Good afternoon, ladies and gentlemen, and welcome to the Deutsche Post DHL conference call regarding the results of the second quarter 2018. At this time, all participants have been placed on a listen-only mode. The floor will be open for questions following the presentation. Let me now turn the floor over to your host, Mr. Martin Ziegenbalg.
Thank you, hello out there, everyone. Don't you worry, we don't want to bore you by running through the Q2 numbers again. We're going to do, of course, today, the Q3 set of numbers, which I take you have in front of you. As you have seen in the invitation, we've got the Group CEO, Frank Appel, and the CFO, Melanie Kreis, here with us. Without any further ado, over to you, Frank.
Thank you, Martin. Thank you for joining us today. Of course, I'm more than happy to share myself with you what our perspective is, and Melanie will later on talk a little bit more about the details. Let's turn to page three. The key summary for this quarter is everything is in line with our expectations. We have continued to make good progress with DHL divisions, and we see first sign of getting traction on the P&P recovery. Overall, there is some concern with the markets are getting more challenging. So far, we haven't seen any impact on our trading volumes. That's the reason why we are confident that we deliver our 2018 numbers and can reconfirm the 2020 targets. If you go to page four, you'll see that we had a good growth rate. In Q3, all divisions have grown organically.
P&P only a little bit. I come later on to the reason for that, because we had last year the election, as you might remember. Express, very strong growth. DGFF is growing as well on top line, and Supply Chain has seen some growth despite the challenges we face in the U.K. Overall, if you go to the right side, you see that the trajectory of the three DHL divisions is continuing. We see a very healthy development of the Express margin now to a new record high. DGFF and Supply Chain are moving in the right direction. Supply Chain already for a while. DGFF has achieved already the level which we had in 2010, but that's not the record level, but there's still more to come. Overall, very good.
PEP, you can see here as well the impact of the challenges we face at the moment. On page five, you see our portfolio overall. You know that our portfolio is very well-balanced and diversified. Even if there might be high risk from trade war or Brexit or other activities, we believe that we have a very good portfolio, and we can benefit due to our global footprint whatever happens, because we can act always from a perspective of strength. Of course, some business are more volatile and more cyclical against the GDP volatility, and others have a structural growth anyway, like the B2C parcel and the B2C express business. That brings me to the uncertainty, which is increasing without a doubt. The biggest impact we have seen so far on our numbers is the currency impact.
We had significant headwinds from currency in Q3, mainly in Express. As you easily can recognize from the numbers, that was mitigated very well by the team. We are very good in Express in yield management, I think the other divisions are learning now on the run. In Global Forwarding, Freight, we are doing better, and in PEP, we have started the journey now pretty well. On trade wars and Brexit, yes, there is some uncertainty. There might be responses from some customers. We see that already in some places that customers are moving or considering moving out of the U.K. or even out of China to avoid any impact from trade barriers. The good news for us is we are always a very visible and highly welcome partner to help them if they do that. That's good news for us as well.
Fuel prices are going up as well. As usually, we will push that further on to our customers. Therefore, the EBIT impact on the long run should be minimal. You see all our measures, if things are getting worse, of course, we have experience how we treat these, despite that we have not seen tremendous impact yet. If we now go to the divisions, Express continues to do very well on top line and volume growth. Yes, we had in Q3, as you might remember, a significantly increase in volume due to the cybersecurity attacks, which had impact on some. There is little bit less growth than in the previous quarters, still a very strong growth on a very strong last year's quarter. That's all fine.
We see the regions are changing from one region to another. Overall, there is very good growth across the portfolio. That is, as I already said, a strength of our portfolio. Page eight shows you the progress in DGFF. Tim is very focused on profitability. That's the reason why gross profit and GP per ton and TEU is up, despite volumes are down. That has led to a significant improvement in our conversion both on GP conversion, also on the EBIT margin. We are now getting back to the levels we have already seen before we started the NFE activities. That's very good news. That's supported by focus on the right customers and the right profitability. It's driven by the indirect cost reductions, also is driven by our renewal on the IT front. That brings me to the next page nine.
We are making very good progress with our transportation management system. Not only that, also other systems are rolled out. Of course, the core is a transportation management system. We are now live in 14 countries with ocean freight. We will be done by the end of the year, with ocean freight next year. Not this year, next year. By the end of the next year's end, we will be done. We have started now air freight as well. First country is live, and we will continue to see more deployments coming next year. Overall, that's good. The benefits are only very little reflected so far in our numbers. As you can see in the right, there's still double data entry because we still have coexistence with the legacy system.
The end-to-end visibility is only in place, of course, if you have full-fledged deployment and other aspects. There's more to come. The good news is the system is well perceived by the organization, and it's pretty easy to implement it now with all the learnings we have taken on the journey. On page 10, one chart on supply chain. As you have seen, we sold our business in China, Hong Kong, and Macau to SF, for a good price, as we believe that on the other side, we stay together somehow. We have created a partnership. We will get an ongoing income stream from that activity. We believe that this is the right choice for the China domestic market, because we have seen that we have a perfect partner for multinational customers, and SF brings a lot of expertise for domestic customers in China.
We believe both parties will benefit from that's definitely only the first step in a potential broader cooperation. That's good news. P&P, which as you know I'm still heading. Visible on page 11, we see a decline in volume and revenue, which is slightly higher than what you had expected, but as I already said, that has significant impact from the last year's federal election. If you carve that out, we are perfectly in line with our 2%-3% decline, which we have expected for a long time and have communicated for a long time. Parcel is continuing very strong. The same is true for Europe and e-commerce. On page 12, it shows the progress on our measures. There are two elements to the pricing measures.
In Parcel, we really see further implementation of our price measures, we are very optimistic that we will see a good price increase this year in Parcel. On the Postage, you have seen the regulator announce that they are not done yet with their assessment. The reason for that is that, of course, due to the profit warning, they had asked for which measures we will take, how likely is their business plan now. You have to give us more information. Of course, certain measures we only have developed in due course as well. They take the perspective, if we have not fully explained all the measures, it's difficult for them to judge if a business plan is right, because that is the basis for their price adjustment. Overall, we are still confident that we will see a reasonable price increase next year.
If there is any later implementation, we will compensate it for that as the regulator already announced commercially. On the direct cost, we get more and more ideas what we can do to improve. On the short term, we have already started to deploy the best practices across the network, and we see already financial benefits coming from that. Of course, that has been started also in Q3. Therefore, the impact for the bottom line is still not very large, but the measures are getting traction. Indirect cost, more progress here, also visible in our numbers. We are really now taking indirect cost out. The first people for the early retirement left already. We booked the whole provision already because we got more than enough applications to support the early retirement program. That leads me to page 13, other indirect cost spend.
We are reorganizing the division even further, which will help us to make it leaner. We have disposed Allyouneed Fresh. Of course, we are very intensively focusing on our marketing IT spend. Next page shows you the split we have recently announced. I'm very happy that Ken is now helping me to focus on the international e-commerce and parcel arena. With his experience, he definitely will help us to get a clear plan what we should do with our eCommerce Solutions business. At the same time, I can exclusively focus in my second role on Post & Parcel Germany. On page 15, that's just a reminder of our bridge. We still see the bridge well intact.
We see that the measures are feeding these different boxes. Therefore, we are very confident that this, what is shown here, is deliverable. On the last page I would like to share is page 16. In a year where we have a profit warning and some uncertainty, it is very encouraging and reassuring that our organization globally gave us an increase in most indicators. We are measuring in total 10, and I think we got improvement on seven. You see here three important ones with employee engagement, active leadership, and customer centricity. That is very reassuring because great morale is providing great service, and that drives, finally, financial success. To be honest, that was a positive surprise for us because we have seen drops when we had uncertainty in the past. This year, even in P&P, we have seen a good improvement.
P&P actually had, in total, the best improvement from all divisions. We still have Express as the superstar in our portfolio with the highest marks, but it's important that we have seen good progress, and the increase in the satisfaction and engagement came particularly from operations. That's very encouraging. With that, I would like to close. Solid quarter, no surprises, and the measures we have installed in all divisions are getting traction. That's probably the summary from my side. With that, Melanie, it's now up to you to talk a little bit more about the detailed numbers of Q3.
Thank you very much, Frank, and good morning, good afternoon from my side. I think actually, Frank has pretty much covered all the relevant topics. What I'm going to talk about in the numbers is just going to confirm the messages Frank has already delivered, and I will focus on the main points. When we turn to page 18, you can see our group P&L for the third quarter. I think the first important message on that page, and Frank said that already, is our underlying organic revenue growth continues with a healthy growth rate of 4.7%. Obviously, on the EBIT side, we can see the effects of the P&P division restructuring booking in the third quarter, with close to EUR 400 million are obviously having an impact here. The important thing to note is that that has no impact whatsoever on the DHL divisions.
They continue to deliver despite the drag from currency. That drag mainly stems from the emerging markets developments. Tax rate is unchanged at 14%, which is still our guidance for the full year. On the financial results side, you can see again, as in the previous quarters, the impact from the implementation of IFRS 16, which we have highlighted again on slide 19. On that page, you can see the IFRS 16 effects in our P&L. Quite frankly, like I guess some of you as well, I'm looking forward to next year when we will have finished the IFRS 16 implementation exercise and the numbers will be clean year-over-year. For the moment, as in previous quarters, we try to give you transparency on what's the impact of IFRS 16 in the different lines of our P&L.
Obviously, when you look at the EBIT impact from IFRS 16 for the full year, you may have some questions with regard to our full-year expectation, given that the year-to-date effect already stands at EUR 145 million. On that topic, I would like to point out that going into Q4, we are expecting some real estate sales from our DHL Supply Chain division, which is a normal part of their business model, real estate venturing. We've talked about that in the past. Under IFRS 16, however, the recognition of the gains from such a transaction will be accounted for differently. This will most likely lead to a negative IFRS 16 effect for DHL Supply Chain in the fourth quarter. This explains why we still expect around EUR 150 million as a full-year IFRS 16 effect on EBIT, even if the current run date indicates a higher number.
That takes me to the group cash flow on slide 20, which is, as usual, a busy slide. I think we have some special topics to point out now with the Q3 numbers. The first thing is that obviously the restructuring provisions which we booked in P&P in the third quarter, particularly those for the civil servant early retirement, means that we have an unusual positive movement in the change of provisions line, as this addition to the restructuring provisions is reducing EBIT, but it's not cash relevant. You can't see the line changes in provisions on the page here, but the effect is visible in operating cash flow before changes in working capital.
The utilization of that provision has actually already started, as we had the first few civil servants moving into their early retirement phase, but the utilization overall will continue for some years until they actually go into retirement. Further down the cash flow statement, the line to point out is obviously the CapEx development. You can see here that our CapEx is significantly higher than in the prior year quarter, which is fully in line with our announced plans. When you look at the nine-month figure, you can also see for the nine months that we are spending significantly more, EUR 566 million compared to last year on CapEx. We have the 777 impact in there. That accounts for EUR 128 million year to date. I would say from our perspective, the third quarter cash flow is in line with our expectations.
I understand that based on the year-to-date free cash flow performance, it looks like a really massive step-up will be required in Q4 to get to our full-year guidance of more of EUR 1 billion in free cash flow excluding the 777s. Let me make a couple of statements on why am I actually confident that this is achievable. When you look at our year-to-date free cash flow number, it stands at minus EUR 248 million, and that includes the EUR 128 million from the 777s. If I strip those out, year to date, we are at minus EUR 120 million, which means in order to get to the above EUR 1 billion, we have to end up somewhere between EUR 1.1 billion and EUR 1.2 billion.
When we look at what we have achieved in the fourth quarter of 2017, the reported figure was EUR 975 million, but that included the Williams Lea Tag disposal gains of EUR 286 million, and the U.K. pension funding of EUR 495 million. The underlying free cash flow generation in the fourth quarter of 2017 was EUR 1.184 billion. Order of magnitude, the EUR 1.1 billion to EUR 1.2 billion in the fourth quarter is doable. What gives me additional confidence, however, is the whole CapEx phasing. What is now burdening our cash flow year to date, the earlier spending on the CapEx, compared to what we saw last year, gives us a rough upside compared to the Q4 2017 CapEx of around EUR 200 million.
I think that should just give you a feeling that whilst it looks quite ambitious to get to the more than EUR 1 billion, that is still our aspiration, and that is why we are confirming it on the guidance page later on. Page 21. I think nothing spectacularly new on this page. Obviously, on that bridge, the big effect we have already seen in Q1 and Q2 is the recognition of the IFRS 16 lease liabilities. The question I get occasionally now is, based that your net debt number is now higher, are you still comfortable with the position? My answer is a very clear yes. I know that some of the ratios now look differently.
For example, when you look at an EBITDA-related ratio, we have the additional fact that, of course, the EBITDA IFRS 16 effect, which is also increasing EBITDA, is only coming in over time. I think we will also see a normalization with the fourth quarter. Overall, I think we are still in a very solid position, and we should not forget, and I've said that repeatedly before, it's accounting after all, so we don't earn a euro less or more, and that is also reflected in the assessment, for example, of the rating agency. That was the group overview. Now, very briefly, onto the divisional pages, starting with P&P on page 22, where I think Frank has already covered the most relevant points.
I just want to point out that in the divisional cash flow, you see again, restructuring costs are a significant impact on EBIT, but not on the quarterly cash flow. On the EBIT performance itself, once you strip out the restructuring charges and the conscious reinvest measures into productivity of EUR 45 million, you can see that we are still down year-over-year. That is shown on the next page where you see the quarterly operational year-over-year performance. In the third quarter, we are still EUR 79 million below the third quarter of 2017. This is fully in line with our predictions. We had said that we would see a reduction in the shortfall compared to last year in the third quarter. The expectation was that it would be around EUR 50 million-EUR 100 million.
It is in line with our expectations, but of course, it's not where we want to be going forward. The clear expectation is that in the fourth quarter, also supported by first benefits from the initiated measures, we're going to further reduce the shortfall compared to Q4 2017. Overall, still some way to go, but I think the path has been laid out very clearly, and it is encouraging to see that in the third quarter, we have been able to come to the results we have been aiming for. That takes us to Express on page 24. I don't think there's a lot to be said here. As Frank already mentioned, Express was the division where we saw the most pronounced effect from the currency headwinds. It's even particularly encouraging that we were still able to grow EBIT by 10%.
I'm also very pleased with the overall cash flow performance of the Express division. They're doing a really outstanding job, for example, on working capital management. Of course, on the basis of a strong OCF, it also makes the decision to continue investing quite heavily into the Express division an easier one. As mentioned before, of course, in the CapEx increase, we also do see the impact of the Boeing 777s. That takes us to Global Forwarding, where Frank has talked about the relevant trends. We continue our selective approach on the volume side, which is paying off in the gross profit development. We are making progress on the indirect costs and are improving the GP to EBIT conversion. We're now at 15%. That's obviously not yet the end of the road, but an important step into the right direction.
On that basis, we can see a significant improvement in EBIT, where obviously also compared to Q3 2017, there was a bit of catching up to be done. The one line where we have to put particular focus on in Forwarding in the fourth quarter is on the cash flow. The working capital development in the third quarter was not what we had aimed for, which is something we have also heard from peers in the industry overall. That's obviously a focus for the fourth quarter. As usual, CapEx pretty much a non-event on DGFF. Overall, the great news on forwarding is we've now seen it for a couple of quarters. I think we can call it a trend. Frank talked about the good progress on the IT rollout.
I think forwarding is clearly moving into the right direction, and the expectation is that this will continue not only in the fourth quarter, but also going into 2019. Which takes me, last but not least, to supply chain. Frank mentioned the important transformational deals we did in the third quarter with SF. In terms of underlying regular business performance, it was a solid quarter on the top line. On the EBIT side, we achieved an EBIT margin of 4.7%, so we are well within the corridor of 4%-5%. We have very good developments in most of the regions. The one region where we see a current weakness in the business is U.K. and Ireland. This is now being addressed. On the OCF side, I mentioned the real estate solutions before.
Those are impacting us at the moment negatively on the cash flow side, that is something which should reverse in the fourth quarter. Moving to slide 27. This slide is completely unchanged. We have not made any adjustments to our guidance. We have also not factored in the proceeds from the DHL Supply Chain China transaction because we do not know whether this will really come in 2018 or in the beginning of 2019. Leaving that aside, we are fully committed to our guidance, and have hence kept it unchanged. That takes me to the last slide of my short presentation. I think the wrap up is a very simple one. On the P&P side, the restructuring is proceeding according to plan and is picking up speed. The DHL divisions continue to deliver profitable growth.
On that basis, we are very confident to deliver on our targets for 2018 and 2020. We, of course, remain committed to our finance policy. Thank you very much. I think with that, over to Martin for the Q&A session.
Right. Thank you, Frank and Melanie. Operator, we are ready now for the Q&A round, please.
Ladies and gentlemen, if you have a question, please press 9 and * on your telephone keypad. If you want to cancel your question, please press 9 and * again. Press 9 and * now to state your question. First question comes from Andy Chu.
Hi, Andy.
Yeah. Good afternoon, everyone. Three questions, please. Firstly, on the employee survey, which I think gave early warning signals for the P&P division, I just wanted to check over and above what you've put out on slide 16, that there's sort of no red flags to sort of highlight across any of the divisions. Secondly, in U.K., supply chain obviously is pretty opaque from the outside. Can you explain actually what's happening there? You mentioned, Melanie, in your section that you're taking steps to address the issue. What was the actual impact on EBIT in Q3? Then just in terms of the Chinese contract logistics business, is it fair to sort of conclude based on your pretty well-defined finance policy that the proceeds from that disposal in the end should end up and be returned to shareholders? Thank you.
All right.
Melanie, you should take number 2 and 3. In the U.S., I can assure you that we have seen progress in all divisions, a slight uptick. There are no concerns in our divisions, and that's a good result. You're right. This is an early indicator of the mood. Despite that, our people are really impressed as well and of course, see profit warnings. The mood is up, slightly up across all divisions. Let me take the Supply Chain U.K. question. First of all, it's not that we are losing money in Supply Chain U.K. or so. It's just that, this used to be the crown jewel in our supply chain division. I think we just have to acknowledge that other regions have performed better in the meantime.
I think there are three reasons why Supply Chain U.K. is at this point in time, not where we would like it to be. The first one is the composition of the business there. We have historically quite a high exposure to retail and consumer in the U.K. Many of our customers are undergoing transformational processes themselves. When you think about the high street retailers in the U.K., which are struggling with the e-commerce transformation in some instances. That is having an impact on the business. The second topic is something, I think nobody loves it, but we are seeing some uncertainties connected to the whole Brexit situation. Be it tightening of labor in certain areas, be it on our customer side. The third important topic is that we have some contracts, some sites which are not performing in line with expectations.
We have had a manager change in our supply chain management team in the U.K. We now have very concrete plans of how we are going to address this. On that basis, I'm confident that we will be able to move Supply Chain U.K. forward. As I said before, we currently have other regions like the Americas, which are performing significantly better. That takes me to the question on China supply chain. We have now signed the deal. I think the first objective is now to get us to closing of the transaction, which will be either at the very end of this year or potentially beginning of next year. We will then look at how we're going to deal with the proceeds. On the cash side, we are, as you know, talking of around about EUR 700 million.
We also expect a positive deconsolidation effect on the EBIT side. We will then deal with this in the broader context. For me, that goes into the pot, nothing changes on what we do with the pot of money in line with our finance policy.
Okay.
Thank you.
Andy, clear now, I think.
Good.
Yeah, thanks.
The next caller, please.
The next question comes from Robert Johnson.
Hey, Rob.
Hello, everybody. Good afternoon. Two questions from me, please. First of all, on German parcel prices. You said on the Q2 conference call that you were planning significant price increases to that business from the 1st of January, and were also planning some price increases from the 1st of September this year. Could you maybe just provide some more color on the extent of the price increases that did go through on the 1st of September? Also maybe provide some color on the discussions that you're having with customers concerning the price increases that are proposed for the 1st of January, please. That's the first question. The second question is on the P&L benefit from restructuring measures.
In the presentation after the Q2 results, there was a slide where you stated that the P&L benefits from restructuring would be around EUR 160 million in 2020, and then greater than EUR 50 million in 2019. I think Frank mentioned before that you've now had enough applications to support the early retirement program and therefore presumably have got better visibility with regards to timing of early retirements. Could you maybe therefore provide an update on the P&L benefits for 2019, where you previously estimated greater than EUR 50 million? Thank you.
Let me talk about parcel pricing. What we have started in September is mainly on very small customers, which are our customers, because there we can implement it straight away. Response so far is driven by acceptance. We had very few complaints about the whole, and we have not seen any losses yet. The rest is coming more January 1. Some might a little bit earlier, depending on when the contract expires. We are on a very confident journey that this is doable. Our competitors are announcing similar stuff. We believe that we will see a significantly higher price increase than we have seen in previous years. On the postage for mail, if I understood that correctly, Rob, you asked for that. That doesn't happen now January 1, slightly later, depending on when the regulator takes the decision.
We are confident that this will happen in the first quarter. On the restructuring measures, I think it's too early to really finalize the numbers because there's a process behind that. Now we have to select the people. There's also a linkage to the organization, because the people can only get an early retirement if the jobs are redundant, and that is linked to reorganization. Then there is a process to do that afterwards, which takes a couple of weeks. I think we can definitely give you more indication when we report about the annual numbers in March. It's too early to say, but it definitely has not worsened against what we have said originally.
Just maybe to add from my side. What we have said is that out of the EUR 500 million which we are investing into restructuring, EUR 400 million will go into the early retirement of civil servants. We have now fully booked the EUR 400 million. Over time, we expect to get exactly the savings we had anticipated. How that phases out over the years depends now on the final selection of civil servants which are going into early retirement. For example, if you have a slightly lower average rate age of the people going into retirement, the saving is spread out over a longer time period. The integral over things stays the same.
I think the important message is that with regards to the benefits we want to get out of the indirect cost area for 2020, the EUR 200 million, where we indicated that around about EUR 160 million should come from the civil servant bucket. I think on that we are still very confident that the EUR 200 million will be achievable. We can also confirm that we will see a significant portion already coming into 2019. As Frank said, the more detailed guidance we will provide in March with our guidance for the year 2019.
Great. Thank you. Maybe just one quick follow-up question, Melanie. Could you just explain what caused the tax rate guidance to come down for this year?
Yeah. The tax rate was something we adjusted in the second quarter. That is actually the cynical upside from the shortfall in earnings in Germany, which is a high tax country for us. On that basis, we were actually able to adjust the tax rate downward because we will make less money in 2018 in Germany. Now in the third quarter, it has remained stable at the 14%, and that is still our forecast for the full year. Great. Thank you, guys.
Thank you, Rob. The next caller, please.
The next question comes from Neil Glynn.
Well, good afternoon, everybody. Neil Glynn from Credit Suisse. If I could ask three questions, please. Following on from Rob's question on parcel pricing. I heard the comment in terms of expecting a significant price increase for next year, but just interested in your thoughts on the mix effects. We've seen clearly negative mix effects to the tune of around 1% on pricing in Germany this year. We had a bigger one last year. Have you any reason to expect that those negative mix effects will change at all as we get into 2019? I think it's important to balance expectations in terms of what your P&L will actually show on the parcel revenue line. The second question on express growth. I understand, I think the TNT cyber attack might have had an impact on the year-on-year volume growth in the third quarter.
You've also clearly at times in Asia in particular, balanced volume growth with a need for high-quality pricing in Express over recent years. Interested in your take as we go forward in Asia as well as Americas, should we expect slower volume growth and stronger pricing as you prioritize quality? A final question on working capital management and tied to the comments on free cash flow, Melanie, earlier in the conference call. Do you need a very strong recovery in working capital in the fourth quarter relative to the historical norms and in the fourth quarter? I'm interested in your take on working capital intensity as a theme, because certainly among peers, it seems to be rising in terms of intensity. Thank you.
Yeah. Let me take the two first, and then Melanie on the working capital. On the pricing, we are working with all customers on price increases. They have different lengths of their contracts. It will remain a mix effect for 2019 that should be weaker in 2020. Nevertheless, we should definitely see that volume and revenue growth gets closer and closer, and we will see in due course if there's even opportunity that revenue growth is growing faster than volume growth. That is too early to say. Of course, the intention is that the numbers are getting closer to each other. That will remain a mix effect, but it should get weaker. In Express, definitely, that has been our strategy all the time. We are a premium provider with the best service quality, and we will continue to do so.
We will go more for the right yield instead of trying to outperform on the lower prices on volume. We believe that we will gain volume by high quality as we have done the last years, and we were always able to increase prices and gain market share in many consecutive years, and that's our strategy going forward again.
On the working capital, that's indeed a very interesting question, where I think the situation is a little bit different in the different divisions. I think the one division which is doing extremely well, on the working capital side is the Express division. I think that's the division where we're also most advanced, for example, in holistic OTC management, optimization of the OTC processes and so on. I'm not concerned about working capital in Express. In P&P, we have a structural challenge on the working capital side because of course, the payment dynamics on the postal and on the parcel side is different. That's a headwind we have had for years. That is a structural challenge, where we have identified a couple of measures which we now have to implement in the fourth quarter.
I think on Supply Chain, we have a very big swing factor at the moment. We had a significant buildup in inventories due to the real estate venturing activities. There, the plan is that this will now be reversed in the fourth quarter, and I'm very confident that this will be achievable. I think the division where, in terms of general trading, the working capital headwinds are most pronounced at the moment are in Global Forwarding, Freight. There after the six months, I think it was looking quite okay. But as I mentioned before, the third quarter was not in line with expectations. That is probably the division where we have the longest way to go. I think if you put all this together, what we have in our forecast for the year-end in terms of working capital is not super aggressive and unrealistic.
We need a contribution, but that is in line with what we generally expect. I think the big drivers for the fourth quarter will be the underlying business performance, the CapEx phasing, where we have just digested more in the first nine months of 2018 than we did in 2017. The real estate venturing and Supply Chain, and then the general working capital management. I think it's nothing out of the ordinary. I think the working capital is just something which needs constant attention, and that has to be confirmed in the third quarter.
That's very helpful. Thank you, both of you.
Thank you, Neil. Onto the next caller, please.
The next question comes from Mark McVicar.
Mark.
Good afternoon, everybody. Three questions from me. First of all, you've given us the number, the EBIT FX headwind for Q3. Could you say roughly what that was for the first nine months, so we have an idea of how the year is shaping up? Is first question. Second question is, at what point will you want to or need to start growing the volumes in Forwarding and Freight? I think it's Martin's phrase, "You can't grow your way to victory." When do you think naturally you will start to see volume growth? Then the third question is just looking at the OpEx increase in P&P, the EUR 150 million. How will you measure and how will you be able to show us the return that you're progressively going to get from that higher OpEx spend?
On the currency, I think, Melanie, you can say something. Of course, we can't continue to shrink the DGFF volume forever, and that's clear understood. We definitely will not see growth coming back in that division in this year. Of course, you have to demonstrate as well that we can now gain with the current level of profitability, regain market share, and that's definitely objective. I think to now tell you exactly which quarter it will be is too early to say, but of course, the team is working on that. For the EUR 150 million, to earmark that and say that is definitely the EUR 150 million is investment in stability of quality, training, and all this kind of stuff. It's not straightaway a productivity measure. Therefore, it is very challenging to quantify that exactly.
That's the reason why we put it in place into the underlying profitability. The increase which we want to see between this year and 2020 is including every year these measures, because we think we have to enable people in the field much more to really now say, if we do more certified training, what the benefit for better performance is very challenging. I would say if we start trying to do that, we will be hopeless anyway. It is more a fundamental belief that if we give people the proper tools and devices and training, we will see a significantly better follow-up on standard operating procedures. Our lessons from the other divisions are telling that very clear that this is very wise. We underinvested to certain elements, and therefore we had negative impact.
To quantify the positive impact is hardly possible. That's the reason why we not put it as a deduction of the target. It is included in the target for this year and as much as for 2019 and 2020.
On to the currency question, which is unfortunately, as usual, a bit complex. Overall, we have seen an increase in the currency headwind over the quarters. There was already a negative number in Q1 and in Q2. Order of magnitude Q1 was half of what we now had in the third quarter. Why is that? When we look at the beginning of the year, we actually had a EUR strength position, which was helping us, for example, vis-a-vis the US dollar. In the first and also in the second quarter, we were still, compared to last year, positive compared to the US dollar. What we have now seen is the strengthening of the US dollar, and that was a strengthening vis-a-vis the EUR, which hurts us on the buying side because we are USD short.
What is hurting us even more so is the weakness of many emerging market currencies vis-à-vis the U.S. dollar and the euro. This combination has led to the increase in currency headwind in the third quarter.
Okay. Is it fair to say you probably expect the net of the headwind for the year to be north of EUR 100 million?
Yeah. We are already, after nine months, north of EUR 100.
Okay, lovely. Thank you both very much.
Very well. Thank you, Mark. Then on to the next caller, please.
Damian Brewer has another question.
Hi, Damian. Damian, you may want to unmute.
Yes, sorry. Your line went absolutely quiet then. Thank you, and thanks for the rapid and punchy run through of the prepared presentation. I've got three questions, please. Two on DHL and one more general one. First on DHL. Could you help us get to the bottom of what real underlying pricing there did? If we look at the nine-month revenue description in the interim report, it looks like fuel was about a 3% impact on revenue there. Then when we look at the nine-month TDI volume per day up nearly 10 and the revenue per day up nearly 10 and the volume up nearly eight, it would appear that sort of pricing, without taking into account a weight and mix effect, was slightly down. Clearly there is a weight and mix effect there.
If you could give us some help on that would be fantastic. Secondly, just on DHL again, the quarter-on-quarter build of FTE count into Q3 looks larger than normal. Is there anything we can read into that about what you're expecting to do in Q4, or is there anything else going on in the business we should be aware of? Very finally, on the other operating income, I appreciate it's a minor item, but given the profitability at the moment, it is still material. The run rate of expenses that appear to have been capitalized as a consequence of taking income from capitalization, that line appears to have gone up significantly. The run rate in 9 months 2017 was about EUR 45 million per annum. In H1, it was EUR 61, and now in Q3, it's up over EUR 100.
Can you explain what's going on there and how that will trend in future? Thank you.
Okay, let me start with the underlying pricing effect in Express. The key measure I always look at is the base revenue per kilo. When we look at that, it is solidly up both for the 9 months and for the third quarter. I think what we are seeing as a input factor in the numbers is that we are focused very much on the right weight bracket. We had quite a bit of heavyweight stuff going out, which of course, in terms of revenue per kilo is not so attractive. I think when you strip out the fuel impact and the currency and all the stuff, you really look at base RPK, that is moving solidly in the right direction, as we have now seen for quite some time. The overall yield focus in Express continues also in the third quarter.
With regards to the FTE development, yes, I know what you're talking about. When we look at the number there, it looks up a bit more than you would have expected. When we discussed it with the Express colleagues, they put it on the quality protection measures, which has been a continued focus in the Express division. I wouldn't over-interpret it at this point in time, and it's clearly not the expectation that we will see an overall proportional build-out in the fourth quarter. Which takes me to the last question on the net other operating. Sorry, I have to say, I have to look at the spec spreadsheet here myself. You're quoting the stat book, right?
Yes, it was in the other operating income, the first line on the-
In Express or in-
No, within the interim report. Sorry, apologies, I can-
Oh, the income from work performed and capitalized.
Yes, exactly.
Is that what
What was EUR 240 million in nine months 2018 versus EUR 137 nine months 2017.
Okay. I think this is the impact from the StreetScooter, which you are seeing here. This is how we do the accounting for the StreetScooter for the internal production.
Okay. Can we be clear, how much in total over the life of StreetScooters being capitalized in there? Therefore, if you sold that business or found some sort of exit for it, how much of that would come out of the balance sheet?
Well-
This capitalization relates to the stakes where it's still.
Exactly
not going to be sold, but sort of inventory, right?
Yeah.
Purely volume driven right now.
Yeah. The whole StreetScooter accounting is a chapter in itself, where you really have to differentiate between what is produced and in inventory for external sales and what is produced internally, but which has not been taken over by the P&P division yet. This is what is impacting this number. I see that more as a phasing topic. Ultimately, those cars which are being purchased internally from StreetScooter are capitalized as if you would buy them from another external automotive manufacturer. The rest of the stuff, once it's sold to the external world, it doesn't stay on our balance sheet. I think this is really the interim phasing effect here. I think maybe, as we continue with the StreetScooter story, eventually we probably have to write a slide on the whole accounting.
It is giving our accounting colleagues a very interesting time, because it's very different from our usual business, and that is why it shows up so prominently in the line you've quoted.
Yeah. Obviously, no real influence on the profitability side of the game, but for the accounting connoisseurs. Okay. Shall we move on, maybe?
Thank you.
The next question comes from Edward Stanford.
Good afternoon, everybody. One question from me left. I'm just curious about the decision to effectively, if I interpret this correctly, exit in China. Clearly, that has been an area of focus for many people in terms of the opportunities in China. What does this say about your strategy for growth in Asia? Could you perhaps provide a little bit more color of how you propose to grow in future in that region now you've, I guess, sold the business. Thank you.
I think the first important comment here is that we have sold the supply chain business in China, Hong Kong, and Macau, which is very different from our network businesses. Of course, with Express global forwarding, e-commerce, we are still active in China, and we expect to grow our business. I think the supply chain situation in China was a very special one. We have a very nice, very profitable business, but it is predominantly driven by multinational customers, which we are serving in China. This strategic partnership with SF has actually been very much driven also by our local management team, who have seen limitations to growth going forward. Because in this domestic supply chain business, winning domestic Chinese customers has been more difficult for us than for local players.
The fundamental idea behind this strategic partnership with SF is that they, as a Chinese company, will be able to grow this domestic supply chain business in China more rapidly than we would be able to do that ourselves. They will take over our management team, and for us the financial benefit is obviously that we get the one-time payment at closing of the transaction, which is already quite attractive financial yield. We will also participate through a fee based on revenue going forward from the now accelerated growth of the supply chain business. I don't think we can read anything into that for the other businesses in China, nor can we read anything into the supply chain business in the other markets in Asia, which are very different.
Thank you.
Okay. Thank you, Ed. One more caller, please.
Another question comes from Dominic Eldridge.
Hello, good afternoon. A couple from me, both on P&P. Just firstly, just looking at slide 15 of the presentation. Obviously you're flagging up that on the cost side, that staff costs will be the biggest headwind to reach 2020. Can you just maybe discuss how much visibility you have, particularly on the sort of what you might call the quasi labor side, which is in the material costs? I know particularly obviously haulage rates, et cetera, going up. How much visibility you have for 2019 and 2020, and what are sort of the risk factors there? In particular, because I'm just thinking because wages I think are only up by 2.1% for you next year, so I'm just a bit surprised about the mix of that. Then the second thing on the stamp pricing sort of element.
Can you just discuss if there are any sort of lessons to be learned, because I suppose from my reading of the situation from a couple of years ago, was that there was going to be a much more simplified process for price rises going forward. Do you feel that's maybe everyone assumed it was going to be a bit too easy after the last price rise? Thank you very much.
On the cost. Of course, first of all, the staff cost and the material cost, the majority of our cost is still two-thirds roughly is own cost, staff cost. That's the reason why the absolute impact should be higher. We have seen just October 1st this year, 3%, and as you said, next year, October 1st, 2.1% in addition. Material cost is going up as well, but to a lower extent. That's our prediction. That might change. I think you should not over interpret now exactly the boxes. This is just more illustrative, but overall we will see definitely more cost increase in staff than other costs.
We have the 3% price increase now in October 1st.
The cost increase, you mean the staff cost.
Yeah.
That's 3% this year somehow. Inflation is currently not higher than 2% in Germany overall. There is an impact, but transportation is only one part of many which are impacting that. The other one on price, I think we have not underestimated the complexity. It's still a complex process. I think we made the process more complex through our profit warning. If we had not had a profit warning, the numbers we have provided earlier this year had been the same and then we were already done. As you know, we changed it and therefore they started again and they asked questions, what might happen? We couldn't answer all these questions straight away because we didn't know the exact precise measures for 2019 and 2020 yet either. That's the reason I think there is not an underestimation.
I think the complexity is the same like in the past.
Okay. Thank you very much.
Thank you, Dominic. On to the next caller, please.
Tobias Sittig has another question.
Yes, thank you. Good afternoon. Three questions from me. Firstly, staff costs in P&P. Could you give us an underlying cost development in the third quarter and also looking into some of the issues that many in the market seem to have in terms of finding headcount in delivery? How do you look at the fourth quarter and the cost inflation there beyond the standard labor cost increase? Secondly, following up on Damian's questions on the regulator. I mean, talking to you a month ago, it sounded like it would be a pretty straightforward decision from the regulator when you read through the data statement from the regulator and you said it also, Frank, that they wanted more information than you could provide.
Is there in that process anything where you think there's a big disagreement, whether there could be a completely different outcome than what you expect or is it really just marginal numbers that we're talking about? Lastly, on the supply chain side, Melanie, you highlighted that there's going to be some asset gains in the fourth quarter, but it makes quite some difference to the quality of your forecast, whether that's going to be EUR 50 million or EUR 150 million or something. Can you give us any ballpark figure what you expect for asset sales in the fourth quarter? Thank you.
Maybe, Melanie, I have not these numbers at hand. Of course, maybe you can comment, but if you find delivery people, we have just launched, weeks ago, quite successful strategy, where we really advertise now using even our sponsorship in certain cases. That has been very successful to find people for the peak period but also for longer term, which is good. Since our people are typically under a collective bargaining agreement, we don't expect a significant increase by the tightening labor market. The key challenge is to find the right talent, and this is happening. With the regulator, this is always a little bit of challenge because, of course, we only know at the final stage if they change something, and they're not very transparent about their whole thinking. We believe if we continue with the process we have established, we should come to a reasonable price increase.
That's not in 100% our control, as I always said. Of course, I can look into our numbers, and our numbers are showing that if there's a potential different outcome, that's a risk always, but we don't know yet. Therefore, we continue to believe that we would get a reasonable price increase next year.
Maybe to complement on the staff cost development. Staff costs are up year-over-year. When you look at the stat book, that number for the third quarter is, of course, heavily impacted by the restructuring booking, which goes into staff costs. If you take it out, I would say that underlying, we are still talking about around 3% increase.
The entire restructuring is in the staff costs? The entire restructuring charge or is there something in other operating?
The whole civil servant early retirement is in staff costs.
Okay.
That is 100% in staff costs. Out of the rest, there are tiny bits which are not in staff costs. Overall, out of the 392 we have now booked in the third quarter, the absolute majority, including the complete early retirement of the civil servants, is in staff costs. That is heavily distorting the staff costs numbers. Nevertheless, when you look at the fourth quarter, we also have continued underlying challenges to tackle. The 1st one is that on the 1st of October, we get the next wage increase. That is 3%, compared to the 2.1% we have had now running through the year so far. That was a price increase which came into effect on the 1st of October 2017. I think the important fundamental topic is, what progress will we make on the productivity development?
I think when we look at the overall trending in the P&P numbers, where we really see a clear trend in the right direction is on the indirect cost side. I think on the productivity side, there are first encouraging signs. I think we need some more months to say that this is really a solid trend, which we can then also share with you in terms of hard numbers. I think overall, it is moving in the right direction, but the fundamental challenges of increasing staff costs remain, and the key lever will be to improve the productivity. On the supply chain real estate venturing, I've mentioned that so explicitly because it is having a big impact on the cash flow side. We are now building up those properties to be sold as inventories, and we will have a very significant positive cash in.
In terms of real estate gains, we get out of that in the P&L, and which are then under IFRS 16 now spread out more over the duration of the lease contract than this was the case. I would say that this is in line with the normal supply chain trading, where we also had in the past years real estate venturing benefits in the fourth quarter. I don't think this is an abnormal element in the EBIT which would hint to a poor quality in the underlying supply chain earning.
Tobias?
Okay. Thank you. Yeah.
Good. All right. We are now a bit more than one hour into the call. Only a few more callers left, I think.
Mr. David Ross has a question.
Okay. David, you may want to unmute as well. Can't hear you. All right.
We lost him?
Operator, we either lost him or any other problem. Maybe we want to see the next caller first, and then see what happened to David.
Okay. Mr. Daniel Röska.
Hi. Good afternoon. Three from me, please. Maybe first, a little bit unrelated to what we talked about so far, the rate of German mail decline. Just wondering, Frank, with your a few months under the belt looking at P&P, is there anything that makes you question the medium, longer-term outlook for mail decline, volume decline in Germany that you've provided so far? Especially thinking also the changes to the federal tax system, where you're basically fully online this year for the first year, and we've seen that in other European geographies, this is kind of a domino that starts mail decline in some geographies. On the parcel pricing, if I could focus on the peak period. I think here the plan was to hold customers more accountable to the volume they actually commit to, both under or over-performing against that volume within a certain bandwidth.
Could you comment on how successful the renegotiation with the clients have been to kind of penalize customers that delivered too many or too few parcels into your network, and how that exactly will work? If you could give us an indication kind of how that has been going and how you would plan to enforce the over or under delivery into your network. You commented on the general parcel price increase you're planning from January 1st, maybe just a flavor on how many of the volumes or contracts that start again in January 1st. If you look at the total volume and given contracts on January 1st, how many of those have been renegotiated already?
How many of those are still open and need to be renegotiated, either because the contract term takes longer or you're still negotiating with the client, and what the average increase is you're aiming for in that general price increase on those B2B contracts? Thanks.
Yeah, let me start with the rate of mail decline. I don't expect an acceleration. I feel even encouraged to see that e-commerce customers are starting to do mailings. We have great products. I think the market has not fully understood yet how important direct mailings are to feed the sales pipeline, therefore I feel even encouraged. I see very good examples with some clients with tremendous success rates. That encourages me, if we educate the market more, that we will even see there some opportunities. Of course, I see that there are, on the other side, some activities from the government. Don't forget Germany is a federal state with a three-tier structure. Local counties, federal states, and then the federal government. To align that across the board is quite a challenge. It took us, I think, a decade on the tech side.
That's good news for us. That's very different in some other European countries where you have such significantly more central steering. That is on this.
Shift of profile in the peak.
We have success with these. I think it's confidential, their terms and conditions of these, but we have been successful. We get an agreement with some customers on that. I'm very confident that we will definitely not be penalized. The purpose of that is not to make money out of that. The purpose is not to lose money through that. I think we have done that pretty well, and therefore we are well protected now for this year's peak period. General price increase, to be honest, I don't know the details. That is moving all the time. You can now ask many different questions, volume-weighted and all this kind of stuff. It's more anecdotal evidence I hear. We are monitoring that somehow there is a majority of contracts has a potential that we do a January 1st.
By far, the majority of countries have a clause that we can increase prices. Not all contracts have that, but the majority has that. I can't tell you because there are several discussions always, and therefore, I can't tell you how much have already gone through. What I hear from the sales force is that the reception of that is not by happiness, but at least by understanding, and they take it serious because they hear the same from our competitor.
Great. Thanks. Maybe just one follow-up on the peak pricing. Is that kind of an automatic increase? If the customer delivers more, you automatically charge more? Is there another discussion involved post-fact when he over-delivers volume?
That's different. In principle, we are more protected because that's a bigger risk that there were volume problems, and they were delivered in different places and other places, and then we have extra costs on both dimensions, so we are protected against that. If the volumes are going above a certain threshold which was committed, we have another discussion around about who takes the cost up and quality-wise, we are off the hook somehow. That is more a protection against that we are generating costs and have no volume. I think we always will find a way that if we get additional volume, of course, we will find then extra capacity. If the quality is not a problem, there should be also a decent price doable for that, but that's another discussion we'll have with the customer then going forward.
Okay. Thanks very much.
Right. Well, thanks, Daniel. I see there's one further call on the queue.
Yes, there is. Mr. Joel Spungin.
Yeah.
Hi, Joel.
Hi there. Just a quick one, actually. Again, coming back on the parcels pricing. I'm just curious, of the price increases that you put through in September on the rate card customers, what proportion of your volumes are accounted for by that customer group? Can you say roughly what the sort of average price increase on that group was? That's my first question. Maybe just a quick one also on stamp pricing. My understanding is that you won't lose out financially from the delay in the pricing decision. Is it your expectation that when an announcement comes out from the regulator, it will contain some sort of clause that says, "This is the price increase of X, plus there will be a further EUR 0.01 or EUR 0.02 on an average stamp price to reflect the delay"?
Do you think it will just all be wrapped up into a single number?
That's a good question. I'm not sure. I think what will happen anyway, they will give us a headroom for increase, and then we have to allocate that to the basket of products. It might not even change for a certain product. There's, of course, obvious focus on the standard letter. That might still be the same as we said so far, but we get some flexibility to increase prices for others. If they will give us separately, I'm not 100% sure. The customers we have started as of September 1st, they are in the mid-single digits percentage points of the total revenue and parcel. The impact is relatively modest. I'm a little bit hesitant to give a number, because that number might then end up with other customers again, and therefore, we are not disclosing that. It is a significant increase for these customers.
Okay. Thank you very much.
Okay.
You're welcome.
Thanks, Joel. One more caller, I see.
The next question comes from Mattia Petracca.
Hey, Mattia.
Yes. Hi. Yes, Mattia Petracca from Goldman Sachs. Two questions for me. Firstly, going back to the mail increase. We talked a lot about the regulated mail, which is EUR 3 billion of revenues. What about the other EUR 7 billion? Are you planning, say, to implement a price increase as of January on some of these products, advertising mail, marketing mail, or will you wait to have the regulated price increase and then increase the prices simultaneously? I think it can be quite material. A second question, just going back to the supply chain capital gains on IFRS 16 comment. It's a little bit unclear to me exactly what should we expect for impact for the fourth quarter for supply chain.
On one hand, I think it was mentioned that now the IFRS 16 positive impact will be effectively slightly negative or much smaller in the fourth quarter, kind of suggesting that there will be an offsetting impact on capital gains. Can we just be a little bit more precise about what to expect for the fourth quarter from either IFRS 16 or capital gains, please? Thank you.
Price increases for business customers are typically linked, but they are separate, but they are typically linked for most customers to the price increase we see in January, because these are rebates we give on the list prices somehow, and that will continue to be the case. On certain areas, like the press, we will start already in January 1st with some price increases. There will be elements where we will see already price increases by January 1st. Other products, they will be aligned more with a regulated price regime, because this is very closely linked to each other.
On the supply chain stuff, sorry if I confused you more. I think really the most important element is, first of all, on cash flow side. I think on the whole EBIT impact. Those real estate venturing activities have been part of the supply chain business forever. In terms of phasing, we had it pretty much every year that most of the real estate venturing transactions closed in the fourth quarter. That always led to a gain, which we saw as a positive impact in the supply chain P&L in the fourth quarter. Now, under IFRS 16, simplistically speaking, we are no longer able to take the gain in the quarter where the transaction closes, but it's being spread out over the duration of the associated lease contract. That leads to a lower number than we would have had under the old IFRS 16 regime.
In our, what is the impact of IFRS 16 comparison calculation, this is probably going to lead to a negative calculated impact from IFRS 16, because it would have been a higher effect if we still had the old accounting world. Now in the new accounting world, the benefit will be lower. It will still be a positive benefit. I hope it's getting more clear on the technical side. We will show you how the whole thing works in the fourth quarter once we have the final numbers.
What used to be a lumpy income in a given quarter is now spread-
Spread out over time.
Yeah.
Yeah. It is still a positive effect in the fourth quarter, but it's a smaller positive effect than what it would have been under the old accounting rules. That shortfall compared to the old accounting world will be reflected in a negative number from IFRS 16.
Okay. Got it. I'm sorry, on the price increase on the, say, business customers, is it possible to have a rough idea of what % of the EUR 7 billion of revenues might get a price increase in January? Just ballpark figure.
I can't remember exactly what the revenue is. It's a higher 3-digit millions, I think, the revenue somehow, which is related to P&P. I have that not in my mind somehow. I can assure you that our whole journey until 2020 was not based on significant price increases for business customers anyway, because that's a quite intensive competition going on anyway. Nothing has changed materially with regard to the price increase for business customers.
Okay. Thank you very much.
You're welcome. Great. Operator, any luck in reconnecting us to David Ross, who we lost earlier on?
Nope. There is no chance. There is no question from him.
All right, good. I think we have no other callers waiting in the line for the Q&A, operator, right?
That's correct.
Good. That concludes our call. Let me hand over to Frank.
Thank you for participating and thank you for all your questions. As I said already at the beginning, the quarter was well in alignment with our expectations, which is for us as well, good news, not only for you. We are very confident that we are on a very solid path to deliver our full year numbers. In addition, I think we have good visibility about all the measures we need to take to go for 2020. That is the reason why we gave, again, reassurance on that. We are still on our journey to deliver the 2020 results. With that, I would like to thank you again and see you soon somewhere. Thank you very much, and talk to you next time. Bye-bye.
Thank you.
Bye.