Earnings Call: Q4 2015

Mar 9, 2016

Good afternoon, ladies and gentlemen, and welcome to the Deutsche Post DHL conference call regarding the full year results 2015. 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 Ziegenbalg. Yes. Thank you, and hello or good afternoon to everyone out there to our full year 2015 conference call. As invited, I have with me here our Group CEO, Frank Appel, and our CFO, Larry Rosen. I take it that you have the material that we sent out this morning in front of you on your desktop or even smarter on your IR app on the iPad. Without any further ado, let's start with the round of presentations and then the Q&A. Frank, please. Yeah. Thank you, Martin. Welcome as well from my side. I am happy to share with you our perspective on the final quarter and the total year. Let's go straight away to page 3, which is a pretty good summary of the highlights of the last quarter in 2015. We have seen a very strong year-end quarter for Parcel and TDI. In Express, we have delivered a strong growth in both. We see a turnaround in Global Forwarding, which materializes in our numbers as you can see later. Supply Chain has completed its 2015 restructuring program and getting traction as well. We have seen some nice improvements in the performance here too. Overall, the free cash flow was very strong at EUR 1.7 billion and therefore we can summarize that we have delivered on our guidance for 2015. We are happy to confirm our targets for 2016 and 2020. We will have a stable dividend on a reported lower net profit. We have yesterday announced a share buyback program of EUR 1 billion. If we go then on page 4, you can see the development of our EBIT numbers aligned with our dividend payout and our free cash flow generation. You can see here that we have now three years in a row delivered significantly more free cash flow than the underlying dividend. That's the reason, following our finance policies, that we decided to initiate a share buyback program. On page 5, you see also the dividend proposal, which we keep stable on EUR 0.85. We lie very well in the range of 40% to 60%, as discussed in our finance policy of the underlying net profit. It follows completely our finance policy. We always said that most importantly, we want to invest in our business and grow it. Then we look into our rating. We pay a dividend of 40%-60% of our net profit. If then we have excess liquidity, as we have generated in the last three years, we either fund the pension more or give something back to the shareholders. We believe that a share buyback at the current stage is a better instrument than an extraordinary dividend. If we now look into the strategic priorities, you can see on page 7 that mail communication volume declined in 2015. That was somehow more than what we had in the previous years. That is mainly driven by, we believe, by the strike impact. Therefore, we foresee for the next year, for 2016, that it will go back to a 2%-3% decline again. The price increases we had last year in January has mitigated it to a certain extent. I think from January this year on, we have a significant price increase of 7.5%. That should help us. Finally, on ePost, I am happy to report that we have not only delivered about EUR 500 million revenue, but also reached break even in the fifth year of that product. If you look into the same division Parcel, Germany and outside Germany, that was a very strong final quarter as well. We had a very strong peak season. Actually, not surprising, knowing that the German consumer had more available income due to the low oil price. We had a very strong growth in the final quarter. Stronger actually than the year-to-date trading. That is very good. We believe that, nevertheless, the outlook for the next year should be 5%-7%, but we have now two years in a row where we outperformed that underlying growth, we assume. We have also extended our activities in e-commerce outside of Europe and also in Europe and in the parcel markets, for instance, Austria or Slovakia. I think overall, that was a good year. The strike definitely had significant impact on our EBIT number, as you will see later on again, or already saw. But overall, I think the fundamental trends in parcels are still intact, and we see a very good growth. Now coming a little bit to other aspects of the parcel market, because it is important to understand the dynamics there. We believe that this is an interesting and competitive market on one hand, with good growth rates, a broad customer base, relatively low parcel prices already, probably one of the lowest in Europe. And a high-quality standard as well. Next day is more or less already in place everywhere. We have grown above the market growth. We believe that we have most of the online retailers in our portfolio anyway, and we also have seen some positive price increases in the last 12 months. We overall believe that this is a very attractive market. It is a market where we have succeeded quite well. And why we have done that is because we have really, on the next page 10, we really have the best quality in this market. Whatever dimension you take, I think it is a very strong footprint we have. We have identified convenience and speed as the key drivers. We have continuously invested into our network. We have a very high level of satisfaction with our customers. So any new entrant or existing entrant has to catch up with our performance, we believe. And with a new labor contract, we also have a more competitive wage structure in place. By the way, the market in Germany has a very low unemployment rate anyway. We believe we are well-positioned to defend our market position here and can grow as we have done the last years above market. We will continue with further innovations. We have already done many of those already. We believe that we have to be innovative to improve service quality continuously. What is celebrated in some markets as a new edge technology, our parcel lockers, is already present for 15 years, and that is just one. We were the first who had a Parcelcopter, a drone flying in tests. We are the first who are piloting in-car delivery. We believe we are well-positioned to improve our position in the group. On page 12, you see some of the highlights of 2015 and the priorities going forward. Of course, the collective bargaining agreement gives us now the visibility until 2018. We have a new price regime in place. We have new entrances in some European markets. I think these are all things you know already about, and we have clear defined priorities as well. Of course, we will have to manage the decline in letter business. We want to continue to foster growth in Germany, and of course, we will continue to expand our Parcel expansion. That's the basis why we believe that the 3% CAGR for our profit in the PeP divisions are realistic, and therefore, it remains unchanged. If we go now to Express. You see here a very nice development. It looks like that we have a significant decline in revenue per day in comparison to volumes per day, but that's only a reflection of currencies. Fuel came significantly down. If you take that out, you see that the growth is very healthy, and we have seen consistent growth in the final quarter around the world in all regions. Interestingly enough, Europe is still the strongest-growing region. We are very happy with a very strong performance in the last quarter. On page 14, the summary. The focus on service quality is the key differentiator. It will remain a key priority. We, of course, will also continue the operating performance and take efficiency measures in yield management while expanding at the same time our network. We actually had record performance despite that we have invested in the business, and that's, I believe, driven by a very motivated workforce. We will also focus on yield management. As a market leader, we believe that we should really drive the yield as well. And we have grown significantly last years without compromising on prices, and we will continue to do that in 2016. Global Forwarding, Freight is turning the corner, as you can easily see on that page. Q4 was, from the EBIT perspective, the best quarter and the only quarter year-over-year improvement since end of 2012-2013, beginning 2013. We really have seen not only a good quarter, but also for the first time since a while, an improvement year-over-year. That is driven by a good development of gross profit. Larry will show that later on as well. That's also by a selective market approach in Air Freight. We believe that we are on the right way. Costs are getting better and better under control. Service quality is improving, and we have seen the positive impact of that in the final quarter. I'm, of course, very happy about that. At the same time, if you now go to the next page, we have discontinued NFE and have initiated now our IT renewal program. We believe that we have a much clearer picture now what we should do. It will be a best-of-breed approach of systems we have already in-house, which we will roll out globally, and also some off-the-shelf product we will include into our roadmap. We believe that we will see some benefits already from the functionality point of view this year. I'm very optimistic that we have found a significantly better journey. By the way, we need for that a robust middleware architecture, which fortunately we have built in NFE anyway, because at that time we needed a middleware architecture for linking all the legacy systems to the new SAP. We can use that now very nicely for our roadmap for the IT renewal. I'm optimistic that we are on the right way going forward and that we will see in 2016 a continuation of the improvement of the performance on one end, and also the starting of the execution of our new IT roadmap. Finally, Supply Chain has seen another good year of business signings, again exceeding $1 billion. We have seen also a solid operating performance. We have invested significantly in restructuring expenses of in total, $150 million. We have seen already in the last quarter, some benefits. We have seen as well growth in several sectors. We believe that we are here really have laid the foundation to improve the performance. Therefore, page 18, you see the summary of what we have done. We have improved efficiency and productivity. The organization is significantly leaner. We have taken first steps for further growth. In 2016 and beyond, we should be releasing now the benefits of that. I'm very optimistic that the 4%-5% EBIT margin in 2020 are achievable. In summary, before I hand over to Larry, page 19. When we started 2015, we said this will be a year of transition. We will have some challenges. Of course, we knew that it will be difficult with the union, but I think we got to a good conclusion. We knew that it will be not easy to get a new price regime for postage, but we got it. We knew that in Express, we will do a lot of investment and hope that we can keep the service quality. Actually, we improved the service quality, which has led to the market share gain. In Global Forwarding, at the beginning of 2015, we were faced with quite a challenge in underlying performance on one end, and a system which finally turned out not to be the right one for us. Now we have an improved performance and at the same time, a much better roadmap going forward for the IT renewal in the Supply Chain. We said we will invest in restructuring to improve performance and make the organization leaner. We have done that as well and created, again, a good foundation. Overall, we believe we are on a good track. As I said, the last quarter was the best quarter ever for that portfolio. The best fourth quarter ever for that portfolio we have currently in our company, and therefore we are pretty excited about the opportunity of 2016. With that, I will hand over now to Larry for his comment on more detail on the financials. Thank you for listening. Thank you, Frank, and thank you to all of you for joining today. I am pleased to now continue the presentation with a deeper look at our financial performance for the full year 2015, and especially the fourth quarter. Then I will finish up with a review of our guidance for 2016 and also the targets for 2020. Over on to page 21, you see the profit and loss statement for the full year 2015. Reported revenue increased by 4.6%. Excluding positive foreign currency effects, lower fuel charges, and a change in our contract with NHS, which we talked about already in our Q3 release, our organic growth for the full year would have been 2.6%. EBIT was in line with our guidance of EUR 2.4 billion. We saw good operating performance in the PeP division, in Express, and in Supply Chain, but we also booked various one-off effects and made various investments. Examples were the strike in the PeP division in the middle of the year, the write-off of NFE, and the restructuring investments in Supply Chain and in Global Forwarding that affected our performance this year. I will come to a more detailed discussion of these effects a little bit later. Our tax rate of 16.4% was pretty much in line with guidance and slightly higher than last year. Net profit declined from EUR 2.07 billion to EUR 1.54 billion in 2015, primarily as a result of the operating income decline. On to page 22, a nicer picture, and that is our Q4 P&L. Here, reported revenue was flat due also to lower fuel surcharges. Here we had the negative effect. It was the only quarter in 2015 where we had the negative effect from the change in our NHS contract. Excluding those effects and also currency effects, organic growth would have been close to the whole year number of 2.3% growth. EBIT was up 5.7% in Q4, fueled by a strong peak season in PeP's Parcel business and the turnaround that Frank already discussed in the forwarding business. This was a record quarterly operating performance for the group in our current structure, and that means without Postbank. It also included the booking of EUR 123 million of the remaining one-off charges as part of the EUR 200 million charge that we announced at the end of October, along with our Q3 results. Even including a minor positive one-off effect in DGF, our organic EBIT growth in Q4 would have been double digits. PeP has seen the expected one-off effects announced in October for a total amount booked of EUR 57 million in Q4. In the Express division, we booked EUR 66 million of one-off charges in Q4. In addition, we continued with the restructuring investment in our Supply Chain division and spent an additional EUR 39 million for restructuring in the fourth quarter. Those one-off effects were compensated generally by good operating development in all three of the DHL divisions, as well as some higher income from real estate sales in Supply Chain. Now on to page 23. I am really pleased that after a strong Q4 last year, we have had a yet even stronger cash flow in this year's final quarter. Supported by more than EUR 1 billion of working capital inflows, Q4 operating cash flow reached EUR 2.3 billion. With cash CapEx of EUR 563 million in the fourth quarter, we saw total net CapEx of EUR 1.9 billion for the full year, and this was around EUR 380 million higher than last year. Despite that higher CapEx spending, which especially was related to our Parcel and Express networks, free cash flow increased to EUR 1.7 billion, an increase of almost EUR 600 million over Q4 of 2014. On to page 24. You see there the development of our net debt and also our net pension provision. You see that due to the strong cash flow performance, our net debt declined year-over-year by around EUR 400 million to EUR 1.1 billion at year-end. The changes in discount rates over the year, in particular in Q4, led to a decline of the net pension provision to EUR 6.1 billion, around EUR 1 billion lower than last year. Together with the reduction in net debt, we had a significant improvement in our credit ratios at year-end. We expect to again follow a similar seasonal pattern in 2016 so that our net debt should increase during the first half of the year and then improve considerably during the second half of the year in 2016. Now, on page 25, we start to take a look at our division performance in Q4, and we will start with PeP, where revenues climbed by 3.7% in the quarter, driven especially by growth in a very strong holiday period in e-commerce and parcel, and also supported by the small price increases in all segments. That growth is also reflected in our good EBIT performance, which also benefited from two additional working days in the quarter. Note that Q4 EBIT included EUR 57 million of the one-offs announced in October and also the utilization of our stamp provision of EUR 71 million as customers drew down their inventory of stamps in anticipation of the significant price increase on January 1st. Operating cash flow in PeP increased by over 66% year-over-year, driven by positive working capital development and of course, the EBIT increase. On page 26, we wanted to give you a heads up on the changes we will be making to our regular reporting for the PeP division. Starting in Q1 of this year, we will report revenue and EBIT separately for our operations in Germany and for parcel and e-commerce outside of Germany. We remain very optimistic about our growth expectations for the international parcel and e-commerce segment. Within Germany, we see a declining trend in letter volumes, i.e., the 2%-3% that we see on average over the medium term. This decline will be more than offset by the growth in Parcel, which we forecast at 5%-7% per year through 2020. Revenues outside of Germany were up 18% in 2015, supported also by some positive currency effects, and we continue to invest in network expansion, most recently in France and for several countries in the Nordics. Outside of Europe, we have seen strong growth in our business in the U.S. and in India, and only recently we launched our domestic delivery service in Thailand to continue expanding our consumer parcel services in key Asian markets. The current low EBIT contribution reflects an underlying very attractive earnings contribution, offset by the current high levels of investment to enter new markets and build up the organization, both at the division and in the case of markets that we enter, at the local level. Now on to page 27. The Express division, we see that revenue increased by 6.7% for the quarter as a result of very strong TDI volume growth. Excluding positive FX effects, but also the lower fuel surcharge, revenues grew by an organic 7.4%. Despite strong operational performance, EBIT was down a reported 8.3% due to the $66 million one-off charge announced in October. Without that charge, EBIT would have increased by around 11%, reflecting sustained operational success for the division. The FX headwinds that we continue to experience were partly offset by mitigation measures, which we implemented in the fourth quarter, and it was in the course of the fourth quarter and not necessarily just at the beginning, and also operational efficiency programs. CapEx increased year-over-year as we continue to invest more into hub and gateway infrastructure and also air fleet modernization and expansion. On page 28, we have a look at Global Forwarding, Freight, where the division reported an increase in gross profit of 2.6%, driven by the selective approach to the market. The turnaround measures were gaining traction in Q4, leading to improved operating performance and resulting in an EBIT increase of almost 40% to $99 million. The result did include a slight positive adjustment, mainly related to the refinement of the rollback plans and costs for the NFE pilot countries. A strong working capital performance in the fourth quarter and higher operating performance resulted in a strong increase in operating cash flow to $384 million. The sharp decline in CapEx was related to the discontinuation of NFE. Now the Supply Chain division on page 29. Reported revenue for the division were down 3.9%, but excluding lower fuel costs, FX, and the change in revenue recognition of the NHS contract, organic revenue would have increased by 3.3%. Starting in Q4, we were able to renew the contract with the National Health Service, NHS, for several more years. As we moved from a principal status to an agent status for the new contract, revenue recognition has changed. We anticipate that annual revenue will be reduced by around $1.7 billion of these so-called pass-through revenues, while giving us around the 20 basis point projected increase in divisional EBIT margin. We've achieved the first benefits of our restructuring program in Q4, an EBIT increase by 9.3% for the quarter. This did include $36 million of real estate gains, $36 million more gains than we had in Q4 of last year. On the full-year basis, real estate gains were actually slightly down by around $5 million, excluding the King's Cross transaction. There's clearly phasing effects from quarter to quarter. I think it's worth noting here, and certainly the way we think about it, that real estate transactions, just because of the nature of the business, are and will remain usual and regular business for this division. We'll see some lumpy results because of real estate gains and occasionally losses, but it's just a natural part of the business as we enter into new contracts and as we end older contract relationships and then dispose of the real estate that was required for those contracts. It's just a normal part of the business. In addition, we booked EUR 39 million of new restructuring provisions in Q4, and that brought the amount for the whole year to EUR 150 million. Good working capital management drove operating cash flow up by 35% for Q4 to EUR 588 million. Now let's take a look on page 31 at a slide most of you may be familiar with, and that is our guidance for 2016 and 2020. You'd be familiar with it because it basically is a reconfirmation of the guidance that we've talked about for some time. We, again, reconfirm our EBIT forecast for 2016 between EUR 3.4 billion and EUR 3.7 billion, where PeP is expected to contribute at least EUR 1.3 billion, and the DHL divisions should continue to grow earnings to an EBIT of EUR 2.45 billion to EUR 2.75 billion during the year, and corporate center expenses should remain around EUR 350 million. In addition, we again project that free cash flow will exceed the dividend to be paid in May this year. We're also maintaining our targets beyond 2016, where we continue to project an average growth rate of 8% for EBIT from the base year of 2013 until 2020, whereby PeP is expected to increase by around 3% per year and DHL by around 10% per year. We'll wrap up with page 32, which is the bridge that we showed you at the end of Q3 or in our Q3 report, but we wanted to reiterate it here because it's as valid, if not more so, following our Q4 performance. We ended 2015 with the EUR 2.41 billion of EBIT. The one-off effects were slightly lower than the EUR 700 million that we originally anticipated, to be exact, around EUR 676 million of one-off effects, which means that we're projecting 10%-20% growth in operating performance to get to our 2016 guidance. After a challenging but important year 2015, we believe that in each division, there's great reasons to believe that this kind of growth is absolutely feasible. Foremost among those are the price increase in PeP, the further dynamic Parcel, E-commerce, and TDI volume growth, significant benefits from restructuring investments in Supply Chain, and further benefits from our turnaround measures, and also restructuring investments in Global Forwarding. To wrap up, for 2015, we did reach our adjusted group guidance, and for 2016, we reconfirm our forecast of EUR 3.4 billion to EUR 3.7 billion for this year. Thanks very much. Okay, gentlemen. Operator, I think we are ready now for the Q&A round. 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, press 9 and * again. Please press 9 and * to state your questions. The first question comes from Stephen Furlong from Davy. May we have your question please? Hi, Steven. Hi. Okay, just two questions. Maybe just talk about the split that you have highlighted for Germany and the international Parcel of E-commerce. When do you think that the buildup of investment there in international kind of slows down? Do you more focus on EBIT, or is it a multi-year process? That is just the first question. The second one, I was just wondering about in the German Parcels, were you surprised about the volume development in Q4? As the business gets more seasonal, how do you manage that? Because I know some of your big peers, let us say, find challenges in that Q4 period just in delivering, really. Yeah, seems on both. Of course, the buildup of the international Parcel business is definitely a more several years journey. We believe that we will see benefits on the EBIT line as well in some countries in due course. But if we expand further and build new businesses, we will see that what is common as well in other e-commerce companies, that you always see an overlap of new startup costs somewhere, diluting or hiding the improvement in the other parts. Of course, we want to grow fast. Why we have carved it out, because we believe you will see a very strong growth rate here in that field. I think we will see the benefits over a year or over the course of years, but it is a more multi-year plan. On Q4, we have not struggled at all with our service quality. We had great service quality in the last quarter. What we actually see is that, the peak in days is less pronounced than it was years before. E-commerce is now a normal part of the day-to-day experience, and people do not do last-minute orders as they did that years ago. Now they start already in late November, early December, to buy their Christmas parcels, and that has led to a more even distributed pickup of volume. So it makes actually easier to cope with the challenge. But also we have benefited significantly from the investments we have done, because we expected significant growth over a year. I would not say that it is more pronounced now than it was. We have over the full year, significant growth, because as I said, it is more a normal part of the business. We never struggled, as some other competitors did, with service quality. We always provided great service, and you can hear that as well in some interviews from our larger customers that they are very complimentary about our service quality and our innovation. That's excellent. Thank you, Frank. You're welcome. Okay, the next caller, please. Yes, the next caller is Tobias Sittig from the MainFirst Bank. Please, your line is open now. Yes, good afternoon. I have got a couple of questions regarding reconciliation, basically. Firstly, on your PeP outlook. 2015 is going to be a good year in terms of stamp price increases, lower labor costs. Why do you only guide for EBIT being flat? Why should it then grow in the years thereafter? Secondly, your cash flow outlook 2015 was great, but the outlook is pretty muted from EUR 3.5 billion of EBIT midpoint. You should be keeping more than the EUR 1 billion free cash that you are guiding as your lower benchmark. Should we expect some of the working capital to swing back, or how do you look at that? Also, could you elaborate on the EUR 2.2 billion CapEx, where the incremental CapEx is being spent? Thirdly, China, my understanding was that you had a little bit of issues in keeping the margins because of the weak renminbi against the dollar. But when I look at your Sinotrans disclosure, your margin has actually gone up by 400 basis points in the Sinotrans joint venture. So can you help me understand what is driving this? Lastly, just to understand your pricing policy and letters. You widened the discount for large clients from 23% in 2009 to 42% now in 2016. Can you just explain the logic of that? Thanks. Yeah, I think most of the questions, Larry, you should answer. But last on the pricing, may I take and start with that somehow? We have done the same as we have done in previous years, where we increased the prices. Of course, we have a competitive landscape there, and therefore we said, with the approval of the authorities, that we will increase the discount. So there is a smaller price increase for the regular letter for our business customers than for private consumers. We have done the same, Tobias, in the last years. So that is a normal procedure and in alignment with our intention as well. That was maybe we could easily have communicated earlier, but that was clear the intention from the beginning. Okay. Let me address some of the other questions, and the PeP outlook or forecast for this year. So our forecast is for at least 1.3, so clearly we expect something higher than that. With the relatively large price increase this year, we wanted to get some visibility as to what the elasticity would be of the price increases and whether we have been as smart as we think we have been at allocating the price increase across the various segments. So the first evidence is starting to come in, but it is really just the beginning since we have had the price increase on January 1st. That was one of the factors. I think after the quite difficult year last year, we wanted to get a little more visibility on what was happening with postal volumes. But I think all of that is becoming more visible. It's still early days in the year. All that being said, we're very confident that we're going to be able to report a more than EUR 1.3 billion result at the end of the year. Why is our cash forecast not better? It's a little bit of a similar answer. Our forecast is to generate more free cash flow than the dividend we anticipate to pay out in May. We've done that each of the last three years and anticipate to do it again this year. We haven't said how much more. We do clearly expect it to be another good year of cash flow performance. But at this point, we didn't want to have an even more specific forecast than the one we have out there. We think it's a good orientation for the year at this point in the year. The increase in the CapEx forecast is for the usual suspects. The Parcel infrastructure inside Germany, but increasingly also outside of Germany, and also continuing high investments in the Express network, both the aviation network and also the hub and gateway network around the world to ensure continuous, very high quality, and the ability to handle the additional volumes that we're able to generate. In terms of China profitability, yes, our business in China is quite profitable. For confidentiality and competitive reasons, I think I would not want to be more specific than that. I'll just confirm that our joint venture is continuing to do very well as the very clear leader in the international Express business in China, and we're very pleased with the results. Let me add maybe on pricing. Due to the headwind from currencies, we definitely have taken the approach as a quality leader and the company who's gaining market share that we are really looking into yield management as well. We have done quite a lot at the beginning of the year, and we will continue to do so. We believe that we deserve good payments for our service quality, and that's the way we go ahead with. That will materialize, I think, and will compensate for some of the challenges from currency or probably most of them. Therefore, we are optimistic going forward that customers understand that if they want to get great service quality, and we have to pay a significant amount in dollars that they have to afford as well locally. Okay, thanks. Can I ask one follow-up? Because you've had two antitrust settlements, $81 million in France, and I think $53 million for an air freight issue in the States. Is that all covered with current provisions, or is there anything more to come? The EUR 53 million is covered. The EUR 81 million is the headline figure. We believe it will be adjusted slightly downwards to a number in the EUR 60 millions. That's the amount we have reserved as of Q4. We had already reserved most of that, around two-thirds of it, much earlier when the complaint was originally raised, and the additional EUR 20 million was part of the EUR 66 million charge that I mentioned for Express in the fourth quarter. Perfect. Thanks. Thanks, Tobias. The next caller is Matija Gergolet from Goldman Sachs International. Please, your line is open now. Yes, hello. Good afternoon. It is Matija Gergolet from Goldman's. So three questions for me. First one will be on capital allocation. You mentioned that the excess liquidity on page 5 could be used for stepwise pension funding. At the same time, your dividend payout is now, say, below the midpoint of 50%. Can you just help us, say, understand or elaborate on how are you thinking of, say, capital allocation between the potential step-up in pension funding and/or increasing dividends? Second question Yeah, I think first Okay, sorry. No, go ahead, please. Why don't you go ahead and ask your other Okay, sorry. The second question was about Amazon. There has been a lot of talk about it in the market. On some of your pieces, you have actually given out some numbers. I think Roman is talking that Amazon is 6% of revenues in Parcel. Posten is saying 10%. Could you give us a number approximately of what percentage of your Parcel revenues in Germany are linked to Amazon? If you cannot be precise, maybe just a rough estimate, because there are very wide ranges out there in the market. Then lastly, on page 27, on your Express division. You talk about mitigation measures. The mitigation measures, to improve the margins in Express, is that price increases, or is there something else? Thank you very much. May I start with the last two? Yes, of course, we are compensating via yield management, that is that we are optimizing our pricing. Yes, we do something. Okay. Have there been price increases also, say, this year? Since January? Yes. Yes. Okay. We have worked already. We are not waiting. We are watching, and we are very proud of our record service quality. As I said, we believe that our record deserves as well the good pricing for our products. Okay. Thank you. On Amazon, I think there are several, or maybe on e-tailers overall, there are several. First of all, it shows how attractive the markets are we are in. That is a compliment for our portfolio. The e-tailers, our partners, will remain partners and important customers. Of course, we have looked into our customer portfolio, not only just today, but for a while already. We know the volumes, the costs, the margins we have. We know better than some interesting numbers which are out in the field. On that basis, we can reassure you that our guidance for this year and until 2020 includes that potentially we might even lose significant volume from one or the other customers as in the past. We believe that we have a clear perspective what should happen and could happen, and we are very confident that we can deliver against the 3% CAGR as we have committed ourselves already a while ago. But no specific numbers? No. We usually do not comment on individual customers. We have never done that, and we would abstain to do that going forward. Okay. Okay. Let me come back to your first question on capital allocation. I think it's important to notice the and/or possibility, in that we may do shareholder distributions and at the same time or with only a short time difference, might do some pension funding as well. In the case where we have now, in fact, we do think about doing some incremental pension funding due to the very attractive interest rate environment. Now, it's basically credit neutral if we do pension funding because we exchange one long-term liability for a different kind of long-term liability, and the agencies see that as broadly neutral. So we think about taking advantage of the great market conditions now to do some additional pension funding, though we haven't taken any final decision yet. So in terms of the shareholder distribution and deciding between a share buyback and an extraordinary dividend. We think that because of the very attractive, accretive nature from both an EPS and a cash flow point of view at the current time, that a share buyback is marginally more attractive at this point, and therefore, we've decided for that. I think the important thing is that we're executing on our finance policy. It's a real expression of confidence that we have about 2016, about our strategy, and about our midterm targets. And I think that is the most important thing to take away about the share buyback program that we announced yesterday. Okay. Thank you very much. Next caller then, please. The next caller is Robert Joynson from Nomura. You may ask your question, please. Good afternoon, Frank. Good afternoon, Larry. A couple of questions from me. First of all, on the CapEx, the guidance of EUR 2.2 billion is similar to the EUR 2.1 billion that was spent in 2015. But it's quite a large increase compared with the CapEx levels seen during 2011 to 2014, for example, where the average was about EUR 1.6 billion. Could you just provide some color on whether a CapEx level of above EUR 2 billion is consistent with what we should expect beyond 2016, or is that type of run rate temporarily high? Yeah. I think you should orient back toward the 3% of revenue. We are close to EUR 60 billion of revenues in 2015. 3% would be around EUR 1.8 billion. From that point of view, you could say we are a little bit above the trend line with EUR 2.2 billion, and it reflects the major investment that we are doing, in particular in the Parcel and the Express Network. I think you could expect that to moderate in the next years, so that will come back more toward the 3%. Now, at the point that it will moderate, maybe we will have EUR 70 billion or EUR 80 billion in revenues, so 3% is again going to be above EUR 2 billion. But relative to the size of the business, I think 3% continues to be quite a good orientation for the midterm trend line. Okay, thank you. Just a question on the pension. I noticed that it was the discount rate for German liabilities specifically that explained most of the reduction in the overall net pension liability reduction. But the rate there increased from 2.25% to 2.75%. Could you just provide some clarity on what drove that increase? I could not see much detail in the annual report. Yeah. The increase is based on mid to long-term market rates in the bond markets. There was a rate increase in Q4, and that is the reason that we had a higher discount rate and therefore lower liabilities. Okay, thank you. The final question, just another one on Amazon. It is a popular topic at the moment. Most of the commentary around the potential impact of Amazon on Deutsche Post DHL has been on the Parcel business. But just thinking about Express, there was a Bloomberg article a few weeks ago which provided some quotes from an Amazon strategy paper, which stated that, as a direct quote, "Sellers will no longer book with DHL, UPS, or FedEx, but will book directly with Amazon." It went on to suggest that Amazon will partner with third-party carriers before gradually squeezing them out of the market. Now, I appreciate that you do not comment on specific customers. But maybe if you could just provide some color or thought on the potential for a new large entrant to enter the global express market going forward. Thank you. To put a broader perspective to that. If you look into the different parts of e-commerce and what happened. We definitely had a disruptive approach to retail by online trading. We probably have also a disruptive approach to software by software as a service or cloud computing. I cannot see at the moment what the disruptive approach to our industry. We create a lot of visibility to our customer already. The complexity of the global network is quite intensive. We will see from current companies and new entrants competitive on a level playing field. That means they have to hire a lot of people to provide the services as well. The idea that there is an intermediate who always will operate as a 4PL was an idea already 20 years ago from Accenture, which did not materialize in a way. I think we should remember that our business is 90% B2B business somehow. I think we have just to take a realistic perspective. We take any new entrants as a serious approach, but we, on the other side, believe that having a high-quality standard on a global scale is also something which people will buy and will work with. Therefore, we have to watch that. As I said, at the end of the day, the competition is in the logistics area, and everybody has to be the best, and whoever is the best will win. Therefore, we will continue to invest into great quality. Thanks very much, gentlemen. Have a good afternoon. Okay, thank you. The next caller is Damian Brewer from the Royal Bank of Canada. Please, the line is open now. Good afternoon. Thank you. I have got three questions, please. If I could give you them all in one go, then maybe we can take them. First will be the flat dividend outlook. I am just wondering, I heard your comments about the share buyback, and obviously, that gives you flexibility. Could you tell us more where that sits in the context of your M&A ambitions? Are they still relatively small for bolt-on? Or given the greater flexibility a lower base dividend gives you, would you ever look at anything bigger? Secondly, on the Express business, taking out the assets sort of right back in Q3, the full year margins are about flat at just over 10%. Is this now effectively the sort of the peak margin of the Express business with anything incremental being reinvested back in quality? Or could the margin go higher than what we have seen? Very finally, on the forwarding business, could you elaborate a little bit more on both the focus seemingly on contribution over volume and where exactly the medium-term ambition on EBIT GP is? Is it average or best in class? How long do you now envisage that taking to be reached? Yeah. On M&A, I can reassure you that we have no intention to make any major acquisitions. I can confirm here as well that we had no intention, we had no discussion about selling The DGFF division. There is no need for big bolt-on. We will continue to make smaller acquisitions to add to our portfolio. In Express, the margin probably has been growing less in the past, but don't forget that we have invested heavily in the scale-up of our operations. That has, of course, impact because we have to hire new people to run those. I think we are in a great service level, and we believe that we can expand margins further. In Forwarding, our intention to get closer to the margins of our best competitors is still intact. We believe that we have a better strategy. I think it's too early to give you more detail when, what will happen. Having looked into that now myself for 10 months, I'm very confident that we have not only the right market position, the right people, but also the right strategy going forward to improve the performance. Therefore, the intention definitely is to increase the margin over time. The investments we have to take with the new IT approach are significantly less than for the first approach, so that should help as well. I'm pretty optimistic that we can close the gap further, and that we should get first to the similar margins back we had already, and then even beyond. Just to be clear on the beyond, are you targeting in the beyond the average of the peer group or the best-in-class? No, the best-in-class. I think we should close the margin to the best-in-class competitors. I can't see any reason. I think we have already tools in-house which are good on IT. We are working now with a different vendor on getting a proof of concept for the transportation management system. Therefore, we believe for the global forwarding business, that margins of 5%-6% midterm should be achievable. Very clear. Thank you very much. Okay. Thanks, Damian. Operator, the next caller, please. Yes, the next caller is Neil Glynn from Credit Suisse. You may now ask your question. Oh, good afternoon. If I could ask two questions, please. The first, just a revisitation of a prior question on cash flow. Obviously, working capital was a very big part of the strength of free cash flow in the fourth quarter. I am just interested in terms of how sustainable that level is. It seemed to be about give or take, EUR 700 million inflows for the full year, which we have not seen in prior years. So I am just trying to understand what scope there is for working capital to revert back to normal annual cash flow dynamics next year or in 2016. The second question with respect to forwarding, and I appreciate Frank's point just made that maybe it is a little bit early, but air freight volume has clearly been falling very heavily this year. I am just interested in terms of the air freight volume strategy and what work has been done with customers to try to arrest that slide, given without the volume, obviously, efficient processes will never really make it to the operating line. Maybe, Larry, you comment on cash flow. On forwarding, for sure, the basis, and that is a part of our Strategy 2020 anyway. We believe here as in the same way as in all the other divisions that superb quality and service excellence provides you a lot of opportunities. In the meantime, we have done additional customer surveys, and it comes very loud and clear. If you make the basics consistent in the forwarding industry, you will win more business and you will keep more business. That is a clear and loud voice we hear from the customers. If you look into the competitive landscape, you see that. You see some competitors, and I do not quote because you know them anyway. Some of them are providing better service quality, and that is the reason why they have grown, despite that the market was not significantly growing at all. I think that creates an opportunity. Do not forget that this industry is still very fragmented. The top five players still have only a 25% or maybe 30% market share overall. Therefore, there is plenty of opportunity, and I think that is what will happen in the next decade, that there will be further consolidation, less through M&A, but just the exit of some niche players, local players, which are not necessary any longer. I think that will happen. You hardly hear anything about that because the exit cost for small forwarders is not particularly high. We believe there is plenty of opportunity. That is what we are going for. We want to have great service quality, and we are working intensively on that at the moment because we believe that this is a differentiator in that industry still. As I said, with the best competitors, we see that at the moment. Let me take the question on cash flow and how much of the improvement is sustainable. We worked really hard throughout last year on, in particular, receivables management in a couple of the divisions where we felt like there was a lot of potential. It kind of all came together in Q4, and we were able to make some substantial progress. We feel like that part of the improvement, which is around half of it, is sustainable. So we are encouraged by that. We did make some improvement in payables management, which is partly but less sustainable. We're encouraged by what we've seen in terms of flowback at the beginning of this year that what we believed about, in particular, receivables is turning out to be right. We think that at least a good part of the improvement that we made and that we saw in 2015, and in particular in Q4, will remain with us. Okay. Leo? Great. Many thanks. Thank you. Operator, we're ready for the next caller then. Yes. The next caller is Tom Sykes from Deutsche Bank. You may have your questions, please. Yeah. Morning, everybody. Sorry, afternoon, everybody. Questions on two topics, please. I wonder if you could give any view on macro developments since the beginning of the year, whether there are any significant changes in any regions or possibly any industries that you'd pick out as being faster or slower. Then just coming back onto the Parcel business, are you able to say whether the Amazon revenues are growing above the 9% that you saw for Parcel Germany? Or are there any comments that you can make about whether larger retailers, say, your top 10, are growing disproportionately versus that 9%? Or whether there's a proliferation of smaller sellers that may be helping you? Any kind of granularity on that would be useful, please. Okay. Let me try to take a shot on both questions. In terms of macro developments, we've seen a continuation of the slow growth rates that we've seen towards the end of last year, or let's say in the second half of last year. In particular, we've seen some slowdown in the forwarding businesses and volumes, which are probably most sensitive in our portfolio to the economic cycle. Our other businesses are less directly affected by the economic cycle. We continue to think that global GDP growth is going to be around 3% this year, and that global trade growth will also only be in the 3% range this year. It's far below historical averages, and is below what the forecast would've been a few months or a couple of years ago for 2016. So from that standpoint, it's disappointing. On the other hand, we think we can continue to thrive and be successful even in that lower growth environment, and that's factored into the guidance that we've given for this year. So again, I think for Amazon, we would refrain from talking about the growth rate or the relative growth rate to our average for the whole business. It's competitively sensitive, and actually somewhat confidential. So we would refrain from talking about differential growth rates with regard to individual customers or customer groups. Okay. Maybe one element on that particular customer. We started years ago already to have the full volume when it was diverted partially to our core competitor. Now one third, roughly, we believe, or maybe even 40% is one with the competitor, which is actually a head-to-head competitor in the online retail, the Otto Group. That's another dimension as well. We have experienced that already once that a significant part of this customer was diverted to somebody else. We still have continued to grow. We are, as I already said, we take that serious, but on the other side, the battleground is delivery or fulfillment or moving goods around the world, which is very similar and not disruptive in a way as it might have been for the retailers or the IT world. I think we should look into the idea of e-tailers is providing the most convenient service, and our service has always been a significant part of that. We feel confident if we provide fantastic service, we have a right to be a part of the game, and we will continue to see that. Actually, if you listen to statements of big e-tailers, they always are very complimentary about our service. I haven't heard in the same way about major competitors. One of you raised the point about service quality. Ask the e-tailers if they ever had complaints about our service quality, you would hear nothing. Ask them about the service quality of our competitors. You can read it even in the newspaper. I think we have the right strategy, quality, customer centricity, being very approachable for consumers, and that's the right answer to the challenge, and then I think we have a good chance to continue to grow our business. Okay, thank you. Are you able to say anything about whether some of the growth. Obviously, you should be getting growth from larger retailers, but also Yeah, we can say- A bit more of a proliferation of smaller retailers as well that may be joining you or expanding their own e-commerce. That may have a yield benefit to you. Just in terms of your customer base, do you think it is becoming more proliferated or less? I think that is different by country. The situation is very different in different countries. Not everywhere the same customers are big. There are significant interests from big Asian retailers to come to Europe as well, which is quite interesting to see. I think we can repeat here what we said in the past. Yes, you see an increase in average price despite that the largest have grown faster than the average. We obviously use that as an argument that we are increasing prices also with the big retailers, as we have done, and therefore, the average price has increased over the last years. Despite that, the total population of big players, they have grown faster than the average. But that is not new. We have said that already for several quarters. Because you always ask why volume is growing faster than the average price or the revenue, and the reason is because there is a mix and match. But overall, we have seen as well with the big retailers price increases. Okay, great. I'll leave it there. Thank you very much. Okay, thank you. Tom, the next caller, please. The next caller is Angus Tweedie from the Bank of America. Please, your line is open. Brilliant. Thank you for taking the question. Just on the fourth quarter volume performance in letters and parcels in PeP. If you adjust for working days, it looks like letter volumes were down 8% and parcel volumes only grew 5.7%. Do you think that's just down to the timing of working days and that's fair to look at it that way? Or are we actually seeing a slowdown in volume growth across the year in both segments? My second question is, a competitor of yours in mail suggests they're winning some market share since the price increase. I was wondering if you could give us January and February volume trends for mail. Then thirdly, on Munich, there's obviously been some press out this morning. I was wondering if you could just disclose how you've seen the volume development there between the third quarter and fourth quarter of last year. Thank you. May I take the last first. The source in this article is an interesting one, because it's an indirect one who operates some tiny mail rooms. Interesting that they couldn't phone somebody more serious to talk about volume development. I would refuse in that I can only repeat what I've said earlier, Angus Tweedie, which was that we have looked into volumes and margins and costs. Of course, we have seen that this took place, and we expect as well that they will not stop this Munich and do something else. We have not seen any need to change our guidance of the 3% CAGR. I said already that we lost already once a significant chunk of the volume to a competitor, which is not the retailer, but somebody else, and we have to continue to grow. You can read in the same article today that they are very complimentary about our service, and we will continue to improve our service quality, because we believe that this is the right answer to any challenge. Because the e-tail market, the e-commerce market, will only grow if the service quality gets better and better. We are prepared to do that. We have done that in the past. That's the reason why we are very confident that we can continue to grow our business. Maybe Larry, you can comment on the importance of working days. Yes. Christmas. Yeah. Let me talk about the question on volume in Q4 for Post and Parcel. Yes, there were technically two additional working days in Q4. One of those days fell between Christmas and New Year's. In particular for the Post business, and to a lesser extent for the Parcel business, it wouldn't count as much as a day that fell during a normal time of the year. It counted for a quarter or a half rather than a full day impact. That's the way that we think about that. That being said, Post in Q4 was a little bit below trend. We believe that the medium-term trend will continue to be minus 2% to 3% per year. We think there'll be some volatility around that average, with some quarters better and some a little worse. But we think that's the base case trend, and that's what we have built into our forecast. Parcel was building on a huge Christmas season of last year, and the 5.7% growth per day. Again, because of when the extra day fell, was probably more like 7% or 8% per day growth. We feel very good about the peak season in Parcel this year. Angus, was that clear enough? Sorry. No, that's great. It was just on the January, February, and given the comments that the competitor was saying they're winning a bit of market share in mail since the price increase. Yeah. We're reporting on 2015 in Q4, so I don't want to give any specific comments about our performance thus far this year other than to say that it's going quite well. It's very much according to what we expected. Beyond that, I don't want to make any more specific comments, especially not regarding individual competitors or volume trends for specific products. Okay, perfect. Thank you, very clear. Tanya, the next caller, please. The next caller is Christopher Combe from JP Morgan. Please your line is open now. Good afternoon. Just two questions. First one relates to Slide 32, your EBIT bridge 2015 to 2016. In light of your comment that you have a 3% global GDP growth assumption, I am wondering how much of that range between EUR 300 million and EUR 600 million of incremental EBIT would you ascribe to or say is highly geared to that GDP backdrop? The second question relates to excess capital. We saw FFO to net debt finish at about 29%. Pro forma posts buyback, that will be somewhere lower. Is that a decent benchmark to use going forward in order to determine what excess capital may look like? Okay. Let me try to take a shot on both of those questions. I think that actually quite a low portion of the growth in operating income that we expect for this year is going to be dependent on economic growth, unless we get some very extreme scenario, which we don't expect at this point. A lot of the 10%-20% increase is due to the homework that we've done and investments that we've done in 2015, like the restructuring investments, like the changed organizational structures that we've done in both the Supply Chain and the Global Forwarding division, like the investments that have already given us more efficiency and capacity in our Express and Parcel network. I think relatively little of the growth forecast that we have for this year is sensitive to the economic growth forecast, unless there would be a really extreme variation, like going into a world negative growth situation. So, excess capital. If I've understood your question correctly, the fact that we've now executed on the promise of our finance policy, how might that change our future finance policy? And the answer is it doesn't change it. We continue to confirm and keep that finance policy also for the future. Thanks. Just a point of clarification, perhaps I wasn't very clear myself, but looking at where funds from operations to net debt finished, is that a good benchmark or I think in the past, you've alluded to 15 or 20 different factors that the rating agencies are looking at. Is there a good single benchmark for us to look at in determining how much capital may be excess? Well, we're defining excess as whatever free cash flow we have left over after the payment of the regular dividend. The target rating, which is driven by the credit ratios, among which are the funds from operation and that debt ratio, is determining then the rating. We continue to have a rating target of triple B plus. And with one agency, we're above that already. And with the other agency, we're at triple B plus. So, we feel like from a rating point of view, and therefore in general, a balance sheet structure point of view, that we're already in quite good shape. Got it. Thank you. Okay. Well, let's keep an eye on time. I think we've got time for one or two quick questions, please. The next caller is Sam Bland from Investec. Please your line is open now. Yes, afternoon. Just on Express volumes with TDI. They're clearly continuing to increase very nicely in the face of some global macro worries and some subdued comments from your competitors. I'd just like to see whether you agree that you're taking quite a substantial market share in some of your markets, possibly, in particular, Asia Pacific. If so, what do you think is driving that, given that yields seem strong still? I think previously you may have said that the China slowdown was not really affecting your markets. Would you still confirm this and agree with that? Thanks. There are several reasons. First, we are pretty independent on the local GDP growth or regional GDP growth, as you can see in the just reported numbers. The strongest growing region was again Europe. We said at the last conference call already, we showed that the leading region has changed quite often in the past, which is good because it shows that we have a competitive advantage. Europe has grown significantly more than the underlying GDP. We definitely have benefited significantly from our highly engaged people, and we talked about the Certified program quite often. We are rolling it out now to the other divisions, and we see already very encouraging signs from the mood of the operations in the other parts. We have invested continuously in the network. We are the international specialists, and that's the driver behind that. We believe we can continue to grow our business very nicely going forward. We got the same question already, I think, 2 years ago, how long we can continue? We are very confident. As long as we provide by far the best service in the industry, we can continue to grow. By the way, there is still a transaction imminent somehow between 2 competitors. We know that from our own past integration is not easy, particularly if you do the integration across different regions of the world. We are sitting there and looking into that and continuing our service quality and let others do whatever they think is right for them. We feel very confident that we can continue to grow our Express business very nicely. We have just expanded significantly the capacity, so therefore the service quality will be very good. We are very confident about our Express business. Okay. That was a short question. One last caller. I think we can digest here. Otherwise, we're getting in troubles with our schedule here. Operator, one further caller if you have. Yes, I have. We have Roger Elliott from Citi. Please, it's your turn now. I'll try and make these very quick. Sorry, but another one on disruptive. I don't know if you've seen it, but ABX have just confirmed they will operate a dedicated network of 27/7 trans-Atlantic. Do you think this has any bearing at all on TransPac or Asia, Europe forwarding or Express? Secondly, does the increase in minority interest in the income statement just reflect the performance of Sinotrans JV? Do you think that's a reasonable starting point for the level of 2016? The second, Larry, you can comment. I just saw an hour ago that announcement. That was already known for a while already that that might happen. It happens. We have not seen the schedule. I believe that this is particular for the domestic U.S. business. You better ask that others than us. The interesting thing is obviously, and that confirms our choice. That has been our operator in the U.S. already and beyond for a while, and that means that's obviously a very good operator. We are very happy with the service quality. You better ask the two parties and some others in the U.S. what they think about that. That was in around already for a while. Okay. The last question on minority interest, I'll confirm that the main contributor, in fact, was our Sinotrans joint venture in China. In terms of what that could imply for 2016, I would refrain from talking about that because, in part, I'd be giving some information that indirectly is reflecting another listed company that has an interest in that joint venture. I would refrain from giving any specific forecast about that. I did say before that I was pleased with the way that our business is going in China, and I'll just stick with that for now. Maybe I can give some more color about the JV performance when we report our first quarter results. Okay, thank you. Okay. Thanks, Roger. Thank you, Frank and Larry. That concludes our Q&A round. Sticking to the schedule. Before we close this call and are obviously looking forward to seeing you, most of you again, face-to-face now for the next couple of weeks. I just want to hand over to Frank for a short closing remark, and beyond that, wish you all a good rest of the day. Yeah. As I already said at the beginning, I am very pleased that we have delivered in the fourth quarter as we have promised. We were very confident that this is doable because we had the right measures in place. They are now bringing the value we thought they will. That run rate is a very good base for 2016, and therefore, we are very confident that our guided range of EUR 3.4 billion to EUR 3.7 billion is achievable. Yeah, we can say that this is true for all four divisions. We have made our homework and have created a right foundation for our Strategy 2020. Thank you very much for listening and talk to you soon. Bye for today. Bye.