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 Siegelberg.
Thank you, and hello out there, everyone. And 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. And as you have seen in the We've got the group CEO, Frank Apple and the CFO, Melanie Price here with us. And without any further ado, over to you, Frank.
Yes, thank you, Martin. Thank you for joining us today. And, 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. So let's turn to page 3 You know, the key summary for this quarter is everything is in line with our expectations. We have continued to make good progress in the Georgia division and we the first sign of, you know, getting traction on the PEP recovery.
Overall, there is some concern we've the markets are getting more challenging, but 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, you know, the 2020 targets. If you go to page 4, you'll see that we had a good growth rate, in Q3, All divisions have grown organically, PeP only a little bit. I can later on to the reason for that because we had last year the election as you might remember, expressed very strong growth. DGF is growing as well on the top line and supply chain has seen some growth despite the the challenges we face in the UK.
So overall, if you go to the right side, you see that the trajectory of the free DHL division since continuing, we see a very healthy development of the express margin now to a new at high. The DGFF and supply chain, I'm moving in right direction, supply chain already for a while. And, DGFS achieved already the level, which we had in 2010, but that's not the record level, but they're still more to come. So overall, very good. And, PEP, you can see here as well the impact of the challenges we face at the moment.
On page 5, 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 strengths And of course, some business are more volatile and more cyclical against the GDP volatility. And others have a structural growth anyway like the B2C pass 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 in our numbers is the currency impact We had significant headwinds can recognize from the numbers that was mitigated very well by the team. We are very good in expressing yield managed and I think the other integrations are learning now on the run. Also in global forwarding freight, we are doing better and also in PeP we have started the journey now pretty well. On trade wars and Brexit, yes, there is some uncertainty And there might be responses from some customers. We see that already in some places that customers are moving or considering moving out of the UK 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 in if they do that.
So that's that's good news for us as well. Fuel prices are going up as well. But as, usually, we will push that further on to our customers. And therefore, the EBIT impact on the long run should be minimal. So you see all other measures, if things are getting worse, groups, we have experienced 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 as you might remember is significantly, increase in volume due to the, you know, cyber security attacks which had impact on some. So there is a little bit less growth than in the previous quarters, but still a very strong growth on a very strong last year's quarter. So that's all fine. We see the regions are changing from one region to another, but overall, there's very good growth across the portfolio.
And that is, as I already said, a strength of our portfolio. Page 8 shows you the progress in DGFF. Tim is very focused on profitability. That's the reason why gross profit and GP per ton and T U. S.
Up. Despite volumes are down, that has led to a significant an improvement in our conversion, both on GP conversion, but also on the EBIT margin and We are now getting back to the levels we have already seen before we started the NFE activities, and that's very good news. That's supported by focus on the right customers and the right profitability. It's driven by the indirect reductions and also is driven by our renewal on the IT front. That brings me to the next page.
Page 9, We are making very good progress with our transportation management system, but not only that, also other systems are rolled out But of course, the core is a transportation management system. We end our life in 40 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 And we have started in our air freight as well. 1st country is live, and we will continue to see more deployments coming next year. So overall, that's good. The benefits are only very little reflected so far in our numbers, as you can see in the right, you're not 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. So there's more to come, but then the good news is the system is well well perceived by the organization, and it's pretty easy to implement that 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, Macau, to SF. We bought a good price as we believe that on the arrow side, we stay together somehow.
We have created a partnership. We will get an ongoing income stream from that activity we believe that perfect partner for multinational customers. And as that brings a lot of expertise for domestic customers in China, we believe both parties will benefit from that. And that's definitely the only the first step in a potential broader cooperation. So that's good news.
Then PEP, which as you know, I'm still heading. We see, 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 can carve that out, we are perfectly in line with our 2% to 3% decline, which we have expected for a long time and communicated for a long time. Parcel is continuing very strong. The same is true for Europe and e Commerce.
On Page 12, chose the progress along our measures. There are 2 elements to the pricing measures. In past, we really see further implementation of our price measures, and we are very optimistic that we will see a good price increase this year and 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 what measures we will take how likely is their business plan now?
You have to give us more information. And of course, in a certain measures, we only have developed in due course as well. And 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.
And if there's any later implementation, we will compensate it for that as the regulator already announced commercially. On the direct costs, 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, there has been started also in the Q3. So that the impact for the bottom line is still not very large, but the measures are getting traction.
Indirect costs, more progress here, Also visible in our numbers. We are really now taking indirect costs out. The first people for the earlier 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 of our indirect cost spend. We are reorganizing the division even further, which will help us to make it leaner.
We have disposed all you need fresh. And 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 this experience, definitely will help us to get a clear plan, what we should do with our e commerce solutions business And at the same time, I can exclusively focus in my 2nd role on post and 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 feeding these different boxes. And therefore, we are very confident that 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 is very encouraging and reassuring that our organization globally, gives us an increase in most indicators we are measuring in total And I think we got improvement on 7. You see here very 3 important ones with employee engagement, active leadership, and customer centricity.
So that is very reassuring because great morale is providing great service and that drives far early 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 PeP we have seen a good improvement. PIP actually had in total the best improvement from all divisions. Yes, we still have expressed 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 engage came, particularly from operations. So that's very encouraging. And with that, I would like to close. So solid quarter and also prices and the measures we have installed in all divisions are getting traction. That's probably the summary from my side.
With that, Melanie, now up to you to talk a little bit more about the detailed numbers of Q3.
Yes, 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. And 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 point. So when we turn to Page 18, you can see our group P and 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 facts of the PeP division restructuring booking in the third quarter, we're close to 1,000,000 now 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 and that drag mainly stems from the emerging markets developments. 10 rate is unchanged at 14%, which is still our guidance for the full year.
And on the financial results side, you can see again, as in the this quarter, 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 and L. And quite frankly, like I guess some of you as well, I'm looking forward to next year. We will have finished the IFRS 16 implementation exercise and the numbers will be clean year over year. But 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 P and L. And 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 1,000,000. On that topic, I would like to point out that going into Q4, we are expecting some real estate sales from our 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. And this will most likely lead to a negative IFRS 16 effect for supply chain in the 4th quarter.
And this explains why we still back around 1,000,000 as a full year IFRS 16 effect on EBIT, even if the current run rate indicates a higher number. That takes me to the group cash flow on Slide 20, which is a usual busy slide. And 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 book in PEP in the third quarter, particularly those for the civil servant early retirement means that we have an unusual positive movement in the change 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 and provisions on the page here, but the effect is visible in operating cash flow before changes in working capital. The utilization of that provision have 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. And when you look at the 9 months figure, you can also see for the 9 months that we are spending significantly more 1,000,000 compared to last year on CapEx.
We have the 7 77 impact in there that account 1000000 year to date. And I would say from our perspective, the 3rd quarter cash flow is in line with our tations. But 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 1,000,000,000 in free cash flow excluding the 777s. So 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 -1000000 and that includes the 1,000,000 from the 777s. If I strip those out year to date, we are at minus 120 which means in order to get to the above 1,000,000,000, we have to end up somewhere between 1,100,000,001,200,000,000. When we look at what we have achieved in the fourth quarter of 2017, the reported result of 975, but that included the Williams lead tax disposal gains of 1,000,000 and the UK pension funding of 1,000,000. So the underlying free cash flow generation in the fourth quarter of 2017 was 1.184. So order of magnitude, the 1.1to1.2 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 1,000,000. So I think that should just give you a feeling that whilst it looks, quite to get to the more than 1,000,000,000, that is still our aspiration, and that is why we're confirming it on the guidance page later on. Page 21, I think nothing spectacularly new on this page. Obviously, on that bridge, the big we've already seen in Q1 and Q2, it's the recognition of the IFRS 16 lease liabilities. The question I get occasionally now is based that your net debt number is now higher I used to be comfortable with the position that my answer is a very clear yes.
I know that some of the ratios now look differently. For example, when you at an EBITDA related ratio, we have the additional effects that, of course, the EBITA IFRS 16 effect which is also increasing EBITDA is only coming in over time. So I think we will also see a normalization with the fourth quarter. But overall, I think we are still in a very solid position. And we should not forget, and I 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 a group overview. Now very briefly on to the divisional pages, starting with PEP on page 22, where I think Frank has already covered the most relevant points I just wanted 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 1,000,000, you can see that we are still down year over year.
And that is shown on the next page where you see the quarterly operational year over year performance. So in the third quarter, we are still 1,000,000 below the third quarter of 2017. This is fully in line with our predictions. So we had said that we would see a reduction in the shortfall compared to last year in third quarter. The expectation was that it would be around 1,000,000 to 1,000,000.
So it is in line with our expectations. But of course, it's not where we want to be going forward. And the clear expectation is that in the fourth quarter, also supported by, 1st benefits from the initiated measures. We're going to further reduce the shortfall compared to Q4. 2017.
So overall, still some way to go But I think the past has been laid out very clearly, and it is encouraging to see that in the third quarter, yeah, we have been able to come to the results we have been aiming for. That takes us to express on page 24. Yes, 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, 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 management. And of course, on the basis of the strong OCF, it also makes the decision to continue investing quite heavily into the Express division an easier one And 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. There 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 cost and are improving the GP to EBIT conversion.
So we're now at 15%. That's obviously not yet at the end of the road, but an important step into the right direction. And on that basis, 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. And as usual, CapEx, are pretty much an on event, on ETFF. So I think 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 deal 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% to 5%.
We have very good developments in most of the regions, the one region where we see a current weakness in the business is UK on Ireland, but this is now being addressed. And on the OCS side, I mentioned the real estate tools. Those are impacting us at the moment negatively on the cash flow side, but that is something that should reverse in the fourth quarter. Moving to Slide 27, this slide is completely unchanged. So we have not made any reference to our guidance.
We have also not factored in the proceeds from the supply in China transaction because we do not know whether this will really come in 2018 or in the beginning of 2019. But leaving that aside, we are fully committed to our guidance and have hence kept it unchanged. And that takes me to the last slide of my short presentation. And I think the wrap up is a very simple one on the PeP side. The restructuring is proceeding according to plan and is picking up speed.
The DHL divisions continue to deliver profitable growth. And on that basis, we are very confident to deliver on our targets for 20182020. And we, of course, remain committed to our finance policy. So thank you very much. And I think with that, over to Martin.
Welcome to the Q And A set.
Right. Thank you, Frank and Melanie. And operator, we are ready now for the Q and A round, please.
Session.
First question
comes from Andy Chu.
Hi, Andy.
Yes, good afternoon, everyone. 3 questions, please. Firstly, on the employee survey, which I think was an early warning gave early warning signals for the PeP division. I just wanted to check, Evan, about 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? And secondly, in UK, supply chain obviously is pretty opaque from the outside.
Can you explain actually what's happening there? You mentioned, Mel, in your section that you're taking steps address the issue? And what was the actual impact on EBIT in Q3? And then just in terms of the Chinese contract logistics business. Is it fair to sort of conclude based on your pretty sort of well defined finance policy that the proceeds from that disposal in the end should end up, and be returned to shareholders.
Yes. So Melanie, you should take number 23. So in the U. S, I can assure you that we have seen progress in all divisions a slight uptick. So there are no concerns in our divisions, and that's a good result.
So you're right, you know, this is an early indicator of the mood. And despite that, you know, our people are really impressed as well. And of course, see profit warnings, the mood is up, slightly up across all divisions.
Then let me take the supply chain UK question. So, first of all, it's not that we're losing money. And supply chain UK or so. It's just that, I mean, this used to be the crown rule in our supply chain division. And I think you just have to acknowledge that other regions have performed better in the meantime.
And 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. So we have historically quite a high exposure to retail and consumer in U.
K. And many of our customers are undergoing transformational processes themselves. When you think about the high treat retailers in the UK, which are struggling with the e commerce transformation in some instances. So that is having an impact on the business. The second topic is something, yes, I think nobody loves it, but we are seeing some uncertainty connected to the whole Brexit situation, be it a tightening of labor in certain areas, be it on our customer side, But then the 3rd important topic is that we have some contracts, some sites which are not performing in line with expectations.
We have had a manicure change in our supply chain management team in the UK. We now have very concrete plans of how we are going to address this. And on that basis, I'm confident that we will be able to move a supply chain UK forward. But, 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.
So 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. And we will then look at how we're going to deal with the proceeds. So on the cash side, we are, as you know, talking of about around about 1000000. We also expect a positive deconsolidation effect on the EBIT and we will then deal with this in the broader context.
So for me, that goes into the pot and then nothing changes on what we do with the pot of money, in line with our finance policy.
Good.
The next caller, please.
The next question comes from Rob Johnson.
Hi, 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 for that business. From the 1st January and we're also planning some price increase from the 1st September this year. You maybe just provide some more color on the expense of the price increases that did go through on the 1st September? And also maybe provide some color on the discussions that you're having with customers concerning the price increases that probably for the 1st January, please? So it's not the first question.
The second question is on the P and L benefit from restructuring measures. I also in the in the presentation after the Q2 results, there was a slide where you stated that the P and L benefits and restructuring would be around 1,000,000 in 2020 and then greater than 1,000,000 in 2019 I think Frank mentioned before that you've now had enough applications to support the early retirement program. And and therefore presumably have got better visibility with regards to timing of early retirements. Could you maybe therefore provide an update on the P and L benefits for 2019, where you previously estimated greater than 1,000,000? Thank you.
Yes. So let me talk about part parcel pricing. So what we have started in September is mainly on a very small, customers, which our Ontario sales customers, there, we can implement that 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 1st, some might a little bit earlier depending on when the contract expires. So but we are on a very and journey that this is doable. Our competitors announcing similar stuff. So we believe that we will see a significantly higher price increase than than we have seen in previous years. So on the postage, for Mail, if I understood correctly, Rob, ask for that.
That doesn't happen now January 1, so 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 is not 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 for an early retirement if the drops are redundant, that is linked to reorganization.
And then there is a process to do that after which takes a couple of weeks. So 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. So, I mean, what we've said is that, out of the 1,000,000, which we are investing into restructuring million will go into the early retirement civil servants, we have now fully booked the 1,000,000. And over time, we expect to get exactly the savings we had anticipated. How that phrases out over the years depends now on the final selection of civil servants, which are going into early retirement. So 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.
But 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 1,000,000, where we indicated that around about 1,000,000 should come from the civil servant bucket I think on that, we are still very confident that the $200,000,000 will be achievable. And we can also confirm that we will see a significant importion already coming into 2019. And as Frank said, the more detailed guidance we will provide in March with our guidance for the
could you just explain what caused the tax rate guidance to come down to this year?
Yes. So the tax rate was something we adjusted in the second quarter, that is actually, yeah, the cynical upside from the shortfall in earnings in Germany, is a high tax country for us. And 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.
Thank you, Robin. Then the next caller please.
The next question comes from Neil Flynn.
Good afternoon, everybody. Neil Glen from Credit Suisse. If I could ask 3 questions, please. Following on from Rob's question on parcel pricing. I hear the comment in terms of expecting a significant price increase for next year, but just interested in your thoughts on the mix effect 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? Just I think it's important to to balance expectations in terms of what your P and L will actually show on the parcel revenue line. Then 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. But 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. Just interested in your take, as to as we go forward in Asia, as well as Americas, should we expect slower volume growth and stronger pricing as you prioritize quality? And then just a final question on working capital management and tally 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 just 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.
Yes. So let me take the 2 first and then Melanie on the working capital. So on the pricing We are working with all customers on price increases. They have different length of their contract It will remain a mix effect for 2019. That should be even 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 And volume growth, that is too early to say, but of course, the intention is that the numbers are getting closer to each other. So that will remain a mix effect, but it should be get weaker. And in Express, definitely, that has been our strategy all the time. We are premium provider with its best service quality and we will continue to do so. We will grow 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 in 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.
So 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. So I think the one division, which is doing extremely well, on the working capital side is the division, I think that's the division where we also most advanced, for example, in holistic OTC management optimization of the OTC processes and so on. So I'm not concerned about working capital in Express. In PeP, 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 the headwind we have had for years.
And that is a factual challenge, where we have identified a couple of measures, which we now have to implement in the 4th 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 4th quarter. And I'm very confident that this will be achievable.
I think the division where in terms of general trading, the work capital headwinds are most pronounced at the moment in global forwarding freight. After the 6 months, I think it was looking quite okay, but as I mentioned before, the third quarter was not in line with expectations. So that is probably the division where we have the longest way to go. Think if you put all this together, what we have in our forecast for the year and 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.
So 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 1st 9 months of 2018 than we did in 2017. As a real estate venturing in supply chain and then the general working capital management. So I think it's nothing out of the ordinary. I think working capital is just something which needs constant attention, and that has been confirmed in the third quarter.
Thank you, Neil. And on to the next caller, please.
The next question comes from Mark McVicar
Hi, Mark.
Good afternoon, everybody. Three questions from me. First of all, you've given us the the number, the EBIT FX headwind for Q3. Could you say roughly what that was for the 1st 9 months? So we have an idea of how the year in shaping up?
First question. 2nd question is at what point would you want to or need to start buying the project in forwarding and freight? I think it's Martin right. You can't grow your way to victory, but, when do you think naturally you will start to see volume growth? And then the third question is just looking at the OpEx increase in PeP 150,000,000, how would you measure and how would you be able to show us the return that you're progressively going to get
So on the currency, I think Melanie, you can see something We've yes, we 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. But 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, a quarter it will be is too early to say, but of course, the team is working on that.
So for the 150,000,000 to earmark that and say, that is definitely, for the 150,000,000 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. So the increase which we want to see between this year 2020 is including every year these measures because we think we have to enable people in the field much more.
To really, I'll say, if we do more certified training, what the benefit for better performance is very challenging. And I would say if we start trying to do that, we will be hopeless anyway So 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 and our lessons from the other division are telling that very clear that business very wise. We under invested to certain elements and therefore, we had negative impact to quantify the positive impact is hardly possible. And 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 an for 'nineteen and 'twenty.
Okay. Then on to the currency question, which is unfortunately, as usual, a bit complex. So overall, we have seen an increase in the currency headwind over the quarters. So there was already a negative a number in Q1 and in Q2, but order of magnitude Q1 was half of what we now had in the third quarter. Why is that?
So when we look at the beginning of the year, we actually had a euro strength position, which was helping us, for example, vis a vis the U. S. Dollar. So in the first and also in the second quarter, we were still compared to last year positive compared to the U. S.
Dollar. What we have now seen is the strengthening of US dollar. And that was a strengthening vis a vis the euro, which helps which hurts us on the buying side. Because we are dollar short. But what is hurting us even more so is on the weakness many emerging market currencies, vis a vis the dollar and the euro.
And this combination has led to the increase in currency headwind in the third quarter.
Okay. But is it fair to say you probably expect the net of the headwind for the year to be north of 100,000,000?
Yes. We are already after 9 north of 100.
Okay, lovely. Thank you both very much.
Very well. Thank you, Mark. And then on to the next caller please.
Damien Brewer has another question.
Damien, you may want to unmute.
Yes, sorry. Your line went absolutely quiet then. Thank you. And thanks for the rapid and punchy run through the prepared presentation. I've got 3 questions, please, 2 on DHL and 1 more general one.
First on DHL. Could you help us get the bottom of what real underlying pricing there did? If we look at the 9 month, revenue description in the interim report, it looks like fuel was about a 3% impact on revenue there. And then when we look at the 9 month PDI volume per day up nearly 10% and the sorry, revenue per day up nearly 10% and the volume up nearly 8%. It would appear that sort of pricing without taking down to weight and mix effect was slightly down.
So clearly, there is a weight and mix effect there. So if you could give us some help on that, 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 else going on in the business we should be aware of? And then 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 appears to be capitalized a consequence of taking income from capitalization and that line appears to have gone up significantly. The run rate in 9 months 2017 was about 1,000,000 per annum in H1, it was 1,000,000 and now in Q3, it's up over 100. So Can you explain what's going on there and how that will trend in future?
Okay. Let me start with the underlying pricing effect in press. So the key measure I always look at is the base revenue per kilo. And 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 an infrastructure in the numbers is, that we have focused very much on the right rate bracket.
So we had quite a bit of heavy weight stuff going out, which of course in terms of revenue per kilo is not so attractive. And I think when you strip out the fuel impact and the currency and all this stuff and you really look at base RPK, that is moving solidly in the right direction as we have now seen for quite some time. So the overall yield focus in Express continues also in the third quarter. With regards to the FTE development, so yes, I know what talking about, when we look at the number there, it looks up a bit more than you would have expect it. When we discuss it with the Express colleagues, they put it on the quality protection measures, which have been continued focus in the Express Division.
So I wouldn't overinterpret 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. So is that for sorry, I have to say, I have to look at this back strategy here myself. You're quoting this that book, right? I guess in
the other operating income, the first line on the
In Express or in
No. Within the interim report, it's sorry apologies.
Was
the income from drug, performed, and capitalized?
Yes, exactly.
Is that what?
Yes. So what was the 1,000,000 in 9 months 'eighteen versus 137,000,000 9 months?
Yes, okay. I think this is the impact from the Q2 job, which you're seeing here. So this is how we do the accounting for the Street scooter, for the internal production.
Okay. Can we be clear, how much in total over the life of StreetScooter is being capitalized in there and therefore, if you sold that business or found some sort of exit for how much of that would come out of the balance sheet?
Well, this capitalization relates to the states where sold, but sort of inventory, right? Yes.
That was
purely volume driven, right?
Yes. So this is, I mean, all treat scooter accounting is a chapter in itself that you really have to differentiate between what is produced, and in inventory for internal sales and what is produced internally, but which has not been taken over by the PEP division yet. This is what is impacting this number of I see that more as a phasing topic. So those I mean, ultimately, those cars, which are being purchased internally from StreetScooter are capitalized as if you would kind of like buy them from another external, automotive manufacturer. And the rest of the stuff, once it's sold to the external world, it doesn't stay on our balance sheet.
So I think this is really the interim phasing effect here. But I think maybe as we continue with the sorry. Eventually, we probably have to kind of like 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.
Yes. Obviously, no real inference on the profitability side of the game, but for the accounting connoisseurs. Okay. Shall we move on, maybe?
The next question comes from Edward Stanford.
Good afternoon, everybody. One question from me left. I'm just curious about the decision to effectively align this if I interpret exiting exit in China. Clearly, that's, and it has been an area of focus for many people in terms of the opportunities in China. How does this 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 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. So 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.
And this strategic partnership with SF has actually been very much driven also by our local management team. We've 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. So the fundamental idea behind this, a strategic partnership is as 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 the closing of the transaction, which is already quite attractive financial yield.
But then we will also participate, through a fee based on revenue going forward from the now accelerated growth of the supply chain business. So 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 April, which are very different.
Thank you. Thank you. Okay. Thank you, Ed. And one more caller please.
Another question comes from Dominic Adridge
Hello. Good afternoon. A couple for me, both on PeP. 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.
Could you just maybe discuss how much visibility you have particularly on the sort of what you might call the quasi costs side sorry quasi labor side which is in the material costs, I know particularly obviously haulage rates, etcetera, going up. How much visibility you have for 'nineteen and 'twenty 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? And then the second thing on the stamp pricing sort of elements, can you just maybe discuss maybe if there are any sort of less to be learned. So I suppose for 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 not maybe everyone assumed it was going to be a bit too easy after the last price rise? Thank you very much.
May on, on the cost, you know, of course, you know, 1st of all, the safeguard and the maturity cost majority of all that cost is still 2 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 and stuff than other costs.
And yes, the 3% price increase now in October 1st?
So that's 3% this year somehow. And inflation is currently not higher than than 2% in Germany overall. So there is an impact, but transportation is only one part of many, which are impacting the other one on price, I think we have not underestimated the complexity. It's still a complex process. Think we made the process more complex for our profit warning.
If we have not had a profit warning, the numbers we have provided earlier this year have been the same. And then we were already done. But as you know, we changed it and therefore, they started again and they asked questions what might happen and we couldn't answer all these questions straight away because we didn't know the exact precise measures for 2019 and 2020, yet either. So that's the reason I think there is not an under estimation, I think the complexity is the same like in the past.
Thank you, Dominic and on to the next caller please.
Yes, thank you. Good afternoon. Three questions for me, firstly. Staff costs in PeP, could you give us an underlying cost development in the third quarter and also looking into some of the issues that mainly 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 Damon's question on the regulator, I mean, talking to you a month ago, it sounded like it would be a pretty straightforward position from the regulator, when you read through the day statement from the regulator and you said it also Frank that they wanted more information than you could provide But is there in that process, anything where you think there's a big disagreement where there could be a completely different outcome than what you expect?
Or is it really just margin, marginal numbers that we're talking about? And 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 50,000,000 or EUR 150,000,000 or something. Can you give us any ballpark figure what you expect for asset sales in the 4th quarter? Thank you.
So, maybe, well, I have a lot of 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 not using our ownership 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 on the collective bargaining improvement, we don't expect a significant increase by the tightening labor market. So the key challenge is to fight 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 are not very transparent about their whole thinking. We believe if we continue with that, the process we have established, we should come to a reasonable price increase. But that's not in 100% our controllers, I always said, but 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 all days, but we don't know yet. And therefore, we continue to believe that we would get a reasonable price increase next
Okay. So then, maybe to complement on the staff cost development, I mean staff costs 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 stock costs. So if you take it out, I would say that underlying, we are still talking about around 3% increase. I think the
in staff costs, your entire restructuring charges or something in other operating?
So the whole civil servant early retirement is in, staff costs. So that is 100% in staff costs. Out of the rest, they have tiny bits which are not in staff costs. But overall, out of the 3.92, we have now booked in the third quarter, the absolute majority, including the complete early retirement of the civil firms is in staff costs. And that is heavily distorting the staff costs numbers.
Nevertheless, when you look at the fourth quarter, we also have a continued underlying challenges to tackle. And the first one is that on the 1st October, we get the a 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 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 PEP numbers, where we really see a clear trend in the right direction is on the indirect cost side. I think on the productivity side, they are first encouraging but 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. But so I think overall, it is moving in the right direction, but 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. There I mean, like 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 real estate gains we get out of that in the P and L and which are then under IFRS 16 now spread out more over the duration of the lease contracts 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 year's real estate venturing benefits in the fourth quarter. So I don't think this is an abnormal element in the EBIT, which would hint to poor quality in the underlying supply chain earning.
Good.
So we are now a bit more than 1 hour into the call. Only a few more callers left, I think. Okay. David, you may want to unmute as well. Can't hear you.
All right. The last time, 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 Otsuka.
Hi, good afternoon. Three for 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 PEP, 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, do the changes to the federal tax system, where you're basically fully online this year for the 1st year.
And we've seen that in other European geographies. This is kind of a domino that starts a male decline in some geographies. Secondly, 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, kind of the over or under delivery into your network.
And then you commented on the parcel 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 1, if you look at the total volume 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.
Yes, 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.
And therefore, I feel even encouraged. I see very good examples of some clients with tremendous success rates And that encourages me if we educate the market more that we will even see there some opportunities and Of course, I see that there are, on the other side, some activities from the government, but don't forget Germany is a federal state with a free tier structure local counties, federal states, and then the federal government and to align that across the board is quite a challenge. And it took us think a decade on the tech side. So, that's good news for us. That's very different in some other European countries where you have such significantly more central steering.
So that is on this. On, the
Shift to pass on in the peak.
Yes. So we have success with these. I think it's confidential the terms and conditions of these, but we have been successful to be get an agreement with some customers on that. So 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.
And 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. So that is moving all the time. And you cannot 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 contracts have been clause that we can increase prices. Now all our contracts have it, but the majority has that. I can't tell you because there are several discussions all these. And therefore, I can't tell you how much had Bori gone through.
What I hear from the Salesforce is that the reception of that is not by happiness, but at least by understanding and then take it serious because they hear the same from our competitors.
Great, thanks. Maybe just one follow-up on the peak pricing. Is that kind of an automatic increase? So if the customer delivers more, you automatically charge more or is there another discussion involved kind of post fact when he over delivered volume?
That's different in principle. We are more protected because that's a bigger risk. That, we, we, they were volume promise and they were delivered in different places and other places. And then we have our costs on both dimensions, so we are protected against that. If the volumes are going above the certain threshold, which was committed, We have another discussion around about who takes a cost step and quality wise, we are off the hook somehow.
So that is more a protection against that we are generating costs and have no volume. I think we always will find a way that we get if we get of volume. Of course, we will find an 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 will have with the customer then going forward.
Okay. Thanks very much.
Thanks, Daniel. And, I see there's one further call on the queue.
Yes, there is. Mr. Joel Spungin.
Yeah. Hi, Joel.
Hi, hi there. Just a quick one actually. Just 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? And can you say roughly what the sort of average price increase on that group was? And that's my first question.
So maybe just a quick one also on stand 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 clause that says, this is the price increase of X plus there will be a further $0.01 or $0.02 on an average stamp price to reflect the delay, or 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. So it might not even change for a certain product. And there's, of course, obviously 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. So, the customers we have started at September 1st, they are in the mid single digit percentage points of a total revenue and parcel. So the impact is relatively modest And 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 we are not disclosing that, but it is a significant increase for these customers. Okay.
Thank you
very much.
Okay. Thanks, Joe. And one more caller I see.
The next question comes from Matija Gagouli.
Yes, yes, hi. Yes, Matija Garvelet from Goldman Sachs. Two questions for me. Firstly, going back to the mailing We talked a lot about the regulated May, which is 1,000,000,000 of revenues. What about the other 1,000,000,000?
Are you planning, say, to implement a price increase as of January on some of these products, no advertising mail, marketing mail, or will you wait to have the regulated price increase and then increase the prices simultaneously. I think it's quite kind of quite material. 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, so slightly negative or much smaller in the fourth quarter.
Kind of suggesting that there will be like an offsetting impact on capital gains. So can we just be a little bit more precise about what you expect for the fourth quarter from either IFRS in or capital gains, please? Thank you.
Yes, so price increases for business customers are typically linked if you know, but they are separate, but they are typically linked for most customers to the price increase we would 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 of ABB elements where we will see already price increases by January 1st and our product They will be aligned more with a regulator price regime because this is very closely linked to each other.
So on the supply chain stuff, I'm sorry if I confused you more. So I think really the most important element is, first of all, on the cash flow side. I think on the whole EBIT impact, I mean, those real estate venturing activities have been part of the supply chain business forever. And in terms of phasing, we had it pretty much every year that most of the real estate venture closed in the fourth quarter. And that always led to a gain, which we saw as a positive impact in the supply chain P and L in the 4th quarter.
Now on the IFRS 6 team, simplistically speaking, we are no longer able to take the gain in the quarter as the transaction closes, but it's being spread out over the duration of the associated lease contract. And that leads to a lower number than we would have had under the old IFRS 16 regime. And 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.
So what used to be a lumpy income in a given quarter is now spread. But out over time?
So 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. And that shortfall compared to the old accounting world will be reflected in a negative number of IFRS 16.
Okay, got it. I'm sorry, on the price increase on the, say, business customers, is it possible to have like a rough idea of what percentage of the $7,000,000,000 of revenues might get a price increase in January, just ballpark figure?
No, I don't have the I can't remember exactly what the revenue is. It's a high out, 3 digit millions, I think the you somehow, which is related to press, you know, I have that nod in my mind somehow. But 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. So nothing has changed materially with regard to a price increase for business customers.
Okay. Thank you very much.
You're welcome. Great. Operator, any luck reconnecting us to David Kerstens, we lost earlier on?
No, there is no chance there is no Gresterson from him.
All right. Good. Well, then I think we have no other callers waiting in the line for the Q And A operator, right?
That's correct.
Well, then that concludes our call. Let me hand over to Frank.
Yes. So thank you for participating and following you for all your questions. As I said already, at the beginning, the quarter was well in alignment with our expectations, which is force as well. Good news, not only for you. And 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. And that is the reason why we gave, again, reassurance on that. We are still on our journey to deliver the 2020 result. And 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.
The conference is no longer being recorded.