"We are on track to meet our earnings targets for 2019 and 2020"
Deutsche Post DHL Group started the financial year 2019 with a good first quarter. Group revenue was up by 4.1% to EUR 15.4 billion. Operating profit improved by more than a quarter to EUR 1.2 billion thanks to positive one-off effects. In an interview with DPDHL Group News, CFO Melanie Kreis outlines the progress being made by the Group in the restructuring of the Post & Parcel business and the reasons she thinks Deutsche Post DHL Group is well on its way to meeting the ambitious goals of Strategy 2020.
Ms. Kreis, how did Deutsche Post DHL Group perform in the first quarter?
Melanie Kreis: We started out the year according to plan. With regards to revenue, all divisions grew further, and on an operating basis we continued to improve in many areas. The fundamental growth drivers of our businesses remain intact and unchanged. Ecommerce continues to boom, and global trade is still on the rise - however, at a slower pace, which is what we expected for 2019. That's why it's even more important for us to do our homework. We can see that the measures initiated to raise profitability in the German mail and parcel business, in particular, are taking effect. On the whole, the Group is therefore on track to meet its earnings targets for 2019 and 2020.
You mentioned the challenges in the core business in Germany. How is the restructuring of the division progressing?
Melanie Kreis: Very well. A year after we initiated a change of course, we can now say that the measures we started are showing effect. At the beginning of the year, we divided the former Post - eCommerce - Parcel division into two separate business units. The Group's core German business now operates as Post & Parcel Germany, or P&P for short. We combined our international parcel and e-commerce activities to form the new DHL eCommerce Solutions division. Good progress has been made in both divisions in the first quarter.
Let's take a closer look at P&P.
Melanie Kreis: The parcel business in Germany again grew dynamically in the first three months of the year - even though Easter falls into the second quarter this year, while it was in Q1 last year. Volumes expanded by 7.7%, with revenue up by even 9.5%. That indicates that the pricing adjustments implemented in the parcel business are showing results. On the other hand, we see - as we have for years now - structural declines in letter mail and dialog marketing volumes. This put a damper on topline growth at P&P, as expected.
Do the pricing adjustments in the parcel business also have a positive effect on the division's operating profit?
Melanie Kreis: The tailwind from the parcel business is helping to stabilize the operating profit in the division. Nonetheless, P&P's EBIT in the first quarter was well below that of the previous year. This is on the one hand due to a positive one-off effect of EUR 108 million in Q1 2018. Another reason is the delayed postage rate increase - this revenue is missing whilst the cost base increased, particularly staff costs. In connection with restructuring the division, we also decided to invest around EUR 150 million per year additionally in the productivity of our core business. These expenses have been booked proportionally in the first quarter, which limits comparability with the previous year. We are confident, however, that we will be able to take a huge step forward - supported by the pricing adjustments in the letter business - at P&P in the second half of the year. The final decision on the headroom for increases is expected at the end of May.
The optimization of P&P goes well beyond the issue of postal rates...
Melanie Kreis: Absolutely. We view our operations holistically and ask ourselves: What is the profitable core in a business, and how can we focus on strengthening it? At P&P, this core is the transportation, sorting and delivery of letters and parcels, which is why we invest specifically in these areas. We are purchasing 160 new sequence sorting machines for our letter business, for example. These automatically sort mail to streamline routes for mail carriers as much as possible. And that's just one example of how the team led by the new P&P CEO Tobias Meyer is preparing the division for the future.
DHL's youngest division is eCommerce Solutions. How did the first three months go there?
Melanie Kreis: At DHL eCommerce Solutions we consolidated the particularly highgrowth international parcel business and e-commerce activities of the former PeP division. The new division recorded around EUR 4 billion in revenue last year and employs a workforce of more than 36,000 worldwide. The task now is to forge an effective unit that can grow profitably out of many dynamic and promising business approaches. This includes critically taking stock of the situation and restructuring where necessary. In terms of revenue, eCommerce Solutions was our highest-growth division in the first quarter.
Let's take a look at the established DHL divisions, starting with Express. How is business there?
Melanie Kreis: DHL Express is and remains a success story. For many years now, the division has guaranteed stable contributions to earnings, high margins, and healthy cash flows. Nothing has changed in that sense in the first quarter, although the figures don't look very strong at first glance. Operating profit came in slightly below the previous year's figure, among others due to negative currency effects. The result also reflects slower economic growth and the decision made last year to wind down the business of transporting particularly heavy and bulky goods and in the future increasingly grow by focusing on smaller, lighter, and therefore higher-margin shipments. This will enable Express to even more efficiently utilize its unique global infrastructure and further improve its margin over the medium term. But the 11.4% margin generated in the first quarter is not bad, either!
Global Forwarding, Freight is also working to continually improve margins. How has the new year been for this division?
Melanie Kreis: Global Forwarding, Freight had a strong start to 2019. The division succeeded in increasing revenue within a weaker forwarding market environment. But more important still is the fact that our selective approach substantially improved profitability. The division's operating profit rose by more than 40% to EUR 100 million. We are on a good path of matching the profitability of leading competitors in the medium-term.
DHL Supply Chain had an unusually good first quarter, although this was also due to unusual circumstances. Can you give more details?
Melanie Kreis: At the end of 2018 we signed a wide-ranging agreement with S.F. Holding regarding our Supply Chain business in China. As a result of this strategic partnership, we were able to achieve a positive EBIT effect of EUR 426 million in the first quarter. We are using a portion of that amount to finance the planned restructuring of the Supply Chain business, particularly in the United Kingdom. This is the last region to undergo greater standardization as part of Strategy 2020, which will lead to larger efficiency gains. In net terms, the remaining positive contribution to earnings totals EUR 368 million. Even without this one-time effect, however, Supply Chain had a good first quarter with double-digit EBIT growth.
What does all of this mean for the 2019 forecast? After all, you intentionally gave a guidance with a broad range due to various uncertainties...
Melanie Kreis: ...and our guidance remains unchanged. For the current year, we anticipate an increase in Group EBIT to EUR 3.9 to 4.3 billion. We expect the second half year to see an increased earnings dynamic. Apart from the postage rate increase, we project positive effects from the early retirement program for civil servants in indirect functions and from increased investment in productivity. These effects will then intensify again in the coming year. As a result, we believe the Group is well on its way for EBIT to reach at least EUR 5 billion in 2020 as planned.