Deutsche Post Profit Falls on Lower Express Earnings

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By Jann Bettinga

Nov. 8 (Bloomberg) -- Deutsche Post AG, Europe's biggest postal service, said third-quarter profit fell 35 percent as declining U.S. shipments hurt express-unit earnings. The stock rose after the company pledged to pay more cash to investors.

Net income decreased to 350 million euros ($512 million), or 29 cents a share, from 535 million euros, or 45 cents, a year earlier, Bonn-based Deutsche Post said today in a statement. Revenue rose 5 percent to 15.6 billion euros.

Takeovers of DHL in 2001 and Airborne Express Inc. in 2003 pitted Deutsche Post against Atlanta-based United Parcel Service Inc. and Memphis, Tennessee-based FedEx Corp. in their home market. Deutsche Post said it no longer expects business in the Americas region, which includes DHL's U.S. express operations, to be profitable by the end of 2009 and scaled back its worldwide earnings outlook for that year.

``It's honest of them to postpone the turnaround target'' for the U.S. express business and cut the 2009 guidance, Jochen Rothenbacher, an analyst at Equinet AG in Frankfurt, said by phone today. Investors had been ``very critical'' about the target and ``nobody believed'' the previous 2009 profit guidance.

Deutsche Post shares rose as much as 86 cents, or 4.3 percent, to 21.11 euros and were up 4.2 percent as of 11:48 a.m. in Frankfurt. The stock has dropped 7.6 percent this year.

Rewarding Shareholders

Deutsche Post wants to ``reward our shareholders better'' and become ``the most attractive investment in the sector,'' Chief Financial Officer John Allan said at a press conference in Frankfurt.

The company plans to raise the 2007 dividend by 20 percent to 90 euro cents and will pay out between 6.4 billion euros and 6.6 billion euros in dividends over the next five years, twice as much as in the past five years, Allan said. The postal service aims to boost earnings before interest and taxes by 1 billion euros through 2009 by improving efficiency.

Deutsche Post plans at least 1.7 billion euros in additional cash over the next two years as part of a new strategy to boost cash generation. Disposals of real estate and other assets will account for at least 1 billion euros of that amount, while reducing net working capital will add another 700 million euros, the company said.

The extra cash may be used to start a share buyback program or pay out a special dividend, the CFO said on a conference call.

Allan became Deutsche Post's finance chief on Oct. 1 to prepare the new strategy as the postal service's share price dropped, trailing gains of other major companies in Germany.

2007, 2008 Forecasts

Ebit, excluding one-time gains or costs, is expected to total 3.7 billion euros this year, compared with an earlier target of at least 3.6 billion euros. Ebit in 2008 is expected to reach 4.2 billion euros.

The company cut the 2009 Ebit forecast to about 4.7 billion euros from an earlier target of 5.2 billion euros. Deutsche Post also said it aims to raise the 2007 dividend by 20 percent.

The express unit's Ebit dropped 37 percent to 85 million euros in the quarter as the U.S. business struggled with ``weaker demand,'' especially in the domestic air-delivery business, Deutsche Post said.

Sales growth in the U.S. was hampered by declines in the number of items transported and revenue per shipment, Deutsche Post said.

Ebit at the mail-delivery division dropped 21 percent to 315 million euros after Deutsche Post cut parcel prices amid increased competition in Germany.

Acquisitions

Deutsche Post has made billions of dollars in logistics, express-delivery and freight acquisitions in the past decade to prepare for the expiration of its German monopoly on delivering letters weighing less than 50 grams (1.8 ounces) in 2008. Dutch competitor TNT NV and German publisher Axel Springer AG have expanded their German mail operations in advance of the market opening, stepping up competition with Deutsche Post.

European Union governments agreed on Oct. 1 to start local mail competition in 2011, two years later than originally scheduled, delaying efforts by Deutsche Post, TNT and other providers to add European countries to their networks. Eleven of the EU's 27 member states don't have to liberalize their markets until 2013. The initiative still needs final approval by both the European Parliament and national governments.

Deutsche Post's monopoly has made letter handling the company's most profitable business. The mail division had a profit margin of 15.5 percent last year, compared with 1.9 percent at its express unit and 3.4 percent for the logistics business.

Standard letters are two-thirds of the EU's 88 billion-euro postal market and offer twice the profit margin of packages and express mail, according to the European Commission, the EU's Brussels-based executive arm.