 2020.