Deutsche Post DHL plays down German parcel slowdown

Deutsche Post DHL (DPDHL) has played down the significance of a marked slowdown in its parcel business Germany in the first quarter of the year, pointing to ongoing 'normalisation' in the B2C segment and very tough COVID lockdown-driven comparisons with the same period last year.

Asked at a conference call yesterday to put some colour on a volume decline of 19% and to what degree this reflected e-commerce market developments and the impact of Amazon delivering more parcels itself and having less reliance on third-party carriers, Group CFO, Melanie Kreis, replied:

“Obviously, there is an impact from Amazon in here, but also excluding Amazon, there has been a drop in parcel volumes of a significant order of magnitude in Q1. Ths was anticipated because Q1 ‘21 volumes were at an extraordinary high level in the lockdown situation in Germany. For me, the important thing is that when you compare now with Q1 2019,  there is 19% growth and when you take out the Amazon development, the growth is actually even more significant. So that clearly points to the structural acceleration that has happened. And the positive thing is, with the net 19% growth over the three years, is that we are really able to digest the Amazon in-sourcing and the share of Amazon is now below 5% in terms of Post & Parcel (P&P) revenue overall.

“I still think we'll have this double-digit decline in Q2 but I would say it shouldn’t be worse than what we have now. The fundamental thing (to take into account) is that we have moved forward in terms of e-commerce penetration to a position which we would normally only have reached two to three years from now.”

Kreis underlined that is too early to talk about fundamental consumer sentiment in Germany, but there had been some apparent caution in spending during the first weeks of the war in Ukraine and parcel volumes remain quite volatile. “As we head towards the summer and the more normal H2 comparison base, we'll see how the volume pattern will really play out.

“Before then will probably be the toughest period, where we will see the normalization against the very high comparisons from ‘21. And then, in the second half of the year,  it will also be very interesting to see what will happen in the market. Everybody is obviously feeling the inflation from fuel, transportation costs and so on. But on top of that, there is going to be the increase in the minimum wage (in Germany) at the end of the third quarter, which is going to put significant additional cost pressures on competitors. This may give us some more opportunity in the market. So a tough H1 with potentially some more normalization and opportunities in the second half of the year.”

Express outlook

Quizzed about the decline in the margin in Express between Q4  last year and Q1 '22 and what the outlook was for the current quarter,  Kreis said: “I think Q1 was really a bit of a very special quarter with lots of moving parts. We've talked about the very strong fuel increase and the time lag in the fuel surcharge, which already gave us, a mid-single-digit headwind on EBIT. We had the Russia impairment going in there. We only increased the emergency service surcharge late in the quarter.

“So I think there were, on top of the usual seasonality, a number of factors coming together. So I would not overinterpret this development on the margin side. Given how much movement there was,  it was a good quarter and what we said in March, that we fundamentally want to grow absolute EBIT and hold the EBIT margin around the 17% mark, is still the aim.”

Responding to a question on volume trends in  Express in the second quarter, amid increasing signs of economic deceleration, especially on the consumer side and perhaps more significantly, the lockdowns in China, Kreis replied:

“What we saw in March was the impact of the lockdowns in Southern China, Shenzhen and also Hong Kong, where we have our Central Asia hub. And then obviously, April was very much impacted by the lockdowns in Shanghai and Eastern China and a number of other provinces. So that will have an impact on the Express volumes going into the second quarter.

“The current expectation is that eventually, there will be an easing of the restrictions and we will then see probably a spike in volume from the pent-up demand. We can’t say precisely when that will happen. There are some first encouraging signs. One of the big challenges has been connecting the hub in Shanghai, our Northern Asia hub, with the service centres, because it was virtually impossible for trucks to get through. That has improved. On that basis, we have earlier this week started accepting inbound shipments into Eastern China and Shanghai again. So there is a bit of normalization. But how the Express volumes will ultimately look like in Q2 will very much depend on the normalization in China.”

M&A

In a brief comment about possible future acquisitions, Kreis said:  “On the M&A side, as we said in March, our focus is and remains on organic growth. But if opportunities come up, which will fulfill our three criteria - a financially accretive, good quality company, with a clear path to integration, I think we would be open to it. As said before, there aren’t that many fantastic opportunities coming up on a weekly basis. But if and when we find something, I think we have shown with Hillebrand, what we are interested in.”