And a warm welcome to anyone out there listening to our Q4 full year 2018 conference call and you have seen in the invitation, I've got with me our group CEO, Frank Apple and the group CFO, Melanie Kreis. I hope you have in front of you the material that we sent out this morning. As you may have noticed in a slightly modified format, designed to give you maybe a bit less busy, more focused slides, some early management comments, but I can assure you that to the material that we had in past, no content has been dropped. So whatever we had in the past, you still find in the material either in the deck or in the stat book. So with that, more of a technical comment, right over to you, Frank, please.
Yes, thank you, Martin. Hello, also from my side, and thank you for joining us this afternoon. Let me just start straight away with page 2, where we summarize how we concluded 2018. We had a strong year end with the quarter result, which is very close to our previous record quarter in 2017, in particular, if you take into consideration our ongoing restructuring expenses in PeP and a one off, which is not related to our company, but a consequence of a court ruling in the UK The second, we propose a stable dividend. We are very confident that we will deliver our this year's and next year's numbers.
And therefore, we also want to demonstrate as a sign of confidence that we are paying a stable dividend this year. And finally, our guidance, we come to that later more in detail, but The guidance for this year is relatively broad. We will explain later on why that is the case, but we believe the measures we have in place, we will deliver that and we will create proof that delivery, a good a very good basis to deliver our mid term goals 2020. If you now go to the next page, I will focus on the top line more and Melanie will cover chapter 2, 3, and 4. And I will come back then to our dividend and guidance for this year and next year.
So if we if I turn page to page 4, you can see the results are pretty straightforward. We had, as a group, good organic growth in Q4, even above the average of the year, we had, as I said, a good EBIT result as well, despite that we had some negative one offs. And overall, we met our guidance as predicted in the summer when we changed our guidance. PIP is continued to grow despite the decline in later on, and the quarter was strong enough that we were slightly better than the originally guided 600000000 fully loaded here with all the restructuring expenses. Express, strong growth, very good development on the bottom line in our very strong overall year to date or year or total year.
Margin, we are very happy about the progress DGFF, as you can see here, as well, healthy top line growth very good bottom line development that shows that this strategy simplifies gaining more and more traction in our IT conversion is getting traction too. Supply chain, good growth, flattish on the bottom line, but if you back in in the, the $42,000,000 from the pension charge, then we would be even nicely up. So overall, If I include then corporate functions and consolidation, just to the point, slightly better than the 4 20 we mentioned in our guidance. On the next page, you can see, the development in volume revenue, nothing new on the mail side still in the corridor. If you correct for these election type of things.
We are at the upper end, but we are still on the corridor of minus 2% to 3%. Volume growth in parcel has been a little bit slower, but still in the range of a market growth, 5% to 7%. We don't know exactly the final growth. You know, the full year was even better than that. But what you see and what is encouraging is that our price measures are getting traction now because revenue growth was stronger than volume growth.
And you have seen in the past, the opposite trend, that is very encouraging. And we see also in the new year already the acceptance of customers to accept higher prices is pretty good. And that's the reason why we are confident that we can see a good development of the price front in 2019. Next page shows you the revenue growth of our new division e commerce solutions, continuation of strong growth, can definitely can Allen will now focus on defining the strategy We have good areas and good bits of pieces there and some challenges. I think the objective has to be that we define more precisely how we want grow in that part profitable, from the overall e commerce trends.
Page 7, Continuation of the strong growth, shipment wise and revenue wise, you see here the trend. Europe has been still our powerhouse very healthy growth. That's very encouraging. We have, without a doubt, again, had another year in 2018 where we gained market share course, we were supported by strong B2C growth as well. Next page on DGFF.
Tim's strategy to be selective is working very well, despite that we lost quite some volume in the fourth quarter on air freight. Stayed stable in ocean freight, we had a nice growth in gross profit and also gross profit per tone in T. U. That is exactly what we try to achieve. At the same time, we are streamlining our operations,
and that should help us
to deliver even more EBIT in a better conversion rate. And we are now shooting for by 2020 or 20 percent conversion rate. We are still some upside then for that division. We are very confident, but also we want to grow again. That has to happen in this year as well that the start growing again, but in a, in a profitable way and not just buy market share again.
Supply chain also very consistent picture here. We had some challenges in the UK, but if you take an overall the growth, very nice in Americas, North And South, very good profitability development. Melanie will talk about that later. Europe as well, good growth. APAC looks a little bit weak.
As you can read from the management comments, It's a change for some contracts we have in Australia where we have pass through our revenue which is under IFRS 15 differently recognized and that has led to the small number. If you exclude that, we had been almost 8% So steady organic growth and good improvements in these regions as well. On Page 10, we more a reminder of our well balanced portfolio. We have some businesses, which are exposed to GDP, decline if that happens, even if we believe still that we should expect from this year free to 3.5% And on the growth side, overall, we have some very strong businesses like the e commerce driven. And of course, it's not a structural growth our business, supply chain sits more or less in the middle.
We believe that this is a very balanced portfolio. On page 11, we put that intentionally into just demonstrate despite that we don't expect a significant global downturn. But if it happens, we have more than enough measures in all parts of our business to be well prepared. What we mentioned here is more a reminder for our capabilities. We have seen before as well reduction in the growth, even if we don't expect that and we feel very well prepared if that happens.
Even if we wish that it doesn't happen, again, at the moment, we have not seen any major decline, we expect 3% to 3.5%. Brexit the same. That's not a good idea in the 1st place, but if it happens, Whatever happens, we don't know that we feel well prepared. We will have worked intensively in all parts of our business for preparing for that. You know, our mantra is to serve our customers in the best possible way.
And of course, we will have and chat with our customers when they compensate us for any extra cost. That will be seen. And if Brexit happens, I'm optimistic that we will do the best for our customers and that should help us. But whatever the impact will be will depend very much and what really will happen. And we don't know that yet, but we can assure you that we feel very well prepared for any outcome.
So that's more or less on the revenue and market front. We feel very well equipped to continue growth in this year in 2020. And with that, I would hand over first to Melanie on the profitability and cash flow. And then I will come back on our dividend and our guidance.
Yes, thank you very much, Frank, and good morning, good afternoon to all of you listening. And thank you very much for joining us. As Martin mentioned in his introduction, we have added our management comments directly onto the presentation, which we published this morning. We hope you find that useful. And don't worry, I'm not going to read it all out to you.
I'd rather point out a few noteworthy developments so that we have ample time for your questions at the end. And starting now with group P and L on page 14, I again want to point out what Frank has already covered. Despite all the often mentioned uncertainties, 2018 was a good year for us in terms of top line growth with an organic growth of 6%. The delta between the reported revenue growth of 1.8% and the 6% is partially due to the Williams lead tech disposal. But clearly also has a significant currency component in there.
So FX effects had once more a significant negative effect on top line, but also on EBIT. As you know, group EBIT is down due to PEP restructuring as well as to a minor extent supply chain 1 offs, while we had very strong EBIT growth in Express and Forwarding. BioFR 16 effect on EBIT is slightly higher than our initial assumption because in our Supply Chain division, we signed more leases with on which longer contract terms, but for the other divisions, we actually made a spot lending. And I have to admit that we are a little bit proud of having been able to predict the IFRS 16 effect quite accurately. One effect of the IFRS 16 accounting change, which we had predicted was that the negative impact in financial results would be higher than the positive effect in EBIT, and that explains the more pronounced decline in net profit compared to EBIT.
The good news on this is IFRS 16 is now done for us. So in 2019, it will be a year over year comparison with IFRS 16 extraordinary explanations. So that is the last call in which we have to talk about that topic. So obviously putting it together in terms of EBIT progression and also net profit progression, it was a challenging year. Which is why we have included page 15 to put things into a slightly more long term perspective.
Because looking at this longer time horizon, while we have had our ups and downs in 2015 with NFE in the postal strike, in 2018 with the PEP restructuring. Overall, we have made significant and steady progress in group margin expansion. And very obviously, that progress is by no means over. And every division has its role to play, with that, I'm now turning to the divisions. And for quite obvious reasons, I will start with, yes, and we'll spend a bit more time on pets which in the last presentation, we are now talking about, in the old structure of this Germany and the international activities combined.
So starting on Page 16 with the 3 buckets of restructuring and turnaround activities we have been focusing on since June. I think the first important message here is nothing has changed with regard to the categories we address So there have been no new surprises, and we have actually made good progress in all three dimensions. I will talk about pricing in more detail on the next page. Let's briefly talk about the cost measures. 1st of all, on the direct cost side on the productivity, we have said that this is more about ongoing investment to improve productivity going forward.
And we had indicated that we intend to spend on an ongoing basis roundabout 1,000,000 in this area. We only started in June, so it's not surprising that in this 1st year 2018, we have only spent 1,000,000 65 of which in the fourth quarter. So I think we are now in a good steady state and we are beginning to see the first benefit. But as we have already said in the previous calls, This is clearly a very, very big machine room, more than 1,000,000,000 in costs. So that is probably the slowest moving from all the three categories.
On the indirect cost side, we had said that we would invest 1,000,000 into restructuring. The biggest chunk of that going into an early retirement program for civil servants. And we did indeed spend the 1,000,000 the remaining quarter saw 1,000,000 taking us to a total number of 1,000,000. And obviously, both cost improvement measures will to improvements in 2019 and then continue to ramp up towards 2020. Looking at the 1st category, the pricing measures, on page 17, I think there are 2 different topics we have to talk about.
What is happening on the letter side and what is happening on the parcel side. So regarding the regulated postal product, We had a first decision on the letter pricing at the beginning of the year, which foresaw a headroom of a price increase of 4.8% on the whole bucket for the time horizon 2019 to 2021. But since then, we have had an announcement that the underlying regulation is going to be changed. And on this basis, the regulator has put the pricing decision on hold because they have to wait for the new regulation. And then on this basis, come up with final decision.
The unfortunate news on that is that there is a further delay. So we still don't have the final decision. Think on the positive side, we obviously hope to get a bit more headroom than with the initial decision, but we now have to wait for the final decision of the regulator. On the parcel side, you will probably have seen that already in Frank's presentation. In the fourth quarter, you saw that revenue in parcel grew more rapidly than volume.
So we are really beginning to see the positive impact from the years active which the parcel team has been very focused on since the summer. And that is obviously something we expect to continue into 2019. A very important element and also in the ramp up towards 2020. Turning to page 18, since the start of the year, we have also implemented the new divisional structure. With Post And Parcel Germany focusing on the German activities under the leadership of Tobias Maier, from the 1st April onwards.
And the international activities being regrouped on the DHL E Commerce Solutions under the leadership of Ken Allen. We are still reporting 2018 in the old structure. You will, of course, get fully restated 2018 numbers with our Q1 reporting. I already want to draw your attention to the split. How would it look like going forward?
So when you look at the revenue, we have roundabout 1,000,000,000 in Post And Percke Deutschland, German Activities, E Commerce Solutions, and the youngest member of the family is close to 1,000,000,000 in revenue. In terms of profitability, not surprisingly, the profit is being made in Post And Parcel Germany because in Consumer Solutions, we have quite a lot of startup activities, and the starting point for 2018 is going to be around minus 1,000,000 for that new division. So much for pets, I now come to the DHL division starting with Express on Page 19. Regarding the outlook for Express, we expect continued B2C growth by visibility on B2B growth is impeded by the general economic uncertainty. For your modeling, it's worth saving in mind that our active youth management to price heavy rates out of the network is leading to lower average rate per parcel.
That is something you should expect in the next quarters. Revenue per day will grow less than shipments per day in the upcoming months due to this heavyweight effect. Turning to Global Forwarding on page 20, you can see that the yellow bars, how the GP to EBIT conversion has developed over the last years. It's quite pleasing to see that Tim's measures are really taking a hold now. GFF is delivering for Global Forwarding, the Q4 EBIT margin was the highest since 2012.
But obviously, that's not the end of the journey. Tim has said very clearly that for GP to EBIT conversion, the short term aspiration is to get to 20% by 2020. And I think based on the director we have now seen in 2018, we are on a good path to get there. Turning to Supply Chain on page 21. Obviously, when you look at the combined EBIT for the division, you don't see progress from 2017 to 2018 because of the pension effect in Q4 because of the challenges we had in the first quarter in UK.
I think that is really covering up a bit of a very good progress we had in the Americas in Asia Pacific also in mainland Europe. In the Americas and Asia Pacific, we have now reached very remarkable margins. And obviously, the one region where we now have to pay specific attention to is the UK. And that is something we are addressing partially using the EBIT gain from the supply chain China transaction which has been completed in February. And you can see that on Page 22.
So as a reminder, the deals which we have just closed with SF, the sale of our supply chain business in China the entry into a partnership where we will get a share of revenue going forward. Financial impact, we will get one time EBIT gain of around about 1,000,000. You will see that in the first quarter of 2019. We will lose through the sale revenue of round about 1,000,000 and EBIT net round about 1,000,000 that's kind of like the EBIT of the business we have sold minus the income stream we expect going forward. Out of those million, it's our intention to reinvest around about 1,000,000 into the supply chain business.
This chunk around about 100,000,000 is intended for the UK. That is the last region where, yeah, we still have some work to do. There's a very clear improvement agenda for the UK. And so receipts we get from this F transaction is now giving us a means to address those challenges. The intention is to really get into a steady improvement.
Obviously, we want to compensate at least the 1,000,000 we are losing from supply chain China by 2020. But the intention is to really use these funds wisely. So that is leading to a sustained improvement in the profitability of supply chain. And coming to our new DHL E Commerce Solutions division on Page 23, well, as you know, he has been off to a flying start, even though he's officially still in his 1st 100 days, he is going through a thorough initial portfolio review. There are a number of very nicely profitable countries in the portfolio.
There are a number of countries are more in the startup phase. And we have granted can also a bit of headroom, so that he can take the actions he deems necessary within e commerce solutions. He has put the expansion on hold for the moment. I think the most important strategic topic here is the long term vision for the division, which is dealing with end to together components of what we are offering through the other divisions. And you will certainly hear more about this in the course of the year.
Once Ken has a bit more time, to look into his new area of responsibility. So much for the divisional earnings improvement agendas and with that moving from earnings to cash, starting with CapEx on page 25. For 2019, we do expect a significant CapEx increase as we will see the peak of our investment into the Boeing 777 Express roof heating. This will increase CapEx by 1,000,000,000 for the year. We will then also have a significant impact in 2020, and then it will trickle off in 2021.
When you look at the underlying CapEx, taking out this spike from the 777 re fleeting, underlying regular CapEx has been increasing gradually over the last years, mainly supporting the expansion of our Express and parcel network, and you should expect this to continue in a steady fashion in line with growth in the business. So nothing extra ordinary there. Page 26, I think, is very important because it shows that growth has been going up in parallel to the CapEx increase. And so I think that's the evidence that these investments we have made over the last years have been paying off. But here again, IFRS 16 is rebasing the starting point.
So due to IFRS 16, 2018 is starting from a new base, but still even under the new accounting standard and including fully loaded PEP restructuring costs our ROCE remains above our WACC, also for this rather challenging year 2018. Clearly, going forward, we anticipate to continue our track record of profitable investments and again show steady improvements in ROCE of this new base. And with that, I come to the cash flow statement on 28 which is always a bit of a complex page to look at. And I think this year, unfortunately, even more so because there have been several larger moving parts, which you need to consider when looking at our cash flow statement. When you look at 2017, we had the William's lead disposal and the UK pension funding at 2 big, discrete events.
This year, we see a very strong impact on OCF from IFRS 16, which we have spelled out here on this page, but we also see the fact that the PEP restructuring costs had a strong impact on EBIT in 2018, but not so much on cash. For free cash flow, as you probably all know, we have an apple for apple comparison because IFRS 16 is not impacting free cash flow. And I'm really glad that I'm also saying this was the last time. So when you look at our free cash flow development overall, it is down 1,000,000 compared to last year. But when you look at the CapEx line, yes, the biggest driver of that is the fact that we have continued to invest for future profitable growth also in the course of 2018.
And when you compare it to our guidance, we actually closed the year on a more positive note than what we had expected. We had said that we would generate more than 1,000,000,000, excluding the 777s. We now have finished at 1,000,000,000,59 including 1,000,000, from the on that. The famous stem provision, this has changed lines in the the cash flow statement, IFRS 15 has overall had limited impact on us. 1 of the impacts, Frank mentioned, in the supply in Asia revenue growth.
One other impact was, that's the utilization of the stem provision is now recognized in the cash flow statement as a working capital movement and no longer as a change in provision. In terms of order of magnitude, nothing materially changed. It's just changing lines. So that is making it again a little bit more complex. I think bottom line is free cash flow is below last year due the continued investments, but we are quite pleased that we have ultimately delivered a full year free cash flow well ahead of our guidance.
Regarding the operating cash flow development by the divisions, you can see that on Page 29, obviously IFRS 16 seen has had quite a significant impact here. We have taken this out on this page. And you can see here that both forwarding and express had a very good year not only on the EBIT side, but also on the operating cash flow performance. While TEP was actually obviously impacted by the down trading in the core business in Germany. S IFRS 16, I think that's really now the last time I will mention it.
S IFRS 16 has brought along quite some changes across many balance sheet figures. We have added a very brief summary on some key balance sheet ratios that you can see on Page 30. I think the key message here is yes, the numbers have changed significantly after the 1st full year under the new accounting regime. Nevertheless, we feel very comfortable with those new ratios. We have a very strong balance sheet position, and I think that is what those numbers show you net debt to EBITDA at 1.9x and a 5x interest cover are very solid numbers.
So, why there are challenges on the PeP side that we are addressing and why we continuously work on improving our cash flow performance we still are generating good cash flows to finance our growth CapEx and we are in a very solid balance sheet position, which is of course relevant shareholder remuneration and in particular, our dividend proposal. And with that, I will hand back to Frank for the last chapter.
Thank you, Melanie. That leads us straightaway to the dividend. As you can see on Page 32, we are suggesting As already mentioned, 115, as a payout, this is exactly in the range of our finance policy now for many, many years. We of course reconfirm that policy as well. It's a very good dividend yield.
Based on yesterday's share price. And we do that because we are confident that we will continue to improve our performance in 2019 2020. We believe as well that we should give something back to our shareholders. If you look then into the how we use the proceeds of the transaction we have done in China on 33 You can see here that 1,000,000, well, I mentioned already as a one time gain from the P and L. We want to invest some of that in the restructuring of our operations in supply chain, in particular in the UK.
That should help us to close the gap We now have some on our midterm plans from the sale of our Chinese business. We also want to do something in the e commerce is already mentioned as well, and that should give us still a $200,000,000 upside in the DHL numbers, which is reflected as well in our guidance. In corporate functions, we still have to ramp up in street scooter and smart trucking that will be visible in our numbers in the reason why in the amount of EUR 100,000,000 will be reflected in the corporate function, corporate incubation line. Nevertheless, at the end of the day, we will still have a net positive EBIT impact from 100,000,000. Then turning to the next page, the guidance we reconfirm first our guidance for next year that we will deliver more than 1,000,000,000 based on 1.6 which was originally $1,700,000,000, but we halved out eCommerce solutions and we always said it will be $200,000,000 to $100,000,000.
So that's now included in DHL, the 3.7 above that. And the reconciliation line will be then 1,000,000 negative, leading us to in total more than 1,000,000,000. In 2019, the range for P and P is pretty broad. That the reason for that is because we still have significant uncertainty with the postage. And we also are preparing in case that the post is not meeting our expectations that we have headroom to do something to accelerate our indirect cost reductions.
So that combined is then the reason why we put a broad range into that. We believe that this year is important to prepare for the significant lift we anticipate for 2020 in PEP or PNP sorry. We are confident that we can make that we believe we have the measures But as I said, depending on the outcome of the postage, decision, we want to be prepared also to accelerate our reduction in our cost to assure that we can make the 2020. In DHL, which includes our e commerce solutions, we have a much more narrow range, $200,000,000 of that comes from the one time gain. So there is significant lift year over year to this year, but we are very confident that we have we are well prepared in all parts of DHL to deliver that corporate functions.
The $100,000,000 are reflected here as well. And next year, it should go down. Because we believe that we can make significant progress in corporate incubations and keep the cost stable in corporate functions. So that's the guidance. So in summary, to wrap up, We believe that we are continue to be in a very strong position not only strategically, but as a financially, we have clear measures to improve our EBIT numbers this year.
If we deliver what we have promised here, it will be a new record for us. And if we did deliver that, we are very confident that we have laid out the right base for next year's success. So overall, strong cash flow, good balance sheet, healthy balance of growth investments and opportunities in the business and a clear list of measures how we want to accomplish that. So that's it. Thank you very much for listening.
And now the floor is yours for any Q and A. Thank you.
Operator, you initiate
Please press
And the first
question comes from Mark McVicar from Barclays. Please go ahead with your question.
Afternoon, Melanie. Hi. I have three questions. One sort of a slightly soft one or 2 more numeric. The first one is just on guidance, can you just remind us of the process that you and the board go through before you either issue new guidance as you've done for 2019 or reiterate the 2020 guidance, which you've also done.
Can you just give us a sense for kind of how formalized all that has to be or not.
Okay. Yes. I mean, it is ultimately quite there is a quite formal element because the guidance is part of our annual close process. So the corporate board has to officially discuss the guidance and agree on the guidance and then goes to the finance and audit committee of the supervisory board where we discuss it with the finance and audit committee. And then finally, it is being discussed with the supervisory board.
So there is this very formal sign off process by corporate board, finance and audit committee and supervisory board. But I think for me, probably even more relevant, we have regular discussions in the corporate board, both about do we want to do with the guidance for 2019? But also in this context, how do we feel about the 2020 guidance? I think that's probably the background to your question. Looking at this deep step up from 2019 to 2020, do we really stand behind it?
So I think, Pat, Frank, maybe talk a little bit about what you have to believe, for the PeP guidance element. Maybe I say 2 sentences on the other two buckets. I think when you look at the DHL number, when you take the number for 2019, the 3.4to3.5 1,000,000,000 range. We have the 1,000,001 time benefit in there. So if we take that out and we look at the midpoint of let's say, 3.25.
To get to above 700 to get to above 3.7 implies a step up of EUR 450,000,000, which obviously looks quite ambitious. But when you then look at what we have achieved over the past years quite consistently in terms of step up in Express. When you then take into consideration that with Global Forwarding, we now in 2018 had the 2nd year L division joining in. When you then consider that, by the way, in forwarding, we saw 1,000,000 a year improvement from 2017 to 2018. When you then look at all the good stuff which has happened in supply chain, which unfortunately, again, has been cured in 2018 by one time effect.
And you believe that those won't happen again in 2019 2020, and that was the restructuring spend. We are now really also getting, U. K. On the right trajectory. We should have supply chain delivering absolute year over year contributions.
And finally, you know Ken, I don't think he's going to be satisfied having his division being the 1 DHL division with the wrong sign. And so we also significant improvement in DHL E Commerce Solutions. So a 4% from 'nineteen to 'twenty looks like a big number for DHL, But what gives me confidence on this number is that we are actually steaming ahead on four cylinders now and not like in some of the past years, just on the Express engine. And on the corporate function side, yes, around 500 this year includes some headroom for the startup activities in corporate incubations, we have to use time in 2019 to bring that in terms of run rate, on a more positive trajectory. And on that basis, we should be able to get back to the range of around 350 where we were before.
So I think I'm taking some time for this answer because that is the question we heard repeatedly, how did you get to this guidance? And and how confident are you? So maybe Frank, you answer the for the PeP part and then we have that pink elephant cover.
Maybe we can even go one step before I come to P And P P. So what we actually do in particular, Melanie does at first with the respective division, but also I do that with them that we go also for the individual measures. You might remember, we showed for the, you know, PeP recovery, a clear water for Chad, how we want to do that. And you might even ask why we it's not in the deck. I come to that in a second today, but we do that all divisions and we also reconcile the P and L what has to happen on price, average price, what has to happen on the average cost and all this kind of stuff.
And if you do these two things together, you get a pretty comprehensive view what is doable and what needs to happen and how realistic that is are these assumption doable. And this is what we have done, pretty comprehensive, I think, in autumn up to Christmas until we put the budget in place. And also we'll be reviewing that in the New Year again in what we see as an operational result. So that's what we do and that makes us confident that this is true. So you might ask why the waterfall chart is not included.
The reason is due to the unknown postage have too many move it to targets and we felt it's inappropriate that we are changing these numbers. We better wait now for a ruling and then we will update. What we of course internally do is that we are constantly looking into the moving parts. And as I already said, the guidance is pretty broad for P and P because we have assumption what we need to do if A happens or B happens, but we would like to disclose it more if we know at least one significant pillar which is supposed to. And that's the reason why we didn't update the picture because it might confuse only everybody if we come then again later on, why is that moving in on.
That's what we felt is now better. We are still working on the same plan. We are confident that we have enough measures in place to deliver what we have promised But as long as we don't know the postage, we abstained from updating that, but we will do that if we know what's going on with the postage.
Okay. That's great. Thank you very much for that. So my other two small questions were, first of all, within the the P and P range, do we therefore assume that the low end of that range would include some restructuring costs if you felt you had to cut further into the cost base? Is that why the bottom end is where it is?
Yes. That's the right assumption.
Okay. Thank you. And then my final question is with, the million going into supply chain, could you give us a few maybe 1 or 2 practical examples of things that you've got to deal with, is it retail, RDCs in the UK or outdated road networks or just a little bit of color around that money is going to go? Because people have noticed it's quite a large sum of money.
Yes. So it is quite a large sum of money. And I think the first important message that's kind of like indicative. Of course, we will have a business case for each individual component. And there will be several components you touched upon some of them already.
So one of the attractive growth areas where we have under invested in the UK is transport management So that is an area which is going to get some, yeah, growth investment going forward. We have in the retail area, indeed a couple of contracts and sites, where we have more of the classical cost of change. So it will be a mix back. And if in the end, we come up with a lower number and we don't spend the 1,000,000, so be it. I think we just wanted to give you an indication for the order of magnitude we have granted to the supply chain team.
They now have to bring forward the individual business cases. Because we're not just going to blow the money for blowing the money, but we really want to have a very clear return path, to compensate, as one element, the 1,000,000 net EBIT loss due to the divestment of the Supply Chain China business, but this is more about really getting us into a sustainable profits run rate for supply chain UK also beyond 2020.
Okay. That's great. Thank you very much for that. It's very clear. Thank you.
The next call is Tobias Cetik, MainFirst. Please go ahead with your question.
Hello, good afternoon. Thanks for taking my questions. I've got 3. Firstly, on e commerce solutions, could you provide a little bit of granularity on what you've done, what you've been doing? You already discontinued some loss making operations, how much does that save you in EBIT and how should we be looking at those 1,000,000 that you provisioned for 2019?
Is that something which allows you to exit one or the other country operation or will that be operating losses in your mind? How should we be looking at that? Secondly, if I'm correctly informed the NHS contract, which is one of your biggest ends this year, could you give us some idea on what that will do to the Supply Chain division. And lastly, your free cash flow number, does that in the guidance of 2019, does that include the 700,000,000 proceeds from selling, supply chain in China or is that excluding that cash inflow? Thank you.
Okay. So I take the second one and Melanie may answer then the first and the third. So on AHS, we still have significant business, they wanted to distribute the suppliers or the government wanted to help with several suppliers are providing. We still kept pretty attractive businesses. But of course, that will not generate the same EBIT impact as we had before, but that is already reflected into our guidance.
And that happens once in a while that you went sometimes winning, sometimes you lose, but that's what it is, but we still have significant NHS business in the UK.
And on your first question with regard to e comm solutions, I mean, It is relatively early days. Ken hasn't completed his 1st 100 days yet. So I can't give you full and precise answer. I think what is already clear is, so when you look at the eCommerce Solutions portfolio, it is quite a mixed bag We have nicely profitable businesses in there. We have early stage startup activities, which are loss making in there.
So I think 1,000,000 will probably be spent on 3 categories. The first one is there is obviously a component of overhead restructuring taking place here as well, because we had to build up overhead, yeah, not in line with the more thought of nature of this division. So that is going to be one clear component. We will have some countries where we are going to, right size our operations, maybe take a different approach. So that is going to consume a bit of cost of change.
But there will also be a very positive forward looking element. So there are some countries there. We would actually like to accelerate the growth based on the good performance we are seeing. I'm I would say that we probably have to give Ken a little bit more time. And then in, one of the next quarters, we will probably give you a more holistic view on what is happening in solutions, but that is directionally where we intend to spend the 1,000,000.
With regard to our free cash flow guidance, So we also got a couple of questions on that this morning, obviously, because the million looks relatively low. It does include the proceeds from the supply chain, China sale as a very positive cash in. It also includes the cash out, for the 777s as a very negative cash out of 1,100,000,000. It also includes some other moving parts like we will have a higher change in the provisions line this year due to some of the cost of change from the civil servants in PeP are now becoming a cash effective in 2019. So I would emphasize that, obviously, the intention is to do better.
And we have said that the 500 is our minimum aspiration in that dimension.
Thanks, Tobias. And over to the next caller please.
Next question, Asian P. Commerzbank. Please go ahead with your question.
Hi, this is Adrian. Hello, everybody. Three questions from my side. Actually first of all, there was quite some operating cash flow swing in Q4 net of the, IFRS 16 effect in supply chain. Was just wondering whether it could give us some more insights on what happened here because it was quite a sizable number, actually.
The second one is on CapEx net of the 777s. So I was just asking myself, should we continue to expect CapEx in 2020 to be at the level of 2019 or lower? Or what is the at least qualitative assumption that we should correctly, actually the costly unit price is more or less flat than 2018 versus 2017@3point 76 roughly. So it looks like that it actually picked up a little bit in Q4, but I was asking myself, is the market ready in 2019 actually for a more sizable increase, I. E.
10¢, 3% or something, for example, Is that what you're aiming at or what should we think about it? Thank you.
Okay. So maybe starting with this chain cash flow question, indeed, we had a very, very strong cash flow in supply chain in the 4th quarter. And that was also driven by our real estate venturing activities with regular parts of our supply chain business. But where we have a typical cyclical pattern over the year. So this real estate venturing stuff is when we win a new customer contract, we have opportunity to go and lease a warehouse or in certain attractive cases, we can also build the warehouse ourselves and then sell it on with real estate gain, to somebody who then wants to operate it or wants to keep it in its books going forward.
Has been a part of the supply chain business for years, in terms of phasing over the course of the year. Given that a lot of this stuff still happens in Europe and North America, you typically start the project in the spring and then complete the construction towards the fall. And then everybody tries to get the transaction closed before the year end. I would prefer this to be spread out more evenly across quarters, but unfortunately, the colleagues tell me that this is the nature of the business, but that was the big driver, because during the course of the year, We build this up in working capital. And then it is released and really brings us the cash in when the real estate transaction happens.
With regard to CapEx, what I call kind of like the regular underlying CapEx, yeah, this has grown gradually over time. We don't see a catch up meet here. It's not that we under invested, but we also expect that it will continue to grow gradually with business growth. So I think it's a very steady pattern, we expect also going forward with incremental step ups year over year in line with business growth. And then finally, with regard to the parcel unit price, yes, when you look at the full year 2018, it looks relatively flattish.
The important thing is that even though we only started with the heavy yield management activities in the second half of the year, it was quite pleasing to see already in the fourth quarter. Stronger revenue growth than volume growth. And that is very obviously something we expect to continue in 2019 because we are increasing prices quite significantly. The benefit here is the whole market has been ready for price increases because also our competitors feel very strong cost pressure. We have a 45 percent market share.
So obviously, we as a market leader also have to take the lead in that area.
And maybe I add to that We have we don't talk about in Q1, but of course, we have changed quite a bit of contracts January 1st. And what the gap so far is the visibility is that we continue to see good healthy growth in volume, but we also see good increase in, in the average price. And that is very encouraging. So I think the market is ready for significant price increases. We will never comment on cents per parcel, but that is acceptance in the market.
And I have no doubt that our competitors are following our role model as well. Because we all have cost pressure due to the, low unemployment in Germany and the increases in transportation costs, not to last by the tall increase. The government has taken January 1. So we are very confident that we will see a significant increase in average price. Even if you still have to keep in mind mix and match because we are doing that mainly on the business customers And of course, on private customers, we have done very little.
And therefore, the average pies will fully visible in the average, but we will see that in the retrospective segments.
Next
question is from Andy Chu, Deutsche Bank.
Thank you. Good afternoon. Three questions, if I may, please. Firstly, in terms of CapEx and from an underlying CapEx perspective, I understand that the billion probably won't include anything that, Ken needs to do on his in his new role. So you give us a flavor of what sort of headroom maybe granted to Ken to sort of accelerate the strategy within the new DHL Ecommerce solution.
So could there be a material uplift in CapEx going forward? Secondly, on the P And P division, why are you not going ahead with restructuring And why does that depend? I think you mentioned, Frank, on the stamp price and where that goes. Isn't that something that you can control in terms of indirect costs and potentially sort of restart or start again the early retirement program for civil servants, for example. And then in terms of yesterday's announcement, in P and P of a new head, who has been with the group for some time, but in sort of strategic roles and within the DGF division of late.
How important do you think it is to have somebody that is sort of intune or aligned with sort of union negotiations? Or is that not a big consideration when making that appointment? Thanks very much.
So I think Melanie will say something about the CapEx for the eCommerce Solutions So maybe I talk with the appointment, you know, Tobias has been around and known as well by our social partners for a while. Of course, that plays a role. I think he has demonstrated in the short time period that he really digged into the business just to he has been out in the field to deliver parcels and let us almost ten times that gives him tremendous credibility with also the unions and the workers council not speaking about our operational leaders and our mailman. And he has taken that decision from day 1 when he took over the COO role That has been also his recipe for success when he joined to DGF. He did exactly the same.
Fundamentally understand the business what I hear from our social partner, they highly respect what he has done to go out and understand before he takes actions. That's one of the drivers. He's very smart, but he's also very close to the detail. He will be a great operation leader for that type of business despite that he has a different background. He's from education and engineer.
That might help as well. So I think I will see a lot of tailwind even in that relationship. And by the way, the negotiations are usually led by our HR director to Thomas Ogilvie. So I think that will work On the other side, the whole process before regulation is pretty complex, and we try to avoid any turbines in addition to what we have already. And that's the reason why we are a little bit cautious to mention too many things.
It might confuse the process even further because we might get question what does it mean if that means. And that's the reason why we are a little bit reserved for talking too much, what what we should do in addition, therefore, we wait and let's see what comes out. And of course, we are thinking as well what we can do in addition.
Okay. And then on your first question, the concern that we may see a surge in CapEx from DHL E Commerce Solutions, that is nothing I would be concerned about. 1st of all, for this year, in the midterm planning horizon, we have split the old CapEx planning into a portion for Can and a portion for Tobias. Because of course, we had included something for DHL ecom solutions already in the old plan. The Kent's current approach, I think he's going to be extremely restrictive on this.
That was also mentioned on the GHL econ solution slide that before spending more, he really wants to finish his comprehensive business review. So additional CapEx a step up from DHL Econ Solutions, I wouldn't put into the very category.
Just maybe one more, just in terms of the stamp price.
Where we stand on the process? Or
Andy? You were sort of cut off. Operator? Mr. Chu still on the line?
Yes, he is. Okay.
Sorry, Andy can't hear you. You either unmute or try again. We would try to maneuver urine again. Okay. Operator, it looks like we lost Andy for now.
Why don't we continue with the next caller then?
Sure. Okay. Next question Damian Brewer from Royal Bank of Canada. Please go ahead with your question.
Good afternoon. Yes, I've got probably three questions as well. Might as well give anyone else have. First of all, on the DHL division, in the Express side. It seems like with the focus on what seems to be yielding up on the more optimal sized parcels, the focus in 2019 seems to be turning a little bit more to margin rather than volume or share.
More generally thinking, at what point do you think you would need to sort of reverse that process and start focusing on volume again? Are you become self diluting to prevent anyone else starting to erode your position? So just where are we before you think bluntly margin caps out in that business? Second question, and I guess this ties to the sort of corporate center EBIT guidance, one assumes the extra SEK 100,000,000 there, a lot of that relates to StreetScooter.
Can I
ask when does street scooter not just turn profitable, but start to cover its 8.5% sort of standard cost of capital in the business? And therefore, what does StreetScooter become? Is it going to become a 6th division of the business or what is the long term objective there if elaborate a little bit more than that. I think that would be quite interesting. And then very finally, just turning to financials, could you clarify in terms of the PeP restructuring charges, the 1,000,000, if we were to look at the cash phasing of that, how much of that is already in the 'eighteen numbers?
How much of that turns into cash out in 'nineteen? And how much is left to come out in 'twenty or onwards?
Okay.
Yeah,
So maybe starting with the last question, so the biggest chunk of the million is the early retirement program for civil servants the EUR 400,000,000. And that had very little cash impact in 2018, but will have a cash impact going forward. The highest one will be in 2019. And we actually assume that in 2019, that will be around 100,000,000 And then it will go down in the subsequent years with the civil servants over time going into full retirement. So that is biggest chunk out of the 500 and it is going to have a material impact in cash flow in 2019.
Gradually then going down in the subsequent years. In terms of sweet scooter, so I mean sweet scooter has been chunking up production in 2018 going into 2019. And it's in a typical financial pattern of a startup company, which is, yeah, very dissimilar to our rest of the business portfolio. We said clearly that we don't want to stay automotive through for manufacturer or turn into an automotive manufacturer. So we are very pleased with the operational progress StreetScooter is making, but we are looking for the right financial set up going forward.
Where we should be able to give you more clarity in the course of 2019. And then with regard to Express, yeah, that is really a very fine, delicate balance. I mean, this is why we included this picture on the gross profit triangle in the presentation. To make money and the good margin and the good growth in Express, you need constant rebalancing along those dimensions. Starting, of course, also with what you do on the top line, where we have seen very strong shipment per day growth.
And what we have now started in the second half of last year was a cut pain on heavyweight shipments. Where we have managed out quite a bit of heavyweight stuff, that leads to a reduction in weight per shipment and hence also to a reduction in revenue per shipment. And so what we expect very clearly now, in the first quarter is a dead between revenue per day and shipment per day. I think in terms of more general, how to calibrate optimally in the year, think we have to see a little bit more of the first quarter. I mean, January February are notoriously difficult to interpret.
And in those uncertain macroeconomic times even more so. What gives me confidence on the Express side is that we have this extremely experienced team with John now taking over from Ken in a totally smooth fashion, they know how to optimize along this triangle. We really have to see now, in the course of the first quarter, what is really the right position for the year 2019?
Can I
just follow-up with 1, just given the cash is in focus, particularly at the moment, how much capital has been sunk into StreetScooter and therefore how much potentially is there sitting in the business that could be released if there was to be a change in that business?
I think the big portion of cash drain in StreetScooter has been working capital, which again is not unsurprising in a startup business, where we have ramped up production quite significantly, production facility in 2018. So very obviously one of the key priorities now for 2019 is to redefine the optimum and output and sales uptake of the Street scooters.
Okay. Thank you very much.
The next question comes from Edward Stanford, HSBC. Please go ahead with your question.
Good afternoon, everybody. Two questions for me for a change. First of all, going back to your guidance on PeP. And the spread between the upper and the lower band. Are we to assume in the upper band that you have made some assumptions on what pricing might look like.
And I'll chance why I'm asking if you're going to tell us what that is. Secondly, looking at the air freight business, obviously volumes have come under, have weakened. In Q4, and that's been consistent with the rest of the year. But we're hearing from your competitors that the airfreight market was quite challenging anyway. Can you perhaps provide a flavor of the extent to which the volume 4 was market driven and the extent to which it was, if you like, a choice to have profitable volumes and how is it looking so far this year?
Thank you.
Yes, so on the postage, unfortunately, Edward, I'm very reluctant in this giving public guidance somehow, to the regulator what we would think is sitting there and there because that has, of course, potential impact on the process. Let's wait what now finally the governance will do and then we will look into what the regulator will decide. We definitely assume that it will be better than the 4.8 we gave us the first time, but we don't know yet. And of course, we are assuming certain elements, which are necessary to happen. And also the timing is important, when it happens and how much compensation we might get for the delay of the process.
All this are still moving parts and I'm pretty reluctant in saying more than what I've just said.
Can I just follow-up on that, but sorry to interrupt just to say that you have made some assumption on all those variables at the upper end of the guidance?
So then on the air freight side, so the shrinkage of the business is very predominantly associated with our own internal decisions. So it's not a statement on the market. It has been this focus on yields, which we have pursued, especially in the last one and a half years since Tim came on board. The focus for 2019 is to slowly get back into growth territory. So to change the sign, We don't have to grow in line with market yet.
The focus is really on keeping the good profitability levels we have achieved but getting from a shrinking position into, again, growing position. That's the top priority to get into peripheral growth mode for both air and ocean freight.
Okay. Operator, maybe before we go to the next caller, Andy, to drop out of the line, but Gavin keyboard and send us the last one question that he wanted to create regarding stem price regulation We still think that the 3 year framework is going to be the basis for the decision. That's basically his question.
That's the question. Yes.
Okay. Yes, we are still assuming that will be until end of 2021. Okay, Andy. So that's for you. Okay.
And over to
the next caller please.
And next question, it's Steele from Citi. Please go ahead with your question.
Good afternoon, everyone. Two areas I'd like to ask about, please. The first is Am I right in thinking that with regards to the extra 1,000,000 of ramp up costs in the corporate functions, the assumption that that'll just be a one off is because you expect gross profit from those associated corporate functions to grow by that amount at least in 2020. If that's correct, what can you say to help us be reassured that that's a reasonable assumption, please? And then on the second question, again on these modeling considerations, the million restructuring efforts in the UK, obviously, is a very big number relative to the size of the business its profitability.
What's what's been the misjudgments made, please, by that team in pricing of their contract bids in the last few years such that this is necessary? And why should we not be fearful that these are signs of industry maturation that could repeat in other geographies over time, please?
May I take the second in the Milan either first. So I think if you look into the UK, what properly happened there is we were a little bit, you know, too satisfied with the progress we have seen. Because that's a big business. It's not a small business, a huge region. It's the, it's the foundation of Exel when we acquired, and they did over many years pretty well.
And if that happens, then maybe there have been some mistakes in detail made. And I think it's now time to correct them somehow. We brought a new management team in to shake out that. And we found some challenges which we better address now and with the opportunity we got we can do that now and that will help us to get the UK business back on growth and profitable growth. And Therefore, I think it's a decision from us as a management team that we show, let's go for it and correct something.
So for instance, the standardization is significantly less when we have another parts of the world. The upgrade of facilities is probably a little bit not done in the way as we should have done And that should be all addressed by these restructuring expenses. So I think there's opportunity to improve the underlying performance quite a bit And John said, I would like to reuse some of the proceeds we get from our sale to invest that and to help us to close the gap. We have gotten from the sale of our
transactions. So 2018 was the 1st year of corporate functions, where we had grouped together, some of the startup activities we had in the group overall. We have now developed solid business plans, for all of those activities with street scooter and smart trucking in India being the 2 biggest element in the portfolio. On the basis of these business plans, we assume that, yeah, in 2019, we will see quite a burden in our P and L, which is why we reflect the 100,000,000 But of course, the anticipation is that we will see some return, and hence, elimination of the 100,000,000 by 2020 turning things into the right direction. And again, I think this is really In terms of profile, we are talking about startup activities here where we need the years 'eighteen, 'nineteen, to really get it into profitable territory.
I think on the underlying corporate center, that is quite unspectacular It actually had a very strong finish in 2018, and we're keeping a tight cost control on that bucket. So it is really making sure that the corporate function startup activities deliver according to plan.
Okay. Thank you very much. Just on that though, what is it that, I mean, obviously you've got a business plan, but what is it about, your order book or your client discussions that gives you that conviction that that level of revenue is going to drop through so quickly, please. Is there anything that's actually happened, or is it more just conversation?
I think there are a number of important elements, I guess, for me, the most important element is the professionalization of the management team we have been working on over the last month. We brought a new CFO from the Automotive business into the company 6 months ago, who has had the enormously, this inventory management matching production and order book, we have announced just last week that we have a new CEO for StreetScooter. So I think we have gone now over the last month through the transition from a very much engineering, research company into a professional operations managing company. And I think for me, the biggest reason for my confidence is the strength of of the management team. And just looking at what the new CFO has already done over the last 6 months on the finance side, I think we are seeing a very good progress
Yes. And not to forget, we have 99,000 cars ourselves out in the street. And we are gaining every day more experience, how you charge these cars, how long they last, and that is factual evidence also for external sales. Because people see now that this is not just one winter. It's really not on a big scale and it has worked pretty well.
So of course, I hear noise from the operation, being the head of that for some time and also from our workers' council. The only subject that didn't come up in the last weeks with regard to what we do in operations and when the unions complain is the performance of the street scooters. That's interesting. That's what positive evidence was negative evidence because they usually don't ever stop to complain because they hear it from the careers. And had worked very well.
We delivered great service quality from Christmas, despite that we have 9000 vehicles now in the business. So that is also important for the new management because that demonstrate that we really have a robust vehicle produced, and that should help to accelerate external sales as well.
Okay. Thank you very much.
You're welcome and over to the next caller then.
Next caller is Tore Spungin Berenberg. Please go ahead with your question.
Good afternoon. I've just got a couple left actually. The first one is, I'm sorry to, once again, come back to the issue of the at the P and P guidance. But just curious to understand whether you considered maybe setting a range about around the pet profitability for 2020 in the way that you've done for 2019, especially given how much the swing, how much it could swing in 2019. And also given that I should imagine the regulator is going to look at this and say well, if you think you can make 1,000,000,000 of profit in 2020, which would be a margin backup to as high as it's pretty much been that might have some bearing on whatever decision they come to.
So I'm just interested to understand why you think under any circumstances billion is where things will drop out. And then my second question is, again, just back on the investment you're making into supply chain and actually indeed into commerce. Melanie, I was wondering if you could just clarify how much of that expense is noncash as opposed to cash. And also interested to understand what you think the payback will be and how long we'll see it will take to come through, particularly on the supply chain side. The underlying margin in the supply chain actually wasn't that bad if you strip out the one off.
So I'm interested to understand where you think it could go from here.
Yes. So let me start with the first one. So the number we are planning for next year has been already before to the regulator. To artificial change right now, just to say, you know, the number is lower they would not trust us anyway. We believe we have all the measures and we have to disclose all the measures as well to them too.
And it's very difficult say, these are the measures we intend to do and this is the impact and then say, but overall, it doesn't lead to these numbers. So that's the reason why we and that we have more than enough measures to make that number. And now to change that number to a lower number, just to hope that postage regulation will get better, it would be screwing up a process entirely. So we looked into that again and again, we believe that we can achieve that goal prove the measures we have on our desk.
And the supply chain questions, so I can't give you the final answer yet because we just going through the long list of individual projects which are applying against the 150,000,000 pot. It is however clear that, in terms of cash out, for this year, that will be substantially lower than the 115, 150. And I think I would also say that overall, not all of the 150 will be cash relevant. But we probably need a couple of weeks more to really get to the final answer. Is that just in terms of direction?
In terms of EBIT margin, yes, I mean, we have a very good EBIT margin performance already in the Americas in Asia. What has been holding us back over the last years was Mainland Europe, which has now consistently moved in the right direction and now it's the UK. But I really think overall, we have put out some time ago this 4% to 4% EBIT margin range for supply chain. I see no reason why we shouldn't be now really solidly moving into this territory.
50 ish of investment. That's all going to be one off. We wouldn't, we shouldn't expect there to be more going in, in 2020.
No, No, for supply chain, I think and Frank also said that. So I think historically, you will recall that we had a couple of challenges in the mainland Europe region to fix in supply chain. I think the UK was a little of, yeah, fortress of its own, that is really the one area where big chunks of the supply chain agenda, driving standardization, digitalizing, and so on have not picked have not been picked up in the same way as in the other regions. We are confident that with what we're now granting them as headroom in 2019, they should be able to really address those challenges. So it is clearly a one off, and you shouldn't see a continuation in 2020.
Sure. Thank you very much.
Thank you, Gerald. And over to the next caller then.
The next caller is David Ross Stifel. Please go ahead with your question.
Yes, thank you all for taking the time. Starting off on PeP, the slide you showed about longer term margin changes at the different divisions on Page 15 of the presentation. Showed that really PeP was the one that's been underperforming. As you think about that longer term, where do you see it settling out? Is 6% roughly a floor?
Do you see it trending back up? Closer to 8. And then what does it need to be to earn in excess of your cost of capital in that business?
Yes. So I think the first distorting element was that, over the past years, we have 2 very different animals in PEP. One was the startup activity in what is now called DHL E Commerce Solutions where, as you will have seen on one of the slides, we are talking billion revenue, which has been ramped up over the last years. At virtually 0 EBIT. So that's at a margin dilutive effect.
So that is obviously now very high Ken's agenda for DHL Ecommerce solutions to turn it from a loss slightly loss making 0 ish position into something where we earn a reasonable churn. So I think Ken's aspiration is to 1st go to kind of like the mid single digits in terms of EBIT margin aspiration. That is going to fix that part of the problem. I think in Germany and Frank can maybe also comment on that. So for Post And Parcel Germany, We had for a long time been quite successful in managing the transformation from a letter to Parcel.
2018 was set back, but I think clearly now the aspiration also with the guidance for 2020 is to go back to the levels we had before. That is quite an ambition because, yes, we are still losing on the high contribution product in letter and we are ramping up in parcel. But I think there's those measures which we have explained. We are confident that we can get to the 2020 number.
Yes. So on the cost of capital, we are earning 5 Buffy, cost of capital. You might remember that we changed the government change regulation a couple of years ago. From a return on capital into a return on sales comparable to the players in the market The reason is because this is not a tremendously capital intensive business, but a very labor intensive business. And therefore, the return on sales is a better yardstick.
So we also continued last year that we earned our cost of capital and there is no risk that we not will earn. We are not guiding you on margins because we are committed to more overall absolute EBIT because there are so many moving targets with top line and price average and all this kind of stuff. So we feel more confident instead of guiding for a return on sales. But what is happening at the moment that the government is looking into that into more and make it more precise, what is the comparable return on sales. And it looks that this is a higher number than they have assumed so far.
So that should give us room for improvement as well. So we want to increase the return on sales, but we are not guiding on that because we think it's we feel more confident to guide on absolute number
for profit.
But I can assure you, we are making our cost of capital including charges for goodwill.
That's very good. And then last question, Frank, you've got a unique perspective on what's going on in China and Asia more broadly. Through supply chain, through forwarding, through Express. What would, I guess, how do you see the Chinese economy right now, given the trade tensions with the U. S.
And the broader Asia supply chain?
Yes. So that's a difficult question, because we are now at the end of February and not further on. And Chinese New Year is always something special in the numbers. We definitely have seen some significant, traffic from China in the world by the end of last year, particularly U. S.
And we see a continuation of that even. How much that is early reflection of expected, increases in duties and all whatsoever, we don't know we believe that China will continue to grow on a pretty high level still to just taking the scale of the of the economy into consideration. So but Chinese in here is always every time when we have our annual numbers, some one of you asking that question, and we always say the same to say really something about China. We need March April. The 1st 2 months because it's driven by assumptions these guys have made to shut down their operations and they're not changing that on short notice because they give people vacation, all this kind of stuff.
So it's tricky. I don't believe that we are really getting mercifully sell, we read as well the newspapers, but they say the expectation is lower than last years. They now want to do a tax reform and all this kind of stuff So I think the Chinese government always looks into that very carefully and that's the reason why I believe we will see a continuation of good growth out of China.
Thanks. Thank you very much.
You're welcome. Thanks. Thank you for that. And One more caller, I think.
Yeah, one more caller, Dominic Adridge, UBS. Please go ahead with your question.
Hi, there. Thanks for taking the question. Just two very quick ones. One clarification, just again, just running back onto the free cash flow. Can you just I know you said there's 1,000,000 from the early retirement plan.
Is that the only other is that the only major movement we should be thinking about year on year except, of course, for the CapEx and other things. It's just because looking at the EBIT growth that you're obviously guiding to, that implies a lot better cash flow? Should we just assume? And I know that you did say it in the presentation that that's the floor for free cash flow and therefore it could easily be higher. Than that depending on circumstances?
And then the second question is related to that a little bit on the new aircraft. Can you just remind us what benefits you'll get from the CapEx on that new aircraft and B, how you're financing it? And lastly, the benefit you're talking about, is that just the financial benefit of owning versus leasing? Or are you including any operational benefits from lower OpEx in there?
Yes. So on the free cash flow guidance, there are a number of moving parts first of all, there are the kind of like 3d 1 off elements, the cash in from China supply chains, the cash out for the 777s. We then have, as I said, run about 100 from the civil servants, and there's probably going to be a little bit from the other restructuring changes and provision stuff on top of the ordinary stuff. I think the 2 other things which we have assumed is that we assume that we will have an increase in cash taxes paid. We have also guided for an increase in our tax rate.
So that is also something you have to take unfortunately into consideration, when modeling for the cash flow, And of course, in growing business, we have assumed that in line with growth, there will be some cash out from working capital. But I mean, we said more than 1,000,000. And of course, it would be very nice if we could give you a positive surprise. I think it's very early in the year. We have to see how a number of these elements develop but the 500 is clearly the floor in the guidance.
On the aircraft financing, It's also a topic where we will probably give you a bit more of an update in one of the next calls. I think in so in terms of where we stand on the financing. We are working on this. We are getting the first 777s delivered in the second quarter. So we are looking at very concrete financing concepts for those aircraft that is a very special market with some very creative opportunities.
So I'm quite optimistic that we will really get excellent financing deals done for those aircraft. In terms of fundamental logic, why are we doing it? So historically, we've had those interconnect airplanes to a large degree leased by our aviation partners, where we took not only crew and maintenance, but also the aircraft from our flying partners. When you look at the strength of our balance sheet and the financing conditions we have as a BBB plus rated company, and the spreads that gives to other companies, which would finance those aircraft potentially, there's just too much upside for us doing it ourselves. That we decided, it would be financially stupid not to leverage our balance sheet for financing those aircraft.
They will still be flown by partners to a large extent. And I think the last argument is, we would have had them on the balance sheet now anyway. In terms of IFRS 16 accounting. But for me, the important bottom line is when you look at the free cash flow, to get benefits both from the financing and also by replacing aging 747s with modern aircraft. That is going to be the big impact you will see in the express OCF going forward because we are going to use more fuel efficient aircraft than what we had before.
Okay, thanks. I'm sorry, just to go back on to the just follow-up on the tax. I know that obviously it's a bit of a moving part. So I think it went down by about 1,000,000,000 recognized deferred tax assets. Can you just say what the sort of situation is on the tax side?
Is this always? Is it always a case of just waiting and seeing how how the planning works out for this year? Yes.
So unlike this time, we have given for the first time a range on tech because it has always developed a bit differently from what we had guided for in the beginning of the year. Last year, that was actually due to the reduced profit in Germany. In terms of tax loss, we still have around about 1,000,000,000 in unutilized tax loss And that is, of course, something which can potentially have an impact on how the tax rate develops. And I think we have to see how the business performance is. That was the reason why we have now given a range for 2019 with regard to tax.
Thank you very much.
Okay. Operator, any further callers waiting?
No, there are no further questions.
Well, in that case, I thank you very much for your very good questions. I hope you're equally satisfied with the answers. Thank you to Melanie and Frank. And before we now rush out and going to see you over the next couple of weeks on road shows and conferences, for some final remarks on this call over to you
Yes. So to summarize, of course, we are satisfied that we met all indicators of our revised guidance it was a bumpy year for us. We have taken all the actions, which are necessary to put us on the in the right foot this year. We have seen good traction in all parts of our business in the last quarter. If you look into the year over year development of the last quarter, it was pretty positive.
That's the reason why we believe that we can make the 3.9to4.3 this year. And it also makes us confident we have, better than the right base to deliver more than $5,000,000,000 next year. So I think we turned the corner. We are heading again in the right direction. And we are working on all cylinders now somehow and adding on all divisions in the we have the right momentum and the right direction and the right measures in place.
And of course, I'm very happy that I have now my complete team back we have to be us joining April 1st. And then I also can focus more on the midterm long term perspective for the company, which is of course important for me as a CEO as well. So thank you very much for listening. We are looking forward to see you very soon again. In different settings and thank you for joining us today.