Deutsche Post DHL today promised better profits next year after third quarter operating profits slumped by 71% and net profits by 89% due to massive financial charges over its failed freight forwarding IT transformation which will also hit full-year results heavily.
The impact of the mail strike in Germany and diverse investment costs also impacted on results for July – September 2015, outweighing strong express and parcel results and a good performance by DHL Supply Chain.
DP DHL group revenues increased by only 3% to €14,424 million in the third quarter while operating profits dropped 71% to €197 million and net profits declined by 89.5% to €49 million. The group recorded high one-off charges of €345 million related to the scrapped new freight forwarding system as well as €81 million worth of charges for diverse legal and regulatory issues.
As already announced on October 28, the German postal and logistics group now predicts operating profits of “at least €2.4 billion” in 2015, down from the original forecast of between €2.95 – 3.1 billion. But it expects to stage a comeback next year with unchanged guidance for EBIT of €3.4 – 3.7 billion due to a mix of organic growth and much lower charges.
“2015 is a transition year from our Strategy 2015 to Strategy 2020. We are working systematically to position each of our business divisions optimally and to achieve the long-term targets projected in Strategy 2020. We have recorded a number of one-off effects, which will de-risk and strengthen our ability to meet or exceed those targets. We expect that the benefits will begin to materialise already in 2016,” stated CEO Frank Appel.
Speaking at the Q3 press conference in Bonn, he said: “We are very confident that we will reach our targets next year.” He was also optimistic about Q4 prospects with the world economy “in a better position than last year” and “very good” Christmas business likely in Germany. “We are cautiously optimistic for Q4 and positive about business in Germany,” he commented.
DP DHL is abandoning an over-ambitious effort to transform the IT systems in the Global Forwarding division into a single worldwide system after major problems in various pilot schemes. “We thought it was manageable but we saw with the pilot schemes that it would not work,” Appel admitted. “Now we have a detailed plan that we will work on in the next few years.”
In future, DHL Global Forwarding will follow a “best-of-breed” policy of combining existing and diverse IT systems instead of a “one big bang” approach, Appel said. In addition, the division is introducing ‘lean empowerment’ giving station managers more local responsibility again. He admitted that the forwarding business had inevitably lost customers but stressed DGF had also separated from other customers under a selective approach of not bidding for business at low prices.
The CEO, who is currently also running the DGF division, stressed that “we can start to see the turnaround” with an improving performance and reiterated “we still believe in the long-term targets”. He underlined: “Global Forwarding will remain a strategic element in our business in the future.”
In Q3, DHL Global Forwarding saw a 13% drop in air freight tonnage and 1.4% fall in ocean freight volumes in the third quarter but higher gross profits per ton and per TEU. Its revenues dropped 5.7% to €3,587 million and it reported a loss of €337 million.
In contrast, DHL Express maintained its strong growth path in the third quarter. Revenues increased by 6.9% to €3,328 million while profits improved by 19.3% to €364 million, pushing the margin up to 10.9% from 9.8% one year earlier. Profits were supported by an €82 million positive write-up of assets in the Americas region, in particular the value of the Cincinnati air hub.
TDI shipments per day were up by 9.4% and revenues by per day 4.7% in revenue terms.
Revenue growth was lower than volume growth due to lower fuel surcharges, as in Q1 and Q2, the company explained. Europe (+14.9%) led the TDI volume growth ahead of the Middle East and Africa (+9.5%) and Asia Pacific (+6.9%) while Americas volumes declined by 0.7% due to the loss of a major customer.
In response to a CEP-Research question about the European Commission’s effective go-ahead for FedEx’s takeover of TNT, Appel said this “did not surprise us” but emphasised that the company “can live with both scenarios”.
The Post – eCommerce – Parcel (PeP) division increased Q3 revenues by 2% to €3,805 million but profits dropped by 50.7% to €142 million due to investments, a pay increase, the impact of the postal strike in Germany and a €42 million provision for an increase in expected payments for federal administration of civil servant pensions. Mail Comunication revenues declined by 2.4% to €1,529 million due to a 4.7% fall in volumes which was partly offset by higher prices.
The parcel business remained a growth driver with revenues up by 9.7% to €1.5 billion. DHL Parcel Germany increased revenues by 7% to €1,005 million while volumes went up by 6.2% to 257 million.
Appel described Parcel Germany as “a success story” with slightly higher average prices in Q3 and average growth of 8% over the last five years which was ahead of the 5-7% long-term growth expectations. “We have won market share,” he said, underlining that the higher prices showed that “we are not making any price concessions. We are not buying market share.”
DHL Parcel Europe, which increased Q3 revenue by 8.4% to €181 million, is now active in seven countries following the launch in Austria earlier this year. Appel said Austria “has started well and we will see how it goes over Christmas”.
CFO Larry Rosen said DHL is investing “a mid-double-digit million euro sum” in expansion of the European and overseas parcel business, although investment needs were limited as many of the companies were existing businesses transferred from DHL Express. DHL eCommerce, which is active outside Europe, increased revenues by 21% to €301 million in the third quarter.
Asked by CEP-Research about Amazon’s expansion of its own delivery services in various markets, the DP DHL chief said the e-commerce giant “has the right to try out different things itself” but emphasised: “Amazon will continue to work with us. We believe quality is the important thing for large customers. We still see Amazon as an important partner and customer.”
Meanwhile, DHL Supply Chain increased Q3 revenues by 9.4% to €4 billion, which was 3.2% over the prior year period excluding currency effects. This growth was mainly due to new contract wins and higher volumes in developed markets. Despite a strict, selective focus on profitable new contracts, the division was able to secure new contracts totalling €262 million (annualized) in the third quarter, in particular in the strong growth sectors ‘Retail’, ‘Consumer’ and ‘Automotive’. Operating earnings dropped 8.2% to €101 million, mostly due to €31 million worth of restructuring costs.
