"Second-quarter results in line with expectations"

Deutsche Post DHL Group increased its revenue in the second quarter of 2018, with all four divisions posting tangible organic revenue growth. As expected, however, the Group was unable to match the record level of operating profit achieved in the prior-year period. In an interview with DPDHL Group News, CFO Melanie Kreis talks about the challenges in the Post - eCommerce - Parcel division and explains how the company still intends to achieve its 2020 earnings targets.

Chief Financial Officer Melanie Kreis

Ms. Kreis, how did Deutsche Post DHL Group perform in the second quarter?

Melanie Kreis: The results were in line with expectations. We grew revenue organically in all four divisions. All three DHL divisions performed well with regard to the earnings situation. However, we are still facing significant challenges in the Post - eCommerce - Parcel division. Due to the ongoing growth in parcel volumes in Germany, our costs have risen sharply. At the same time, mail volumes continue to decline structurally. This has diminished operating profit at PeP. The decline is, in turn, reflected in our Group's operating profit in the second quarter, which was below the prior-year level, as expected. We are now resolutely addressing the challenges at PeP with the measures initiated in June to guide the division back on track in the medium term. In total, with its four strong divisions, our company remains very well positioned to achieve profitable growth in the long term. We have therefore expressly confirmed our earnings forecast for 2020.

What exactly are the challenges facing PeP?

Melanie Kreis: The good news is that the challenges we are facing can be addressed by measures within our control - and will be addressed. We, definitely, do not have a market problem. The structure of our organization is too complicated in some areas and indirect costs have grown too rapidly. We must again focus more closely on the core business of PeP. Our aim is to set clearer priorities and concentrate strictly on adding value for our customers by determining which activities truly create value for them. To achieve this, we will design our standard processes more efficiently to ensure continuous improvement. Furthermore, in the past we have failed to make sufficient investments in the modernization of our operational procedures.

As mentioned, you presented an extensive package of measures in June. How far along are you with their implementation?

Melanie Kreis: In recent years we have worked hard to expand our leading market position in the German parcel business. We are now entering a new phase in which we will concentrate more intently on improving profitability and not primarily on further increasing our market share. Our program for PeP has three focus areas: first, improving productivity; second, reducing indirect costs; and third, improving yield management. Specifically this means that we invest more intensively in automation and digitalization in operations. We are increasing productivity on the last mile and intelligently optimizing the utilization of our network. We immediately initiated the corresponding operating expenditures and have already invested the first EUR 10 million of the announced yearly volume of EUR 150 million. At the same time, we will sustainably reduce the indirect cost base of PeP, mainly by means of an early retirement program focusing on civil servants in overhead areas. Last but not least, we are intensifying our focus on striking the right balance between growth and yield. Against the backdrop of higher transport and staff costs the annual increase in parcel prices for our business customers will be greater this year than in previous years. Our price increases will focus on bulky and heavy shipments in particular, since processing these items is more complex and expensive for us - a factor not adequately reflected in the price of these products at present. The new prices will be effective as at 1 January 2019, but they will apply to some customers from September 2018 onward. Having initiated this package of measures, we are very confident that we will soon be able to lead PeP back towards a path of sustainable profitable growth. However, some changes initially cost money. Indeed, the restructuring costs announced in June, only a small part of which we recognized in the second quarter, will significantly diminish earnings at PeP in the second half of the year.

Let's take a look at the DHL divisions. How would you rate the performance at Express?

Melanie Kreis: DHL Express again had a very successful quarter and is growing quickly and profitably for the long term. At the same time, our operations are becoming more and more efficient as we have been able to continually improve utilization of our global infrastructure. For example, Express generated an 8.4 percent increase in shipments per day for our most important product, international time-definite deliveries, compared with the prior-year period. Our operating margin improved to a record level of 12.8 percent. The foundation for this ongoing success is continuous investment in a strong infrastructure. Following the expansion of our central hubs in Brussels and Hong Kong, we are now modernizing our intercontinental aircraft fleet. We recently concluded an agreement to purchase 14 new Boeing 777 freighters. By deploying these state-of-the-art, fuel-efficient aircraft we are not only making our fleet more cost-effective and efficient, but we are also taking a crucial step toward achieving our 2050 zero-emissions goal.

How was the second quarter for Global Forwarding, Freight?

Melanie Kreis: Our freight division is definitely developing in the right direction. With our selective approach, we are consciously forgoing low-margin business. However, we still succeeded in raising divisional revenue compared with the prior-year period. In this regard, we were much more successful than in the preceding quarters at passing on the higher freight rates in the market to our customers. We are also seeing good progress in the implementation of our measures to improve cost efficiency. As a result, our operating profit climbed sharply by 57 percent in the second quarter. We are therefore on the right track in terms of returning the division to former profitability levels and making it even more successful in the future. We haven't yet reached our goal, but we've achieved the turnaround and are trending in the right direction.

You had to overcome a number of challenges at DHL Supply Chain at the beginning of the year. How did Supply Chain fare in the second quarter?

Melanie Kreis: Supply Chain had a solid second quarter. The sale of our UK subsidiary Williams Lea Tag, other less significant portfolio factors and negative currency effects led to a decline in revenue. Nonetheless, we saw an almost three percent increase in revenue after adjusting for these effects. Even more importantly, we also generated attractive new business of EUR 283 million in the second quarter and are making progress with our optimization program. The operating margin of this division was 4.0 percent in the second quarter, reaching the bottom end of the 4 to 5 percent corridor we are targeting for 2020.

With the second quarter, the current financial year is half over. What are your targets for the second half of the year?

Melanie Kreis: We are focusing above all on overcoming the challenges at PeP, but we will not neglect the profitable development of the DHL divisions. We have confirmed the targets for 2018 that we adjusted in June. Our earnings forecast for 2020 continues to be valid. We remain firmly convinced that we will reach our goal of increasing Group EBIT to more than EUR 5 billion by then, with the PeP division contributing about EUR 1.7 billion and DHL about EUR 3.7 billion to this target.

Interview with CFO Melanie Kreis