Another weak performance by Deutsche Post DHL’s Global Forwarding, Freight division weighed upon otherwise solid first-quarter results published today, with DHL Express reporting a particularly strong EBIT performance, buoyed by positive currency effects and growth in TDI volumes.
Group revenue for January – March 2015 grew by 8.8% over the prior-year quarter to €14.8 billion, albeit boosted by positive currency effects. Adjusted for positive currency effects, revenue saw an organic increase of 2.1%.
DP DHL reported revenue improvements in all four divisions, but particularly highlighted the sustained growth in revenues and volumes in its international express business and its German parcel business. But the group’s operating profits fell by 1% in the first quarter to €720 million, primarily due to the weak performance registered by the Global Forwarding, Freight business and planned, non-recurring restructuring costs in the Supply Chain division.
DHL Express profits up 20%
DHL Express significantly increased both revenue and earnings in the first three months of the year. Reported revenue climbed by 12.5% in the first quarter to €3.2 billion, although adjusted for positive currency effects of €296 million, the increase amounted to 2.3%, held back by lower fuel surcharges in all regions resulting from the year-on-year drop in crude oil prices.
The division performed even better with respect to operating profit: EBIT rose by 20.3% to €332 million, reflecting “the positive effects of volume growth”. The profit margin also increased, rising to 10.2% in the first quarter compared with the prior-year figure of 9.6%, with “increased revenues and the higher operating profitability of our network in particular” contributing to this improvement.
DHL said the main driver of “the sustained positive trend” in the Express division – continuing the positive trend of last year – was further strong growth in the time-definite international (TDI) business, where first-quarter volumes rose by 7.1% compared with the prior-year period. Daily revenues in the first quarter of 2015 were up by 3.5 % and therefore significantly less than daily volumes – a difference attributed to the lower fuel surcharges. In the Time Definite Domestic (TDD) product line, daily volumes in the reporting period were up 5.3 %, while daily revenues remained at the prior-year level.
Express revenues in the Europe region increased by 5.4% to €1.427 billion in the first quarter, although the figure included positive currency effects of €25 million, which related mainly to business activities in Switzerland and the United Kingdom. Excluding these effects, revenue growth was 3.5%. In the TDI product line, daily revenues increased by 1.8%, while per-day TDI shipment volumes went up by 10.2%.
The Americas region recorded a 14.1% increase in revenue to €590 million, including positive currency effects of €83 million. Excluding these effects, revenue in the region declined by 1.9% in the first quarter. Compared with the prior-year period, 0.6% more shipments were sent each day in the TDI product line, while daily international shipment revenues increased by 6.3%.
In the Asia Pacific region, DHL Express recorded a 19.4% increase in revenue in the first quarter to €1.177 billion, but excluding positive currency effects of €170 million, the revenue increase was 2.1%. In the TDI product line, daily revenues and volumes grew by 3% and 5.4%, respectively.
Meanwhile, TDI volumes in the Middle East and Africa (MEA) region increased substantially. Revenue in the MEA region climbed by 15.5% to €254 million, although excluding positive currency effects of €34 million, revenue in this region remained at the prior-year level. Daily revenues in the TDI product line rose by 6.8%, as per-day volumes saw an increase of 12.4 %.
Commenting on the performance of the Express division, CFO Larry Rosen said: “Express was once again the stand-out performer, with double-digit growth in revenues – thanks in part to favourable currency effects – and a more than 20% increase in EBIT. The EBIT margin improved further over the prior-year period – to 10.2%.
“We continue to benefit from the fact that we have the best global network and are very well positioned in our Time Definite International product line. At the same time, we continue to invest in our network in order to further strengthen this position.”
But Rosen said the strong position of Express today “should also be considered within the context of possible future consolidation in the express market”, referring to the planned acquisition of TNT by rival FedEx. “While we are not unduly concerned, we will watch these developments closely and will capitalise on any short-term opportunities that arise by remaining absolutely focused on our customers,” he said.
Parcel revenues rise by 13.7%
Meanwhile, revenue in the group’s Post – eCommerce – Parcel division increased by 3.6% in the first quarter to €4.1 billion, of which €1.5 billion was attributable to the eCommerce – Parcel business, which continued to register “dynamic” growth to achieve an improvement of 13.7% over the prior year. The increase, including positive currency effects, reflected revenue growth of 25.8% in eCommerce, 12.1% in Parcel Germany and 4.8% in Parcel Europe.
“This positive trend demonstrates that Deutsche Post DHL Group continues to benefit from its successful positioning in the high-growth e-commerce, parcel market,” the company said. “Innovations such as parcel boxes for apartment buildings and the recently piloted car-drop delivery service continue to advance the group’s leading position in the market.”
In contrast to eCommerce – Parcel, revenue in the Post business decreased by 1.7% in the first quarter to €2.6 billion, once again illustrating the impact of structural change as the mail market shrinks.
Operating profit in the PeP division rose by 0.8% to €399 million, reflecting the higher revenues in eCommerce – Parcel and partially offset by lower Post volumes, higher staff and purchased goods and services costs, as well as expenses especially related to the international expansion of the Parcel business.
Freight profits slump
In contrast, market-share losses in both its air and ocean freight businesses contributed to worse-than-expected results in the group’s Global Forwarding, Freight division.
Describing a “still-challenging market environment”, DHL Global Forwarding, Freight reported a revenue increase of 7.6% to €3.8 billion, although adjusted for currency effects, revenue increased by just 2.7%. In contrast, the division’s operating profit experienced a sharp decline to €17 million in the first quarter, down almost two-thirds compared with the €49 million achieved in the first quarter of 2014.
DHL said this was due to “on-going margin pressure in the overall market, as well as direct and indirect costs related to the transformation programme. In the wake of the weak development, the new management of the division will intensively focus on improving the operating performance.
“In parallel, the results from the countries that have piloted the transformation programme, as well as the impact of the worldwide organizational alignment implemented as part of the transformation, will be reviewed in detail. Based on this review, the future implementation approach will be defined,” DHL said.
This “new management of the division” comes following the decision late last month to part company with the division’s former CEO, Roger Crook, who “stepped down with immediate effect, for personal reasons”. Although the company declined to give any further explanation for his departure, the poor performance by the group’s freight forwarding division in the run-up to his exit will increase speculation that his departure was at least in part for business reasons.
Pending the appointment of replacement for Crook, Deutsche Post DHL Group CEO Frank Appel has taken on the responsibilities in a dual role, although for the operational management of the DHL Global Forwarding business, Renato Chiavi, has been named interim CEO, while Amadou Diallo remains CEO Freight, responsible for the group’s Road and Rail Transport services. Chiavi previously led the Ocean and Air Freight business of DHL Danzas between 1995 and 2006.
Looking at the performance of the Global Forwarding business unit, revenue grew by 10.7 % to €2.791 billion, although excluding positive currency effects of €170 million, the increase was 4%. Gross profit, meanwhile, improved by 2.4 % to €587 million, although no figure was given for adjusted gross profit.
The division posted market-share losses in both its air and ocean freight businesses, with the company’s ocean freight volumes rising by just 2.3% in the first three months, while air freight volumes remained flat, at approximately the prior-year level (+0.3%), compared with global market growth of 4-5% in air and ocean freight.
DHL said air freight margins continued to be low compared with historical averages. “In light of the falling oil price, major customers engaged in aggressive competitive tendering in the second half of the prior year,” it said.
“Moreover, a number of new products were introduced to the consumer goods market. This caused transport capacity utilisation and rates to increase on the very busy routes from Asia.” Air freight revenue in the first quarter of 2015 grew by 11.9 %, while gross profit increased by just 0.5 %.
It said the 2.3 % rise in ocean freight volumes was “mainly a result of new business gains in the second half of 2014.” It continued: “Asia remains the largest growth engine. As in previous years, a short-term volume increase was again experienced just before the beginning of the Chinese New Year holiday. Ocean carriers continue to control capacity effectively.”
Ocean freight revenue grew by 12.2 % in the reporting period, but gross profit fell by 11.6 % “due to increased price competition”.
Meanwhile, the division’s industrial project business saw weaker performance compared with the prior-year quarter, with its gross profit declining by 7.7 % compared with the first quarter of the previous year.
Commenting on the performance of the division, CFO Larry Rosen said: “Our Global Forwarding, Freight division registered a weak performance in the first quarter against the backdrop of its ongoing, complex transformation. Despite the fact that the overall market environment is still challenging, we are naturally not satisfied with this development.
“The new management team will therefore be strongly focusing on improving the operating performance of the business. At the same time, there will be a thorough review of the transformation programme, in particular looking at the results from the pilot countries and the impact of the organisational alignment. This will allow us to carefully map out the right implementation approach and decide on our next steps.”
Revenue in the group’s Supply Chain division increased by 12.4% in the first quarter of the year to €3.9 billion, although adjusted for currency effects, revenues rose by just 0.8% over the prior-year period. DHL said the division was able to conclude new business contracts with a volume of €260 million (annualized), particularly in the Automotive, Consumer and Life Science & Healthcare sectors.
However, operating profits declined to €53 million in the first quarter, with “planned, non-recurring costs for the Supply Chain optimization programme chiefly responsible for the decrease”. DHL said the division “intends to take advantage of the optimization program to increase margins to 4% to 5% by 2020 through further standardization, greater efficiency and improved utilization of economies of scale.”
Commenting on the overall group results, CEO of Deutsche Post DHL Group Frank Appel, said: “We saw a moderate start to the year, as we expected. Our strategy, aimed at growth in e-commerce and the emerging markets, in particular, is progressing.
“At the same time, as we transition from Strategy 2015 to our new Strategy 2020, we are now consciously undertaking a number of specific measures. These measures will allow us to build a strong base to bring our strategic priorities forward.
“We are investing significantly to ensure that our four divisions are optimally positioned, even though this is having a temporary impact on our performance, as we previously discussed. Our overarching focus today is on the sustainable, profitable growth of our business.”
