"All divisions generated an operating profit"
Deutsche Post DHL Group performed well in the first quarter despite the Covid-19 pandemic. The Group increased revenue by 0.9% year-on-year to EUR 15.5 billion in the first quarter of 2020. Operating profit (EBIT) came in at EUR 592 million. The Group has thus confirmed the preliminary figures published in April. In an interview with DPDHL Group News, CFO Melanie Kreis explains the impact of the pandemic on the Group's five divisions and why the company navigates through the crisis in a robust and stable way.
Ms. Kreis, how would you assess the performance of Deutsche Post DHL Group in the first quarter against the backdrop of the coronavirus crisis?
Melanie Kreis: Although the year started out differently than planned, our Group nonetheless performed well in the first quarter. We continued growing despite the negative impact of the pandemic. All divisions generated an operating profit, which is not a given in times such as these. This demonstrates that the Group is fundamentally in strong shape. Our robust position is based on our broad geographic footprint and our comprehensive portfolio of logistics services. Furthermore, our financial position is solid.
Could you please provide some more details?
Melanie Kreis: From a CFO perspective, the top priority in a crisis is ensuring the company's liquidity. Deutsche Post DHL Group is in very good shape in this respect, which allows us to continue investing substantially in future growth. Operating cash flow was strong in the first quarter, having risen by nearly half a billion Euros compared with the previous year. Our available liquidity amounted to approximately EUR 2.6 billion at the end of March. We have also undrawn credit facilities worth several billions of euros. Thanks to our solid balance sheet, we are in a good position to overcome this crisis confidently.
As a logistics company, you are currently assisting both consumers and other companies in navigating the crisis...
Melanie Kreis: Right now, logistics services are more important than ever before in order to ensure supplies. Thanks to the tireless efforts of our employees all around the world, we are managing to keep up the global flow of goods. We transport personal protective equipment and medicines, for example, and we help deliver supplies to local populations. Our primary task, however, is to ensure that supply chains remain intact so that companies are able to continue producing, despite the major challenges involved. Especially in difficult times such as these, we see our role as standing by our customers' side as a strong, reliable partner - all over the world.
How did the divisions perform - starting with P&P Germany?
Melanie Kreis: The German post and parcel business performed overall well. The initiated pricing adjustments are taking hold. First-quarter revenue was up 3.8% year-on-year, and we managed to increase operating profit by even 47.1%. This shows the positive impact of the division's restructuring initiated in 2018, despite the substantial effects of the pandemic in March. Letter mail volumes registered a significant decline towards the end of the quarter, especially in dialogue marketing, i.e., advertising mail. In our parcel business, however, from the end of March onwards we experienced a boom similar to the Christmas season due to the closure of physical retail stores. While it helped volumes grow, it of course also increased our costs. In addition, we are using all available resources to protect the health and safety of our employees, which is also resulting in additional expenses. The total negative impact of Covid-19 on first-quarter EBIT at P&P is calculated at EUR 44 million.
How do things look at DHL Express?
Melanie Kreis: The crisis has shown just how robust the Express business model is. The division increased organic revenue by 4.6% in the first quarter. While passenger flights remained grounded - which eliminated a major portion of air freight capacity - we were able to take advantage of our own cargo fleet to ensure that urgently needed supplies reached their destinations quickly. Our core product, time-definite international, nonetheless reflected slower growth due to the pandemic. Although business in China registered a notable recovery in March, business in Europe and North America experienced a downward trend at the end of the quarter, similar to what we had seen in China in February. This development resulted in a low and imbalanced utilization of our network due to the crisis, which was the main reason for the operating profit falling below prior-year level in the Express division. Express nonetheless generated an operating margin of 9.5%, which is excellent for times of crisis.
For Global Forwarding, Freight the situation also appears challenging...
Melanie Kreis: The past few weeks have indeed presented a challenge for the entire freight industry, which has felt the impact of the pandemic significantly. Despite the severe shortage of available market capacity, DGFF revenue, however, only decreased by 4.1%. Here our colleagues have done an incredible job in ensuring that our customers continue to obtain freight capacity. Hence, we were able to increase gross profit in air freight despite the decline in revenue.
DHL Supply Chain's core activity is supply chain management and warehousing. How was business in the first quarter?
Melanie Kreis: The crisis has shown that Supply Chain runs a stable business model. The pandemic put our flexibility in warehouse logistics to the test. We succeeded in proving that we are able to respond to changing customer needs quickly, for example when a company is restarting its production with little lead time. Thanks to the fact that our customer portfolio is very well balanced in terms of sectors and regions, we increased organic revenue in the division by over 2% year-on-year. We did, however, note varying effects of Covid-19 in the different sectors in which our customers operate. For example, supply chains in the automotive and fashion industries in some regions came to a near standstill. Conversely, the food and health care sectors registered a surge in activity. After adjusting for the negative effects of the pandemic, we improved EBIT markedly in the first quarter compared with our prior-year earnings after adjusting for non-recurring items.
The pandemic caused a surge in online sales globally. How has that affected the newest DHL division, eCommerce Solutions?
Melanie Kreis: The division maintained its growth trajectory in the first quarter. Organic revenue excluding portfolio effects rose by 4.0%. Yet, performance varied rather widely in the different regions. The Netherlands and the Czech Republic, for example, reported double-digit growth rates, and the USA also reported good results. By contrast, we have seen significant, pandemic-related declines in India and Spain. In spite of the resulting drain on revenue, eCommerce Solutions made a positive contribution to earnings in the first quarter. Our restructuring efforts are bearing fruit, and the business is moving in the right direction.
Due to Covid-19 there is still little visibility about the further macroeconomic development. What are your expectations for the rest of the financial year?
Melanie Kreis: In the first quarter our business was less impacted by the pandemic than many others. It is nonetheless extremely difficult to predict the effects of the pandemic on the world economy or on our business operations over the coming months. That is why we withdrew our earnings guidance for 2020 on April 7. It is still too early to issue a reliable forecast for the rest of the year. As soon as a more reliable assessment is possible, we will communicate a new forecast. Our medium-term objective of Group EBIT of at least EUR 5.3 billion in 2022 is still valid.
You issued your EBIT target for 2022 in October 2019 as part of your new Strategy 2025. Despite all the crisis management - are you at all able to pursue the big strategic plan?
Melanie Kreis: First of all, our resilience as a company and our contribution to the economy and society worldwide are the best proof that we have the absolutely right strategy. We are focusing on our core logistics business, i.e. what we do best, and are thus fulfilling our corporate purpose. We are the backbone of the economy. We connect people and improve their lives. Our company addresses three dimensions in the context of Covid-19: Short-term crisis management and medium-term planning for the recovery phase, but also the long-term perspective. The latter clearly revolves around the priorities of Strategy 2025: We are focusing more than ever on our core logistics business. At the same time, we continue with our digitalization agenda, for example through the increased use of data analytics. And our commitment to sustainability and the associated goals is also in place.