"We're going to take a major step forward in 2019"
Deutsche Post DHL Group, the world's leading mail and logistics company, continued to grow in the 2018 financial year. Adjusted for exchange rate and portfolio effects, consolidated revenue rose by 6.0 percent. The Group reached its target for the year as adjusted in June 2018 with operating profit of EUR 3.2 billion. In an interview with DPDHL Group News, CEO Frank Appel explains why the Group is not only well positioned to reach the goals set in Strategy 2020, but also on a path of further profitable growth beyond 2020.
Mr. Appel, how did Deutsche Post DHL Group perform overall in 2018?
Frank Appel: Last year was a challenging one for Deutsche Post DHL Group but, all in all, we were able to bring 2018 to a successful close. After another strong fourth quarter, we reached our earnings targets as adjusted in June. With regards to revenue, all four divisions grew organically. That means that our fundamental growth drivers are intact. E-commerce is booming, and global trade continues to expand, which benefits the DHL divisions in particular. In the German Post and Parcel business, we took the necessary steps for securing the division's profitability in the long run, even though this has a negative impact on earnings in the short term. We thus set the stage not only for reaching targets for 2020, but also for continuing to grow profitably beyond 2020.
DHL Express made the largest contribution to the Group's operating profit. How was the year for this division?
Frank Appel: Express again had a very successful year. Adjusted for exchange rate effects, revenue and operating profit were up by double-digit percentages. In 2018, we saw another high point in a series of record-setting years at Express under the leadership of Ken Allen. It's not least due to his efforts that the division is now the global leader in the express services industry. We continue to see robust growth most of all in the international time-definite (TDI) delivery business. This has enabled us to use the capacity of our unique global Express infrastructure even more efficiently and further boost profitability. With an operating margin of 12.9 percent in the fourth quarter, we are also number one in terms of profitability in our market. I am very pleased that we were able to appoint John Pearson, an experienced and passionate express manager, as the new CEO of the division who has worked closely with Ken Allen for many years. So, the conditions are optimal for seamlessly continuing this successful trajectory.
Global Forwarding, Freight also reports strong earnings. What's your assessment of this division's performance?
Frank Appel: Global Forwarding, Freight saw the greatest improvement in earnings year over year - an increase of nearly 50 percent. And this despite the fact that the volume of ocean and air freight declined. That underlines that our selective approach has proven to be correct. We concentrate on the high-margin business, which has enabled us to continually grow our EBIT margin since the division's turnaround in 2015. Other contributing factors are the rollout of our new IT systems and the cost-cutting programs, which are both proceeding well. We are therefore on the right track to return the division to its former earnings position and, over time, to catch up with the profitability of leading competitors.
Let's take a look at DHL Supply Chain. This division is the world leader in contract logistics. What is your analysis?
Frank Appel: Supply Chain also had a good year, even if the figures appear to have declined at first glance. We shed non-core business with the sale of our subsidiary Williams Lea Tag. Adjusted for portfolio and exchange rate effects, Supply Chain also continued to grow. We see major potential for outsourcing supply chain solutions now and in the future. After all, automation and digitalization can be catalysts for enormous efficiency improvements in this segment. In our warehouses, we increasingly use drones as well as robots. Our customers are latching on to this trend, and this is reflected in our strong pipeline of new business: In 2018, we secured additional contracts totaling EUR 1.3 billion.
So, developments were generally positive in the DHL divisions. In contrast, internal challenges were a factor in the Post - eCommerce - Parcel division, known as PeP, which operated in its previous structure up to the end of 2018. Why?
Frank Appel: For years now, the Post and Parcel business has been going through a fundamental transformation. Volumes in the letter business have been declining steadily, whereas the e-commerce boom has led to very dynamic growth in parcel delivery. Both trends necessitate continual adaptation of structures as well as investments in new technologies. In the course of the past year, we determined that we had not been doing enough in this regard. For this reason, we have consistently been taking measures since the summer. We took steps to future-proof the structures in the Post and Parcel business and position the business for long-term profitable growth. This includes three points in particular: one, improved yield management; two, investments in boosting productivity; three, lowering our indirect costs.
How far along are you with these measures?
Frank Appel: We are making good progress and are fully on track. Most of these initiatives are now underway, and the expected expenses were recognized as planned in the past financial year. In terms of prices, we have already been able to implement adjustments in the parcel business. The framework for increases in letter postage prices are determined by the Bundesnetzagentur, as the regulatory authority. This process is still ongoing. We are increasingly investing in new sorting equipment to improve productivity. And we are also making brisk progress when it comes to improving cost structures. Our offer of early retirement to civil servants working in indirect functions has been very well received. In addition, we completed the announced split of PeP at the end of the year. The new Post & Paket Deutschland (P&P) division will now be able to concentrate fully on completing the restructuring process and, in its new structure, increasing profitability.
You recently announced that delivery quality in the German P&P business will be improved further. What plans do you have exactly?
Frank Appel: We will use the annual investment budget of up to EUR 150 million announced last year for staff, further automation, and expanding post and parcel infrastructure. In this context, we plan to create at least 5,000 new jobs in this segment. We also plan to add 500 new partner-operated retail outlets and 1,000 additional Packstations to our network. In addition, we are opening a new, modern parcel center in Bochum this year, and just a few days ago, we broke ground on a parcel center in Ludwigsfelde in the state of Brandenburg. Both can process up to 50,000 parcels per hour.
Also new as of January 1 is the DHL eCommerce Solutions division, which consolidates international parcel and e-commerce activities. What are your plans for this division?
Frank Appel: E-commerce logistics is a highly attractive growth market both in Europe and worldwide. By establishing this new division, we aim to more effectively unlock the enormous opportunities in this field. And Ken Allen is exactly the right leader for the job. At Express, he already put into place top-notch processes and steered the division onto a unique path of highly profitable growth. We want to replicate this success in the international e-commerce business. To this end, we will pursue a global approach to customers and solutions going forward, while at the same time reinforcing the autonomy of the country organizations with focused support from headquarters. However, this will be preceded by a critical assessment of the current situation in this division in view of the fact that we have tried out and launched many new initiatives in e-commerce logistics in recent years. As in the case of P&P, we will focus more intently on the businesses and regions in which we see not only substantial growth opportunities, but also considerable profit potential in the medium term.
After a relatively long growth phase, many economists, business leaders and politicians see clear signs of a downturn in the global economy. What effects will that have on Deutsche Post DHL Group's business?
Frank Appel: We observe economic developments around the world very closely. To date, however, we have not seen any signs of a noticeable slowdown on the horizon. And according to our assessment, the global economy will continue to grow this year, although at a somewhat slower pace. In view of heightened geopolitical insecurities, this comes as no surprise. However, our now five divisions operate in very different markets and naturally also in a wide range of regions. In addition, some operations such as warehouse logistics and the parcel business in Germany are not very cyclical. This broad base of business gives our Group a balanced profile and makes us more resilient in the face of economic volatility.
Against this backdrop, what goals have you set for the current financial year?
Frank Appel: In 2019, we will make major strides and greatly improve our positioning in the German Post and Parcel business. However, the initiatives we have introduced are focused upon long-term success, so it will take several months until the progress we have made is reflected in our financials. In the DHL divisions, we anticipate further profitable growth. Overall, we forecast Group EBIT between EUR 3.9 billion and EUR 4.3 billion for the current financial year. We are therefore taking aim, as planned, at the EUR 5.0 billion mark by 2020.
You are heading towards the closure of Strategy 2020. When will you give an insight into the path beyond?
Frank Appel: First of all, our efforts are focused on implementing Strategy 2020 and reaching the targets we set in that context. We want to sustainably raise Deutsche Post DHL Group's operating profit to at least EUR 5.0 billion, and from there, reach for new heights after 2020. In parallel, preparations are naturally underway for a strategy update, which we will give in autumn this year.