"We had a good second quarter"
Deutsche Post DHL Group maintained its profitable growth path in the second quarter of 2019. Group revenue was up 3.0% on the prior year, and operating profit (EBIT) improved by 2.9%. In an interview with DPDHL Group News, CFO Melanie Kreis explains why the company has raised the lower end of its guidance for the current financial year and why the logistics industry is offering attractive growth opportunities also beyond 2020.
Ms. Kreis, how would you assess the recent performance of Deutsche Post DHL Group?
Melanie Kreis: We had a good second quarter: All five divisions succeeded in increasing revenue and showing operating improvements. We are making step-by-step progress towards our 2019 targets. Six months into the current financial year, our operating profit has already reached EUR 1.9 billion. That's nearly half of our minimum target for 2019. Earnings will keep improving in the second half of the year, among others in light of our efforts to raise productivity at P&P as well as the postage rate increase. That's why we have raised the lower end of our guidance and expect Group EBIT to come in between EUR 4.0 (previously 3.9) billion and EUR 4.3 billion.
What makes you so optimistic - given the volatility in world trade?
Melanie Kreis: The declining momentum in world trade is not exactly a surprise given trade disputes and corresponding insecurities. This is also indicated by the latest DHL Global Trade Barometer results: When it comes to trade wars, there are no winners. We at Deutsche Post DHL Group are naturally not immune to a potential downturn, but our broad portfolio makes us quite robust. Our divisions depend on the economy to very different extents. For instance in our freight business, we feel the revenue effects of economic ups and downs relatively quickly whereas in warehouse logistics, i.e. our Supply Chain division, the business cycles are noticeable much later due to the long-term agreements we have in place. Apart from that, we have a number of internal options for increasing our profitability, even in a weaker environment.
Let's take a look at the divisions: Your optimism for 2019 is based mostly on your Post & Parcel Germany division. Why?
Melanie Kreis: We deliberately set a wide forecast range for P&P in our full-year forecast because there were a few uncertain factors at the beginning of the year. Our view is now much clearer. The new rates for our German mail business took effect on July 1. This gives us - and our customers - planning certainty for the coming years. In addition, our pricing measures in parcel are showing effect: Average revenue per parcel is increasing. Furthermore, we are seeing that our productivity improvement measures are beginning to show effects and that indirect costs are declining. That's why we expect a significant earnings impact in the second half. Not only that, but the Christmas season is traditionally the busiest time of year for P&P, when we generate the majority of our earnings. That's why we are now expecting EBIT to increase to between EUR 1.1 billion and EUR 1.3 billion at P&P in 2019.
You have not altered your forecast for the DHL divisions. How would you assess the performance of DHL Express?
Melanie Kreis: Our colleagues in Express have done well once again. We have continued to succeed in increasing volumes significantly despite the decision to limit heavy shipments in our network. In its core time-definite international business (TDI for short), Express now transports an average of more than a million shipments per day. This is reflected in our continually rising revenue and earnings. However, our second-quarter results were impacted by the reduction of heavy shipments and exchange effects. The operating margin nonetheless reached a very good 12.3%.
Due to the weaker market trend Global Forwarding, Freight has reported declining volumes in air freight. How do you view the situation here?
Melanie Kreis: Even though the economic parameters are not ideal - indeed the air freight market showed a weak development in Q2, we are making very good progress in the DGFF business. We expect to close the gap to the most profitable providers in the industry in the medium term. Structural measures such as closer integration between product and sales are having an effect, and we continue to make good progress in revamping our IT systems. Both of these areas have a positive and sustained impact on earnings.
You initiated a restructuring program in the Supply Chain division at the start of the year. What sort of progress have you made?
Melanie Kreis: The restructuring, especially in the UK, is the last piece of the puzzle in our strategic realignment of Supply Chain under John Gilbert. In the first quarter of 2019, we incorporated our Chinese Supply Chain activities into the S.F. Holding network. We use a portion of the proceeds from the transaction to position our business optimally for future success. Some of the expenses for this were recognized in the second quarter, which negatively impacted earnings. In terms of operations, however, the division continues to perform very well. Again the adjusted margin was in the corridor of 4-5 percent, targeted for 2020. When John Gilbert leaves the company at the end of September after 25 years of service, he will be handing over a streamlined, high-performance division to Oscar de Bok.
Your new DHL eCommerce Solutions division just got underway at the start of the year. How do you assess the division's recent performance?
Melanie Kreis: The performance of eCommerce Solutions reflects two opposing trends in the second quarter - growth and consolidation. On the revenue side, eCommerce Solutions was again our company's highest-growth division. At the same time, the division is in the process of creating the future shape of the business after taking stock of the current set-up. The restructuring expenses impacted earnings, which is why EBIT was negative as expected. Adjusted for these effects, earnings showed a positive development. Our focus for eCommerce Solutions is on long-term, profitable growth.
So you're saying that all in all, it was a good second quarter for Deutsche Post DHL Group. But we can't help noticing that free cash flow was significantly negative ...
Melanie Kreis: ...There's a simple reason for that: targeted investments in our core business to create the basis for long-term profits. In order to further improve our profitability and carbon footprint, we are purchasing 14 brand new Boeing 777 freight aircraft for Express. In the second quarter alone, we spent around EUR 750 million on these aircraft.
Enough said on the second quarter. Let us look at the future. How do you see the Group positioned?
Melanie Kreis: Our portfolio covers the whole range of logistics services. We transport, sort, warehouse and deliver just about anything, in any size - from the tiniest clinical tissue samples to pallets and containers and everything in between, including envelopes and parcels. And we do this as quickly as the customer likes. We hold leading positions in all of our markets. Our strong brands stand for an excellent customer promise. Plus we have the best and most dedicated employees in the industry. We are therefore not only well positioned to operate in today's complex markets but are also in an excellent position to shape the future of logistics.