OREANDA-NEWS. Deutsche Post DHL Group has continued to lay the groundwork for long-term business success. In the process, the Group has recorded a number of one-off effects that impacted earnings in the third quarter of 2015.

"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 materialize already in 2016," said Frank Appel, CEO, Deutsche Post DHL Group.

As announced on October 28, the Group has recognized one-off effects of EUR 345 million in connection with the further course of the IT renewal roadmap at DHL Global Forwarding. In addition to the above described measures, as also communicated at the end of October, Deutsche Post DHL Group has reduced risk to future earnings potential by recognizing in its outlook for 2015 further one-off effects of around EUR 200 million. These exposures relate mainly to the updated assessment of primarily legal and regulatory exposures in the Post - eCommerce - Parcel (PeP), Express and Global Forwarding, Freight divisions. EUR 81 million of this sum was booked in the third quarter.

Alongside these one-off effects, third quarter earnings have also been impacted by further measures taken to strengthen the positioning of the business divisions for future success: The Post - eCommerce - Parcel (PeP) division has invested in the international expansion of its parcel network, in order to maximize benefits from the dynamically growing e-commerce segment outside of Germany. At the same time, the earnings of the PeP division have been impacted in the third quarter by the postal strike in Germany and its after-effects, and the one-time payment included in the new tariff agreement. The Express division has continued to invest significantly in the modernization and expansion of its unrivalled worldwide network, in order to further bolster its leading market position. The Supply Chain division booked further restructuring costs in line with the implementation of its optimization program.

Overall, including the impact of the above factors, Group EBIT in the third quarter declined to EUR 197 million. In order to recognize the one-off effects in Global Forwarding and the additional one-off effects of EUR 200 million, the Group lowered its 2015 EBIT guidance in October and now expects operating earnings of a minimum of EUR 2.4 billion. The Group previously expected operating earnings of between EUR 2.95 billion and EUR 3.1 billion.

Outlook: Earnings guidance for 2015 adjusted in October. Forecast for 2016 and longer-term objectives confirmed

The DHL divisions are expected to contribute minimum EUR 1.65 billion in 2015 EBIT to the full-year 2015 target of at least EUR 2.4 billion, while the guidance for PeP is at least EUR 1.1 billion. The Group expects expenses for Corporate Center/Other to remain at around EUR 350 million. In addition, the Group continues to expect sufficient free cash flow to be generated to cover the dividend paid out in May 2015 for financial year 2014.

The one-time nature of the effects and the expected impact in delivering structural enhancements for the individual business divisions should contribute to a significant increase in earnings in the coming year. For 2016, Deutsche Post DHL Group therefore re-confirms its forecast of EBIT between EUR 3.4 billion and EUR 3.7 billion. The PeP division is expected to contribute more than EUR 1.3 billion to the 2016 target and the DHL divisions between EUR 2.45 billion and EUR 2.75 billion.

The Group is also maintaining its objectives beyond 2016: 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. The Group additionally plans to keep expenses for Corporate Center/Other at less than 0.5% of consolidated revenue by 2020.

Third quarter 2015: Earnings performance marked by investments in future growth

At EUR 14.4 billion, revenues in the third quarter increased 3.0%, or EUR 423 million, over the prior-year period (2014: EUR 14.0 billion). The DHL divisions contributed growth of 3.3% and the PeP division an increase of 2.0% to this result. Adjusted for positive currency effects, Group turnover was stable (-0.5%), while lower fuel surcharges held back growth levels.

Group EBIT declined in the third quarter by 70.9% to EUR 197 million (2014: EUR 677 million). Operating earnings at PeP contracted by 50.7% to EUR 142 million. Operating earnings at Express grew by 19.3% to EUR 364 million (2014: EUR 305 million). At Global Forwarding, Freight, EBIT declined, not including one-off effects, to EUR 47 million (2014: EUR 71 million). Including negative one-off effects, EBIT was EUR -337 million. EBIT in the Supply Chain division in the third quarter totaled EUR 101 million, compared to EUR 110 million in the prior-year period.

Consolidated net profit in the third quarter contracted to EUR 49 million (2014: EUR 468 million), mainly due to the decline in EBIT. This equates to basic earnings per share of EUR 0.04 (2014: EUR 0.38).

Nine months: Revenue growth of around EUR 2.6 billion

In the first nine months of the year, Group revenue climbed 6.4%, or around EUR 2.6 billion, to EUR 43.9 billion (2014: EUR 41.3 billion). Adjusted for positive currency effects, revenue was 0.7% above 2014 levels for the same period. Organic revenue growth at Express, Post - eCommerce - Parcel and Supply Chain made a positive contribution to this increase, which was offset by an organic decline in revenue at Global Forwarding, Freight. In addition, lower fuel surcharges held back stronger organic revenue growth. Group operating earnings declined in the first nine months by 29.4% to EUR 1.45 billion (2014: EUR 2.06 billion). Consolidated net profit was EUR 870 million (2014: EUR 1.4 billion). Basic earnings per share were also therefore lower at EUR 0.72 (2014: EUR 1.18).

Capital expenditure and cash flow: Foundations for future growth strengthened

Group investments grew to EUR 547 million in the third quarter of 2015 (2014: EUR 494 million). Overall, investments in the first nine months grew from EUR 1.0 billion in 2014 to EUR 1.2 billion in 2015. The focus was on positioning the Group for future profitable growth in all four business divisions. Investments were therefore made in further building up the national and international parcel infrastructure, expanding the global and regional Express hubs in Leipzig, Cincinnati, Singapore and Brussels, modernizing the Express air fleet and supporting new contract start-ups in Supply Chain.

The Group's free cash flow declined from EUR 371 million in 2014 to EUR 329 million in 2015. This reflects the lower operating earnings and higher capital expenditures (net cash capex). Net debt for the Group was EUR 2.8 billion at the end of the third quarter. Due to an expected strong cash flow generation in the fourth quarter, the Group expects a significant reduction in net debt by year-end. 

Post - eCommerce - Parcel: Further strong growth in Parcel business

Revenue in the Post - eCommerce - Parcel division in the third quarter grew by 2.0% to EUR 3.8 billion (2014: 3.7 billion). EUR 1.5 billion of this total was generated by the eCommerce - Parcel units, which continued to grow dynamically, increasing by 9.7% over the prior year period. This growth was based on revenue gains of 7.0% in Parcel Germany as well as 8.4% in Parcel Europe and 20.9% in eCommerce, the latter two supported by currency effects. This development reflects once again the successful positioning of the Group in the dynamically growing e-commerce sector, in Germany as well as increasingly internationally. In order to continue building on this position, the Group is significantly investing further in developing its national and international parcel infrastructure, as well as in further innovative customer solutions.

In contrast to eCommerce - Parcel, revenues in the Post business declined by 2.4% in the third quarter to EUR 2.3 billion. The structural decline in volumes within the Mail Communication and Dialog Marketing segments was accelerated by the strike and its after-effects. These negative effects could only be partly mitigated by price increases for postal products in Germany.

Operating earnings in the PeP division contracted by 50.7% to EUR 142 million (2014: EUR 288 million). Included in this decline was a EUR 42 million provision for an increase in expected payments for federal administration of civil servant pensions. This decline also reflects investments in the international expansion of the eCommerce business and lower volumes as a result of the postal strike which ended on July 7, and its after-effects. The results were also impacted by higher personnel costs including an accrual of EUR 48 million to cover the one-time payment of EUR 400 in October to tariff-grade employees, which was part of the new tariff agreement.

Express: Further strong revenue and earnings growth

The Express division was able to continue its successful revenue and earnings development in the third quarter of 2015. Revenue climbed by 6.9% to EUR 3.3 billion (2014: EUR 3.1 billion) in the period. Adjusted for currency effects, the increase was 2.2%, while organic revenue growth was held back by lower fuel surcharge revenues. The main driver of the positive revenue development was the ongoing strong growth in international time definite (TDI) shipments, where volumes grew by 9.4% over the prior-year period.

EBIT at the Express division grew by 19.3% to EUR 364 million (2014: EUR 305 million). The continued good operating performance has been achieved despite currency headwinds and continuing significant investment in the air and road network. The result was also supported by a write-up of assets in the Americas region. The EBIT margin in the third quarter was 10.9% and above the prior-year level (2014: 9.8%).

Global Forwarding, Freight: One-off effects impact earnings

Revenue at Global Forwarding, Freight declined in the third quarter of 2015 by 5.7% to EUR 3.6 billion (2014: EUR 3.8 billion). The main reason for this development, alongside the weak market environment, is the division's selective market strategy.

The measures introduced in the second quarter to improve the operating performance of the division have delivered their first benefits to the cost efficiency and margin of Global Forwarding, which helped reduce the rate of decline in operating earnings in the third quarter on an adjusted basis, compared to the rate of decline in the first half of this year.

As announced on October 28, the Group, while still weighing potential alternatives to NFE, is looking at implementing a step-by-step replacement and upgrade of the IT set-up at DHL Global Forwarding. This could rely on a flexible IT architecture, potentially enhancing and converging existing systems and also incorporating advanced 'off-the-shelf' solutions that have been commercially proven within the freight forwarding industry. The aim would be a business-centric, gradual IT renewal roadmap which could best support the improvements in operating performance that the division is targeting. This could include enhancing shipment visibility through better capture, management and display of operational milestones, and reduction of paper work through greater use of a document management system which has already been proven in our U.S. business. The Group is still in discussion with vendors, including the NFE implementation partner, and remains committed to allowing the NFE implementation partner the opportunity to fulfill its contractual obligations.

Given the decreased likelihood that DHL Global Forwarding will be able to realize benefits from the originally pursued New Forwarding Environment (NFE) system due to continued issues, the Group has recognized one-off effects of a total of EUR 345 million in combination with defining the new IT renewal roadmap. This sum relates to the EUR 308 million write-down of investments to the NFE system that were activated on the balance sheet, as well as EUR 37 million in provisions which cover expenses during an expected roll back of NFE in the countries where it is piloted. The division has also booked EUR 39 million in one-off effects related primarily to a legal dispute with a joint venture partner. Overall, these one-off effects have contributed to a decline in the Global Forwarding, Freight division's EBIT to EUR -337 million (2014: EUR 71 million). Factoring out these effects, EBIT was EUR 47 million, a decrease of 33.8% over the prior-year period.

Supply Chain: Optimization program continues as planned

Revenue at the Supply Chain division grew by 9.4% to EUR 4.0 billion (2014: EUR 3.7 billion) in the third quarter. Adjusted for currency effects, revenue was 3.2% over the prior year period. This growth is 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 totaling EUR 262 million (annualized) in the third quarter, in particular in the strong growth sectors 'Retail', 'Consumer' and 'Automotive'.

Operating earnings in the period from July to September were EUR 101 million, 8.2% lower than the prior-year period (2014: EUR 110 million). The main reason for this decline was planned restructuring costs totaling EUR 31 million relating to the division's optimization program. 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.

Excluding the restructuring costs, the operating earnings of the division would have been significantly higher than the prior-year period.