Deutsche Post DHL Group has today decided on a suite of measures to sustainably secure the further earnings growth in the PeP division. To counteract the decline in profitability in the Post – eCommerce – Parcel (PeP) division, which became evident in the first quarter of 2018, the Group decided on a range of measures to safeguard a positive earnings development in 2019 and 2020. The measures mainly target further improvement in productivity, indirect cost and yield management in the Post and Parcel business.
“We are fully focused on achieving our strategic and financial targets for 2020 and on positioning our business divisions for success in future years. In order to deliver long-term sustainable growth, we are now consciously accepting short-term negative effects on our earnings”, said Frank Appel, CEO Deutsche Post DHL Group.
As communicated in the first quarter, the structural shift from Post to Parcel resulted in a number of challenges in 2018. In Parcel Germany, the division sees unchanged structural volume growth, but costs inflated with more FTEs and transport capacities needed in unusually tight labor and transport markets. The challenge for Post is the unchanged structural volume decline with stable stamp prices since January 2016 and a high fixed cost base. Additionally, the structural shift with mail decline and parcel growth is currently not adequately reflected in the overhead cost of the division, and the investment into the further development of operations in PeP Germany has not been sufficient over the last years.
Program to ensure long-term earnings growth of the PeP-division
In order to address these challenges, the Group has initiated a comprehensive program to improve productivity, reduce indirect costs and implement yield initiatives.
Productivity: To increase productivity, the Group will lift PeP operations onto the next S-curve through regular opex investments of EUR 100 – 150 million annually. This will include automation and digitalization, continuous improvement, increased last mile productivity and intelligent network utilization. Ultimately, these operational investments will drive better customer service and higher efficiencies, which will lead to an improvement of EUR 150 – 250 million per annum.
Indirect Cost Reduction: In order to reflect the continuous decline in letter volumes, the Group will sustainably reduce the fixed cost base mainly with an early retirement program focusing on civil servants in overhead areas. This will come with restructuring costs of EUR 500 million in 2018 and will be implemented in 2018 and 2019. The Group expects the program to lead to an annual cost reduction of at least EUR 200 million by 2020.
Yield Management: For regulated products in Post, the Group is awaiting the new regulation from the Federal Network Agency as of January 1, 2019. Price increases for unregulated larger-size shipments as of July 1 have already been announced. In Parcel Germany, the Group will focus on a balance between growth and yield. Even in a competitive market, cost inflation requires price adjustments, which will be implemented on a rolling basis upon contract renewal and signing. The future volume growth for Parcel Germany is expected to be closer to the market development of 5 – 7 percent growth.
The measures will only help in part in 2018; therefore, the PeP-EBIT prior to one-off cost is now expected to come in at around EUR 1.1 billion. This includes additional operating expenses for productivity improvements of around EUR 150 million. In addition, a restructuring charge of EUR 0.5 billion will be recognized in 2018 to implement measures.
Starting in the second quarter of 2018 the activities of the recently founded area of Corporate Incubations will be shown as part of the new line Corporate Functions together with Corporate Center/Other. The full-year result of Corporate Incubations is expected to be EUR -70 million.
Including the above described effects, the management board expects in 2018 an EBIT of around EUR 3.2 billion. The PeP division is likely to contribute at around EUR 0.6 billion to this figure while the DHL divisions are still expected to reach around EUR 3.0 billion. The Corporate Functions result is expected to be at EUR -0.42 billion, including the unchanged projection for Corporate Center/Others of a result of around EUR -0.35 billion.
The above mentioned measures result in a confirmed earnings forecast for 2020: Group EBIT is expected to reach more than EUR 5.0 billion. The PeP division is expected to contribute around EUR 1.7 billion of this and the earnings contribution of the DHL divisions is forecasted to reach around EUR 3.7 billion. Corporate Functions is forecast to reach around EUR -0.35 billion.
The reported Group Free Cash Flow for the full year 2018 – excluding the debt-financed renewal of the Express intercontinental aircraft fleet – is hence expected to exceed a minimum of EUR 1.0 billion.