Morning, ladies and gentlemen, and welcome to the Deutsche Post DHL conference call regarding the second quarter results 2019. At this time, all participants have been placed on a listen-only mode. The floor will be open for questions following the presentation. Let me now turn the floor over to your host, Mr. Martin Ziegenbalg.
Thank you. Good morning to everyone out there to our Q2 2019 results call. As outlined in the invite, I've got Melanie Kreis, 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&A. Without any further ado, Melanie, please.
Yeah. 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. 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 two, 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. 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.
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&P guidance from EUR 1.0 billion-EUR 1.1 billion. The lower end of the group guidance is similarly raised so that we now expect a range from EUR 4.0 billion-EUR 4.3 billion for the full year 2019, and we leave our 2020 guidance unchanged. Slide three is our agenda slide 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 one, sustainable top-line growth based on a well-diversified footprint. On slide four, 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&P on slide five. 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 one working day. Once you strip out that effect in mail, we are still very close to our historic and expected volume decline corridor of -2% to -3% per annum.
We do not see any pronounced change here. On slide six, 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% price increase on the EUR 2.8 billion of regulated mail products on July 1st. 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 parcel services revenues. We decided here not to do anything in the second half of 2019 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%-4% as of January 1st, 2020.
This is similar to our practice in the last pricing period, spreading out our price increases to business customers into smaller annual rounds should help to mitigate elasticity in this segment. On page seven, the situation in Express continues very much as I had flagged 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 eight, the effect of slowing global trade flows, particularly in air freight, is visible in our DGF volumes.
Here again, strong internal discipline helped 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. 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%. We were growing at twice the rate of revenue. I think really now in the second 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 encouraging, and we haven't had that for a number of quarters now.
Looking at the divisional details, starting with P&P Germany on slide 11. Just as we discussed last quarter, in the second quarter, P&P continued to face headwinds from ongoing cost inflation. 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 the fourth quarter of 2017. This is really an important milestone. We look forward to 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 the 1st of July. Now that we have certainty on the letters price increase, let's revisit our P&P Germany EBIT bridge on slide 12.
When we now look at a comparison to where we were a year ago, when this 2018 to 2020 EBIT bridge was first introduced, we can reiterate our confidence in our 2020 guidance, with a P&P EBIT contribution of greater than €1.6 billion. 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, that the sum is essentially the same, an EBIT contribution of €150 million-€250 million. Our measures to increase productivity are on track, we are still looking for the targeted improvements in the €150 million-€250 million range.
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 €200 million. We are, however, working on identifying additional measures for indirect cost reduction. I think it's important that you are aware that we expect any potential additional restructuring charges in P&P in the second half of the year to be largely offset by positive pension revaluation effects. This would hence have no material net impact on 2019 EBIT and the related guidance. 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 while the volume growth is very solid at 6.6%. You can see on the slide the Express cost triangle as presented before. What you can see at the top of the triangle is the difference between shipment per day growth and revenue per day growth. 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 SPD and RPG 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.
Because we carry the full cost of the aviation network but have a temporary dip in utilization, which we have tracked in the chart on the lower right-hand side of the page, our cost per kilo initially goes up. We now gradually backfill the capacity and annualize the 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 upwards trend 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 Scharwath's Simplify 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. Turning to the group P&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 is a much higher tax rate. 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. 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 of the provisions built up during last year's restructuring, which affects the changes in provisions line. We also had a year-over-year higher cash tax 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 EUR 743 million for the Boeing 777 Express refleeting. This is fully aligned with our gross CapEx guidance for the year of EUR 3.7 billion, EUR 1.1 billion of which will be for those 777 refleeting.
All movements on the cash flow statement are coming in as we anticipated, allowing us to maintain our free cash flow guidance 2019 of more than EUR 500 million for the full year. This takes us to page 19 in our guidance. I've already talked about the reason why we have tightened the lower end of the P&P range and how that affects our group guidance. As mentioned before, any potential additional restructuring charges in the second half of the year in P&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. 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. 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. I think you can see that very nicely in our Q2 numbers. Obviously, the air freight volumes are more exposed than the revenue growth we see in Supply Chain and the parcel growth in Germany. Even the post decline in P&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 the important thing here is 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. 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. We are able to narrow our 2019 guidance upwards, and we remain committed to delivering on our 2020 goals. That was the short overview, and now over to you for your questions. Thank you.
Ladies and gentlemen, if you would like to ask a question, please press nine and the star key on your telephone keypad. In case you wish to withdraw your question, please press nine and star again. Please press nine and star to state your questions. The first questioner is Robert Joynson from BNP Paribas.
Hi, Rob.
Good morning, Melanie and Martin. A couple of questions from me on Express to begin with, please. First of all, on the network utilization, you mentioned, Melanie, that the utilization is temporarily lower, while volume is growing so that the capacity freed up by replacing the heavyweight items. Could you maybe just comment on how long it will take before the network utilization returns to the optimal level? 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. If you maybe just comment on what's driving TDI growth in Europe specifically, please. Just a final question on the impact of IFRS 16 on net income.
When Deutsche Post introduced IFRS 16 at the beginning of 2018, you communicated that the impact on net income would be negative initially. 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? Thank you.
On Express utilization, we started with a heavyweight campaign after the summer of 2018. We now expect utilization levels to increase back to the more normal levels in the course of the second half of the year. Obviously, when you take out this heavy stuff, particularly on the flying side, it frees up quite a bit of capacity, and we now needed time to really grow into it. I think two things are going to help. The first one is the more dynamic growth of the nicer, smaller shipments now with 6.6%. 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. 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 Express 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 extension. I think also when you look at the second quarter margin, now with 12.3%, that is a very good margin.
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 financial results below EBIT. The problem is that the interest component and the depreciation component are different in the way you treat the liability and the assets. That is leading to a bigger hit in financial results than the gain you get on the EBIT side. 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. 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 of January 2018.
Given that those are normally multi-year 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 with apples.
Wonderful.
Could you, sorry, just a quick thought. Could you maybe just provide maybe an estimate of an indication, Melanie, of when the IFRS 16 impact on net income will become neutral compared with when it was in 2017? Are we talking maybe the 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. 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. For us, the important thing is that we now show year-over-year progress from the new starting point, 2018, after the implementation of IFRS 16.
Okay, Rob?
Okay. That's clear. Thank you.
Great. Thanks. The next caller then, please.
Yes, next up is Mark McVicar from Barclays.
Morning, Mark.
Good morning, Melanie. Morning, Martin. How are you?
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 EUR 10 million? Is it EUR 30 million? That order of magnitude?
The second?
That's the easy question. Now let's hear the difficult one.
Yeah. The slightly more difficult one is, if we look at your underlying EBIT in 2018 was just over EUR 3.6 billion, and the target remains to get that to at least EUR 5 billion, by 2020. With all the restructuring programs, how much of that EUR 1.4 billion uplift do you think is coming directly from 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 would be good.
Okay. Maybe starting with the currency question. Actually the biggest pain point for us year to date and also now in the second quarter, was the U.S. dollar. I think overall in terms of negative effects, we are talking about order of magnitude of EUR -40 from currency headwind in the second quarter. With regard to the EUR 5 billion question, obviously, delivering on the numbers for 2019 is already going to take us a big step closer to the EUR 5 billion, 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, in terms of absolute step up, the biggest contribution had to come from P&P, There, 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&P side, being disciplined on the parcel yield, continuing with taking out indirect costs, the productivity measures, those are all things which are under our control. I would really say on P&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.
Obviously, for example, when you think about Global Forwarding, getting the GP to EBIT conversion up from a certain point onwards, gets easier if you have a bit of macro tailwind. 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.
Okay. That's great. Thank you.
Fantastic. Thank you, Mark. We'll come to the next caller then, please.
The next caller is Cristian Nedelcu from UBS.
Hi. Thank you very much-
Hi, Cristian.
for taking my question.
Mm-hmm. Sure.
Can I start with Parcel Germany, please? Should the price increases tailwind accelerate in Q3 versus what we've already seen in the second quarter? Secondly, here, maybe, we are hearing Zalando talking more about diversifying its last mile partners. Do you expect this to be a headwind to your parcel volumes into the second half? 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 from the purchase goods, we've seen relatively good performance in Q2. Do you expect to see some further benefits from lower air freight rates and lower oil prices? Equally, so in staff costs, what are your expectations of staff addition and cost inflation for the second half in Express? Thank you.
Okay. Starting with Parcel Germany. As I already tried to say with regard to the full benefit of all the yield measures, I think we really have to see now in the course of the third quarter. 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. 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. Again, I think now after the third quarter, we will get a better feeling for the running rate here. Zalando diversifying on the last mile.
I think what we have always said, also with regard to our very big customers here in Germany, we are not as dependent on one or two customers as it may sometimes seem reading the newspapers. Overall, of course, we love working with the big e-com centers, but we also have a very broad customer portfolio below the big centers. On that basis, we are relatively relaxed. I think this is more the usual shifting around between players in the market. On the Express side, with regard to cost development. The big chunk of the flying in Express is actually through our dedicated network. We do commercial airlift, where we will see some benefits of the falling freight rates. At the same time, we are also selling off excess capacity in our dedicated fleet.
I don't expect a significant positive benefit from the net position of those two. With regard to staff costs, we are at the moment still seeing an increase in our direct FTE because the volume is growing. Staff costs will continue to go up, but in Express, like in the other divisions, we have a very tight focus on indirect costs. Again, that is an important element of our self-help agenda in those uncertain times, really make sure that we keep particularly the indirect cost line under control.
Okay. All three questions answered. Christian, any more?
Thank you very much. No, I'm fine.
Good. On to the next caller, please.
The next caller is Joel Spungin from Berenberg.
Hi. Good morning, Melanie. Good morning, Martin.
Good morning.
Just got two, actually. Maybe just to start off, you mentioned potentially doing some more restructuring in the P&P division in the second half. I was just wondering if you could elaborate a little bit on what you were thinking about there, and specifically, do you have a sense at this stage, I know it's early, but what the quantum of that might be? Also you mentioned obviously it'd be offset by a pension gain. Does that mean that we will be seeing something like a cash restructuring charge being offset by a non-cash gain? Is that incorrect? Maybe we start there and then I'll come back. I've got another question on Express as well.
Okay. On the P&P restructuring, again, this is early stage. 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 2019, 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 civil servants had stayed on board until their retirement, all under the assumption that we don't have to refill those positions. 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, EUR 200 million.
Overall, we would expect it to be more or less neutralized by a net cash neutral pension valuation effect. We will explain all the details once we have firmed up the program, probably in the course of the third quarter. I don't think you should expect any nasty surprises, neither on the EBIT nor on the cash side.
Okay. Thank you for that. Then maybe just another one on Express. I was just wondering a little bit, if you could comment, maybe just qualitatively, if 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, now the last five years. 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 is not growing as dynamically as the parcel stuff. Overall, we've had a positive base revenue per kilo quite consistently over the last years, and that is also not changing now. I think that is, for example, an area where we have been extremely disciplined also in dealing with currency fluctuations.
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, thank you. Maybe just one very quick follow-up on that. UPS has talked about sort of increasing their investment into their own cross-border B2C product, which 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 too early to say?
I think it's clearly too early to say. If I understand it correctly, they are building a deferred postal-like product, where we have the advantage of also having our postal legacy, and that is what we're trying to leverage in our eCommerce Solutions division. I think we are quite uniquely positioned here in the sense that we have the high-value, speedy TDI Express offering, whilst also having a postal product and a deferred product available.
Okay, thank you very much.
Thank you.
Great stuff. Thanks, Joel. The next caller, please.
The next caller is Damian Brewer from the Royal Bank of Canada.
Morning, Damian.
Good morning. How are you? 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? Could you elaborate a little bit more about how much more you think you could take that, both in the second half of 2019 and into 2020, particularly in areas where you haven't seen much in the way of volume pushback? Second question.
Sorry, is that relating to Parcel Germany or to Express?
Both.
Both.
Across the businesses, Parcel.
Okay.
In Express, and also, frankly, in the freight forwarding business as well.
The second question, really about your customers. Are you seeing any change, given how thin these 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? If you have, could you elaborate a little bit more on anything you're seeing there? Very finally, in the Supply Chain business, that clearly did very well in H1. Is there anything unusually non-seasonal in that business? Should we still expect Supply Chain to do about 60% of its EBIT in the second half of the year on an underlying basis? Thank you.
I think on the yield side, when I look at the maturity levels across the divisions, I would say the Express colleagues have been the masters in the art of smart yield management. We have now cross-fertilized the parcel pricing teams with the knowledge of Express, so there has been a very vivid exchange. 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 Parcel Germany to offset the cost inflation. I think this year was very much a catch-up year. I think on the air freight 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. 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 Global Forwarding, the main focus is still on process efficiency and the GP to EBIT conversion. With regards to do we see any specific customer groups, industries now coming after air freight 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 there's no clear pattern at this point in time. Like everybody else, we also see that automotive isn't having a great time, and so the usual observations, but I don't see anything totally noteworthy and somebody now showing signs of revival.
No. That would be my answer, provided that we understood your question correctly.
Okay.
Damian?
Yep, you have. Thank you.
Yes, indeed, you have. Thank you.
On the last question, Supply Chain, is there a kind of like a season and non-seasonal element in there? 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 real estate venturing 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. The fundamental Supply Chain business is very non-seasonal and stable.
That's great. Thank you very much.
I always say, it's a lot of consumer stuff and diapers and toothpaste are relatively non-seasonal.
Okay. Thanks, Daniel. Over 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&P and the relatively large 3%-4% price increase on the parcel services. How should we see that price increase in relation to the expected cost inflation you anticipate for 2020? I understand you have the next pay rise on October 1st of 2.1% under the current labor agreement, and what do you anticipate will be coming in 2020, and could you please provide a timeline of when the next negotiations with the unions will start? Secondly, also on Supply Chain. I saw you did not discuss it in the slide deck, but the restructuring of the U.K. 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? Thank you very much.
Okay. First of all, on the cost inflation in Germany, we had a 3% wage increase on the 1st of October 2018, and that is quite visible in our staff cost development. We will now have a relatively moderate 2.1% increase on the 1st of 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. That is clearly one of the major to-dos for P&P in 2020.
Looking at what we currently see in the market in terms of labor agreements, I think it's safe to say that it will probably be 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 parcel year side.
Is that already included in the staff cost increase that you highlight in the slide deck of almost EUR 50 to almost EUR 50 million, or would that 2%?
That is one-
in addition to that range?
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%, but that is one of the reasons why we have this relatively wide range in this number.
Understood. Yeah.
On the Supply Chain question. Yes, indeed, we didn't point it out in detail in the presentation because it was, I think in terms of news, not materially different to what we had discussed with the Q1 numbers. We had the second booking of restructuring charges now in the second quarter, EUR 53 million for Supply Chain. Again, if you take that out, we saw solid underlying growth in the Supply Chain result. The improvement program for the U.K. is delivering benefit year-over-year, but there are some legacy topics there which will really take us into 2020 to get fixed. There will be also a year-over-year contribution in 2020 from what we do this year in terms of restructuring in the U.K.
Okay. Thank you very much.
Okay. Thanks, David. Let's speed up and go over to the next caller then, please.
The next caller is Adrian Pehl from Commerzbank.
Yes. Hi, good morning, everybody. First of all, question, again on the yield side of things. Just to be very clear on that, it sounded that you were pretty happy with the 3.6% increase, but I sense a little bit that you were positively surprised to some extent, but refrain a little bit from being more upbeat on H2 price measures. Do you fear a little bit that we see, let's say, a lagging volume effect in Q3? Otherwise it seems that you need even more price increases to offset the cost items that you just mentioned. Then I have two 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? A question a little bit linked to what has been asked in Supply Chain on any special effect.
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 pushed it up, and what should we think of it, going forward? I might have follow-up.
I think on the parcel yield side, that was more, not to let expectations run away. I think we now really have to see after the summer, how the whole thing stabilizes. I very clearly expect a solid continued growth in parcel volumes. 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. They feel the same or an even higher cost pressure. Given that their whole delivery model is, to a large degree, built on subcontractors, and it's just difficult to find people willing to deliver our parcels at minimum wage in Germany. Their inflationary cost pressure in many cases is even higher. 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.
The fundamental trend is definitely a healthy one, and the parcel marketing and sales team is doing a terrific job here. In terms of pension effects, no, there were no pension effects in Q2. 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. 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 fourth quarter. I think we also talked about that in March briefly, because that was really extremely prolonged, and that was really then driven by a lot of those real estate venturing projects being concluded just before Christmas. Now in the second quarter, I would say it's more the ordinary course of business and working capital management.
Yeah. All right. 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 stamps 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 stamp 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 numbers side, there were no extra distribution costs for stamps or anything material which would impact our third quarter numbers.
All right. Thank you.
Thanks, Adrian. Over to the next caller then.
Next up is Andre Mulder from Kepler.
Good morning. A few questions on parcels again. Can you give us 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's shown in the numbers. Secondly, you're looking at a possible change in the setup of countries. You already made an agreement with Post CH on Austria, Slovakia, and the Czech Republic. What more countries can we expect, and how is the path going forward there? Last question is on the e-commerce. Loss is still quite high there. Can you talk us through the different parts, how these are developing?
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 small and mid-size customers, but we are also targeting big customers. Those considerations, of course, also take mix effects into account and also seasonal volatility, which we see from large customers. I would say at the moment it's really a healthy price development across the whole product set. With regard to eCommerce Solutions, 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.
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 Austrian Post in the Czech Republic. I think this is really a very pragmatic and undogmatic approach, which is quite opportunity-driven. When you look at the eCommerce Solutions results, they are indeed negative, but that is largely driven by a EUR 28 million restructuring charge we now took in the second quarter. There has been a clear focus on the leadership of Ken Allen in taking out overhead costs, and streamlining some of the organizational setups he found when he took over on the 1st of Jan. 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, it's unchanged.
It's our pan-European network, and it's a selective number of activities outside Europe, with the biggest countries outside Europe being the U.S. and India.
A follow-up on that. How are things developing in the U.S. now? Because we hear some other postal operators having difficulty there.
I think we have had a very nice and profitable niche business there for many, many years. We are actually quite pleased with the performance of the U.S. business, both in terms of top line, as well as EBIT development.
Okay, last one on the parcel side. You mentioned these agreements with Austria Post. They have some other countries there as well. How will you look at those areas, the former Yugoslav Republic?
I think the big benefit we have for the really small countries is being a postal operator. We can still use the ties to the local post offices. That's kind of like the default option, which we utilize in most of the really small countries. Alternatively, and that's also a nice element of the group structure, in all of those countries, we also have our Express networks. For each country, we have two 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.
Okay. Thank you.
Okay, thanks Andre. Back to the bigger picture. Next caller, please.
The next caller is Christian Obst from Baader Bank.
Yes, good morning. I have three questions. First is, on the volume in Express, how much of the entire Express volume currently is B2B and how much is B2C? Can you give us the growth rate? You talked about B2B is approximately 2%-3%, if I got it right, and B2C, is it going toward double digit or is this only a high single digit growth there? What do you expect for the time to come there? It goes to Supply Chain staff cost increase by approximately 11% on a year-on-year basis, also in Q1. Maybe can you give us some clarity what's happened there? The last one is on DGF. CargoWise is implementing, and you talked about that you are running two systems in parallel and there's no impact so far.
When do you expect first meaningful impact from the switch towards CargoWise in the forwarding business? Thank you.
Starting with the Express question. The current split on B2B, B2C is 70/30. 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 in 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. 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, there is a general increase in headcount and salary inflation. There's also a specific topic with regard to health insurance.
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 costs. There is also a shift between buckets in there. It's a combination of headcount growth in line with business growth, cost inflation, but there is also this movement between the categories.
Okay.
Yeah. Then on the CargoWise-
Then on the CargoWise, yeah, sorry. On the CargoWise timeline, so we are well advanced with the rollout of ocean freight. Intention is to really get ocean freight completed towards the end of the year, so that for ocean freight, we should leave the co-existence phase in the course of 2020. For air freight, the rollout will continue throughout 2020 and into 2021. 2020 will be the first year when we should really begin to see the benefits on the ocean freight side.
Okay, thank you very much so far. One last question concerning freight forwarding. The air freight volume is going down and in the quarters before, Tim?
Tim.
Tim Scharwath.
Yeah, Tim. Reduced volume to improve productivity going forward. How far can you lower your volume going forward without having a massive negative effect on the fixed cost base?
Yeah. I think what we have now seen in the second quarter is indeed a combination of two 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. 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. The next caller, please.
The next caller is Daniel Roeska from Bernstein Research. Over to you.
Thanks very much. Good morning, everybody. Just two from your left, both on P&P Germany. Number one, could you comment on the current discussions on the USO and how the discussions on the USO, whether or not to move to the five-day delivery framework is factored into your plans and how you would expect that to evolve and when we could expect, or how long that discussion will actually take. 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. Could you just comment on the current, 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.
Yeah, I think two very good and very broad questions. I think first of all, on the universal service obligation, in the coalition agreement, there was already a clause in there, that the postal law should be reformed during this legislative period. We feel that this is really overdue, because obviously, the law is around about 20 years old. Looking at what happens with e-substitution and digitalization, we feel there is a time to take a new 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. We will get the opportunity to comment on the law, like other involved parties. 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. 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 deal 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 have started hiring new parcel delivery people into these new entities.
They were, of course, an object of hate for the unions. We have now struck 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 at more favorable starting conditions. 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. We now got what we had 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.
They also positively acknowledge that we are reinvesting in productivity and in the people in the field out there. I think compared to where we were a couple of years ago, it is actually a quite constructive atmosphere at the moment.
Is that true for both the unions and the?
It is true for both. I think normally, we had, in many cases, independent of union politics, very good relationships with the works councils. They also see that a lot of the stuff we are now doing, for example, with the reinvest in productivity, and new tools for people, that this is really helping people do their job.
Good. Thank you.
Daniel, thank you for that. There are three more callers in the queue.
The next caller is Andy Chu from Deutsche Bank.
Hi, good morning. Two questions, please. First one is on Express. I wondered if it's possible to give the market any sort of comfort that the rebound in profitability is already happening. Is it possible to maybe talk about the spread between revenue per day in terms of TDI revenues and volume, in TDI, that spread? Has that actually closed to flat or even slightly positive as you've exited Q2 into Q3? I'm switching to Corporate Center. You spent EUR 200 million in the first half, nothing in terms of the EUR 100 million of investment. Is EUR 500 still the right sort of number for the full year? Thanks very much.
Yes, I think on Express, we obviously expect, both with regard to RPD, SPD, but also with regard to the leverage of the network, a positive development in Q3. We're just getting the July numbers in, I wouldn't feel comfortable making bold statements on the topic. I obviously would expect a clear positive direction. In terms of Corporate Center costs, the reason why we have a different guidance from the 350 we normally have for corporate functions, is the areas we have in corporate incubation, where we have a couple of plans now, in the second half of the year, which is why just taking the H1 rate and doubling it is here not the right approach.
Thanks very much.
expecting them around about minus EUR 500 for corporate functions.
Good question. Thanks, Andy. Two more callers.
The next caller is Andre Mulder from Kepler.
Yeah, good morning. Some follow-ups. Firstly, on the Forex effect. I think the effect on sales was something like EUR 100 million. The EUR 40 million that you mentioned, was that just the U.S. dollar, or was that the total Forex effect?
Yeah. 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 EUR 100 million FX on revenue, and then we have around about EUR 110 in revenue loss from the divestment of the China business. On the revenue side, it's indeed around EUR 100 million, and the EUR 40 million on EBIT was the total number there. However, the US dollar is the biggest chunk by far. Yeah.
Yeah. On tax rate. So far, it's at 22%, but that didn't let you to change your guidance from 19%-22%?
No. At the moment, we are at 22%. I think we still have to see how now the dynamic in the second half of the year develops. 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.
Last question on Asia, looking at the development at the divisions. Only at Supply Chain, I think the effect is a bit large there, even if you strip out the China thing. Can you comment on that? Why is it stronger there? I would have expected it would be stronger in Express.
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 divisions, be it in E-commerce and Express or Supply Chain. Both in the E-commerce and Express, the development in Q2 is about the same as what we've seen in Q1. Only in Supply Chain, there is a somewhat bigger decrease compared to Q1, even if you strip out the China disposal. It seems like the Q2 number in Supply Chain is a bit weaker for Asia-Pacific than, for example, Q1.
I think when I look at the revenue in Asia-Pacific, for Supply Chain, it was EUR 482 in Q2. Yeah. In the second quarter, we didn't have anything from China. I think there was an effect of around about EUR 110 million in revenue losses. In the first quarter, we still had the China revenue for January and February, and we only missed it in March.
Okay. Thank you.
Well, good. Thanks, Andre. One more caller I see.
Yes, it is Cristian Nedelcu from UBS.
Hi. Apologies. Two 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%. 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? Did I understand well that you do not expect significant demand elasticity post the price increases in July? Just the second one on Express. If I remember correctly, you gave us a bit of color into Express volumes for April at the Q1 result. I was wondering if you can provide a bit of color about July, how these Express volumes are starting in the quarter. Thank you.
Yeah. I think on the Express July question, I think it's really 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 far, no peculiarities. In terms of Mail Communication, we had one less working day in Q2. When you look at the volume decline normalized for working days, it is more in the usual range. I wouldn't over-interpret this. We indeed do not expect a lot of price elasticity on the increase we have now implemented for the ex-under regulated EUR 2.8 billion basket.
Thank you very much.
All right. Thanks, Christian. Looks like my bold prediction was correct, and there are no further callers. Operator?
We have one more caller in the queue.
Close. Okay.
It's Matija Gergolet from Goldman Sachs. Over to you.
Yeah. Sorry for the last-minute question. I have two, hopefully quick.
The whole one.
Firstly, on the guidance. You're still keeping the full year EBIT guidance relatively wide, particularly in Post & Parcel. 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 revaluation benefit on the pension. Why is the guidance in the Post & Parcel still relatively wide? What are you particularly fearing or monitoring? The second question, just on operating cash flow in the second quarter. Can you just remind us what were the outflows for the restructuring charges in the quarter? Perhaps also give us a bit of color on what you expect for the coming quarters in those restructuring cash outflows. That's one area, particularly Post & Parcel, where numbers were perhaps a bit below what was expected by some.
Thank you.
Okay. I think on the second question, I think the overall amount of cash out we expect for the restructuring is around about EUR 90 million for the year. That is clearly skewed towards the second half of the year. I would say it's roughly one third, two thirds between first half and second half of the year, but just kind of like order of magnitude. The overall number for the full year should be around about EUR 90 million order of magnitude. In terms of why do we still have a relatively wide range for P&P? Obviously, like I said, we have to see how the whole parcel volume growth yield meanders out. I think, however, the biggest uncertainty is on the whole productivity, which is the area which is most back-end loaded, where we are now beginning to see an encouraging trend.
We really have to see how rapidly that now ramps up in the second half of the year.
Okay. Very clear. Thank you. Thank you very much.
Thanks, Matija.
Thank you.
No more callers in the queue.
Oh. Well-
Okay.
Melanie, over to your closing remarks.
Yeah, I think we've covered a lot in the Q&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 and 2020 guidance. Thank you very much, and have a nice rest of the day.