Good morning to everyone out there on this Friday morning. As you have seen in the invitation, we're going to take you, as always, with Frank Appel, our CEO, and Melanie, our CFO, through the Q1 deck that I take it you have in front of you, and we're happy to deal with your questions after that. With that, over to you, Frank.
Good morning as well from my side. Let us turn straight away to the first page, where we highlight the Q1 results. Overall, we are satisfied with the starting to the year. We had a relatively slow start with volumes in parts of our business, that has accelerated quite a bit in the quarter and confirms our perspective that we will see this year a solid growth in the global environment. We have also worked on all our agenda points intensively, we see already impact from that, starting with the draft mail regulation, which is helping us now going forward. It's higher than the original ruling and is at the upper end of the potential outcome we expected. That's good news. The parcel price increases are working, as I will show you later. Volumes are growing still very nicely, revenues even growing faster.
We expected relatively little or non-growth on EBIT in the first quarter in Express because in October last year, we took volumes above 300 kilograms out, that has led to a lower utilization rate of our airplanes as expected, that has led to no further progress on the bottom line, this is perfectly in line with our expectations. DGFF had another very strong quarter, very nice development in both parts. Supply Chain as well had, if you take our transaction out and some restructuring expenses we have booked as announced, we have seen very strong development there as well. That's the reason why we are very confident that we can deliver this year and next year's guidance. The quarter overall is fully in alignment what we expected. We are happy with that.
That's the reason why I can go straight away back to page four, where you can see the revenue development for the quarter by division. With PeP, we had a relatively small growth, that's in line with our expectations. We didn't get, in this quarter, any postage increase. We knew that already before. Of course now, for more than three years, no postage that has impact parcel continued growth and mail volume declines. Express, good development, as I said, due to the change from heavier weights to lower weights, we have not as strong growth as we have seen in previous quarters. DGFF, good development as well, particularly on yield. Gross profit is developing nicely. Volume still declines, also as expected, Supply Chain, good momentum on the top line and also good growth in our new division, eCommerce Solutions.
Overall, this is, as I said, in line with our expectations. If I go now to the growth of the different divisions, page five. You can see here the development, and I would like to highlight two things. One is that the overall volume decline is still on the range of 2%-3%, 3.1%, but that includes also a shift of one smaller product to parcels. You can see here very nicely that volume have grown still on the upper end of our long guidance, 5%-7%, and nevertheless, we had even stronger revenue growth. That shows us for the first time that our price measures are working. It's definitely too early to declare victory that all customers are sticky, but it's very encouraging that you see such a strong growth in volume despite significant price increases. Don't forget, we have a mix effect.
Our larger customers, our business customers, have grown faster than our private customers. Of course, private customers are paying significantly more. If you look into individual customers, you see even higher increase of prices, which is very encouraging. Second, we are still working with some customers on the implementation of price increases. Anyway, it's a very encouraging sign. What we have done here is working. It shows also that our quality is better as we monitor that very precisely. We had a great Christmas performance and quality, and we had equally a great Easter performance. That shows that the fundamentals are heading in the right direction. Express. You see here that the revenue per day growth is smaller than the shipment per day, so we still see very healthy shipment growth. That was started weaker and accelerated quite a bit in the quarter.
This mix effect from having taken large heavy weights out is, of course, leading to that the revenue growth per day is slower than the volume growth. Because if you take high-yield product and very few shipments out, you have that effect. That should normalize in due course, and we are fine with the development we have seen in this quarter. As I said, it has been expected by us as well. On page seven, you see still that on volumes, there is still some work to be done. Our focus on profitable customers is still working, as you see in the overall development with GP per ton and GP per TEU. That's right. Of course, the agenda now will change that we start to grow profitable, and Timo and his team is working on that.
Overall, we are very satisfied, particularly because this gross profit has turned in a higher EBIT as well, as you will see later. I turn to page nine. This is the EBIT development for all. The development in P&P Germany is fully in alignment with what we expected. I explain in a second more or less how we see the phasing. We had last year a significant one-off, which we of course have taken out. Even if you take that out, we are still down year-over-year. That doesn't come as a surprise for us. We have put additional measures in place in the first quarter to improve productivity, and the benefits are not there yet. Second, of course, we haven't had a price increase, which had been supporting the business quite a bit.
That had already taken place in the first quarter. I will comment in a second about the overall development. This is in line what we expected for Q1. Express is stable year-over-year. I explained the reason is not that we have no volume growth or that we see a significant slowdown in the economy. It's really a reflection of the significant measure we have taken, because we took the heavy stuff out. DGFF, very nice development. A significant increase in the bottom line. It's definitely one, if not the best first quarter in the last 10 years, that's very encouraging. The journey to close the gap in our margins to our competitors is continuing, which is great. In Supply Chain, if you take out the China benefits and our restructuring expenses, double-digit bottom-line growth as well, which is also good.
In eCommerce Solutions, despite that it's a small number, if you take the restructuring numbers out, we are up year-over-year as well. Overall, very good. In corporate functions, finally, we have not seen the expected ramp-up cost in the scale as we planned for. That's the reason why we had a good start here as well. Overall, all what we see here is in line with what we have expected for the first quarter. In all measures, if you go through all divisions, we see that they are generating impact. Next page 10. If you go through that, you of course have several impacts. We had no price increase. That will now take place in summer. I come to that, what the next steps are, in a minute. The parcel price increases are working. We see a reduction in direct cost.
What we said in the last month already, that takes always longer than you expect. We have enough measures. We have a good pick-up of the early retirement, but it takes time until the people are really leaving the company. We will see an acceleration of decline in indirect costs, but we have now seen since August every month was lower than the previous year. It takes time. Finally, the productivity measures, that of course, is back-end loaded, as already said. We should see in the second half significant more impact from that already than in the first quarter. That's the reason why we see here that, of course, first quarter will be still down year-over-year. Second quarter will show improvements in alignment with our guidance we have given you. Next year we should see then the full impact.
What I see in detail is very encouraging, even if that's not visible in our numbers here. On page 11, before I come to the Post's agreement you see here. We appointed a new colleague to that. Tobias Meyer has worked for me already when I was in charge of that division as the COO and head of IT. He has done a great job there and helped me to define the agenda, which is described here. We are following here exactly our normal procedure. We have measures to become employer of choice, provider of choice, and investment of choice. We are very clear that we have to intensify our Certified program, and you know that we have done that in other parts of the company very successfully, in particular in Express. We have to improve the equipment side.
We have probably a little bit too less invested in the last years into that. If you don't enable our people, you should not expect great service quality. We have to focus more on an open dialogue culture and focusing at the same time on improving performance, which is happening already. That's tone from the top very much, and I think Tobias does a great job there. On the provider of choice, if you go through that, of course, we have to follow the standard operating procedures. That has improved significantly quality. I see that as well. I'm still monitoring that on a daily basis, despite that I hand it over, because I think that's a recipe for success. We have significantly better forecasting, where we also use some artificial intelligence to predict better, which has helped.
The focus on service quality, service quality, service quality is very clear. We have now brought some of these parts under operations so that there's even a closer link between customer service and operations. On the investment price increases will continue. We feel very encouraged what we have seen. Anecdotally, we also hear that our competitors are doing something. That our customers are telling that we are not the exception, and that is helpful as much as they really do, I don't know, because we have no visibility about that, but it's more anecdotal evidence that this is working. On indirect, I talked already about, and we have good ideas or very good ideas what we can do to improve the process. We have seen a stabilization of productivity declines in the first quarter already. This is again, heading absolutely in the right direction.
Last page from me on page 12. We got now the new proposal that is from 4.8 to 10.6, which is a very good step. The final decision after they listen to comments from interested parties, will be decided end of May. The proposal will then translate it in real price suggestions, which needs to be approved by the regulator as well. Hopefully by July 1st, we then can implement that. We are very confident that this is now the right journey. That's a process. That's the reason why we not today talk about that, what the real final price increase will be. The regulation gave us now significantly more headroom, more than twice what we have gotten from the regulator in the first place. That definitely will help to achieve our goals this year and next year.
With that, I hand over to Melanie, and she will comment more on the EBIT numbers, the cash flow and these kinds of aspects for the group and the divisions.
Thank you very much, Frank, and good morning, everybody. I will now start by covering the DHL divisional EBIT results in a bit more detail. Starting with Express on page 13. When we presented our full year numbers in March, the global macro situation showed a lot of uncertainty and somehow that hasn't changed. At that time, we saw a rather slow start to the year, plus a high comparison base. In March, we began to see signs of normalization. When you look at our Express phasing over the quarter, January and February were definitely significantly slower than March. By March and now also going into April, we saw again solid growth in Express TDI volumes. I think it's important to mention the timing here because of course, we were fully aware of this dynamic, when we issued our guidance for the full year 2019.
You can see on page 13 also, the mascot for our heavyweight campaign. As communicated in March, have actively managed heavyweight shipments out of the network. That led indeed to the effect I mentioned two months ago of slower revenue per day growth, compared to shipment per day growth. As you saw in Frank's slides, we had still 5% TDI shipment growth, about 150 basis point difference to the revenue per day growth. That was really driven by the heavyweight campaign. This effect will still be visible in the second quarter, but should diminish as we lap the start date of the heavyweight campaign in the third quarter. Currency is obviously always a topic for a global business like Express, for us, that's a normality and a reality of life.
In the current quarter, we have seen a strong year-over-year increase in the U.S. dollar versus EUR rate, and that has increased our sales, but cost even more so. If you would look at the Express EBIT, excluding those FX movements, the numbers would be slightly up. To summarize it, all these effects made for a more demanding start to the year, but we are confident that Express will remain a strong growth engine for DHL. We currently see growth again on more solid levels, and the very experienced management colleagues at Express really know which levers to pull. That takes me to page 14 and Global Forwarding, where it was a very good start into the year. We see a continuation of the upward trend in Global Forwarding, and we are very pleased to see now in the first quarter conversion ratios back to previous peak levels.
I think we are in a very good way here to reach our numbers for 2020. The Global Forwarding improvement agenda is clearly more than IT, but IT does play an important role as an enabler. We are hence pleased to see good progress in the rollout of the new IT systems now both in ocean and in air freight. We still have a way to go before both have reached full implementation status and deliver full benefits. It will be a gradual ramp-up over time, as we have discussed in the previous quarters. Turning to Supply Chain. Obviously, the Q1 numbers are distorted by the closing of the transaction in China with SF Holdings. The proceeds from this transaction allow us to undertake some restructuring primarily in the U.K., which I had already mentioned last year.
We began with those measures in Q1, have so far used a bit less than half of our cost of change budget. On that basis, we are confident that we will for sure recoup the lost EBIT from the disposal of the business in China, and that this will really boost also the profitability in the region U.K., Ireland. That takes me to our overall group P&L for the quarter. We have already talked about revenue and EBIT, where obviously we see the various one-time effects. The two lines I want to mention here on that slide are the financial results. The increase in financial result or the more negative financial result line, is due to two effects. The first one is the impact of the mark to market of long-term incentive plans based on our now higher stock price.
We also see the higher interest costs from leases, a normal development in line with more leasing due to more business growth. Finally, the tax rate in the first quarter was 22%, in line with our guidance range of 19%-22%. We also had a higher profit before tax base, hence the increase in taxes. That takes me to cash flow and balance sheet topics, starting on page 18. The first thing I want to mention is that in the first quarter, our cash flow is always negative due to seasonal effects, and in particular, the annual payment for the civil servant pensions here in Germany. Having said that, the cash inflow of the SF transaction helped to counteract the normal Q1 effects, so that the free cash flow in Q1 2019 was significantly less negative than in a usual year.
We also, as we have now one full year of IFRS 16 implementation, we have clear year-over-year comparison numbers. You can see in the net cash for leases that, as well as due to the growth in the underlying business and the underlying lease portfolio, mainly for land and buildings for new Supply Chain warehousing contracts, we have an increase in this line. That is the standard slide on cash flow, but we are obviously aware that cash flow is one of the big topics on your mind. In recent investor meetings, we got a lot of questions regarding free cash flow, which is why we have now included two rather detailed slides on page 19 and 20 to give you an indication for how to think about the key elements in our cash flow guidance for 2019.
Page 19 first shows the bridge from EBIT to operating cash flow. Here we have two technical aspects which are worth taking into account. In 2018, we built EUR 400 million in provisions for the early retirement program in PeP. We expect roundabout EUR 100 million of cash out from this program in the course of 2019. That is obviously impacting the changes in provisions line. The second thing is that with more and more people accepting and going into early retirement, we will see a accounting reclassification from provisions into other liabilities. There will be a technical move, which is also going to impact the changes in provision line, which is why this line will be higher than our normal roundabout EUR 400 in this line.
The second technical thing to point out is that obviously we have to eliminate in the operating cash flow the impact of the one-time gain in EBIT from the China Supply Chain transaction. That as well is impacting OCF, and you can then see this effect turning to page 20 in the net M&A line. Otherwise, the observation remains that the two biggest cash utilizations on our way to free cash flows are the investments we are putting into our operations through both CapEx and ongoing cash for leases. I think there's no surprise here that is in line what we have talked about in the past quarters. As you know from what we have said before, 2019 is the peak year in our spending on the 777 investment plan.
In 2020, CapEx will be significantly lower than in 2019, although again, we remain very keen to invest into attractive return opportunities with our business. You can see that overall, lower CapEx and lower M&A gains will essentially net in 2020, which is why 2020 free cash flow will be driven by EBIT growth, which we expect to be substantial as we will feel the full benefits of our PeP and other restructuring efforts. That takes me to page 21. Couple of comments on the balance sheet. I think here the key message is that we have a strong balance sheet, which allows us to support the level of investment, including the exceptional 777 buying, which is peaking this year.
We are showing here some leverage ratios and to put those into historical context, generally speaking, we have always delevered over time, but in 2018, as you obviously see, due to the implementation of IFRS 16, we had an upward step change, but the leverage still remains very reasonable. Our rating agencies have both confirmed the debt rating, so they are fully aware of what we are doing from the 777s to our cash flow outlook for this year. Naturally, over time, we will strive to generate free cash flow in excess of what we need to pay our dividends. However, we are not concerned about paying 2018 or 2019 dividends in excess of our free cash flow. Also because we are confident that over time, our CapEx, including and particularly with regard to the 777 program, will improve returns.
Finally, just one last sentence on the 777s because there are also always coming questions on that topic. That is a discrete program and is not intended to be a permanent step up to that level of CapEx intensity. That takes me to a very easy slide, page 23, because that slide is fully unchanged. Nothing new here. Based on what we have seen in the first quarter, we confirm our guidance both for 2019 and for 2020. We are, however, aware of a certain element of skepticism with regard to the achievability of our 2020 guidance. Frank already talked about what levers we see in PeP to get to those numbers. We have now included page 24 to give you a little bit of a feeling for why we, as a management, also believe in the DHL guidance for 2020.
What we have tried to do on this slide here is take out one-off effects. When you look at 2018, excluding the EUR 92 million one-off effect in Supply Chain, we are talking about a starting point of around about EUR 3 billion. We want to go from EUR 3 billion to EUR 3.7 billion by 2020, which means on average EUR 350 million year-over-year. We have it a little bit back-end loaded, as you can see here, because some of the restructuring activities in 2019 are going to dampen 2019 and then put the full thing into 2020. I think the important thing is, A, when you look at what we have achieved in terms of step-up from 2017 to 2018, we had a year-over-year step-up of more than EUR 400 million in DHL. That is not an unrealistic order of magnitude we are talking about here as such.
B, unlike in the past, when most of the DHL growth, or pretty much all of the DHL growth year-over-year was coming from just one division, Express, we now see a much more balanced situation. That is one of the really positive things for me with regard to the Q1 numbers. We said it in March, that we expect all three big DHL divisions to really contribute to 2019. What we nicely see in Q1 now, both Global Forwarding and Supply Chain on an underlying basis have really delivered a very good year-over-year growth. I think the order of magnitude is clearly ambitious, but it is not unrealistic. The key ingredient here is that this is really a three-cylinder game, which will take us to 2020.
To conclude, yes, the growth in Q1 was slightly slower, but we had growth across all divisions, and it was in line with what we had expected when we issued our 2019 guidance in March. We are making good progress on all of the planned improvement measures, and they will start to deliver more and more going forward throughout the year. On that basis, we are confirming our guidance both for 2019 and 2020. Much from my side, and I think that now takes us to the Q&A support.
Right. Over to you.
Thank you, Frank. Thank you, Melanie. Operator, if you start the Q&A session, please.
Thank you. Ladies and gentlemen, if you'd like to ask a question, please press nine followed by the star key on your telephone keypad. If you wish to withdraw your question, please press nine star again. Please press nine star now to state your questions. The first question comes from Mattia Ghergo, calling from Goldman Sachs. Over to you.
Yes, hello. Good morning. It's Mattia from Goldman Sachs. Three questions on my side. Firstly, when it comes to, say, to the guidance for 2019, you mentioned that when you provided the guidance in March, there were some uncertainties, a slow start of the year, no clarity yet on the tariff, say, on the increase for regulated mail. Okay. We don't yet have the final confirmation for the regulated mail increase, but now do you feel more comfortable about the guidance or about reaching, say, the upper part of the guidance, given that, as you said, the mail price increase is at the high end of your expectations? That would be my first question. Secondly, in July, when you get the price increase for the regulated mail, will you be also considering increasing prices to business customers?
Thirdly, still on the PeP, with regards to the EUR 150 million of, say, you call it restructuring automation costs, just wanted to double-check that these were basically the same costs that you have already signaled last year, or whether these are incremental costs for the division. I think there is a comment about that in the press release.
Thank you.
Okay.
Yeah. I take the two first and then Melanie on the last one.
Okay.
On the guidance, as long as we have not a final decision of the regulator, Mattia, you answered more or less the question. We will not narrow down the guidance, that's the reason why I'm not commenting now where we end up. I said already, it's also considering how much restructuring we will do, we are working on that as well in conjunction with the regulation. That I have to say, we are still saying we are very confident that we can get into this range as we have given. With regard to the stamp price, we have not taken a decision yet what we will do January 1st. We have taken a decision in already now-
July 1st.
July 1st, that we are not doing anything on July 1st. We have communicated already. If we take some increases for business customer January 1st, we have not decided yet.
Okay. On the 150, this is nothing new. Those are the 150 we have been talking about since last summer. It's just a hint that obviously we didn't have the impact from those in Q1 2018. The EUR 28 million in Q1 2019 don't have a comparison in Q1 2018, which is why we're highlighting it. It's nothing new.
All right. Mattia?
Okay. Thank you. Sorry, clarification. You mentioned that on business customers, you have not yet taken a decision whether there will be a price increase in July.
No.
Is that correct? No.
No. Maybe I mixed it up. We have taken a decision not to do any price increase in July 1st. We communicated that already.
Okay.
We believe we can't do that with business customers who have budgets and all this kind of stuff. What I added, in addition, we have not taken a decision if we do or don't do something in January 1st of 2020.
Okay. Very clear now. Thank you very much.
You're welcome.
Thanks, Mattia. Over to the next caller, please.
The next question comes from Andy Chu, who's calling from Deutsche Bank. Over to you.
Hi, good morning. Three questions, please. Firstly, on Express, several parts there. Just in terms of, could you just sort of quantify what you mean by sort of solid levels of growth in Express as you exited the quarter? Do you mean sort of more like 8%, which has been sort of more your run rate of TDI volume growth? What levels of capacity will be freed up by taking your sort of over 300-kilogram shipments off? In terms of phasing of Express, will you still be down in Q2, given that you mentioned that you're looking at sort of price and product mix effects should continue into the first half of the year? Will EBITDA be down in Q2 in Express? Then on P&P, you took the EUR 400 million charge for the early retirement of civil servants.
Why are we not seeing any of that impact already coming through in Q1? When you look at the sort of FTE equivalent numbers in P&P, it was 159,000 in Q1 versus 155,000 last year. Clearly, you'll be adding more people in the growth areas such as parcels, but can you just give us some flavor as to what sort of FTE equivalent run rate you'll be looking at going forward in P&P? Lastly, just in terms of the restructuring and investment costs of EUR 150 in Supply Chain, EUR 60 million in DS, and EUR 100 million of investment in corporate. Is there any sort of steer that you can give us in terms of the quarterly phasing of those costs? Obviously they're pretty hard to sort of nail down from the outside. Thanks very much.
May I take just the EUR 400 million in the FTE run rate, and Melanie answers all the other questions. On the EUR 400 million, yes, we see already a reduction in headcount, but it's phased, and we will see in the second quarter, and the third quarter, and the fourth quarter an acceleration of how many people leave. The reason for that is, there is a very clear defined process. First, we can announce it, then people can raise their hand that would consider. We have to take accordingly restructurings of the organization. Some of them are still happening. Operations, which is a significant part of the overhead, is only taking place mid of this year because there are negotiation with the unions. If the people are then identified, we have to send the paperwork, not in regulator, but to-
Agency
area. They have to check if that's right, what we have suggested. There is a significant time delay, and that's the reason why we now see every month that some people are leaving, and that is accelerating through the year. That's the reason why you haven't seen the impact in the first quarter. May we have better explained that already earlier, but that is a significant timeframe before you raise your hand until you leave really the company. With regard to FTE, there is a reduction in indirect. The increase you see in our numbers is exclusively coming from operational increases. We are adding people there. We always refused to give headcount reductions because they are ending up then in the wrong moment. We confuse people only.
We never said how many people will leave, and that's the reason why, Andy, we will not tell you now what you should take into consideration. What I can tell you, the number of reductions will always be slower than the addition of people for the operations. You will see a continuation in the year of headcount, because we are growing. 7.7% growth in parcel is quite a bit, so you should expect that this number will grow. On the other side, we see that in the indirect, people are leaving, and we have seen already a reduction in the headcount, but we have never disclosed that, and I will not do that today either.
There are seasonal fluctuations, particularly from Q4 into Q1, right?
Of course. That is also.
Yeah.
Yes. I think what I would add, Andy, when you look at our stat book and the staff cost line for P&P, it is a bit confusing this year because obviously last year's number is depressed by the EUR 108 million. I think when you look at the underlying development, the first important message is on the indirect cost, which is predominantly staff cost. We see that it is down year-over-year, Q1-19 versus Q1-18. In terms of run rate, this has to pick up in the course of the year, but that is also what we had planned for. On the operating staff cost side, we see the impact from the wage increase, the 3% we had on the 1st of October last year, and we also see the increase in headcount. Probably the right number is around about 4% growth here.
That takes me to the Express question and the general cost of change question. I think in terms of looking at the growth pattern in Express across Q1, I think first of all, in terms of weight, January and February together are around about the same order of magnitude of revenue compared to March. Growth was very slow in Jan and Feb. Until Chinese New Year, not a lot happened. Then also the pickup after Chinese New Year was more subdued. I think by March, we were getting back into more normal growth territory, but not to the peak levels we had seen before. The encouraging thing is that April is more moving in with March, and not with January and February. We expect now to be back in solid growth territory, but a little bit less dynamically what we have seen in the past.
In terms of how is the heavyweight stuff and the aviation capacity going to play? I think for us, the main focus here was not to really take down capacity by getting rid of the heavyweight stuff, but to really slow down the rate with which we have to expand capacity. That means that we somehow have to grow into it, which is also what we have tried to show on the Express slide with the elephant. In the short term, this has a negative impact. In the medium term, as we are growing in the freed-up capacity, this will have a positive impact on our aviation core KPI cost per kilo. Of course, we also expect benefits on the ground ops side.
With regards to the second quarter, based on what we see at the moment and the April dynamic being more in line with March, it should be a bit more dynamic than Q1. Obviously, we will still feel the impact from the heavyweight campaign. The bigger uptick will be in the second half of the year, but Q2 should already be a bit more dynamic than Q1. With regard to cost of change, both in Supply Chain and in eCommerce Solutions, we've booked a little bit less than 50% of the allocated cost of change budget in Q1. We expect the majority of the remainder to go into the second quarter, so that really the big chunk of the whole cost of change will have happened in the first half of the year.
The benefit of that is also going to be that we should see some benefits already coming into the second half of the year. With regard to corporate functions, corporate incubations, as you may have seen, we have a new management team in StreetScooter, and they are currently coming up with their business plan going forward. We said we clearly give them the time to do a thorough job here. I think once that is finalized, we will have a better point of view on the phasing of the impacts we expect in corporate functions.
Andy, lots of modeling in.
Thank you.
Any more? Good.
That's it. Perfect. Thanks very much.
Leave.
Thank you.
Next caller, please.
Next up, we have Damian Brewer, who is calling from the Royal Bank of Canada. Over to you.
Good morning, everybody. Three questions, please. First of all, just coming to DGFF. Obviously, across the market, pricing per unit has gone up, but yours looks like it's gone up a little bit better. Could you talk a little bit more about how much that GP per unit increase has been down to your mix and efforts, and how much was market, and therefore how much should probably spill over into Q2 as well? Secondly, coming to P&P. Given it sort of identified the issue early in 2018, could you give us an update on where your staff and customer surveys are going there? Are they improving? Is there some sort of support from the metrics there? Anything else you can elaborate on would be appreciated. Very finally, you've hinted at it already, I think, in one of your last answers.
Could you give us an update on the group structure and whether there's any other tidying up you're envisaging there, for example, StreetScooter or any other parts of the operation which are in focus at the moment? Thank you.
Yeah. May I take the second and third question? On staff, we only do an annual survey, which took place in autumn. It was very encouraging that we have seen that our U.S. data went up the most of all divisions. The group went up, the P&P division went up the most, which is very encouraging despite all that. It went up the most was in operations. The people apparently saw already that we are taking the right direction, that we are communicating differently. That was well received, and I believe that has not changed. We also see a significant improvement in the underlying operations, that has led in the last months to a starting decline on complaints of customers about service.
You can read in the news all days what the regulator counts, the regulator counts one complained for 2.3 million shipments, letters, and parcels. That's very low. We see the early indicators, which are customer complaints coming down. That is very encouraging. There is response to the better performance, the performance is better because the people are more engaged. That makes me very confident that we are taking the right actions and heading in the right direction with P&P. On the Group, I think we have made significant cleanup in the portfolio of P&P. On other aspects, we might sell some small pieces as we have done with SIMSme recently, on the bigger scale, StreetScooter, we have a new management team. I think they have a very good understanding of what should happen.
We always say that we don't want to be forever the owner, we are not in a hurry, we will consider that in due course. I feel very encouraged what I've heard from the new management team with a lot of expertise in this field. We had a great innovator with a previous CEO who created a product which is working well. I asked as well of the new CEO, what is the feedback, what he sees, because he has worked in that environment. He says we have a great product. External customers are happy with the product. Internal customers are getting happier every moment or every month. That's the reason why we think we have a very good product, that makes us confident that there is a journey with, for StreetScooter as well. Now I hand over to Melanie to answer the first question.
Thank you.
The first question was on the DGFF GP per ton for TEU development. That's a trend which we have seen now for a couple of quarters because we have taken this conscious approach on being selective with regards to volumes and to focus more on profitability. I would still say that what we see in the first quarter is more attributable to our selective approach than to what we see in the market. Obviously, our aspiration is to get back into growth mode in the course of 2019, but in a very controlled and selective way, not at the expense of profitability, which is why we are obviously focused on doing that.
May I add to the whole, because you asked as well about the mood in PeP. Maybe I comment as well about the mood in this division. That is now really black and white to two or three years ago. There's high energy in that division. Understand fully that you really can drive yields, and at the same time improve your, or streamline your operations. They are very positive about the rollout of the IT. These are all green lights for me. I'm very happy. The changes we started already before Tim came, Tim has accelerated that is working well. That's very encouraging, and that's also reflected in the mood of the organization.
If you talk to them, I'm now traveling after I handed over the division, I'm traveling significantly more again myself outside of Germany, and it's very encouraging what I hear from the DGFF colleagues. That's great news.
Thank you.
All right.
That's good to hear. Thank you.
Thanks, Damian. Right on to the next.
The next question comes from David Kerstens, who is calling from Jefferies. Over to you.
Hi, good morning, everybody. It is David Kerstens from Jefferies. Three questions, please. First of all, could you give an indication on what you expect the volume decline in mail would be following a 10.6 price increase based on the elasticity that you have seen in the past? If any, I think the price was relatively, or the impact was relatively limited in 2016. Secondly, on DHL Supply Chain, what is behind the improving earnings momentum in the first quarter? I think you said double digit underlying EBIT growth, despite the fact that you missed the Chinese asset in the first quarter. Also heard you say that the lease portfolio had expanded largely due to Supply Chain. Was there an effect of that? What was behind that improvement in earnings momentum? Finally, maybe on Express. You are highlighting that you expect volume momentum to improve going forward.
What could be any impact, if any, from the increased tariffs on, U.S. tariffs on Chinese imports to 25% this morning? Thank you very much.
May I answer the first and the third? Of course, we have analyzed that as well. Of course, the lift is slightly higher if you compare that than what we got last time. We can't really predict, but of course, we have some assumptions made, and we have not taken it for granted that there will be no price elasticity. We have to watch that. Last time it was not very strong. We have, of course, calculated that in our assumptions as well, that we see some elasticity which is larger than last time, but not massive Huge, but higher than last time. That's our assumption at the moment. The impact on volumes of Express is very difficult to judge. We have seen in Asia different patterns.
China had a very good development. Other parts of China were weaker. Maybe that will now change because there are ways, of course, to move stuff around then for some manufacturers as well. That might change when trade lane trapping. Overall, we still believe that we will see a continuation of the economy. We have seen not so much surprising, I believe, but for the public more that U.S. had a very strong quarter, first year China, not in our numbers, but the economy. Europe was better than expected. China was better than expected. I don't expect that this fundamentally change, because we still have a pickup in increase in employment around the world, and we have still a continuation of increase in middle class, and that drives fundamentally both things, the B2B and the B2C growth we have seen in Express. All this noise is not healthy.
You see that in the capital market, they respond to that very volatile. We have not seen that in the last four quarters or five quarters, this volatility is happening. Yes, there might be one month weaker and then stronger because maybe now people will ship even, or delay now shipments because they want to now wait. It could happen that May is then weaker on the short end, but then if things are changing then again, then June will be very strong. Overall, the fundamental growth dynamics have not changed. That's our conviction.
That takes us to the Supply Chain question. I'm really glad that you asked that question. I think the Supply Chain colleagues will be delighted because I think what we now see in the first quarter is actually what we have seen in most of the Supply Chain regions for some time. In Q1 underlying, we see a growth in operating results by around about 12%. We had that dynamic in most of the regions already in 2018, but it was unfortunately overshadowed by the step back we had in the U.K., Ireland. For me, what we are beginning to see here now is the underlying growth potential of Supply Chain, and that is driven by the standardization agenda, the automation agenda, which the team under John Gilbert's leadership has been pushing for the last years, where they're now really beginning to see the benefits.
On that basis, what I already said in March is in 2018, we had Global Forwarding beginning to really deliver year-over-year step up to the DHL progress. In 2019, I'm deeply convinced that Supply Chain will also be a significant contributor on an underlying basis. That's indeed very encouraging to see this coming through in the first quarter. With regard to the leases, that was actually not pointing as an unusual development. Obviously, the nature of the Supply Chain business is that many of the warehouses are leased in line with the duration of the underlying customer contract. That's a natural growth driver for the lease portfolio, nothing unusual.
All right. Thank you, Melanie.
Thank you very much. David?
David? Okay.
That's great. Thank you.
Good. Thank you. Over to the next caller then, please.
The next caller is Daniel Roeska, who's calling from Bernstein Research.
Good morning, everybody. Just a little bit more detail on forwarding, if I may. You already commented on GP. Could you touch a little bit on conversion? How much of the conversion improvement in Q1 is really due to the GP mix that's different? How much is it really due to underlying productivity gains and OpEx improvements? As a follow-on, if there are significant OpEx improvements here, how much of that is already driven by the new IT?
Okay. We are at the beginning of seeing benefits from particularly the rollout of CargoWise. The aspiration is to get to the full rollout for ocean freight by the end of the year. At the moment, we are in the coexistence phase. We currently don't have significant benefits from that. However, the IT transformation is more than just the CargoWise rollout. I would say at the moment, it's a mix, and the big benefit from particularly the CargoWise rollout is going to come beyond 2019.
So-
Maybe one point to follow.
Sorry. Just one point to follow up. One of the strategies with Tim was to kind of manage the mix, go for higher yielding, grow a little bit slower. That's something we've seen over the last couple of quarters. How long can that strategy still continue? Kind of the slower growth margin optimization in your view?
I think the aspiration is that in the course of 2019, we want to get back to a more normal growth level because we all acknowledge that you can't shrink forever. Obviously, now in the first quarter, the whole market dynamic, both in air and ocean freight, wasn't that buoyant. I think for us, the focus is still very much on profitability, but acknowledging that we have to slowly get back into growth mode, that is what the team is focused on.
Daniel, that was question two out of two, or do you have any more? No, thank you. Sorry for the ad hoc follow-up. No, thanks very much.
Good. Cool, thanks.
Thank you.
Who's the next?
The next one is Edward Stanford, who's calling from HSBC. Over to you, Mr. Stanford.
Good morning, everybody. Two, please. Following up on an earlier question about the decision to remove or discourage large volumes in Express. You mentioned that this is a way of reducing the capital needs for the business. Are you able to quantify how much you think you will be saving in this initiative? Secondly, again, following up on previous questions, just looking at the kind of return, I may have missed this, return to growth in freight forwarding. Do you think growing volumes in the current market environment is achievable, given competitor activity?
Yeah. On the heavyweight question, I don't want to quantify the savings here. Again, this will not lead to us cutting back on the network. It will be a slower expansion than what you would have seen otherwise. How much that is actually going to contribute will also depend on the fundamental growth dynamic, where, as we said before, we expect things to pick up in the second half of the year. That's a little bit of a moving, continuous improvement game. I think the important thing here is that with the great experience we have in our Express management team, they really know how to play this and are able to react also on a relatively short notice. That is why we have also kept our whole aviation capacity in the right balance between firm commitments, owned aircraft, and also shorter-term lease commitments.
It depends a bit on how will the small stuff fill the capacity now in the next quarters, and we will adjust accordingly. I think on the forwarding question, obviously, returning to a growth path is easier when you have some tailwinds from the general market, which wasn't there in the first quarter. That is why we don't have a specific target. That's the date by which we want to see a volume growth again. I think it's more managing for profitability and finding the right balance. If the market picks up more dynamically, it will be a bit earlier. We're really not fixed on a specific date here.
Robert, let me add, because the transformation in IT gives us more visibility, our customers more visibility. It helps as well, and I'm talking at the moment more about sea freight and air freight is to come, more stability and service quality. You see that as well in the industry. Our best-performing competitor has, without a doubt, a right recipe to grow even in a difficult environment. That's based on similar IT in the core and very stable processes, great service quality. I think there is, of course, an opportunity even to grow in a challenging environment. We are not in a hurry because I always, and Tim sees that exactly the same, we have the focus on service quality is important, and we will never compromise on that just to gain business.
We have to be sure that what we win, we also can execute to the expectations or even better of our customers. I think this focus from him, despite all the transformation and to make it leaner, will give benefits. We are not in a hurry. If it takes a quarter longer, I'm equally happy. The focus has to be that we provide the best possible service for our customers.
Thank you.
Ed? Yeah. Good. All right.
The next question comes from Edward Steel, who's calling from Citigroup. Over to you.
Morning, all. Thanks very much. Two areas I'd like to ask about, please. The first is the incubation extra cost of EUR 100 million that we guided for this year don't seem to have impacted the first quarter. I think that's mostly in StreetScooter. I guess if the guidance is still the same, that implies the run rate on a quarterly basis will be EUR 33 million a quarter for the last three quarters of the year rather than EUR 25 million. Obviously, that provides a bigger offset required next year. Do you still think there's enough momentum going on there that you'll be able to get enough revenue and gross margin to offset that higher number, please? Second area. Obviously, you're on the cusp of putting forward your proposal to the regulator for the implementation of the stamp price rise.
Clearly, there's a range of options there for you still, but one, of course, would be to delay the bulk of that across the various categories until the 1st of January. Which, of course, would then give you a bigger % gain and a bigger contribution to the 2020 profit number. Is that something you're considering, please? If so, what do you think would be the implication for the next stamp price agreement, given you obviously had a higher average rate going into that, please?
That's something I take. The first one, we have currently with clear intention to make a price increase in July 1st. Of course, you are thinking about all these dimensions, but we believe that we should do something now which is helpful. Whatever our run rate is, it doesn't hurt anyway, because in three years' time, the data will be compared with your original proposal. In the event the same price is higher, the regulator, if that's too high from the mathematics because we delayed it, then they'll say, "You have to reduce prices." You don't get a long-term benefit if you just push it backwards and say, because of course you can say, if we wait half a year, then you get two years and forever a higher price. The regulator is smart enough to figure that out.
That's the reason why that will not work in such a way. We have currently the intention to increase by July 1st.
Yeah. To your first question, the EUR 100 million for corporate functions, corporate incubations. You're right, that is mainly targeted at StreetScooter, where we are still very much convinced of the growth potential, and hence the opportunity to get a good return on the invest here. Internally, we continue to be a very strong buyer of StreetScooter. Our PeP colleagues are not the easiest customers, so they really want a robust product for the PeP operations. What is encouraging is that we are now also beginning to sell to completely new customers externally. We have completed a deal with Yamato, to also go international with StreetScooter. As mentioned before, we have the new management team with a lot of automotive experience now on board. We are giving them the time to really come up with their plan and phasing in their plan.
We will probably be able to comment more on the exact timing in August, when we talk about the Q2 numbers.
That's great. Thank you very much.
Thank you, Ed. I think we've got two more callers waiting.
Yes. Next we have Per-Ola Hedengren, who's calling from LBBW. Over to you.
Yes. Good morning, everyone. I've got only one question. It indirectly relates to your guidance for 2020. The question is, what effects, if any, do you see in terms of your business coming from the IMO 2020 measure and the likely effects that this will have on world trade? Obviously, your forwarding business will be affected in the first level. Generally, there would be repercussions due to fuel costs for demand worldwide coming from this. The question is, have you quantified these effects in terms of your business? Alternatively, if you don't see any major issue out of this, could you please elucidate as to why you don't see any effects coming from this? Thank you.
Yeah. This is for us, not the most material effect. Hence, we don't have a precise quantification model for this. I think when you look at the overall volatility in rates and the general pricing level driven by numerous other macro factors and capacity factors, we still see that not as the main driver. I think the good thing is, given that it's an industry thing, we expect that to be then more of a general uplift in the market, which customers will have to adopt to. Overall, it's not our number 1 worry on the priority list.
Okay.
Thank you.
Thanks, Per. Over to the next caller then, please.
Thanks. The next caller is Joel Spungin, who's calling from Berenberg.
Hi, good morning. I've got three. Maybe if I can just start off by asking about your pricing initiatives in parcels in Germany. I was just wondering if you could give us a sense of how far you are now through the process of implementing price rises, maybe how much of the volume has now seen some kind of year-on-year price increase. I know that you still have some outstanding negotiations with larger customers. If you could give us a sense of how much more we might expect on that side, it'd be useful. That's my first question. My second question is, again, just on Express, just in terms of understanding some of the dynamics there, given the changes in the weights.
I know it's not a number that you normally give out, in terms of understanding what's going on with underlying pricing, if you could give us a sense of what's going on with maybe revenue per kilo, that would be helpful. Finally, just on the additional detail on CapEx developments and the investments in the new 777s. Obviously, you've highlighted there that there will be quite a big step down in 2020. I think it's EUR 600 million step down in CapEx relating to the 777 in 2020. I just wanted to check, is that new information? Is that the first time you've disclosed that? In my head, I thought it would still be quite elevated in 2020 and then come down in 2021. I just wanted to check whether your thinking on the investment pattern has changed.
Okay. On the first, I answer the price initiative. I would say we have about, if you take the average of the first quarter, I would say we are probably two-thirds, maybe up to three-quarters through. We have still something to come. Of course, that has already developed through the quarter somehow. There's still something to come in the course of the year.
Of course, we will continue to see a year-over-year step up. I think the second important thing is this is clearly not a one-time exercise. I think the other important focus is to now, like we have in Express, get into a regular general price increase, annual pattern in Parcel. I think we have captured a big chunk for the 2019 volume. Obviously, this is supposed to be a continuous exercise.
Yeah. May I add one other thing? We have definitely best-in-class guys in Express, to work on yield management, and of course, they helped the team. Some of the guys were new in PeP when I took over last year, and they have learned a lot from our Express colleagues. Probably they are the superstars in yield management, I believe, and they learned a lot in PeP in the meantime. Therefore, we monitor that, and I have not seen the last statistics, but it's probably, as I said, two-thirds or three-quarters, which is already visible in the first quarter.
I think that's a nice lead-through to the next question on the base revenue per kilo development in Express, which is, I think, a very valid question in the current quarter. I can assure you that this development is still healthy. That is one of the reasons why I'm so confident with regard to Express development for the rest of the year. We clearly can see that the impact on the revenue per day is driven by the weight per shipment and not by the revenue per kilo. With regard to the 777 CapEx, that is nothing new. That is in line with what we have said before, and I think it shows again, the law of relativity. You can look at it as it's a big step down in 2020 from 2019, but it is still elevated compared to our normal CapEx level.
I would say 2020 is going to be on a path to normalization, but you will still clearly see the impact from the 777 CapEx.
Thank you very much. Just maybe just a very quickly follow-up on the domestic parcel pricing initiatives. Do you think the rate in the first quarter is a reasonable guide to where you would like to be for the rest of the year?
The what?
Can you say that again?
In terms of the revenue per item in the German parcels business, do you think that what you achieved in the first quarter is a reasonable guide for the rest of the year in terms of the price increases?
I would say that's definitely on the lower end of what I expect. It should be better.
Okay. Thank you.
Good.
Well, thank you, Vicky. One last caller.
Yes, the last question for today comes from Andre Mulder, who's calling from Capital Shipways. Over to you.
Oh, Andre. One question, you heard it.
Good morning. A question on the heavyweights again. Would you be able to quantify what that did to growth, and possibly to margins? Secondly, for how long will this focus continue? Should we expect another few quarters or longer there?
No, the heavyweight campaign was started in the second half of 2018, which is why we will still see the visible impact in Q2. Then it will normalize out in the course of the third quarter. I think in terms of number of shipments, this is a relatively finite number of shipments. Of course, in terms of kilos, it impact, and that is why it has this distorting impact on the revenue per day growth versus shipment per day growth. It will continue in Q2, and then it will fade out in the second half of the year.
Any specific size? Did it depress growth by 1% or so?
I think you don't see the impact on the shipment per day growth side, because it is a small number of shipments. The 5% shipment per day growth is not impacted by the heavyweight campaign. The delta between shipment per day growth and revenue per day growth, that is due to the heavyweight campaign. I think that is why it's important that the underlying revenue per kilo development is healthy. The area where you see the impact is really in the spread between SPD and RPD.
Okay, the final question. I saw numbers on CapEx, 3.7, 3.5. What's in between there?
Sorry, I didn't get the question.
I saw two numbers for CapEx.
Oh, the one for the cash?
3.7 and 3.5. What's in between there?
Yeah. The 3.7 is our gross CapEx number, and the 3.5 is the impact in the cash flow statement because of course, we also have a disposal of assets. That's a historical number. I think that's a number we have had for a couple of years, quite stably now that there's a EUR 200 million delta between the gross CapEx for the balance sheet and what we see in the cash flow statement.
That's mainly we are selling vans we have used and trucks which we have used to a lower price, but of course, generates a positive cash flow.
Yep. Okay, thanks.
Nothing unusual. Be in line with previous years.
All right. Andre, any more?
Yep. No, thanks.
Good. Okay. Well, I think that's concluding the Q&A round. Frank, you want to close the call with your comments?
Yeah. As we said already, we had a solid start into the year. If we go through the different divisions as we did, we see positive momentum of our actions we have focused on in the last couple of months. That's the reason why we feel very confident that we can deliver this year, the guidance, and this is then a very good base to deliver next year's guidance, which we confirm today as well. As I said, I'm traveling around the world, and wherever I go, I see very positive momentum and mood of our organization, which is very encouraging for me because obviously, we have taken a lot of right decisions last year. Now we start seeing the benefits from these actions. With that, I would like to conclude.
Thank you for listening this morning or on a Friday, talk to you soon. Bye-bye for now.
Bye-bye.
Thank you. Bye-bye.