Welcome to you here in London, in the auditorium, but also welcome to everyone out there following this via the VEP As usual, you will have opportunity to ask questions. We have a couple of blocks. If you're following on the web, you're going to see there's button where you can place your question right away. So I know it's going to be a pretty busy day for you reporting season is is high. And I do understand that we are sort of adding to that business.
So let me introduce you quickly to what we have thought of as the concept for this Capital Markets Day, And, as you know, we have been introducing our current strategy, strategy 2020 back in 'fourteen When we announced this in Frankfurt, and you may remember that about half a year ago, we gave you what we call half time report on where we stand in executing on our strategy 2020. And by the way, in between, we did a couple of tutorial workshops, the one on supply chain. We had 1 in 'sixteen on e commerce. So we understand that you have understood and the principle concept of our strategy in 2020. Nevertheless, we keep running into set of questions from you, from the sales side, from the buy side time and again.
And as you know, we are very thorough in also measuring that. So we've been tracking where are the areas where we see you still having the most crash So we have been tracking that for a while, from our one on one notes, we've been doing our online service of the meeting with you guys. So putting that all together, we had a serious head scratching exercise at the IR department trying to condensating boiling down this set of questions we keep running into. And put it into some sort of structure. And that's basically what you've done here, in the further course of this morning, for each of the divisions, for each of the board members.
We have taken basically the cloud of words and issues keep you busy when you think of our industry and dodge post the Agel in this industry. And here for the example of the CFO agenda have structured it down to a way that you will see the board member tackling those questions. So I hope that this is helping you to get a better understanding of the things where obviously there's still a lack of understanding. That's not a certain guarantee that you will love the answer but we will do our best to give you an honest answer to the questions that you have. So that's basically the agenda for the day.
And we are starting off, of course, with Melanie taking us through the set of Q1 numbers. And we thought it would be a good timing to have CEO of the PEP Division, Frank Eppel, giving us his update on the status of the PEP Divisions business right after that because obviously that's sort of one of the main themes today. Which is why we're also going to do a bit of a Q and A on Q1 and on PEP after that. And there will be a coffee break. Now we have a series of presentations by the 3 CEOs of our DHL divisions, again, followed by Q And A, And we are concluding this the whole exercise with the state of affairs types of update from the CFO and the CEO.
So there will be time to have Biobreaks and to mingle and grab a coffee. Again, I hope we can take on all the questions that you have out there. We intend to be done by something like 13145. So Without further ado, I would like then to hand over to you, Melanie.
Yeah. Thank you very much, Martin, and, warm well come and good morning also from my side. So I will start with the Q1 part, which, as you will have seen by now, actually needs a bit of explaining, which is why I'm very grateful that we actually have it coinciding with our Capital Markets Day because that I think gives us the opportunity to answer some of the questions you will obviously have when looking at our Q1 numbers. So starting with the high level overview, I think the first important message is that actually we had a good growth development on the top line. Which you don't immediately see because we had a significant currency headwinds around 1,000,000 year over year down on currency.
And we also see the effect of the Williams Lee Tech disposal. So when you look at our top line on a organic basics, we actually had good growth with 6.4%. So the fundamental growth drivers are intact. We still see a good macro environment and of course, the e commerce growth trend continues. When you then look at what is happening in the different divisions with regard to the EBIT development, it is a bit of a mixed picture.
We had another very, very strong quarter in Express. We saw solid progress in global forwarding freight, which is of course pleasing to see. We had, a quarter in supply chain where the good operating progress was overshadowed by a write off on customer contracts and it's clearly had a more challenging quarter on the PEP side. They are despite good top line development, challenges on the cost side in Germany, health bet head back the year over year progress on the EBIT development. With regard to the Q1 cash flow, the 1 off EBIT effects both in PEP and supply chain found their way into the free cash flow line We also had the usual seasonal patterns, the prepayment for the civil servants, and we had, working capital performance, which was a bit worse than what we had anticipated.
So that together led to the free cash flow number. But putting all this together on the basis of the start into the year, we are confident that we will make our 2018 numbers for the EBIT on the CapEx and on the free cash flow guidance we have added a little element, which I know has already raised some questions with regards to express extra CapEx for our intercontinental fleet renewal. I will talk through that as part of the Q1 presentation, but Ken will also cover that in more detail in the press presentation, and I will then pick it up again later on. I think that is really something you shouldn't be concerned about. It is actually good news, and I hope that we will be able to explain that in the course good continued growth 6.4% despite 1.6% working days less.
So I think that is, a tick When we look at the EBIT, as mentioned, it is a mixed picture, on the PET side, despite a positive one off effect of 1,000,000 from a revaluation of our pension scheme in Germany. We are down year over year. The reason, and I will get into that in more detail, is the cost development. And Frank, as a new PEP CEO, is also going to talk that obviously. On the DHL side, the positive thing is that despite the million hit in supply chain, we are actually seeing good year over year growth and that is driven by the very strong continued dynamic in Express and by forwarding really picking up speed.
Financial result is down. I think that's now the first time I have to mention IFRS 16, and I will show that to you transparently on the next slide, it would have actually been better year over year if it hadn't been for the IFRS 16 impact, which we had anticipated. And that also the reason why the net profit is down, year over year. We thought in order to give you full transparency on the next page, we tried to carve out the IFRS 16 effect. And I want to emphasize again that we haven't been able to do a full restatement because we decided for the simplified approach on IFRS 16 which I think is understandable given the fact that we're dealing with 10,000 of leasing obligations.
But we believe that what we show in the IFRS 16 column is really a very, very good number for the year over year impact of IFRS 16. So Starting with the depreciation, the EBITDA. As anticipated, we see a significant upswing in our EBITDA. Which you will also see in the next page flowing through to operating cash flow, but that is strongly driven by IFRS 16, 482,000,000 additional impact out of IFRS 16, as you can see in the last column. On the EBIT, we had a million positive impact from IFRS 16.
And you see on the right the breakdown by divisions. As anticipated Express is the division which takes the biggest chunk of that, 1,000,000 out of the And you can see the breakdown across the rest of the divisions. One remark for your extrapolation going forward, obviously, if you take the 44 and you multiply it by 4, you come to a number which is higher than 150 We still think that the best full year number for the IFRS 16 effect is around 150. Why is that? We also have, as part of our business, real estate venturing activities predominantly in supply chain, which are combined with leasing activities where so far in the previous year, we have been able to take the gain on these deals immediately into 1 year.
In the future, we have to spread it out. That is going to be a year over year downing effect. We didn't have anything of this in first quarter. We expect some for the rest of the year. For the full year indication, million is still our best number for the IFRS 16 effect.
So that was EBIT Now looking at the financial results, you see what I already mentioned on the previous page, a minus 1,000,000 impact on the financial result. And that is then flowing through to the net profit and explains, the decline in net profit, where we had obviously, where we had already said before that obviously for all dividend discussions, we have this headroom in our 40% to 60% payout corridor to not allow accounting staff to tamper with our dividend decisions. Because after all, IFRS 16 is accounting, We're not earning a euro cent more. We're not earning a euro cent less on the cash generation side. And I think that is an important reminder.
We always have to bear mind. Also when looking at our cash flow statement, which is on the next slide, where we are using the same structure to make transparent to the IFRS 16 effect. You can see as before that we have the big depreciation uplift going to the operating cash flow. We have introduced a new technical line here in our free cash flow statement net cash for leases so that the free cash flow is really like for like comparable year over year. Now on the OCF line, you have distortions on the free cash flow by taking the net cash out for leases into consideration, we have a like for like comparability year over year.
So when we leave all the accounting stuff aside and we ask ourselves the question How have we really done in terms of free cash flow in the first quarter? When you look at the last line, actually a 1,000,000 worse than last year, The fact that we have a negative free cash flow in the first quarter is not a surprise. We are always having a free cash flow, which is negative in the first quarter. For example, due to the prepayments, we have to do annually for our civil servant pendants,
so the
fact that it's negative is no news But the question is, of course, why is it so much more negative than in Q1 2017? I think there are 3 main reasons for that. The first one are those 2 special effects in the EBIT. The million positive EBIT from the pension scheme and the PEP numbers, which are not cash generating, the million in supply chain, one off, which are cash negative. So the one off effects are having an impact The second impact is, working capital, whereas the development wasn't quite, as good as I had hoped for particularly on the PEP side.
The working capital development was a bit behind plan, and we had a slightly higher cash out for CapEx. So that explains, the free cash flow side. In terms of net debt, Yes, numbers look completely differently from what we are all used to, but I hope that this is not coming as a surprise to anybody. Because yes, we had anticipated that we would get another 9,000,000,000 on the balance sheet from leasing obligations and that is exactly what has happened. Of course, again, it's just accounting.
The good news is that, for example, is the rating agencies have always taken leasing considerations into their calculations. So our FFO to debt number hasn't changed materially. So with regard to rating, and that I mentioned, this is not going to have any impact, but it is a material swing compared to where we were last year. So much for the group overview. I will now go into divisions.
And of course, we have then the benefits that all the colleagues are here and can talk about their respective areas of responsibility in much more detail. But starting with HEP, I think the first extremely important message on those, challenging PET numbers is it's not a top line problem. And I think you can see that quite clearly here on page 8. And I think that is something which is very reassuring because both on the postal side And on the parcel side, we haven't seen any reversal in trends. So when we look at the post side, we all know it's a declining business, we had this continuous decline of around 2% to 3% per annum.
When we take into consideration that we had 1.6 working days less, in this first quarter, we are actually continuing to decline in that range. You can see that in the commentary on the first bullet point. So mail communication per work day was down -2 point 7 percent, dialogue marketing down -1 point 4 percent, So our statement that we believe we will continue to decline in the 2% to 3% corridor that is still valid We may see a slightly higher number in Q2, Q3 because last year, we had the big election effects in the second and third quarter that may distort the comparison. But really also what we now see in the first quarter gives us no reason, to predict acceleration of this mail volume decline. When we look at the growth side of the business, we continue to see good growth in parcel Germany, in parcel Europe, And also on the e commerce side, on the e commerce side, we have a currency impact when you take that out, the growth is actually 17%.
So the growth drivers on the parcel and e commerce business are intact and the decline on the postal side is what it has been for years. So PeP is not a problem on the revenue side. But obviously when you look at the numbers, there is a challenge when we look at kind of like the EBIT composition into Germany and International, in International, yes, we are worse than last year minus 8, but that is in line with our expectations that in this growing business, we will be hovering around the 0 line Q1 'seventeen, it was positive. Q1 'eighteen is slightly negative. I would say this is in line with expectations.
Clearly the focus topic is Germany where you can see here that we went down minus 5.1%, but we have to factor in that we had this positive one off contribution from the pension revaluation. So obviously there is a challenge on the German side. Frank will cover that in more detail in his presentation. I also want to give you some transparency on the next slide, to at least start the discussion on what is happening here. So when you look at the PEP year over year bridge, you see again that it's not a revenue challenge despite the 1.6% working days less.
Despite not having an increase on the letter, pricing in Germany, revenue is up. But unfortunately, costs are up even more. So you can see material costs and staff costs. We have taken in this view 108 into the other category, now, so that you see kind of like material costs and staff costs without this one time effect. When you now try to analyze what is driving this cost development, there are 2 categories from my perspective, One are more specific Q1 topics.
We had a big flu wave in Germany. So our sickness rate is up And given the amount of people we employ, that immediately has a double digit year over year impact on the cost. And that is, of course, something where we would assume that's with the lovely spring weather, it should get better. But very clearly, there are also a number of topics, which will continue For example, freight rates in the German market have gone up quite a bit. That's positive for Tim and our road freight business.
But clearly, we see that in the PAP numbers, that's something which the whole market sees on that is a topic we have to work with. But we also have to think about other ways to, yeah, further proved productivity, and automation given the continued switch from post to parcel. And again, Frank will talk about that in more detail. We are aware that we have quite a lot of work ahead of us for the year, but particularly because it's not a fundamental change on the top line side and more cost management question. You remain confident that we will get this, under control.
That takes me to a very short and easy division. So in Express, The growth continues. You can see that in the first quarter, TDI shipment per day growth was 9.6%. Revenue growth was even stronger. That is impacted by fuel surcharge developments, but also when you look at the underlying base revenue per kilo, we see a positive trend.
So the yield management is really working. And yeah, it was just another very successful quarter for Express. We keep investing in our Express division. We will cover that later. I mean, you may have seen that we've opened our new Brussels hub in the first quarter.
The one area where we had a lot of strategic discussions about were our intercontinental airplanes. Where our historical approach has been predominantly leasing. We have a lot of the regional aircraft on the balance sheet, For the big intercontinental aircrafts, for a variety of reasons, our historical approach has been more on the leasing side. We are now in a phase where some re fleeting the renewal will be required, and we could easily continue with this leasing approach. Nevertheless, when you look at the cost comparison between doing a dedicated financing on our side, using the strength of our balance sheet and having somebody else do it and us pay a premium for it, the economics are extremely clear and convincing, and I will cover that in my CFO CND section later on.
This is probably going to lead to an increase in our CapEx for this year, of roundabout CHF 200,000,000 And of course, accounting wise, this will also go through free cash flow. We will, however, show it separately, because we intend to do a dedicated financing for this so that it's also not impacting excess liquidity considerations, which I know you are quite interested in. And again, more detail on the logic and the rationale in cans and my sections later on. Yes, compared to that, all the Q1 numbers in Express are quite easy. I mean, I mentioned before that Express was the division which had the strongest tailwind from IFRS 16.
But even if you take that out, you have a 12% growth. So the good year over year improvement is not accounting related but is really driven solidly from the business. And that is also true for the very good operating cash flow development in Express. That takes me to Global Forwarding Freight. So in Global Forwarding Freight, under Tim's leadership, we have worked on 2 things or we have worked on many things, but maybe 2 or 3 things are now really beginning to show.
The first one is we have worked very diligently in passing the increased freight rates on to our customers. That was this squeeze, which was a big challenge for us in the first of 2017. So we have been really successful in passing on those higher buying rates to our customers. The second element has been that we have been more selective with especially some big customers, which gave us a lot of volume, but not the right yields. And the third one is a clear cost focus and cost control.
So how do you see these, attention areas in our numbers? The first one is because of our selective approach because also parting from some customers, you can see that actually our volume, development has been relatively moderate, slightly down on airfreight, stable on ocean freight. But you clearly see the benefit when you look at the gross profit development. Well, unfortunately, you don't see it because we have a big big currency effect here in those numbers. So for example, the airfreight gross profit at constant exchange rates would be up 11%.
And the Ocean Freight gross profit would be positive. Altogether, our GP and DGFF would have been up 4.9% instead of the minus 1.5% you see here. The good thing is the currency then helps on the cost bucket, which is also smaller So that all together, we get this positive EBIT development with an increase of 75%. So from all the numbers, I see and I think Tim will say that also, again, even more convincingly, it's really pointing in the right direction including the IT renewal, which is progressing to plan. And yes, we said that before, we are all very aware that this is needed to make our guidance for 2018, but also for 2020.
And so it's very pleasing to see that global forwarding freight is moving in the right direction. That takes me to our supply chain business. On page 15, we give you a quick overview of what is happening on the top line. The first number, the new signings, in 2017, we still had the new signings from Williams Lee TAC included here. If you correct for that, we're kind of like for like slightly up year over year.
Overall, John and his team have pursued a selective approach, focusing more on profitable growth than on just growth for the sake of itself. And you can also see that in our revenue development, if you take out currency, which is of cross, a big factor in our Supply Chain division as well and the Williams LiTech disposal effect, our organic growth is 3.8%. So we are growing nicely, but because of the selective approach, a little bit lower than in expressed in global forwarding freight. We are also making operating progress, which you don't see because, in the first quarter, we had to take a one time hit due to customer contracts where for legal reasons, I'm not able to talk about individual customers. But I guess you can, yes, make an educated guess on what 1 or 2 of those customers may be.
I think the important message here is that we really believe that we have covered those issues now, also financially. That takes me to the guidance slide. Where as mentioned before, we haven't made any changes, any adjustments to the EBIT numbers. So we confirm our EBIT guidance for both 2018, 2020. The tax rate is also unchanged at 18%.
For both free cash flow and gross CapEx, we have now included the 1,000,000 for the intercontinental fleet renewal in Express, but we are consciously keeping it separate for the reasons I've already explained. And again, we were into the business logic in the following presentations. So in summary, it was a mixed start into the year, But we confirm our targets, 1st of all, because the macro topline trends and the structural e commerce drivers remain intact. We have 2 divisions, which are doing really well express and forwarding. Supply chain operating is moving in the right direction.
On PeP, we obviously have quite a lot of work to do, but we have identified the challenges and are confident that we will put the right measures in place. So we will face quite a lot of work for the rest of the year. But we are confident that we will deliver in 2018. And that is, of course, going to be the next important step on our way to 2020. So much for the Q1 update.
And with that, I will hand over directly to our, yeah, new PEP CEO, who is going to explain the PEP development in more detail.
Yeah. Thank you, Melanie. Good morning as well from my side. Indeed, it's always interesting to look a little bit closer. I have been around for a long time.
And of course, I have seen many things in Peppa. May I give you a little bit of perspective now being in charge for that business for 4 weeks now? So, you asked us a lot of questions in the past as well about PeP all the time. So that's not surprising. We condensed them to 4 key questions.
First is how is the development on the Mail business and the parcel business doing in Germany? How do we manage costs and profitability going forward in that area. And then the other areas, you know, why we are doing, parcel in Europe and what is actually e commerce doing around the world. And I would like to answer these questions. And as I said, Melanie already said, the first good news is, where it's definitely not a a top line challenge, if you look into that.
There are some opportunities, I think, in that area as well, how we can manage top line But here you see our volume development over the last 7 years. And as we predicted, we had a decline in volume by 2% to 3%. We never lost a large customer. The e post business helped us quite a bit, but volume more than $1,000,000,000 our volume is now there without that probability that the client had been 1 percentage point more per annum. So that's good news.
We see now an interesting phenomena that e Commerce is now touching more and more the Mail stream as well. Our customers are sending low value products through mail, which is the larger piece of mail, so not the standard letter. It's more the larger pieces. And that creates some challenges as well for operations because as I will show you later, the automation is advanced much more for the smaller literatures. So that is good news because it helps our top line, but it's a challenge for the time being after we learn to cope with that somehow on the short end.
So overall, therefore, we can see a continuation of these 2% to 3% decline. Going forward. So no news here. Actually, it's good news because that decline has been much better than operators. You know that we have a tight regulation on at the Semprise and that shows you the history.
In 2015, we got a deal for 3 years. '16, 'seventeen-'eighteen. And we always knew that 'eighteen will be for perhaps the most challenging on the mill side because we have seen the last price increase beginning of 2016. So we are able to talk now to the regulator and automate in about the next price step. And I think there's an opportunity to do something here because the inflation went up The salaries went up and so I will show you later, and therefore, there's an opportunity to do something.
And if you have seen, we haven't seen quite, good step ups in pricing already, and that didn't have significant negative impact on our volumes. Otherwise, the volumes had declined more. Therefore there is an opportunity and we will see that later this year, but that's definitely the area we have to look at. And as expected, for the male part this year will be more difficult than 2016 2017. And if you look into our guidance, the guidance for the division was already flattish to the previous and that's a reflection of that somehow.
If you look into the parcel, that's a very well oiled machine. We provide great service We have the best parts and service in Germany. We have seen in the market, our growth, we have actually grown faster than the market And that's the reason why we have gained market share in that area, as well for many consecutive years. And that enables us to invest even more into the network, which increased when the service quality, again, and therefore you have a very positive cycle here, how you can improve the performance. So we I are confident that the business in Germany will grow 5% to 7% as we have told you already before.
And we have seen that now in many years that we in most years, we even outperformed that, that expectation, in the Posit area. Giana, the question is, obviously, are you dependent just on 1 or 2 customers I think that clearly demonstrates that this is a broad range of customers who are growing equally fast. So here you see first how much we have grown with business customers in that in that period, more than the market. And second, more important here, you see how much of the revenue comes from the top accounts and medium accounts to smaller accounts. And what you can see is that we see a very balanced growth rate across these channels.
So it's not just one customer or 2 customers, it's growth, e commerce growth, which comes from all channels. And that's important and we see that even that the medium sized customers have grown on average even faster than our top account. So that's good news as well for the parcel business. It's not just one dependency or 1 or 2 or 3 customers. It's a pretty broad range.
What we can do here. And that is, of course, the e commerce segment here, and I think that's quite important to know that we really grow here. So if you talk about then, finally, to summarize, yes, we will see on the level of at the mail volume decline, which will continue on a certain pace, as I already said, there is an opportunity on the other side to continue with our APOS because that because obviously is a good defense mechanism for our business. There is a pricing opportunity in post coming in this autumn But if I look into the detail and I see that factor costs are going up and pass as well, we also have to look and that's too early to say, but now looking into the 4 4 weeks, I think we have also to look into the pricing for parcels going forward, because if the markets are growing and the markets are getting tighter in Germany, with regard to labor and transportation, you have to ask yourself, what is a customer willing to pay? And finally, the parcel growth is very much intact will see a continuation of e commerce.
So if I look onto the top line, I think they are going forward more opportunities than risk And that is also my understanding if I look into that in the 1st 4 weeks more in-depth. And of course, I have seen that already before, but it's good. And so you have to look into more detail. I think there are more opportunities and challenges. So how do we manage costs?
So first of all, before I come to that, what we are doing there, Again, we are this is still an organization which has 60 percent of revenue coming from mail, which is declining. You see here the change in Germany not more than one for parcel. And the division overall has even more in parcels, but that's related to Europe And E Commerce. And we have almost 2 thirds still in the mail. So that's important and that is a trend which will continue that we will see decline.
So you can see that here, We lost 14% since 2010 and we gained 68% growth. So that changes the mix we operate. And that of course puts pressure on the operations somehow. And these are the trends we have to face. So, nothing is new about that.
Here's just a high level. This is the total staff cost transportation cost not separated for Germany and for international business somehow. But you can see there, of course, in Germany, we have pressure from the market on transportation costs. The labor rates are going up, the freight rates are going up. And we also have seen in over the years increase in our salary costs somehow.
And as I said already, in this year 2016, it was the easiest year because we've commenced enterprise increases in 2017, we of course managed that for productivity. As in 2018 was obviously most difficult to do. So the cycle will now start again in autumn. So that is of course the opportunity, as I said. And that's the challenge on the other side.
The contract is, I think, reasonable because the salary increase will only hit us in October 1st. So a new colleague who is in charge for HR has done, I think, a good job to negotiate something, which actually is also significant lower than in some other industries. And therefore, I think we have found a good balance between doing something in a market which have you know, hardly any unemployment left, you know, on the other side not to overshoot somehow. So I think that's a good balance, but it puts another pressure particular in 2018 on our cost structure without a doubt. How we have dealt with that in the past, as you know, we extended our joint delivery.
And that's good news that we still have so much mail, and the mail is only declining slowly. That gives us an opportunity. Instead of having 2 networks, we have a combined network and you'll see on the left what we are doing. That gives us particular in the rural areas a significant competitive advantage because we are delivering combined and nobody can ever match that cost structure because there is a significant benefit from having the mail and the passes at the same time. We also have seen a switch from the mail operation to the parcel operation.
Of course, the new hires on the parcel areas in course, because the age is different, there's also a cost benefit by hiring new people and also our second new level of salaries, which we have introduced when we had one more strike in 2015, it helps us as well to compensate. So we see growth in headcounts, but the per person of course It's a good switch from mail delivery, which I usually believe that people who have worked for longer is now significantly more expensive than the new camera. So there is I think this is one opportunity. And of course, when mail declines, we will probably have more opportunities to extend that network even further. We have standardized a lot.
And here you see that we have to do some pickup in on loading, there are new ideas what we can do to make it even faster and more automated to sort in the middle. You see that for standard letters, we are fully automated for these new products from e commerce, we are significantly less. That's, as I said, already a challenge on one end, but also an opportunity going forward I have no doubt that you can automate that. And of course, it passes I 98% sorted. That also should give you a hint that we have not a shortfall in automation.
Some of our competitors are now taking CapEx up a bit because they are not so fully automated as we are. They have no need to do that. We have more to look into how we can improve productivity further. And there are also opportunities in the last slide. Due to technology, we can do more.
The interesting thing about the whole thing anyway now being 4 weeks of the job, the opportunity is definitely there what we can do first. I believe we have an overhead opportunity there because the unit has done so much different things and that has added some overhead, which I think we can go back. And if I look into productivity and costs in this year already, there is a wide variety how well the regions have done. And that gives me a hint that we can do much better. If some regions can deal much better with the cost structure than others, that's a homemade problem and not a market problem or a fundamental problem.
And that gives me the confidence that we can overcome these challenges on the overall side as much as in the productivity side. And we can do even more here in installing new technology. So that gives me the confidence that as long as you don't have a market problem, you can fix that problem. And I'm very confident that we will see improvement already this year. And that's a history seminar.
So we have done pretty well. You know, when we started a journey 10 years ago, You know, many people never felt that we can really level out the profitability and ability. And now we have 1.5. That's not still still a 1 quarter away from where we have been before, but we lost a monopoly. I think we have managed that very well.
And that also gives me very much confidence as long as we don't see many issues on the market side that we can cope with that as well. And as I said, there's an overhead structure, which probably creates an opportunity. And there's a significant variety in Germany about productivity as well and cost structure. And that is something you should collect because there's no reason if a business is just saying why the costs are different and their productivity is different. So I think there is a good track record of this organization.
So we have a very strong team there, and that's the reason why confident to overcome the challenges. Here are opportunities as well. And what we have to do is, of course, we have to continuously look into the different areas. I don't have to go through the detail. There are many opportunities to look in all the cost structure are somehow, and I think we will do that.
We will do continuous improvement as we have done. We have to accelerate that. Again, If you look internally and you see a significant viral activity, the deployment of certain things are probably not consistent. Overhead is a challenge. I think we need to look into also how we deal with the post network going forward.
If a decline continues, what we do with the parcel, And I think there are many opportunities to improve the cost structure. And that's the reason why we are confident that we can make our numbers this year. So this is here somehow in our asset. That is balancing what you see. We have an inflation without a doubt in Germany.
We have a cough of the parcel expansion. And we will cover that through more parcel growth, through natural attrition and joint delivery, which are I think, helpful because we are swapping the more expensive to be cheaper. And we enlarge our footprint where we have joined and that is competitive advantage and finally productivity gains. And that is in the operations as much in the overhead. And that should help to compensate for the challenges you see on the left.
So finally, we have our 2 questions. Why we are doing international expansion in Europe? Here you see the opportunities. So here you see the numbers of parcels per capita in the different countries. And you see that in Great Britain and in Germany, the number of passes, which are delivered to the citizens significantly higher.
There is no doubt there is no doubt that all the other countries will follow that model. So that is, you know, the opportunity. There is huge opportunity across Europe to really build a new business model somehow which is our last mile delivery for e commerce and consumers. So that's the opportunity. And we believe 4,500,000,000 parcels will be sent by 2025.
So since we are the expert in the field, we would miss a huge opportunity, it would be foolish not to do that. And that's the reason why we have started. So here you see what we have much progress we have made already. We have found different solutions for different markets. We don't think that one fits in all.
So in some areas, we have taken over business over from Express where we had already operations and we have now move them from more or less B2B to B2B plus B2C, and that's the list on the top left. We have some greenfield operations, Slovakia and where we really started from scratch and they are doing pretty well and they're ahead of the plan. And we have done some acquisitions. In France, we acquired a a minority in Relico Lee and in the UK, we acquired UK Mail. So that's different answers to different markets.
And on the right side, we even have, in some markets, we are working with partners because we think these will be huge inbound markets anyway, And they never will be large domestic markets, so the majority will be cross border and therefore it's right to work with a partner, but they follow our standards. So that's good. So we will use our technology, our labels. Somehow that is the long list of activities. What we have seen is that our growth has been stronger than the underlying market.
So the product offering offers fits, purpose. So and I believe there is a huge as I said, an opportunity. And we showed you, recently as well, I don't know, I think with the annual result of this quarter, that we have already 1st countries, which are in the target range of 5% to 8% profitability, return on sales. So that gives me confidence that you really it takes time because at the beginning, you have to build scale. But after a certain time period, you can really make these countries profitable and then they have a decent margin, despite that you still see significant growth, as I explained before.
So that's the opportunity and that's the reason why we are investing in Europe. When we are doing in e commerce last question, we are doing many different things, and that's different by country as well. But we are in principle in free things. We are in domestic delivery and across border and in fulfillment. And that's a huge opportunity as well.
Some of these markets are even less advanced and many of them will never build retail molds on a big scale because there is no space. There is no need. They grow straight away to e commerce. So the crucial be much steeper as well. So we have a good domestic delivery footprint in the countries you see here.
Of course, you know, the U. S. Is significant piece than India, but also now in Thailand, Malaysia and Vietnam, we are doing our own domestic delivery and in Thailand, the first one is far ahead of what we originally expected for volume growth. And that is because our product often is good, but also because the markets are even growing faster than originally anticipated. So that is good.
Cross border, we see tremendous growth as well in our cross stream markets. Particular to Europe. There's a lot of demand. Some of that is again coming also to Germany. These e commerce products, which are larger, are many of them are coming Asia and are getting in here and then lost more delivery.
So that will continue. So we have to be present and fulfillment I think this is the biggest long term opportunity because particularly our brands are looking for a combined increased strategy, how I can get a solution for inbound warehousing and last mile distribution. And if you can make that as pluck and play for these companies, they definitely are very keen to go straight away to the last mile. They create a portal and the products and we will then do that for themselves. I think there is a big opportunity in many Asian markets, but we are doing that also in the more mature markets already.
So that is, I think, what we wanted to, and I think there is a equal large opportunity like in parcel Europe. That's the reason why, here, see, we reconfirm that we are we'll be able to deliver these numbers. 2020 is definitely something which is achievable. I think what I have seen so far, 2015 after the weak start is a challenge, but at the moment we still are very confident that we can make that number too, but that depends as well on kind of measures we will develop and what if there's extra cost to these measures. But overall, there is more than enough opportunity to improve productivity, reduce overhead costs to make over 2020 goals.
And I'm very confident after I looked into it. 4 weeks, I definitely am more accrued to say more when we go through the year because I have the intention to do that for a while as I have done that. With DGFF as well and I learned a lot and I think I hired the right person and we said the right based and you see now the improvements coming and I'm very confident that we can keep that in PeP as well because we don't have a market problem as we don't have a market problem in our DGF division. So that's more or less what it is, for PeP. So as you have seen, we have challenges and that is related to the phasing as well as post price and the productivity, but we also have, I think, enough opportunities to overcome these challenges, which are not market challenges, but internal challenges with regard to productivity.
So with that, Melanie and I am more than happy to answer all your questions through her speech and my presentation.
Right. Thank you. Thank you, Frank, for that. And, yeah, may I encourage you to use the microphones that you find somewhere near your seat We will be dealing with questions that are coming in from the web also, but let's start by, taking the questions we have here in the room. Mark, we start with you and then Damien.
Yeah. Is that working? Yes, it is. Good morning. Mark Marvicker from Barclays.
A
couple of questions. With the absenteeism, Could you give us a sense of the scale of the cost of it and what gives you the confidence that it was just related to the flu incident, and there isn't just a general increase sort of sitting underneath there. In that absenteeism rate?
Yes, if you can Melanie me, on the Melanie set, not already, it's a low double digit number. So, it's to really precisely define that it's very difficult, but we had a massive flu this year, which was significantly stronger than in the previous year. You can read that in the news. And of course, our people catch that quite rapidly somehow. So there is definitely there is an underlying trend, but not of that scale.
And therefore, we will see a continuation of that sickness rate because our workforce will become older, but not that scale, what we have seen, and it's a low double digit number in the first quarter.
Yes. So you can really very clearly see there's kind of like the long term trend and now really Q1 2018, it's a blip on top of the trend curve, which is why we're able to quantify it as a year over year burden of low single digit.
Second question still on PeP, I think, Frank, for you, is obviously with any postal business, you can identify what needs to be done to get costs under control and down, but all of these things tend to take time to put the plans together you've got a unionized workforce, you've got to agree those changes. What gives you the confidence that you can sort of make up what you've lost in Q1 by the end of the year because that's only 7 months away now?
And that's the reason why I've said, there's definitely some spend which is, discretionary. You can check straight away. There is also a variation of transportation costs So the optimization in that's also more variable. If we talk about headcount reduction or productivity improvements, It's probably wrongly said headcount release because we will see a continuation of headcount increase because we will get more parcels into the network. It has to be more productive and we will see how much we really can digest.
That's the reason why you don't need so much restructuring because if you make people more productive you can produce more process per employee and then you do need to lay off people. And that's that's why I'm confident that you will see some impacts already busy. And finally, the overhead, I think that's something we have to tackle in there. So as Glenn, there's related to people, but whereas also discretionary spent. So therefore, you know, I think as I said, you know, 2020 is much more certain that this is achievable And maybe I say in 2 or 3 months something different if I really understand what kind of measures we should take at the current stage, I'm confident that we can make also our 2018 numbers.
Okay. Thank
you. If I just may add, I mean, when you look at it mathematically, if we want to get to our guidance, I mean, we have a bit of upside from IFRS 16. It essentially means that for the remainder of the year, we have to be on last year's level. And So for the big workforce out in the field, as Frank talked about, we really have to focus on productivity. And with regard to overhead, there are also short end things, which we are, of course, taking as measures, like, yes, every new, every vacant position where people would want to do a rehiring is going to extreme scrutiny.
And those are things where you also don't need extra money to implement it, but you can do it quite quickly.
And my last question is when you set the guidance for PeP, did you know that the $108,000,000 pension revaluation was coming through? So was it part of the guidance.
So we didn't know that there was 1,000,000 coming from this pension scheme. We knew that 2018 would be a challenging year. On PEP. We already discussed in March that our guidance looked cautious. So of course, we knew that it would be a challenging year which is why we were already thinking about what levers could we pull on in the year and we had a couple of measures thinking about the pension scheme, was something which we had on an option list, but not in the order of magnitude.
I mean, what we have now done with the pension scheme is something that structurally, we had done to a similar degree already before where we then use that, to offset our early retirement scheme against the answer. It's not something structurally completely new. Thank you.
One last quick question. The extra spend on intercontinental planes Should we expect that to continue beyond 2018 or does the 1,000,000 get Ken all the shiny planes he needs?
No, we will go into this in more detail later on, but to tackle it already now. So I mean, we are constantly going through renewal in our aircraft fleet, right? And I think, what we have now analyzed in quite a lot of detail is what is really the economically sensible thing to do on our interconnect fleet. There historically, for a number of reasons, we have very few old planes and we do the most part of the intercontinental flying with partners through ACMI agreements. And we will continue to work partners for flying rights and a number of other reasons.
So what we have now really looked at, what is the best way to deal with the A component? And when you look at our financing costs, and the returns you get in terms of operational savings from having your own aircraft. And Ken is also going to talk about operational flexibility. It gives you on talks. There is an extremely convincing case to consider moving into more buying.
That is going to create some additional CapEx also beyond 2018, we can't quantify the whole number yet. We have done some simulations. When you look at our CapEx intensity at the moment, for 2017, we had 3.8%. So let's say it's around 4%. We would say that even if you kind of like go the full way, it would probably in a peak at 150 basis points.
And that's kind of like really rough to give you kind of like a feeling for a worst case, yes? And I will talk again later that this is really going to be accretive to our EBIT margin. We will finance it in a separate way so that it's not going to take away from excess liquidity. Where you would maybe propose us to do something else with that. And again, yeah, our financing conditions are so attractive to let somebody else finance those big planes and then give them to us with a markup, just really doesn't make a lot of sense.
We still have that option yes? So if the world looks completely different in 18 months time, we can say, okay, we go back to what we have done successfully for the past years. And go back to the ACMI model. At the moment, it looks really attractive financially to separate the APs and do that more ourselves than we had often in the past. Yes?
Thank you, Mark, and we continue with Jaime.
Good morning, Damian Brewer from RBC. Two question areas, please. First of all, in DGF, at least it looks on paper like the SG and A costs fell again. But could you maybe elaborate a little bit more on how much of that was currency and how much of cost is there in there, the buildup of the technology change coming within that business and how you'd expect that to trend over the remainder of the year And then the second question coming back to Peppa again. Frank, you mentioned there was some sort of regional variability in the business and variance.
Could you expand a little bit more on that? What causes it? What kind of variance there is in the cost base and what that means you think you can do with that? And then if it's not a cost impact, because, as I think Mark mentioned, that would seem to take time to build up, if it's a price reaction instead, How much room for maneuver do you have on prices, particularly in the parcel side vis a vis both your competitors and the duration of shipping contracts you'll have signed with your customers? Thank you.
Yes. May I start that. So what I meant with variation in Germany. I'm talking about the regions in Germany. This is management.
There's no other reason than, you know, we have in some areas significantly better execution than in others. And that we have to realign back that everybody provides in a pretty narrow range the same service quality and the same cost per item. And that's the opportunity, I think, which is a management problem, you know, in not a on a fundamental structural problem. That's the reason why I think it can be addressed. The second is that's a very, interesting area, but We have grown in the parcel area quite a bit and gained market share.
And I think that triggers immediately the question is then on headroom for the price line as well. Because otherwise, you should at least test that and we have to consider that. Have not taken any decisions, but I think it's an opportunity if the market's getting tighter by supply, then you have to consider that. And we will look into that very carefully. But of course, there's always a fine area of that.
But I think we have learned in the other divisions as well if you provide premium service, there's a price ticker to that. And that I think an opportunity for us, as I said. On the market side, as I said, the price regime in post and parts of this is more an opportunity for us than the risk We have increased prices and parcel already in the last years. Enough, that's a good question and that will be considered.
Okay. To the forwarding question, so, it's correct. When you look at our step book, you see, for example, on the staff costs, a 8% year over year decline that is heavily supported by currency. That's kind of like the converse effect to what you see on the side, when you look at the development at constant currencies, staff costs are down by about two point 2% year over year. So we really see the impact of the cost measures, Tim and the team have taken.
Tim will talk later about that anyway, I guess. Yeah.
Okay. Then we continue with Matti and then Dominic.
Yes. Matija Gargareth from Goldman Sachs. First question is about the excess liquidity. As you referred to it once or twice, I don't know if it's later in the presentation, but no, how do you define it and say how do you see what's the current amount of excess liquidity that you are thinking about? Our second question is, around the FX.
I mean, we have all this data about the no FX impact on the revenues. What do you think is your feeling about, say, the potential FX impact that you have had at the EBIT level given I presume also perhaps in some divisions like Express, maybe it was even, say, you know, supportive, the effects. And then just two quick ones. Firstly, just on Parcels, would you consider like an in a price increase in Parcels also say midway through the year or no, would your contrast typically run just from the 1st January? I think particularly in the context of your guidance for the current year, And then lastly, just a quick comment on the street scooter, just, no, maybe twofold.
On one hand, basically, was there any impact at the EBIT level in this quarter from the street scooter and then such on the, no, well, we were we were reading the press, let's say, maybe, no, there might be some options on the table. If you could give us any comment about now, I think you always referred to as being non strategic. How long do you think it will stay within Deutsche Post? How many years?
So pricing is a very sensitive area, and you have to be clear. You can't make surprises to your customers. I know that you wish everybody wishes that, but we have to follow a certain process. And therefore, when we really do something, you know, let's wait and see, but you should not frustrate customers by saying, you know, by out of the blue now we make a pricing increase. You have to prepare the market if you want to do something.
So it will not be a rapid decision. It will take some time when we really do something let's analyze that first and then have a discussion with the customers before we do something. On the other CNR, we both can answer probably both questions, but maybe Melanie, you answer the discrete scooter question. Yes.
So maybe firstly quickly on the security and the FX impact, I'm going to cover that later in the day. So both are interesting and relevant questions understand that. This is why I have included some slides in my second deck.
I will say because you want to know that not only from a CFO, but also myself, I have some pages as well in wide deck as well, what we think about that.
Yes. So we try to be aligned. So, and then on the street Scooter, yes, I mean, the street scooter and Frank actually has a couple of pages on where we actually stand in his presentation. It is a fantastic says story, we have 5a half 1000 of this fully electric delivery vehicles out there on the street. And obviously it's a story where we are now thinking about what's the best way to move it forward.
I know they have been speculations, what we may do with that. I think for us, a very clear focus is to grow it within the company. We are going to move it to the new area of corporate incubations now. And we have a long list of interesting things. We have now started external sales So we're really going to push the sales side of things.
We are going to open our second production plant, in Germany. End of the month. So we are at the moment really focused on continuing the success story of Streets Guga of the over the last per year. Yeah. Okay.
Let's see. We'll then continue.
Yeah. And then, you know, we don't disclose a number of the impact, but there is an impact as well. If you take all these impacts together, you saw, if you take the year over year, we have a $20,000,000 expected a lower EBIT number in the international business when we had last year. So that's 21. We have about Pori probably it's obviously a question 30,000,000 dollars, $40,000,000 less revenue due to a 1.6 working days.
We have a salary increase of about $40,000,000. We have a sickness rate. We have higher tariffs. So the bridge bets becomes much more explainable if you see that. And we expected that in the first quarter anyway because the quarter is shorter And certain effects, we didn't expect this, the flu was very strong this year and the transportation costs, we have not foreseen either in such a strong way.
So, but if you see things like the $21,000,000 year over year decline in EBIT for international business, we expected that we expected a certain quarter. It was worse due to some reason when we expected also the impact of street security and other incubations have impact in the first quarter of the underlying PeP number. So and that is, of course, we will go forward as well with corporate incorporations. When we are clear, we will show more about that as well. And there are elements on street soda as well.
So the whole bridge becomes much more clear And you saw us where there were some smaller one time effect last year. That's the reason why you saw only it was $44,000,000 positive impact from other 100 and 8 because we had last year some positive impact as well, which was so small that they didn't have to be disclosed, but cumulated if they had a positive impact last year. So therefore, on balance, the bridge is more explainable. Nevertheless, there is an opportunity on the market side for pricing and there's an opportunity on the cost side the overhead area and also on the productivity side. And that makes us confident to close the gap, which we have generated in the first quarter.
Okay, Dominic. May I now
know we go with you?
Hello there, Dominic Hedridge from UBS. Just two things for myself. Firstly, I'm just going back to the point you just made, Frank, on regard to the, incubator businesses. That sounds like it's going to add some as they get bigger, obviously, it's going to add more noise quarter by quarter at some point. At what point do you think it'd be worthwhile splitting it out?
Because you say, trying to explain all these things in absolute number within the pet business, where there's an awful lot of other things going on, it's going to get more and more complex. And then my second question was more looking at the business mix that you have. Obviously, we all knew about parcel and about the small letter business, the flat letter business, Obviously, you're now talking about the large letter business. Could you just talk on maybe a little bit generalities about contribution between those different elements and how what will happen with them as a biz business mix changes going forward, what we should think about in terms of margins and also in terms of how the cost base will move as well there?
Yes. So on the first one, the intention is why we have separated by the corporate incubations out, has two reasons. One reason is because we think we have great ideas, where we need more visibility to our shareholders because they have a different dynamic, you know, it's true that these businesses sometimes are growing very rapidly, but have negative EBIT impact. And this is very difficult and disguise somehow in the numbers of Papridge is twofold negative because if we have really attractive business who are growing rapidly, you should roll that and it's not seen on the top line nor on the bottom line. And it dilutes our profitability impact.
That's one which if the other one is And I know that as well, there has been probably a little bit of loss of focus in certain areas as well on the core if you do so many other stuff, and that's right. Separate that and give it somebody else and refocus on their focus in the pet division on what is important, that's male imposits. And we have seen that how much focus can help in the Express division, because that's Ken's mantra now for 9 years. To focus on something and that helped a lot. And I think that is also what I see now that you have to be clear there is an area of responsibility on this new operative.
And we have not made our final decision, but of course, we need to be more transparent what's going on, what's going on on the line what's the business model and what's the potential negative impact currently and in the future because that will help you to assess that differently because that's a problem we have We have to deliver every quarter our numbers, but we are competing in certain areas with startups where you don't care about what kind of cost it is as long as it grows very rapidly. And I think with corporate incubation, we want to try both to show you visibility on that so that you'll make the assessment on that. And separately, you know, how are really the long term 4 divisions which we have are doing underneath. And at the moment in Peptice is mixed And the combination of many of these startups have a sizable impact on our numbers, in PeP. And that needs more transparency.
How we want to do that, we are still internally in the process to define that. So the second, the Latmos Yes. So the business mix. So to be honest, I asked the same question. I have not I got a full answer to that problem is because it's all produced in the same flow.
And you can make now any guess and any allocation, how you allocate certain costs. So that needs a little bit more in-depth analysis to really get a good understanding what's the yields for the respective line, and that's not easy to be honest. In an integrated network, it's not so easy to really get the idea is that what's a positive or the negative impact of that.
But just to give you an idea, do you feel the current pricing structure differentiates between the different products enough? Just from what you can see?
That is the question we will answer as well in our price. I request some more later this year and course, that's the reason why we need that analysis as well. I think it's not completely odd. I think it's not completely wrong. The prices are significantly higher and it reflects probably reasonable well, the actual cost structure.
That's the reason why, as I again said, I'm it's good news that we get volume now for something which was not original mail volume, which is low value products shipped in letters. So that should give us good opportunity also in volume in the mail business. We are not probably as effective as we have been with the standard, which was a core product. And that is new, and that is has to be adapted. And I think we have to equip our machines differently and that is something which takes some time.
But overall, this is great news that we see growth again in an area where we said this would be gone many people felt it by this by today, already the business had been gone. I always say, you know, if I talk to some of the silicon valley people say, you know, forget email. And our email is gone. The junk generation doesn't use email and you'll only have a just take messaging services. Your email will be, I promise you, email will be gone earlier than our letter business.
And let's continue there.
Good morning. It's Amanda Chu from Deutsche Bank. I have two questions, please. The first one is on stamp prices and obviously the formulas somewhat fluctuated and changed over the last few years. So what are your expectations please in terms of stamp prices?
Are we going to see an annual increase? Are we going to see a sort of cliff face again? And my second question is on the International E Commerce Parcels business. Where are you in terms of the investment phase? Are you sort of past the peak at the peak of investment such that we could see an inflection point for the first time in profitability next year?
Thank you.
So, Tony, again, that's a question we have not finally decided, but I think we had benefit for having a 3 year period. Consumers are pretty fair to have one step and then stable prices. If that will be accepted by the regulator, we will see if they have done it once, why should they do it over the next time? So I'm reasonably optimistic. I think it's better.
Instead of having smaller incremental steps every year. I think that is what consumers are frustrating. Don't forget consumers, which is the main area, of that anyway, are spending, I think, only 2 year or 60 in the meantime on postage anyway a month. So it will not be a big difference for them anyway. And we have seen that past as well due to the small amount, there has been more or less no less electricity to the demand somehow.
So but it's It's very difficult to predict because we are not on our own there, but I think it would be smarter to go for another step and then keep it for a certain time period stable. And the second question was on do we have I think that's too early to say. The problem is we are still learning so rapidly. And if we see as we have seen in most of these emerging countries, we see have seen stronger growth and I want to keep the pace. I don't want to stop it now due to, and I said that to the team as well, you know, we will not fix, we will not fix the challenge we have in the PEP division by slowing down our European parcel or e commerce business.
I think we would be foolish to try to optimize that to EBIT. I think the focus has to be that we are really doing our homework in Germany. And that will help us much more. And the rest is that we should continue as fast as we see success that we continue to invest. And therefore, I think it's too early to say that we have seen already, the tipping point for the for parsing e commerce yet.
Yes.
So I think in terms of financial implications, our guidance here remains unchanged, that we expect the whole international portfolio to hover around the breakeven line, not giving us a significant contribution but also not being a significant drag on profitability.
Can I just ask one more just in terms of the phasing of how you see the cost challenges of, of Pet improving when you look into sort of Q2, Q3, is this going to be sort of back end loaded in Q4 in terms of the catch up so that you get back to flat year on year? Or do you think already in Q2, the market should see the benefits of, what you've been describing?
So, I would not any promise anything. I think we are we are confident that we can make our numbers how the phasing will be. Don't ask me now after 4 weeks exactly about the phasing of that somehow. I think we let's wait and how that works somehow. And Q4 of 2017 was not a stellar performance on our side, and that had different reasons.
So let's see what we can do, through the year.
Okay. Maybe before we continue with, Ed here on the floor and you, let throw in on that topic also a question that we got from the outside, maybe to you Melanie from Adrian Pail. So is the pension revaluation potential then exploited for this year, do we see any other, one offs of this nature or this side, that we expect being part of the Peppers album? Understandable question.
Yes. So let me take one minute to explain what actually gave us this 1,000,000 benefit. It goes back to something which we already did in 2016 for our current employees and pension years. We offered them the option when they go into retirement instead of getting a monthly payment to get a lump sum payment, you know? That is accounting wise a change in the plan where you ultimately pay interest arbitrage.
We have a group of people which have pension entitlements against our company who are no longer with the organization. And we hadn't touched that group yet. So we basically did the same thing. Now we are also offering this group a CAPP payout option. And that gave us as a change in plan, this one time EBIT benefit, that option has been explored.
And so there's no more coming from that area.
Okay. Very helpful. Okay. And then let's continue with you.
Hi, Edward Stanford from HSBC. Just inevitably coming back to PeP, I guess, was a question. You've talked about the measures that you think you can take and that you hope you can achieve your guidance by doing them. Could you perhaps, are there any you've skirted around the issue of whether or any costs associated with this? Is it too early to tell how much that might cost you to achieve what you need to do?
And again, forgive me if I've missed this, but, you've mentioned that transport costs were perhaps surprisingly higher than you thought a few months ago. Are you able to quantify the impact on that?
Yes. I think that's by far too early to say what the cost might be. As I said, this is a growing business somehow, so therefore, we can grow and improve productivity on the run. So I think it's too early to say anything about that.
Yes. So I think my answer would be, I think we have 2 different areas. One is our productive workforce, where for, I think it was mentioned before, for union reasons and a number of things it is a difficult area to really take costs out. So I think the focus here has to be increasing productivity. And we already touched on some ideas.
So for example, when you look at those rapidly growing bigger letters, in the mail, work stream, that's an obvious area to focus on, where we don't need restructuring money, where I think a couple of process changes, maybe a bit of investment is required to do that. I think the question on the overhead, as I said before, we are already taking, measures which don't cost restructuring money like hiring stocks and so on. And I think that is all we can say at this point in time And Frank mentioned it repeatedly. He has been now the new Pepsi for 4 weeks. I think we have to give him a bit time to come up as a holistic program.
On the transport cost increase, Yes. So, I mean, in line with the, extremely positive economy in Germany, we see a general increase in freight rates, and that has also led to year over year increase in our transport costs. It's kind of like a mid single digit million number. I said that correctly in English now? Yes.
Okay.
Hi,
good morning. It's David Kerstens from Jefferies. Question on the growth in parcel Europe. Do you still see the European cross border parcel market outgrowing the domestic market what was behind the slowdown in the first quarter to a low teens, I think you said 10.5% revenue growth. Is that mainly calendar have you changed some of the structure of the organization there as well?
No, so it is definitely still that cross border is growing faster than domestic. That's still Ks. And you asked me a question, I would, you know, I think we don't have any structural effect there. How many, you know, the UK is now also and that is all an impact year over year still. That might change.
So on the We
are 10.5 percent organic growth on parcel Europe. This is 1.6 working days less. So we still that as a continuation. So there's no slowdown. And as Frank said, clearly, from what we see the cross border business is still outgrowing the domestic stuff.
Okay. So it seems to it seems to look like we were closing in on the Q1 related topic. Maybe one that's left over from Tobias, today's question, financial result in Q1, 135 should we take this times for now? Or is the run rate in the next quarters a bit higher than that?
Yes. So I mean, we had a number of effects in there. The biggest one was obviously the minus 89 from IFRS seen on the other side, we had some positive benefits, for example, on the pension interest. So I think there are many moving parts. And, I mean, like last year, our financial result was 4 11.
Obviously, it will be a higher number this year, but I wouldn't assume an increase in the run rate now for the rest of the year.
It's really good. And one questioner up on that side.
It's Joel Swungen from Berenberg. Just a couple. Melanie, just to start off, in terms of obviously the working day effect, on the volumes, are all your costs also working day adjusted, or is there anything in there, which is invoice on a monthly basis or anything like that that might have any impact? And then secondly, just in terms of thinking more generally about the issues that you've had in in PeP in the first quarter. I mean, things like higher wage costs in Germany, higher transport costs, these aren't phenomenon that started on 1st January.
Why is it that it suddenly come to head in this quarter?
Yes. So, I mean, 1st of all, in terms of the cost base, a lot is not working day dependent. For example, our staff costs, given that we pay monthly salaries, this example, a big factor, which is not flexing with the working days. And yes, you're absolutely right. The trends we have seen have been around for some time.
I mean, we had the tariff increase on the 1st October last year. That now flowing through. I think on the staff cost side, the big swing factor, which we hadn't expected was the sleep increase in the sickness rate, which forced us to bring in more auxiliary people to cover the work. In terms of the transportation costs, when you break it down to even more detail, it's a combination of several factors again. 1 is the increase in the rates, which is a market phenomenon, which we have been seeing for some time, which now continues quite sharply in the first quarter.
But for example, another factor on the transportation costs is this mix shift, Frank talked about that we now have more e commerce stuff also in the mail stream. So when you look at transporting letters, we have our standard boxes and you can fit in 200 standard letters but you can only fit in 40 of those bigger flattish things. So that has also led to a higher volume requirement on the transportation side. So, trending wise, a lot of that was to be expected, but there were then also some specific factors augmented, the impact in this first quarter. If you think about Q2, what does it mean?
Just in terms of the working day effect is what I was thinking. If If we have extra working days in the second quarter, should that give us some relief on, on the costs as we look at, we look at that because of the way that you account for your staff costs and so on?
Yes. So I mean, the way we normally think about working days is we see that because we take the cost base as it happens every month and there's a little working day flat So if you have more working days or less working days, it normally helps us on the revenue side. And so that is where the impact should help.
Yes. And again, if you look into this waterfall, maybe you can even see that. That was a Melanie's part. Maybe the page, we can
Page 10?
So if you see that some post, so certain elements, we expect we didn't expect a very strong first quarter in PEP anyway because we knew that we have less working days. So if you see, there is a miss on the revenue line, not because we are not growing. We're reason is because we have less revenue in the first quarter. We expected a certain part of immature across we expected less. And we expected less due to the sickness and this kind of stuff as well.
And we have a variation. So this is a mixture. So we have definitely lesser revenue that should go away through the year. And I'm a little bit more cautious to quantify that because we have seen so many ups and downs in one quarter. It's a little bit more than the other quarter.
We definitely anticipate the facility increase. And if you see then the others, it's not just that we had this year, we had last year, but these were all smaller things as well in the first quarter. Some positive benefits. That's the reason why the impact is only 44. So we expect it actually a worse, 1st quarter than than the actions that pension fee was a phasing problem this year more than that hit the first quarter more.
But The reason is we have lesser revenue and that's not surprising as well. And we had higher costs, which is a surprise, which we didn't anticipate, but not to a full extent, therefore we expected that the first quarter will be not terrific. That's the reason why we are confident. Beyond that, I think we have still an opportunity to review its overhead and improve productivity and why productivity different because we have different management execution. That's the only reason.
The business is so much identical. And if I see a variation, quite a sizable variation, you will ask me, what is your variation? I will not give you a detail, but the size of a variation between the different regions and that needs to be tackled. And I have seen that in other parts of the business as well, then when I swing to see you have a large scalable operations, you can make internal benchmarking. And I think we have to do that and understand better what the root cause of all that is.
Maybe just to add to that because that may not be so self explanatory. What Frank is talking about When you look at Germany with regions, we just don't mean Westhouse Northeast, but I mean, we have our production, locations, spread across the Republic. And when you look at, the list of, for example, our AD 3 mail sorting centers, our 34 parcel sorting centers and the related areas, you see pronounced differences in productivity KPIs in sickness rates, and so on. Also with regions where the labor markets are comparable, And of course, you ask yourself the question, why is that? And that is, of course, something Frank is now focusing on.
Let's look at some internal benchmarking. Let's understand why in the same circumstances, some are obviously doing a significantly better job than others and then learn from that. And The fact that we really have despite the cost challenge in this first quarter, well performing, locations gives us optimism that we should also be able to replicate that in the not so great performing, vocations.
Okay. So that's the last question, okay. That's the one last question that we're going to take. On Q1, before we go into a short break to stick about to the schedule, there will be plenty of opportunity to ask questions also in later sessions.
Thanks. I'll be brief. Daniel Ryska from Bernstein. Maybe first question on the accounting changes relating to the fleet and also the global airlift for Express. You disclosed kind of a $9,000,000,000 increase in the net debt figure you showed Melanie.
Was that is that kind of the entirety of the network or are there still operation leases that run shorter than a year. And about what percentage of the global airlift for Express is now kind of included in that net debt figure? And then second question on PP and Parcels and E Commerce, of course, if you think about adding capacity, you always add capacity for new networks at average cost. E Commerce volume is usually quite cheap, especially if you look at it in volume terms. So how do you think about that as you develop kind of your own and your third party business within PEP?
Third party delivery business in PEP, where you're growing the network based on the e commerce volumes and what's the price level of that volume kind of in comparison to your average?
Okay. So on the first question, just,
and
not to be honest with you, I mean, of course, the billion is much more than the express aviation fleet. Yeah. I mean, lots of real estate operating leases, and so on. Which is why we also see the effect across all our divisions. With regard to moving now really have everything on the balance sheet low.
We are making assumptions for low value leases. And also for short term leases. And that has the fact that not all aircraft in Express are on the balance sheet, about the absolute majority. I can't give you a percentage number. But, so, are we going to see a creeping increase of the 1,000,000,000?
Well, of course, with the growing business and new operating leases coming online, that is going to increase but it's not that we have kind of like completely overlooked an area.
Yes. So, so we, of course, we don't disclose the detail of our price thing for parcels. But of course, there is a significant there is a difference between B2B, but there's less from the pricing, but more from the stop factor and that diluted in B2C, but that's the reason why we do joint delivery and that is a competitive advantage we have in Germany. Outside of Germany, competitive advantage is different. We don't have a legacy.
In Germany, we are in a tech by companies who are working with different salary structures when we do. We don't have that problem if we go abroad because we are not the incumbent there. So therefore, we have in Germany, we that we do a lot of deliveries jointly, mail and parcels. And that is, I think, uncompetitive etch. And in other markets, we are the new entrants.
Where others are benefiting in German in the German market for being good. So that's the reason why I believe and we see that Despite that, we have changed the mix already from B2B to B2B to C in certain markets. We still see a good profitability with a range of 5% to 8% return. So if you can make money in that business, even if you are more in the B2C business and that we see in the in the reality of our numbers.
Okay. So at this point, I would say we compute the first session. Go into a coffee break for just short of 20 minutes. So let's be back in that room by 10 to the full hour. Okay.
Okay. Yeah.
What's the problem?
I've ever had to do
Well, yeah, it's likely it's changing the roadshows.
But is
it whether or not he has real feelings or is it something I don't think anyone can truthfully
Okeydoke. So may I please ask you to find your way back to your seats so we can continue with the next block in our, Capital Markets Day program, same concept, keep in mind, all the questions that we keep hearing will be in a structured way will be taken on by the divisional seals of supply chain express and global forwarding freight. And We start with you, John.
Thanks, Martin. Thanks, everybody, for attending this morning and afternoon. It's a real pleasure to have chance to speak to you about what it is we do at DHL Supply Chain and how we're performing.
I
was asked to cover just a few questions. And as you can see, there's a number of things that have continuously come up over the last few years about areas of focus and areas of interest for us, but I've been asked to cover 4 specific topics rather than give a general presentation about the supply chain division and where we are in our strategy progress. So of those 4, give a little bit of background about what exactly it is that we do and in particular, how is that affecting us in the e commerce space? The second is what sort of role is technology disruption playing in our business, how we're approaching things how it's changing our plans and our progress against our strategy. A third thing is, really about where are we in terms of this midpoint in our strategy 2020 journey.
And then, maybe offer a little bit of commentary about why supply chain continues to be an area of focused interest for the broader organization. So first things first. Really, our organization is comprised of core warehousing and transportation as well as value added services. Everything we do is focused on solving complexity issues in our customer supply chains, and we do that with a combination of people, process, and technology. We organize and the way we interact with our customers is by market verticals, so Automotive Technology, Life Sciences And Healthcare consumer and retail would be major market verticals for us.
But we align our business and we manage it on a regional basis. We have a couple of global products and services But for the most part, it's a regionally managed business. We are the largest 3rd party logistics player in the world. We are a global organization working in all of the major geographies. We have significant presence in 56 countries, although we operate service logistics operations and many more.
And the way we generate profit is by doing things that our customers consider to be quite difficult in an operating environment. We do them better and more efficiently. And by making things better and more efficient, we have an opportunity to achieve a rate of return for our investors. And the key to all of that is having the right people right process and the right technology in the right places. We believe that our market vertical orientation is a big differentiator for us and it ensures that we have the industry expertise necessary to be successful in very technical markets like Automotive, Life Sciences And Healthcare, as well as the tech space.
So that leads into lots of questions around e Commerce. And there been loads of disruption for many of our customers, whether it has to do with things like Brexit or the introduction of e commerce, cannibalizing the core retail business, But disruption is ever present in almost every one of the markets we serve, but it's nowhere more so than in the core retail logistics. Many of our traditional brick and mortar customers have experienced substantial challenges. And we get asked the question a lot about where are you in the e commerce space? And I can give a relatively complicated answer to a relatively simple question.
And that's because almost everything that we do is significantly impacted by digitalization e commerce. You know, there isn't really almost every interaction we have with our customers, once we're up and running in a day to day business environment is done through digital means. It's a very, traditional and standard way of doing business and things that we used to have. Our core systems were integrated with our customer systems through EDI Transactions. Now in many cases, that's done through APIs and a host of much more nimble mechanisms.
But narrowly defined DSE runs 100 plus e commerce fulfillment operations. They are more than simply B2C. They're typically omnichannel type operations, where we combine B2B with B2C operations, and it is a big part of our roughly 18% to 20% and that continues to grow at a disproportionate rate, but all in all, it's a significant portion of our business. And the balance is all e enabled. Almost everything we do is e enabled now, and that is very true in all parts of the world, whether it's an emerging market or a developed economy.
So as we've been faced with a number of disruptions in our business, And as we're faced with a much more complicated operating environment where we're doing more piece picking instead of vault picking because the work content is moving upstream, We've had to embrace a different level of automation and robotics in our operations. There's a lot of pressure on our unit productivity rates we're moving into more complicated operating environments. And the interesting thing is that the distribution center operations tend to be a great test bed for new robotics, automation and mechanization opportunities. That's because we typically have a high degree of control in those operating environments as opposed to the transport space. We have an enabling technology in the form of warehouse management or warehouse control system, and we're able to deploy different types of pilot programs quite nimbly and quickly.
And what we've really seen in our business is much more of a grassroots innovation approach, which is really gaining traction in the organization. So we have numerous pilots in every one of our geographies where people are testing out new hardware configurations, new robotic solutions, new transport solutions, and all of them are focused on reducing complexity and eliminating work content. Typically, the best paybacks come from when we're eliminating transit time within an operation. And so that we've got a variety of different examples here on this slide, which we're really trying to show a lot of the pilots that we're progressing throughout the organization. Things that were really exciting to people, are the way in which we interact with those robotics in a collaborative environment.
I've got a little video I'll show you in just a few moments. But for the most part, if it has an impact on reducing travel distances, eliminating work content or facilitating picking and packing activities in particular, those robotics pilots are demonstrating really good payback and really good value for the investment that we're making. Now it's important to understand as well. That our focus on standardization in the business means that we're able to deploy those pilot programs, going from proof of concept to deployment much more quickly, So the work we've put in in the 1st 2 years of our strategy around standardizing our warehouse management enabling technologies are really starting to pay dividends for us. There's a lot of work to be done.
And one of the challenges we have is that as it relates to the innovation funnel, there are many, many good ideas, all of which seem like they've got a great payback, but picking providers, which have a sustainable track record, and we believe will be successful over the long haul, is something that's really important. So I could speak about vision picking for one thing. We've had great success with vision picking. It's a different type of an RF device moving from paper to an RF terminal to actually keeping somebody hands free so that they're using a sort of augmented reality glasses. That's worked very well for us in a number of pilots both in the Netherlands and in other parts of the United States.
But we have to pick the right application there because in some cases, we've actually found that the collaborative robotics a much more efficient, much more effective way of doing business. So picking the right technologies, deploying them in evaluating the proof of concept and then making sure that they continue to be the very best answer going forward is what our team is really doing on a day to day routine basis It's paying real dividends for us. And, we continue to see lots of value coming from those pilots. What we're trying to do now is to narrow down the soy that choices that we are deploying to the business and making available to our teams. And, our ops excellence team combined with our IT organization and our solution design team, are really doing a nice job of creating what we call site roadmaps.
And those site roadmaps will be the basis for deployment in the broader organization. I do have a short video I'd like to show you because I think it will do a much better job of characterizing the nature of the work. These robots are provided by a group in Massachusetts called Locust robotics. The Locust Robotics have demonstrated an extraordinary level of productivity improvement for our team. The people that work with them, are actually very excited about working with the technology and the way in which we're trying to attract workers to our organization was we're trying to pick people who have the right quantitative skills as well as the right focus on quality.
And so when we're attracting new people into an organization like ours, we've got to find people that wanna part of the business on an ongoing basis. They have to meet a variety of criteria to join the organization. And once we've trained them, we want them to stick around. So we're finding that things like locust robots are adding real value. Our customers are excited about the productivity improvements.
Our people are excited about the way in which the operating environment is evolving and the quality outcomes are very, very high. Could you run that video one more time for me? So this is a particularly good example where, the robots themselves are moving from zone to zone. Could you could we Okay. We're getting, okay.
If they're trying, I'm getting the wave that we're trying to run the thing one more time. So the bottom line is that, here we go. Is that the robots themselves carry a variety of different technologies on them so that our people are basically stationed around the facility. The robots come and basically dictate the work that needs to be done. So our folks can stay focused on managing the activity, the robots do the transit work, and we've seen productivity improvements of plus percent by deploying this technology.
1 of our customers, this is a life sciences and health care operation where quality is an absolute requirement. Any mistake could actually be a tremendously bad outcome because we've got surgical kits that we're preparing for procedures that will be oftentimes taking place next day. So everything has to be exactly right. So this drives productivity, quality, and the employee experience, which we think is just great. We got a note from the folks at Locust Robotics a few weeks ago that we completed our 1,000,000th pick in this operation using the robotics solution.
So we believe this is one of the technologies which will be deployed in a much broader basis in our organization. So a couple of questions. Where are we on the road to achieving strategy 2020? We feel like we've made very solid progress. We came out with a 9 point plan back in late 2014.
We began in earnest in 2015 to put the plans in place. And one of the keys in the to our IT environment. We've worked very hard to ensure that all of our new operations are deployed using that standard WMS and transport management solutions. As well as having the right types of back office technology in support of the business. So we've made some fairly substantial investments.
And as you'll see in the next slide, we're actually made substantial progress in terms of our operating performance and the productivity of our workforce. The next area was really around creating lean and effective functions, despite the fact that we have made numerous changes and made a number of investments, you will see that the cost of our operating structure continues to decline against a variety of investments that we've made and the fact that we've got a consistent lean organization On a global basis, really puts in a position to do much better benchmarking and comparative analysis across the organization, which is also leading to improved performance. And then on this 3rd pillar around Gro, our ability to take advantage of global services and products is fundamentally connected to our ability to deliver a consistent outcome for customers. And if you were to take a look at our service logistics business, almost the entire business on a global basis has been converted to what we call our select system, So all operations for all customers around the globe would be leveraging a Standard Technology platform, and that's a very different place than we were, we were just a few years ago.
So we feel like we've made substantial progress, but there's clearly more work to be done. This is strategy 2020, not strategy 2018 as of May, midpoint. So, lots of work to be done, but we're very confident and comfortable with the progress that we've made. And I think as you take a look at the balance of the results, it's pretty exciting for our organization in terms of the journey that we're on. So I mentioned before, the focus on standardization and operational improvements has put us with a 5.8% CAGR on the EBIT per FTE in the which means that we are doing more with less.
Typically, we had fairly standard ratios we used around the workforce that would have to be acquired in order deliver the startups that we were taking on, and we continue to see things improving all the time. Now one challenge in our business, which is a little different than some of the others you may interact with, is that for the most part, we have long term contracts with our customers, our ability to drive the pace of change in many cases is dependent on the pace of change that our customers are prepared to absorb. So we work hand in glove with our customers, even if we had a great idea, if it didn't fit into their overall plans. Oftentimes, IT resources are the single biggest constraint in making these changes, but we have to move at a measured pace because we can only move as quickly as our customers are prepared to allow us to move. And we have a fairly substantial program around refreshing the portfolio as it relates to renewals.
And as we make those renewals, we oftentimes make those investments. So if you think about us having 3 to 5 year contracts, There is a measured pace at which we can move. And ultimately, it's that measured pace, which allows us to be fairly consistent in our results delivery, as well as the long term nature of our contracts, On overhead, I mentioned before that we continue to make progress here. You can see we've had a CAGR of reducing that expense of 1.4% per year. And that's despite the fact that we've had to make some fairly substantial investments in financial systems and a few other things.
So we continue to see progress there, which is a clear demonstration that We are driving organizational effectiveness on the overhead side. And on the growth side, where we're focusing on those global sectors and products, We see a substantial increase in overall sales performance. We will believe we believe that will continue to be the case. Think that now that we've got much of the work associated with Focus and Connect out of the way, that we'll see much more performance on the growth side of things. In terms of financial performance, the question keeps coming up.
Why is supply chain an interesting business for DPDHL and how does it fit together? That's particularly the case when we'll be getting to hit sort of benchmark EBIT margins. And in comparison to some other businesses, benchmark EBIT margins in our environment aren't necessarily that exciting. However,
if you take a look at
our return on capital employed, it's quite a different story. And I believe it'll continue to be more interesting as interest rates rise over the course of the next few years. With or without goodwill, we see very good figures there and very good development a return on capital employed. And as it relates to our EBIT, I've already mentioned that we're approaching target EBIT margins, my confidence and conviction that we will achieve our long ambitions has never been higher. Our organization has been tossed a few curveballs along the way, and I think we've demonstrated a fairly tremendous degree of resilience and ability to get past those.
I'd also point out that from an EBIT perspective over the same planning period, we've had 13 plus percent CAGR in our EBIT delivery, And, I believe it's when you account for the pension funding we did last year, we've got a 10 plus percent, OCF performance CAGR as well over the same planning period. So, the last thing I'd say is about the attractiveness of this business, is that we have long term contracts with the world's leading companies. We work in the world's leading economies. We are subjected far less to sort of hiccups in the global economic conditions, and we're a very resilient organization. And so it is a long game that we're playing in this organization.
We have mature businesses in certain markets. We have rapidly evolving businesses in newer markets. And along the way, we're driving fairly substantial financial performance improvements. We're very confident that our strategy 2020 ambitions will be achieved. I think our team has a greater degree of confidence now than it's ever had And, we believe that we've got the right framework and the right pieces in place to make it happen.
So with that, I'll turn it over to Ken. Thanks,
John. Good morning, everybody. It's a sign of respect. I've had my haircut. I'm wearing my tie, which is normally only for customers and Frank, And this is not a stain, by the way, it's a microphone.
I know it looks like a bit of a stain. But the biggest thing I want to share today is my DHL socks. This is a this is a sign for my, favorite small and medium sized enterprise, which is a company called Vettamo, If you want to buy these, only GBP 100 a pair. So that's why I only have one pair. But anyway, I've been wearing them for the last week, and I shouldn't say that.
That's not quite true. But I think it's interesting when we talk about e commerce and about TDI and DHL in general, right? We only we'd probably only move about 3% or 4% of the world's movements, right? But it's the high end of stuff. And as my colleague, John Pearson, in Europe, I'd like to say, there's a luxury end for everything, even dog food, right?
There's a luxury end and people are willing to pay a premium for that. So we're not looking at mass market. We're looking to be very specific, very targeted on the customers that we choose. So a lot of very, interesting questions, but what I'd like to say first of all, and I know analysts and everybody else like that doesn't really like to hear it, right? Because you can't put it into a spreadsheet and everything else, right?
But motivated people is the biggest source of our success, right? So we all have the passport, the certified international specialist passport. We've got a lot of motivated people that work for us And this should be motivated as well, right? Because, you know, we work for the most international company in the world, not just the most international express company, the most international company in the world. And I know that, why?
Because we want a global solution for vehicles. We want a global solution for telecoms. We want a global solution. For material handling. There ain't any, you know, one of the very few global providers is us.
As you'll see there, we started in the USA in 1969, which means that next year, we're fifty years old. So maybe we'll do the Capital Markets Day in Hawaii, Frank, right? Hawaii or something somewhere pretty interesting, right, just to show what we've done. But this is when I put this slide up with a lot of our big customers, this is the thing that they love, right? We are we haven't got that representation all around the world.
I mean, people talk about bricks. We've been in Brazil since 78, Russia since 84. Indian China since 'eighty. So we know that all the issues on the ground and everything else, and customers this is what they what they use as well. We are the most international company.
We're certified international specialists, and it's a great sense of pride for all our people, right? Because anybody who works for DHL, they work for the most international company in the world, something which builds a lot of pride, into our people. On focus, yes, 78% of our business now is in the TDI segment. Back in back in 2010, it was about 65%. And back in 2010, we had about 8% of our business in the what we call the day definitely domestic, that's all gone.
With either dispose of it or we transferred it to our sister organizations, right? So that total focus, on TDI is is a big source of our success, and it's still a growing market. And the TDD, the time definite domestic and ACS all support the core at TDI Business as well. So what's happened? Volume growth, what's happening on volume growth?
I think it's quite interesting. First of all, What we've seen is there was a lot of if you look back in history, starting with the financial crisis, with subprime and right? That was immediately followed by all the problems that we had in Europe. Remember the pigs and all the restructuring that European companies had to do? Then immediately after that, China, no downturn in China, but China finished its building boom about 2012, 2013.
So there was a lot of collapse in commodity prices. I think now we're just back to a time where the whole world, the traditional B2B is growing again. And I can say that with a lot of certainty because we have a group of customers, which we call CSI customer solutions and innovation, that our top 100 customers, they never change on a year by year basis. Historically, they've gone about 2% or 3%, which is in line with global GDP growth, at the moment, they're growing at over 6%. So the traditional B2B is definitely growing.
And then e commerce I really think I'm a big fan of Jack Ma, I think this whole concept of you know, the B2C segment explored in the need for an EWTO and electronic World Trade Organization for the smaller countries, for the smaller companies to drive it. First time in history, and this is why digitalization is so important. First time in history, in theory, every single person in the world could be connected to everybody else. If you've got access to Internet and you've got a device, everybody can be connected, which means a massive increase in the number of consumers and a great opportunity for entrepreneur anywhere in the world to start a business. And people say, okay, well, which parts of the network are growing?
We've had, for the last 9 years, I think 8 to 9 years, we've had consistent growth every quarter. Every time it's a different part of the world that's growing fast Sometimes it's Asia, sometimes it's Europe, sometimes it's the Americas, sometimes it's Middle East and Africa. So the value of our portfolio, right, is that it's so well spread, and it is a network, so we get a lot of network advantages. If we sign a customer in one part of the world, we do get synergies in other parts. And because we are so focused on this business, we're always looking at, how we are subjected to competition that come up.
So this is a classic, Spotify 5 forces model. If you look at the threat of new entrants right now, we're really down to 3 players, FedEx and TNT combined, UPS and DHL. It's interesting if you think about it throughout the history of this industry, even 15 years ago when Japan was the most 2nd most strong economy in the world, there was never really a Japanese entrant that came into the global market. And I think it's I think being from English speaking environment, I think it's a big advantage. So we've got 3 players.
We compete on quality. We don't really compete that much on price. And then we have the likes of the threats from Amazon, from Alibaba, the Uber fragmentation, the drones, I don't think any of those, especially in the medium term, are going to make a much difference to our business. Like on the drone side, I was in He hang in Guangzhou, a couple of months ago, maybe we'll try a drawn out, but the delivery denses and everything else make it only relevant for specialized reasons. So from a macro point of view, I think the threat of a major new entrant is pre limited.
On the bargaining power of buyers, we've got about 2,700,000 customers. I can see in 5, 10 years' time, that could be 270,000,000 because more and more we'll see smaller medium sized enterprises and even individuals being a bigger and bigger part of our supply of our customer base. So that is fantastic for us, right? They're all looking for service quality, you know, these are top end, small and medium sized enterprises and high end consumers who want to use a service like ours. We look at the threat of substitutes 3 d printing, again, I've looked at that in a lot of detail.
It's still very expensive. You can't 3 d print everything. I think it's good for experimental pieces, but on a mass production, maybe not. I think the on and near shoring could be the the biggest factor, but that's going to take years, for that to change. And on the bargaining power of suppliers, as Melanie says, think as we looked deeper and deeper into our core networks, and this is a power of focus, right?
The opportunities become more and more obvious to us, right? So I think we're in a very powerful position overall. And as we've seen that, just to emphasize that, our shipment per day growth has been very strong. These are volume figures on the left, right? So this has nothing to do with fuel charge and everything else, our volume figures.
And I think if you remember, at a time, probably between 2011 to to 2015, 2016. The rates of global trade had slowed to more or less the same rate of GDP, which haven't happened before in history. We've always grown generally about two times the rate of GDP. I think what GDP now doesn't take into consideration is e commerce, but 2017, we saw that trend reversed global trade, expanded. As I say, a lot of customers now in the B2B segment growing, a lot faster than they've done for some time.
And then first quarter of this year, the last two bars, strong growth at 9.6% versus 8.1% same time last year. So that's a good start to the year. Our market shares gradually improving around about 1% per year. I think in the early days, a lot of it came from TNT when they were going through process of do they want to sell what they're going to do next, but that was very good for us. I think a very important point for us, and I think this is particularly important when you get into the e commerce market because the temptation there is some of these customers have huge volumes and very tempting to give in on price to get volume, but for an established player like us, we've got a very well established long term yield management program, right?
So the first one is every single year, we look at inflation, we look at what's happening in wages in the country, we're looking at our security costs looking at anything that's impacting us. And we review every single country in the world and we decide on a GPA every single year, For big customers, where there's a lot of competition, we have a tender review board where each region and then a global sign off looks at those big customers and where do we want to play? And what are the advantages and disadvantages of taking them on? We have what we call red and yellow cards. These are red cards are sort of obviously negative margin customers, yellow cards are marginal customers, a lot of focus on there.
As to how do we go back and up the rates or get more volume from them. On the surcharges, the two relates that we don't want to lose more than 2% of our revenue by surcharge exemptions. Sometimes in the beginning, we exempt remote area where we exempt some volumetric things, but we want to keep it very close and it's something we're looking at all the time. And then shift to profile, I mean, as everybody knows, density is one of the biggest drivers cost in our business. So we constantly if customers if we sign a deal for 500 shipments a day and they're only giving us 300 we're going back and saying give us the other 200, or we're going to have to look at the rights again.
So a very disciplined process about that. And I think when you look at the E Commerce scenario, we have to be as disciplined, there as well. So that brings me on to E Commerce, I think what we've found is we've had to take a much more consultative approach to this sale. You would think that the best way to find e commerce customers is to go digital and have lots of digital marketing. Actually, it's still a lot of knocking on those, right?
Because a lot of new companies, they automatically use the post office. They don't realize the advantage of working with a company like ours. I mean, we've got numerous examples where somebody started to use DHL Express, the shopping cart size improves, the customer satisfaction improves. And we can really help these customers because as well, when you it's great to go and see them because they're all young and they've done a great job raising money and they've got a great product and it's out there, but they don't they don't always realize, what an opportunity there is in the international market. So a lot of them start domestically then you go to them and you have a look at their website and you say, right, you're a Canadian company, but do you realize 30% of your hits are coming from Belgium.
Than 10% are coming from Australia. Do you have an international offering on your website, right? Can we help you to do that? Do you have an express delivery option? Do you know what the total landed cost for your customers is, right?
If somebody wants to get some spinners from from Canada into Turkey, what's it going to cost and everything else. So that's what we're trying to do as well. We've got these electronic ship solutions. We call it my DHL now, makes a lot easier for a, for an SME to start up and, and get shipping internationally. Think logistics think DHL, we want to be part of the, high level thinking 21st century spice trade.
This way it shows that the cross border is growing at 25%. The great thing for us now, we are always a B2B company. Now we're getting into B2C deliveries in this e commerce well, but more and more business companies are now going online to have their deliveries made, right? I mean, if a company like Toys R Us can't make it with their margins, does a staple? So it's just selling stationary, everything online in a business environment, be able to make it.
We're going to see more and more business to business moving into this e commerce world. Globally, I'll touch on it at the moment. The interesting thing about e commerce is that every single brick and mortar retailer has got to get into e commerce now or face the end, right? So we need to help the existing brick and mortar retailers to have an e commerce offering, and that's why it's more of a consultancy sell, as I say. So globally, this is a small company that we took staking.
They go into big companies like Marks and Spencers, like Harrods, given them international offering, let a customer log on from Australia, find out what the transport cost is going to be, what the duties and taxes are going to be a destination, what the actual cost of delivery is going to be. From an economic point of view, We don't treat B2C as a separate product. It's part of our industry verticals, just like life sciences, automotive, banks, and everything else. So It is now a bigger and bigger proportion of our business. It's the fastest growing, and it was somewhere the biggest.
It does drive all our economic issues, right? So the shipments per day are going up. The weight per shipment is lower, but that's great for our automated processes. Everything else. The last mile now, I think we've turned the corner there that on last mile, we can't look at a house as the final delivery point.
I think we have to look streets and bigger areas, but now we don't see any productivity negatives from that last mile delivery So I think we've cracked a lot of those issues. The gross profit triangle on the top line, if you listen to John Pearson who runs Europe And Commercial, right, we obsess on growth at the right price with the surcharges, right? But if we're not growing in a certain area, why aren't we growing? Everyone's a salesman, sell, sell, sell at the right price. Just keeping that top line moving the aviation network.
I'll touch on that as Mellon has come to it as well. Honestly, there's no issue from a CapEx point of view, we can finance it separately and everything else. It's just a logical step in our way to increase margins. And then the efficiency in the ground operations, that's what the volume drives. And as I say, we're starting to see the positive impact now on a lot of that e commerce business.
The story has been quite good so far. So pretty consistent growth in EBIT, So in the first quarter figures, so last year, 3 96% was 11%. If we take out the 40 odd of, IFRS. We had 443, same figure 4.44, which is 11.8% margin, right? So we are seeing gradual increases in margins as well.
And we've still got a little way to go to capture with one of our competitors. But the conversion to cash and the use of CapEx has grown steadily. Return on capital, is pretty good, Mel. I know you always want more. So this has been our historical, CapEx spend, and you do see that increase in aviation And then we have recently spent a lot in hubs, and I think the investment in hub is peaking.
So that should start to fall as you see it there. But let me let me talk about aviation when I come on to it because I think the aviation story has been great. If you look here between 2010 17. Our dedicated flights would increase by about 4% a day. And the but there are our ability because they're bigger gauge aircraft, our capacity has gone up by 9.
But even though we've added all the extra capacity, our weight load factors have increased as well. So we've got more space, but we're filling more capacity. Therefore, the absolute cost per kilo is coming down and the commercial airlift cost has been coming down as well. And it has a great effect on the environment as well, right? So all that, works in our favor.
Now so what Mel is going to explain in a lot more detail, than I can is. So our current growth rates we'd need to add some 4 to 5, some foursevens or 777s every year on that 4% or 5% growth rate. So recently, we've been looking at some of our older aircraft that we need to take take out. So when we've looked at these figures, we're looking at a no growth environment even, right? So just replacing existing aircraft.
We'll have to add existing aircraft anyway. But when you look at ACMI, the aircraft, maintenance, crew and insurance, on the insurance piece, We've already moved some of that cost in house. So we have an in house insurance broker, some of our partners use it as well. So we've used that leverage to reduce our cost overall. Maintenance is usually just a pass through.
Every single company uses the same maintenance facilities worldwide, there's not much of a shame there. Crew, we obviously need that from our partners. But on the aircraft piece, we've renegotiated a number of those aircraft leases with our with our where we've got an equity interest as well with those JV partners. And we start to unravel how much of that financing cost really inflates the cost of that aircraft piece because, you know, the lease lessor He's wanting to recover his money in 10, 15, 20 years where his oil's aircraft can last up to 30 years. So as we've looked at it and we've gone to Mel and as Mel said, we could have just carried on leasing, but the opportunity of EBIT increase and cash flow benefit as well by bringing that in house is pretty is pretty big.
Because what a lot of people don't realize is because we're not a U. S. Airline, and we have to fly, through partners in many places around the world. If you take all those flights that are dedicated to us, as DHL, we'd be the biggest, cargo airline in the world. We want to if you look at how much of our fleet is with some of the big aircraft suppliers, we rank in the top 2 or 3 customers, right?
I think we've done a great job, and this is Express only. This is not including my colleague from DGF. So as we go forward and we're trying to squeeze more margin out of such a great product than breaking down the individual constituent costs is something that's showing us a big opportunity. So all favorable, nothing to worry about. So I'll stop at that.
I got I had a video as well, right, from nervous to show it now, right? Cause you probably won't have enough time. It was just an e commerce video, right? So I won't bother playing it. But I just think, I just think, as Mel said, don't worry, from a CapEx point of view, we'll finance it through, through separate financing.
And we can do the return on investment there. It gives us a lot of flexibility within our networks. We 3 or 4 partners globally, we can move planes around, as needs come up. And the overall cost of ownership is so positive that it's something that we've got to look at. If you guys don't like it and you want us to sort of keep it the same, EBIT levels, then we can just go back to the old system.
Okay. So with that, let me, let me flick on and hand over to Tim. Thank you, Tim.
So thank you, Ken. I'm glad you didn't show your video because I didn't have a video prepared. And I would have been the only one without a video, and that also probably is not the best place to start. So So your questions or the questions from, analysts and investors around freight forwarding which I, of course, always find highly interesting having only worked in this part of the industry, but there is reasons to ask questions as always make sense to have them. And so I only have 3 questions to answer.
Why is forwarding interesting III for DPDHL. So I'll talk a bit about markets and how they develop and why we believe it's important to be in these markets. Structural changes is tech disruption a problem for forwarding? How much of a problem is it? Definitely something we have to look into.
And Last but not least, what role does DGF play for the DPDHL group? So let me start with the first question on the industry, characteristics and dynamics. If you look at this slide, especially the two parts of it, the left and the right side, you will see the growth of the market in the last Well, starting from 2010 up to 2020. And you will see, of course, the dip we had during the financial crisis when it came to growth in the freight forwarding industry. But you can also see that it has been recovering after that.
And it's a market with growth growth, which is seen with a 4.1 CAGR going forward to 2020. If you then look at the market players, the top 10, which have more or less 44% market share, we are the number 1 with market share of 7.9 closely to 8%. So there is room to move room to grow within this market. And to be in the position that we are, it's actually a very nice position to be in. Because you can also somehow manage the markets in which you are working in.
If you look at airfreight in, especially you all know that last year was probably the mother of all air freight years. We've seen growth like we've never seen before. Probably comparable only to 2010, right after the financial crisis. And we had this big rebound. So last year was a huge year.
We actually had a peak season not only in Asia, but also one out of Germany, which was never seen before and which caused a lot of trouble on the trucking and handling side at the airport in Frankfurt. It took hours for trucks to get to Frankfurt because they couldn't be unloaded because the infrastructure wasn't managing this kind of size of volume. And that is something which is really was probably in the strength, strong for 2017, '18 is something where we were people like, see very, see a growth of 4.3% for the air freight market. We predict also that there will be a peak season again this year, strong again out of Asia. If we see the same constellation out of Frankfurt we have to see, but it will be again a strong year for airfreight and a strong year for airfreight means you have to think on how you want that channel challenged or how you want to move around in this challenging environment.
And why is airfreight so strong? One of the big drivers is the e commerce business. And it's not only the e commerce business, which is managed by postal organization, but also e commerce business managed by the freight forwarding companies. And it's something which is a new driver. It hasn't been there.
It's been a way comparable to what we had before the financial crisis when we've been this industry started flying computers and notebooks around the world. This is the new driver with lots on huge growth, huge growth in it. A CAGR of 17.8%. And this takes away space in the airplanes. This drives rates up.
And there's not enough capacity on the on the coming into the market, especially when you talk about freighters. So for us, it's important that we know these things and that we take them into consideration of our plans. Also one of the reasons why we have now 2 flights that we control directly where we control capacity on the markets and are not so much dependent on commercial carriers as probably if you do not have these flights. Ocean Freight, It's a bit of a different. This is again a slide of Seabury's looking at a CAGR growth until 2021 of 2.3% on the ocean freight side.
Here, the question is a bit more different than when it comes to airfreight. Here, the question of course is the consolidation of the carriers of the alliances, how will this work going forward? It's a question on how much capacity is going to come into this market, And there you've heard a lot of stories in the past and I've been sitting in a lot of discussions in the past on this and to foresee what's happening here is really, really difficult. And, last but not least, the market shares of the leading forwarders in this market is very small because you remember that carriers dominate this market by themselves, a lot of the market. So for us, it's all shared also an actually a very good growth opportunity to grow the ocean freight business going forward.
So together, it really makes a lot of sense to be in freight forwarding and be in this market. The second question was around disruption points, which you, in average, have for every air on ocean freight shipments. Now these touch points are difficult to really get away because as I always say, freight Ocargo has one disadvantage to us being passengers on an airplane. It cannot wave. It cannot read.
It just sits there. If someone puts you in the wrong place, it sits there and doesn't get no discipline from doing it. So we have to keep these things in mind. And important is that there will always be people who have to handle these 21 touch points. And you can discuss it with 21 or 17, but it will still be a double digit number of touch points within this industry.
So it's really important in forwarding that you have expertise in your organization. You know your customers because customers work differently, even though they only ship Some of them just do different than others. Some are very good in planning and forecasting others aren't, and you don't need to know these things. And you have processes in place and that you are able to So what you see here now on this slide is a bit of a simplification of what can be done differently or how, how IT can support you on this. And the examples you see here starting with the online quotation too on the left hand side, on the top part of the slide to the online brokerage platform, freight brokerage platform.
These are all examples what we are doing today or what we have already today for our customers in place. And what this means is that these these programs or applications support and simplify the way that our customers work with us. Because for them, it's easier to get an online quote online than asking someone to generate an online quote, an online quote for an import shipment out of Asia in the past took 24 hours because you had to wait for Asia to wake up to submit the quote. Nowadays you can get these things much quicker. So it's a simpler way of working with us or with a freight forwarding industry.
And these innovations will accelerate also the way we work and will exploit our strength and will make us better in our in our way of managing the market. And we will continue to work on these things. And we have to do more on these things because a generation of new decision makers is coming And they are used to more e commerce, more shopping at home, and they will bring these habits also into the normal way of working in our B2B environment. Now, third question was the question on DGF contribution. And as you know, I'll come on another slide to our simplified strategy where we are which we rolled out last year and implementing and working on every day.
We have to get back to be in a company which also generates the right EBIT GP conversion, which is our KPL measuring us towards also the competition. And this of course means that our EBIT margin will go up. And you see here that as of 2018, we are aiming a solid line to get north of 20% conversion rate EBITGP conversion rate by 2020 in this part of our strategic cycle within the group. And There's no reason for us not to be able to do these things because at the if you look at the structure of the organization, so if you look at the network that we have, we are in the right places. We have a very, very large network.
We've made the right decisions in 2015 2016. I'll touch on that a bit later too. On how we started to roll out the new transport management systems. And all of these things are the basis for us together with a good organized people and a good organization. To come up back to where we need to be as the company with the highest market share also.
So A bit on the IT renewal, what you see here on this slide, I'm apologizing it's a bit a lot of information on it, but the important parts are on the lower half of it, shows all these things which we have been doing in the already. So we've updated our customer relationship management system. We've harmonized the quotation tool. We have the online quotation and booking tool out in the market now. And the big role that what we are doing is we are going into the transport management system.
So our legacy systems are a bit outdated. You can clearly say there from the 80s more or less they were developed more or less in the 80s and come also from 2 different parts of the organization. And We are right now after we've piloted ocean freight last year rolling out ocean freight. It's difficult to say exactly every day how many countries have been rolled or deploy because every month, we have at least 2 rolls out, 2 rollouts per different parts of the region in the organization. But we expect this year to roll out countries like Germany, China, piloting the U.
S, all in ocean freight with a lot of smaller countries around it. And we have making very good progress. And as I said, every 2nd week, I get a new email saying, okay, this next Monday Costa Rica and Croatia will go live. And the noise around it is very limited. We have no issues towards our customers.
They end up noticing this. And we can invoice. We can do the right things. And especially those countries where now we have trade lane pairs working on the new systems, we always see small benefits in the way they work together because Now suddenly, when you have this, you have a transparency in your transportation. And if you have a transparency, it's easier.
Again, it's simpler for you to talk to your customers and tell your customers what is going on with the shipment or if there are any issues or other things. So that's ongoing. We will also pilot this year 1 air freight company 1 air freight country, most likely in Africa. As a basis then, South Africa was large enough as a basis then for the rollout of air freight next year in larger countries. And for smaller countries, we'll roll out air and ocean together.
So we have an aggressive plan on rolling this out. It's aggressive, but we also know that it has to be sustainable because we have to make sure that our organization follows up on this and is able to manage the changes within the organization because If you say we have to change the transfer management system, that is for a forward, a change in the way he works from 8 o'clock in the morning to 8 o'clock at night. So we have to bring people along and have to take them with them on our journey. But until now, it's working very well. And countries are actually asking to be pulled up front to be first in line.
And that's quite interesting because that normally don't have because people normally don't like changes like that that much. Simplify the contribution. That's our motto, our strategy. In easy words, simplify means that we look into the way that we work and we try to find waste in the way that we work, which we can take out. So we have more time to talk to our customers, talk to our suppliers and partners.
And that gives us more ability to do the right things and work in a better way together. And it's based on 3 things, the entire strategy. 1 is a clear set of business rules, which has 3 areas: we've talked a lot about how we should work together on the mindsets and behaviors, who is responsible for what. It's very important in forwarding with the cultural way of working that it's clear who's responsible for what. And if you have discussions on that, you lose time again and then off your customer goes.
And we're clear on how we steer and how we incentivize the organization. And if you do that, you see things happening and we talked about the production of FTEs already as part of it also because the steering and incentivization was changed in certain ways that it becomes clearer for the organization. We are also looking at structural costs, reductions on our levels. Structural costs is costs on running the organization. That doesn't mean that we look into taking out clerks to bring our productivity up.
It's more about making sure that we ask the question, do we need full fledged management boards and come in countries like Honduras or Guatemala, or can we do this differently? And those are the things we're looking at and trying to make things easier, again, simpler, again, on how we work internally and again, to have more time to talk to the customers and talk to our suppliers and partners. And of course, on the last slide, you also saw the importance IRR, the IT renewal roadmap is a very integral part of the simplifies strategy to make sure that the systems that we use going forward will be the basis also for us to become even better when it comes to results, when it comes to conversion rates. So looking, he also at the, at the contribution is my last slide. You know that fore warning is an sit light in high return industry.
You see the return on capital employed also excluding and including the goodwill. And you see our dip that we had in 2015, and we are working hard now to go back to a similar ROLOCs we had in 2013. But also keeping in mind that EBIT margin and the conversion rate has to go in the right direction. The organization is very strongly committed to this. And the good thing is after the first quarter results and the reactions I got also from the organization, the people are noticing that they can do it.
And if people notice that they can do it, they get used to larger numbers. And once you get used to larger numbers, even larger numbers are not that difficult to digest anymore for this sort of thing. So that was my last slide. And I think we are now even for questions and answers.
So, Tim, thank you very much. So for this on time delivery by all the three of you. We've got a few minutes left. Of course, for your questions and their answers, Although the concept risk, we answered all questions already, but obviously, no, the more you share, the more questions are coming in. Penny, why don't we start with you and then Christian?
Thanks, Penny Butcher from Morgan Stanley. I have one for each of the speakers. On the supply chain side, again, it's been reiterated that you are comfortable getting into your target margin range in the midterm plan of 4% to 5% given the noted more specialization of services you are providing for customers the automation potential of some of those why is 4 to 5 still the cap on margins for maybe some customer verticals? Could you do better and potentially take out more cost and have that opportunity?
Yes. So, we already have some portions of our business, which are exceeding 4% to 5% EBIT margins problem is that when you take a look at the totality of the division, we have certain portions, which are hamstrung with older contracts, which were much lower in nature than they are now. Some of those deals we wouldn't renew at the current rates, and, that's been part of the process of what we've been working our way through over the years is getting the portfolio right so that we're working with the right customers and the right environment with the right commercial terms. So one of the reasons our team has the level of confidence we do about achieving our stated targets is that we have portions of the business, which are doing substantially better than that. And it's about how quickly we can refresh the portfolio to make sure that we've got that rate mix
Thank you. For Ken, you alluded to the comment about your peer margins and getting towards those levels. Could you speak about it in the same sort of timeframe of the midterm targets? I mean, with the maybe fleet renewal potential in place, what is the scope for the margins we should think about in Express specifically? Yes.
I think this is the the power of the focus strategy, right? As we sort of limit ourselves to that TDI market and there's no reason why it shouldn't continue to expand the especially in this sort of e commerce arena, then it's systematically looking at every element of cost and pricing and capital investment and seeing where we can squeeze out any cost that doesn't impact service. So I've never set a margin target. I've just said that we year in, year out, we just need to see where are the opportunities think the example that we're talking about now is an opportune one because, we're taking all the risk on a lot of the slides, right? So we should have the lion's share of the return on them, right?
But that is just one element. I mean, I think as the if we keep this level of volume improvement going as well, that should automatically lead to, the next area, which is the lower the lower of the absolute delivery costs around the world. So I can I can see what all I'm about to say is that I don't think we've plateaued from a margin perspective?
Great. Thank you. And finally on forwarding, happened to note on the charts you showed of the air and sea growth opportunities that it seems very clear why you'd want to continue concentrating in air and what e commerce might continue to drive. I could also maybe see from broad freight perspective that U. S.
And Europe have shown strong data What I don't really understand is the ocean side that even Sebree is forecasting a CAGR below global GDP run rates. How does that influence your sort of decisions about where to focus your sales force and customer focus as well?
I think we have to go back to the to look at how large our market share is in ocean freight. And I would assume because it's difficult to find out exactly it's around 2%. Below 2%. So there's always opportunity to grow in ocean freight. And only because markets don't grow significantly, doesn't mean that you cannot grow inside a market.
I think for us, it's more important that we understand where we can have profitable growth in certain markets. And look at different trade lanes the way we're doing it today because we today, we are very much standard. We are focused on maybe 1 or 2 trade lanes and we have to go into other trade lanes also. Where we can also generate a higher margin per container. So for me, also towards the customers, it's important that if you offer air, you have to be able to for Ocean, if you would separate it, the your value story towards the market really declines and it becomes more difficult also to keep the other up and running.
Maybe just a quick follow-up. I mean, do any of your customers signal why there's such differentiated growth rates between the two? I mean, what are they shifting for? What are the advantages of aviation? If you go back like 4 or 5
years customers were shifting their air to ocean because they were more relaxed on production time and they could plan much better than they could in the past. Nowadays, it's a changing a bit because consumption is so high around the world. And that brings, of course, more and more of the plans that they used to have to go by Ocean, they're putting in more and more air. And I think that's a bit I mean, if you talk to some of these customers, they will never openly say it, but you sense it, of course, when you see the volume development, when you see the ship to profile on the customers based on the RFQs. So that's why you need both because customers are looking for transport solutions with different transit types, and you have to be able to manage all of them.
Christian.
So now, Christian Ofer from Baader Helvea. I have a question on forwarding maybe. It's a from Skyiden or a scalable business, but in the first quarter, you delivered minus growth. So you're not growing with the market, but you're
absolutely not growing.
And so going forward
in a market, which is such as very fragmented, of course. How would you like to deliver that kind of growth? And when it comes to the IT system, you are now changing the IT system. And it looks like you were saying everything is working very smoothly and you are implementing your new IT system. Almost every 2 weeks, something like that in the new country.
So when we see some kind of a scalable development going forward in 2019 2020? And what is the main trigger for that scalability then going forward? And what is the difference to the new to the former system? So it seems that the entire organization had a lot of problems by implementing SAP transport management system. And now you are saying that you are implementing a new system, and there is almost no problem by implementation.
So what is the main differentiation between these two systems and how or and why is it so easy now to implement that kind of system? Thank you.
Okay. So maybe let's start with the volume question, the first one. So you don't see volume growth with DGF in the first quarter based on the fact that we looked at our customers very closely last year and made decisions on pricing that we has been worked, but can explain on how shipped to profile and how margins work with the yellow and the red card made decisions to step away from business. And I think we had to clean up our portfolio also. That's that's done.
We will continue a bit in the second quarter because some we are more we have a portfolio of more larger customers and smaller customers and larger them as you typically have contracts. And of course, we honor the contracts and bring them to the end. And we're in discussions with them. That doesn't mean that we don't want to We don't want to give everything away. We're trying to bring the rates up then.
Sometimes it happens. Sometimes it doesn't happen. The good thing on the volume, however, is that we only we've only had a volume reduction in one region and the other regions are working fine. There we are growing volume profitably also. And we knew this one region would be our problem.
When it came to that. And also we budgeted this year, not much of a volume growth, but more of a margin improvement. So that's all all working fine. And you see it also in the EBIT result. That's questionable.
And we will go back to a growth mode, probably in the second half of the year, but next year, we have to go
back into the growth modes.
So to your other question, so where's the big difference between an SAP introduction and then the system we're using now? The system we are using now has already been deployed to, I would say, 10 or 12 different freight forwarders. It's a system developed by a specialized company who only does straightforwarding and custom system, and it's very close to what we actually do. SAP has a SAP transport management solution, which is a bit further away probably what of what what freight forwarding is. And that's the big difference because if you bring a system in, which is already used by competition, it works from day 1.
So we were able on day 1 to generate 44 shipments in the Netherlands when we implemented last year. That is a lot compared to what we're doing able to before that. And what's the big advantage? There's 2 things. It's you have a workflow component and a 1five component, which gives you transparency.
And it's easier for you to work on a shipment globally because that's what you need and our customers are expecting from us, answers on questions. Where's my and why is it stuck in customs? What's happening? If you have a one file system, you can easily answer these questions. Today, we have to write emails pick up the phone and try to figure out what's going on.
So it will simplify our way of working.
And that means that you don't have to train your your entire staff, not so much than you have done it before. It was with the SAP system. So it's very easy to switch now to the new system?
It's easier to you do have to train the staff because our old system is a green screen system and this is a web based system. So you still have to train them, of course. And I think we learned also a lot from the SAP implementation, and we take a lot of the information we have and the knowledge to make sure that this time we do it much better. Because, openly speaking, we can't fail second time. We have to make this run.
And do you have, some double costs currently by running 2 systems?
We have in those countries where we implement, we only run one system. So there's so if we implement ocean fill, we implement ocean fill, and import in one country. So the entire country is then off the old and on the new system.
As for implementation costs, I think you are exercising well within the guided numbers. Yes? Okay.
Thank you very much.
Thank you for that. We want to stick to the time schedule somehow. So therefore, Mark, you're gonna conclude the Q and A round on these three gentlemen. We're gonna the last final Q and A round on all. Was.
Is that working? That's fair. Okay. I again also have a sort of question for each of you. Can we start with John?
John, as you're introducing more sophisticated technologies and systems and robotics and all kinds of clever stuff for your customers, have you ensure you get paid for that? Because supply chain has a long history of sucking up every service that someone is prepared to offer. But not paying for it.
Yes, that's a great question. Today's creative, innovative new idea is tomorrow's commodity. And so What we have to do is to strike the right spot between where we have the right types of contractual incentives, whether it's a closed book contract or an open book contract. So we're picking customers and deployment opportunities, which will provide the best yield for our organization, as well as address a meaningful and supportive client need. Like I said before, we don't really have the opportunity to invoke ourselves in our client's operating environment.
In some cases, we work on their manufacturing plants. And we have to very much align with what their needs are in the way they run the balance of the business. So, we've done a much better job of focusing on close book contracts, done a much better job of embracing, what I call gain share mechanisms. And, that's becoming fairly standard. So where we really have challenges, as I said before, is old legacy contracts, which were very low yield, with very little opportunity for upside.
And I think what's happening as the market matures is that buyers are realizing that while it seemed like a good idea to nail their suppliers down with such low yields, they took out a lot of the proper incentives to move forward, and they're becoming much more balanced in their view. And they simply now want high quality, low cost, and things to come together in a sustainable fashion. And they're open minded about the contractual terms, as well as the way they incent their providers and us to perform. So we see this as being, a much more fertile field these days than it was just a few years ago. And like I said before, we're being diligent in picking our areas of opportunity in the same way that Tim and, Ken have talked about pick those areas that offer the best yield and, move quickly to take advantage of the opportunity.
Okay, thank you. And then for Tim, you've obviously been the head of DGFF almost a year. What what have been the surprises on either side, things that when you got inside the business were better than you had expected, and those that were worse. If you can give us a few examples.
No, I think what surprised me positively was first of all, the setup of the network, not wrong, wrong priority. What surprised me really positively was the mindset of the people and their willingness to change. And do something and get out of that corner, which they were somehow in and stopped running on circles and trying to do the right things for them also as individuals and for the entire organization. I thought that, would be much more work in trying to motivate the organization, but that there was a lot of motivation in it. And, I think what was also good were the decisions made on, especially on the IT part, When I saw the system for the first time, the capabilities, I was hugely surprised how well it was and then knowing and seeing how well and easy it is to implement because it's a standard software for the freight forwarding industry and us being a fairly large customer there also, of course, suppose.
So those were the 2 upsides. The downsize were a bit the ability to make decisions. And this again is turning in circles, and that's why the simplified strategy has this important about roles and responsibilities. And we founded ourselves some guiding principles on how we want to work together. And I think that's probably also together, if you pair that, then with being more successful, you see how this entire thing can work.
And I think that was also the one where I sometimes got a bit disillusionized and I don't know where it was a bit skeptical sometime. And then also what I would always forget was my first discussion on how we prepare for the peak season 2017. And the ability or the non inability to speak to customers about higher rates was something I really had to digest. And make myself very clear, and then I can be sometimes if you ask my wife very, very stubborn.
Okay. And then finally, just a quick one for Ken. I totally understand the buy versus lease option on the new aircraft. But does that or doesn't it increase the operating leverage into the next downturn? Because you'll have more planes on your balance sheet, or is it offset by not having long lease commitments?
Can you just walk us through the sense of that?
Well, I think when we started to look at the replacements and the plan, we're talking in a no growth scenario that we have got certain a certain number of old aircraft that's coming to the end of life. There's better, types of aircraft with lower CO2 emissions, greater efficiency and everything else. So just a pure replacement gives us a good EBIT benefit, I'm sure Melanie will tell you, and a good cash flow benefit as well if we finance them separately. I think the way I look at it, I hear a lot about these asset light models, right, which is great if you can get away with it, right? But I think The most important thing is asset owner, this is why the pricing is so important.
Asset owner is going to make sure that he gets the fair return for all the risk an investment that he's taking, right? So when I look at some of those planes that are flying around and you go back to the dark days of 2089 when we had to sort of almost closed down the U. S. Fleet and we had to reduce the amount of planes that we've got, we've grown every year since then, right? And all the risk really with those planes okay, we've got a lot of them on short leases, but the real risk is our notes, right?
We're responsible for filling them for getting them around the world and everything else. I think it's just one of those progressions where you look at that APs and you think, should we do it, or should somebody else do as I said, I think it's an ultimately it's a Melanie question more than a kin question because It's just she want more margin or not, right? I can live with the current margin that I have, but then it's just the way we are FedEx and UPS, as you know, they own all their planes, right? So that bit of margin that they get on theirs is denied to us unless we start to change our approach. But I honestly think it's a zero risk game because we're not we're going to have to add fortify the aircraft anyway.
I mean, if we could get flying rights to certain places, we would be adding planes tomorrow. So it's not even a new expansion strategy, it's what have we built as an existing network that gives us a bit more ability to take a bit more margin into the current result.
Thank you, Mark. And I'm going to release you now for a 10 minute bio break before we continue your quarter past. Thank you.
You've been coming now. Coming down. It's coming Keep it coming now. Give it coming down.
Okay. So thank you for rushing back in such a timely fashion and Now we were all ready and freshened up for the final section of our Capital Markets Day program. State of affairs, we're starting off with a view of the CEO. CFO. Sorry.
Yeah. So, after you have now heard from our divisional CEOs on what is happening in the different divisions. I want to take you through some of the questions which obviously come up in meetings Frank and myself and Martin and the investor relationship team has with you. And I think most of the topics on the page should ring a bell with you. So we have tried to cluster them into 5 topic areas.
The first question is dealing with the capital allocation process. Return on capital employed, how do we think about those topics? 2nd area is free cash flow. How do we see crash flow generation going forward. Then to quite specific, but obviously relevant topic tax rate and foreign currency exposure.
You heard from Ken, we are the most international company in the world. So currency is something we have lived with for a long time and will continue to live with. And then, last but not least, the question, what do we think about our balance position, the topic of excess liquidity and our finance policy. So starting with the first topic capital allocation return on capital employed. As you know, we have, and you can see that on the bottom of the page, Over the last years, we have increased our gross CapEx.
The guidance for this year is at 2.5% last year, we had 2.3. And we now have this aircraft topic of 1,000,000 on top, which I will come back to also with regards to the flexibility question. I think what is important on this page is that at the same time, we have significantly improved our return on capital employed. Small technical remark for those of you who will try to do the numbers later on. I'm using a slightly different definition here to what the divisional colleagues used.
They looked at our internal divisional definition for ROCE where we take business operating assets and goodwill. Here, we just take the number you can directly get from our balance sheet So we take asset minus current liabilities, yes? That is why this number is on a slightly different definition basis, but of course, consistently across the timeline, And you can see that in 2017, we came to a return on capital employed of 14.7%. Obviously, we will have an impact from IFRS 16 on this number. This is something where we will have see at the end of the year what the ultimate number is.
Our current modeling suggests that it will be an impact of around 250 basis points So for me, that is going to be a rebaselining. Of course, the ultimate aspiration continues the same as in the previous years that we want to provide you with sustained growth metrics then going forward from the new starting point. The next page is a variation on the theme. It basically takes the absolute numbers rebase lines them to 2010 and then shows you the growth rates. I think 2 important messages here is, our return on capital employed growth has outgrown the CapEx sales ratio increase.
And overall, we now had, at the end of last year, a CapEx to sale ratio of just below 4%. So I think overall, we still feel very comfortable with this dynamic. That takes me to the question: how do we do our capital allocation process. And that's a topic we have already covered in previous events So I don't want to go through all the details. We have kind of like picked here some pages we showed in previous capital market days.
I think the obvious important message here is it is a topic of the utmost relevance to us. So we have regular processes, our regular general strategic capital allocation discussion, where we look at how much do we need for replacement? How much goes into growth? We have different criteria, strategic financial risk based to assess on how much money do we want put into the different areas. That then leads to the annual budget where the divisions get allocated their share of the CapEx budget for the year.
And we also have a year 2 and year 3 plan, which we then adjust in the next budget cycle. And obviously, and that's not a surprise. We have 2 divisions, which tend to get more CapEx because they are of 2 more asset intense businesses. The PEP And Express division, which is why I'm showing you on the next page, an overview on where this CapEx goes. I think that is also nothing totally new.
We have shown these breakdowns before. Just wanted to give you a bit more of feeling for where do we actually spend it? The one thing I want to point out here is on the lower right. In Express, we already had quite a bit of aviation CapEx in the year 2017. That was driven, for example, by the Air Hong Kong Transact where we had the opportunity as part of this deal to take some, aircrafts on our balance sheet.
And that leads us to the interesting question of how do we think about this topic and ownership versus lease, fundamentally? The 3 axis I have already used a long, long time ago when I was still the CFO of the Express division because ultimately you to continuously look for the optimum point along three dimensions. The first dimension is the cost position. Where obviously in terms of EBIT operating cash flow ownership is the preferred model. But you have to take into account what does that mean in terms asset intensity, how much assets do I put on the balance sheet and how much CapEx do I have to pay upfront.
And you have the question of flexibility. And on flexibility, there are actually 2 things to bear in mind. Operational flexibility, they're owning the aircraft gives us more operational flexibility. If we have a partner and we have an ACMI construction with the partner, the aircraft is bound to the partner and the routes we fly a partner. If we control the asset, the aircraft, we have more operational flexibility where we want to utilize this aircraft.
So that's the one dimension of flexibility. Of course, the other dimension of flexibility is how much headroom do we have in terms of a crisis to get rid of airplanes, which is why we have always been very careful to have a healthy mix between short term and medium term and long term leases and ownership. And that's the graph we don't have in the deck this time. I know we have shown it in the past in Capital Markets events, we will probably also come back to that slide, because you see that even if we now shift to a bit more buying on the intercontinental side, there will still be a lot of flexibility, that was, of course, also a big topic in our internal discussions if things would turn into a different direction, would we still have the flexibility to shed capacity and that would still be the case? So that's the fundamental way how we think about these questions.
On our regional expressed fleets, we already have a high degree of ownership, particularly when you look at our European fleet. And there are numerous reasons for that for example, the type of aircraft you fly there tends to be older and you have to put it on the balance sheet earlier anyway. On the Intercon side, we historically had, a relatively low share of ownership. And I think there are a number of reasons for that. The first one is, especially on the intercon side, we always had to work with partners because we didn't get the flying rights.
And we will continue to work with partners because we still have certain routes on which we, as a European carrier, cannot get the flying rights. So that created a simple opportunity to do it through an ACMI construction and not get into the CapEx ourselves. The second point was of course that there was a time, like, yeah, 10, 15 years ago when we were in a financially different position as a company, where also the economics of taking it out on our own balance sheet was not the type of option we have given the strength of our balance sheet today. So that is why we went into a very thorough reevaluation process on that question. Obviously, on the cost side, by upgrading from older aircraft to newer aircraft, which we have to do anyway independent of the ownership question, we will get to a better cost position.
But of course, if you then also, cuts cost on the A component, that gets even better. And that is why based on our current assumptions and what we are looking at as scenarios, we clearly see through these intercontinent shifts, a 5 bps margin improvement potential going forward. As I said, this is going to lead to some CapEx beyond 2018, we have to come up with a concrete plan of how we want to do the re fleeting before we can tell you more on this. But the current modeling in all scenarios doesn't show for no year and increased by more than 150 basis points. On our CapEx to sales ratio.
And I think very importantly, as I already said, we will fund this through a separate debt vehicle and we will be able through the operating savings and the cash flow to repay that in a very, very good time horizon so that in terms of excess liquidity, it's not going to be detrimental to what is relevant to you. Yeah. So that's kind of like the first question topic, capital allocation and the Express Intercom Fleet. That takes me to The second topic, free cash flow generation in general. And this graph shows again how we have developed over the last 8 years since 2010 where I think quite obviously the biggest driver for our improvement in operating cash flow has been the EBIT growth.
Yes, we had a couple of things like provision movements, which tampered off, but the fundamental growth driver for the OCF has been EBIT. And of course, the improvement in OCF has been the basis for investing into future growth on the CapEx side, but also for generating free cash flow to pay our regular dividend and to also accumulate some excess liquidity. I'll come back to that later. So what to expect going forward in terms of the levers of free cash flow There's nothing fundamentally new on this page. We are still convinced that the biggest driver for free cash flow growth will be continued EBIT improvement flowing through to the OCF line.
We have highlighted here where IFRS 16 is distorting the lines. I mean, obviously, in the depreciation, we have the one time step change now in 2018. Thereafter we expect a slow gradual increase, changes in provisions, no change. This is going to be a line where for a number of accounting reasons, we will always have movements in the course of the year, but cash outs expected to trend flat to slightly down year over year. Working capital, fortunately, we are a growing business.
So that is obviously something where we will see a little bit cash drain, but they have a very strong focus also through the management incentive to make sure that this is kept under tight control. Texas, yes, we are growing EBIT and our operating results, and that will also lead to increasing taxes. I'll give you a bit of an indication on that in a minute. And then on net CapEx, yes, we expect to grow in line with what we have seen in growth over the last years. And then there will be the separate topic of the Express intercon fleet.
Redemption of lease liabilities, we have included newly, as previously mentioned, to make sure that the free cash flow number is comparable year over year. And last but not least, net M and A, and I think Frank is going to talk about that as well, it will remain opportunistic and bolt on. So overall, like we have successfully done over the last years, we expect that increasing EBIT is going to translate into increasing operating cash flow and increasing free cash flow. That takes me to another interesting topic, tax rate and cash taxes paid. So when you look at our tax rate over the last years, it has been quite low, as you know, I mean, kind of like low, like 12%, thirteen percent, 14%.
That is obviously not our long term tax rate. We still have 4,000,000,000 of unutilized tax loss carry forward, which we can over time activate So we expect that we are not going to do on the tax rate, but there will be an increase to what we currently assume is around the mid 20s and also over the next couple of years. For 2018, we feel comfortable with our guidance of 18%. And again, we will, especially in the U. S, be activating more tax losses carry forward.
But we have to expect that there will be an in the tax rate. I know that this is very relevant to you because it impacts our net profit and hence our dividend, our regular dividend, The important thing to bear in mind here is that we have our 40% to 60% payout corridor. So course, when we talk about the regular dividend progression, we would want to avoid a situation where because of the tax rate things are not moving into the right direction. That takes me to another fascinating topic, FX exposure. And we had
a long debate of how to, yeah, show it here in a way which
is explainable Maybe the first thing I have to say is if you now expect the great unified theory and a simple formula, I have to disappoint you because it is hugely complex. And why is it so complex? Because we are the most international company in the world. And we have impact from a lot of different currencies. So for example, in 2017, we had a lot of influence from Egypt.
Which many people probably wouldn't have had on the radar screen. So, what we have tried to show you here is those currencies where we have a net short position and those currencies where we have a long position. So the big short block for us is the U. S. Dollar.
Why is that? Because you have a lot of buying to do on the aviation side, and that is denominated in U. S. Dollar. And then the other two currencies, where we are in a short position are in Malaysia and in the Czech Republic.
Why is that? Because we have our 2 big IT service centers, there. So those are essentially our short currencies. The rest is long. And now the important thing here is when you look at the U.
S. Dollar block. So even though we are USD short, and you would assume that, depreciation of the dollar would actually be a good thing. We are long on more U. S.
Dollar correlated currencies, in Asia predominantly, so that we have net positive exposure that means that if the U. S. Dollar depreciates, that would be positive on the red box on the very left, But because of the big green block of the USD correlated currencies, it would actually not be good. And now that the complexity comes when you kind of like look at the light green thing, even if you kind of like understand what is now happening in U. S.
Dollar and euro and the U. S. Dollar correlated currencies, we also have a lot of other large currencies, like the Japanese yen, like the British pound, Russia, Turkey, there is no direct correlation. And so that really makes predicting the currency developments, a little bit tricky. What does that all mean for us as a management team?
It means that currency movements are a reality we have to live with and where we are clearly focused on then taking action. And when I look at the possibility to take action, clearly, I mean, Ken talked about the annual price increase, they do in express. Obviously one of the factors going into the decision of what we do in terms of the local rate card is how has that currency developed vis a vis the half currencies. So I think in Express, we can react in a very well controlled and very established way. In forwarding, it ultimately also goes into the rates.
It takes a bit more time and it's more of a market driven thing. But I think there's also a natural process over time to take currency fluctuations into account. The 1 division we are reacting to currency is most complex is in Lon's division and supply chain because we have local revenue and local costs. So take the UK example here, we have our revenue in pound, we have our cost in pound, we have our EBIT in pound. If the pound depreciates, that doesn't change anything in the local P and L, but we get a translational effect when we put it into euro.
But to then explain to a customer, Hey, we are going to increase your prices because we as a group report in euro, and we have this translational effect, that's a bit of a more tricky sell. And that is why In supply chain, it is more of a question of how do we steer our portfolio, across the different geographies. So much on currency. And that takes me to a comparatively simple topic the cash generation, excess liquidity and the balance sheet. So I've shown you the slight before.
And here, the important message is the yellow bars are taller than the gray bars. And that tells you that over the last years, particularly since 2013, we have been able to generate more free cash flow than what we have paid out to our regular dividend. And that was the basis why we did our first ever share buyback, distributing 1,000,000 of this excess liquidity for our shareholders. So obviously, we have now accumulated more, and we intend to accumulate more of this excess liquidity. And I know the question is, what are we going to do with that?
And in this context, I really want to reiterate on the firm commitment to our finance policy we are still targeting our BBB plus rating, where again, all the IFRS 6 seen lease accounting is not going to have an impact on. We are committed to our regular dividend payout policy with 40% to 60% corridor, which we are, of course, going to utilize should there be through IFRS Six seen or through tax, being an impact to make sure that we show a good progression on that. The one area where we have adjusted, our old, our finance policy is on the top of us, excess liquidity. We have said so far that, excess liquidity will be used for share buybacks and or extraordinary dividends and or additional pension funding. We have taken that out for two reasons.
We are now at a funding ratio of 75% That's the ratio with which we feel very comfortable. Also with regard to regulatory pressures after the funding we did in the UK at the end of last year, we are also, very well covered on the regulatory side. But I think more importantly, even should there ever be an additional pension funding in the future, we would do it like we did this in the past as a liability swap on the balance sheet without impacting excess liquidity. So our finance policy is in place and there is a clear commitment that at the right point in time, we will have a discussion about what to do with the excess liquidity. Obviously, that is not a topic.
We're going to, have pre discussions on when would be the right point in time. But it is a topic we are fully aware of, and we know it's of interest to you. And it's a very clear commitment that not going to do anything stupid with this excess liquidity. And, yeah, I hope that gives you some assurance and Frank is going to cover that as well in the CEO presentation and the final wrap up for the day.
Yes. Thank you, Melanie. So let me go straight away into the final set of questions, which is here. So how do we see e commerce and how important is that is? It's very often on your mind.
And of course, we have a clear opinion about that too. So therefore, I would like answer that first. 2nd is what is the volatility, what is the tailwind or risk in our portfolio, And I would like to give you some ideas in our perspective on that as well. 3rd, is there any big M and A or any change in the structure of, the company necessary, what are our targets and how we want to make them, what it means for you as shareholders and finally, what means digitalization and disruption for our business So let me start with the first one. So here you'll see all the activities we are doing in the different fields of e Commerce.
So with our broad portfolio, we are well positioned to capture all opportunities, which are in the e commerce world. You know, Ken talked very intensively about the opportunity in the premium segment and how much that has helped to grow the Express division. And we have helped other customers. I have seen that when I heard that from customers myself that they say without bless you without, yourself, as DHL, we would not be in existence because we are connecting the small enterprises the world. Cross border is driving, not only express, but also our Peptivision.
The international trade is getting now, and that's one of the reasons as well we see now for sustainable growth at a lot of air freight. Is now e commerce actually, and that captures a lot of potential there. B2C and B2B supply chains, going all on our multi channel, and that means that B2B customers need fulfillment centers and not only B2C customers, And you can go around that. And we are really well positioned to capture even full potential. That's the reason why this industry is very important for us.
Here you see what we're doing from a product offering across the whole portfolio because we are sitting in the Express segment. We are also sitting in the smaller or slower speed products, and that is when either express or PEP supply chain does multi users and dedicated fulfillment centers, as John explained. I think all the forewarning is capturing not only deferred in economy, but also in some places, even small multi users activities for the e commerce band. So we are well position in that industry. And fortunately, that industry is still at the beginning because we have seen so far only the consumer conversion of e Commerce and not the business conversion, which will happen.
And we are serving these are not just customers. This is just a list of different activities and you see all people are looking into that. The platforms and marketplaces and a lot of retailers and small companies. And that's interesting as well. We see a lot of growth.
And you saw it in my presentation as well. The small companies are growing now as well. Due to the conversion that the internet gets much better, they are getting more intelligent as well so that they are found are through research engines. We see a lot of small companies are growing rapidly as well despite the marketplaces. And finally, of course, for brands, which are looking as well, they want to be visible themselves and they need a great service so that the customers have the same experience then in the same way as if they go through the marketplaces.
And that is what is happening. What is important as well, so far, no customer represents over 2% of our total revenue. I think that's an information you are looking for quite often as well. We are a very customer centric organization and I think we have really, be successful in competing in all these markets, in all our 4 divisions, I mean, of course, in Permian, clear and expressed, you have seen the impressive growth we have seen in e Commerce. John talked about a lot of, you know, fulfillment activities for e Commerce and that will continue to grow.
In DGF, of course, in a fragmented market, there is a lot of opportunity to consolidate and do even more And we have seen that already that in this industry, the players have. The large players have gained market share already. So I think we are, you know, know that and that's not new for us. These are competitive markets, but at the end of the day, I think we have good recipes for success in all of them. So the key elements are actually in e commerce, the customer centricity.
At the end of the day, what e commerce really has helped is it helped gave consumers power. And in the past, customers have power and now consumers have power, and that really changed quite a bit. And therefore, it's very important that we are most customer centric. I think wherever we are really customer centric, we see the benefits on that straight away into our numbers. We have gained market share in Express for many years.
In PeP, we have gained market share. I'll be minimize the losses in the mail area. In supply chain, in certain segments, I think we have grown faster as well in DGFF due to the struggle we had. And I think Tim has now laid out the right foundation that we will benefit from that too. So we need to be customer centric.
We need as well that we are paid for service. We are providing premium service at buffer market. And the markets are complex without a doubt, but that generates an opportunity. The more complex situation, the more benefit it's for the service provider because we are helping to take the complexity out for the customers. Excellent, simply delivered is actually the promise that we make it easier for the customers, than they can do themselves.
So that's e commerce. So e commerce will be a very strong growth pillar for our company across all parts of our company. Second question is, how much risk of volatility or tailwind or headwind we have that shows you on two dimensions. So what is our exposure to GDP growth? So that means the volatility, you know, of course, you know, in that's different for the business.
And the other is the growth rate, we expect. So in B2C parcel and express, we definitely have a structural change. That's the reason that the volatility, even if the GDP is slowing down, the structural change will continue. So that business is not volatile because it's a structural move, which is taking place and will continue definitely for the next decade. On the other side, DGFF is more volatile to the GDPR because that's the fundamental support of global trade and global economy.
The growth rate is still pretty good, but it's not as strong as we see it in e commerce. So this is a more volatile business as we've seen, but this is very asset light, as you know. Then the post, of course, you know, there's hardly any growth. It's probably more slow, but also here, we have seen hardly any strong correlation with the underlying economy in Germany. So that's pretty little volatile.
So what it shows here is But I think we have a pretty diversified product portfolio with our divisions and we have seen them in the past as well. So we are not just the high growth engine of the economy is very strong, nor we are the door of the economy is poo. So we are having a very balanced portfolio, if you think about our companies. And that makes us, of course, more resilient as a company. And you have seen that in the last 10 years quite often.
Here you'll see even, you know, more by numbers, how much the different areas are contributing course, we are in the Circular. We have still 45% of our revenue. Restructural decline is just 15%. That's a male business, or it's probably even slightly less, and getting less resilient growth in supply chain, in particular, is 20% and 20% is in structured growth. So that I think shows here that we are really having a good balanced portfolio, from a risk perspective.
Therefore, we will not never get the next momentum if they is very strong, nor we will ever see the penalties of a recession. So and I think that gives us certainty that we always very good see a good EBIT development in the cash flow generation midterm. So that's what the portfolio of our company is all about. If you look into then the different divisions because that's a question as well, are they are self funding? Yes, all divisions are generating more cash flow than they need as I think that's an important indicator as well.
We don't shift money from one pocket to the other. They all are generating sufficient cash flow to run their own CapEx. DGFF was easy because they'd hardly have any CapEx, but at will, the cash flow generation will improve significantly if we see an acceleration of a profitability, as Tim has outlined. And we have already seen significant that our EBIT as working capital was not great, but we will see a tremendous change in global forwarding and the difference will become much bigger than it's shown here. Supply chain always generated more cash than CapEx.
And also our cash, the divisions with more cash need capital needs have generated significantly surplus in cash flow. I think that shows that we have a self financing mechanism for our portfolio in total. The last dimension to that I'm sorry, two dimensions to that is, yes, we have some synergies between them, not only in the back office, if you go around that, but also on the front end. We have done much more on the alif than we have done in the past. We have now interesting enough.
We have been fitting as well with our around the world freighters, but we are a strong buyer in that market. So that's the reason why we get access to this around the world. Freight us for DGF. And there are probably more opportunities going forward than we had in the past. And I think that after Global Forward, it is now gaining strength again.
I think we will see even more upside in that area. We also benefit tremendously from our 2 brands. Which is important because that we are not ending up on the purchase list of a procurement guide is difficult, to explain to your bosses somehow that is a benefit. And finally, what can describe as a certified program, we are rolling that out in all divisions, and we are seeing the benefits of that in all divisions. The mood is going up and that will help us to become even more customer centric.
So I think we have a good structure and that leads me to the last page of that chapter. We haven't done too much M and A in the last 10 years, as you can see here, a little bit, but it was all in some small activities. And we still don't see any major acquisition needs because we are well positioned with our business. But on the other side, if you look to the bottom, that's the reason why we only share ROCE's for DGFF and supply chain. We don't see any need why we should separate that.
I think when that discussion comes hardly ever up now, But if you ask me why we should split that, we will be more busy in separating that than regenerate shareholder returns. And you see that we have. Yes, we have still a way to go for DGFF because if you include goodwill, the the ROCE is below the threshold of our weighted average cost of capital, but supply chain has not delivered there for many years and I have no doubt that DGFF would deliver that soon as well. So we don't see any need because they are self funding. They are well positioned to the EKura's world, and we are generating even some synergy in our portfolio.
So I think that's important to understand because that's a question you might ask. Do you want to buy something or sell something and the answer to both is no, we don't. The targets, of course, as I said earlier today, we are very committed to deliver our target numbers. 2020, I think, is something we are very confident that this can be achieved. In 2018, we confirmed We will see now in the next weeks what we need is it easy to achieve that without any major restructuring or not and that will of course depend.
But I'm very confident and I'm very confident about the 2020 numbers, and I'm confident as well about 2018, but we will see that in the next months. And that's the reason why we are I mean, today, our goals, we have said already a while ago. Remember, the goals we set for 2020 are going back to 2014. So, and I'm standing here in front of you and being more confident than ever before that the 2020 goals are achievable. How?
Yes, we have to continue to grow in PeP. I think we have a good base, and I demonstrated this out, we don't have a market problem. We have a cost challenge in Germany, not in Europe and Internationally. And if we tackle that, I think, and that's a problem where you can easily attack than the market prop, I think there's an opportunity to improve the PEP numbers to the goals we have set. Express is a flywheel anyway.
So that's amazing, you know, how well we have done. And Acad is so right. The reason is because that division has, by far, the best employee engagement and that makes such a big difference in that industry. And if you sit in boardrooms of others, they all talk about employee engagement. I think we have really a role model I think the other divisions are learning from that and we can improve in the others as well.
Then DGFF is simplifying plan. I think it's a perfect combination. I think Tim was perfectly right. When I left that, I probably took some decisions, but I never understood really the dynamics of the business. And Tim has expert in the field understands it very well.
And that goes a long way with the organization. So we have now a very clear plan. We have a great platform with the new IT formats coming in. We have high motivation, and now it's really time to take costs out as he does and grow the business in a profitable way. And that starts with being firm that a good service needs a good price.
And I think you see already the benefits in the first quarter and not to come in supply chain. I think the beauty of all that is, it's much easier now than it was to manage that business because we have significantly more consistency in that business That was the strategy focused connect role up on John and you see that. The business cases we get are significantly more consistent. So I think there is a significant upside potential as well. If it goes here, like Penny, you are sorry, if there's an opportunity about 45, we always say, let's make the numbers first and then we talk.
And we had we said the same for Express. He said today, maybe we can close for Get Furva, that has always been the aspiration, but we are only committing ourselves to what we can deliver and we have done that in the past, as you know. So I think that we have a very clear plan by divisions, and I think that was in very clear for the DHL divisions on PeP. I gave you some first ideas, and of course, you wait for more. I feel very confident that we will see in due course a good plan as well to improve her performance.
The next S curve is digitalization on one hand and e commerce. So globalization, fortunately, will not go away. That will be a core driver, but we can do more. And I will share that later on as well at the end. So 5th dimension is, what do we do with the cash flow?
This is a different picture, but Melanie presented already that we are generating more cash flow than we need for ourselves and then for the dividend. So, and of course, if we accumulate more and more cash, of course, we have to find ways to give the money back to shareholders. And we will, and Esmeron, you already said we would don't want to do any pension funding any longer because, you know, we are well funded now. Therefore, if we continue to generate more, then we have to find a way to give excess liquidity back to the shareholders. But as we have done that in the past as well, we obviously, we generated first before we talk about what we want to do with the money.
We are very committed to the whole finance policy, which is in place now for a long time. And I think we have seen a significant increase in the dividend with the strong support from the supervisory board as well. And that's I think it's a good trend as well for you. So there is acceptance that the company is doing well. There's a need to return money back to shareholders.
So you have my own commitment as well, but I always say Let's deliver first before we talk about what we do with the extra money we have. Final thing is our digitalization and that's is only worth today, probably not enough time to talk about that. That will change our industry tremendously. So, and that picture shows you more how we think about digitalization. And since we started that and at the end of that framework came from our new colleague for HR, who was my right hand before, And he created that because he said as well, you know, the organization will only capture what digitalization means for the organization if that's easy to understand.
So and that is very easy to understand because we say, if you think about your own processes you have currently, think about data and technology, how they can improve your existing processes or even more challenging rethink due to the technology or processes. And adjust them. But don't forget to make them more customer centric. So that's what is on the left side, what we call technology exploitation. So I believe that will be the majority of all activities we have and we call that small eye because it will change our business model.
On the right side, there are stuff where we can use technology to even disrupt in certain areas our own approach. Or where we can leverage our unfair competitive advantages we have. And we have in certain areas unfair competitive advantages. And we should take those and use the technology to make them to business models. And that's the area where you can gather your focus on now in particular we have, I think we have good ideas when we have an advantage over others.
Postpost probably was not an example. We didn't have, we felt that we fought through our brand. We and competitive advantage, but unfortunately, this market is just cost driven. We will don't care what the brand of the bus is as long as it's cheaper. And therefore, our idea didn't work out in hindsight.
But so what and that's the reason why stopped it. You know, the street scooter, I come to that later on, it's we have a very round. We have such a high demand that we can build a business model and now start selling to others. That needs to be supported by a consistent culture and leadership approach, and we have that established now for 2 years. I don't talk about that today, but we are measuring our leadership even on these leadership.
Are they role model or where they are role model and that influences their variable pay on an annual basis. Small eye cases, yeah, there are many from different divisions, you know, a lot in PeP itself, you know, trunk delivery. We were the first to really create a vet solution. It's still small. The drones are still more interesting for Civilians or inventory measurement inside the walls than on the street because the complexity is much smaller first.
And second, we have it under control. So that's an easy business case to replace our security guards by these drones. And these drones are actually in some markets where you know that corruption is a significant problem, drones are not corrupt. So that is helpful too. Data analytics, we are building now as well our data lake, and we see very good business cases where we predict churn, where we predict our routings, and there are many other business cases we report.
We do that case by case. So we are only putting data into our data lake based on business cases. Augmented reality, John talked already about that, Sawyer, as well. In Air Freeport as well. These are all things from the supply chain where we really see significant productivity enhancements.
And that's what will happen in our industry. Our industry suffered from very little productivity gains. If you look into what we are doing, it's very similar to 20 years, 30 years ago. The technology will change that. And that opens a huge opportunity for all our business units to improve productivity.
So that's great for the planet as well because productivity creates at the end of the day wealth because there are only two reasons, which create wealth, either in our population growth because everybody who works creates value by definition. So if more people work, that's good, are the people what we're doing in our creates more value or more output. And that will change our entry industry entirely. The nice thing is For us, in many parts, if we have an idea, we can scale it immediately to other places because some of these pilots are quite expensive But if you have done that and see the benefits, you can scale them very rapidly. That will definitely hit particular supply chain where we will see significant opportunities, but also we have a stage analytics We can do it in one country and then we can cave scale it to 200 countries.
And you can go through that. If you have drones, civilians, you can do it in every facility because even in the low cost countries, there's a business case. So and that's an advantage of our scale and reach. Then the streets go down, which is a big eye test somehow. And we are so successful that you know, Ewing and I came to the conclusion is right that he focused on the new I incubation ideas and I take over for him from him for PEP.
So that we have maximum focus on both. So here's the journey. We acquired the company already a while ago and they really launched the 1st in 2015. And then we really started to use them for joint delivery. So my career hasn't already for two and a half years or so.
Who I'm living in a small village close to born, and we have a joint delivery, and he's using that already for a while. We have now 4500. We have different scale. The XL is now coming, which is for dedicated parcel delivery. So the others were so far for joint delivery, and now we even an electric vehicle for parcel delivery.
Here are the different types. The interesting thing here is here is that These toys or devices are things which you can only produce if you have an internal need in the first place because nobody actually from an OEM would ever accept that there's a car which drives only 85 kilometers has reached 200 kilometers you need really an internal amount. And now the things are changing. If you can live with that as Deutsche Post, you know, I can live with that easily when I'm a craftsman. Or university of born recently bought 1.
The point here is that it takes some time. That's B2B business. It takes lead time to see a big step up in sales because if people are taking a pilot, they want to see the results of the pilot, then they want to do second pilot and then you will really see the breakthrough. So it's still some time to go, but I'm very confident the feedback we get from customers is superb. So there is an opportunity for us needs attention.
And that's the reason why this is one of the core elements of corporate incubations. So here you see some numbers. We have, of course, we're charging. Installed. And that is also an example, you know, why that works if you have your own demand.
You know, to build these charging places, for us a normal record that move anyway because we know that we will always have enough, street scooters and we need them. And they come back to the same place anyway. That's not for private person. It's no different. Therefore, if you look into private cars, why they're starting the premium segment is pretty straightforward.
You know, Tesla attacked exactly the right segment. If you have already 2 cars at home, you don't care if a third is an electric vehicle or in combustion engine because you a car for 800 kilometers at home anyway. So you can use them via just for city tours. That's very different. If you go for you buy only one car and you own only one car and you live in a 20 year flat building that's different with charging than being at home.
Here, we have a charging infrastructure straight away. All careers are coming back to the base anyway, and that's the reason why it's so attractive. We cannot produce up to 20,000 And of course, we are looking into enhancement of that, including autonomous driving, which we have already in place, but it's not allowed to do that, as you know, on free streets. So this is what StreetScooter is all about. I have in more detail.
I think it's straightforward, easy production which we have scaled now. We have a market leading position that brand is known now and we get more and more interest even from our competitors. To because there is more regulation coming about city centers where only electric vehicles probably will be a allowed in the future. So that's a great case. And it shows what I meant with unfair competitive advantage.
Our internal demand and our knowledge about what we need and our perfect application because delivery is stop and go. So that's a perfect application for electric vehicles is in comparative etch. Others don't have that. If you would produce it as a startup, you would fail because with these lead cycles of B2B purchase, it takes so long. In consumers, that's different.
Consumer business, people switched straight away from a Nokia to an iPhone, turn from an iPhone to something else. That's easy. In the B2B world, it takes much longer. The decision making process is different. We don't care because we have more of an enough demand internally to fill these operations, these plants.
So if it takes longer for us to buy them, but they will come, I have no doubt we are, these are easily off. So that's the reason why this has been new structure now. We have now 4 divisions and we created more or less a 5th pillar, which I would not call the division yet. But you asked already earlier, we will give you more information, what is part of that, what is inside, what is revenue, what is our losses or profits in this area, Going forward, when we would do that, how we will do that, we will come later back to you. But it's important we have CEOs who are driving the classical business and we will have something which creates new ideas, bigger ideas, which are related to our core.
So we will not do things there, which are completely off they will leverage always something. And we have tried that twice to do that. We did that in the around 2000 and we IPOed and one of the analysts wrote even at that time, all our startups at that time were $1,500,000,000 worth. We had an email address for everybody in Germany. We had a signed trust center.
We had even a portal, but we lost focus on that, unfortunately. And on hindsight, it was a mistake because it was separate from the core and the organization said that doesn't work. That's all nonsense. Because it was completely separate. Now we said in the last years, let's integrate that and do that in the business.
That possible that creates new frictions. Like you see now, we have costs in the PeP, which is invisible and you will measure us only on the existing core business as long as you don't know more about that. Now we combine both approaches because we have now somebody who deeply understands what the logic of our Kois and therefore he can develop ideas which are adjacent and close to our core. And it's not somebody, and that's the reason why we don't call it business ventures. We call it corporate incubations because we want to leverage what is close to our core.
And this is the big eye ID area, and I'm very confident that we have enough unfair competitive advantages in our operations. But we can build more business models around that. So that's the story behind that. So to conclude, You have seen that before. I think we are still a very attractive business.
We explained why I think that portfolio is not only resilient. Self funding, but also attractive. We continue to have a very good dividend yield as we have demonstrated a couple of weeks ago and I think we have improved our performance consistently and we will do so in continuation because don't forget, yes, we have a we had a challenging first quarter But years ago, nobody believed that PeP will ever make 1,500,000,000. So yes, that is true. And we will tackle that, but it's not that this is all a problem.
When we started, we felt this railroad down to the 0 line and we are far away from that. So therefore, we have, I think, improved consistently. So finally, the digitalization is already set a busy slide, but what the so what of that page is, we have built a global player benefiting from globalization for many acquisitions. Now we use organic growth to leverage digitalization of our company in the existing business and in adjacent businesses. So that's the story.
And our business model will be in 15 years very different from now, but we are investing into that area and we are very confident that we can transform because we have the scale and the reach to transform our business model to the new world. And we will benefit from digitalization in e commerce quite a bit because we are well positioned for both. So that's the end of the story. So thank you very much for listening. Now we have another Q and A session and more related to that, but whatever you want, my colleagues pre DHL colleagues will sit there, but they have a microphone, if you have questions, because we don't want to stand here in front of 5 and 4 people are at Isle the whole time.
If you have questions to that, so the other colleagues, beyond Melanie, myself, you can ask them as well. And then they will pull out the microphone. So thank you very much. All right. Well, thank you, Frank.
Thank you, Melanie, for that, for that roundup. Grab it. Grab a water. And yeah, we got a couple of questions that came in from the web, but I want to give you the benefit of, being here in person. So Tim, why don't we start with you in Virginia?
And just on the street scooter, is the plan or will you consider maybe listing part of it at some stage if the market environment looks right?
So, you know, it's too early to say, but of course, we have to think about if we really get more and more traction externally how we fund growth, and how we unlock the potential. And there are different ways to do that. I think it's too early to say what we want to do. What we believe there is significant value already in that. And we have to make it somewhat visible for you as a shareholder because at the moment, the first started to take it to put a price ticket, the best is proof of evidence instead of having any theoretical logic.
So but that's too early to say.
Can I ask 3, please? 1st of all, coming back to dividend and potential surplus capital, are you still content paying a dividend once a year Or is the mix of the business changes and its seasonal cash flows change as well, would you ever look at a more steady picture across the year And if so, do you have any initial thoughts on that? Secondly, with the focus on excellence and what that can drive in terms of revenue growth, and particularly with the changes with IFRS 16, has the supervisory board had any thought about the way management are remunerated and looking at something more beyond just the absolute share price and the return on capital. Or is that still the absolute focus? And then very finally, and I guess linked into that, Frank, a little while ago, you made quite sizable part of one of your presentations on the sort of the impact of the business, both socially and environmentally.
Could you give us an update on your thinking of that? Thank you.
Okay. Maybe I'll start with the first question. I have to say on the question of, dividend spread out through the year instead of once annually. We are not getting consistent feedback on that. There are different preferences So, I mean, it's a topic we touch upon, quite frequently in discussions, but, I haven't seen a clear pick on this yet.
So there are no concrete plans yet. But of course, we're going to see many of you over the next days and going forward. That's the topic we'll be happy to discuss. But as I said, so far, there was no consistent picture.
Yes. I think those of you, our shareholder just approved our, you know, with vast majority, almost 90% of the new incentive scheme we have as a senior management team. And that is we have a 1 third is a fixed and then we have 1 third which is a variable income in the 1st year and half of that is deferred as long as we don't earn our cost of capital as a company that will disappear. And that's still in place. And the last third is completely related to either the absolute share price increase or the relative against index comparison.
What's important is the whole thing is empty and we are not increasing share price. So we will not get from that for any euro after 4 years if the share price is down on this period. And I think that's right that we should not be remunerated or rewarded for underperformance regardless what the markets have done, because I think it's right that the management only gets something if you get a return. And that doesn't include the dividends. So that's a model more or less, and it has been already for a while with some changes now.
For hurdle to get, the long term incentive is a little bit higher because there's another step now, which in the 1st year, the supervisory board can give you more or less on, the on these stock appreciation rights phenomena, but that drives mainly the income of the senior team. And that is share price related. And I think that's right because that's the best measure. And shareholder returns beyond share price are embedded somehow. Of course, if we would say we do an extra dividend, then we have that drive for share price as well.
So So these things are embedded, I think, are best reflected. And I think that's a good model. So what you should expect, I should be rewarded on long term. That means 4 to 6 years. And the majority of my income, if you look into the annual reports, obviously driven from the long term as long as we're doing well.
If we don't do well, then I get my fixed and I get might get half of a shorter variable. And that's it. And then I have less income, but if it the shareholders get a good return, then the management should get a good return as well. And that's the basis for incentive, and I think that's right. And you know, you can criticize me, but the shareholders actually from this is right.
Obviously, my advisory board decides on that, but of course, I was heavily engaged with that in 90% or 88% felt that this is a good model. And wanted for that.
Corporate Social at this point?
Of course, this is corporate social responsibility has now been a part for for almost 10 years of our whole strategy. We always said that corporate social responsibility can't be something different from what the company does. Therefore, now our free bottom lines, customers, employee shareholders, there's obviously Centra, that's a planet, and we continue to roll out our activities, which are go teach where we work with different organizations to work with the people at the bottom of the pyramid. We are not sponsoring the Ivy League Universities. We are sponsoring the activities which are on the bottom.
Teach for all, is the major activities in SRS Wilages where we really help keep children disadvantaged children to get appropriate education. The second is go help, but we use our logistics expertise when natural disasters are happening. The UN and the company can call us. If we come for free, of course, we pay for a lot of people to help them for, with logistics, which is usually the bigger need than money. Money comes in from all places, but logistics need is not well covered.
And the last one is go green. We are very committed to deliver until 2050, a carbon free, not a carbon neutral, a carbon free operation. And I very often say that politicians and COP 21 did that the Paris agreement who set a goal and should say that a goal and maybe there's a regulation how you enforce that, but the technical solution should be driven by the demand of companies like us. So we meet airplanes, which are carbon neutral by 2015. Whoever produced them first will make the race.
And I have no doubt that our logistics companies will follow our model pretty soon. Like we did that, then TNT and us started that until the 1st place in 1008. All of us follow the postal industry is all on carbon neutralization and all this kind of stuff and the logistics industry as well. I have no doubt in a couple of years, all our key competitors will say, we go for 2015 carbon neutral as well because it gives you more and more advantage in the customer market. So we will lose that when they join.
But if they join, if a whole logistics industry say, we want to have carbon neutral airplanes by 2015, The bones and airbrush, these will better, you know, put their sleeves up and produce them because if they don't do that, somebody else will do that. And there will be people who will produce carbon neutral outputs. I have no doubt. On the carbon infection, we are already on their journey anyway, Varun's sweet crudes. So this is what we are doing and I think that is a journey.
We have to do as a company as well because we are working 200 funded countries and we have to give something back and have to take responsibility and you can't do that just on Sundays as a Christians, when you go to church and pray, you have to do it every day in your day to day operations and this is what we are doing. And that goes a long way with our employees, by the way, too. So long answer to, but you asked for the social sports and that's it. It's good
to get these from this audience didn't get We
don't get them as often as many years ago.
So Damien, thanks for that. Dror, we continue with you and then we'll
Hi there. Just a couple for Melanie. Just starting with the tax guidance, obviously, saying mid to high 20s, is that by 2020? And also, it feels like quite a big jump from where you've been. Can you explain maybe how you arrived at that guidance?
And also what the implications for your tax, your cash tax will be, on that basis. And then my other question is really point of clarification about the million that you talked about in the debt financing vehicle. I'm still a bit confused about exactly how that will work and why it doesn't impact your excess liquidity. And also, it doesn't feel like a big number given what, say, a 7 77 freighter costs, million is a lot. So why is it that number?
Yes, okay. So, I mean, first on the tax rate, I think you have to take into account that our tax rate, in the last years has been abnormally low. And, why have you been able to get to such low tax rates. I think we had some one time opportunities like in 20 16, we had a restructuring of our German pension vehicles, which gave us a one time opportunity So we've really worked on tax optimization, legal, not gray zone, very legal and transparent, tax organization opportunities. The second big driver over the last years was the uptake in the business with a good growth of the business in the U.
S, also in countries like France, we have been able to utilize so far untapped loss carryforward potential. So I think what we are now seeing going now to 18% this year, probably in the through the 20 in 'nineteen is a bit of a normalization now. As I mentioned, we still have 1,000,000,000 of unutilized tax losses So there is going to be some opportunity to temper it. But I think we wanted to be more on the conservative transparent side in telling you what to packed in terms of P and L tax. In terms of cash tax, you've also seen that in the slide, that has been a more continuous increase and that is also what we assume going forward that with the increase in our operating results, yes, that is also going to go up.
And then secondly, to the aircraft question, as I said, I mean, we are quite sure that it makes sense to go down that route. But of course, we now have to go into the sourcing and we have to look in different opportunities. And of course, there's a lot of demand in the market. So we really have to see, how we go through it in tons of timing And obviously, the million we anticipate for this year is not the final number, which is why I gave you that indication that, yes, even in the peak year, based on our current modeling, it shouldn't add more than 150 basis points to the CapEx ratio So we will give you more clarity once we have finalized our thinking on the sourcing But given that we have a very high likelihood for this to impact the numbers in 2018, we wanted to use the opportunity of today to already give you a heads up and put it out in a transparent format.
And the last
one, right? That doesn't impact our cash flow generation.
Yes. So, I mean, of course, technically, this is going to impact free cash flow and CapEx. But because we are leveraging our good balance sheet position to prove dedicated financing and because we are also going to repay out of the excess cash flow from the savings, this obligation, which we will have for a couple of years in terms of thinking about excess liquidity, they're going to put it into a different bucket. So we will be transparent about it. We will probably just continue showing it separately.
So that in our return discussions, it doesn't distort the picture, yes?
Okay. Rob, why we continue with you and then let's see.
Good afternoon. It's Robert Johnson from Exane BNP Paribas. A couple of questions on the higher aircraft CapEx if I may. First of all, Melanie, you mentioned a really interesting figure in the presentation, which is, you said that there could be a 5 percentage point margin improvement for DHL Express from the higher asset ownership. It's obviously quite a tantalizing figure for us analysts in the audience.
So Oh, 50 basis points. Okay.
It was in writing. I was okay. So I don't want to get too excited at all.
I think 50 basis point is also interesting, but yes.
Well, in that case, I mean, either around that figure, could you provide us with some details on how much the asset ownership would need to change? For that to be achieved and what type of time frame you're looking at?
Yes, I think, again, the way we also discussed it internally, we have 2 elements The first one is that over the next years, we are going to do some refleting in our intercontinental air fleet because some of the planes are quite old and no longer the most fuel efficient, you have airports where you have noise restrictions and so on. So we will work on some form of re fleeting. And that is going to give us some savings, for example, through the higher fuel efficiency of the new aircraft. The second question is then, does it make sense continue leasing those aircrafts like we have done on the intercon side so far? Or is it more economical to go into a buying position?
And here, we clearly look at the financing costs, which we have ourselves. If we kind of like fund that, CapEx when we have the final number externally with our financing costs or if you do it through an airline partner, they are we have to look at their financing costs and the markup they put on the A component, right? And that is all on top of the generally more efficient aircraft type giving us the 2nd type of saving. This together creates a cost benefit, which based on the current modeling should help on the express margin by around about 15 basis points or plus.
The second question is just on the timing. Of the higher aircraft CapEx. I think on the last few conference calls, the question's been asked a couple of times about could the aircraft CapEx increased materially and the answer has been no. So what's changed internally to kind of prompt me the announcement today that there will be a change in that respects? Is it just kind of more analysis internally on the cost benefit analysis or what are the reasons?
Yes. So I think it's a couple of points. I mean, obviously, the whole aircraft market, also for a larger, a white bodied aircraft has been heating up over the last months. When you look at the announcements, others have done on how much aircraft they are securing, I mean, obviously, we have been following the market. We are continuously following the market, but clearly there is also a certain capacity constrained becoming apparent.
We also have new players who all of a sudden start buying airplanes. So in light of that, we revisited our general re fleeting plan where of course we have a multiyear plan and we use that occasion to reassess the question again does it make more sense to continue with our leasing model or go into the buying model, right? And I think really we have 2 things. We have to treat a little bit independently. The first one is a question.
Do we have to renew our intercon fleet over the next years? And the answer is, yes, it makes absolutely sense because there are more efficient aircraft out there, and they're going to give us a lot of fuel efficiencies. So renewing in itself is something which due to the age of the aircraft we have to do, but also because it gives us operational savings. We then looked independently at the question, is there an economic benefit, which we can also communicate to you by going heavier into to refinance those aircraft and what we are paying if somebody else does it for us. And if we then look at the flexibility, we will still have because those would be tangible assets, which I mean, if the position should ever change, we would be able to take off balance sheet and give to somebody else, I think it is really a no regret move to make this change now.
But we completely kept in mind that we said, we are not going to have a big mega CapEx explosion on the aviation side. And I think first of all, in terms of numbers, that is clearly the page. The case. If you now talk about a CapEx intensity of 4% where maybe for a while we will go up by 150 basis points that is not kind of like going into the 6%, eight percent, ten percent range. But secondly, we also want to make sure by keeping it separately by doing this debt funding that it is not hurting you on the excess liquidity side and on the dividend side.
Okay. Being mindful of time and knowing the type of questions that you you have, just as a pre warning, we have to stick to our schedule. There are flights to be caught later on, and you probably have got great stuff to do also this afternoon. So for the physical round, it's going to be the last round of questions from Matija, please.
So Matija Gergolet from Goldman Sachs. My first question is going back to Page 112, which is your CEO slide about excess liquidity. If I read it correctly, you are showing, well, left column minus right column, 3,200,000,000 of excess liquidity less share buybacks which are already down 1,000,000,000. So I read that as around 2,300,000,000 of excess liquidity. Is that a fair, fair assumption?
And then a follow-up to that, if you consider excess liquidity, do you, would you have a preference between, say, dividends or share buybacks between the 2. And then another question for the CFO, just so we talked about taxes. So the headline tax is going to go up. Perhaps, I mean, you still have around over 2,000,000,000 of deferred tax assets. Aren't they going to be utilized to some extent in the coming years as well?
Maybe just second question about taxes is, what about, say, a guidance about cash taxes? Where would you expect it to be? Should it be in line with the reported tax going forward or, if you can give us some color. Thank you.
So the first page you referred was done by the CFO team anyway. So probably, well, I can explain that better somehow how these numbers came together. On the second question, What I prefer, I think I've said that several times already, the share buyback needs to be reflected somehow, how attractive the share buyback price is somehow. When we did that and started the last time our share price was at 20 and we felt the share price is significantly depressed and undervalued. Therefore, there is not every time I think it's perfect intuitive share buyback.
On the other side, the special dividend is in a German listed company complex that's the same with these quarterly dividends. That's also more challenging than in other jurisdictions. And therefore, this is we have 1 AGM and therefore, we needed a proposal and we needed approval of that and that is complex in a German listed environment. And therefore, I would say I have no preference. I think we have to assess that if we have excess liquidity, what is the better process to get these things through?
Because on the extra dividend, you have to approve that. And we have one AGM. Of course, we can do an or ordinary AGM, but that is very uncommon. So that is both have advantages. If you give money back straight to a shareholder, that's a clear.
You don't have to sell your shares, and you get the money. Therefore, that's a clear preference. The share buyback is easier to execute.
Okay. So I'm on the access liquidity. Yes, I mean, this is why we put the slide in to
show you how we generally
think about it. So a free cash flow minus regular dividend of what is left in terms access is what we, as a category, see as access liquidity. And based on the math, there is access liquidity accumulating. I think on share buyback versus a special dividend, I can only echo what Frank said. I think we're fully aligned on that topic.
In terms of the tax rate questions, so yes, we still have the DTA and this is going to be also utilized over the next year. So I think we have flexibility on the tax rate. But I just wanted to give you a transparent feeling that the rates of like 12%, thirteen percent, 14% were abnormally low and we are expecting a normalization now going to the 18%. But there are still, numbers, which will give us a little bit of a shielding over the next years. And in terms of cash taxes paid, I mean, you can see on page 93 that it has trended roughly in line.
I think but you always have the timing differences, of course. So I think ultimately for me, with our profit going up, around the world, we will also see an increase in the cash taxes paid.
Yes. So I mean,
like, it is going to go up, and I think it is going to go up with our increasing profitability.
Okay. What you have thought, and
we're going to end this whole exercise on the text question.
So Oh, I love text.
We'll be
very pleased to have that.
I consider that good news. Okay. No. Well, thanks, Melanie. Thanks, Frank, for this last session.
That basically concludes our program for you today. Thank you very much for coming here, participating. Thanks to my IR team for the great preparation. And look forward to see you sometime soon. Bye bye.