"We continue to grow, even in uncertain economic times"
Following a good first half, Deutsche Post DHL Group, the world's leading mail and logistics company, continued its profitable growth trajectory in the third quarter of 2019. Revenue was up 4.7% year-on-year, and operating profit (EBIT) improved significantly to EUR 942 million. In an interview with DPDHL Group News, CFO Melanie Kreis explains how the Group manages to keep growing even in times of economic uncertainty, and how Deutsche Post DHL Group will be sharpening its focus on sustainable growth in its profitable core businesses in line with the Group's Strategy 2025.
Ms. Kreis, how did Deutsche Post DHL Group perform in the third quarter?
Melanie Kreis: We had a very good third quarter. Our business is going according to plan, and all divisions posted revenue growth. Growth was especially dynamic in the international express business and in the German parcel business, where we continue to benefit from the ongoing boom in e-commerce. We're particularly pleased that we succeeded in improving margins in all divisions compared with the previous year. This shows that our strategic measures are taking hold. Even in uncertain economic times, our growth trajectory remains intact.
You referred to the challenging environment. How is this impacting Deutsche Post DHL Group?
Melanie Kreis: Global uncertainty persists as there is still no clarity on Brexit and trade disputes remain unresolved. This negatively impacts the global economy and causes a deceleration in world trade growth. Like other companies, we are not immune to these developments. But: We benefit from the strength of our Group as the world's biggest, most globally positioned logistics provider. Our five divisions cover the entire logistics spectrum. And we operate in more than 220 countries and territories. This makes us more robust and resilient in comparison to other companies. We also have a number of internal measures in place, such as yield management or efficiency gains through new technologies, to ensure that we continue to grow even in difficult times. That's why we were able to confirm our earnings guidance today.
What makes you so confident?
Melanie Kreis: The third quarter again showed that our strategic measures are delivering results. We've already generated an operating profit of around EUR 2.9 billion after the first nine months. We anticipate a traditionally strong holiday season in the fourth quarter. Moreover, the non-recurring expenses we recognized in the fourth quarter of 2018 for restructuring in the German post and parcel business will not be incurred this year. That's why we're optimistic about 2019.
And after 2019?
Melanie Kreis: Our "Strategy 2025 - Delivering excellence in a digital world" puts us on course to continue our profitable growth in the years to come. In this context, we're systematically strengthening our core logistics businesses and stepping up the pace of the digital transformation in all divisions. We're confident that with these measures we can further improve the Group's profitability and thus secure our future outlook. We're projecting Group EBIT of more than EUR 5.0 billion in the coming year, and we plan to reach at least EUR 5.3 billion in 2022.
Let's talk about Post & Parcel Germany. How are things coming along there?
Melanie Kreis: The measures we've introduced to increase productivity and reduce indirect costs are taking hold. We're also seeing benefits on the price side in the form of higher average revenue per parcel. In the letter mail business, the postage rate increase that took effect on July 1 is helping to offset the ongoing structural decline in volumes. As expected, the positive development in the third quarter can also be seen in the figures: Compared with the third quarter of 2018 in which restructuring expenses significantly impacted the bottom line, P&P has now returned to generating solid earnings with EUR 304 million in Q3 2019. We're ensuring continued improvement going forward by making targeted investments in our core business, such as new sorting systems at our letter and parcel centers.
You're also investing heavily in the logistics infrastructure at DHL Express. How has business been in this division?
Melanie Kreis: Express had another very good quarter. Revenue was up 8.7%, and per-day volumes in the high-margin core business of international time-definite shipments rose by 5.9%. The division succeeded in translating the revenue improvement into an even greater rise of 11.0% in operating profit. And we continue to invest heavily in future growth, such as by renewing our aircraft fleet and expanding our hubs. For example, we recently announced an investment of EUR 131 million in our South Korean gateway.
Global uncertainty is having a particularly strong impact on Global Forwarding, Freight. How is it that this division was also able to increase its margin?
Melanie Kreis: The freight business has held up very well in a difficult market. Global Forwarding, Freight improved operating profit by 17.0%, even though revenue only rose slightly. The margin increased to 3.3%. However, the situation remains challenging due to economic headwinds - especially in air freight. Volumes are declining, and market freight rates are dropping. Here too, our internal initiatives aimed at generating growth even in a weak environment are having a beneficial effect.
How do things look with DHL Supply Chain?
Melanie Kreis: During the third quarter, Supply Chain maintained the upward trend seen in previous quarters. Despite the sale of our Chinese Supply Chain activities to S.F. Holding, divisional revenue was up on the prior year. This is above all a result of the division's continued strength in acquiring new business. We are also satisfied with Supply Chain's performance on the earnings side, which reflects the positive impact of our efforts in recent years to optimize and standardize its operations. The operating margin for the third quarter came to 4.8%, which was again at the upper end of the target corridor of 4.0% to 5.0% set for 2020.
Let's talk about eCommerce Solutions, the youngest of the DHL divisions.
Melanie Kreis: eCommerce Solutions also posted very encouraging results in the third quarter. The division increased revenue. With third-quarter EBIT of EUR 6 million, eCommerce Solutions made a positive contribution to Group profit for the first time. We expect the division to continue on a stable growth trajectory thanks to the sustained boom in e-commerce.
One item stands out in particular when looking at Group financial figures: cash flow, which improved significantly. Where did this unusually high influx of cash come from?
Melanie Kreis: Our strong free cash flow in Q3 is evidence of the Group's good operating performance. In the period from July to September we gained half a billion more euros than we spent in the third quarter, even though we stepped up our investment activities. Strong cash flow is a basic prerequisite for being able to invest in the future and pay dividends consistently. That's why we've placed even greater focus on cash flow in our Strategy 2025 and have for the first time given medium-term cash flow targets. Cumulative free cash flow is projected to be between EUR 4.5 billion and EUR 5.5 billion in the period from 2020 to 2022. We believe that we are also on the right track with respect to cash flow - not only because of the encouraging trend in the past quarter.