Earnings Call: Q4 2016

Mar 8, 2017

Good afternoon, ladies and gentlemen, and welcome to the Deutsche Post DHL conference call regarding the full year results 2016. At this time, all participants have been placed on a listen-only mode. The floor will be open for questions following the presentation. Let me now hand the floor over to Mr. Martin Seidenberg. Thank you. Good afternoon and good morning, everybody out there to Deutsche Post DHL Group's full year 2016 conference call. As announced, we have with us CEO Frank Appel, CFO Melanie Kreis, and with a pretty clear set of numbers in front of all of us. I take it you also have the slides for the webcast in front of you. We are going to follow the usual procedure. We are going to have Frank and Melanie presenting, followed by what I hope for to be a crisp Q&A session. Without further ado, may I hand over to you, Frank, please. Thank you, Martin. Welcome as well. Good afternoon or good morning, wherever you are. I am very pleased to share with you the highlights for the year, the final quarter, then talking about how we are investing to continue to grow profitable. Melanie will talk more about the details of our results and the guidance for 2017. Let's move on to page 3, which summarize very well how we did overall. Of course, we are very pleased with the results. We are well in our guided range of EUR 3.4 billion to EUR 3.7 billion. We have improved year-over-year significantly our EBIT, including Q4. Our earnings per share are significantly up by 72%. I think good cash flow development, and I am happy to suggest, or we propose to the AGM, a significant increase in the dividend to EUR 1.05. Overall, that is a consequence of the strategy put in place, and we are executing successfully, being e-commerce, significant investments in our capabilities, or even the focus on cash flow generation. That leads nicely to the next page, where you can see how our free cash flow and our dividend has developed. We have seen very strong cash flow, free cash flow over the last years. Above the dividend we paid in 2016, you remember that we acquired UK Mail. If you exclude that, because that has been our largest acquisition for a while, we will be on the same level as 2015. Very strong cash flow development. Of course, we are very pleased that we now have a good proposal for the dividend as well. On the share buyback as well, it is now finished. We spent EUR 911 million. You see the average price here and how many shares we acquired. On page 5, again, the reconfirmation of our finance policy. Nothing new about that either. You see as well that we are, again, just in the middle of our guided range of 40%-60%, and I am happy that we are giving significant money back to our shareholders. Then move on to page 7. You know that we talked, since 2009 always, about our three bottom lines, which are shown here, that we believe in a service company, the mood of the employees is the best indicator for great service, and great service is a key driver for top-line growth, and that we can convert in shareholder return. The certified program, which we are running now for two years for the whole company and Express for many years, is in full swing. We are deploying it more and more. We have seen a good response in our improved employee satisfaction. You see here how many people are already certified, and we will continue and intensify our training for the people because we believe that will give us a great chance to improve our service more. Some highlights on PeP on page 8. Nothing new there. The trends we have seen for a long time now decline in mail volumes. Last year compensated by the postage increase. In parcels, strong growth, even above our long-term expectations of 5%-7%, has led to a significant increase of the share of revenue from parcels. So we are well on our journey to make us less dependent on mail and more dependent on the growing part, which is parcel. The letter volume per working day was back in the fourth quarter in the range of 2%-3%, as we have said for a while now. Also, outside of Germany on page 9, we have continued to grow the business quite nicely, if you see the revenue. The final quarter was in Europe as much as in e-commerce, the strongest quarter for the year. We have now enlarged our footprint in Europe significantly to now 21 countries. UK Mail is closed. We have engaged with other partners to extend our activities to the Nordics and Baltics and some other countries. We will now transfer Iberia as well, or we started that by January 1st to Parcel Europe, and that should give us a very good base for further growth. E-commerce, our launch of last mile delivery in Thailand is very successful. We are well ahead of our expected volume growth. China has grown rapidly, cross-border, and also we see good successes in fulfillment and in U.S. To accelerate the growth even further, we now create, and that is in full swing on page 10, standardized product for cross-border in Europe with the features you can see here, with the delivery options and also with additional services. That will be fully rolled out during this year, but that gives, of course, a very nice customer experience for the consumers. In Express, continuation of our tremendous success we have seen now for many years. Revenue is up per day, shipments up per day. Again, the fourth quarter, it was again Europe, which was the strongest. It resulted as well that e-commerce in a premium segment is really enlarging in Europe. Other regions are catching up now, but they have seen slower growth last year than Europe. We told you already before, very often, that is changing every year somehow. Of course, we are very happy that we have seen such a strong growth in our home region in Europe. We also continue to invest on page 12. Many of the stuff is already done, but we will continue to invest even more due to the strong growth we have seen, and that is all over the place, from the Americas to Europe and Asia. Some activities are already in place, but some others will come in 2017. Global Forwarding Freight, we have improved the performance. As you can see on that page, we are not yet at the level where we have been, but I think we have made a good step and a solid step in the right direction. Ocean Freight actually did very well, as you can see here, by TEU and also by gross profit increase. The market is getting tighter as well in Ocean Freight. Air Freight has been a challenge for us in the last two years. We had declining volumes. That is now started to change in the last quarter that we see volume growth, but the buying rates are pretty tough. You have heard that from other forwarders as well. That is still a challenge with regard to the Air Freight segment. Ocean Freight is in pretty good shape, which encouraged me because, of course, globally, we are working with the same organization, and we are proud success from Ocean Freight, and I'm optimistic that we will see good progress in 2017. We still have a challenge in the U.S. The changes we did under NFE had significant impact on our performance, and we are still continuing to recover from that. Since the U.S. is important, it has impact as well on our numbers, and therefore, there is a challenge. But we are now even focusing more on the U.S. than we can do because other parts of the business have done pretty well in the last 12 months. Also, our progress on our IT renewal is getting traction on page 14. You see here under one, the systems which we have upgraded and enabled and now roll out globally. Systems which we used already in parts of our operations but never scaled and globalized. This is now happening. We are very often in pilot stage already, and that is very encouraging because we get better visibility. We will avoid work because we have an electronic document management system. We can manage the service better because we have visibility about irregularities, and we have a better quoting tool for internal use so that response rate to spontaneous demand is better. We will even launch very soon an online quotation tool, which should give us access to small customers in a much better way. At the same time, we are in the final steps of proof of concept of our transportation management system and will launch a pilot in the second quarter. Overall, IT renewal costs will stay on the same level as last year, and these systems should help us to close the gap to our previous margin conversion and then even beyond. Finally, Supply Chain had a very strong year overall, record results. Margin is in the range of what we guide originally for 2020 with 4%-5% margin. We used the gain from King's Cross, I think, very smartly. We gained the largest amount of new contracts and new signings ever in that division. Supply Chain is, I think, on a constant track to improve. We always will have sometimes one-offs, because if you lose a customer, it's unavoidable that you have restructuring expenses. That will be always a theme of certain restructuring costs. That's given by the business model, because if you have dedicated facilities, you will have one-off. If you are losing customers or they go bankrupt and whatsoever, that will happen and continue. You should always look at Supply Chain for the full year numbers, because that's much better than on a quarterly base. I think the full year numbers show that we have not only increased margin very nicely, but also in absolute terms, improved the performance significantly. Overall, I think as we promised, 2016 has a very good year for us. I think we have outgrown the market environment and overcome all the uncertainties very nicely. We continue and leverage our position in e-commerce, and we benefit from that. Of course, we continue to invest into growth and to return to our shareholders at the same time. Therefore, the long-term strategic goals with our Focus, Connect, Grow strategy is right, and we are very confident that we will see more benefits coming from that going forward. Therefore, of course, I'm very happy that we made all our numbers and we had now five quarters in a row with record results. With that, I will hand over now to Melanie for more financial detail. Thank you for listening. Yeah, thank you very much, Frank, and good morning, good afternoon also from my side to all of you. Frank already covered most of the relevant topics in his strategic overview. I now go into a bit more detail with the numbers, and I'll start with our full year profit and loss statement on page 18. As Frank said, we finished the year on a strong note, which is maybe not immediately visible on the top line. I think you're all aware of those adverse effects which impact on our top-line development, currency effects, as well as lower fuel surcharges, and the change in the revenue recognition for our National Health Service contract in the Supply Chain division. When you take out those effects, revenue growth was actually around 2.8%, which we feel is a good result in the current economic environment. When you take a look at our EBIT development, you see that year-over-year, we have actually managed to add more than EUR 1 billion in EBIT to this line. You all know that we had negative one-off effects in 2015, but even when you exclude those effects, we achieved a 13% operating improvement in EBIT compared to previous year. What is very positive in this development is that it has actually been driven by all divisions. When you look at the PeP development, you can see that e-commerce-driven parcel growth is offsetting the structural decline in letter mail, and that allowed PeP, as well as our DHL divisions, to contribute strongly to our EBIT growth. When you look at the tax line, as guided, we came in with a tax rate around 11% for the full year. That led to a stronger net income growth. Consolidated net profit is up 71.4%. When you look at the final line on the page, you see that in terms of earnings per share, that increased even a tick more than the net profit, because you can see the accretive effect of our share buyback program throughout the course of the year. That's the overview over our group P&L. On the next page 19, we've put together, again, the overview of the operating dynamic in our four divisions. You can see on the left side is PeP, that we have really switched from stabilization mode to EBIT growth mode, achieving the EUR 1.44 billion EBIT in 2016. We have already included a sneak preview on the guidance for 2017 for PeP on this page. You can see that we expect this positive growth momentum to continue. But of course, we have to take into account that some of the tailwinds we got in 2016 from the stamp price increase, the absence of the wage increase in Germany for the first nine months will not happen again in 2017, hence the growth rate is a bit more normal than what we had seen for PeP from 2015 to 2016. Turning to the middle of the page, on the Express side, we have now achieved a full year EBIT margin of 11% and also in absolute terms, we had a very strong performance from the Express division. Finally, last but not least, on the right side of the page, you see the margin development in Supply Chain and Global Forwarding Freight. Frank already mentioned that in Supply Chain, we have now achieved a margin which is above 4%, so for the full year, we're at 4.1% and hence in our target range, where we were aiming to go. On the Global Forwarding Freight side, we have improved, as you can see here. We're now at 2.1% in terms of EBIT margin for the full year. That is clearly better than in 2015, but obviously not where we want to be. So there is, of course, continued focus on further improvement in this area in 2017. On the next page 20, I would like to highlight just a couple of noteworthy points with regard to our fourth quarter P&L. When you look at the revenue line, you can see that now reported revenue is back in positive territory. Nevertheless, we continue to see adverse currency effects. You will see that, for example, very strongly in our Supply Chain P&L. Excluding those currency effects and fuel price effects, growth was around 3.2% on the top line for the fourth quarter. On the EBIT, we had a 16% growth in the fourth quarter, driven very strongly by the year-over-year improvement in the DHL divisions. On the PeP side, you can see that, yes, we had the wage increase coming in on October 1. We also had less benefits from the stamp provision utilization in the fourth quarter. But thanks to the strong parcel growth and cost management, we were able to offset those effects. That takes me to slide 21, where you can see the fourth quarter cash flow statement and our usual strong fourth quarter cash generation. This year, it is worth noting that after having had a very strong cash inflow from exceptionally good working capital management in 2015, we have managed to stay at these good levels in 2016, while we took a more balanced approach to our year-end cash management. You will also see that as I proceed through the divisional results. The second effect I want to point out on this page is on the M&A line. You can see the closing of the UK Mail acquisition in the last days of December, which led to an outflow of EUR 278 million in the M&A line. When you look at the overall cash flow statement for the year, we feel that there are a couple of points which are worth a couple of extra sentences. On page 22, we have included some explanations for our full year free cash flow development. Maybe just taking first a look at the bottom of the page. You can see that the reported free cash flow for the full year is 444. That's of course impacted by the EUR 1 billion pension funding. When you add back the EUR 1 billion in pension funding, the, for us, relevant free cash flow is EUR 1.44 billion. Then you then add back the UK Mail acquisition, you can see that it's actually pretty much on last year's level. But there are some important differences in the different lines, and I just want to highlight some important elements. The first thing I want to point out is on the depreciation line, you see, in the 2015 number, the effect from the NFE write-off, so the 2016 number is the more normal number. The second line, which looks a little bit confusing at first glance, is the change in provisions line. First of all, we had the EUR 1 billion pension funding effect go through this line. That is the first thing you have to take out here. We then also applied some changes in the pension scheme structure here in Germany, and that gave us headroom, to provide for an early retirement of civil servants. These effects caused some movement in the change in provision line, but they were as such, EBIT neutral. Excluding the EUR 1 billion pension funding, when you look at the operating cash flow, it is pretty much spot on last year's level. But what is important to notice is that this year it has been driven by sustainable operating performance in OCF before changes in working capital. Whereas last year, changes in working capital played a much more important role. Taking it all together, as I said, adjusting for UK Mail and the pensions, free cash flow is on last year's level. The difference you see is due to the UK Mail acquisition, and then you have those shifts between working capital, and OCF before changes in working capital. On the next slide 23, we show you how the net debt has developed in the course of 2015. There were a number of elements impacting our net debt in the course of 2016. The positive news is that despite the effect from the pension funding, the EUR 1 billion, from the share buyback, where for the year-end, we had to book the full amount of EUR 1 billion, and from the M&A activities, the net debt position only increased by EUR 1.2 billion to a very manageable EUR 2.3 billion overall. That is a position we feel very comfortable with. The second thing I want to point out on this page is kind of like the statement at the bottom of the page. You can see that our net pension provision at the end of the year stood at EUR 5.4 billion. In the full year, you see, of course, the positive benefit from the EUR 1 billion pension funding. But it is also worth pointing out that compared to where we were at the end of the third quarter, we saw a significant improvement because of an increase in the discount rate. Overall, in terms of pension funding, we are close to a 70% funding ratio, at 69% to be precise, and this is a level that we feel very comfortable with. I will now quickly talk about what happened in the fourth quarter in the different divisions, and I will start with PeP on slide 24. You can see in the revenue line that we had solid growth in the fourth quarter in the PeP division. That came from a strong growth on the e-commerce and parcel side, up 10.5%, and that offset the 2.6 decline in postal revenues. On the EBIT side, I already talked about the wage increase, and the offsetting effect, which kept the overall EBIT stable. You can also see very clearly on this page that the PeP EBIT, and that is not a surprise, is coming from Germany, whilst the international e-commerce and parcel business, where we are in an expansion phase, is around about the break-even line. I will talk about that in a second, in a bit more detail. Just one final comment on the CapEx line. That is predominantly going into investments in the German parcel infrastructure, because the international expansion is still comparatively asset light. On the next page, we wanted to give you a bit more of a feeling what to expect from this international e-commerce and parcel expansion in the PeP division. Because I know that there are lots of questions out there on how and when will these operations contribute to our bottom line. So we have a clearly defined strategic rationale for the international expansion, which I think is relatively obvious. It is driven by the increasing customer demand for domestic and cross-border e-commerce services. When we took the decision on how we want to expand internationally, one prime directive for us was to really stay flexible and asset light, and to really find the right approach market by market. That is what we talked about in more detail in our e-com tutorial, in October of last year. Ultimately, though, B2C delivery remains a network business, even in an asset-light setup. And that means that you first have to build up a network, then gradually fill it, and with increasing volumes, you will achieve operating leverage. How fast or how much we achieve over the next years will also depend on how rapidly we expand our portfolio, which will again, be a function of our perception of the risks and the potential returns of each market, and which we will adjust according to what we see and what we have built up so far. By 2020, we, of course, expect a significant increase in revenue levels driven by our expansion as well as the overall e-commerce market growth. In terms of EBIT, we expect a positive but not yet significant EBIT contribution by 2020, with a more significant expansion, of course, to come thereafter, if all goes according to plan. That takes me to page 26, and the Express division, where I don't think you will see many surprises. We continued to grow healthily on the TDI volume side with an increase of 7.4%. That was the basis for the revenue growth, and that was also the basis for really achieving a very good EBIT number for the fourth quarter. Thanks to strict focus on yields and efficiency, the Express team has been able to offset adverse currency effects and has really managed to get to an 11.4% margin in the fourth quarter. The lower CapEx amount in the fourth quarter is more a question of phasing. If you look at it from a full year perspective, we spent more than 5% in Express in 2016. We expect to also spend a lot in 2017, as guided before. This is like the peak phase in the Express CapEx scheme. Frank showed you some examples where we're actually using the CapEx for. On slide 27, the Global Forwarding Freight results reflect the market trends mentioned earlier by Frank. Volumes have seen a good peak season, but at the expense of gross margin driven by increasing buying rates. So while we are very happy to see that our business is picking up and performing more in line with the overall market from a volume and GP perspective, the main driver of our increasing profitability remains our internal self-help agenda and the related turnaround measures. Looking into 2017, we think the market conditions seen in Q4 will probably persist at least through the first quarter of 2017. That's the indication we have on the trend from the first weeks in the quarter. Yeah, and finally on this page, in the cash flow line, you see the effect from last year's very strong and partially one-time cash management, as well as last year's phasing. That takes me, last but not least, to Supply Chain on slide 28. On the revenue side, that was now the first quarter where the NHS effect was out, but you still see that year-over-year, we have a decline in reported revenue numbers. We have very significant negative currency effects, most notably from the British pound, where we have a sizable business on the Supply Chain side. But the positive thing is that when you look at the EBIT, we had significant progress year-over-year. Frank already showed you how we invested the King's Cross proceeds from the first quarter into some final restructuring spending. So overall, we do see the benefits of the cost savings in the Supply Chain performance, and as mentioned before, the increase in margin to 4.1% for the full year. That takes me already to the last slide of the presentation, and that is our guidance and outlook for the full year 2017. Generally, we believe that those positive growth trends from e-commerce will continue to support our growth trajectory, both in PeP and the DHL divisions. In the PeP divisions, as already mentioned, we assume to see growth also in 2015. Our goal is to achieve an EBIT of around EUR 1.5 billion for the PeP division. In the DHL divisions, our goal is to get to an EBIT level of around EUR 2.6 billion. Those assumptions are based on a relatively moderate global GDP growth of around 3%. Like in 2016, we do not count on a very hefty tailwind from the global economy, but we continue our focus on those things which we can control internally. That is most noticeably really our focus on customer centricity, on yields, on efficiency measures, and internal improvements to drive earnings growth. We also give guidance, as in the previous years, on three other elements. The first one is on the free cash flow, where you have seen the solid development over the last years and also in 2016. In the past years, we have always guided that we want to at least get to our dividend from the free cash flow with a 1.05. That would mean we would aim for around EUR 1.3 billion. But given the good free cash flow performance we have had now over the last years, we really want to take a changed approach to the free cash flow guidance, and we want to achieve at least EUR 1.4 billion on the free cash flow side. Tax rate, we had 11% in 2016, which was clearly driven by one time effect, which will not come back. There are some uncertainties around the tax regimes in relevant countries. So we took a more conservative approach here, like in the past years. At this point in time, our assumption for the tax rate is around 19%. But I think there is some potential that there may be changes in the course of the year. Finally, with regard to gross CapEx, we expect to maintain our investment program for growth. So we have a small increase in our CapEx spend in 2017 to approximately EUR 2.3 billion. Finally, for the longer term, our goals out to 2020 remain unchanged. As Frank already said at the beginning, we are in full execution mode for Strategy 2020, and we are confident in our ability to deliver profitable growth and attractive shareholder returns into the future. That concludes my part of the presentation. Thank you very much for your attention. I think we are going to now open the floor for questions. Right. Operator, please. Yes. Ladies and gentlemen, if you would like to ask a question, please press 9 and * on your telephone keypad. In case you wish to withdraw your question, please press 9 and the * key again. Please press 9 and * to state your questions. Please press 9 and * for your questions. The first question comes from Tobias Sittig from MainFirst Bank. May we have your questions, please? Yes, good afternoon. Thanks for taking my questions. Three for me, please. Firstly, on the logistics division on the cost development there. In the fourth quarter, there has been pretty substantial changes in what you call net other operating in your segmental disclosure. That is EUR 19 million better in Supply Chain and EUR 43 million better in Forwarding, even there is a net operating income in Forwarding. Can you explain a little bit what has been driving these developments and how that impacted EBIT? The second one is on your cash flow guidance. How do you think about CapEx versus disposals? In the past couple of years, you had quite substantial disposal income. Should we basically be thinking of really EUR 2.3 billion CapEx, or do you plan for EUR 200 million, EUR 300 million, EUR 400 million of disposal income to get to your free cash flow guidance in your mind at this point in time? Thirdly, when you look at 2016, basically what you've been communicating was that you're pretty happy with everything that happened in terms of operational development and volumes and so forth. Yet you're ending the year rather at the low end of the guidance. Maybe can you elaborate a little bit on what went wrong in your mind, and where those headwinds came? Why didn't you reach the higher end of your guidance range then? Thank you. May I start with the third, Tobias Sittig, and then we can answer the two other questions. I think we ended up in a very nice spot, actually, and not on the low end. We always guided for the pretty broad range. I think we had a record last quarter. We never were better than in this quarter overall. I think this is a very good result. So I can't give you any indication that we are dissatisfied with any of the operational results. The economy was okay, but not very strong. I think we had a very good result, and I'm not disappointed with the fourth quarter. Yeah. Then let me take the other two questions. First of all, you asked about the net other operating income development, most noticeably on the Supply Chain and Global Forwarding Freight side. So on Supply Chain, I talked about the currency effects we see on the revenue line. We also see those, of course, in the expense positions, and that is the one driver in Supply Chain. The second one are the restructuring costs, which were substantially lower now in the fourth quarter of 2016 than in the fourth quarter of 2015. On the Global Forwarding Freight side, I think the one effect to point out here is that we had in freight, both in the end of 2015 and in the end of 2016, some benefit from real estate proceeds, which, including some other factors, were pretty much on the same level, but they played a little bit into different lines. So when you look at the freight EBIT overall, it's pretty much on the same level in the fourth quarter. But the benefit from the fourth quarter real estate sale is impacting the number in net other operating income. Then on the free cash flow question and the CapEx, you're of course absolutely right. Our CapEx in the cash flow statement is not the balance sheet CapEx. So this year, in 2016, we had EUR 1.7 in cash out on a gross CapEx number of EUR 2.1. We naturally also expect some proceeds. The CapEx guidance I gave you around EUR 2.3 billion is the gross CapEx guidance, and that should not be one-for-one, like-for-like, what we see in the cash flow statement. Okay, Tobias? Thank you. Very clear. Pretty good. Next caller, please. Yes. Next up is Damian Brewer from the Royal Bank of Canada. Good afternoon, everybody. Three questions from me as well. Thank you. First of all, I am just wondering, Frank, given it is such an important part of the business, if you could talk a little bit more about how the employee and customer satisfaction scores trended in Q4 2016 versus Q4 2015, and in particular, what level they are now and how they have changed. The second question, I was wondering, given Blue Dart and your 46% of the air market there and the B2C growth, whether you could elaborate a little bit more on what is happening with your Indian strategy, not just across B2C and parcel, but Express and the other components of the business in this ever larger and GDP-focused economy. Then very finally, in terms of capital allocation, I am wondering if you could tell us a little bit more about, as 2017 develops, how you will think about triggering any decision between maybe special dividends or more share buybacks and how that changes. As a sort of maybe an addendum to that, given the very unusual IFRS accounting, where you have to sort of take into debt share buybacks you have not done, and you have underspent that, what the accounting adjustment will be that we will see in Q1 to, if you like, reflect accounting catching up with reality? Yeah. So let me take the first, Damian, for the first two questions. On EOS, we do a once a year in September, our employee opinion survey, and the analysis is then done in October, November. So we do that always in autumn. Very pleased by the progress. We had record numbers. On the global scale, all divisions made progress. I do not have them at hand at the moment, because I did not expect that question, to be honest, but we had very good numbers. Three indicators already at our target level, 80 or above. The others made very good progress. We have now more or less, or Melanie has it at hand, so I can tell you more precisely. I am also head of HR. We made progress between one percentage point on a scale from zero to 100, up to three percentage points in some indicators. Three percentage points, for instance, for future and strategy. We are now at or above the external norm. Most of the companies we are comparing with, that is done by IBM, are white-collar and blue-collar-driven companies. We are now above or the same on most indicators except one. That is, I think, fantastic progress, and that gives me very much confidence that we will improve our service quality this year again. That is a very early indicator, and of course, that was the biggest step in progress we have seen, I think, in the last five years. That is a consequence, I think, of the certified program, which I mentioned already. India is a very important market for us. We have very good footprints from all divisions, not only in Blue Dart. For instance, through Blue Dart, we have enlarged our footprint, how many ZIP codes we deliver. We do now B2C on a significant scale as well. Supply Chain is providing fulfillment services for our e-commerce customers. Global Forwarding Freight has nicely grown. Our Express business is in good shape, too. India, I think we are really a powerhouse, and that, of course, the development India is taking, and the encouraging signs from some reforms they have taken will give us confidence that India will be a very good contributor to us for the next years. It is always a little bit slower than you expect in India. But I think the GST reform, the tax reform, will now happen. I am pretty confident. There was some pushback from these, pull back from some money from some notes, and I think that is now overcome as well. Overall, India will be a very interesting market for us, and will continue to invest into our capabilities there. That leads to the final question about the capital allocation, what we do with free cash flow. Yeah. In line with our unchanged finance policy, we have always said that when we have excess liquidity accumulating on the balance sheet, we will think about appropriate means to return those to shareholders, and we will take the decision at the right point in time. I think for now, we have just concluded on Monday evening our first share buyback ever, where we have, as promised, spent close to EUR 1 billion, EUR 911 million to be precise. You asked about the accounting treatment, and I have to agree personally that it is a bit unusual, but according to our auditors, that was what we had to do under IFRS to really book the full EUR 1 billion, even though we hadn't spent it at this point in time. What will happen now is the delta between the EUR 911 million and the EUR 1 billion will be taken out again. The liability side will come down, and the equity will increase again. That will be now booked in the first quarter. Okay. Yeah. In addition, let me say, because I know that this is an important factor, I think we have proven in the last 24 months that we always find the right balance between all stakeholders. Because as you know, we have some different structures in Germany with supervisory board levels, and I think we did pretty well in balancing all these needs, took the right decision. We took the full share buyback when the share price was pretty low. We give you now a significant increase in dividend, and I think we will remain committed to return to our shareholders, but we always have to keep everything in balance. Otherwise, it might be very difficult and counterproductive. We keep that in mind that if we continue to generate, we have no intention for large acquisitions, as we said several times. But I think the momentum at the moment, having just concluded on a share buyback and increase of dividend more than at least I can remember in one step, I think that's a good balance of keeping everything in balance and return a lot to shareholders. Thank you very much. Okay. Thank you, Damian. And further on our way to crisp Q&A session. Yes. Next up is Neil Glynn from Credit Suisse. Good afternoon, everybody. If I could ask also three quick questions. The first one with respect to PeP. Parcel Europe revenue growth is obviously very strong, but just interested in terms of how attractive do you need to be on pricing to fill those new parts of the network? Are we seeing pricing significantly lower than other parts of, well, than in Germany, really? Second question with respect to Express. Cost per kilo has been mentioned in the past. I am specifically interested in how cost per kilo, excluding fuel, performed in 2016. So how successfully are you balancing underlying inflation and the benefits of utilization improvements in the Express network? And then finally, Supply Chain. With a 2020 target of a 4%-5% EBIT margin, you are now at the bottom end of that range three years early. Just wondering, is the bottom end of that range still applicable, and is there scope for that target to be changed in due course? Thank you. I can talk about the last one easily. I think we have no intention to change it now already. I think John Gilbert and his team have a very comprehensive strategy, and it is well executed, and I am very happy with the progress we have seen. We are now world-class with regard to margins for a global player. It is a mix and match of different regions and different margins, and there is not a single company who is even close to our footprint. I am very pleased with that margin, and I have no tendency at the moment to change the guidance already now, but let us see what will happen in the future. Our pricing, I think, is very difficult to compare because the markets are very different from dynamics and from overall level. Labor costs are very different as well. To compare the price in Germany and some other markets on a EUR basis is almost impossible. What I can tell you is that I think our home turf in Germany is probably one of the most competitive we can get in Europe. U.K. is quite competitive too, but some other markets are significantly less competitive than what we face in Germany. We are used to that. And of course, we took that into consideration always when we went into these markets. But it is very difficult because the price level is very different, but costs are very different as well. Yeah. Maybe first one small addition from my side to the Supply Chain margin question. I think what you have to bear in mind is that Supply Chain is the slowest moving of our businesses, right? We have multiyear customer contracts where it really takes some time for improvements to materialize. I think the very positive thing is that we now see those improvements materializing, and we are very focused on making sure that also in terms of new customer contracts, we get the right business in. But of course, it really takes time to take the operating margin up in Supply Chain. And hence, we have now only arrived at the lower end of the range. I think the clear focus is now to make progress within the range. Then at the right point in time, we have to think about, is it no longer sufficiently aspirational? On the Express question, when you look at the important operating cost categories in the Express network, the first big bucket are our ground operations costs. On the ground operation costs, I think Frank mentioned that already in our third quarter. The very pleasing thing is that really what we call ops cost move has come down over the year. That is especially pleasing in light of the now 20% share of B2C shipments in our Express network, which really means that those operational measures we have worked on over the last years, for example, on the delivery pre-notification side, are really paying off. We see good operational leverage on the ground op side. On the aviation side, we have invested a little bit into the build-out of our air network capacity. But overall, we are on a relatively stable level in this area. The one area where we have seen, and I think that is now temporary and will wash out over time, a temporary increase in 2016, and that's not surprising, is in the smallest third bucket, and that's our hub cost per throughput piece. Where given the amount of investment we did into building out our big hubs in Leipzig and so on, we have seen an increase year over year. But clearly overall, in terms of direct costs, we had a very pleasing moderate increase in 2016. That's great. Very comprehensive. Thank you. Thanks, Neil. The next caller. The next caller is Edward Stanford from HSBC. Good afternoon, everybody. Two questions, please. First of all, the relationship between the dividend and the tax payment. Clearly it would appear from looking at the numbers that the lower tax charge was helpful, perhaps, in the board's decision to increase the dividend. Likewise, with a higher tax charge in prospect for 2017, can you perhaps explain how that may influence the board's decision? Secondly, it looks from your freight forwarding slide that you are on the threshold of rolling out IT improvements across the group. Clearly, this has been fraught with difficulty, both within the group and in competitors. How confident are you that, A, this will proceed smoothly and, B, it will deliver competitive results once you've achieved it? Thank you. Yeah. Let me start with the IT question, and then Melanie Kreis will talk about the dividend and tax ratio. I feel very confident, and of course, I have a closer look than the last time because I'm in charge of the division, and I'm reviewing what we are doing there on a regular basis. I think this approach by evolution and revolution, I think, is much more likely to be successful. We have very good feedback from our forwarders about the different systems. We are working diligently through all the challenges we face with these systems. The existing systems are already in rollout. That means that they work and they are used, and we see a good take-up. We will get benefits from these systems in many dimensions. It's too early to quantify them, and I said this is not the priority at the moment anyway. The priority is great service for the customer, no disruption if we change system, and a seamless rollout and not to get a full-fledged number how much productivity gains we would get. But if you think about quotation systems which support you, that will definitely improve productivity. If you think about electronic document management system, instead of printing them again and again, we have them in the system, will lead to significant improvements. Of course, the transportation management system will help us as well. There are productivity gains, but there are also tremendous quality gains. As you know, one of our core competitors in Global Forwarding is using the same transportation management system, and they are doing very well with that system, and they have said that several times. I'm very confident that we are on the right path here. Other things, operational irregularities, we believe we are even ahead of the curve with that system. I am very confident that this will help us. As I said already a while ago, of course, the margin increase year-over-year will be in 2017 lower because we will spend time and money on these people, and that will distract them to a certain extent. But I am very confident that we will see benefits then in due course. I am very optimistic about this system change, and I think we have learned our lesson that evolution is much more digestible than revolution. Yeah. Coming to your first question, correlation between dividend and tax payments. First of all, I and we fully understand the concern behind the question. I think my answer at this point in time would be, as I already said, the 19% on the tax side is a very cautious approach, which is predominantly driven by some uncertainties around the tax regime in a major economy. We potentially see the upside that this guidance will change in the course of the year, which hopefully would then alleviate some of your concerns. We will see how it develops in the course of the year. I think then the second element is, of course, and consciously, we have a range from 40%-60% for the dividend to net profit ratio. But I think really at this point in time, we have to see how the whole tax thing develops in the course of 2017. Yeah, and we intentionally said on page 5 of our presentation, continuity and cash flow performance are considered for the dividend payout. As Melanie Kreis said, we have a range. You should not be too concerned about that the tax rate might increase. We have shown that last year we did not increase the dividend because we said we had lower profits from operations actually. We are catching more and catching up due to the great performance as predicted. Therefore, I think the combination of these should give you confidence that we will continue to give shareholder back if we really generate what we have promised. Thanks very much. Okay. Thanks, Ed, for bringing that up. The next caller, please. Next up is Dominic Edridge from UBS. Yes. Hello. Three questions from myself as well. Apologies to go back to the tax point again, but maybe looking at a different way. From what I can see from the annual report, you used about EUR 700 million of unrecognized deferred taxes this year, but then your unrecognized tax asset actually increased by EUR 100 million from the notes to the accounts. Could you just talk a little bit about what's going on with the tax, and particularly the unrecognized tax? Because it never seems to sort of fall particularly, even though obviously you're utilizing quite a bit of those assets. Secondly, just from the press conference earlier, I know Ken was talking a bit about the emerging markets and sounded quite a bit more positive, particularly on the commodity-focused regions. I was wondering if maybe you could make some comments about your view on the outlook, just generally. And then thirdly, just given your slight caution about global GDP, can you just say, is Williams Lea still in your long-term plans? Thanks so much. Melanie, may you start with the tax issue, and then I talk about. Or should I start with it? No, I can start with it. Let me start with the tax rate. First of all, why was our tax rate in 2016 so low? I think there are two important factors I want to point out here. One is also leading into 2017. We still have a significant amount of unrecognized tax losses in different countries. In the course of 2016, we were able to activate a bigger chunk of that, and that came mainly from the United States. The second, and that is really a one-time effect, the second one-time effect we had in 2016, was the way in which we were able to take into consideration our pension liabilities in Germany for the tax books. That takes me to one of the uncertainties around our tax rate for 2017. We have tax losses carried forward in the United States. Of course, if there would be a significant change in the tax rate, that would have, in our case, a negative impact because the reduction in the tax rate would reduce the value of our tax loss carry forward. That is one of the major uncertainties around our tax rate. Yeah. So maybe on the outlook. Global GDP, we expect that global GDP should grow slightly more than last year, so probably up to 3.5%. I think what Ken meant is, if oil price goes up, certain areas of the world will get more income, and then they restart to pump this money into infrastructure development and whatsoever. It is so unpredictable where the growth will come from next time, because it is true, that might slow down the growth in some other parts, where you have to pay a higher bill for the oil, and in other parts, it might lead to more investments. Overall, we are slightly more positive about the world economy than we have been last year, but it will not be a very strong growth as we have experienced a couple of years. I think it is in line what we said already in 2014. The growth should be around 3% to 3.5% for the years to come, because there is no trigger for significant growth. It has to come from more productivity gains, and that will come through digitalization, but that is happening probably more beyond 2020 on a massive scale, that it drives productivity, and then we will see probably higher growth rates again, which is encouraging. Williams Lea has been a part, and is a part, and will be a part of a business. We have, with that business, some challenges, as we mentioned several times. But overall, we have no decision that we should have a different perspective on that business. Okay. Thank you very much. Thanks, Dominic. The next caller, please. The next caller is Daniel Roeska from Bernstein. Hi, good afternoon, Melanie and Frank. Hi, guys. Three questions, if I may. First two on PeP, and more specifically, your European expansion. During the press conference today, Juergen Gerdes talked about your plan to expand to the EU 35 by 2018 or 2020, as he called it. I was wondering if you could provide us some color and say, what attributes or characteristics do you look for in the new markets you're expanding to? Give us your lines of thinking around which of the remaining countries are the most attractive for a postal operator from your point of view. Secondly, in Germany, one of the cornerstones of your development has been the investment into mechanization. I was just wondering, could you share your views at what point a higher automation will become a critical success factor also for the other EU markets? Or, other way around, how long can you sustain lower automation in those countries without it becoming a competitive disadvantage? Third question on DGF. IATA and several others reported global air freight up by globally almost 11%, Europe's up 7% for financial year 2016, yet DGF decreased in volume. Could you give us your thinking around that and what the management team is putting into place to stop the loss of market share in air freight? Thanks. Yeah. So, maybe in the same order. So with Europe, enlarging our footprint. We are looking market by market and have found different solutions. In France, we are participating in an outlet system, because we think that's the right way to enter that market. In the U.K., acquired something in some other markets like the Baltics and some of the Nordic markets. We are partnering with local partners. So we will look into these markets case by case and make a conclusion what is the best strategy to enter that market. I can't even tell you what the next markets will be because, that's more Juergen's job, and he comes in with the clear proposal, and then we look into that. So the answer will be different. I think that's the beauty about the strategy that we have not one fits all strategy. We are looking really into the respective market dynamics to come to the right conclusion what we should do where. I think just to add one small thing here, which I also said in the press conference, I think the important thing, I think that's really one thing which makes us unique as a company. It's not so that we are not present in those countries, where we are not yet offering our standard product, for PeP, right? For each of the countries, we have an Express presence, which is of course, a more costly network, but we already have a delivery network in all of the European countries. Plus, from our postal operator side, we have access to the postal networks, right? It's not that we are completely white in those countries. The important thing for those 21 countries is, that we really offer there a standardized product with completely harmonized features. On this automation, I think that's a long way to go. We are the only one who is highly automated in Germany, and the others do something as well, but a significant step behind us. We are by far the largest player as well. We do 1.2 billion parcels a year, so we can live with relatively low automation for a long period. That's the reason why we are also said that in Europe and in the emerging markets, we don't have to invest a lot of CapEx. It generates losses because we have operational losses through expenses for people and facilities, but we don't expect huge CapEx in these markets for relatively foreseeable future, because there is no need. The volumes are not on that level that we really need high automation. I think just one thing to add here, I think what makes Germany special is not only the very significant volume we have, but of course also the labor cost side, right? In Germany, in terms of labor cost, we are at a disadvantage compared to other players in the market, which makes the incentive to go for automation higher. In other European markets, that's a completely different theme. On DGF, I think on ocean freight, we have done pretty well already and had, I believe we had even slightly higher growth than the market. In air freight, I think we had a very healthy trend in the last year, which materialized in the Q4 with a couple of months already are up trading. I believe we will see a continuation of that in 2017. The reason for that is because in the first place we said we have to stabilize operations. Service quality is of utmost importance. First, we have to become leaner. That was the internal measures we took. Now let's focus on external, better selling to customers, and I think we made good progress. I expect that we will see growth again in 2017 in air freight, as we have seen already in ocean freight last year. I think the time that we lose market share, I think comes to an end. I am optimistic that we will say in 2017, we will at least grow with the market or even beyond. That is my outlook at the moment. Okay, great. Thanks very much. Thanks, Daniel and operator. Let's see whether there are more callers on forward-looking issues or backward-looking issues. Yes, the next caller is David Kerstens from Jefferies. Hi, good afternoon, everybody. I have got three questions, please. First of all, regarding Parcel Europe, you realized 15% growth in 2016, but you also highlighted the entry into new markets. What would be the underlying growth excluding these new markets, and would have that implied that you would have gained market share? Regarding Parcel Germany, you always highlighted the positive price mix in your Parcel Germany business. I think the price mix turned negative. Was it mainly mix in the fourth quarter, or were there also some negative price effects? Finally, regarding DHL Forwarding and Freight, I was wondering if you have become more cautious on the timing for a profitability recovery to former levels of over 3%, in view of a still challenging performance in the U.S., as well as increasing yield pressure following higher freight rates and perhaps increased risks around the rollout of the Global Transportation Management System. Those are my questions. Thank you. I think on the first one, I think we would not now start disclosing which markets are doing what at the moment, because then you ask us every quarter, how is that market doing? Overall, I think we are pretty successful across the board. Therefore, I would abstain from telling you what has happened in the existing markets or the new markets. But I can tell you that we have been pretty successful as well in the existing markets and not the growth comes only from the startups. I am not sure if we are more cautious. We always said that we will see a significant lift up early on in the DGFF, and then it is a mixture of investment in the change. That do not get just the cost, it is also the attention it needs from the organization. We have made great progress on the numbers. We see that we have grown nicely in ocean freight. We are now tackling the challenge in air freight. We have still a challenge in the U.S., and that is, of course, an important country, and that will take time because we closed too many stations in the U.S., actually. I think this is what we shared already a while ago. In 2017, I said already before as well, the lift in profitability will be not the same scale as we have seen that in 2016, because we are busy with a lot of stuff. That doesn't compromise on the midterm and long-term goals, and I'm very confident that this will happen. I'm even more confident because we will have soon, or I will have a new colleague who will take over that responsibility from myself anyway, and then we have somebody who has 100% time to focus on that, which should help as well. I think that left the second question, the middle question, on what is happening with Parcel Germany, where you rightly point out that in the fourth quarter, volume growth was slightly higher than revenue growth. I think you gave the answer already, that is really due to a mix effect. There was one special element in here. There was quite a bit of revenue and no volume from a not sufficiently profitable two-man handling customer, which we took out. It is really a mix effect, and I wouldn't read too much into it. Okay, great. Thank you. Europe market shares, any idea where we stand in our underlying growth in European parcel markets? I said that at the beginning, that we won't disclose the detail for the countries. Good. Okay, the next caller, please. Yes, the next caller is Chris Conway from JP Morgan. I'll try to keep it short. Chris, we can't hear you very well. Could you speak up somewhat? Is that better? Yeah. Yes. Great. Following on the freight forwarding questions, I think you alluded to the fact that you're growing ahead of market, especially in sea freight in the fourth quarter. To the extent that you continue to close the gap with peers, how aggressive are you on price? How much of the yield pressure that we see is in fact strategic versus margin pressure? Does that also require some working capital pressure as you close the gap with the market? So, that is a difficult question to answer. Of course, we do not want to compete on price. But we had in the fourth quarter a situation that everybody tried to read the market, and then the buying rates went up quite more than expected due to different aspects. So, I am convinced that we should win on service quality. But I believe in the last quarter, we were successful with service, and we were successful with gaining customers, but the buying rates were higher than expected. So that should level out, and that is a constant discussion forward as we will have to manage that somehow. I think how I see that is always the same sequence. First, you have to be lean enough to be successful. Second, then you have to focus on service quality. Then you have to start to win business, and then you have to optimize what you won. But without growth, you cannot shrink forever, and I think we are now at that point where we really continue to grow, and then you have to balance and have to find the right footprint. And I guess sometimes we were perfect at the right price, and sometimes we probably made some mistakes, but that is something which we have to work out after all the changes we have done. And that is a scatter picture. In some markets, we are well on top of everything, and some others, we have still some challenges. And maybe on the working- Yeah. Sorry, go ahead. And maybe on the working capital side, I think you saw a positive benefit from the shrinkage in the business in the fourth quarter of 2015, which we then didn't have again in 2016. So that's one of the reasons why the operating cash flow in Global Forwarding, Freight for 2016 was below the level of 2015. But now looking forward, I would just expect a more normalized behavior and what you would expect in a normal growing business. Okay. And just one last one. If we look at Amazon over the past year, could you give us some color as to how the relationship has progressed? And while the focus a year ago was in the domestic parcel market, what are your thoughts around some of their activities in other parts of Supply Chain, whether it's air freight or forwarding? Our relationship with Amazon has been very good, is very good, and will be very good. I think they need us for their growth, and of course, we benefit from their growth as well. They want to understand more about other aspects. The answer from myself has been consistently, I think in the last 12 or 18 months, we have to be the best in the industry in what we do, and then we have a right to exist. And if we don't do that, then we should not complain. And I think we have done that very well, and that's the reason why they look at us as a role model for responsiveness and new ideas. And if we continue to do that, I think we have all the rights. And to be honest, their pace to grow is so high that they can't build all the infrastructure themselves anyway, because otherwise, they will be busy with finding land and facilities and whatsoever. So I think it's a mutual benefit from both sides, and therefore, I'm very confident that we will see good progress in 2017 again. Very good. I will sneak in one last one on Express. We have seen a lot of volatility in the underlying revenue per shipment the past few years, stripping out FX and the fuel. Is it correct to assume that this should stabilize in 2017 or are there some additional meaningful mix effects that you anticipate? No, I think on the Express side, of course, there is an ongoing mix element on the Express side, which we have seen as a trend for the past years, and I do not expect a significant change there on the mix side. I think what you have seen in 2016, and which has really helped drive the good Express results, has been the very strong focus on yield management. That is something which, of course, we continue with in 2017. Thank you. Okay. Well, thank you, Chris. I think we have got time for one or two more questions. Yes. The next caller is Alex Paterson from Investec. Good afternoon, everyone, and congratulations on the results. Apologies, I was cut off for a few minutes, so you may have already heard these questions before. If I might ask three. Firstly, on GFF, you talk about the priority getting back to former level of profitability. When do you think that is going to be? Secondly, I think you said for GF&F that you are going to be targeting smaller customers more. Can you talk about how you're going to target them, whether there are additional costs to service them, and if that can be recovered in higher average unit revenues? Thirdly, your e-commerce strategy is very clear. Is mail an integral part of that in the U.K.? Okay, so I didn't take a note of the first one. The Global Forwarding side. When will we get to the- Sorry. I refused in the last quarters to give you a precise date. I feel even more uncomfortable now knowing that my new colleague will join us soon. I think we should give him then a couple of months at least to give a clear understanding. I think he has the same aspiration as I, that we close the gap until 2020 significantly. I would feel very uncomfortable to put now the mark to a certain point. He should have a perspective. I didn't say anything in the last 12 months when the moment will be, because there are a lot of moving targets to the change we do. I'm very confident that this is the right strategy and will be successful, but I feel, as I said, quite uncomfortable. On the smaller- I think the question was more when do we get back to the pre-NFE former levels, and I think that was- Yeah, but this is all linked because- Yeah The point is we are doing a lot of change at the same time. Therefore, it's difficult to say that because our focus is not just improving the margin. Focus is equally on deploying the systems successfully, and I think that's, for me, more important that we get that done without any service failure. Therefore I'm saying, sometimes you need a little bit more cost temporarily, and that has impact on the P&L. On the smaller customers, I think we had that on the agenda for a while. We now really see traction because we are working on service quality and systems and these tools, online quotation tools, and we see now really benefits. If I see in the detail, which I can't disclose because we never disclose it, the gross profit growth we have seen on smaller customers is pretty nice. We get traction, and I am confident that, of course, on a smaller scale, because we always were more balanced to the large customers, but I am very optimistic that we will see benefits from that in the coming quarters. The role of UK Mail in our e-commerce strategy? Yeah. I think UK Mail is an important part. The nice thing about our footprint now is that we are in all countries where the large e-tailers have, and the emerging important e-tailers have their footprint. We do not have to be present with own operations everywhere where they are just shipping outside because then we have a strong partner we still control. The U.K. is an important outbound e-commerce market as well, and therefore, we found now a good platform with UK Mail. UK Mail has a very good reputation. Some of you are living in the U.K., know it better that they belong to the stronger performers, as we have heard from customers as well. I think UK Mail is a very good part of our strategy here, really to grow with the e-tailers and focusing on B2C. Do you need to continue with the letter side of- The letter The Express? Yeah. So, why should we throw it out as long as it creates benefits for us? So we acquired the company for the parcel purpose, and it's not such a big business. I think we can see what will happen. So, we keep it as long as customers are happy with the service, and we can make money out of that. But of course, the strategy is to grow the parcel. Thank you. You are welcome. Okay. Thanks, Alex. Operator, are there any further callers on the line? No. No more callers on the line. All right. Good. Well, that fits to our timing. Well, with that, I think we can conclude the Q&A session and the call overall. Thank you very much. Looking forward to seeing you over the next couple of weeks on road shows and conferences. Hand over to Frank for his closing remark. Yeah. I am, of course, very pleased that we had a record year last year, that we had four record quarters and finally delivered what we have promised. All indicators are very strong. I am particularly pleased with the engagement of our people, because that is an early indicator. I am also very pleased with the feedback we get from customers in different surveys we do. We made very good progress, particularly in our more struggling businesses like Freight and DGF, where we had the biggest jump, actually, in customer satisfaction. That has led to the improvement of our numbers. Not to forget that we have reached our goal of carbon efficiency by 30% already last year instead of by 2020, and that is the reason why we today announced our mission, zero emissions by 2050. I think that will give us an edge as well on the marketplace. I am very happy that we can do that because we made so much progress. The early indicators, the forward-looking indicators are looking all very green. Therefore, I am optimistic that we can deliver what we have guided you to today. That is a great basis then for next three years to come to deliver our 2020 goal. I am overall very happy. Thank you for your attention. We will see you in due course in the next weeks. Thank you. Thank you. Bye-bye.