Good afternoon, ladies and gentlemen, and welcome to the Deutsche Post DHL conference call regarding their results of the second quarter in 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, and welcome, and hello everyone out there to our Q2 2018 results conference call. As announced, we have with us here Frank Appel and Melanie Kreis. Without any further ado, I will ask Melanie to start taking you through the presentation that you have in front of you, I take it, then hand over to Frank, then we go into Q&A. Melanie?
Thank you very much, good afternoon, everybody. Thank you for joining us today. I will briefly run through the Q2 financial results for the group, and I will cover the DHL divisions before I hand over to our CEO, Frank Appel, who will talk about the PeP division in his capacity as acting CEO, PeP. Starting on slide two, I think the main takeaway of the results for the second quarter is that overall, they came in fully in line with the adjusted full year expectations that we had shared with you in June. For the DHL divisions, we see unchanged positive momentum, particularly with regard to Express and Forwarding, where we see strong progress on the EBIT progression year-over-year. For PeP, we do see a bit of sequential improvement, the Q2 numbers were in line with our new expectations.
Nevertheless, the principal cost inflation challenges didn't improve in Q2, which was also not what we had expected. Main point here is that we are moving forward with our planned restructuring activities, with our productivity enhancement measures, and with the yield activities. All of these will be covered by Frank in more detail in a couple of minutes. I think the last point I want to mention on the overview page is that, we had a good operating cash flow performance in the second quarter, and that helped us to bring the half year numbers more in line with what we had achieved in the first half of 2017. We maintained, at the same time, the investment into our growth projects in line with our CapEx guidance. The conclusion at the bottom of the second page says it all.
The PeP issues are still there, but they are being addressed. On the DHL side, we are fully on track, and on that basis, we confirm both our 2018 and our 2020 guidance. Moving over to slide three, we can see some of the details and drivers that we will also find again in the divisional P&Ls. The first point I want to mention is, again, the currency impact on the top line. For the group, the reported revenue increase was 1.4%, but when you look at it organically, it was a very good growth of 6.2%. When we look at the DHL divisions, we were able to translate this good revenue development also into an EBIT progression, but that was not the case in the PeP division due to the known operating challenges. That was also then impacting the EBIT figure for the group.
As already mentioned, underlying PeP EBIT was a bit better compared to Q1 in terms of year-over-year deterioration, but it was still a deterioration year-over-year, even when you take out the restructuring costs we booked in the second quarter. Obviously, the numbers for PeP remain challenging. We booked, in the second quarter, EUR 61 million for restructuring and productivity measures in PeP. Again, those measures will be covered in more detail by Frank in a couple of minutes. Totally different picture at DHL, with a double-digit increase in EBIT, driven in particular by strong performances in Express and Forwarding. In the financial results, we see the significant effect from IFRS 16, which we will go into more detail on the next page. You should expect this to continue also for the full year. Coming to the tax line.
I know that taxes were a discussion point during our last quarterly call and at the CMD, I just want to make a couple of comments on the tax number. First of all, due to the lower expected taxable result in Germany as a result of the PeP issues, we are able to reduce our full-year tax guidance to 14%. That reflects that Germany has a higher than average tax rate. Based on the lower results in PeP in Germany, our new guidance for the full-year tax rate is 14%. We had to adjust for that in the second quarter to bring the first half year down to the 14%. That led to a much lower quarterly tax rate of only 8.8% for the second quarter.
In terms of medium-term outlook, what we had said at the Capital Markets Day, our expectation is that the tax rate as such will increase to the mid-20s by 2020. I want to clarify here is, though, and I think there was a bit of a misunderstanding with regards to the cash taxes paid, the increase will be more slowly. We expect the cash taxes paid increase to be more in line with the increase in profit before tax. Overall, when you look at the financial results, the negative impact in the second quarter by IFRS 16, and the tax line, the positive impact of the reduced tax rate, that balances out to a certain degree. When we look at the net profit development, the decline here is really predominantly driven by the EBIT development, and that, again, is driven by the development on the PeP side.
Moving on to slide four. That's a slide we already showed you after the first quarter, where we want to give you transparency on what the accounting change IFRS 16 is doing to our numbers. The total EBIT impact we had in the second quarter was very close to what we saw in Q1. It was EUR 47 million for Q2 compared to EUR 44 million in Q1. I know that we've guided for a full year impact of EUR 150 million. Obviously by now, many of you will have taken out the pocket calculator, will have added up EUR 44 and EUR 47, gives you EUR 91, times two, takes you to a full year run rate of EUR 180. The reason why we stick to the EUR 150 million guidance is linked to the way how certain real estate transactions are accounted for under IFRS 16.
We do a lot of real estate venturing activities as part of our regular Supply Chain business. Those profits, they used to be accounted for at the point in time of sale. Now we have to spread it over time. When we compare what we had in the second half of 2017 in the old IFRS world and what we now will have in the second half of 2018, when we have a couple of those real estate venturing projects in the pipeline, there will be a reduction in the impact due to IFRS 16, and we have netted that off, and that takes us to the overall number of EUR 150. When we look at the financial results, you can see a significant impact here in the second quarter, EUR 94 million. That's a structural effect due to the way we decided to apply IFRS 16.
The simplified adoption approach leads, as a consequence, to a higher negative impact in the financial results in the early years than a positive benefit in the EBIT line. Over time, this will even out. Turning now to group cash flow on slide five. Here again, we see quite significant distortions by IFRS 16, which we are showing to you in the final column of the page. It obviously has a significant impact on our operating cash flow before changes in working capital and after changes in working capital. I think the important thing to mention here is that taking out the accounting effect, the operating cash flow has improved on the back of the DHL operating performance in the second quarter. Of course, the EUR 51 million PeP restructuring cost for the civil servant retirement were non-cash, so that is also helping on the operating cash flow side.
In the free cash flow line, the biggest drivers versus Q2 2017 are our higher CapEx, which is in line with our guidance and some smaller M&A activities for bolt-on acquisitions this quarter. Technically, quick reminder, as you know, we have adjusted our free cash flow definition. We have the new line, net cash for leases included here. That ensures that free cash flow is really totally comparable year-over-year. With that, let's move to the net debt profile on slide six, which I hope doesn't bring a lot of surprises to you. The big change was the introduction of IFRS 16 that we already saw in the first quarter. The other important event now in the second quarter was the dividend payment, which happens every year. I would say that slide six is relatively unspectacular and in line with the expectations. Much for the group overview.
Let's now get into the divisions on slide seven, starting with Express. I know that when you read the news nowadays, you see concerns about global trade and trade wars and the impact of tariffs and political rhetoric. Of course, we get that question all the time, do we see it in our numbers? I think when we look at our Express numbers for the second quarter, we do not see an impact at this point in time because we continued to grow very strongly, both with regard to shipments per day and with regard to revenue per day. That growth really came from all regions, and it was, not surprisingly, boosted in particular by e-commerce. You may note some divergence in regional growth rates. This is due to our active yield management and selective customer focus rather than there being a specific regional effect.
You probably also saw that, as hinted at in May, we have now signed an order with Boeing to acquire 14 new 777 aircraft for our intercontinental fleet. As already indicated, this will lead to EUR 200 million incremental CapEx this year. The first tranche, we have actually already booked in the second quarter. You'll see that in a second on the next page. I don't want to go into a deep dive on the whole refleeting exercise. Just a couple of reminder on some key points, which we already covered in May. We expect that in the peak year of this refleeting program, we expect group CapEx intensity to increase by around 150 basis points. You can expect that in 2019, in this peak year, CapEx will be higher. We are planning to finance the aircraft via debt.
Yes, we are fully aware that technically, accounting-wise, it of course impacts our free cash flow and our CapEx line. When we think about excess liquidity, we will take the refleeting financing out, so that it's not going to impact our excess liquidity consideration. Why are we doing it? As Ken explained that in May, we see significant operating and financial benefits for replacing leased older aircraft with those highly efficient owned planes. That is going to really have the biggest impact, naturally, in the year 2022, when the whole refleeting exercise has been completed. Looking at the Express P&L on slide 8. When you look at the revenue development, you do see the strong currency effect on revenue. Reported revenue growth was 7.9%, organic increase was actually 12.1%.
Yes, we also had negative currency headwind on the EBIT line that was actually higher than the benefit from IFRS 16. Even more so, we are very pleased with the result from Express EBIT increase by 10.2%, margin now up to a record 12.8%. The next nice thing on this slide is that, in line with what we usually expect nowadays from our Express division, they did succeed in translating the good EBIT development into operating cash flow. We are showing for all the divisions, clearly the IFRS 16 effect. You note that it is material, but even excluding this, we had a very strong operating cash performance in our Express division. CapEx is up significantly year-over-year. The big driver here is the first tranche of the refleeting investment, which accounted for EUR 69 million in the second quarter. Turning to DHL Global Forwarding, Freight on slide 9.
You can see that our selective approach to volumes is paying off across the board, especially in air freight, where you can see that gross profit per ton was up by 12.8%. Despite currency distortions, excluding that it was even better, and the same holds true for ocean freight. One important point to highlight here is, not only is gross profit up, but we are also making progress on the GP to EBIT conversion. I think it's fair to say that Tim's Simplify program is delivering tangible results, which is quite pleasing to see. On a quarterly basis, we are getting back to where we were before NFE, and that has always been our first intermediate goal with regard to the Global Forwarding Freight profitability development. Finally, the implementation of our new IT system continues to progress smoothly and without any disruption to the daily business.
You can see all this reflected in the Global Forwarding Freight P&L on slide 10. Topline growth continues to be muted as a result of our selectivity and currency, GP has a very solid development. Together with the improved conversion rate, we have been able to really improve the EBIT by 57%. With a 2.8% EBIT margin, we are now heading back into the right direction. We know that we still have some way to go. We have also looked at what our competitors have reported. Clearly 2.8 is not where we want to stay. It is definitely moving in the right direction for Global Forwarding Freight. The good operating performance, combined with working capital improvement, also led to an excellent operating cash flow result. IFRS 16 doesn't have much of an impact here.
As usual, CapEx for Global Forwarding Freight is a very small amount. That takes me finally to the Supply Chain P&L on slide 11. Like in Q1 and for the rest of the year, we see the effect of the disposal of Williams Lea. That has had, of course, a significant impact on the top line. Currency also had a negative impact this quarter. On an organic basis, top-line growth would have been 2.7%. The EBIT performance for Supply Chain is solid, with IFRS 16 benefit roughly balancing both negative effects from currency and the disposal of Williams Lea Tag. Despite the relatively large positive effect of IFRS 16 on operating cash flow, it was still lower year-over-year. Clearly not a number we are happy with. The driver here is phasing on the working capital side.
That's a topic we now really have to focus on intensively in the second half of the year. Finally, similar to forwarding, CapEx is low, in line with the Supply Chain business model and driven by the phasing of new projects. So much for the group, and the DHL divisions. With that, I will hand over to Frank for the PeP update. I look forward to your questions later on. Frank?
Thank you, Melanie. Let me talk about PeP. First of all, what we have seen now for many quarters is that we are well-positioned in the market. We see the same trends continuing. Our decline in volume in the mail part is significantly less than other companies have, or other postal operators have experienced. We have, in the second quarter, a volume decline, which is 3.2%. Yes, we had one day more, but in exchange, we had last year already a significant increase in volumes due to the elections, and you might remember, we will have another impact in the third quarter from the election of the federal government. Overall, the underlying trend of 2%-3% is continuing from. That's our assumption here, and we see that confirmed so far, if you look into the whole year.
On the parcel side, very strong volume growth and good revenue growth, but the revenue growth is smaller than the volume growth, and we have seen that also for a couple of quarters now. Internationally, we are doing well. The business is growing. If you exclude currency impact, it's growing double digit, and that's very healthy as well. As you can see on the next page, where you see the split of the EBIT number between Germany, international, e-commerce. We had a quarter which is balancing the negative result from the first quarter international e-commerce parcel. It shows also the underlying trend, if you look into the detail. The countries are improving across the board, even if we have loss-making operations at the beginning. Germany had one-time impact of EUR 61, mainly for the early retirement program, but also some of the reinvestments we took already place.
Overall, the result doesn't make us happy, but it's in line with what we expected after we changed our guidance for this year. No further surprises. Operating cash flow is good, and CapEx is the consequence of our investments into Germany in parcel operations and international parcel operations. Since we expected such a second quarter, on page 14, that's the reason, and that's a reminder. That's the reason why we reduced our guidance for this year. The underlying performance of the implied operating cost overrun is EUR 350, because we had a pension revaluation, as you know, the first quarter of EUR 108. We will invest additional EUR 150 million to help to improve our operational performance. We need EUR 500 million for restructuring, mainly for the early retirement program that led to the new guidance. How is that split among the quarters?
On page 14, you see if you exclude these pension revaluation over the first quarter, the underlying performance was EUR 140 million down. That had impact from higher transportation costs, higher salary costs, higher sickness rate. That's the reason why Q2, despite that it's better, we would not overstate yet. We have not really seen a significant cost improvement in that quarter. Nevertheless, it's heading in the right direction from the nominal amount. We will see better improvements in Q3 and particularly Q4. That is what our expectation is. We are working on all dimensions, as I will explain in a second, on all dimensions to really improve the profitability of the PeP division. The challenge is not the market. We are very competitive, and you can see that on parcel and on mail front, but we have an internal problem. Nevertheless, we can do a lot on all levers.
On page 16, reminder again, we will work on the revenue side, on both parts. I come to that in a second. We need to improve our productivity, which is not in good shape, and we have to think about what can we afford as an overhead cost structure. I will explain some of the measures we have already taken. On page 17, you see what we do on both parts. First, on Post, we have a clear timeline. We have currently discussions going on with the regulator. I'm confident that we will see a price increase and adjustment by the end of the year, so late November, early December. As I said, there are constructive dialogue. As a reminder, this is only for the about 3 billion regulated mail volume, not for the rest.
What we do on that one is dependent on what the regulator decides on this area. On the parcel front, we have already started, and we announced it already to rate card customers, so smaller customers, that they will see a rate increase by September 1st. We are planning a significant price increase for January 1st. We have already started and are implementing at the moment for heavy and bulky stuff, a price increase. Due to the exchange we have between Express and the PeP division, we are learning from them how they manage more the shipment profile yield management. I think there is plenty of opportunity. I have seen that in the meantime. We can do better on that dimension as well. That all should help us to improve our yields in the parcel area.
We are also talking to customers about the planning for the peak and how we deal with overrun and underrun of volumes. I'm optimistic that we will see some impact there as well. Overall, I think that's important. We are market leader. We are quality leader. In a tightening market with regard to capacity and resources, I think it's important that we are leading the pack, and we'll do some price adjustments. We have started already, and we have clear plans, which we already decided. It's always properly talking about that is different than what we really are doing with our customers individually. On page 18, you see what we plan to do and what we have started already on our productivity measures. We are thinking along the whole supply chain. Different elements.
First, we have standard operating procedures, as I said already last time when we talked, we have seen a deviation from the standard operating procedures, which has negative impact on quality and cost, which we have to readapt. We have to deploy First Choice significantly more rigid than we have done. I think we have good tools and we have enough trained people that should help us to improve the processes. Finally, the new technology, digitalization, automation will help us to renew even processes. You can read in the middle some examples. It's about training, it's about transfer of best practices because there are significant productivity gaps between best performing and lowest performing companies.
You might have seen that we also now have hired for that division, a colleague from DGF who helped us already on renewing their VIT platform, and he will now help me on the operations side in PeP. I think that will be a good move to focus on these areas of importance. On the next page 19, these are indicators what we are doing with regard to restructuring. The organization is too complex. We are working now, and we are getting closer to the announcement what we want to do. That's an internal announcement, of course, how we simplify, how we right-size, and how we avoid duplications. There is a lever, and I'm very confident that we will deliver the EUR 200 million-plus savings. We have already decided to shut down certain things which are not big, but important as well for cleaning up.
You can see them here. Finally, of course, we have worked on our marketing spend. We are reviewing our sponsoring activities and have already reduced. The impact will happen probably more in 2019 and 2020 because of course there are contracts, and we can't see the impact straight away. We are reviewing IT project and reshuffle certain things to more beneficial projects, as I call it. Page 20 is just a reminder of these early retirement, how their provision is built and what's the P&L impact and cash flow impact. Again, the early retirement program has a positive and not a negative impact on our free cash flow, as shown here. It has a positive impact on our P&L as well until 2020. We expect around EUR 160 million and even slightly positive free cash flow. That's important to understand.
That doesn't hurt our free cash flow because we are not paying upfront. We will pay in the respective year, for the early retirees, the money, and that's the reason why we have even a slightly positive impact on free cash flow. Overall, as I said, I'm confident that we can deliver EUR 200 million-plus. On page 21, you see where we are. We understand, I think, all our problems we have, all of them are internally focused. Of course, pricing measures. There is a customer, and therefore we have to monitor that very tightly. I believe, as a leader in our industry, we have to take that seriously. I'm very close to these activities, and we will review that very closely. I think pricing is always a key priority for the divisional heads.
I'm very confident that we are taking here very reasonable measures which help us to convert more revenue into profits. Direct costs, I just talked about is the same. Indirect costs, yes, it's not all done yet, but I think we have a clear plan. That leads me to corporate incubations. Now I'm coming again back more for my CEO for the group. As we explained earlier this year, we bundle now certain activities which particularly are loss-generating at the beginning. You can see that on the bottom. StreetScooter is getting more and more traction, not only internally but also through external sales. Nevertheless, we can't create miracles either. Therefore, we generate more losses this year than we had in the last year because we scale now operations. We are very confident that we can turn that around in the next years to come.
SmarTrucking is our startup in India for premium trucking. I believe that this is a great idea as well, and it gains momentum. Again, here we face losses at the beginning after we didn't have any losses because we didn't even start last year. Finally, our SIMSme project. We are reviewing that against the backdrop of GDPR. Is there an opportunity for more confidential information? SIMSme is such a platform, and we might have an opportunity to leverage what we have built for a messaging service. In summary, 2023 and 2024, we reconfirm today based on the second quarter our guidance for this year. We are confident that we can achieve that not only in this year, but also that we have the right base for 2020. That's the reason why 2023 has not changed at all.
All the numbers we have already shared 8 weeks ago with you when we changed guidance for this year.
That's for the tax rate.
Sorry. The tax rate is new. Sorry. That's true. We have reduced it, as Melanie already explained. The wrap up. The Q numbers are in line with what we knew. I think we have a lot of positive. The DHL divisions have a clear agenda, and they're heading in the right direction. I'm very pleased to see the significant improvement in the first half for DGFF. That is a fundamental change. I'm also happy about the progress we have made on the IT front. Express is running very smoothly anyway. We have record margin there. Supply Chain, after some hiccups in the first quarter, I think is back on track. That's good. As I said, PeP has internal issues but no market issues. That's the reason why we are confident that we are knowing what to do, and we will execute accordingly.
We have all the right focus on the right subject. Overall, that's the base for our confirmation of the guidance for this year and 2020. With that, thank you for listening, and I hand over now to you for any of your questions. Thank you.
Ladies and gentlemen, if you would like to ask a question, please press nine star on your telephone keypad. In case you wish to cancel your question, press nine star again. Please press nine star now to state your question. The first question comes from Andy Chu.
Hi, Andy.
Hi. Good afternoon. Three questions, please. The first one's on the additional OpEx investment, the EUR 150 million. Would it be possible to sort of phase that for us in terms of Q3, Q4? Second question is on DGF. When will you stop being selective on volumes, and when can we expect Air & Ocean volumes to trend more in line with market volume growth? On my final question on the parcel price increase, you alluded to some quite significant price increases on more sort of bulky items from the 1st of January. Would you be able to give us some sort of quantum of what sort of price rises you're thinking about there, please? Thank you very much.
Sure, Andy, let me take the first and the third question. Melanie will talk about the second. We have not finally decided which measures will really trigger which expenses, and therefore it's too early to judge how much we will see in the third and the fourth quarter on OpEx. I think a solid assumption would be that we probably have one third to half in the third and then more. As I said, it's still a work in progress. On the price increases, we don't want to quote percentage points. We will do more than in the past. We already have started on bulky and heavy stuff. That's not for implementation January 1st. It's going at the moment. Of course, we have contracts with customers which we can't change, and therefore, it will take months until we really see the full impact.
We have taken significant increases, and we will see then in the next weeks how sticky customers are. I'm positive because I think the pricing level we had was too aggressive and not necessary, and that's the reason why we have taken that as a step. The more general price increase will happen on January 1st, except for rate card customers, and that will be significantly more than in the past. We don't want to talk about a percentage point, or percentage points, because that will be slightly different per customer, and therefore, it's individual negotiations.
Maybe brief addition to what Frank said. Andy, you asked about the phasing of the EUR 150 on the OpEx reinvest. The other question we get all the time is what about the restructuring, the EUR 350 we still have for the civil servant and the EUR 100 other? I think here you should expect in terms of phasing that we will see a lot of the civil servant, EUR 350 actually coming into the third quarter. We are now already working on issuing the announcements. Whilst the EUR 100 is probably more moving into the fourth quarter. I think that gives you the full picture on the timing of the one-off effects in PeP. With regard to Global Forwarding, Freight volume, it worked very nicely for the numbers now in the second quarter again. We know that you can't shrink yourself to greatness forever.
Obviously we have to find the right point in time to go back into a growth mode. We will do that selectively and carefully. It should begin to move in the other direction, but at a slow pace. Don't expect volume growth yet in the third quarter.
Super. Thank you very much.
Thank you, Andy. The next caller, please.
The next question comes from David Ross.
Hey, Dave.
Yes. Good morning. How are you?
Wonderful. Thank you. Your questions, please.
With all the tariff and trade talk, I know that you haven't seen it in the numbers in terms of Express or Air Ocean yet, but in conversation with the customers, maybe around the Supply Chain division, where they're locating facilities, how they're moving goods, are you seeing any impact yet? What are your customers telling you about the pending trade war?
I think they are all watching and nobody really is thinking that we will get to a trade war. I think what concerns customers more is the potential of a hard Brexit, and we see more movements already that customers are starting to move operations from the U.K. to mainland Europe. I think that's more imminent than a response to all the talks about trade war. I think what I hear is at least there is a quite reasonable approach to that. Nobody believes that this will get out of proportion. We will see. On Brexit, there's definitely preparation going on already. People start moving their operations from the U.K. to mainland Europe, which is for us, not a major problem, but it's not good. There's extra cost and there is a fear of increasing fear that there will be a hard Brexit.
To follow up on that, related to the global economy, not just tariffs and trade. We've been very strong across all regions for some time. Are you seeing it soften anywhere? I know in some of your numbers, it's not related to the lane strength. It might just be customer pricing actions or taking a harder yield stance in Asia-Pacific, for example. What are you looking out for? What are you worried about? Are you seeing any softening anywhere around the world right now?
I think the real concern is that the psychology changes. At the moment, I think the world economy is in a pretty healthy stage. If the politicians don't disrupt that, then we will see a good continuation of that. That's the biggest risk, I think, that we have getting too much noise into the system, and then consumers are changing. If consumers are changing, then investments will change. That's a risk that we have not seen that in any part of the world yet.
Excellent. Thank you very much.
You're welcome.
Thanks, Dave. One more caller, please.
The next question comes from Damian Brewer.
Hey, Damian.
Hey.
Hello. Good afternoon, everybody. If I can be cheeky and ask three questions, just two simple ones, first of all. I appreciate you can't say on what the impact of trade, et cetera, is. Just for information in Q2, how much of the revenue base for the group as a whole was either within or going to or from the U.S.? Second question, just on the PeP goals that you set. Can we just be clear, given the management change that's going on in PeP, were those set by the current management under Frank's direction, or are there elements of that that are set by the outgoing management team within that business? The very final question, just on Melanie mentioned the extra 150 basis points of CapEx intensity for 2019, which is the peak year of the payments for the 777 freighters.
That feels like it's about EUR 900 million to EUR 1 billion of extra CapEx or what would be classified as CapEx in that year. Given that cash outflow you'll be seeing on top of the ordinary cash position of the business and the normal CapEx, how confident are you in terms of when this gets to the supervisory board that they will be quite confident and happy to pay the dividend out of equity if the dividend cost is going out bigger than your free cash flow? Thank you.
Melanie, may you answer the question with regard to the U.S., but maybe on that subject without talking about the numbers. The interesting thing is, and I have seen that now in the last years already. There is not a single root cause for what happens finally. The trade will change, but we have a big domestic business as well in supply chain that might have see a positive impact short-term and long-term. Even the Brexit, it's cynical, but it might lead to better results for us because the complexity of a hard Brexit will drive complexity and that drives cost for our customers and potential profit pools for us. It's unpredictable somehow. Therefore, I would not be too concerned because we are fortunately not depending on one region, one trade lane.
We are really global, and that's the reason why I'm more concerned about the overarching decline in growth than I would be about particular markets. The targets, that's a good question. We had the target of EUR 1.7 billion already before, but of course, after I stepped in, I reconfirmed these numbers with my colleagues. The current management team under my leadership is fully convinced that this is doable. They have developed, of course, measures, and we have looked into these potential measures and the impact that we really can deliver. The target was already before, but I think we have a pretty robust plan to go for the EUR 1.7 billion in 2020, assuming that not all our measures will deliver the maximum.
It's a balance of having more ideas what we should do and knowing that not everything will materialize in a complete way, and that's the experience. The team I have in PeP is very confident and committed to deliver that number. These are old numbers by definition, but they were reconfirmed by the current team.
Maybe just to add some numbers to the first question. When you look at our annual report, you can see that for the Americas region, roughly 18% of the group revenue were in the Americas region, EUR 10.8 billion. Out of that, I would say that roughly probably around two-thirds are in the U.S. That's also a bit of a technical thing because that's revenue built and recognized in the U.S., so the real geographic origin may be completely different. I think as Frank said, overall, we feel very well-balanced with regards to our revenue exposure across the different regions. We have seen over the last years and decades, always one region going in the one direction or the other. I think this is really a time when having this global balanced approach is going to be helpful.
On your third question, first of all, as always, your math is, of course, right. What you have calculated for the 150 basis points sounds like a very reasonable number. I think the important point here is that, of course, when we talk about this refleeting exercise, also the supervisory board, we took a look at the bigger picture, including dividend considerations and so on. You know that our dividend is not linked to the free cash flow, even though, of course, free cash flow is a topic we take into consideration. It is linked to the earnings development, where we have sufficient flexibility with our 40%-60% corridor. For the regular dividend, it's something I wouldn't be concerned with regard to the Boeing 777.
With regard to excess liquidity considerations, that is why we made the specific point that we will treat it as a separate category, even though, of course, accounting-wise, it will go through the free cash flow numbers.
Let's talk about, because there are several questions with regard to what U.S. and trade war. I think it's, again, important to reflect about the portfolio of divisions. If you think about DGF, let's assume there is a decline in growth. There is tremendous potential still through the self-help and the IT platform, which has not been captured, particularly the IT platform, because that is still in the rollout. That will help that division even if the growth. I have to say, we haven't seen any decline in growth, therefore, it's just for the sake of the argument, DGF could help themselves through the measures I just explained. Supply Chain is late in the cycle all the time, we will not see any major impact at the beginning.
Express and PeP will benefit tremendously from the structural change to e-commerce in any case. That will continue regardless what the economy does, because the trend is still intact. That's the reason why our portfolio is pretty robust against these things. That's the reason why myself, as a citizen of this planet, I don't like what is going on, because I believe globalization is good for the planet and has proven that very strongly. Therefore, I'm nervous about these kind of talks. The impact in our company is, of course, there is some growth deterioration, but our business units have enough opportunities in their respective area of responsibility. On top of that, we are very well-balanced with our footprint around the world, which is, I think, good for us as a downside protection. Damian, three questions, definitely three answers. Any more?
That's great. Thank you.
Very good. Next caller, please.
The next caller is Edward Stanford.
Good afternoon. You'll be relieved to hear I've only got one short question. That's really picking up on one of Damian's points, which, could you remind me of the profile of the CapEx on the freighters? It peaks in 2019, then do we have two years beyond that of payment? Perhaps you could just remind me of that, please.
We expect around EUR 200 million now in 2018. Then we expect the peak in 2019, followed also by quite significant CapEx in 2020. Then it will tail off in 2021. We will have all planes in operations by the end of 2021. That 2022 will be the year when we really see the full operational benefits.
Thank you.
Okay. That was quick. Next caller, please.
We have a question from Dominic Etheridge.
Hi there. Just a couple of connected questions on the PeP business. Now that you've reviewed all the operations in Germany and seen how things are set up at the moment, do you foresee any requirement to change the business model fundamentally? Obviously, some other countries in Europe, you are seeing some changes and some alterations to how they operate. Do you see that being an issue in Germany, or do you feel, are you fairly comfortable given the volume trends that that's not something you require at the moment? Maybe you can say if there's been any discussions with the regulator about that. Then on the connected point on pricing, do you see there, in going forward, being a much more annual process of price rises in letters and parcels?
Because I suppose one of the, you could argue, one of the lessons of this current year has been maybe you didn't put prices up when you could have done in the past. Could you just talk about how you view the pricing mechanism going forward in PeP as well? Thank you very much.
Yeah. You have both questions. I don't believe that we have to change our business model. I think these adjoined or the combined delivery of letters and parcels, I think, is a good one, and we will continue to do so. You can even find somewhere in the pages that we want to extend the joint delivery for letters and parcels. I think there is an opportunity to change the steering logic. Maybe just to give you an idea of what I mean by that is, I think the linkage between what customers demand and what we accept from the sales side is not fully aligned with operations all the time, and we have to combine that more tightly. Because I have seen complaints from customers that the cutoff time for pickup is too early, but they are not willing to pay the price.
We move that without increasing price, and that puts additional pressure on the operations. I think these kind of things have to be circled much closer in a region than on a global area. I think that's not a change in the business model. It's more a change how we steer that. I think we need more accountability for the results down in the operations, and we have, at the moment, accountability for either revenue or cost. I think that needs to be changed. On pricing, I think what we have done with stamp price or postage increase was right to take a longer perspective, because that's better for the consumers and small customers, and that is impacting them in particular. On parcel, I think we have to be getting closer to that.
We really review that in a constant way and probably come more to an annual price increase. We have to learn now somehow. I think we can learn internally from Express and Global Forwarding. It's based on premium quality, and that's the reason why I'm telling our people all the time, quality, quality is the name of the game. We are not allowed to drop the ball, because that's the right basis. We are unavoidable with our scale for any customer and I think that's the objective. If we are unavoidable, then it gets easier with annual price increases as well. I think that's the way we have to go, and that's also a reflection of the tremendous growth the industry has seen in the last years. Capacity got tightened. Of course, the labor market in Germany is very tight already anyway.
I think there's an opportunity to do that more on an annual basis. Not on postage, but on parcels.
Thank you very much.
You're welcome.
Thanks, Dominic. We would have time for the next caller.
The next caller is Joel Spungin from Berenberg.
Hi, Joel.
Hi, good afternoon. I've just got a couple. If I can just start maybe just by asking about the early retirement program again. Just maybe if you could just give us an update about how advanced you are in that program. I assume there'll be some sort of window where you'll make an offer to eligible employees. Is that process now started? How long is it likely to go on for? Just related to that, in terms of the benefits from the program, I would assume that you would get the benefits from that program relatively quickly. This slide 20 would seem to imply only a modest benefit in 2019. I just wanted to make sure that that was the correct way to read it.
My second question was just a relatively simple one, again, on the airplane CapEx and excluding it from the liquidity. This may be really obvious, just to understand why you're excluding it. Is the debt in some way non-recourse, or is it simply a decision that you've made internally in terms of how you're going to assess the business?
The early retirement program is in full swing. We have already done for the first tranche, and we got already acceptance for many. There will be already a benefit happening from probably September on. We now have written letters to the next tranche. We will learn from the next tranche how well the pickup will be. We have identified quite a long number of people, which we will take in portions, one after the other, to realize that that's the reason why we felt that page 20 is a more realistic reflection to conservative reflection what might happen. We have only done EUR 50 million so far, to now say that the pickup will be exactly the same for the next, I think is too aggressive. That's the reason why we think let's wait and see.
We can tell you probably more when we release our third quarter numbers and how that really will face in year-over-year. I think that's, at the moment, the realistic perspective. The program is in full swing, and we are very optimistic about the pickup. Let's see for more evidence. The first tranche was well accepted by the people we asked.
Maybe to the second question on the Boeing 777 CapEx and why we look at it slightly differently with regard to excess liquidity. When we had our internal discussion, should we go down the route of purchasing those aircraft? We were very well aware that this is a deviation from how we have purchased a big chunk of our aircraft before. We are replacing existing Boeing 747s, which are leased with purchased aircraft. We could have continued with leasing, when you do the lease versus buy calculation, it's economically obvious that purchasing is the better way.
We were, at the same time, however, aware, given our free cash flow generation and the amount of CapEx, particularly for 2019 and 2020, that this would have severe implications on our free cash flow generation and that this would be a significant deviation to what we had told you before about excess liquidity. That was the one aspect we took into the consideration, that we wanted to have some continuity, how we think about excess liquidity and shareholder returns. At the same time, we took into consideration the strength of our balance sheet and the fact that we have the opportunity to counter finance those Boeing 777s at extremely attractive rates in the debt market. That is what we are doing now and are beginning to do now.
We are tailoring debt financing really with the timing of the delivery and the payment for the aircraft, also with the payback we get on the operating cash flow side from putting those more efficient aircraft in. I think what we then came up with is this overall logic. Yes, of course, accounting-wide it is free cash flow and CapEx, given that we counter finance it, I think there is a justification to say for excess liquidity considerations with regard to shareholder return, we put it into a separate bucket. I think that gives us the opportunity to do what is economically the right thing for the company, i.e., purchase those airplanes instead of leasing them without becoming inconsistent with what we have promised to our shareholders.
To add to that again, somehow, of course, we fully disclosed all these elements to the supervisory board. They are fully aware that we are treating that separately as well, not a part of our normal free cash flow, which I think is important in conjunction with dividend and all these aspects. That is fully aligned and understood by our whole supervisory board.
Okay, thank you. If I can just ask one very quick follow-up on the civil servant program. Do you think you will have offered everyone who might be eligible by the end of this year?
Yes. I think in terms of phasing, we have just started the second wave. The clear intention is to already book a significant chunk of the restructuring of the remaining 350 in the third quarter, and definitely by year-end. The reason why, in terms of phasing, it may still lead to some benefits coming in in 2020, depends on when those people will go into retirement. That really depends on the age brackets and so on. In terms of booking for the restructuring, EUR 50 million in Q2, expect a big chunk in Q3 and the remainder in Q4.
Okay. Thank you very much.
Thanks, Joel. The next caller, please.
The next on the queue is Mark McVicar.
Mark, there you are.
Hi. Good afternoon, everybody. three quick questions. I think two for Frank and one for Melanie. Just in terms of PeP, Frank, how long do you think you'll need to remain in direct control of the division? And when you look for your successor or whatever you want to call it, will that be exclusively internal, or would you look externally for someone as well?
I think that's an important question. Let me answer the question. I'm prepared for do that longer than just the year-end. I have a tendency to understand really all the issues and then put the master plan on the road. I'm confident that different from the situation we had in DGFF, despite that we will consider also external candidates. The people we have in mind will be relatively short-term available for us. I think, let's see how fast progress we made, and if I'm confident that things are in good shape and on the right path, then we probably will also think about a successor in that division.
Around about the end of the year or getting into the next-
No, I think it will probably longer than the end of the year, as I said. I'm prepared to do that longer than the end of the year.
Into '19.
Into '19, yes.
Okay. Thank you. The second question I think for you, Frank, is of the EUR 500 million restructuring charge, you've clearly told us where EUR 400 is going. What sorts of things are likely to absorb the other EUR 100?
That is, of course, some restructuring expenses for some of the shutdowns. It will mainly also related to staff costs, which we will expand also, and we'll have restructuring outside of civil servants, and we have to then pay people, executives packages, and that is a major chunk. We don't have major restructurings for other staff. There might be some write-downs in Allyouneed for Marketplace, for instance, because there is IT and all this kind of stuff. It will be mainly related to severance packages for people.
Yeah. For non-civil service grade people, generally.
Exactly.
Then my question for you, Melanie, was, if I look at the way the financing charge has developed this year, and I adjust it for what you told us was the IFRS 16 impact, which was to add EUR 350 million, roughly, I think, for the year. It looks like the underlying number year-on-year has come down and stayed down quite significantly. What are the main bits that are driving that reduction?
Yeah. That observation is correct. One big driver in here is actually the development of our share price and the way we account for stock option programs, particularly for the board members. That has been one of the big offsetting factors in the second quarter.
Okay, which is not something anybody wanted to see, really, but every silver lining has a cloud or something.
Exactly
Okay. Sounds great. Thank you very much.
Working on it.
Yeah.
Thanks, Mark. I see we have one further question.
Next question comes from Edward Stanford.
Yes, hello. Just one follow-up I forgot to ask. In all the mention of the price increases in Parcel, have you had time to gauge the reaction of your Parcel customers to what that might mean? How are you gauging the customer reaction to your proposed price increases?
It's very early to say. So far on heavy stuff, they are not excited, but they didn't walk away. On rate card customers, noise level is pretty low, actually. People expected something anyway after the announcements we did, and it doesn't come as a surprise because they see that the market is tightening and our competitors are talking about price increases as well. So far so good, but we are still at the beginning. I think, the bigger chunk will come by January 1st, and then we really will see how good the stickiness will be and how much, potentially, we will lose volume. It's too early to say, but I would say it's not discouraging what we have heard so far. We are confident that we really have a good product in the market, and people expected that something might happen anyway.
Thank you.
You're welcome.
Thank you, Ed. The next caller, please.
The next caller is Mattia Gabeli from Goldman Sachs.
Thank you, and good afternoon. Three quick questions for me. Two more on the numbers and one more on, say, the corporate incubators. Firstly, just on the corporate incubators. You have now quite a few, say, startups in that business. You are generating a bit of an EBIT loss due to the startups. When you think about the next two or three years, would you think that now you want to allocate more capital to that division, or are you happy with the current, say, pace of innovation and also capital allocation, i.e., do you want to accelerate that further? Is it more, "Okay, we have quite a few projects. Let's get these projects made to turn profitable first of all." Secondly, too, on the numbers. You mentioned there will be some shutdowns, like Allyouneed and the ones on page 19.
Is there any EBIT contribution at the moment from these subsidiaries, or are they actually loss-making at the EBIT level? Lastly, you mentioned that basically the working capital in supply chain had quite a negative swing in the first half. Is that an area of concern to you, or do you already have a pretty clear view of what you need to do to get the working capital back to normal for that division? Thank you.
Let me take the two first, Mattia. For the time being, we think we are well positioned with these three. There are two reasons why we put that out, just to remind everybody. First is, create more visibility. Before, particularly this year, it has overshadowed our numbers. Let's assume we had not changed our guidance for the half, I think we should separate that because you can't grow a startup by limiting them all the time to deliver numbers. That's the reason why we said, "Let's do that." I think we will add more activities if we see that these things are really working well. That's the reason why I would say for the time being, we will stick to these things and we see how they progress. If they really create value for the shareholders, then we will consider other ideas.
For the time being, that is not planned. As we guided already, we assume that the losses of the EUR 70 million this year should be zero in 2020, and we are optimistic that this is achievable. On the other one, I can assure you, these are all loss-making activities. We will not shut down our profitable businesses to refocus. Maybe, yes, these are all loss-making activities. We will take that out of the P&L.
On the supply chain working capital. First, to put it into perspective, I was highlighting that because it is a bit of contrast to the good development we see both in Express and Forwarding for the first six months of 2018. When you look at the root causes, I think there's one area which is really a timing thing. I mentioned earlier in the context of IFRS 16, those real estate venturing activities which are part of the regular supply chain business, where we currently have a couple of projects in the pipeline, which should materialize in the second half of the year. That is currently driving up the inventory position. That is clearly understandable phasing topic. I think the area where we really have to now work on intensively, and the supply chain colleagues are all over that, is on the receivables side.
We weren't pleased with how the quarter end for June 30th went. That is something we have to correct. I think in terms of timing, the inventory stuff on the real estate venturing is probably going to go over into the fourth quarter. On the receivables side, basically, we have to work on that already in the third.
Thank you very much.
Great.
We have time for one more caller, please.
The so far last question comes from Andre Mulder.
Yeah, good afternoon. A question on the stamp price increase. You said that it's probably not going to be an annual change. If I look at the other postal operators that implement stamp price changes on a regular basis, everybody does that on an annual basis. What's the reason for you to do that in, let's say, a multi-year bracket? The second question is, should we, again, expect a three-year timeframe like it was in 2016?
I think that's a good question. We think, if I see the responses to our last price increases, the biggest one was the last one. It went very smoothly because people said, "Okay, fair enough, they do that for a longer time period, for three years," and therefore, it's better than having these annual small steps. I think that, and the culture is different. I think that has worked pretty well. That's a part of the discussion at the moment with the regulator, if that's for two or three years. We will see that in due course, what the outcome will be. But it will definitely be more than one year. That's at least our intention as well. I think the regulator sees a benefit in that, too.
Thanks.
You're welcome.
Okay. Thanks, Andre. Are there any further callers out there?
Just as a quick reminder, if you want to state a question, please press nine star on your telephone keypad. There seem to be no more questions.
Jolly good. Well then, I'd like to thank you for your focused Q&A round. Before closing, I thank Melanie and Frank, for the final words, over to you, Frank.
Yeah. Of course, after the little bit bumpy road of the last months, this quarter was in line with what we expected. Now, having looked into in detail into the PeP division, if I summarize our business, we have an Express division which is now delivering record margins in our industry, growth is growing quite nicely. I think we have a right recipe for success created there. E-commerce helps there structurally, so that's in good shape. DGFF, we said that before, now you see first indications we don't have any strategic disadvantage, neither by our footprint nor by our people. Now I think the IT platform is working well. We see that. The benefits are not embedded in our numbers yet.
Supply Chain, we are at the target margin with our margin, but we have to accelerate growth, and I think that will be a significant focus for John and his team. In PeP, we are the market leader, and we are well-positioned. With our growth rates, we have to fix our homemade problems, and that's where I spend a significant amount of my time on. That's the reason why I am pretty happy. We have a clear plan, and we have plenty of opportunities in all divisions because structurally, our industry is well-positioned for what will happen going forward. Despite that we had not the record quarter, I think we have a very good logic that we will see that in the next years to come until 2020.
We are confident that we can make our numbers until 2020, because wherever I look into, I think we have a good story to tell and clear plan. With that, thank you very much for participating today, and I hopefully see you soon somewhere. Thank you, and bye-bye.
Thank you.
Bye.
Bye.