Interview with Frank Appel on the Group's plan to restructure its U.S. Express business

Deutsche Post World Net, the world's leading transport and logistics company, today unveiled a plan to restructure its DHL U.S. Express business. The plan will lead to sustainable improvements in financial performance and provide a sound starting point for a more efficient and customer-oriented business in the future.

Under the plan, DHL U.S. Express will redesign the network to better match capacity with customer requirements and partner with UPS for airlift capacity on domestic and international Express products in North America. In an interview with DPWN News, Chief Executive Officer Frank Appel comments on the rationale behind the plan and the anticipated improvements.

In a nutshell - how would you characterize the plan that you unveiled today?

Appel: I would call it a realistic and pragmatic approach. We are focusing our strength and expertise on what our customers really want. They need us where they have the lion share of their business, namely in large U.S. cities and cross border. We will be able to significantly improve performance of our U.S. business just as we pledged in our capital markets program Roadmap to Value. At the same time the restructuring plan allows us to keep a significant footprint in the world's largest express market.

What are the main measures of the plan?

Appel: Well, first of all we are cutting down our infrastructure network in the U.S. by almost one-third in order to get rid of excess capacity. We will achieve that by reducing the number of locations that we currently do business from by more than one-third and combining them into larger ones. In terms of process improvements we will modernize our courier and sorting facilities, make changes to staffing plans and employ better route planning to avoid peaks in our operations. Secondly, we have agreed with UPS to work out an agreement whereby UPS will provide airlift capacity for our domestic and international express products within North America to us. Thirdly, we will reduce our overhead costs.

This is not the first time you are presenting a restructuring plan for the U.S. Express business. The break-even target was postponed more than once. Why is this plan different?

Appel: We are taking a totally different approach than in the past. While in the past management strived for an expansion of DHL's market share with the necessary costs attached to it, we are now looking at improving our bottom-line performance while at the same time maintaining service quality where it's needed. Our steps are more drastic and we are certain that this is the right way to achieve the anticipated improvements. Our team has evaluated all possible options over the past few months and put a tremendous amount of work into this plan, which we believe is the best-possible solution for customers, investors and employees.

Has the economic downturn in the U.S. led to a new sense of urgency in finding a solution? Has it put you under pressure to draft up a plan?

Appel: The downturn in the U.S. economy has definitely had a large impact on our operations, but we are not trying to suggest that it's the root of all of the challenges we've been facing in the U.S. Even before the downturn, when our U.S. business was showing great promise and steady improvements for an entire year, we were looking for ways to take costs out of the operation. The economic downturn caused us to accelerate that search and we now believe we have the right plan to proceed.

What can we expect in terms of job cuts?

Appel: The job cuts in our own U.S. operations are rather limited, with about 4 percent of our total U.S. workforce being affected. However, you have to keep in mind that we are working together with numerous suppliers in the U.S. and we can't comment on the possible impact our restructuring plan will have on their operations.

This sounds as if the whole plan is all about cutting and reducing on the back of your customers?

Appel: Not at all. As mentioned before it's about being where our customers need us most. We won't compromise our service quality by any means. Quite the contrary: Like shown with the recent Walgreen partnership, we will further expand our visibility and make it even easier for customers to get their express services at a good price. That's what we are good at and what we will expand further. The cuts will affect less than percent of our total shipping volume in the U.S.

What will be the bottom-line improvements and at which cost do they come?

Appel: The measures will result in costs savings of around $800 million in 2010 and around $1 billion in 2011 with corresponding improvements in EBIT. In terms of costs we expect to spend up to $2 billion to finance the restructuring plan. These charges will be tied to transition costs, contractual obligations and write-offs.

How much money are you currently losing in the U.S. and are you expecting to ever make a profit?

Appel: As we said before, we are not reporting EBIT figures on a regional level. However, since the situation in the U.S. is a special case and we want to prove that we're successfully implementing our plan, we can tell you that the EBIT loss amount to $1.3 billion this year, which, of course, is totally unacceptable. That's why we have presented a plan aimed at improving underlying EBIT by around $1 billion in 2011. However, it's part of our new realistic approach to accept the fact that we may be posting a limited loss in the future. While our goal is to be profitable in all of our operations, in certain situations such as the U.S. - where despite local challenges, the existence of the operation adds to the overall profitability - we know our customers and shareholders are better off with it than without it. Our U.S. operation plays an important roll in us maintaining our position as the world's No. 1 express shipper.

Obviously this is going to cost a lot of money - what will the impact be on the profit forecast for the Group in the coming years?

Appel: With the restructuring program and the economic uncertainties in the U.S., we are now foreseeing an underlying EBIT of around 400 million euros for our Corporate Division EXPRESS. That means we will adjust our overall guidance for underlying EBIT to 4.1 billion euros for 2008.

If this is only about losing less money and not about becoming profitable, why not pull out of the U.S. market altogether?

Appel: The U.S. market is an extremely important component of DHL's global network. In fact, almost half of total DHL shipments touch the U.S. and half of our 200 largest customers are based there. Offering a high performance range of products and services in that market guarantees the business success of other regions so it's part of our strategy to become First Choice for customers worldwide. Plus, our presence in the U.S. goes well beyond DHL Express. DHL is the No. 1 logistics company in the U.S. and the largest in the world.

What is your plan B if this one doesn't work out? How much time are you giving yourself?

Appel: Again, we are very confident of having found the right solution to going forward in the U.S. We will continue to be a competitive choice for customers and there is certainly room for a third player in that market. We aren't thinking in terms of alternatives at this point, this one will work. As for a timetable, I haven't given some arbitrary date to determine if we've turned the corner, but we'll all be reviewing our progress on a constant basis to ensure continuous improvements.

Are you concerned your diminished footprint in US will drive customers in Europe and Asia to turn to the competition when shipping to the States?

Appel: I'm confident that once our international customers understand exactly what we are doing in the United States, they'll know that we will continue to fulfill there shipping needs as we currently do and in fact for many of them our service will be even better.