August 26, 2015

Heads roll in major DB restructuring as profits tumble

Written by 
  • Print
  • Email

German Rail (DB) has launched a major restructuring of its organisation and a reduction in its management team in the wake of an 18.2% drop in Ebit for the first half of 2015, and a 39% fall in after-tax profit from €642m to €391m, reports David Briginshaw.

GERMAN Rail's (DB) disappointing first-half results and restructuring plans were announced in Berlin on July 28 by its CEO Dr Rüdiger Grube who blamed the poor performance on nine strikes by train drivers over several months and a series of severe storms which resulted in a €198m reduction in Ebit to €890m.

"Had it not been for the strikes, which cost us €252m, our Ebit would have been slightly above that of the previous year, but that cannot hide the fact that we are also facing structural challenges, which we are determined to tackle with the transformation we have set in motion," Grube explains.

DB GrubeThe strikes and storms led to reductions in passenger and freight traffic during the first half of 2015. Overall passenger journeys fell by 1.6% or 16 million to 985 million, with long-distance dropping by 1.2% and local and regional traffic by 2.8%. Railfreight was even more badly affected with a 6% reduction in first-half tonne-km from 52 billion to 48.9 billion.

The reduction in DB's profitability was despite a 1.3% increase in revenue to €20bn, although this was achieved partly as a result of positive currency exchange rates which added €481m to the bottom line. Grube says overall the strikes and bad weather cost DB around €250m in lost earnings in 2014 and another €250m in the first half of 2015.

However, CFO Dr Richard Lutz says the wage settlements which have now been agreed will at last enable DB to control a dynamic increase in costs which has burdened the company during the last few years.

Lutz also pointed to another factor which is reducing profitability: a surcharge imposed by the Renewable Energy Sources Act (EEG) which, combined with tariff-related effects, cost DB almost €200m. "We anticipate that an EEG surcharge amounting to approximately €160m will be imposed for 2015 as a whole, which represents a quadrupling of the figure for 2012 and an increase of approximately €60m over the previous year," Lutz says.

"The imposition of such additional costs for what is by far the most ecologically-sound mode of transport is a source of bewilderment for us, especially in light of the fact that the price of diesel fuel has been falling, not rising, in recent years and railway operations are becoming less competitive as a mode of transport as a result of their proportionately high use of electrically powered vehicles."

DB also announced that its long-term debt for the first half increased "in line with expectations" by €1.4bn or 8.6% to €17.6bn. "Approximately half of this increase was attributable to catch-up effects on working capital and other balance sheet items amounting to approximately €750m," Lutz says. "A further reason for the increase in our net financial debt was the dividend payment which we paid out from our profit for 2014 to the federal government in the first quarter of 2015."

For 2015 as a whole, DB is sticking to its original revenue forecast of €41bn but it has reduced its Ebit forecast by €200m to €2bn. Gross capital expenditure is expected to be €400m less than predicted at €9bn, while net financial debt could increase by €500m to €18bn.

Grube is concerned about the steady decline in earnings from its core business - rail operations in Germany, where Ebit has fallen from €1.9bn in 2012 to €1.3bn last year, while at the same time capital employed has increased by €1bn. As a result return on capital employed has dropped from 7.6% to 4.9% over the same period. If this trend continues it will affect DB's ability to fund investment.

"The German rail business accounts for 75% of our company's total capital employed," Grube says. "But the return on this capital is shrinking instead of growing. Growth in returns is essential to us, however, since roughly 90% of all DB investments over the coming years are planned for rail operations in Germany. This discrepancy makes it clear that we must reposition ourselves."

The restructuring involves the loss of key senior managers at DB including Mr Gerd Becht, who was board member for compliance, legal affairs and corporate security, Dr Heike Hanagarth who was responsible for the now defunct technology and environment division, Mr Ulrich Homburg who was board member for passenger traffic, Dr Karl-Friedrich Rausch who was due to retire this year as board member for freight and logistics, and Dr Alexander Hedderich, who steps down on August 31 as CEO of DB Schenker Rail.

Only three members of the management board will remain: Lutz as head of finance and control, Mr Ulrich Weber, head of human resources, and Dr Volker Kefer, who as board member for infrastructure and services will also take over responsibility for technology.

Two new appointments have been made to the board of management. Former chief-of-staff at the German Chancellery, and federal minister for special affairs, Mr Ronald Pofalla will head the expanded economic, legal and regulatory affairs division, while Mr Berthold Huber will be in charge of the new traffic and transport division. In addition, Mr Jochen Thewes becomes CEO of DB Schenker Logistics on September 1. Grube says Thewes has led DB's logistics business in the Asia-Pacific region with "great success."

DB's supervisory board approved a six-point restructuring plan on July 27 which is already being implemented and is designed to save more than €100m at the corporate level, and more than €700m by 2020 when combined with previously-approved measures.

The biggest change is the integration of freight and passenger operations into the new traffic and transport division encompassing DB Schenker Rail, DB Long Distance, DB Regio, and DB Sales. "This will enable us to focus even more on rail operations in Germany, which is what the German public also focuses on, and rightly so," Grube says.

Another potentially significant change is the option to partially privatise DB's international passenger subsidiary, DB Arriva, and its global logistics business DB Schenker Logistics, which will be brought together in one division. Both of the subsidiaries were originally private companies which DB acquired. DB Arriva saw its first-half revenue rise by 7.5% to €2.4bn while DB Schenker reported growth in all areas except ocean freight.

However, Grube stressed that nothing had been decided yet and DB intends to retain management control of these two subsidiaries.

"We are not seeking to completely divest from either of these companies," Grube says. "All we are considering here is a possible partial privatisation and selling minority shareholdings. There is no partial privatisation of the German rail transport companies planned for the foreseeable future. An IPO is not on the agenda at this time."
The other measures comprise:

  • the reduction in the number of management board members from eight to six
  • the merger of DB Mobility Logistics, which was set up with an IPO in mind, into the DB group
  • the disbandment of the technology and environment division and the reassignment of these activities, along with DB's IT strategy, to other divisions, and
  • the reorganisation of service functions into a DB Global Service Centre to focus on transparency, cost and efficiency.

Summarising the changes taking place, Grube says: "DB is going to become leaner, faster, more efficient and even more customer-focused. Leaner management and structures, and more focus on customers will enable us to successfully tackle the rapidly changing challenges in the world of mobility and logistics."

Get the latest rail news

IRJ Rail Brief newsletter covers global railway news