Good afternoon, ladies and gentlemen, and welcome to the Deutsche Post DHL conference call regarding the results of the 2nd quarter At this time, all participants have been placed on a listen only mode. Let me now turn the floor over to your host, Mr. Martin Siegelberg.
Thank you, and well and hello everyone out there to our Q2 twenty eighteen results conference call. As announced, we have with us here Frank Apple and Melanie price. And 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 and then hand over to Frank, and then we go into Q and Melanie?
Yes, thank you very much, and 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 Apel, who will talk about the division in his capacity as acting CEO, PEP. Starting on Slide 2.
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 and 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. The 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 more by rank 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 get achieved in the first half of twenty seventeen. We maintained, at the same time, the investment into our growth project in line with our CapEx guidance. So 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 3, we can see some of the details and drivers that people also find again in the divisional P and Ls. And the first point I want to mention is again the currency impact on the top line. So 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. And 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 2nd quarter, So obviously, the numbers for PeP remain challenging. Drilling 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 double digit increase in EBIT driven in particular by strong performances in express and forwarding.
In the financial results, we see the significant effect on IFRS 16, which we will go into more detail on the next page, and 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 CND. So I would just want to make a couple of comments on the tax number. First of all, due to the lower expected taxable results in Germany as a result of the PEP issues, we are able to reduce our full year tax guidance to 14 end. That reflects that Germany has a higher than average tax rate.
So 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 time 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. What I want to clarify here is though, and I think there was a bit of misunderstanding this regard 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. So 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 Moving on to Slide 4, that's the 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 1000000 for Q2 compared to 1000000 in Q1.
I know that we've guided for a full year impact of 1,000,000. So obviously, by now, many of you will have taken calculator will have added up 44.47 gives you 91 times 2 takes you to a full year run rate of 180. The reason why we stick to the 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 and those profits that used to be accounted for at the point in time of sale. Now we have to spread it over time.
So when we compare what we had in the second half 2017 in the old IFRS world and what we now will have in the second half of twenty eighteen 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 that netted that off and that takes us to the overall number of 1,000,000. When we look at the financial results, you can see a significant impact here in the second quarter. 94,000,000. 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, then a positive benefit in the EBIT line over time, this will even out.
Turning now to group cash flow on Slide 5. 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 peddle. 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. And of course, the 1,000,000 PEP restructuring cost the civil servant retirement via non cash flow that is also helping on the operating cash flow side.
In the finance 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 and A activities for bolt on acquisitions this quarter. Technically, a 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 With that, let's move to the net debt profile on Slide 6, which I hope doesn't bring a lot of the prizes 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. So I would say that Slide 6 is relatively unspectacular and in line with expectations. Yes, so much for the group overall overview. Let's now get into the divisions on Slide 7, 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. And of course, we get that question all the time to recede in our numbers. I think when we look at our expressed numbers for the 2nd 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. And that growth really came from all regions and it was not surprisingly boosted in particular by E Commerce. You may note some diversions in regional growth rates this is due to our active use 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. And as already indicated, this will lead to 1,000,000 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 kind of go into a deep dive on the whole re fleeting exercise, just of reminder on some expect that in the peak year of this re fleeting program, we expect group CapEx intensity to increase by around 150 basis points. And so you can expect that in 2019, in this peak year, CapEx will be higher.
We are planning to finance the aircraft via debt. And yes, we are fully aware that technically accounting wise, it, of course, impacts our free cash flow and our CapEx line. But when we think about access liquidity, we will take the re fleeting financing out so that it's not going to impact our excess liquidity consideration. And 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.
And that is going to really have the biggest impact naturally in the year 2022 and the whole re fleeting exercise has been completed. Lufthansa expressed P and L on Slide 8, I mean, 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%. And yes, we also had negative currency headwind on the EBIT line. That was actually higher than the benefit from IFRS 16.
So even more so, we are very pleased result from Express, EBIT increased by 10.2%. Margin now up to a record 12.8 technologies 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 materials 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 refuting investment, which accounted for 1,000,000 in the second quarter. Turning to 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 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. So on a quarterly basis, we are getting back to where we were before NFE, and that has always been our 1st immediate intermediate goal with regards 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 and L on Slide 10.
Top line growth continues to be muted as a result of our selectivity and currency But GP has a very solid development and, together with the improved conversion rate, we have been able to really improve the EBIT by 57%. With the 2.8% EBIT margin, we are now heading back into the right direction, but we know that we still have some way to go. We have also looked at what our competitors have reported So clearly, 2.8 is not where we want to stay, but 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.
And as usual, CapEx for global forwarding freight is a very small amount. That takes me finally to the supply chain P and L on Slide 11. Like in Q1 and for the rest of the year, we see the effect of the disposal of Williams Lee. 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 the IFRS 16 benefit roughly balancing both negative effects from currency and the disposal of William Fleetak.
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 the topic we now really have to focus on intensively in the second half of the year. And finally, similar to forwarding, CapEx is low, in line with the supply chain business model and driven by the phasing of new projects.
Yes, so much for the group and the DHL divisions. And with that, I will hand over to Frank for the PEP update. Then I look forward to your questions later on. Frank?
Yes, thank you, Melanie. So 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 2nd quarter a volume decline, which is 3.2.
Yes, we had one day more, but in a exchange we had last year, already a significant increase in volumes due to the, some of the elections, and you might remember, we'll have another impact in the third quarter from the election of the federal government. So overall, the underlying trend of 2% to 3% is continuing from that 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 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 and International E Commerce. We had a quarter, which is balancing the negative result from the first quarter international E Commerce password, but it shows also the underlying trend if you look into the detail of the countries are improving across the board even if we have loss making operations at the beginning, our Germany had one time impact of 61 mainly for the early retirement program, but also some of the reinvestments we took already place. So overall, the result is not doesn't make us happy, but it's an inline in line with what we expected after we changed our guidance for this year. Or no further surprises.
Operating cash flow is good and CapEx is the consequence of our invest into German in parcel operations and international parcel operations. So since we expected such a 2nd quarter on page 14, that's the reason, and that's the reminder. That's the reason why we reduced our guidance for this year. The underlying performance of the implied operating cost overrun is $3.50 because we had revaluation, as you know, the first quarter of $108,000,000, we will invest additional $150,000,000 to improve to help to improve our operation performance. And then we need 500,000,000 for restructuring, mainly for the early retirement program that led to the new guidance.
So how is that split it among the quarters on page 14, you see if you exclude these pension reevaluation over the first quarter, the underlying performance was $140,000,000 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 were 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 at Q4. That is what our expectation is.
We are working on all dimensions as I explain in a second, we'll explain in a second with all dimensions to really improve the profitability of the subdivision. So the challenge is not the market. We are very competitive, and you can see that on parcel and on my front, that we have an internal problem. Nevertheless, we can do a lot on all levers on Page 16. Reminder, again, we will work on on the lending 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 be afford as an overhead cost structure. And I really explain already the some of the measures we already taken. So 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, and I'm confident that we will see price increase and adjustment by the end of the year.
So late November, early December, And as I said, there are constructive dialogue. As a reminder, this is only for the about 3,000,000,000 the regulated mail volume, not for the rest. What we do on that one is dependent on what the regular decides of this area. On the parcel front, we have already started, and we announced it already to red card customers some 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 and due to the exchange we have between Express and the PeP division, we are learning from them how they manage more the ship to profile yield management.
And 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 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 under, under run of volumes. I'm optimistic that we will see some impact there as well.
So overall, I think that's important. We are market leader. We are quality leader. And 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. And we have started already and we have clear plans, which we already decided, But as always, you know, properly talking about it is different than what we really are during, you know, 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 and different elements. First, we have standard operating procedures, but as I said already lost and then we talked, we have seen a deviation from the stem of operating procedures, which has negative impact on quality and costs, which we have to reiterate. We have to deploy 1st choice significantly more rigid we have done. I think we have good tools and we have enough trained people that should help us to improve the processes.
And 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 our best practices, but 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, calling from DGF, who helped us already on renewing their VIP platform, and he will now help me on the operational side in PEP. I think that will be you know, good move to focus on these areas of importance.
So then on the next page 19, these are indicators what we are doing with restructuring, the organization is too complex. We are working now and we are getting closer to the announcement. What we want to do. So that's an internal announcement of course, how we simplify, how we right size and how we avoid the applications, but there is a lever and are very confident that we were delivered with 200,000,000 plus savings. We have already decided to shut down certain things, which are not big, but important as well for cleaning up.
So you can see them here. And 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 'nineteen and 'twenty because of they are contracting, we can't see the impact straight away. We are reviewing the 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 they provision is built and what's the P and 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.
And it has a positive impact on our P and L as well until 2020. We expect around how 60,000,000 and even slightly positive free cash flow. So 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 slight positive impact on free cash flow.
So overall, as I said, I'm confident that we can deliver 200,000,000 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, they are customer and therefore, we have to monitor that very tightly. I believe, as a leader in our industry, we have 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. And I'm very confident that we are taking here very reasonably measures, which help us to convert more revenue into profits. Direct cost, I just talked about as the same indirect cost.
Yes, it's not all done yet. But I think we have a clear plan. That leads me then to corporate incubations. And now I'm coming again back more from my CEO of Holter Group. As we explained earlier this year, we bundle now certain activities, which particularly have a loss generating at the beginning, can see that on the bottom, streets scooter is getting more and more traction, not only internally, but also through external sales.
Nevertheless, we can't create miracles either. So therefore, we generate more losses this year than we had in the last year because we scale our operations, but we are very confident that we can turn that around in the next years to come. So much 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 faced losses at the beginning after we didn't have any losses because we didn't even start last year.
And finally, our CMthony project We are reviewing that against the backdrop of GDPR, is there an opportunity for more information and since me is such a platform and we might have an opportunity to leverage what we have built for a messaging service. So in summary, 2324, 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 23 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 yes. The tax rate is new. Sorry. That's true.
We have reduced it as Melanie already explained. Then the wrap up, the queue 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 progress we have made on the IT front. Express is running very smoothly anyway. We have record our margin there. Supply chain after some hiccups in the first quarter, I think it's back on truck. That's good.
And 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, and we have all the right focus on the right subject. So overall, That's a base for our confirmation of the guidance for this year and 2020. And with that, thank you for listening, and I hand over now to you for any of your
The first question comes from Andy Chu
Hi, Andy. Good afternoon. 3 questions, please. The first one's on the the additional OpEx investment, the 1,000,000, 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 and ocean volumes to trend more in line with market volume growth?
And on my final question on the parcel price increase alluded to some quite significant price increases and more sort of bulky items from the 1st January, would you be able to give us some sort of quantum of what sort price rises you're thinking about that, please? Thank you very much.
So, Andy, let me take the first and the third question, Melanie, then talk about the seconds. So, you know, we have not finally decided which measures, you know, will really trigger which expenses and therefore, it's too early to judge how much we will see in the 3rd and the 4th quarter on OpEx. I think a solid assumption would be that we probably have 1 third to half in the third and then more. But as I said, it still work in progress. On the price increases, we we don't want to vote a percentage points, we will do more than in the past.
We already have started on bulky and heavy stuff. It's not for implementation generally. 1st, it's going at the moment, of course, we have contracts with customers, which we can't change. And therefore, it will will take a month until we really see the full impact, but we have taken significant increases, and we will see that in the next week's house, sticky customers are. I'm positive because I think the pricing level we had was too aggressive and not necessary that's the reason why we have taken that as a step.
The more general price increase will happen on the January 1, except for red card customers. And that will be significantly more than in the past, but we don't wanna talk about a percentage point, percentage points, because that will be slightly different to our customer. And therefore, it's a difficult negotiation.
Yes, so maybe brief addition to what Frank said, and you asked about the phasing of the on the OpEx. We invest them. The other question we get all the time is what about the restructuring, the 350, we still have for the civil servants and the 100, are other. I think here, you should expect terms of phasing that we will see a lot of the civil servant 350 actually coming into the 3rd water, because we are now already working on issuing the announcement, whilst the 100 is probably more moving into fourth quarter. I think that gives you the full picture on the timing of the one off effects in CAP.
With regard to global forwarding freight volume, I mean, it worked very nicely for the numbers now in the second quarter again, but we know that you can't shrink yourself to greatness forever. So obviously, we have to find the right point in time to go back into a growth mode. We will do that selectively and carefully. So it should begin to move in the other direction, but at the low case. So don't expect volume growth yet in the third quarter.
Thank you, Andy. And the next caller please. Hi, Dave.
Your questions, please.
With all the, tariff and trade talk, I know that you haven't seen it in the numbers in terms of press 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, or what are your customers telling you about, depending trade war?
So I think they are all watching and nobody really 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 UK to mainland Europe. I think that's more imminent than a response to all the talks about trade war. I think they are what I hear is, at least there is a quite reasonable approach to that nobody believes that this will get out of proportion. That's But we will see, but on Brexit, there's definitely preparation going on already.
The people start moving their operations from the UK to Maine in Europe, which is, for us, not a major problem, but it's not good. This extra cost and there is a fear of increasing fear that there will be a hard
Brexit. And
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, but What are you looking out for? What are you worried about?
Are you seeing any softening anywhere around the world right now?
Yes, you know, I think the real concern is that the psychology changes. At the moment, I think the world economy is in a pretty healthy stage. And if the the politicians don't disrupt that, then we will see a good continuation of that. And 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. And that's a risk, but we have not seen that in any part of the world yet.
You're welcome. Thanks, Dave. And one more caller, please.
The next question comes from Damian Brewer.
Hi, Damian.
Hi there. Good afternoon, everybody. If I give you
2, can I ask three questions, just 2 simple ones, first of all? I appreciate you can't say on what the impact of trade, etcetera, is, but 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 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 current management under Frank's direction or was other elements of that that are set by the outgoing management team within that business S. And then the very final question, just on, mainly mentioned the extra 150 basis points of CapEx for 2019, which is the peak year of the payments for the 777 freighters.
So that feels like about 1,000,000 to 1,000,000,000 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?
Yes. So 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. So 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, you know, see in positive impact short term and long term even the Brexit, it's clinical, but it might lead to better results for us because the complexity of a hard Brexit will drive complexity and that drives, you know, cost for our customers and potential profit pools for us So it's unpredictable somehow.
Therefore, I would not be too concerned because we are fortunate not depending on one region in our 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 1,700,000,000 already before, but of course, after I stepped in, I reconfirm these numbers with my colleagues. So the current management team under my leadership is fully I'm fully convinced that this is doable.
They have developed, of course, measures, and we have looked into these measures and the impact that we really can deliver. So the target was already before, but I think we have a pretty robust plan to go for the $1,700,000,000 in 2020, assuming that not all our measures will deliver the maximum. So 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. But the The team I have in PeP is very confident and committed to deliver that number.
So these are old numbers by definition, but they were reconfirmed by the current team.
Okay. So then maybe just to add some numbers to the first question, I mean, when you look at our annual reports, you can see that for the Americas region, roughly 18% of the group revenue were in the Americas region, 1000000000, And out of that, I would say that roughly probably around twothree are in the U. S. But that's also a bit of a technical thing because that's revenue built and recognized in the U. S.
So the kind of like real geographic origin, maybe completely different. I think as Fran said, overall, we feel very well balanced with regards to our revenue exposure across the different regions. And yeah, we seen, over the last years, in 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. Right.
So 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 talked about this re fleeting exercise, also the supervisory board, we took look at the bigger picture, including dividend considerations and so on. And 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% to 60% corridor. So for the regular dividend, it a special.
It's something I wouldn't be concerned with regard to the 777s. With regard to accessly liquidity considerations. That is why we made a specific point that we were treated as a separate category, even though, of course, accounting wise it will go through the free cash flow numbers.
Yes. And may let's talk about because there are several questions with regard to what U. S. And trade wars. So I think it's again important to reflect about the portfolio of division.
So If I think about DGF, let's assume there is a decline in growth. There is tremendous potential still through the sulfate help the IT platform, which has not been captured, particularly the IT platform, because that is still the rollout. So that will help that division even if the growth And I have to say, we don't have we haven't seen any decline in growth, so 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.
So we will not see any major impact at the beginning. And express and pet will benefit tremendously from the structural change to e commerce in any case, and that will continue regardless what the economy does because the trend is still intact. So 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, you know, very strongly. And therefore, I'm nervous about these kind of talks But the impact in our company is, of course, there is some growth deterioration, but our business units have enough opportunity is in their respective area of responsibility.
And 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.
Damien, three questions, definitely three answers anymore.
The next caller is Edward Stanford.
And that's really picking up on Damien's points, which, and could you remind me of the profile of the CapEx on the freight as it peaks in 2019? And then do we have 2 years beyond that of payment? Perhaps you could just help me remind me of that, please.
Yes, so we expect around 1,000,000 now in 2018. Then we expect the peak in 2019 followed also by quite significant CapEx in 2020. And then it will tail off in 21. And we will have all planes in operations by the end of 2021. So that 22 will be the year when we really see the full operational benefits.
Thank you.
And we have a question from Dominic Adridge.
Hi there. Just a couple of sort of connected questions on the pet business. Now that you've reviewed all the operations in Germany, and seeing how things are set up at the moment. Do you foresee any requirement to change the business model, fundamentals 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's not something you require at the moment maybe you can say if there's any been any discussions with the regulator about that?
And then on the Connected Point on pricing, do you see there in going forwards being a much more annual process of price rises in letters and parcels? And could I suppose one of the you could argue on the lessons of maybe the last of this of this current year has been maybe you didn't put prices up when you could have done in the past. Can you just talk about how you view the pricing mechanism going forward in PEP as well?
Yes. So, both questions. So I don't believe that we have to change our business model. I think these are joined or the combined delivery of letters and parcel, 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 our letters and parcels. I think there is an opportunity to change the steering logic, you know, maybe just to give you an idea 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 they are not willing to pay the price, then they move that without increasing price, and that puts additional pressure on the operations. And I think the kind of things have to be circled much closer on and in a region than on a global area. I think that's not a change in the business model.
It's more change how we steer that. I think we need more accountability for the results downing the operations and we have, at the moment, accountability for either revenue or costs. And I think that needs to be changed. On pricing, I think what we have done with stem 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, but we have to learn now somehow. I think we can learn internally from express and forwarding based on premium quality, and that's the reason why I'm telling our people all the time quality, quality, quality is the name of the game. We are not allowed to drop the ball because that's the right basis. Then 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. So I think that's where we have to go, and that's also reflect of tremendous growth the industry has seen over the last years and capacity got tightened. And of course, the labor market in Germany is very tight already anyway. So I think there's an opportunity, to do that more on an annual basis, not on postage, but on parcels.
Thanks, Dominic. And we would have time for the next caller.
The next caller is Joel Spongin from Berenberg.
Hi, Joe.
Hi, good afternoon. I just got a couple. If I can just start maybe by asking about the early retirement program, again, and just maybe if you could just give us an update about how advance 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? And then just related to that in terms of the benefits from the program, would assume that you would get the benefits from that program relatively quickly, but this slide 20 would seem to imply only modest benefit in 2019. I just wanted to make sure that that as the correct way to read it? And then 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, but just to understand why you're excluding it, is the debt in some way nonrecourse, or is it simply a decision that you you've made, internally in terms of how you're going to assess the business?
Yes. So the early retirement program is in full swing. We have already done for the first tranche and we got already acceptance for many. So therefore, there will be already a benefit happening from probably September on. We are now have written letters to the next tranche, and we will learn from the next on 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 paid 20 is more a realistic reflection to conservative reflection. What might happen, we have only done 50,000,000 so far and to now say that the pickup will be exactly the same for the next, I think, is too aggressive, and that's the reason why we think let's wait and see can tell you probably more when we release our 3rd quarter numbers. And to how that really will phase in year over year. So I think that's at the moment, the realistic perspective, the program is in full swing, and we are very optimistic about the pickup, but let's see for more evidence.
So first tranche was well accepted by the people we asked.
Yes. Then maybe to the second question on the 777 CapEx and why we look at it slightly differently with regard to excess liquidity. I mean, when we had our internal discussions, 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 chance of our aircraft before. And we are replacing existing 747s, which are leased with purchased aircraft.
We could have continued with leasing, but when you do the lease versus buy taxation, it's economically obvious that purchasing is a better way. We were at the same time, however, aware given our free cash flow generation and the amount of CapEx, particularly for 2019 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. So that was the one aspect. We took into consideration that we wanted to have some continuity, how we think about liquidity and shareholder returns. At the same time, we took into consideration on the strength of our balance sheet and the fact that we have the opportunity to counter finance those 777s at extremely attractive rates in the debt market.
And is what we are doing now and are beginning to do now. So we are tailoring debt financing really with timing of the delivery and the payment for the aircraft and also with the payback we get on the operating cash flow side from putting those more efficient aircraft in. So I think what we then came up with is this overall logic, yes, of course, accounting wise is free cash flow and CapEx. But given that we count off finance it, as I think they suggest to say for excess liquidity considerations with regard to shareholder return, we put it into a separate bucket. And 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 in consistent with what we have promised to our shareholders.
Yes. And to add to that, again, somehow, Now, of course, we fully disclosed all these elements to the Supervisory Board. So they are fully aware that we are treating that separately as well and not a part of our normal free cash flow, which I think is important. In conjunction, we have dividend and all these aspects. So that is fully aligned and understood by our whole Supervisory Board.
If I can just one very quick follow-up on the civil servant program. Do you think you'll have offered everyone who might be eligible by the end of this year?
Yes. So I think in terms of phasing, we have just started the 2nd wave. And 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 really go into retirement. Yeah.
And that really depends on the age brackets and so on. But in terms of booking for the restructuring, 1,000,000 in Q2, expect a big chunk in Q3 and the remainder in Q4.
Okay, thank you very much.
Thanks, Trevor. And the next caller, please.
Mark, there you are. Hi, good afternoon, everybody. Three quick questions, I think 2 for Frank and 1 for Melanie. Just in terms 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?
So 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 DJF despite that we will consider also external candidates, the people we have in mind will be relatively short term available for us.
So I think, you know, let's see how progress, 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.
Sort of around about the end of the year or getting into Yes,
I think it will probably longer than the end of the year, as I said. So I'm prepared to do that longer than the end of the year. In 2019. In 2019, yes.
And the second question, I think, for you, Frank, is of the million restructuring charge, you clearly told us where is going. What sorts of things are likely to absorb the other 100?
So that is some, of course, some restructuring expenses for some of the shutdowns. It's mainly also related to, stuff cost, which we we will expand also and we'll have restructuring outside of civil servants. And we have to then pay people executive packages, and that is a major chunk. We don't have major things for other stuff. There might be some write downs in all you need, for a marketplace, for instance, because there is IT and all this kind of stuff but it will be mainly related to severance packages for people.
For sort of non civil service grade generally.
Exactly. Exactly.
And then my question, for you, Melanie, was if I look at your, the way the in charge of developed this year? And I adjust it for what you told us was the IFRS 16 impact was to add 1,000,000 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?
Yes, so 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. So that has been one of the big offsetting factors in the second quarter.
Okay, which is not something anybody wanted to see really, but there's every silver lining has a cloud or something, but I think that's great. Thank you very much.
Thanks, Mark. And, yes, I see we have one further question.
Next question comes from Edward Stanford.
Yes, hello. Just one follow-up. I forgot to ask when all I mentioned of the price increases in parcel, I mean, have you had time to gauge the reaction of your customers to what that might mean? I mean, what's the, how are you gauging the customer reaction to your proposed price increases
So it's very early to say. So so far on heavy stuff they are not excited, but they didn't walk away. So on rate card customers, you know, noise level is pretty low actually. So people expect it something anyway after every announcement 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 so far so good, but we are still at the beginning, I think, The bigger chunk will come about January 1st and then we really will see how good the impact, how good the stickiness will be and how much potentially, we will lose volume.
So it's too early to say, but I would say it's not discouraging what we have for it so far. So, we just we are as confident that we are really having good product in the market and people expected that something might happen anyway.
Thank you, Ed. And the next caller please.
The next caller is Matija Gagoulis from Goldman Sachs.
Okay. Thank you and good afternoon. Three quick questions for me. 2 more on the numbers. I'm going to say the corporate incubators.
Firstly, just on the corporate incubators. I mean, 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 the next 2, 3 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, do you want to accelerate that further? Or is it more okay? We have quite a few projects. Let's get these projects to turn profitable, first of all. And then secondly, 2 on the numbers.
So you mentioned there will be some shutdowns like, I don't know, all you need on 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? And then lastly, you mentioned that basically the working capital in supply chain had a 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.
So let me take the 2 first, Matthew. So So for the time being, we think we are well positioned to be 3. There are two reasons why we've booked that out just to remind everybody. First is create more visibility. It was particular this year, it has overshadowed our numbers.
Let's year, we had not changed our guidance for the I think we should separate that because you can't grow a startup by limiting them all the time to the results. And 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 it really create value or all the shareholders.
So 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 $70,000,000 this year should be 0 in 2020 and we're optimistic that this is achievable. So on the other one, I can assure you these are all loss making activities. So, we will not shut down profitable businesses to refocus? Maybe yes, but these are all loss making activities.
And we will take that out of the P and L.
Okay. On the supply chain working capital, I mean, 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 a good 1st 6 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 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. So that is, clearly understandable phasing topic.
I think the area where we really have to now work on intensively and supply chain colleagues are all over that is on the receivable side, where we weren't pleased with how the quarter end for June 30th event. So that is something we have to correct. I think in terms of timing, the inventory stuff on the real estate venturing is probably to is probably going to go over into the 4th quarter on the receivable side. We clearly have to work on that already in the third.
Okay. Thank you very much.
All right. The time for one more caller please.
The so far last question comes from Andre Muirda.
Yes, good afternoon. Question on the stem price increase. You said that it's probably not going to be an annual change. If you look at the other postal operators that implement stem product 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, multi year bracket on, I'm second question is, should we, and again, expect a 3 year timeframe like it was in 2016?
So, 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, but it went very smoothly because people said, okay, fair enough. They do that for several, for a longer time period for 3 years. And therefore, it's better than having these annual small steps. So 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. We have the regulator, if that's for 2 or 3 years. We will see that in due course, what the outcome will be, but it will definitely be more than 1 year. That's at least our intention is well.
And I think the regulator sees a benefit in that too.
You're welcome. Okay. Thanks, Andre. Are there any further callers out there?
There seem to be no more questions.
Charlie good. Well, then I'd like to thank you for your focus Q and A round. Before closing, thank you, Melanie and Frank, and for the final words, over to you, Frank.
Yes. So of course, after the a little bit bumpy road and over the last months, this quarter was in line with what we expected now having looked into in detail into the Prep division, if I summarize our business, we have an Express division that we're just now delivering record margins in our industry and growth is growing quite nicely. I think we have the right recipe for success created there. E Commerce helps there structurally. So that's in good shape.
DGFF, we said that before, and now you see first indications, we don't have any strategic disadvantage neither by our footprint nor by our people. And now I think the IT com 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 And 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. And that's the reason why I'm pretty happy we have a clear plan we have plenty of opportunities in all divisions because structurally, our industry is well positioned for what will happen going forward. And despite that we have not the record quarter, I think we have a very good logic that we'll see that in the next yes to come until 2020. So 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. So with that, thank you very much for participating today, and I hopefully see you soon somewhere.
Thank you.
Thank you.