Ladies and gentlemen, thank you for standing by. I am Emma, your Chorus Call operator. Welcome, and thank you for joining the Deutsche Post DHL Group conference call. Throughout today's recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by a question and answer session. If you would like to ask a question, you may press star followed by one on your touch-tone telephone. Press the star key followed by zero for operator assistance. I would now like to turn the conference over to Martin Ziegenbalg, Head of Investor Relations. Please go ahead.
Well, thank you, and a warm welcome to everyone out there. Thank you for joining us on what is fairly short notice after last night's release of our preliminary Q2 numbers. I take it you have the presentation we sent out in front of you, and as announced, we're going to have Frank and Melanie taking you through the brief deck, and then there will be time for any of your questions. With that, I'd like to hand over to you, Frank.
Yeah. Thank you, Martin. Welcome and good morning as well from my side. Thank you for joining us on short notice. What I would like to do with Melanie is that we go through three chapters. In the first, showing that our Q2 was actually in good shape. We improved our operational performance quite a bit despite the coronavirus pandemic. We have also, Melanie will introduce that, a new guidance or a guidance for 2020. We also informed today or last night the market that we will hold our AGM end of April and have a clear dividend proposal. I finally conclude later on the outlook. Let's go on page three. Here you can see the good operational performance. On fully loaded numbers, we go up from EUR 770 to EUR 819, which is a 16% improvement.
If you exclude our announced one-offs already and a new impact, we have some lockdown-related asset write-downs in two divisions, about EUR 100 million worth as well. That in total has impacted our fully loaded numbers. We have not any longer include other COVID impacts because it's very difficult to judge what is really COVID impact. If you take all these one-offs out. Most of these one-offs are non-cash. You see that we have improved the year-over-year performance by 220. That of course is very pleasing to us as well that we could hold the line so well and even improved our profitability in a very difficult economic environment with the pandemic. On page four, you see that it's not just based on the performance of one division.
It's actually based on the performance of all divisions, despite that one went down, but I come to that in a second because there's also good news in that. P&P Germany has continued to demonstrate the self-help measures, and that has led to a very healthy improvement in line with what we have seen in the first quarter. Express has improved as well, despite the quite difficult volume situation at the beginning of the quarter. DGFF has a very good performance. There you can see our good connection to cargo airlines. The Express/DGF combined, of course, are a very reliable partner for cargo airlines, and that enabled us to secure significant freighter capacity and that helped Express and DGFF. Supply Chain is down, but we had a one-time hit from our U.K. business delivering beer and liquor to pubs, and of course, that was closed.
If you exclude that, we had a pretty good result actually in a moment where many of our customers will report heavy losses in the second quarter. We were able, despite significant volume drops coming from fashion retailers, from automotive, from even these activities we have with the pubs. We mitigated that and kept still a profitable business, which is quite encouraging. DHL eCommerce Solutions, of course, is benefiting from the e-commerce boom, and it shows that we have put the right strategy in to do also domestic deliveries in other markets and, of course, create a European business here as well, which is beneficial. This number has been delivered despite that we had massive lockdowns in countries like Spain and India. Therefore, the numbers are pretty good, I believe. On page five, you see the volume development as we have introduced it with the first quarter.
You see here the development of volumes. Mail volumes are still down more than we expected due to direct mailings, which are still, of course, advertising is not to the normal level. The regular mail is more or less normal with a normal expected decline. Parcel volumes are still up, not as much as they were around Easter, but still higher than what we have expected originally. You will see that now over the summer, how lasting that effect is. In Express China, we have seen good growth already. Europe is now positive as well. In June, we actually had global volumes were even up year-over-year. We really see a recovery of volumes, of course, at the beginning, driven by B2C, but now we see also that B2B volumes are coming back.
On that basis, we felt it would be a very good sign to our colleagues around the world that we give them an extra bonus. Everybody gets the same if you are a full-time employee. They have demonstrating our purpose, connecting people, improving lives by work extremely hard to keep the world moving. We felt as a board, it's appropriate to reward that by giving everybody a flat EUR 300 bonus around the world. Of course, that's more valuable in the emerging countries than in the rich countries. We felt that's a strong sign of confidence, and thank you to our people that they have done an outstanding job. Nevertheless, we stay prepared. We are working with the team, and I do that myself, with the CEOs of the divisions there.
How can we prepare the best way for a potential second wave, even if that's not the most likely case that this happens, but I think it's not over yet, and therefore we will stay tuned for a potential other outbreak. With that, I hand over now to Melanie to explain a little bit more what we have introduced last night with regard to the guidance.
Yeah. Thank you very much, Frank, good morning everybody also from my side. Thank you for joining us on such short notice. You will have seen that last night we introduced guidance for the year 2020. Our new guidance is in a range between EUR 3.5 billion and EUR 3.8 billion reported EBIT for the group for 2020. On page eight, we have tried to better show you what that implies with regard to the underlying operational performance, because we do have a number of one-offs. First of all, when you look at the starting point, you can see on the left side of the page that for us, the underlying starting point 2019 is a bit over EUR 4 billion. When you look at the right side of page eight, you can see that we expect for StreetScooter around EUR 400 million.
Most of that is non-cash, in line with what we had said previously. What is new is the EUR 300 million in one-off we now expect for 2020. Those EUR 300 million include, first of all, the EUR 100 million asset impairments, which we booked in the second quarter. Those were asset impairments predominantly in Supply Chain and eCommerce Solutions triggered by the lockdown consequences. We don't expect at this point in time any more of such asset impairments. EUR 100 million asset impairments booked in the second quarter, then EUR 200 million in staff costs, related to the one-time bonus payment, which we anticipate to book in the third quarter. If you take those EUR 400 and EUR 300 one-offs out, you will see that our target in terms of operating performance is between EUR 4.2 billion and EUR 4.5 billion.
You will have noticed that different from the first quarter, we no longer differentiate between COVID effects on the operating results and underlying operating results because we saw in the course of the second quarter that this distinction became increasingly artificial and less and less meaningful. I don't think anybody would be able to say what the air freight market would've looked like under normal circumstances in June 2020. We have abandoned this distinction. The EUR 4.2-EUR 4.5 include all operating COVID impacts. Also the EUR 210 million we showed you in the first quarter. On that basis, we have quite a wide range, still for the guidance for the rest of the year, which again, I don't think is surprising. There is still a lot of uncertainty out there.
When you look at the development in the different divisions, we have some divisions where the market's obviously still enormously distorted, like in air freight, where it is difficult to predict how the second half of the year will play out. As a management board, we feel quite comfortable with this underlying range of between EUR 4.2 billion and EUR 4.5 billion, for 2020. Turning to page nine and the other elements of our 2020 guidance. When you look at the free cash flow number, EUR 1.4 billion, that's exactly the same number we had given you in our old guidance. There are of course, a number of moving parts. In the old guidance, we had included EUR 500 million for the 777 Express refleeting exercise.
That number has now come down to EUR 300 million, because we have been able to do some alternative financing structures for three of the 777s, which came into service this year. At the same time, we also have EUR 200 million additional personnel expense due to the bonus. Those two effects are neutralizing each other. I think on that basis, the 1.4 is quite an encouraging statement. You will see in a couple of slides, what this is based on. It's actually based on the very good cash flow performance we have now seen in the first six months of 2020. Looking at CapEx, the old guidance was EUR 2.6 underlying core CapEx plus EUR 500 for the 777. We have now put both things together into one bucket. It's EUR 2.6 plus EUR 300.
Our underlying core CapEx guidance is unchanged, because given the strength of our balance sheet, the continued growth in the business, we actually plan to carry on with our investment projects and no changes to the tax rate compared to the previous guidance. Turning to page 10 and our 2022 guidance. You will see that we have now introduced a wider range of scenarios because obviously nobody knows what 2022 will look like. If things recover relatively rapidly and we see a V-shaped type of recovery, we are still confident that we will get to the minimum of EUR 5.3 billion in EBIT for 2022. Should the recovery be more slowly, more of a U-shape, should we be in 2022, more around the 2019 global economic level, we would anticipate to be more in the order of magnitude of EUR 5.1 billion.
Should there be a really slow recovery with setbacks, more of an L-shaped type of recovery, the range of around EUR 4.7 billion. On the right side, the cumulative free cash flow and the cumulative growth CapEx guidance, that has not changed compared to our old guidance. Also based on the good free cash flow performance we have now seen in the first six months of 2020, we are still aiming for free cash flow cumulative between five and EUR 6 billion. That already takes me to what happened with regard to cash flow and where do we stand with regard to liquidity, page 12. In the first quarter, we had a reported free cash flow of a bit over minus EUR 400. That was actually underlying a EUR 500 million improvement compared to Q1 2019. We're very pleased that this positive development has now continued in the second quarter.
Our free cash flow in the second quarter was more than EUR 500 million. On that basis, we have achieved a positive free cash flow for the first six months of 2020. Most of you follow us for quite some time, I guess most of you are aware that this is quite unusual for us. We normally tend to have a negative free cash flow, in the first six months of the year due to some seasonal effects. We're really happy that in the year 2020, we managed to get to a positive free cash flow for the first half year. I think, no totally surprising news, with regard to the rest of the balance sheet. We did the bond issuance mid-May, that under very favorable conditions, EUR 2.25 billion as an additional safety buffer.
We felt that at the end of the second quarter, we were really in a very stable and safe position with regard to liquidity. That was, of course, an important factor when we discussed the dividend again in the corporate board and supervisory board yesterday. The proposal is to pay a dividend at the same level as last year, EUR 1.15 per share. This is fully in line with our finance policy. We are honoring dividend continuity. It was very important for us also in the COVID year, to pay a dividend, to keep it on last year's level. I think it was also important that we took a balanced decision with regards to the different stakeholders, which is why we are now proposing a dividend on the same level as last year, which corresponds to a 55% payout ratio fully in line with our finance policy.
Last important information on page 13 is that we indeed have a new date for our AGM. We plan to hold it on the 27th of August, in a virtual format. Invitation for that will go out shortly. With that, I hand back to Frank, for the conclusion.
Thank you, Melanie. On page 14, what we already said, EBIT is back to growth in the second quarter. We have introduced a 2020 guidance because we believe we have now more visibility. We have given now a date for the AGM, and it's a dividend proposal, which is in line with our policy. If you now look forward on page 15, I said months ago already that we are in great shape or better shape than ever before, we really now see the strength of our portfolio as much as the strength of our workforce. As you know, we have invested heavily in trainings to become employer of choice. The priorities going forward remain the same. Protect our people, provide great service, manage liquidity in the best possible way so that we have the strength to continue to invest into our operations.
We believe that with the guidance we have never given and significant one-offs, if you exclude them, we have a pretty healthy 4.2-4.5, which would be, I think, without the one-offs of StreetScooter and the others, like the bonus payment, I think that would be a very good result. Our strategy is very robust against the situation. We have the purpose and the values. They have worked. We have, as we can see on page 16, also a very clear strategy for any scenario, regardless if it's L, U, or V. We believe that our purpose, our vision, our values are spot on, and we have from our people in the last months the excellent [safety leverage]. The focus on performance, and execution is the right one.
The focus on our profitable core is the right one, and the digital agenda will definitely only accelerate. We have seen that having 150,000 people working from home and that works very well. The digitalization will only accelerate. To conclude, we believe that we have a pretty solid investment case along all the three dimensions, be it earnings, cash flow and shareholder return. With that, of course, I'm happy to report today that we really had a pretty strong second quarter. With that, I'm interested to hear from you, your Q&A. Thank you very much.
Ladies and gentlemen, at this time we will begin the question answer session. Anyone who wishes to ask a question may press star followed by one on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press star followed by two. If you're using speaker equipment today, please lift the handset before making your selection. Anyone who has a question may press star followed by one at this time. One moment for the first question, please. The first question comes to the line of Andy Chu with Deutsche Bank. Please go ahead.
Good morning, everyone. Good morning. Three questions please, if I could. Frank, maybe just could you, for the first question, just to sort of maybe talk a little bit about your sort of view on how far you can push air freight rates in the future. I think you've made comments at presentations, including Q1, that you wouldn't really want to push freight rates up too sharply, but I wondered why that would be the case. Surely you want to sort of maximize profitability. It's a sort of around the fringe, it's quite a commoditized industry. Maybe just some views around air freight rates, please. Secondly, in terms of the union negotiations with Verdi, I understand that they sort of kick off today, so just wondered what your view was on that process and importantly, when do you think that process could be concluded?
Just the final point on DSC, on the supply chain business. I think you have got quite a big contract that you renewed with the Jaguar Land Rover last year. There are some talks in the U.K. about some quite heavy redundancies on that Jaguar Land Rover contract in the U.K. I just wondered if that was material, had anything been booked into Q2 and could there be any impact, therefore in Q3? Thank you.
Yeah. Thank you, Andy. First on air freight, what we see at the moment that rates are coming down again, and we have not overstretched the envelope. The demand for cargo space was very tight and of course that leads to significant price increases. Now the rates are slowly coming down again, volumes are increasing because there are some passenger flights coming back as well and even some passenger airplanes which are converted. What we should assume for the second half, that rates will remain higher and that there is of course an opportunity. For forwarders it's always good if the uncertainty is high and transparency is low. These are traders and you have seen that with your own trading decks as well. At the moment, nobody knows what happens tomorrow and that is of course good for people who have potential better insight somehow.
And of course, forwarders have more insights because we know what is happening in the market and we know what people are willing to pay. We didn't overstretch that, and we will not follow a different strategy. This year is not a year to maximize EBIT. What is important is liquidity, but we will not push the envelope. We know that we will see customers later on again, and we will not do the maximum yield management just to disappoint customers because we know that there will be also a normalization sooner or later. The markets are tight and that's the reason why customers have to pay for the space if they have urgent needs and of course certain stuff has been flown, which is usually on shipping vessels. On the union negotiation, actually they start only, the contract lasts until end of August.
It starts later this year. They are not starting now and we have to see what is happening in that situation. I'm modestly optimistic that we will get a reasonable approach from the union as well somehow. The bonus is independent from that because we felt we should appreciate the hard work of our frontline people anyway. We do that because I think it's a right signal and we have talked about three bottom lines now for more than a decade and that's a moment where you have to demonstrate that as well. You can't only say thank you. You have to let participate and what we have so far seen in our internal communication rooms is very positive. It's very well received and that's the idea. It's an investment into our workforce.
The last one, maybe Melanie you can elaborate about the Jaguar Land Rover situation a little bit more.
I mean, as you know, Andy, DHL Supply Chain is a bit different from our network operations because we have dedicated sites for customers. If a customer takes the decision to restructure the business, for example, because volumes are down, that also has implications on our sites and our workforce. On that specific case, we are in negotiations with the social partners and we're not going to comment on any specific numbers. Obviously JLR is an important customer of ours and we will work very closely with JLR to jointly get through the current situation. Have you booked anything on JLR? Nothing material in the second quarter. The EUR 60 million asset impairment in DHL Supply Chain was related to the Tradeteam business in the U.K., where obviously we were negatively impacted by the closure of the pubs.
That was the root cause for the EUR 60 million asset impairment in the second quarter.
Melanie, is that the Tradeteam business that you're alluding to when you say the pub?
Yes.
Okay.
Yes.
Thank you very much.
Thanks, Andrew.
Thank you.
Next caller, please.
The next question comes from the line of Cristian Nedelcu with UBS. Please go ahead.
Hi. Thank you very much for taking my questions. Three, if I may. Firstly, on your FY 2020 EBIT guidance. It seems to imply that in the second half, the EBIT in DHL will be flat year-over-year. We do have some tailwinds here, I guess, on the 100 seeing volumes recovering. Looking at the commercial airline flight schedules, it looks like the air freight market will continue to be tighter than usual. I guess, can you elaborate a bit on the headwinds to EBIT you are seeing in the second half? Is it still concerns on supply chain, for the second half or anything else in there that we should keep in mind? Secondly, maybe a question on Express. Could you offer a bit of color on the service levels for TDI over the last few months?
I believe historically, DHL Express was using a bit more commercial airlift in contrast to UPS and FedEx. I guess I'm trying to get a glimpse of how you're seeing the market share developing these days. I'm asking this as one of your competitors recently report to the 10% volume growth in international priority, which seems to be a bit better than TDI. Lastly, looking at your parcel business in Germany, what signs would you need to see to believe that the acceleration in online sales is more structural in nature, and therefore, it makes sense to invest more CapEx in capacity there? Thank you.
May Melanie take the first, and I take the second and third. On Express, the service quality has been great. We have covered the shortfall in commercial airlift by more ACMI agreements for cargo airplanes, which we actually were able to secure. We also fly more rotations on certain routes, and using airplanes for other destinations. Overall, service quality has been outstanding. I have to say, the team has done magic stuff somehow, if I look into the details. I'm really pleased by that, and I hear that from customers as well. You have seen that we have seen a good positive development in course of the quarter. That is, I think, very encouraging, and I think that will go in the second half in the same way. On P&P, I think we need still to see the summer break-in.
We had a lot of new customers, many consumers who were first-time e-commerce customers. The elder people in particular, who were still going to shops and they started, they probably have put their credit cards now into the machine. They are now trusting the system. If that is lasting, we have to wait until the summer is over. I think the third quarter will tell us if we see a structural acceleration of e-commerce or if that's just a period, which was just driven by the pandemic. I think, with the third quarter numbers, I think we can really say if that's a structural change or the structural acceleration, or is that just a temporary effect.
Yeah. With regard to the 2020 guidance, when we look at the state of affairs in the different DHL divisions, we have some very encouraging trends, at the end of the second quarter. There's also still a lot of uncertainty out there. When you look at the Express volume development, as Frank, showed earlier, we really saw that we are back in growth territory in June. That is driven by e-commerce to a very large extent, but we also see the B2B volumes slowly getting out of the very depressed state we had in April, May. If that trend continues, that should clearly be a very positive for the second half of the year. That obviously depends on how the pandemic is going to play out. On the forwarding side, the market is still hugely distorted. Demand is still down.
Capacity on the air freight side, is down even more, which led to the extreme situation in the second quarter. How that is going to develop in the second half of the year is difficult to predict. I think it's better to be a bit on the conservative side here. With regard to supply chain, we don't expect a very fast recovery here because we have a number of customers, a number of industries like automotive, where there's still not too much good news. We are more on the conservative side with regard to supply chain numbers for the second half of the year. Last but not least, eCommerce Solutions, very encouraging development, in the second quarter. They achieved break even despite the EUR 30 million asset impairment. We clearly see eCommerce as a structural growth driver in the second quarter.
Here, as Frank just mentioned for the German parcel business, we probably have to see in the course of the third quarter how much of this acceleration is going to be there for the longer term and how much was temporary. I think given all those moving parts, we had a quite wide range now for the DHL divisions for the rest of the year.
For the macroeconomics, despite that, we feel comfortable with the guidance we've given you, there is still significant uncertainty. If the consumer demand is not coming back, that will definitely impact as well us, as many others. If a massive second wave of lockdowns comes back, that will undermine the trust citizens have in their respective governments because they said it's getting better now, that will lead to significant increase in unemployment. We probably see that as well, a second wave will impact that even more. My people say, "Okay, we better keep the money in our bank account instead of spending that at Christmas." That's the uncertainty we are living in.
I'm not saying that this is very likely, but, if we say in three months, we gave you a higher number, and now these things are happening, you say, "Why you have not participated that before?" Yeah, you're right. We had better anticipated that this could happen. How likely is we will see? That's the reason I think we have to stay prudent in what we are doing, and I think we are doing that with our guidance we are giving today for 2020.
Thank you very much.
Chris, helpful enough?
It's really good. Next caller, please.
The next question comes the line of Neil Glynn with Credit Suisse. Please go ahead.
Good morning, everybody. If I could ask three quick ones, please. The first one with respect to Express. I think this year you had expected about 30% of your volume to be B2C. Just interested, given the dynamics in the second quarter, could you help us understand how big a proportion of the second quarter B2C actually was for Express? Second question, as obviously air freight rate strength has been a key feature in the second quarter, and I think with capacity on the passenger jet on the wide-body side remaining pretty scarce through the rest of the year, I wonder to what extent you're getting feedback from customers about shifting from air to ocean as they plan the second half of the year or leading up, for example, towards the Christmas period.
A third question on disposal proceeds within your cash flow guidance for the full year. Usually, we have around EUR 200 million-plus of disposal proceeds annually. I guess it's not a great time to be selling assets, even if they are small assets within the portfolio at the moment. Just interested, do you have anything significant in mind for disposal proceeds for the rest of the year? Thank you.
Yeah, sure. I start with the second. Then Melanie answers the first and third. The tightness of the air freight market due to the missing intercontinental flying will remain tight. Even if customers are now starting to divert volumes to ocean, there will still be a very tight market. Certain stuff has to be flown. Certain products have too much high value that people say to have them four weeks on vessels is not a smart way to finance my supply chain. They will pay the price without a doubt. Therefore, what we will see is we will see a pretty strong demand for capacity in Express and DGF in the air, and prices will stay higher than they are normally. Despite that, we tell even customers, you have to be smarter in preparing for the Christmas season.
We see that now that ocean volumes are coming back now. Replenishment of warehouses needs to happen. We see that coming back. I still think that we see in the second half definitely a relatively high price level for Express products as much as for volume.
Mm-hmm. With regard to the first question, B2C share and Express, 30%, it was clearly higher than that in terms of volumes in the second quarter. When you look at the overall volume development, and we will give you the usual set of details when we come out with our regular set of figures on August 5th. Just directionally, in April, shipments were down. B2B was in decline in the course of the second quarter, less so in June than in April, obviously. The growth element now in June, towards the end of the quarter was driven by B2C. As a consequence of that, the share of B2C in the second quarter will be more than 30%, and we will provide some more color on that, on August 5th. With regard to the disposal proceeds.
Yeah, this normal roundabout EUR 200 between gross CapEx and net CapEx in the cash flow statement. This is a lot of small stuff. A big chunk of that is a disposal of vehicles. We expect that number actually to be lower this year. For example, here in Germany, we are holding on to more vehicles, A, because of the market, but B, because we need them to cope with the parcel boom. The number will be lower than the average trend over the last years. We don't plan any significant disposals at this point in time.
Great. Thank you both for the color.
Great. Thanks, Neil. Next caller, please.
The next question comes the line of David Kerstens with Jefferies. Please go ahead.
Hi, good morning, everybody. Three questions from my side, please. First of all, on mail volumes. With mail volume maybe coming back a bit slower than expected. Do you see a risk of accelerated e-substitution with everybody working from home and digitalization picking up as you indicated? Secondly, I was wondering if you could provide maybe a bit more color on the drivers for the much than expected turnaround in earnings momentum in DHL Global Forwarding, Freight, particularly what you did see in terms of air freight yield development. Finally, with regards to the 2022 guidance, the difference between the V-shaped and the U-shaped recovery is only 4%. I was wondering, what businesses would you expect to be most affected on the U-shaped recovery, and are there also offsetting factors elsewhere that explain the relatively small difference of only 4%? Thank you very much.
With regard to the mail substitution. Currently the volume drop, which is faster than we anticipated, is coming from direct mailings, that is a situation we have seen for a while that doesn't come from regular mail. I think it's too early to say we will see that in the third quarter as much as I said earlier about parcels, if that is a structural acceleration of the decline. On the other side, you're right. The second and the third quarter are also a good stress test for how well we can mitigate the faster decline in mail volumes, potentially because we have seen that in the second quarter and might we see that as well in the third quarter, not knowing yet. At the other side, we see a significant faster increase in parcels.
The conversion from a mail business to a parcel business is potentially accelerating and therefore it's a good stress test for the longer term outlook, which I think is good news actually for investors to see. We are testing already something at the moment which maybe we had anticipated more in two or three years' time. As I said, we don't know yet. Maybe volumes are coming back to the normal level. On the air freights, yes, the yield has been better, of course. We don't know the final numbers yet. It's preliminary numbers we are communicating, so I can't say too much in detail. I have not seen the final numbers either. I would assume that we had a pretty good yield in air freight. That's driven by, of course, by the market. That's the old problem.
If the rates are very much down, the markup is not much higher. Of course, the markup might be the same, but relatively, if the rate is higher, the markup is higher. That's somehow where we're benefiting as well from that situation. That's true for both for air and ocean, somehow. With that, I hand over to Melanie before the third question.
Yeah. Of course we have done a lot of internal scenario planning and modeling and stuff, but I think what it boils down to, the fundamental essence is that a lot of the improvement we see for the next years is still driven by our Health agenda. Which is, of course, easier in an environment where you have better volume growth. For example, getting the GP to EBIT conversion up in global forwarding is easier when you have better volumes. A big chunk of the roadmap to 2022 is driven by our internal improvement agendas, and that explains the relatively small difference between the V and the U-shape scenarios.
It's good to hear. Thank you very much.
Thanks, David.
The next question comes from Muneeba Kayani with Bank of America. Please go ahead.
Hey, Muneeba.
Hi. A number of my questions have been answered, on free cash flow. You've maintained the EUR 1.4 billion guidance for this year, your EBIT guidance is lower versus what you had earlier this year. Can you explain the moving parts here and specifically what you're seeing in terms of customer payments? If you've seen any impact from that yet and how you're seeing that going forward. Secondly, on the air freight benefit, can you explain how it's impacted the portion of the benefit on the Express versus the DGFF businesses, in terms of rates and yields, please? Thank you.
Yes. First of all, thank you very much for this question on the free cash flow because I think that is indeed one of the encouraging messages we wanted to share with you that we are sticking to the 1.4 despite the lower EBIT guidance. What is that based on? I think it's based on the fact that we have now also seen in the first six months of the year that we are able to really, the EBIT performance converted in a much better way into free cash flow than what we did in the past. That is really based on the work we have done over the last years to drive up our cash flow performance. It is also based on the fact that we have extremely focused on the whole working capital and particularly on the receivables side.
Since the beginning of the crisis, Frank has led the operational task force and we have had a finance task force focusing on the receivables side. Far, we have not seen a material deterioration in customer payment behavior. We are watching this like a hawk because obviously we are still concerned that there may be some customer insolvencies in the third quarter. I wouldn't say that we are out of the woods yet. Looking at what we have seen in terms of aging and receivables development so far, it has been amazingly stable. To the air freight Express question. In air freight, with us being a broker, we have obviously passed on the increased freight rates to customers.
I think what has really helped us here is that we secured capacity quite early on. Given our size as a forwarder, our good relationships with the carriers, we have been in a position to get capacity in this extremely scarce market. That has really helped us on the forwarding side. In Express, we always sell off excess capacity into the forwarding market. The Express colleagues think about that as a cost offset. That is also how we think about it in the second quarter, where we actually had additional costs on the flying side. We had to compensate for the non-existing passenger flights on certain routes. We had to deal with the extra demand outbound from Asia by putting on extra carriers in the Express dedicated network.
Here we have then been able to offset part of this extra cost through ACS sales into the forwarding market.
Muneeba?
Muneeba, I hope that answers your questions.
Okay. Muneeba.
The next question comes from the line of Alex Irving with Bernstein. Please go ahead.
Hi, good morning. Two questions from me, please. Firstly, P&P, the EBITDA growth was quite strong year-over-year, despite the fact that in parcel you will have had a B2B, B2C mix shift. Be interested to know what actions you've been taking to offset this margin dilution, please. Are you experimenting with planning for or making any longer-term changes to your operations in readiness for a different profile or demand profile in the years ahead? Secondly, on DGFF, just trying to understand this a little bit better. We had EBITDA up year-over-year, while market cargo volumes down what looks like, let's call it 20%-ish, maybe a bit less than, see a bit more on air. Be interested to know what the contributors to the better performance were, please. How much of this was unit gross profit? Are you taking volume share?
Do you expect this to continue? How much was any cost savings or conversion improvements? Basically trying to get a feel for what would be sustainable in the better DGFF performance, please. Thank you.
Yeah. Me on P&P, the effect we see here is the consequence of all levers we have established in the last 18 months. It starts with proper pricing. Of course, we have seen a good, healthy development as well from many small customers who are new as well because their stores were closed, and they started to go online as well. We have seen, and we helped even some of them to get connected to some websites where you can really sell your products. That helped as well somehow. The indirect costs are coming further down. The operational performance is a productivity improvement that has many different aspects. One is, for instance, that we have transferred the light products from parcel delivery to joint delivery or even to mail delivery, which helped to keep productivity up. It's a whole range of activities.
In P&P, despite the changes in the mix, we have seen exactly what we have expected as well, and you can see that in our guidance. 1.5 is a logical consequence, despite that we are paying a bonus that is very close to the original number we have given you. When we had the old guidance of one point. That's a consequence of a great performance Tobias Meyer and his team is doing there. On DGFF, these are several factors. We have not seen the final numbers. If we have really gained market share, we don't know. We believe that we are well-equipped and some smaller forwarders will suffer by having not access to cargo airplanes. As I said, we have a very good relationship to many of them due to the scale we have and the DHL Express operations we have.
Therefore, we believe that we had better access and more capacity than many of our competitors because we had more control of more cargo airplanes. That's the reason why I believe we had probably pretty good yield in comparison to others. We had good capacity, and we at the same time have improved conversion as well. Without a doubt, I would guess so. I have not seen all these detailed numbers, because when we saw the preliminary numbers yesterday, we felt, okay, they are so good that we have to say something. The detail, we have to wait until early August. From looking into the monthly numbers, this is what I've said is probably what happened. More detail, please wait until early August.
That's great. Thank you very much.
Thanks, Alex. Still a few callers left. Let's see whether there are still some questions left.
The next question comes from the line of Robert Joynson with Exane BNP Paribas. Please go ahead.
Oh, good morning, everybody. Just two questions from me, please. First of all, on the finance policy, on slide 13, you reiterated that excess liquidity will be used for the share buybacks and/or special dividends. Could you perhaps just indicate roughly how much excess liquidity Deutsche Post has on the balance sheet at present? Also if and when you may start to more formally disclose the excess liquidity number going forward. That's the first question. Second question on the 2022 outlook. From a volume perspective, could you maybe just talk about how you define a V-shaped recovery, U-shape and L-shape? In particular for the V-shape scenario, could you maybe just talk about what that assumes for freight volumes, broadly speaking? Maybe just reference that to the 2019 level.
For example, does it mean that freight volumes globally are back to the 2019 level or maybe ahead of the 2019 levels? Any color would be appreciated. Thank you.
These would be two great questions for Melanie, but maybe I answer the second. Probably, Robert, you said already more or less. The U-shape is we expect similar economic activity like in 2019. We believe that with our [self-care measures], we can still lift the 2019 result by about EUR 1 billion, which is that scenario. The V-shape is that our global economic activity is north of the 2019 by quite a bit. That means we should have seen growth already. At least we should be on the same level already next year, then see growth at 2022. The L-shape is that we will see a quite lasting recession. That means there will be no volume recovery.
Why we are still thinking that we can deliver in that scenario 4.7, because there will be just hardly no intercontinental flying until 2022, if that happens. We will benefit then from e-commerce surge as much as a tight cargo market. That's the basis of these scenarios somehow. I hope that this gives you a little bit more color on how we think about these three different scenarios.
Mm-hmm. Yeah, that helps. Thank you.
With regard to your first question and the excess liquidity, it's nice to now get such questions again. That shows that things are beginning to normalize. Obviously, given all the uncertainty, for us, the important first milestone was now to get clarity on the regular dividends and to pay that out end of August, after the AGM. I think we will then focus on the second half of the year on really delivering on our free cash flow guidance and see where we stand at the end of the year as a company and globally.
Just in terms of potentially disclosing the excess liquidity number going forward, Melanie, is that something that maybe you could do or not really planning to?
We haven't discussed that. I think we are trying to give a lot of transparency at the moment on the whole balance sheet liquidity situation. We are obviously now, particularly after the new bond issuance in terms of liquidity, to safely get us through whatever type of scenario, we are in a good position. To really disclose excess liquidity, we haven't discussed. I would now focus really on delivering solidly on the free cash flow.
Okay. That's great. Thank you.
Thanks, Rob. Three more callers, I see.
The next question comes from the line of Sam Bland with JPMorgan. Please go ahead.
Morning. Three questions, please, if I can. The first one is on P&P. Obviously, the trend there has been parcels up, letters down. That's been a problem for some peers, but doesn't look like it has been at your side. Do you see much of a difference in profitability or drop through margin between letters and parcels in your business, or are they fairly similar in P&P? The second question is on pensions. Just a quick one. With the way discount rates have gone through, is there any risk that you could have to make another one-off payment into the DB pension schemes? The third one is on the express price increases you may be able to do over the next year. I guess that air freight market is going to be tied up, particularly on the continental side, for some time.
Just wonder whether you might be able to push pricing a little bit more over the next year. You put them up in January, I think. Maybe you could put them up a little bit more this time around than you would have done otherwise because of the tightness in the air freight market. Thank you.
Yeah. Maybe on the pension. I wrote P&P, but not the-
I think on P&P, it was on the profitability, which I think goes back to, I think the question was difference in profitability, GP contribution between parcel and mail.
Yeah, exactly. The answer to that is, I think we are in some dimensions pretty different from some others because we have a combined operation for quite some time. Majority of our staff mail and parcels goes through a combined mail and parcel delivery. We have done these investments in the fleet already quite some time ago. The smaller portion is dedicated mail, and I said already that we are now transferring even light product to them, give our people e-bikes or trikes even, so that they can really deliver that as a mailman. On the other side, the parcel, dedicated parcel districts becomes less and less. Some others struggle with that because they have dedicated letters and dedicated parcel workforces, and that makes it significantly more complex.
We don't have that challenge, and that's the reason why we believe we can stabilize the profitability quite nicely because we use the same network for different products, and we have a competitive advantage, particularly for the lightweight products, by pushing that into our joint delivery or the mail delivery. That, I think, which is different from some other operators, which have decided to separate both.
If I could just add to that, and which also goes back to what Frank said earlier, I think one of the great messages is when you look at the second quarter, we saw a fast-forward by, say, three years in terms of balance between mail and parcel volumes. The P&P team under Tobias' leadership has shown that, A, they get it done on the operation side, which was quite a challenge in the beginning of the quarter when we were really swamped with parcels. That was due to the fact that over the last 18 months, we have systematically, for example, taken the light parcels into the letter sorting centers. We were prepared to accelerate the transformation. It worked operationally, and as you can see from the financials, it obviously also worked on the financial side.
I think that's a very encouraging message with regard to the longer-term transformation from letters to parcels for the P&P division.
Yeah. On the last question, pricing Express, I think that's too early to say. Let's see how the second half develops. The Express division has demonstrated now for many years that they are very good in yield management, and I have no doubt that they will continue. We also have seen by the customers never overstretching the envelope either. What that means for the new year is too early to judge. Actually, it's also true for P&P. We will watch now the development, and then we will make up our mind what we do with pricing in Express and in P&P. The pension scheme, the pension question, maybe you, Melanie, answer that.
Maybe just one addition on Express. You will have seen that we introduced an emergency surcharge, to really now under COVID, manage on the pricing side, the cost increases. I think that has been the main focus. Other than that, we will have our regular GPI process, which is well established in the Express organization. The main pricing focus at the moment is on the ESS. With regard to pensions, our big pension obligations in size are in Germany, and then followed by U.K., Switzerland, Netherlands, U.S. In Germany, where we have by far the biggest obligation, there's absolutely no debate because there's also no minimum funding requirement by the regulator. I think the one country to watch, in a broader context, is the U.K. There, given the market development, pretty much all of the pension schemes are not at the 100% funding level which is required.
There will be discussions with the trustees on how to close the gap over time. We have to see what comes out of that, but I think that is really a problem for the U.K. overall.
Okay, understood. Thank you very much.
All right.
The next-
Two more callers, yeah.
The next in the question line of Mattia Gagliardi with Goldman Sachs. Please go ahead.
Yes. Hello, good morning. Three questions from my side. Two on the numbers and one a bit more, say, on strategy. Firstly, just on StreetScooter. Basically, with this quarter, have we seen all the charges with StreetScooter, or should we expect something else also for the second half of the year? Just to hear, to confirm that basically, you'll be closing down the business during the year. Secondly, on the cost side. I appreciate that you can no longer quantify what is the COVID impact. Can you just help us to understand what will be the extra costs for you linked to COVID? In particular, say, what are, kind of, say, costs that now, if you go back to a normal situation, are unlikely to recur, such as now masks, extra protective equipment.
Just if you have any figure there in mind that we can, say, think about for the future years that may not recur. Thirdly, it's a bit more of a, say, strategically. I think you mentioned that, Frank mentioned that you have 150,000 people working from home. There's a big debate in the market about working from home and what that might mean for corporates. How are you currently thinking about that? Now, will there be opportunity for you over time to basically have more people working from home, and that ultimately could lead to lower costs? Any color there would be greatly appreciated. Thank you.
Yeah. On the last one, I start and then Melanie. I already joked to my wife, you might find it, buy a house now somewhere in a nice island, and I run the company from remote, because it works so well. More seriously, and I have no plans to buy a house on an island. It works pretty well, actually. It will not last forever in that situation. We are benefiting massively from that. Our senior team, even if some of them became only board member recently, but they have been around for quite some time, and the organization knows. If I see, I'm now doing country visit digitally. I visit them, I do BRMs with the team, and I do town halls in a virtual form. That works because people know me and my colleagues. You can't do that forever.
Personal interaction is important. That's the reason why hopefully we will come back to a normal working situation sooner or later. I believe we will still find benefits, and we will look into them in the second half. We already have started to ask our folks about homework, how they like it, and if they would accept that they don't have a fixed seat at work any longer and all this kind of stuff. That needs consideration. I believe that the amount of office space we run will go down in the next couple of years, by quite a bit. We are not in a hurry to execute that, because we have currently the same amount, and that's full in our numbers, so we have not assumed any benefits from that until 2022, even there might be some benefit.
Melanie, may you answer the other two questions, StreetScooter.
First of all, on StreetScooter, as you have indicated, that the impact of StreetScooter will be around EUR 400. After six months, we are a bit over EUR 300. There is still a bit to come. Where is that coming from? We have now, in the first half of the year, booked most of the write-offs. We've booked a provision for claims and so on. We are, as we already said, in February, ramping down the production slowly. We still have quite a bit of stock, where we are continuing to build a certain number of StreetScooters. It's a gradual phase-out, which will, in terms of final production, go into the early part of next year. That explains why we will still have some to come in the second half of the year.
In line with the overall indication, around 400 StreetScooter impact for the year 2020. In terms of extra costs, yes, we had indeed, quite a bit of extra cost for PPE and sanitizers and so on. At the same time, we also saved quite a lot of money on travel, and those type of things. Overall, that balanced out relatively well in the second quarter.
Yeah. Maybe let me add, important is in the second quarter, we had not to do harsh cost measures. Of course, we had no travel costs because we had a travel ban. Of course, we have not hired and we had, in certain functions, hire freeze, but we not really have had done massive restructuring, because we felt we better keep people on board to be well prepared if volumes are coming back. Fortunately, the market has shown that we were not completely wrong. If things are getting worse, we still, as we described already in former calls, we have enough measures in place which we have not triggered to do more to reduce the cost base. I think we were right in not doing that and keeping the morale of the organization up, like you have seen in the performance.
That was, I think, the right decision. If things are getting worse and our volumes are dropping more than we are expecting at the moment, or the world gets in long-lasting recessions, of course, we have more muscle to flex our costs, which we have not played yet.
Okay. Thank you very much. Over to you.
Thanks, Mattia. That will bring us to the last caller.
The last question is from the line of Adrian Pehl with Commerzbank. Please go ahead.
Yes. Hi, good morning, everybody. Three quick ones, actually, from my side. First of all, on cost again, from the input side of things in Express and P&P, I was just wondering whether you enjoyed a positive effect from oil actually, direct and indirect transport costs. Obviously, I know you're working with surcharges in Express, but maybe you could keep some extra money if you want, so in your P&L, and if you have a figure for us, that would be pretty helpful. On the volumes in Parcel in particular, as they have been very strong, obviously, in Q2, could you say a little bit about, did actually the Amazon volumes grow in that quarter, or were they actually down, versus the Q1 level? Lastly, on a regulatory topic.
Obviously, the postal law reform appears to be postponed due to COVID. I was just wondering whether you had any insights on when that topic is going to be picked up, or if there are any changes on the content, i.e., there was this discussion on five instead of six delivery days. Is that still a topic? Anything clarifying here would be pretty helpful. Thank you.
Yeah. Let me start with the last one, and Melanie then takes the other two. It's at the moment a little bit unclear. It's true that currently there is no clear plan to do something with the postal law in this year. It's not very clear. I think none of the themes which were on the agenda are off the table at the moment. We will update you when we know more ourselves. I'm optimistic that this will go in a decent way as well, as we have done that. We have support from the broader political base, I think, because it's appreciated that we have done a very good job. I think it takes longer, and of course, the government has, at the moment, significantly other, more important priorities than the postal law.
I doubt that something significant will happen in the next one and a half years until the next election is taking place, or one and a half, 15 months actually, is now. The likelihood is pretty low that something happens, but maybe we'll be surprised, but we have not taken into consideration that we get any upsides or any changes in the postal law in the next two years.
With regard to the first two questions, First of all, on oil price, it is not that relevant for Post and Parcel. A bigger amount is in the jet fuel in Express, where there is indeed a established fuel surcharge mechanism, which passes on the price development with a two months delay to the customers. Given the timing of the big drop in the oil price, there was still some benefit at the beginning of the quarter, but that then faded out towards the end of the quarter. With regard to the volume development in Parcel and Amazon, what we indicated pre-corona, with the parcel volume guidance for this year was a 0%-5% growth expectation, which was based on the assumption of insourcing by Amazon. That is still the structural direction we anticipate.
Obviously, with a number of customers, things were a bit more dynamic, and not entirely normal in the course of the second quarter. I think the important message is with regard to the fundamental trend of continued insourcing by Amazon, we don't expect a change here.
Yeah, May, it's pretty volatile with this customer, but I can say for the second quarter, having not seen the final numbers, that the growth rate we have seen was definitely not driven by Amazon.
All right. Thank you.
Okay, Adrian. Yeah, I think that's dealing with all the questions and callers out there. Thanks for your interest. This just got us past the full hour, and I want to hand over to you, Frank, for the final wrap-up.
Yeah. Thank you very much for your questions. We believe that we have had really a very solid Q2, along all dimensions. I'm particularly pleased that this is, I mean now the sixth quarter in a row that we have seen very strong improvement in free cash flow. That is a strong sign of the quality of our earnings. I said that already in previous calls. I think we are getting where many of you have asked for, the conversion rate from EBIT to free cash flow is improving, every quarter. That is encouraging to see. Yes, the company is in good shape, and that is thanks to our great workforce. That's the reason why we decided to keep the dividend flat and give some money to our people as a special bonus.
With that, I hope that you all stay healthy and safe, and that we can see each other sooner or later as well, once in a while in person again. All the best, thank you very much, and goodbye for today.
Thank you.
Bye-bye.
Ladies and gentlemen, the conference is now concluded and you may disconnect your telephone. Thank you for joining and have a pleasant day. Goodbye.