"We're now beginning to reap the fruit of our strict cost-cutting measures"
Deutsche Post DHL announced its results for the first half of 2009 today.
Although difficult economic conditions are continuing to be felt, the Group has achieved some first successes in its cost-cutting efforts. Underlying EBIT in the second quarter totaled 257 million euros, a 37.8 percent decline compared with the previous year. Revenue fell 17.7 percent to 11.1 billion euros. CEO Frank Appel discussed the results in an interview with Deutsche Post DHL News.
Deutsche Post DHL News: Mr. Appel, EBIT plummeted in the second quarter of the year. Underlying EBIT fell almost 40 percent. Including non-recurring effects, EBIT even dropped 70 percent. Still, you claim that you are navigating the Group successfully trough the current economic crisis. What's the reason for your optimism?
Frank Appel: Of course, the global economic crisis had a direct impact on our business in the second quarter just as it did in the first. If the patient is sick, less blood is pumped through the circulatory system. But to continue with the metaphor: We started treatment early and are now seeing its effects. In both the Mail and Express Corporate Divisions, we made good progress in reducing costs.
Deutsche Post DHL News: The bottom-line figures seem contradictory. While net income after minorities declined 71 percent in the second quarter, the Group reported an increase of around 65 percent for the first half as a whole. How can you explain that?
Frank Appel: That's easy to explain. In the first quarter the valuation of our put options on shares in Deutsche Postbank AG had a positive effect on our financial result, boosting our net income. In the second quarter we saw the reverse effect because of a lower follow-up valuation of the put options. In addition to that, the poor business development also burdened profits in the second quarter.
Deutsche Post DHL News: In the first half of the year, Deutsche Post DHL completed the deal to sell its Postbank subsidiary. What effect does the sale have on Deutsche Post DHL earnings, and will stockholders profit from it as well?
Frank Appel: As a result of the agreement we negotiated with Deutsche Bank, we have realized a cash inflow of about 5 billion euros from the sale of the Postbank up to now. But the transaction will be recognized in income in three years, once the period for the transfer of the remaining Postbank shares expires. But the transaction is having a positive impact on our net income this year, which enables us to expect positive consolidated net income for the full year of 2009. As already mentioned, this positive effect is linked to the valuation of put options for Postbank shares, which will boost the financial result. In terms of the payment to shareholders: As a responsible manager, I need to ask for patience in light of continued uncertain economic developments. We hope we'll have a clearer picture in the fourth quarter.
Deutsche Post DHL News: You have tied your forecast to certain conditions. How save is your outlook?
Frank Appel: You're right, we're indeed careful in regard to our outlook. There are still many uncertainties, which is also reflected in the broad range of forecasts of the further development of the economic development, particularly for Germany and the Euro zone. That's why our forecast is built on the assumption that we won't see a substantial improvement of global trade in coming months. We've also taken into account that individual customers may file for insolvency or that we will see extended factory closures in individual sectors. Taking all those factors into account, we expect a full-year underlying EBIT of 1.2 billion euros for 2009.
Deutsche Post DHL News: Could you provide a few details about the cost-cutting program?
Frank Appel: Last fall, we said a part of our capital-market program Roadmap to Value would include the objective of lowering indirect costs - including administrative, travel and IT costs - by 1 billion euros through 2010 as part of the so-called IndEx program. Thanks to the fact that particularly in EXPRESS we're progressing faster than planned, we now expect to reach our target in the second quarter of 2010. Since the beginning of the program we have already cut 552 million euros in indirect costs on an annualized basis.
Deutsche Post DHL: Mr. Appel, Deutsche Post DHL is restructuring its global express business. What is the goal of these efforts?
Frank Appel: The focal point of the restructuring is to further strengthen the profitable business areas and to lower unnecessary costs, particularly in the business with time-critical deliveries. In this way, we can demonstrate our unwavering commitment to high service quality while simultaneously increasing profitability. In the United States, we completely ceased our domestic delivery services at the end of January. As a result, costs in the Express division are now significantly decreasing. By the fourth quarter, we will have reduced losses being made in the market by an annualized $400 million. We also restructured our express business outside the United States, concentrating in particular on countries in which the domestic express business was losing money. In addition, we have streamlined the structures and reduced the number of organizational units. As a result, administrative costs have dropped further.
Deutsche Post DHL News: The MAIL Corporate Division, traditionally a high-margin business for you, is also experiencing a drop in revenue. This has prompted you to start running a major program for MAIL that focuses on the future. How much leeway do you even have here?
Frank Appel: In the area of productivity improvement, for example through the installation of better equipment, the leeway is quite limited. As a result, there's no way of getting around an extension of working hours without a pay raise. We also have to put the brakes on wage increases. These measures are essential if we want to avoid being forced to take even more drastic steps in a few years. In addition, we have suspended overnight shipping by air and postponed IT projects. But controlling costs is just one part of the effort. We are also working intensely on products that respond to the needs of tomorrow's customers while simultaneously offering a level of reliability that only Deutsche Post can guarantee.
Deutsche Post DHL News: One of Deutsche Post's largest customers is the mail-order and department store group Arcandor. What impact will the company's bankruptcy have on Post business?
Frank Appel: It's true that Arcandor represents a significant share of the Deutsche Post customer portfolio. However, for a company like ours, which generates revenue of more than 50 billion euros a year, the bankruptcy of a major customer like Arcandor is not as great as it would be at a midsized company. But we also have 4,000 employees at our company who work just for the customer Arcandor. In addition, we manage the entire department-store and mail-order logistics for Karstadt and Quelle and have a shipping partnership with Quelle. As a consequence, we are also working closely with the companies Karstadt and Quelle as well as the bankruptcy administrator to continue to support Arcandor.
Deutsche Post DHL News: Did the bankruptcy also affect your figures for the first half of 2009?
Frank Appel: Yes. The negative effects from the Arcandor insolvency totaled around 40 million euros in the first half of the year.
Deutsche Post DHL News: In the first half of the year, you introduced your vision for the future, "Strategy 2015." Given the economic challenges it faces, does management have any time at all to work on the implementation of a long-term strategy?
Frank Appel: Strategy 2015 has three core objectives: to strengthen the two pillars of MAIL and LOGISTICS, to permanently anchor the values "Respect & Results" within our company and to make our services better, easier and more sustainable. If we vigorously implement the strategy's measures, we will succeed over the long run in fully tapping the latent potential of Deutsche Post DHL. Are we waiting until the crisis is over before we implement Strategy 2015? Of course not. Everything we've discussed here - IndEx, the restructuring in the Express Corporate Division and the plans for Deutsche Post and the MAIL Corporate Division - is part of Strategy 2015. You can think of this strategy as a structure consisting of two pillars that will support Deutsche Post DHL in the future. This also includes both lowering direct costs and achieving annual organic growth of 1 to 2 percentage points above the market average in all group divisions. Over the long run, profitability, cash conversion and return on capital should also range in the upper quarter of a group of similar competitors.