Credit Opinion: Deutsche Post AG

Transcription

1 Credit Opinion: Deutsche Post AG Global Credit Research - 17 Sep 2015 Bonn, Germany Ratings Category Moody's Rating Outlook Stable Issuer Rating A3 Senior Unsecured -Dom Curr A3 ST Issuer Rating P-2 Deutsche Post Finance B.V. Outlook Stable Bkd Senior Unsecured -Dom Curr A3 Contacts Analyst Phone Lynn Valkenaar/London Maria Maslovsky/London Patrick Mispagel/London Key Indicators [1]Deutsche Post AG Scale - Revenues (US$ mil) 6/30/2015(L) 12/31/ /31/ /31/ /31/2011 $70,760.6 $75,241.7 $72,924.0 $71,372.7 $73,542.7 EBIT Margins 4.7% 5.7% 5.6% 4.8% 5.8% ROA (EBITA / Avg Assets) 7.0% 8.0% 8.0% 6.8% 7.5% Debt to Capitalization 55.3% 57.6% 57.3% 56.6% 59.9% Debt / EBITDA 2.7x 2.5x 2.5x 2.4x 2.9x RCF / Debt 24.4% 26.2% 26.9% 27.4% 18.1% FCF / Net Debt 0.5% 2.9% 5.7% -1.0% 0.7% (FFO + Interest) / Interest Expense 12.2x 12.4x 10.2x 8.3x 4.6x [1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non- Financial Corporations. Source: Moody's Financial Metrics Note: For definitions of Moody's most common ratio terms please see the accompanying User's Guide. Opinion Rating Drivers - Strong business profile and large scale, supported by global leadership positions in express and logistics and its large German mail business - Exposure to highly competitive mature markets and global macroeconomic volatility

2 - Overall operating performance and key credit metrics are on an improving trend - GRI support built into the rating due to the German government's 21% indirect ownership and the essentiality of its services to the German economy Corporate Profile Deutsche Post AG, based in Bonn, Germany, is the incumbent postal operator in Germany and the world's largest logistics service provider with total revenues of EUR58.8billion as of 30 June 2015 (on a last-12-months (LTM) basis). The company operates under four different divisions: Post - ecommerce - Parcel (PeP); Express; Global Forwarding, Freight; and Supply Chain. The first division trades both as Deutsche Post and DHL, the latter three divisions trade under the DHL brand. Approximately 21% of Deutsche Post's share capital is owned by KfW Bankengruppe (KfW, rated Aaa stable), Germany's largest public development bank, which serves the government's domestic and international public policy objectives. SUMMARY RATING RATIONALE Deutsche Post's (DP) A3 rating reflects the group's strong business profile, which is the result of its (1) scale and global presence as the world's largest logistics company; (2) large and robust mail business in Germany; (3) success in improving profitability through its network investments and restructuring programmes; and (4) moderate financial metrics. The rating also reflects the group's conservative financial policy and sound liquidity profile. DP's key financial strength metrics are on an improving trend, but currently constrain the baseline credit assessment to a high baa. The metrics reflect challenging and competitive market conditions and the significant restructuring costs of the company's multi-year programme. The change in Moody's approach for capitalizing operating leases has lowered Deutsche Post's adjusted debt/ebitda to 2.71x from 3.58x (for the 12-month period through 30 June 2015). At the same time, adjusted retained cash flow/debt improved to 24.4% from 18.0%. In addition, Deutsche Post's overall rating is driven by our assessment of the default dependence between the group and the German state, and of the probability of Deutsche Post receiving government support in the event of need, which results in a one-notch uplift from the baseline credit assessment (BCA) of baa1. In terms of credit constraints, the rating incorporates the group's exposure to the global macroeconomic trends in its logistics businesses and the structural decline of the traditional postal services. DETAILED RATING CONSIDERATIONS STRONG BUSINESS PROFILE SUPPORTED BY DOMESTIC AND GLOBAL LEADERSHIP POSITIONS With EUR58.8 billion in revenues as at end-june 2015 (LTM data), Deutsche Post is the largest mail and logistics operator in Europe and the world's largest logistics service provider. The group delivers around 64 million letters and more than 3.4 million parcels daily in Germany, and has a global network that provides express and logistics services in more than 220 countries. The group's operations include its mature, declining mail activity and the more dynamic parcel, supply chain, express deliveries and freight forwarding businesses; the latter two of which are more influenced by economic cyclicality. Given Deutsche Post's incumbent market position and established domestic mail network, the group's revenue mix is weighted towards Europe and Germany in particular. However, Deutsche Post is one of very few large logistics companies with a comprehensive global network. Globalisation and increasing manufacturing in low-cost countries have led to a growing demand for express and logistics activities and, as a result, a greater proportion of Deutsche Post's revenues are now generated in emerging markets, especially in Asia-Pacific (16.1% of the company's 2014 revenues). The growth prospects for Deutsche Post's logistics activities and its German parcel business compensate for its flat to declining traditional mail activities. DECLINING MAIL VOLUMES IN GERMANY OFFSET BY DIGITAL SERVICES AND PARCELS Deutsche Post's mail volumes are on a long-term flat to declining trend as a result of the general substitution of traditional mail items with electronic communications. Total mail volumes declined by 7.4% year-on-year in the first half (H1) 2015; of which traditional mail communications decreased by 3.4% and the Dialogue Marketing business by 11.2%. Nevertheless, Deutsche Post's PeP division has been able to maintain market share in Germany, as

3 well as offset the decline in its ordinary mail activities, primarily on account of (1) new product launches like digital services; and (2) a growing parcel delivery business. In 2014, DP moved its domestic parcel business outside of Germany into the PeP division, enabling the company to transfer its German parcel business know-how to other markets. Parcel delivery has been growing both in terms of volumes and revenues owing to the rise in internet commerce and other e-post products. During the first half 2015, parcel volumes increased 9.5% and revenues by 13.0%. We expect that the group's traditional mail volumes will remain flat or continue declining at single digit rates year-onyear. However, parcel volumes, digital services and the three increases in the postal tariff effective from January 2013, January 2014 and January 2015 have offset this. As a result, reported EBIT, adjusted for non-recurring items, in the PeP division has been maintained at a fairly steady level. However, the division's reported EBIT of EUR474 million for H was 19% lower year-on-year, but this was the result of a one-off EUR100 million loss owing to reduced revenues combined with increased costs to support the network in the second quarter owing to the German mail and parcel workers' strike. However, a long-term wage agreement was reached and we expect no further strike action. EXPRESS PROFITS GROW FROM INCREASED VOLUMES AND IMPROVED COST STRUCTURE DHL'S Express revenues are growing in connection with increased volumes. In particular, its time definite international (TDI) product experienced 7.9% year-on-year growth in volumes in H1 2015, following 7.8% growth for the full year TDI year-on-year 3.7% revenue growth in H was slower due to the lower fuel surcharge. The company's investments for network improvement (international hub and gateway infrastructure) and restructuring to reduce operating costs are having a positive effect on reported profits and profitability. Express reported a 16.6% year-on-year increase in H EBIT and its EBIT margin in the second quarter of 2015 improved by 20 basis points year-on-year to 10.9%. GLOBAL FORWARDING, FREIGHT STILL FACING HEADWINDS Although revenues in DHL Global Forwarding, Freight division increased year-on-year by 5.7% in H1 2015, this was driven by positive exchange rate movements because organic revenue shrank in Q by 1.5%. The division is experiencing continued pressure on gross profit margins. In addition, gains made on the sale of a stake in Sinotrans were offset by restructuring charges with the result that reported H EBIT dropped by 62.3% year-on-year. The division is poised to launch a strategic IT project together with a transformation of its business processes, New Forwarding Environment, the aims of which include optimising its forwarding network and cargo loads, but the expenditure combined with the compression in gross profits, means that we expect that the division will continue to under-perform until the project is completed. SUPPLY CHAIN FACING OPPORTUNITIES FOR GROWTH The outsourced contract logistics market is currently growing faster than GDP and DHL's Supply Chain divisional revenue for the first half 2015 was up 12.1% year-on-year. Reported EBIT declined by 11.3% due to effect of restructuring costs. Going forward, we expect all DHL divisions to continue to benefit from economic growth across the countries that most affect DP, with the Express and Supply chain divisions as key drivers of the positive performance, compensating for the decline in the Global Forwarding, Freight and flat results in the PeP division. ONE-NOTCH UPLIFT BY VIRTUE OF CURRENT OWNERSHIP AND SUPPORT In light of its existing ownership structure, we regard Deutsche Post as a government-related issuer (GRI), and under our GRI methodology, the group's A3 rating reflects a combination of the following inputs: - A baseline credit assessment (BCA) of baa1 - The German government's Aaa rating - Low default dependence - Moderate probability of support Our assessment of a moderate probability of support, in particular, reflects the social, economic and political significance of Deutsche Post for Germany in light of (1) the importance of mail delivery and the group's Universal Service Obligation; (2) Deutsche Post's overall size both in terms of revenues (given its status as one of the

4 largest German corporates) and number of local employees (around 167,000 staff in Germany alone); and (3) the high probability that the government will intervene in the event of need, despite the presence of EU regulations that limit direct support from the state. Despite the reduction in KfW's stake in the group in 2012 and 2013 (from 30.5% to the current 21%), we believe the factors mentioned above are still enough to warrant a moderate support assumption. The government's stated intention to reduce its stake in the group to zero could - in due course - lead to a lowering of our support assumption and an element of the rating uplift under the GRI methodology. The low default dependence reflects the fact that both the German economy and Deutsche Post are highly diversified, with the group generating only around 30.7% of its revenues (at FYE 2014) within its domestic market. Liquidity Profile DP exhibits an excellent liquidity profile, underpinned by the generation of a strong and recurring cash flow from operations, large cash balances and full availability under its undrawn long-dated committed revolving credit facility (RCF). As of 30 June 2015, the company had total liquidity resources of EUR3.8 billion, comprising EUR1.8billion in cash and cash equivalents and EUR2.0 billion undrawn under its RCF. We expect these resources to more than cover cash outflows anticipated over the next months. DP shows a comfortable amortisation profile with an average debt maturity of over 5.5 years and no meaningful debt repayments in any given year. The final maturity of the company's RCF is September 2020 and it is not subject to financial covenants but it contains material adverse change clauses at closing. DP manages its currency, interest rate and commodity risks by using derivative instruments. The company's policy is to hedge an average of up to 50% of all significant currency risks over a 24-month period and was an average of around 39% as of 31 December Interest rate risk is partially hedged using interest rate swaps. As of year-end 2014, 35% of all variable interest liabilities were hedged. Finally, Deutsche Post's exposure to fluctuations in fuel prices is mitigated via a combination of fuel surcharges passed on to the customers and a small number of commodity swaps for diesel and marine diesel fuel used to control residual risks. Rating Outlook The stable outlook reflects our expectation that Deutsche Post will sustain the improvement to its top-line earnings and profitability and key credit metrics achieved over the past few years, as well as maintain a conservative financial policy and a solid liquidity profile at all times. What Could Change the Rating - Up Upward pressure on DP's BCA would occur if the company is able to sustain profitability improvements such that it is able to maintain (1) a retained cash flow/debt ratio above 30%; (2) leverage, as measured by adjusted debt/ebitda, below 2.5x; and (3) an excellent liquidity profile at all times. A higher BCA will result in a rating upgrade if our support assumptions remain unchanged. What Could Change the Rating - Down Downward pressure on Deutsche Post's BCA could occur if adjusted debt/ebitda rises above 3.5x or if its retained cash flow/debt ratio falls below 20% on an ongoing basis, in the absence of a convincing management plan to improve these ratios in the near term. A lower BCA would result in a rating downgrade if our support assumptions remain unchanged. We also note that the government has indicated that it intends to reduce its stake in DP over time. Such a reduction could -- in due course -- lead to our revising our assumption of moderate support. Nevertheless, at present, KfW remains DP's largest shareholder. Other Considerations GRID INDICATED RATING The principal methodology used in rating Deutsche Post's BCA was Moody's Global Methodology for Postal and Express Delivery Companies, published in December Other methodologies used include Government- Related Issuers methodology, published in July The baa1 BCA is two notches lower than the A2 grid outcome. The company's scale and diversification raise the overall grid score, but the baa1 BCA is more consistent with the company's financial strength metrics.

5 Rating Factors Deutsche Post AG Postal and Express Delivery Industry Current LTM [3]Moody's Month Forward Grid [1][2] 6/30/2015 ViewAs of 9/8/2015 Factor 1: Scale and Business Measure Score Measure Score Diversification (28%) a) Scale - Revenues (US$ mil) $70,760.6 Aaa $ $72000 Aaa b) Business stability and diversification Aa Aa Aa Aa c) Geographic diversity Aaa Aaa Aaa Aaa Factor 2: Efficiency and Profitability (14%) a) EBIT Margins 4.7% Ba 4.5% - 5% Ba b) ROA (EBITA / Avg Assets) 7.0% Baa 7% - 8% Baa Factor 3: Financial Policy (20%) a) Financial Policy A A A A b) Debt to Capitalization 55.3% A 52% - 55% A Factor 4: Financial Metrics (38%) a) Debt / EBITDA 2.7x Baa 2.4x - 2.7x Baa b) RCF / Debt 24.4% Baa 23% - 26% Baa c) FCF / Net Debt 0.5% B -1% - 2% B d) (FFO + Interest) / Interest 12.2x Aaa 11x - 13x Aaa Expense Rating: a) Indicated Rating from Grid A2 A2 b) Actual Rating Assigned Baa1 Government-Related Issuer Factor a) Baseline Credit Assessment Baa1 b) Government Local Currency Rating Aaa c) Default Dependence Low d) Support Moderate e) Final Rating Outcome A3 [1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non- Financial Corporations. [2] As of 6/30/2015(L); Source: Moody's Financial Metrics [3] This represents Moody's forward view; not the view of the issuer; and unless noted in the text, does not incorporate significant acquisitions and divestitures. This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on for the most updated credit rating action information and rating history Moody s Corporation, Moody s Investors Service, Inc., Moody s Analytics, Inc. and/or their licensors and affiliates (collectively, MOODY S ). All rights reserved.

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