Last time I bumped into John Allan, he burst out laughing. It might have been that my appearance was more than usually comical that day, but I prefer to think it was the incongruity of the surroundings, writes Malory Davies.
The location was the huge glass tower that serves as head office for Deutsche Post World Net in Bonn – not the first place to look for an English journalist, but now home for Allan, who became chief financial officer for the group in October.
The building itself is significant. The German Post Office has much the same reputation in Germany as the British Post Office does in Britain – worthy but a bit old-fashioned and bureaucratic. The move from a traditional building into the ultra-modern 40 storey tower is a powerful symbol of the modernisation of the business and its move from the public to the private sector.
John Allan’s appointment carries an equally powerful message. One of the top jobs in the German Post Office is now held by someone who has been chosen for his financial expertise and closeness to the money markets.
The changes at Deutsche Post have been eye-wateringly rapid. The past few years have seen it swallow up a host of major companies in the logistics, forwarding and express industries, including Securicor Omega, AEI, Danzas, DHL and Exel. This is all part of its strategy to prepare for liberalisation of the postal market and its privatisation.
Liberalisation of the German postal market is due to take place this month. Sending a letter in Germany is significantly more expensive than in the UK so it’s no surprise that mail is currently DPWN’s most profitable business sector.
However, it recently reported that earnings before interest and tax (EBIT) in the mail division was 10.3 per cent below last year’s level at 1.3 billion euros in the first nine months despite revenue rising by one per cent to 11.2 billion euros. And, as competition starts to bite, margins in the mail business could be cut significantly.
German government plans for a high minimum wage for postal workers, announced in December could slow the growth of competition in the market. The Dutch government has postponed its own liberalisation plans while it ponders the implications of the German move.
While this might take some pressure off DPWN, there is no doubting the scale of the challenge John Allan faces. The group has spent billions of pounds on buying its way to leadership in the logistics, forwarding and express markets and it now needs to satisfy the capital markets that it will produce the juicy returns that they expect.
There is no doubt that he has the qualifications for the job. Within the logistics business, he is seen as the man who, through a series of takeovers, made Exel a world leader. That ability stems largely from his ability to convince the financial community of the logic of the moves and then to deliver the expected results.
Announcing his appointment at CFO, the group said: “Allan is well connected and highly respected in the London financial community and is well known and recognised for steering an organisation close to capital markets expectations.”
His first task in his new role was to unveil the “Roadmap to value” – a two year programme to improve profits by some £700 million (1bn euros). The programme includes cost savings both at head office and the operating divisions, focus on value generation, reduction in working capital, and disposals of property and other assets.
This year DPWN has increased the dividend by 20 per cent and promised to increase it again in line with earnings growth. It is also talking about share buy-backs.
Allan is also promising detailed earnings outlooks for the following year to reduce the volatility stemming from unexpected regional economic slow-downs and provide an outlook in line with the industry. “This change will allow us to give a more precise and reliable earnings outlook. It’s an important step to help improve transparency.”
And there are tough targets to hit. It set a target for earnings before interest and tax of 3.7bn euros for 2007, 4.2bn euros for 2008, and 4.7bn euros for 2009. It is going to have to achieve this in the face of slowing markets in the Americas and introduction of competition in mail.
“For the Mail business, there is now a high degree of confidence that a maximum of between 10 and 20 per cent of EBIT will be affected by the full opening of the German mail market compared with the 2006 level. The group still expects the Mail division to reach an EBIT of 1.65bn euros to 1.85bn euros for 2009,” the group said. For the Logistics division, an EBIT of between 1.15 billion euros and 1.25 billion euros is forecast for 2009. In 2006, the figure was 762m euros so the challenge is substantial.
John Allan might have moved on from his role as chief executive of the world’s largest logistics organisation, but as group finance supremo his influence on the logistics business will continue to be decisive.