"Our growth trend continues"
Today, Deutsche Post DHL announced its results for the second quarter of 2012. Revenues increased compared with the same quarter last year, and the profitability of the Group further improved, adjusted for one-time effects. Both pillars of the Group continued their positive development, with the DHL unit remaining the company's growth driver. In an interview CFO Larry Rosen discusses the company's results for the second quarter of 2012, explains the one-time effects recorded during this period and comments on the Group's adjusted earnings guidance.
Mr. Rosen, the first six months of the year are over. How has the Group performed so far?
Larry Rosen: We are very satisfied with the company's performance during the first half of 2012. Despite the subdued economic climate, we were able to substantially improve our operating performance during the first six months of this year. Revenues rose by almost 6 percent, and EBIT increased moderately. The investments we have made both in the DHL divisions and the parcel business in Germany are paying off. We also continued to profit from our strong presence in the world's growth markets, particularly those in Asia. At the same time, revenues in the German parcel business grew by double digits. And we expect that the Group's business will continue to grow during the second half of the year.
It does not appear that the global economy is very supportive of the company's growth targets; there was no significant pick up during the second quarter. Has the economic climate impacted the company?
Larry Rosen: As a global company, we have the advantage of being able to offset an economic slowdown in one part of the world with growth in another. As a result, we were able to once again boost revenues in all of the company's divisions during the second quarter. Our DHL divisions are clearly profiting from our excellent position in Asia. And in the MAIL division, the previous quarter's trend continued: the moderate decline of the letter mail business could be more than offset by the planned double-digit revenue growth in the parcel business. All in all, we posted very good quarterly results.
Nevertheless, Group EBIT decreased during the second quarter. Why?
Larry Rosen: The Group's reported EBIT did indeed fall by nearly 3 percent compared with the previous year's period - even though we made further progress in all of our divisions during the second quarter. But this result has been anticipated. The primary explanation for the decrease is the VAT charge, which had a negative impact of EUR 181 million on our operating result. At the same time, we recorded a number of positive one-time effects during the quarter, which impacted the EBIT of our EXPRESS division in particular. These included the reversal of provisions that we had set up in 2008 as part of the restructuring of our business in the United States and the sale of the domestic express business in Australia and New Zealand which were not part of our core business. Together, these two items generated income of more than EUR 140 million. Even though these positive items could not completely offset the negative impact of the VAT payment, they certainly increased earnings in the EXPRESS division. Adjusted for all - both positive and negative - one-time effects, our Group's EBIT would have risen by 8 percent in the quarter. At DHL, it would have increased by 11 percent. And the MAIL division's operating earnings would have exceeded the previous year's level by 2 percent. In short, our growth trends remain firmly in place.
That sounds like strong underlying business performance. Which divisions delivered particularly good results?
Larry Rosen: We are very satisfied with the performance of all divisions. We are particularly pleased that our DHL divisions could continue to profit from our excellent market position in the world's growth markets, especially in Asia. This is particularly true for the EXPRESS division, where we have gained additional market share in all regions. And it is also true for our SUPPLY CHAIN business, where we succeeded in gaining new customers in Australia, Thailand and Indonesia. All of this demonstrates one thing very clearly: the investments that we have made in our global network in recent years, particularly those in Asia, are increasingly paying off. But I would like to emphasize that we will continue to make significant investments to further bolster our market position as we move forward. For example, we not only opened our new EXPRESS North Asia Hub in Shanghai in early July expanding the reach of our unparalleled network in the region. At almost the same time, we also launched operations at - and laid the foundation for - new, state-of-the-art hubs and distribution centers for our other two divisions in China.
At the close of the first quarter, you mentioned that you had seen some signs of slowing in the GLOBAL FORWARDING, FREIGHT division. Has this situation changed in recent months?
Larry Rosen: One thing is clear: the global economy remains volatile. This is evident in many areas. For example, our customers continue to move volumes from air freight to ocean freight. As a result, air freight volumes have slipped, primarily as a result of declining demand in the 'Technology' sector. However, we have made strong efforts to improve the division's efficiency and are taking a selective approach to tapping new markets - focusing on the profitability of the business we do instead of quantity. In addition, we are profiting from improved purchasing conditions in air freight. This has all led to an increase in our gross margin in all freight categories during the first half of the year. As a result, the GLOBAL FORWARDING, FREIGHT division's profitability is significantly improving.
The picture in the MAIL business appears not as rosy. The division's operating result has declined. Will you have to abandon your plans to stabilize the segment?
Larry Rosen: Not at all: the division's actual operating earnings are skewed by the significant VAT charge. As I mentioned earlier, if you adjust the result for this one-time effect, you will see a slight improvement year-over-year, even though we have incurred additional expenses in connection with the new collective wage agreement in Germany that took effect on April 1. On the one hand, the decline of the traditional letter business is progressing as expected, despite the fact that the past quarter had one fewer workday than last year. On the other hand, the growth momentum in the parcel business continues: we generated an increase of more than 12 percent in parcel volumes in the second quarter. We are continuing to benefit from the ongoing boom in online retailing, and we will be investing significantly in this area over the next couple of years. We believe that the future of the parcel business is making parcel deliveries easier and even more convenient for our customers. This is what we are working on and investing in.
Nonetheless, trouble is looming in the mail-order business: in July, Neckermann, a long-established mail-order company filed for bankruptcy. How will this impact earnings for the year?
Larry Rosen: We are of course carefully monitoring the situation and are reviewing its impact on us. We have, however, included the potential range of outcomes in our decision to leave the MAIL guidance unchanged.
You said it - your guidance for the MAIL division remains unchanged. In terms of the Group result, though, you seem more optimistic and have raised your earnings guidance. What makes you more confident than you were at the beginning of the year?
Larry Rosen: Our confidence has generally not changed since the beginning of the year. In addition to the positive performance turned in by all DHL divisions in the first half of the year and our expectation that the growth trend will continue throughout the second half of the year, the raised guidance primarily reflects the positive one-time effects that were recorded in our EXPRESS division during the second quarter. We currently expect EBIT at DHL to climb to around EUR 2 billion. That is EUR 100 million more than we forecast at the beginning of the year. And this would be EUR 300 million more than the three DHL divisions generated together last year. This is evidence of the strong progress these divisions have made in a challenging environment. For the Group as a whole this means that we now expect the operating result to reach between EUR 2.6 billion and EUR 2.7 billion this year.
What does the liquidity situation look like? For the first time since 2009, the Group is reporting a net debt position.
Larry Rosen: During the first six months of this year, our cash flow was affected by some fully anticipated items that led to this net debt position. As in past years, the annual pension contribution that the company makes in the first quarter to the pension fund for the company's civil servants and the dividend payment we make in the second quarter after the Annual General Meeting also impacted our liquidity in the first half of the current year. In addition, we also had to repay almost EUR 300 million in state aid to comply with the EU Commission's decision in this matter. All together, these effects had a negative impact on the Group's net liquidity totalling roughly EUR 1.7 billion. In the second half of the year, we expect that our underlying business will generate the usual seasonally strong cash flows. This will positively impact our liquidity position. Despite the factors I have just mentioned, the company still has a very solid balance sheet position. This is demonstrated, for instance, by the attractive terms of the two bonds we issued for a total of EUR 1.25 billion at the beginning of June. The high demand for the bonds underscores the reputation that Deutsche Post DHL enjoys in international capital markets and may be interpreted as a sign of appreciation of our reliable financial strategy.