Good morning, ladies and gentlemen, and welcome to the Deutsche Post T. H. L. Conference Call regarding the Second Quarter Results 2019. At this time, all Let me now turn the floor over to your host, Mr.
Martin Siegenbark.
Thank you and good morning to everyone out there to our Q2 2019 results call. As outlined in the invite, I've got Melanie Christ group CFO with me here today, and we're going to do straightforward standard procedure. Melanie is going to take you through the deck. I take you have in front of you. And after that, there will be time for Q and A.
And without any further ado, Melanie, please.
Yes. Thank you, Martin, and hello, everybody. Thank you for joining us this morning. As Martin said, same procedure as in the last quarters, we have taken the step of adding management comments into the slides. So I guess you already have a lot of information in front of you, and I'm just going to highlight some points of special interest so that we have sufficient time for questions and answers at the end of the call.
Starting on slide 2, I'm very happy to report that, despite all the global macro concerns, we have had a good second quarter with all divisions contributing to the improved performance. And this is mainly due to our focus in all divisions on yield management and cost control, which all come under the heading of self help. Because we have final clarity on and have now implemented our mail price increase, we are able to tighten our 2019 guidance and lift the lower end of the P and P guidance from 1000000000 to 1000000000. The lower end of the group guidance is similarly raised so that we now expect a range from 1000000000 to 1000000000 for the full year 2019. And we leave our 2020 guidance unchanged.
Slide 3 is our agenda side and should hopefully look familiar to you as we have used it before. It summarizes quite well our unchanged key drivers. And I will walk you through those elements starting with number 1 sustainable top line growth based on a well diversified footprint. On Slide 4, it is encouraging to see that all divisions continue to grow their top line also organically. That was already the case in Q1, but it also continues now in the second quarter.
It's worth pointing out that FX had a small positive impact on the top line. EBIT growth was, however, actually held back again by ForEx movements. Moving over to the divisions, starting with P And T on Slide 5. Just as in the first quarter, Our parcel yield measures are coming through nicely in our numbers. Volume growth also remains well sustained without any significant sign of price elasticity.
Still, as mentioned before, we would not draw any final conclusions before the end of the summer on this topic. It is also worth mentioning that the working day effect in Q2 was negative minus 1 working day. And once you strip out that effect in mail, we are still very close to our toric and expected volume decline corridor of minus 2% to minus 3% per annum. So we do not see any pronounced change here. On Slide 6, I would just like to remind you of the increases to mail prices that we are implementing.
As you know, we have implemented an average 10.6 percent price increase on the 1,000,000,000 of regulated mail products on July 1. So obviously, those benefits will now become visible in our Q3 results and also in the subsequent quarters. We've had a number of questions on what we intend to do with the partial services revenues. We decided here not to do anything in the second half of twenty nineteen. In order not to surprise our business customers, but we plan to reduce our discounts in order to drive an average increase of between 3% to 4% as of January 1, 2020.
This is similar to our practice in the last pricing period, so spreading out our price increases business customers into smaller annual rounds should help to mitigate elasticity in this segment. On page 7, the situation in Express continues very much as I had fact starting in March of this year. Our heavyweight campaign means we have faster shipment per day growth than revenue per day growth. This should begin to annualize out over the course of Q3, but you can still see the delta in the second quarter. What is encouraging is that after the slower start to the year, we have seen a normalization of volume growth in Q2 again, as we had already anticipated in May.
Moving to Slide 8, the effect of slowing global trade flows particularly in air freight is visible than our DGF volumes. But here again, strong internal discipline health to mitigate some of these effects. Especially in air freight, we have also seen the buildup of GP margin, which is quite usual in a market downturn situation. So that takes me to the EBIT slide, on page 10. I'm really glad that this quarter, once you adjust for our restructuring charges, all divisions were back to growing the bottom line.
And we've had a clean group EBIT increase of 6.5%. So we were growing at twice the rate of revenue. So I think really now in the 2nd quarter, We had top line growth across all of the divisions, but we also saw an organic EBIT growth across all of our operating divisions. And I think that is very in encouraging, and we haven't had that for a number of quarters now. Looking at the divisional details, and starting with PNC Germany on Slide 11, just as we discussed last quarter, in the second quarter, P and P continued to face headwinds from ongoing cost inflation.
But this quarter, The progress we are making with cutting indirect costs and improving productivity has become more tangible so that we have turned towards year over year growth in EBIT again. For the first time since fourth quarter of 2017. So this is really an important milestone. And we look forward even greater improvements in the second half of the year as we make continued progress with our combined yield and cost measures and the mail price increase is now implemented as of 1st July. Now that we have certainty on the letters price increase, let's revisit our P and P Germany EBIT bridge on Slide 12.
We first introduced that slide, last summer. And when we now look at the comparison to where we were a year ago, then this 2018 to 2020 EBIT bridge was first introduced, we can reiterate our confidence in our 2020 guidance with the P and P EBIT contribution greater than 1,000,000,000. Looking at the individual building blocks, we have so far seen higher than expected revenue contribution from the various price and yield measures, particularly on the parcel side that has obviously worked better than what we had assumed, when we first introduced the slide, However, these are offset by generally higher cost inflation, so that the sum is essentially the same in EBIT contribution of 150 to 1,000,000. Our measures to increase productivity are on track, and we are still looking for the targeted improvements in the 1,000,000 range. But as expected, this is more skewed towards 2020 as those measures are gradually ramping up.
With regard to overhead cost measures, they are in full execution and will deliver as planned a contribution of above 1,000,000. We are, however, working on identifying additional measures for indirect cost reduction. And I think it's important that you are aware that we expect any potential additional restructuring charges in P And P in the second half of the year to be largely offset by positive pension revaluation effects. So this would hence have no material net impact on 2019 EBIT and the related guidance. And we will certainly talk more about this in the second half of the year with our Q3 results.
Looking at Express on Slide 13, Let me quickly remind you of the major effects of our heavyweight campaign and why this is currently holding back EBIT growth, why the volume growth is very solid 6.6%. You can see on this slide, the Express cost triangle as presented before. What you can see at the top of the triangle is the difference between per day growth and revenue per day growth. And that is what we have been flagging for quite some time. Heavy shipments are low in volume count, but high in revenue and hence drives this delta between FPD and RPD growth.
When you move to efficiency in ground operations, initially we saw an increase in operating cost per move which we have mostly digested. We are now moving more towards the medium term improvement we have been targeting. Similarly because we carry the full cost of the aviation network, but have a temporary dip in utilization, which we have in the chart on the lower right hand side of the page, our cost per kilo initially goes up. As we now gradually backfill the capacity and annualize initiation of the heavyweight campaign, these effects will turn around, but in Q2, EBIT growth was still held back as expected. Turning to Global Forwarding Freight on Slide 14.
We continue the upward strength in conversion ratio and EBIT margin in DGF. I want to be clear here that most of what you see in terms of improved ratios so far is due to the GP sales focus and the process improvement aspects of Tim Charlotte's simplified program. It's not so much due to the benefits of the CargoWise rollout as the implementation is still ongoing and we're still in coexistence mode at the moment. Now turning to the group P and L on Slide 15, the main additional aspect to note here is that our good revenue and EBIT contribution is not reflected in net profit and EPS because there was a much higher tax rate. And why is that?
That is because last year, when we lowered the EBIT assumption, that also led to a lower full year tax rate, which resulted in a really unusually low tax rate in Q2 2018. In 2019, the Q2 tax rate is at 22% in line with our full year guidance compared to 9% in Q2 2018. That explains the difference here. So let's turn to the question of cash generation on Slide 17. Our operating cash flow is lower than last year, despite the EBIT improvement.
This is largely due to the utilization provisions built up during last year's restructuring, which affects the changes in provisions line. And we also had a year over year higher cash phasing this year and a growth related cash out from working capital. Free cash flow generation was significantly lower than last year, but this is due to the timing of our CapEx spend specifically a payment of 1,000,000 for the Boeing trips 7 expressed re fleeting. This is fully aligned with our gross CapEx guidance for the year of EUR 3,700,000,000, EUR 1,100,000,000 of which will be for those 777 re fleeting. So all movements on the cash flow statement are coming in as we anticipated, allowing us to maintain our free cash flow guidance in 2019 of more than 500,000,000 for the full year.
And this takes us to page 19 and our guidance. I've already talked about the reason why we have tightened the lower end of the P and P range and how that affects our group guidance. And as mentioned before, any potential additional restructuring charges in the second half of the year in P and P are not expected to have a material net effect on EBIT, given that we should have the opportunity to cover them with a positive pension revaluation effect. With regard to all other guidance elements, our current assessment allows us to confirm all of them. Including the group 2020 guidance.
We are aware of course, that there is a lot of skepticism in the market also with regard to the macroeconomic uncertainties. So let's take a look at Slide 20. We would like to reemphasize here not only our diversified revenue exposure, which we have seen before, but also our self help EBIT drivers. So the aim of the chart on the left is to demonstrate that we have a portfolio with different degrees of macro exposure on the revenue side. Which allows us to maintain a steady path even in times of economic uncertainty.
And I think you can see that very nicely in our Q2 numbers. Obviously, the airfreight volumes are more exposed than the revenue growth we see in supply chain and the parcel growth in Germany. And even the post decline in P And P Germany is very resilient. It's around the minus 2% to 3% independent of what the macro situation is. The right side of the chart shows what we are doing on the operating leverage.
It's important for me to note here that Each division has a well defined self help agenda, which is geared towards EBIT margin improvement. I think it's important in years also that most of those plans are not new. Some of them have been in execution for several years now. So that we are familiar with their trajectory and we know that they support economic resilience, which is one of the main benefits of our group structure. So allow me to wrap up on Slide 21.
We are very satisfied with our Q2 performance as all our restructuring and yield measures are bearing fruit. Without a doubt, there still remain significant clouds on the economic horizon and we are watching them closely. We are not immune to what is happening around us, but we are able to narrow our 2019 guidance upwards and we remain committed to delivering on our 2020 goals. So that was the short overview and now over to you for your questions.
Questions. And the first questioner is Robert Johnson from BNP Paribas.
Hi, Rob.
Good morning, Melanie and Martin. A couple of questions for me on Express to begin with, please. First of all, on the network utilization, you mentioned Melanie that the utilization is temporarily lower while volumes grow into the capacity freed up by replacing the heavyweight items. Could you maybe just comment on how long it take before the network utilization returns to the optimal level? And then secondly, on TDI volume growth, it was obviously very good at 6.6% up, but it was particularly strong in Europe where the volume growth was up by 8.2% despite the obvious headwinds from weak German, ifo data and various other issues.
So can you maybe just comment on what's driving TDI growth in Europe specifically please? And then just a final question on the impacts of IFRS 16 on net income. When Deutsche Post introduced IFRS 16 at the beginning of 2018, you communicated that the impacts on net income would be negative initially, but then it would transition back to being neutral over time. Could you maybe just provide an update on where we are in that respect please Melanie?
Yes, okay. So, on express utilization, we started with a heavyweight campaign after the summer 2018. And we now expect utilization levels to increase back to the more normal levels in the course of the second half of the year. So I mean, obviously, when you take out this heavy stuff, particularly on the flying side, it frees up quite a bit of capacity. We now needed time to really grow into it.
I think 2 things are going to help. The first one is the more dynamic growth of the nicer smaller shipments now with 0.6%. And then of course also the annualization of the phasing effect. With regard to the shipment per day growth, of 6.6%. I think in general, but also very clearly for Europe, we see the continuation of the structural e commerce growth, supporting this growth figure quite substantially.
B2B growth is there. So we are growing also on the B2B side, but that is more in the lower single digits. So a lot of growth dynamic is coming from B2C And E Commerce, and that was also the case in Europe. The important thing for me is, and I think that is where the expressed colleagues are just doing a really terrific job. We have to be extremely selective with what type of B2C stuff we allow into our premium network.
We could have substantially higher growth rates, but at the expense of margin, I think the real success of Express over the last years has been finding the right balance between good top line growth but at the right price, so that we have had a margin expansion. And I think also when you look at the 2nd quarter margin now with 12.3%, that is a very, very good margin. On IFRS 16, yes, so what we explained last year was that we get the benefit on the EBIT side because part of the old operating leases costs go down into financials. Result below EBIT. The problem is that the interest component and the DPA component are different in the way you treat the liability and the assets.
And that is leading to a bigger in financial results and the gain you get on the EBIT side. And when you look at last year's numbers, the order of magnitude was what we felt in terms of pain on the financial result was twice the amount of what we got in benefit on the EBIT side. And that is also not going out of the system. That will take time. The root cause for that is that we pretended that all leases started on the 1st January 2018.
And given that those are normally multiyear leases, it will take time to wash out. The important thing is that in terms of year over year comparison, we are now back to comparing apples to apples.
Wonderful. Could show you just a quick follow-up, could you maybe just provide maybe a kind of an estimate of an indication, Melanie, of when the IFRS 16 impact on net income will become neutral compared with what it was in 2017. Are we talking maybe kind of mid to early 2020s or is it just too difficult to say?
I think it's really too difficult to say because there's so much dynamic happening. I mean, it's like a rolling process. Which is why for us also when you look at ROCE and these things, the past is the past. 2018 is a new starting point and for us to import thing is that we now show year over year progress from the new starting point 2018 after the implementation of IFRS 16.
Great. Thanks. And the next caller then please.
Yes. Next up is Mark McVicar from Barclays.
Morning.
Good
morning. Two questions, one small one and one bigger one. The first one is on FX. Can you give us a sense of what the EBIT headwind was in, Q2? Is it 1,000,000?
Is it 1,000,000? That's the order of magnitude?
That's
the easy question. Now that's the difficult one.
Yes, that's a slightly more difficult one is if we look at your underlying EBIT in 2018 was just over 1,000,000,000 and the target remains to get that to at least 1,000,000,000 by 2020. With all the restructuring grams, how much of that billion uplift do you think is coming directly from, the those programs? And how much still relies on some kind of growth out there in the market? If you can give us a sense of that, it would be good.
Okay. So maybe starting with a currency question. So actually the biggest pain point for us year to date and also now in the second quarter, was the dollar And so I think overall in terms of negative effects, we're talking about order of magnitude of minus 40 from currency headwind in the second quarter. With regard to the 1,000,000,000 question, So I mean, obviously, delivering on the numbers for 2019 is already going to take us a big step closer to the 1,000,000,000, but we naturally acknowledge that there is still a significant step up from 2019 to 2020. When you look at where it's coming from in the different divisions.
So in terms of absolute step up, the biggest contribution has to come from P and P, And they are really the majority of the uplift is pretty much directly under our control. If you assume that the parcel market in Germany is not going to collapse, completely, that we don't have any reason to believe that this will be the case, I think the rest of the measures on the P and P side, being disciplined on the past years, continuing with taking out indirect costs, the productivity measures, those are all things which are under our control. So I would really say on P and P, it's 90% plus. When you look at the DHL divisions, there is also a lot, of, self help agenda in there. Be it the simplify program in global forwarding, be it the automation and standardization approach in supply chain, be it the continued yield and indirect cost discipline in Express.
But obviously, for example, when you think about Global Forwarding, getting the G to EBIT conversion up from a certain point onwards gets easier if you have a bit of macro tails. So I think on the DHL side, I would still say the majority of the uptick is linked to sales head measures, but here a bit of macro would be a positive contribution, but we don't count on it at this point in time.
Fantastic. Thank you, Mark, and we'll come to the next caller then please.
The next caller is Christian Nedelco from UBS.
Hi, thank you very much for taking my questions. Can I start with Parcels, please, Parcels Germany Should the price increases tailwind accelerate in Q3 versus what we've already seen in the second quarter? And secondly here, maybe, we are seeing Zalando, Zalando talking more about diversifying its last mile partners, to expect this to be a headwind to your parcel volumes into the second half? And secondly, one last one on Express, if I may. Looking a bit at the cost base in Express for the second half of the year, could you tell us the main dynamics there?
I guess on the purchased goods, we've seen relatively good performance in Q2, do you expect to see some further benefits from lower air fried rates and lower oil prices and equally selling staff costs when our expectations of staff addition and cost inflation for the second half in Express?
Okay. So starting with part of Germany, I mean, as I already tried to say, with regard to the full benefit of all the year's measures, I think we really have to see, now in the course of the third quarter. I mean, if customers because of our price measures decide to change and there is pressure on the yield side. That would now happen before the peak season. Yeah.
So I think by the third quarter, we will have a good feeling on how it develops. I don't think that there will be an additional boost but I think order of magnitude, we should still see an increase in revenue per parcel. But again, I think now after the third quarter, you will get a better feeling for kind of like the running rate here. Thalando, diversifying on the last mile. I think what we have always said also with regard to our very big customers here in Germany.
They are not as dependent on 1 or 2 customers as it may sometimes seem reading newspapers. So overall, I mean, of course, we've love working with the big ecom senders, but we also have a very broad customer portfolio below the big senders. And on that basis, we are relatively relaxed. I think this is more the usual shifting around between players in the market. Then on the Express side, with regard to cost development, I mean, the big chunk of the flying in Express is actually through our dedicated, network.
Commercial airlift, where we will see some benefits of falling freight rates. At the same time, we are also selling off excess capacity in our dedicated fleet. So I don't expect a significant positive benefit from the net position of those 2. With regard to staff costs, we are at the moment still seeing an increase in our direct FTE because the volume is growing. So staff costs will continue to go up but in Express like in the other divisions, we have a very tight focus on indirect costs because again, that is an important element of our self help agenda.
And those uncertain times really make sure that we keep particularly the indirect cost line under control.
Okay. All three questions answered. Christian, anymore. Good. Then on to the next caller, please.
The next caller is Joel Spangen from Berenberg.
Hi. Good morning, Melanie. Good morning, Martin. Just got 2 actually. Maybe just to start off, you mentioned potentially doing some more restructuring in the P And P division in the second half.
And I was just wondering if you could elaborate a little bit on what you're thinking about there? And specifically, do you have a sense at this stage? I know it's early, but the quantum of that might be. And also you mentioned obviously it'd be offset by a pension gain. Does that mean we will be seeing something like a cash restructuring charge being offset by a non cash gain.
Is that the right way to think about it or is that incorrect? So maybe we start there and then I'll come back. I've got another question on Express as well.
Okay. So on the P and P restructuring, again, I mean, like this is early stage, and we are now working through a number of options, which in essence are very similar to things we have done now in 2018 and the first half of twenty nineteen. Where, for example, on the civil servant side, we actually have found ways to do things which had a positive NPV because we were, over time, paying out less cash, than we would have paid if those service had stayed on board until they are retirement, all under the assumption that we don't have to refill those positions. So that's another important that's an element where we have identified additional opportunities and we're now working through this. In terms of order of magnitude, I think the important thing is it can be up to, I would say 200,000,000.
But overall, we would expect it to be more or less neutralized by a net cash neutral pension valuation effect. And we will explain all the details once we have firmed up the program probably in the course of the third quarter. But I don't think you should expect any nasty surprises neither on the EBIT nor on the cash side.
Okay. Okay. Thank you for that. And then maybe just another one on Express. I was just wondering a little bit if you could comment maybe just qualitatively nothing else on what the pricing trends within Express are, say, on a revenue per kilo basis?
I think in Express, we have seen a very strong discipline on the pricing side for, I would say, in all the last 5 years. So really in terms of getting base revenue per kilo up, that has been quite consistent over time. There are of course some structural headwinds. Like, for example, we have a product mix shift ongoing also in Express. We have a document portion in our Express volume, which not growing as dynamically, as a parcel staff.
But overall, we've had a positive based revenue per kilo quite consistently over the last years and that is also not changing now. And I think that is, for example, an area where we have been extremely disciplined also in dealing with currency situations. So if you have a country where the local currency devalues, not just short term, but in a lasting way, that's an important input factor into our pricing decisions because we acknowledge that our network cost is in hard currency in U. S. Dollar And so we really have to recover that in local currency.
Okay. And then maybe just one very quick follow-up UPS has talked about sort of increasing their investment into their own cross border B2C product I think is an area where you've probably had an advantage over some of the others. Is that something you're seeing at all in the market? Or is that is that too early to say?
I think it's clearly too early to say. I mean, if I understand it correctly, they are building a deferred postal like product where we have the advantage of also having our post legacy. And that is what we're trying to leverage in our e commerce solutions division. So I think we are quite uniquely positioned here in the sense that we have the high value speedy TDI stress offering whilst also having a postal product, and a deferred product available.
Okay. Thank you very much.
Great stuff. Thanks, Joe. And the next caller please.
The next caller is Damien Brewer from the Royal Bank of Canada.
Good morning. Good morning. How are you? And thank you for such a concise fast run through. I've got three questions, please.
First of all, Could I just come back to yield and sort of price elasticity limits? And could you elaborate a little bit more about how much more you think you could take that both in the second half of twenty nineteen and into 2020, particularly in areas where you haven't seen much in the way of volume pushback. Second question
is, is that relating to parcels Germany or to express
both?
Across the businesses, parcel in Express and also frankly in the freight forwarding business as well.
Then
the second question really about your customers, Are you seeing any change given how thinly supply chains have been stretched and where inventory has gone in terms of forward looking inquiries for the air cargo side of the businesses, whether it's freight forwarding or air related express? And if you have, could you elaborate a little bit more on anything you're seeing there And then very finally, in the supply chain business, that clearly did very well in H1. Is there anything unusually non seasonal in that business? Or would or should we still expect Express to do about 60% of its either? Sorry, it's not express supply chain to do about 60 percent of its EBIT in the second half of the year on an underlying basis?
Okay. So I think on the yield side, when I look at the maturity levels across the divisions, I would say, on the expressed colleagues have been the masters, in the art of, smart youth management. We have now cross level cross fertilized the parcel pricing teams with the knowledge of Express. And so there has been a very vivid exchange So I think this year, we see a lot of benefit obviously on the parcel pricing side. I think what we now have to get to is having a standard annual price review, a GPI process like we have in Express.
So that we continue to see annual price increases, which obviously we need in parts of Germany to offset the cost inflation. But I think this year was very much a catch up year. I think on the FX side, it is trickier, because of the nature of the market. What is helping us here is, more and more IT support, also with regard to spot rate quotation tools and so on. So I think there will be an IT supported sophistication increase in global forwarding.
Which should help us on the GP side. Nevertheless, I would say in forwarding, the main focus is still on process efficiency and the GP to EBIT conversion. With regards to do we see any specific customers moves industries now coming after airfreight capacity. I really haven't heard that. So I wouldn't feel qualified to point out a specific industry here.
I'm looking at Martin, but I think it's there's no clear pattern at this point in time. And like everybody else, you also see that automotive isn't having a great time. So the usual observations, but I don't see anything totally noteworthy in somebody now showing signs of revival.
That will be my answer provided that we understood your question correctly.
Okay, great. Thank you. Yes, indeed, you have. Thank you.
Then on the last question, supply chain, is there a non is there kind of like a seasonal, non seasonal element in there? So I think fundamentally in terms of all the warehousing and transportation activities supply chain is the most stable of our business. Ecommerce activities in there, which have a little bit of a Christmas peak. I think the biggest seasonal effect we have seen in recent years is our real estate venturing business where we utilize the customer understanding in the supply chain team, to also make a development profit on a real estate mentoring opportunities. That tends to be more seasonal with a lot of projects being constructed in the course of the year and then being completed.
Towards the end of the year. But the fundamental supply chain business is very non seasonal and stable.
That's great. Thank you very much.
I always say, I'm like, it's a lot of consumer stuff and diapers and do toothpaste, relatively non seasonal.
Okay. Well then, thanks, Damien, and we'll move to the next caller then.
Next up is David Kerstens from Jefferies.
Hi, good morning, Melanie. Good morning, Martin. Two questions, please. First on P and P. And the relatively larger 3% to 4% price increase on the partial services, how should we see that price increase in relation to the expected cost inflation you anticipate for 2020.
Understand, do you have the next pay rise on up the first of 2.1% on the current labor agreements? And what do you anticipate will be coming in 2020? And could please provide a timeline over when the next negotiations with the unions will start? Then secondly, also on supply chain, I saw you did not discuss it in the slide deck, but the restructuring of the UK operations when does that benefit really start to kick in? Would that lead to a further acceleration in earnings momentum in the second half of the year, or will it mainly come in 2020?
Okay. So first of all, on the cost inflation in Germany, we had a 3% wage increase on the 1st October 2018, and that is quite visible in our staff cost development and we will now have a relatively moderate 2.1% increase on the 1st October. Which will then take us to next spring and we will have the next round of tariff negotiations in the spring of 2020. That will be a relatively straightforward tariff negotiation. So no other complexities around that, but that is clearly one of the major to do for P and P in 2020.
Anticipating what we see as the so I mean, again, looking at what we currently see in the market terms of labor agreements. I think it's safe to say that it will probably more than 2%. And that is why it's so important that we work on the letter prices and that we are really keep the discipline on the path of yield side.
And is that already included in the staff cost increase that you highlighted in the slide deck of 1,000,000 to 1,000,000, or would that 2% in addition to that range?
No, that is of course included there. We have put an assumption in there for also what to expect, for the remainder of 2020 beyond the 2.1% or that is one of the reasons why we have this rewrite range in this number.
Understood. Yes.
Then on the supply chain question, so yes, indeed, we didn't pointed out in detail in the presentation because it was, I think, in terms of news are not materially different to what we had discussed with the Q1 numbers. We had during charges now in the second quarter, 1,000,000 for supply chain. So again, if you take that out, we saw solid underlying growth in the supply chain result. The improvement program for the UK is delivering benefits year over year, but there are some legacy topics there, which will really take us into 2020. To get fixed.
So there will be also a year over year contribution in 2020. From what we do this year in terms of restructuring in the UK.
Thanks, David. And let's speed up and go over to the next caller then please.
The next caller is Adrian Piel from Commerzbank.
Everybody. First of all, a question, again, on the yield side of things. Just to be very clear on that, it sounded that you were pretty happy with the free 6% increase, but I sense a little bit that, you were positively surprised to some extent, but refrain a little bit from from being more upbeat on H2 price measures. Do you fear a little bit that we see, let's say, a legging volume effect in Q3. So, otherwise, it seems that you need even more price increases to offset the cost items that you just mentioned.
And then I have 2 housekeeping ones actually just to be clear also on this item, can you rule out that there were any positive pension revaluation effect already in the second quarter? And a question a little bit linked to what has been asked in supply chain on any special effects. However, I would gear this towards operating cash flow, obviously, that was quite strong, in Q2. I was just wondering, were there any kind of real estate effects or other effects that are posted up and what we should we think of it going forward? Then I might have a follow-up.
Okay. So I think on the parcel year side, that was more, not to let pectations run away. I think we now really have to see, after the summer, how the whole thing stabilizes I very clearly expect solid continued growth in parcel volumes. And I also expect a continued healthy increase in parcel revenue per shipment. What we clearly see in the market is that competition is also following.
I mean, like they feel the same or an even higher, cost pressure. I mean, given that their whole delivery model is to a large degree build on subcontractors and it's just difficult to find people willing to deliver our parcel at minimum wage in Germany the inflationary cost pressure in many cases is even higher. So I think we have a healthy balance developing here how big that is going to be. Let's see in the second half of the year, but the fundamental trend is definitely a healthy one and parcel marketing and sales team is doing a terrific job here. In terms of pension effects, no, there were no pension effects in Q2, and that is something which we will be very transparent about should we do something now in the second half of the year.
In terms of special effects in the supply chain, cash flow, there were none, in the second quarter. I think the fundamental topic with some of those real estate venturing projects is that, whilst you develop a site, you have a build up in working capital. Which is then released when the site is sold. So the whole real estate venturing is creating volatility on the cash flow side, we saw that very strongly in supply chain last year, when we had an abnormally high cash in supply chain in the 4th quarter. I think we also talked about that in March briefly because that was really extremely pronounced and that was really then driven by a lot of those real estate venturing project being concluded just before Christmas.
But now in the second quarter, I would say it's more the ordinary course of a business and working capital management.
Yes. All
right. And then just quickly, just to get a sense of the magnitude or if the effect is potentially negligible is I learned actually that there was some sort of shortage on Stanson in July and was just wondering whether you had to face any kind of extra cost in Q3? And was it actually the reason that you granted a contingency period for a couple of days in July with respect to the increased term price or is that not an effect worth mentioning here?
No, I think it's an absolutely immaterial effect. I think it's sometimes interesting how, on the media side, certain personal experiences can be blown up into a big topic. I can say from the number side, there were no start distribution costs for Stamps or anything material, which would impact our 3rd quarter numbers.
All right. Thank you.
Thanks, Adrian. And over to the next caller then.
Next up is Andre Mulder from Kepler.
Yes, good morning. A few questions from Parcels again. Can you give a split between the price and the mix effects, normally these mix effects are negative in Parcels. So I assume that the price effect is then a bit larger than what shown in the numbers? And secondly, you're looking at possible change in the setup of countries.
You already made an agreement with Austrian Pros on Osteon, Slovakia and the Czech Republic. What more countries can we can we expect and how is the path going forward there? Last question is on the e commerce loss are still quite, quite high there. Can you talk us through the different parts? How are these are developing?
So I think on the price mix effect in parcel, I would just say that we are very clear that with the price increases, we are not only targeting a small and mid sized customers, but we are also targeting big customers and those considerations, of course, also take mixed effects into account and also seasonal volatility which we see from large customers. So I would say at the moment, it's really a healthy price development across the world, a product that With regard to E Commerce Solutions, yes, so I mean, we have always said that with our Pan European network, we don't have a one size fits all approach. We don't necessarily have to do the last mile ourselves. We're doing this very successfully, for example, in the Netherlands. But we now have the opportunity for Austria and also for Slovakia, to strike partnership deals with Austrian Post and they will do the last mile for us whilst we will, do the last mile for imposed in the Czech Republic.
So I think this is really a very pragmatic and un dogmatic approach which is quite an opportunity driven. When you look at the ecomm solutions results, they are indeed negative, but that is largely driven by a 1,000,000 restructuring charge we now took in the second quarter. There has been a clear focus on the leadership of canal in taking out overhead costs and streamlining some of the organizational setups he found when he took over on the 1st Jan. So when you take that out, we are actually seeing good year over year progress on the operating performance. In terms of what's in there, I mean, it's unchanged.
It's our pan European network, and it's a selective number of activities outside Europe. It's the biggest countries outside Europe being the United States and India.
A follow-up on that. How are things developing in the U. S. Now because we have some other postal operators having difficulty there?
I think we have had a very nice and profitable niche business there for many, many years. And we're actually quite pleased with the performance of the U. S. Business, both in terms of top line, as well as EBIT development.
And then last one on the past side. You mentioned these agreements with Tabithosha Post. They have some other countries there as well. How will you look at those areas, if the former Yugoslav Republic?
I think the big benefit we have for the really small countries is being a postal operator, a weekend to use the tide to the local post offices. That's kind of like the default option, which we utilize in most of the really small countries. And alternatively, and that's also a nice element of the group structure. In all of those countries, we also have our express networks, right? So for each country, We have 2 default options, give it over to the postal incumbent or give it over to the express, sister division.
Obviously, we don't plan to build up own last mile activities in any of those small countries.
Thanks, Andrew, and back to the bigger picture. Next caller please.
The next caller is Christian from Baader Bank.
I have three questions. First is on the volume in the next press how much of the entire Express volume currently is B2B and how much is B2C? And can you give us the growth rate you sales talked about B2B is approximately 2% to 3%. If I got it right, then B2C, is it going to a double digit or is it only a high single digit growth there? And what do you expect for the time to come there?
Then it goes to supply chain staff costs increased by approximately 11% on a year on year basis also in Q1. Maybe can you give us some clarity what's happened there? And the last one is on GFF, cargo wise is implementing and you talked about that you are running 2 systems in parallel and there's no impact so far. When do you expect, 1st meaningful impact from the switch towards CargoWise in the forwarding business?
Okay. So starting with the express question, so the current split on B2B, B2C is 7030. In terms of volume, we see, as I said, low single digit growth in B2B at the moment, and we see double digit growth in B2C in the teens. I think again, for us, the important element here is to keep this a healthy balance on the yield side. And as long as this is beneficial on the margin side overall, This is something we will continue, but believe me, this is one of the most closely targeted and monitored topics within Express and also within the group overall.
On the supply chain staff cost side, I mean, there is a general increase in headcount and a salary inflation, but there's also a specific topic with regard to health insurance. I'm just, there was a reclassification of some health insurance costs, which was previously in the U. S. Not shown in a staff cost, but which is now as of the first quarter being recognized in staff cost. So there is also a shift between buckets in there.
So it's a combination of headcount growth in line with business growth, cost inflation, but there is also this movement between the categories.
Yes. And then on the cargo wise And
then on the cargo wise, yes, sorry, on the cargo wise timeline, so we are well advanced with the rollout of ocean freight, and, intention is to really get ocean freight completed towards the end of the year. So that for ocean freight, we should leave the cold system phase in the course of 2020. For air freight, the rollout will continue throughout 2020 and into 2021. But 2020 will be the 1st year when we should really kind of like begin see the benefits on the ocean freight side.
Running freight forwarding. So the airfreight volume is going down and in the quarters before. Tim, Sure. It was reduced volume to improve productivity going forward. So how far can you lower your volume going forward without having a massive negative effect on the fixed cost base?
Yes, so I think what we have now seen in the second quarter is indeed a combination of 2 effects. It's first of all, our selective approach where we have also coming back to the yield management theme where we have taken out lower yielding customers in air freight. That was now clearly augmented by the general development of the market. And it is now at a level where we have to take a look at staff levels because obviously with this amount of volume decline, you see an impact on productivity per FTE and the team is already working on this. Okay.
Thank you very much.
Okay.
Thanks, Christian. And the next caller, please.
The next caller is Daniel Reska from Bernstein Research. Over to you.
Thanks very much. Good morning, everybody. And just two from your left, both on P and P Germany, Number 1, could you comment on the current discussions on the U. S. O and kind of how the discussions on the U.
S. O, whether or not to move to the phase 5, they did the reframe work is taxored into your plans and how you would expect to, that to evolve and when we could expect kind of or how long that discussion will actually take? And then secondly, we've talked about the restructuring measures you're putting into the business. You're getting the price increases This doesn't sound like an environment where unions would be willing to give you a lot of concession. So could you kind of just comment on the current kind of let's say, temperature level of your union, how the relationship is going and maybe also on the willingness of the Works Council to continue working on more efficiency measures?
Thanks.
Very good and very broad questions. I think first of all, on the universal service obligation, I mean, in the coalition agreement, there was already a clause in there that the postal law should be reformed during this legislative period. And we feel that this is really overdue because obviously, the law is around about twenty years old, and, looking at what happens with ESAP institutional and digitalization, we feel there is a time to take and you look at it. We have not factored that into our plans now, for 2020, because I think it will take some time for this to now go through I mean, like, we will get the opportunity to comment on the law, like other involved parties. And then we have to see how it develops now after the political summer break.
I see that more as upside potential for us particularly for the case, should there be an acceleration in the mail volume decline, which we don't see at the moment, but I think it is only prudent to prepare. Should there be an acceleration? It would be quite helpful if we had the opportunity to reduce the number of delivery dates per week. In terms of union environment, relationship with
the works
council, in the beginning of the year, we struck a very important and groundbreaking year with the union. You may recall that in 2015, We had a very massive confrontation with the union about the conditions under which we can hire new people into Deutsche Post AG. That led to the foundation of new entities and we started hiring new parts of delivery people into these new entities. And they were, of course, an object of hate for the unions. And, we have now track, a very forward looking deal with the union, bringing those companies back into the mothership but giving us the opportunity to hire all people, not only parcel delivery people, but also other people more favorable starting conditions.
So I think that was really a win win deal because the unions were able to show that they brought those evil new entities back home. And we now got what we have been aiming for from the start the opportunity to hire at more competitive levels, for all, categories. I think that has helped us to improve the relationship, with the union. I think also they understood last year that there was a need to do something different. And they also positively acknowledged that we are reinvesting in productivity and in the people in the fields out there.
So I think compared to where we were, where we were a couple of years ago, it is actually a quite constructive atmosphere at the moment.
Is that true for both the union and the fleet costs?
It is true for both. I think normally, yet in many cases independent of union politics, very good relationships with the works councils. And they also see that a lot of the stuff we are now doing for example, this is reinvest in productivity, and new tools for people that this is really helping people do their job.
Great. Thank you.
Daniel, thank you. For that. And I've got 3 more callers in the queue.
And the next caller is Andy Chu from Deutsche Bank.
Good morning. Two questions, please. And first one is on Express. I wondered if it's possible to give the market any comp, any sort of comfort that the rebound in profitability is already happening? Is it possible to sort of maybe talk about the spread between revenue per day in terms of TDI revenues and volume in TDI that, that spread, is that actually close to sort of flat or even slightly positive as you've exited Q2 into Q3?
And then switching to corporate center, you spent 1,000,000 in the first half, nothing in terms of the 1,000,000 of investment. Is 500 still the right sort of number for the full year?
Yes, I think on express, I mean, we obviously fact both with regard to RPD SPD, but also with regard to the leverage of the network, a positive development in Q3. I mean, we're just getting the July numbers in. And so I wouldn't feel comfortable making both statements on the topic, but I obviously would expect a clear positive direction. In terms of, corporate tender costs. Yeah, so, the reason why we have a different guidance from the 350 we normally have for comfort functions.
It's the areas we have in corporate incubations. Where we have a couple of plans now in the second half of the year. Which is why I'm just taking the H1 run rate and doubling it, it's here not the right approach. So we are still expecting them around about minus 500 for corporate functions.
Good question. Thanks, Andy, and 2 more callers.
And the next caller is Andre Malder from Kepler.
Yes, good morning. Some follow ups. Firstly, on the, the ForEx effects, I think the effect on sales was something like SEK 100,000,000. The SEK 40,000,000 that you mentioned, was that just the dollar or was that the total forex effect?
Yes. So first, on the revenue side, you see a relatively small delta between reported and organic growth. But that is actually because we have a net effect in the organic calculation. We have around about 100,000,000 FX on revenue. And then you have round about 110 in revenue loss from the divestment of the China business.
So on the revenue side, it's indeed around 100,000,000. And the 40,000,000 on EBIT was the total number of there. However, the dollar is the biggest chunk by far.
Yes.
Then on tax rate, so far, it's at 22%. But that didn't let you to change your guidance of 19% to 22%.
No. I mean, at the moment, we are at 22%, I think we still have to see how now the dynamic second half of the year developed. I think it's too early to say that there will be upside. So I think at this point in time, 22% is the best number.
And last question then on Asia, looking at the development at the divisions, Only its supply chain, I think the effect is a bit larger even if you strip out the the China thing. Can you comment on that? Why is it stronger there? I would have expected that it would be stronger in expense.
Sorry. I'm not sure I understood the question correctly. Martin,
can you repeat rephrase maybe?
If I look at the development of turnover of the sort of the divisions, be it an e commerce and Express or supply chain, both in e Commerce and Express, the development in Q2 is about the same as what we've seen in Q1, only in supply chain, there's somewhat bigger degrees compared to Q1, even if you strip out the China acquisition of the China disposal, It seems like the Q2 number in supply chain is a bit weaker for Asia Pacific than, then, for example, Q1.
So I think when I look at the revenue in Asia Pacific, for supply chain, it was 482 in Q2. And I think yes, And then, I mean, in the second quarter, we didn't have anything from China. So I think that was an effect of roundabout 110,000,000 in revenue losses. And in the first quarter, we still had the China revenue for Jan and Fab and we only missed it in March.
Okay. Thank you.
Good. Thanks, Andre. And one one more caller I see.
Yes. It is Christian Nadellko from UBS.
Hi. Apologies. 2 short follow ups, if I may. The first one in the mail communication segment in post if I look at Q2 volume per working day, I think this is down 4.7%. And I think it's sort of the biggest decline we've seen in a few quarters.
Now anything in particular there to keep in mind? And did I understand well that you do not significant demand elasticity post the price increases in July. And just the second one on Express, If I remember correctly, you gave us a bit of color into Express volumes for April, the Q1 result. I was wondering if you can provide a bit of color about July, how did Express volumes starting in the quarter?
Yes. So I think on the express like this, I think it's really a too early to say, anything definitive. I would say that we don't see a fundamental change to the trends we saw in the second quarter. So so far no peculiarities. In terms of mail communication, I mean, we had one day, one less working day in Q2.
So when you look at the volume decline normalized for working days, it is more in the usual range So I wouldn't over interpret this, and we indeed do not expect a lot of price elasticity, on the increase we have now implemented for the ex hunter regulated billion basket.
Thank you very much.
All right. Thanks Christian. And Looks like my both prediction was correct and there are no further callers. Operator,
We have one more caller in the queue. From Goldman Sachs. Over to you.
Firstly, on the guidance. So you're still keeping the full year EBIT guidance relatively wide, particularly in in post and parcels. I'm not sure I fully understand that because you do say that you might have more restructuring charges, but that will be offset by the say, revaluation benefit on the pension. So why is the guidance in the mail and parcels still relatively wide? What are you basically particularly, say, fearing or monitoring?
And the second question, just on cash operating cash flow in the second quarter. Can you just remind us basically what were the outflows for the restructuring charges in the quarter? And perhaps also say, give us a bit of a color on what you expect for the coming quarters into the restructuring cash outflow because that's, I think, one area particularly made on parcels where numbers would have a bit below, what was maybe expected by some. Thank you.
Okay. So I think on the second question, I think the overall amount of cash out we expect for the restructuring is around about 1,000,000 for the year. That is clearly skewed towards the second half of the year. So I would say roughly 1 third, 2 thirds between first half and second half of the year, but just kind of like all of magnitude, but the overall number for the full year should be around about 90,000,000 order of magnitude. In terms of why do we still have a relatively wide range for P and P?
I mean, obviously, like I said, we have to see how the whole, a parcel volume growth yields meanders out. I think, however, the biggest uncertainty is on the road productivity, which is the area which is most back end loaded. Where we are now beginning to see an encouraging trend, but we really have to see how rapidly that now ramps up in second half of the year
And then there are no more callers in the queue.
Helening, over to your closing remarks.
Yeah. I think, we've covered a lot in the Q and A. I do hope that what you take away from this call is that it was a quarter where despite all the volatility out there, we were able to grow not only the top line, but really the underlying operating result in all of our divisions. That gives us confidence that we will continue on the path towards delivering on our 2019 2020 guidance. So Thank you very much and have a nice rest of the day.