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Article Excerpt
OPERATOR: Good day, and welcome to the Deutsche Post AG US Express Structuring and Q3 2008 Conference Call. Today's conference is being recorded.
At this time, I would like to turn the call over to your host today, Mr. Martin Ziegenbalg. Please go ahead.
MARTIN ZIEGENBALG, HEAD IR, DEUTSCHE POST WORLD NET: Thank you, and a warm welcome to everyone out there for our conference call. I have here today with me our CEO, Frank Appel; our CFO, John Allan; and the CEO of the DHL Express business, John Mullen, who will take you fairly briefly through the presentation, the slides of which you have been sent by us or you can see on the Web. And we will have sufficient time for Q&A after that. For organizational reasons, we would aim to finish the call at 5:15 here, Bonn time. And, without losing any further time, I would like to hand over to our CEO, Frank Appel, please.
FRANK APPEL, CEO, DEUTSCHE POST WORLD NET: Good afternoon, ladies and gentlemen. It's a pleasure to tell you a little bit something about three subjects - first, the overall business development environment and current challenges we face; secondly, our third quarter results, including an update on our Roadmap to Value program - the shareholder value program; and, thirdly, what we plan to do differently with regard to our Express business. You know that we have announced already at the end of May major changes in the Express structure in the US. Nevertheless, we think that, due to the tougher US economy, we have to do some additional measures, which we will explain in a minute.
If we go to page 3 of the document, the challenges we faced for quite a while already are more or less three. The first is that we felt, and I've said on several occasions-- we want to focus our Company on their core activities - that means the Mail, Express, and logistics activities. And that's the reason why we started the process. We recently succeeded in selling our share in Postbank to Deutsche Bank. Secondly, we are facing a tough challenge in the US with enormous losses. And we have taken already actions. I will come to that in a second what the impact of them has been. But we think that we have to take even further massive actions. Overall, the third thing is that the economy, as you know, is getting more difficult. And, therefore, we have some plans I will share with you how we want to make our Company more [better] prudent. So I think the overall agenda is clear.
Nevertheless, I would like to mention that we are in pretty good shape as a Company. We are market leader in all our divisions and in very healthy markets which show, midterm and long-term, very healthy growth potential.
If I go then to the next page, to summarize briefly, the sale of the Postbank shares we just announced, I think, almost two months ago that we sell 29.75% of the Postbank shares to Deutsche Bank in the first quarter. That creates a clear perspective for Postbank on one hand but also creates for Deutsche Bank the opportunity to build the largest retail bank.
If we then turn to page 5, you can see where we are. We expect the closing of that transaction early 2009. There is a call/put facility in place to sell the second 20% as well. There's an interim step that has been announced recently that there's some capital increase of Postbank, where we said we will underwrite that on EUR18.25 a share so that there is certainty for that transaction. That would lead to a split of Deutsche Bank has almost 30%, and we have a little bit more, if we get all the shares (inaudible) issue. And the free float will be down a little bit less than 40%.
We think that the transaction is on the right track. We are pretty sure that we can close. We have no indication that it can't close. Deutsche Bank, as well, commented that they are keen to make that transaction happen. So that will be something. We will in the future report that only under income from associates and held for sale, so we will not report them in our consolidated figures any longer.
If I then come to the next challenge, this is the final decision on restructuring, if you go to page 8, where I summarize briefly where we are. We announced on [May 28] of this year that we massively restructured our US Express operation. In taking into consideration an outsourcing contract with UPS, where we transfer more or less all the flying from our current suppliers to UPS, that we streamlined our ground and pickup and delivery networks in the US quite sizeable, and, finally, that we take out overhead costs. Currently, all these restructuring plans are on track and in line with expectations, and these activities are even slightly ahead of plan. So, on the cost side we are making good progress.
The issue comes on the next page. We have a massive weakening in the economy. We are not the only ones. You see that as well. If you look into the numbers of our competitors, they see a weakening of the economy as well. That's the reason why we now announce today additional measures.
These are that we will focus entirely on the international-only business. We will just focus on where we are the best at; that means cross-border business. We will close our loss-making domestic activities in the air and in the ground business. And, as I said, we will focus on the core strength we are in. And we will bring similar quality, and John Mullen will explain it a little bit more, in full coverage for the international passes to the US, and we will pick up most (inaudible) everything as we have done so far.
That's the massive transaction that we want to face. You can imagine this was not an easy decision. It has massive impact on jobs, so our people will be heavily impacted by that decision. Nevertheless, there is no alternative to that.
If we think about how we remain there, as I said, we will remain as a strong player for the international business. We are convinced due to our capabilities in the rest of the world that we will keep our fair share of international trading out of and into the US. And we are pretty much convinced that we will be successful in delivering good value to our customers.
Our negotiations with UPS are proceeding. Definitely some details have to be adapted because the volume is now much smaller. But we expect that we can come to an agreement until the end of this year.
The financial impact is shown on page 11. What we want to say there is that, definitely, we will face more losses than originally than originally anticipated due to the fact that we announced today a massive restructuring program. We assume, although we are very much on track with our cost structure so far, that this will impact revenue massively in the last eight weeks of the year. So we will see a significant hit for our operation. That's the reason why we forecast for the business $1.5 billion before one-time effects. Nevertheless, we are confident with that plan that we can achieve at least less than a $900 million loss in 2009, and on a quarterly basis, we think we can achieve already a loss of around $400 million in the final quarter of the year. That was originally the target we only planned to achieve in 2010.
That means we are taking now massive action. We are investing additional money, and, in total, it will be $3.9 billion we'll invest. But, on the other side, we will take, massively, costs out to reduce the risk profile. So we will have a much smaller activity. We expect that operating costs will be lower than $1 billion after we anticipate, this year, $4.5 billion almost. So that is a massive cost takeout. It costs quite a lot, but I think we de-risk significantly the prospect of our business in the US. We still have the ambition to achieve cost of capital for the whole year's Express business by 2010.
We then turn to the next page, and you see somehow what the future setup will be. We will have around about 4,000 employees going forward, starting in February. The coverage will be 103 stations instead of a couple of hundred we had so far. All other business units will remain the same. They are pretty large, and they are in very good positions, be it the Forwarding business, the Supply Chain business, or our Global Mail business in the US with 25,000 employees. And we will definitely invest in this business going forward quite massively.
So the US remains a key market for us. We are just leaving the domestic US Express market but not for the other divisions. And we are very committed to deliver superior quality for the international trading.
Turning, finally, to the last challenge - How do we react to the weakening of the economy? It's definitely a challenge. The financial market crisis has led now to significant impact to the economy. We see significant challenges, and many customers have already announced that they're trading volume is going down. We expect, as well, that trading volumes and logistics will go down. Nevertheless, we think we are well positioned.
If we now look into our numbers, on page 14, you see that year-to-date numbers are, on the reported revenue, still up. If you even exclude some foreign exchange, it looks even better, but we will come to that later. John Allan will talk about it. Our reported EBIT is up by 26%. That comes from the repayment of the fine we had to pay a couple of years. We got it back because, obviously, there was no state aid. So a part of that is in the EBIT. The increment to the EUR1 billion or a little bit more than the EUR1 billion you find in financial results-- Overall, excluding that, we also saw until end of September an overall year-to-date plus on the underlying EBIT of EUR1.3 billion.
The divisions are doing fine. Mail has defended their numbers pretty good. Express, outside the US, has done a good job as well. And, also, Forwarding and Freight, as well as Supply Chain, are in good shape. But you will see the numbers when John Allan talks about the quarter.
Supply chain, on the next page, has won record new revenues of more than EUR1 billion. That is the first time that we gained that early so much in revenue. If we [exclude] foreign exchange effects, the revenue was up year over year by 4%. And if you exclude one-time effects of foreign exchange, the EBIT was even up by 11%.
Nevertheless, the economy is as it is, and we are now focusing very much on cost improvements. We have said under the Roadmap to Value program that we will deliver EUR500 million this year, and we are pretty sure that we will achieve that. And we will have an additional EUR500 million next year. We are still committed to deliver that. But we even increased that target for and replace it by delivering EUR1 billion until the end of 2010. So we want to accelerate our operating and non-operating spend pretty massively to deliver good results going forward.
Let me summarize and give you a little bit of an outlook. First of all, as you know, we have changed our guidance for this year down to-- underlying EBIT down to EUR2.4 billion. And we see significant shortfall, particularly, in the US part of our Express business due to the fact that the economy has weakened significantly, although our restructuring plan is in good shape.
In addition, we will show not only the restructuring costs or a significant chunk of that in our net profit this year but, also,...
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