Deutsche Post DHL’s second-quarter operating profits slumped by 18% and net profits by 29% due to €100 million worth of lost profits caused by the recent postal strike as well as by freight forwarding restructuring costs, forcing the group to downscale its full-year 2015 financial guidance.
The combined financial impact outweighed a further rise in DHL Express profits to a record 10.9% margin level and continued parcel growth fuelled by e-commerce in Germany, Europe and overseas.
DP DHL’s group EBIT dropped by 18.1% to €537 million in the April – June 2015 quarter and net profit was down 29.3% at €326 million. Group revenue, including positive currency effects, grew by 7.3% to €14.7 billion. Adjusted for these effects, organic revenue was only 0.6% higher, with growth held back by declines in the Post segment, mainly due to the strike action, as well as lower fuel surcharges in the DHL divisions.
To reflect the one-off earnings impact of €100 million from the postal strike, Deutsche Post DHL Group has adjusted its 2015 guidance downwards, with EBIT for the full year now expected to reach between €2.95 billion and €3.1 billion. The previous forecast had been for Group EBIT between €3.05 billion and €3.2 billion. PeP is now expected to generate operating earnings of at least €1.2 billion in 2015, while the forecast of €2.1 billion to €2.25 billion in EBIT for the DHL divisions remains unchanged.
“After the successful execution of Strategy 2015, the current year represents a year of transition. In the second quarter we worked very hard and took important steps towards the successful implementation of our Strategy 2020. With that, we want to ensure the long-term, profitable growth of the Group. To achieve this, we have recorded some short-term impact on our results. At the same time, we are convinced that these measures will contribute to accelerated earnings growth in the next year and enable us to achieve all our targets set for 2016 and beyond,” stated Frank Appel, CEO, Deutsche Post DHL Group.
Postal profits slump on strike impact despite parcel growth
At the Post – eCommerce – Parcel division, Q2 revenues increased by a moderate 1.9% to €3.7 billion. Revenues in the Post unit contracted by 3.8% to €2.3 billion reflecting an overall 9.8% volume decline in Mail Communication (-5.3%) and Dialog Marketing (-12.8%), which was worsened by the recent strikes. Price increases only partially offset the volume decline.
In contrast, the eCommerce – Parcel units increased revenues by 12.2% to nearly €1.46 billion thanks to further dynamic growth. DHL Parcel Germany’s revenues rose by 9.3% to €990 million on an 8.1% increase in volumes to 255 million parcels.
However, CFO Larry Rosen told analysts on a Q2 results call that the company probably lost “a couple of percent” in parcel growth due to the postal strike in view of its 11% growth in the first quarter. But he stressed the strike impact on customers had been minimised due to good preparations and the commitment of non-striking employees.
DHL Parcel Europe increased revenues by 8.6% to €177 million while DHL eCommerce grew by 26.3% to €293 million (including substantial currency effects).
The PeP division’s Q2 operating earnings slumped by 60.3% to €75 million from last year’s €189 million, mainly due to the one-off impact of €100 million in lost revenues and increased costs from the postal strikes, as well as investments in the international expansion of the eCommerce business, the company explained.
DHL Express hits 10.9% profit margin
DHL Express again performed strongly in the second quarter. Revenue climbed by 11.8% to €3.5 billion. Adjusted for currency effects, the increase amounted to 2.7%, held back by lower fuel surcharges. Once again, the main driver was further strong growth in the TDI business, where second-quarter shipments per day rose by 8.6% compared with the prior-year period. Express operating profits rose by 13.6% to €376 million, mostly attributable to profitable volume growth, which also saw the EBIT margin increase by 20 basis points to a historical record high for the division of 10.9%.
At a regional level, European daily international volumes were 14.4% higher in the second quarter while revenues were up by 5.8%. In the Americas, Q2 daily volumes dropped by 2.4% but revenues were 6% higher, while Asia Pacific daily volumes increased by 6.1% and revenues were stable.
Rosen told analysts that the express revenue growth was “significantly ahead of the market”. In response to questions about express yields, he said the slower revenue growth compared to volumes was “almost entirely due to relatively low fuel surcharges”. Underlying yields were stable, reflecting the product mix effect rather than any pricing effect. DHL Express had slightly higher revenue per shipment and slightly lower revenues per kg, reflecting the ongoing trend to heavier shipments, he explained.
He also highlighted the ongoing investments in new express facilities around the world, with Q2 Capex of €154 million compared to €85 million the year before. “Given the very strong volume performance, (bottlenecks) could develop if we were not doing these investments. We plan to stay one step ahead,” he told analysts.
Turnaround programme for Global Forwarding, Freight
Meanwhile, a turnaround programme has been launched at the troubled Global Forwarding, Freight division which has been hit by major problems in its ambitious IT modernisation over the last year. DDF’s revenues increased by 3.8% to €3.8 billion in the second quarter but adjusted for currency effects this was a 1.5% drop. This mainly reflects lower air freight volumes resulting from a stronger focus on margin improvements within a weak overall market environment.
The division’s operating profit experienced a sharp decline from €102 million in the prior year period to €40 million in the second quarter of 2015. This reflects a number of factors: the turnaround programme, including comprehensive restructuring measures that the division is undertaking and ongoing transformation costs, as well as continued margin pressure in the overall market. A positive one-off effect of €99 million from the partial divestiture of the Group´s stake in the Chinese logistics company Sinotrans was mostly utilized to support these restructuring initiatives.
DP DHL underlined that the new divisional management is focusing on improving the operating performance and has already introduced a number of changes to structure and processes within the division to address this goal. This includes, for example, giving the management of individual countries more autonomy and enabling a renewed strong focus on customers. Measures have already been initiated to improve the division’s cost structure and service quality. The future of the transformation programme will be defined in the coming months, Rosen confirmed.
Supply Chain optimisation programme accelerated
Revenue in the Supply Chain division increased by 11.8% to €4 billion in the second quarter, which was a 0.7% rise adjusted for currency effects. Despite its more selective approach with regards to the profitability of new contracts, the division was able to win new business contracts with a volume of €266 million (annualized), particularly in the Technology, Consumer and Life Science & Healthcare sectors.
The division’s operating profit rose by 9.2 % to €119 million. Higher positive effects from real estate-related transactions (€53 million) enabled an acceleration of its restructuring initiative, with non-recurring costs of €55 million in the second quarter of 2015. The division intends to take advantage of the optimization program to drive further standardization, greater efficiency and improved utilization of economies of scale in order to increase its operating margin to 4% to 5% by 2020.
Discussing DP DHL’s views on current economic trends, Rosen said the group had seen a ‘mild slowdown’ in China which “we can feel in the express and forwarding businesses” but he emphasised that Chinese economic growth of about 7% was still much stronger than in Europe, with about 1.5%, and the USA, with about 2.5%.
He reaffirmed DP DHL’s goal of increasing group revenues from emerging markets to 30% by 2020, adding that “we clearly have to take some measures” such as investments to achieve this goal. “Long-term we think the emerging markets will be the most attractive markets for the future.”
Apart from the revised financial guidance for 2015, DP DHL also reaffirmed its forecasts for 2016 and beyond. For 2016, the group expects a rise in EBIT to between €3.4 billion and €3.7 billion. The PeP division is expected to contribute more than €1.3 billion to the 2016 target and the DHL divisions between €2.45 billion and €2.75 billion. “The one-time nature of the strike-related effects incurred in the current year and the expected positive impact of structural improvements undertaken within the individual divisions should drive a more dynamic earnings growth trend in 2016,” the company said.
Deutsche Post DHL Group continues to forecast that operating profit will increase by an average of more than 8% annually during the period from 2013 to 2020 (CAGR). The DHL divisions are expected to contribute to the improvement with average EBIT growth of 10% per year. At PeP, operating profit is expected to increase by an average of around 3% per year.
