Earnings Call: Q4 2013

Mar 12, 2014

Ladies and gentlemen, welcome to the Deutsche Post DHL conference call regarding the full year results 2013. 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 turn the floor over to your host, Mr. Martin Seidenberg. Thank you, and a warm welcome to everyone out there for our full year 2013 and Q4 earnings call for DPDHL. We are here at our headquarter in spring-like Bonn, and we assume that you have got all the material that we sent out this morning in front of you or follow this via the web. For our call today, we have our CEO, Frank Appel, and also our CFO, Larry Rosen, who will take you through the presentation. As usual, we will afterwards have time for answers to your questions. With that, I would like to hand over right away to you, Frank. Yeah. Thank you, Martin. Good morning, good afternoon from myself as well. Thank you for joining us for the call. Let me go straight away into the figures and the presentation. If you turn to page three, this is, I think, a good summary of what we have achieved last year. We had a very good year, I think, again, based on delivering an EBIT, which is just in the middle of our guidance, despite that the economy was not particularly strong. The key trends are still intact. We have benefited from our strong footprint in the international Express business and gained market share. We also have grown and continue to grow our parcel business in Germany. It is very strong and had a good final quarter as well. We have, unfortunately, continued to see the headwind in the air freight market and the ocean freight market. I will come to that later on. That has resulted in a very strong cash flow, driven by a very good performance also in the fourth quarter. With regard to that, Larry will explain more the flow over the year. We are very happy about that. Together with the significant increase in net profit, which is also supported by a lower tax rate than we originally anticipated, we are happy to suggest an increase of the dividend to EUR 0.80, which is 40% lift to the previous year. We think we have delivered all the targets of the guidance. Larry will show that in detail later on. Let me turn to the next page where you see the different results. If you start first with the group, it looks like that we shrunk the business a little bit, but it is only a result of foreign exchange headwind. If you exclude that, we have been in organic growth almost 3%, and the fourth had shown the strongest growth in the year with more than 4% organic growth. That has led to a good development as well of our EBIT with a number here of 7.5% EBIT growth. The divisions are looking positive from a revenue perspective. In Mail, we have, and you will see later on as well, we have nice development on the top line. The EBIT looks better than actually it is, if you compare year-over-year. It is a good number. We are now about EUR 1.2 billion, but we had last year a negative impact of EUR 150 million from VAT and the state aid proceedings. We have this year, as we already told you earlier, a slight improvement because we have released a postage provision. If you take that out, the number would be slightly down, more or less on the same level as previous year. Express, the other way, is showing here no growth, but it has grown quite nicely if you exclude foreign exchange. The profit has lifted more than it is shown here because we had last year about EUR 100 million one-off effect as a positive in 2012, and therefore, if you exclude that, we have a nice development, which is above 10% growth on the bottom line. You will see later on as well the nice development of the margin. Global Forwarding, Freight has continued to be challenged from the market. Our strategy to be focused on profitable business has put pressure on our top line, so we definitely lost market share, but the profitability from the margin is still the same as you see later, and the profitability is only slightly down year-over-year. It was still the second-best year ever in the forwarding activities, despite that we have the significant transformation going on. Supply Chain also challenged with foreign exchange changes, exchange rate changes, and if you exclude that, we are probably about 5%, very nice growth. You will see later on that we had some positive one-offs in the fourth quarter. If you take the year, those numbers are more or less on the same level, and we are compensating some one-offs positive in the last quarter, some pushback in the first quarter. Overall, there is a nice development. As you have seen from our release, we have now a change as well in the management in best terms, in a way that Bruce wanted to hand over to his successor in the moment where we have to start thinking about the next step anyway with regard to our strategy. Instead of being on board to start executing that, he felt it is better, prepared that we hand over. That is the reason why we have that change. It was not because the performance is dissatisfactory or whatsoever. It is really because we think it is a good timing for have a transition to a younger colleague. In overall, we are happy with the numbers. If you go to next page 5, you see that we even have seen in the Mail communication volumes an increase, which is good. Parcel has grown as well very nicely. The dependency on letter is shrinking, as you see here as well, if you look from revenue. The E-Post revenue is now EUR 100 million, which is a significant step to the previous year. We have transferred as well some parcel operations in Europe to the Mail division, which has an impact on the EBIT for 2014, and you will see that later on in the guidance. We have still a challenge that we grow revenue, but we do not generate more profit, and that comes from factor cost increases, but also significant wage cost. Of course, we have to work on that. But the good news is that we have now a growing business again. Express is definitely a star performer and has continued so. A very nice growth through the year in all dimensions. Also, if you look to the right, the margin has improved through the whole year and more than a percentage point in the last three quarters. So we are delivering what we have promised you a couple of years ago, that we first invest, and then we expand margins, and that is happening. Ken always said that 2013 would be a year of margin expansion. Global Forwarding, Freight. The good news on that page is that the deterioration of volumes is slowing. So you see here in the fourth quarter, we had less air freight reduction than we had in previous quarters. In ocean freight, we have even an increase. So I think we are heading in the right direction. Nevertheless, 2014 will be, as 2013, a challenging year because we will go through the transformation organizationally, introduction of the system. Despite that we are making good progress, as stated here as well, there will be a challenge. Also, the markets are not yet so much stronger than last year. Supply Chain, also a new record number in new signings. I think that is a great number with EUR 1.5 billion. The business we win is larger and has good, attractive margins, which are higher than the existing business. So we believe that this will continue, and I have no doubt that the new colleague who is coming from the region with the strongest margin, Americas, will help us to improve even further. So these are the results on a high level of the volume development. If I now go to page 10, you see additional elements of what we want to do in e-commerce. Yes, we want to roll out now the parcel boxes in Germany. We have added additional services to our parcel products to make it even more convenient for our customers so that they really have an easy life and get easy access. So we will continue to do that. That will be less an investment case, but in a continuous improvement overall. On page 11, you see the development of the revenue proportion which comes from the emerging markets. If we compare last year with 2009, we have seen a significant step upwards. We have no doubt that this will continue in the next year because the fundamental trends of globalizations are still intact, even if the growth rate in some of these areas is smaller than it was. Last page before I come to the guidance for this year and next year. We had invested in 2012 significantly. We have continued to invest in 2013, and one of the biggest investments we will start now or have started last quarter is the expansion of our major hub in Leipzig. That's a result of significant growth. If you look later on in the guidance, that's also the reason why we think we will continue to see even a slightly increase in CapEx, because we see significant growth in our operations. To feed that and to continue to grow fast, we probably need more CapEx than we a couple of years anticipated. That is not for any crazy things. That's really for supporting the strong growth we have experienced very recently, and we want to continue in that path. Page 13, the guidance for 2014. We believe that we can deliver EUR 2.9 billion to EUR 3.1 billion, so another step into the direction of our 2015 targets. We have increased the Mail guidance to about EUR 1.2 billion. It's also driven by the transfer of some businesses from Express. That's the flip side that the number is smaller in DHL division maybe than you have anticipated originally, but that comes also because we have transferred some activities, as mentioned, about EUR 60 million from the DHL divisions to Mail. The Corporate Center, others, should this year better than EUR 400 million. We are very confident. The free cash flow should at least cover the 2013 dividend. Larry will talk a little bit more about some timing effects with regard to the cash flow. We believe that this is doable, and we should see the same what we have seen this year, that we can really pay the dividend out of the free cash flow. The tax rate should go up again. As I already said, the gross CapEx will go up to about EUR 1.9 billion. That is only driven by our greater success in the marketplaces and mainly by Parcel and Express. If you look then on the next page, you see that we have not changed our guidance overall for 2015. We are still confident. Despite it still needs hard work because the economy is not helping us and currencies are not helping us either, that we are confident that we will deliver that number. We have increased Mail as a consequence of some transfers as well to EUR 1.1 billion, and that's the reason, as I explained already, that we reduced the guidance for the DHL divisions, and for Corporate Center is still the same. We are at the moment confident that we can deliver in 2014, and this is another step into the direction that we deliver next year as well, the guidance we gave you already a while ago. With that, I would like to hand over to Larry to talk a little bit more about some other group financial professional performance. Thank you for listening. Good afternoon, everybody. I want to continue the presentation now with a deeper look at our financial performance for the whole year 2013, and also for Q4. That will include also a review of the performance for each division. Turning on to the next slide, we are very pleased to have been able to meet or exceed all aspects of our 2013 guidance. With growth of 7.4%, EBIT at EUR 2.861 billion was just about in the middle of our guidance range. Mail, DHL, and Corporate Center each met their targets as well. As forecast, net income grew faster than EBIT, with almost 28% growth to around EUR 2.1 billion. We will talk a bit more about the reasons for that excellent performance in just a minute. Finally, free cash flow was a star performer in 2013 with EUR 1.65 billion of free cash flow generated far in excess of what we would have needed to cover the dividend that we paid last May. Over to the next page, you see our dividend recommendation, which we hope will be approved in the shareholder meeting in May. Due especially to the excellent cash flow and net income performance, the management and supervisory board have recommended a dividend increase of EUR 0.10 per share to EUR 0.80. This keeps us right in the middle of our target range of 40%-60% and represents an increase of over 14% compared to last year. Now, let us turn to the next page and look at our P&L for the full year 2013. Revenues were slightly down, as Frank Appel talked about, due mainly to adverse currency movements. However, organic growth was around 3% for the year. Mail EBIT increased significantly, mostly due to one-time effects like the utilization of the stamp provision this year and the charge for the VAT settlement last year. DHL EBIT increased slightly but was actually significantly improved considering positive one-time effects that we had last year and significant currency headwind that we had this year. Mail was not quite as good as it looks, and DHL was quite better than it looks. Financial expense improved significantly due to the overall low interest rate environment and lower interest expenses on provisions associated with, for example, the large pension funding that we did at the end of 2012. Tax expense declined, and the effective tax rate was far lower than we expected due to some favorable audit closures both early in the year, so we knew about those, but also late in the year, so in Q4 and even towards the end of Q4. We were also able to activate more tax loss carryforwards than we originally anticipated. As a result of these positive developments, net income and EPS increased by around 28% for the year. On to the next page, we have a look at DHL margins, where we also were quite satisfied with our margin performance in DHL overall. In particular, Express could increase its margin by more than 1% to just under 9% for the full year. This was a result of scale effects and efficiencies stemming from investments and initiatives that we have implemented over the last several years, also naturally, the volume and revenue growth that we have been able to achieve. Global Forwarding, Freight could stabilize the margin at 3.3% despite higher spending on NFE. I will come back to that in a minute, and lower revenues and also volumes. This was due to our selective market strategy and also strict cost control. Supply Chain margin increased to 3.1% as the benefits of new, more attractive contracts improved our overall contract mix. On the next slide, you see the P&L for Q4. Q4 was, as usual, our strongest quarter of the year. Revenues also declined slightly, but we had our best quarter in terms of organic growth with 4.2%. EBIT increased by 7% over the very strong Q4 that we had last year. Mail declined slightly as the benefits from letter and parcel volume growth could not quite offset the increase in factor costs, in particular, labor costs. DHL improved significantly with 13% growth over Q4 of 2012, led especially by Express and Supply Chain. The good results in financial and tax expense that I mentioned already were especially evident in Q4. This, combined with the growth in EBIT, led to a 44% growth in net income just for the quarter. Looking on to page 8, as mentioned, we have very strong cash flow for 2013 and a great finish to the year in Q4. We saw the typical seasonal pattern in 2013, where the second half is much stronger than the first half, and certainly 2013 was no exception. In Q3 and Q4, we were able to preserve and even build on the outperformance that we had already achieved in the first half compared to previous years. In expanding on free cash flow performance on the next page, in Q4 of 2012, most of you know that we had the approximately EUR 2 billion pension funding, which, from an accounting point of view, is a reduction in operating cash flow. Correcting for that pension funding, you see a much cleaner comparison in the right two columns of cash flow performance just for Q4. Here are better operating earnings, a very good performance on working capital reduction with contributions from both receivables reduction and increases in payables, and lower cash out for CapEx all contributed to the free cash flow generation of over EUR 1 billion. As mentioned, we had some timing effects which make part of the very strong cash flow generation transitory in nature. In particular, we booked a fair amount of CapEx just toward the end of the year, where the cash out will occur or has occurred in 2014. We estimate that in total, these transitory effects amount to between EUR 300 million and EUR 400 million, with the largest effect being the just mentioned CapEx effect. On to the next page, we were very pleased to be able to reduce our net debt by around EUR 470 million for the year with the big reduction of around EUR 1 billion in Q4. Adjusting for the pension funding we did at the end of 2012 of EUR 2 billion, we actually would have been cash positive again at the end of 2013, as we were in 2010 and 2011. We expect to again follow our seasonal pattern in 2014 so that our net debt should increase during the first half, then improve considerably during the second half of the year. Now over two pages, we will take a look at each division's performance, and we will start with the Mail division, where revenues increased also in Q4 due to the stamp price increase from the beginning of the year. Increased traffic due to the SEPA preparation. For those that do not know, SEPA is a new vehicle for electronic payments that is being rolled out first in the Eurozone and then later in all of the EU in 2016. It was supposed to have been implemented on February 1st, that got delayed at the last minute to August 1st. Nevertheless, there was a lot of mail traffic, both to businesses and private individuals, instructing them how to be compliant with SEPA, and that really had a benefit for our mail business in terms of volumes in Q4. We have also seen that EBIT, while on a satisfactory level, declined slightly as the benefits of revenue growth could not quite cover the increase in factor costs, most importantly, labor costs. The cash flow trend is distorted by the pension funding from the end of 2012, where 95% or EUR 1.9 billion of the EUR 2 billion pension funding is attributed to the Mail division since most of the retirees are mail retirees. CapEx increased significantly year-over-year and compared to the first three quarters of this year, as we spent more on expanding and improving our parcel infrastructure, in particular for the Parcel 2012 project. Moving on to Express. The division continued to perform very well in Q4. Revenues were significantly affected by currency movement and to a lesser extent, by smaller divestitures. Organic revenue growth was close to 6%. EBIT increased by over 14% and the operating margin increased by 120 basis points to 9.6% in Q4. The primary drivers for the improvement are continued strong TDI volume growth, driving scale benefits, as well as the efficiency benefits enabled by our investments in the ground and air network over the last years. Cash flow was very strong with an increase of 19% compared to last year. Moving now to Global Forwarding, Freight. They really have continued to be affected by trends that we have seen in previous quarters. Revenue declined due to continued weak volume trends, driven by an overall weak market environment and a particular impact on us due to our sector and customer mix. With our leadership position in air freight, we have been especially affected by structural changes causing down trading in technology or modal shift in technology, and a weak engineering and manufacturing sector. In addition, our road freight business is largely concentrated in Europe, where the economy has been comparatively softer compared to other regions. Of course, we are implementing the comprehensive change initiative called NFE amid these weak market conditions. In Q4, we spent more than in previous quarters on NFE implementation. In recent months, we have seen signs of recovery in volumes, though the trend in gross profit margins remains challenging. Last but not least, Supply Chain. On the next page, the Supply Chain division continues to perform well, benefiting from a strong trend in new business generation and the accompanying benefits from a continuously improving contract mix that we are able, as a result, to achieve. EBIT benefited from net positive one-time effects in Q4 of around EUR 30 million, but nevertheless, increased by around 28%, even without that effect. For the full year, positive and negative one-time effects for the division just about fully offset each other so that the improvement for the full year was around 5%, with an increase in EBIT margin from 2.9% to 3.1%. Cash flow was very strong in Q4, with the biggest contributor being a reduction in working capital. Wrapping up on the last page of the presentation. Mail EBIT has clearly been stabilized above EUR 1 billion, our longtime target in Strategy 2015. We have made further progress on DHL profitability improvement with strong improvement in Express. We had a very strong 2013 cash flow performance, however, with the mentioned timing effects, and we confirm again our 2015 group guidance. Please remember to save the date for our Capital Markets Day on April 2nd in Frankfurt. We will be very pleased if you are able to join us. Now we would be happy to answer any questions you might have. Right. Thanks, Frank. Thanks, Larry Rosen. Operator, if you would start the Q&A sequence, 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 * again. Please press 9 and * to state your questions. The first question comes from Stephen Furlong from Davy Research. May we have your question, please? Yeah. Hi, just three quick ones. In terms of the guidance in 2014, EUR 2.9 billion to EUR 3.1 billion, it's not abnormal, the range. But I'm just wondering, it's a bit narrower than 2013. Are you seeing any improvement in terms of visibility you can see in some of the markets, which enables you to more accurately indicate on earnings? The second question, I was just wondering, in terms of free cash flow, obviously, it was very good in 2013. There was some timing benefits. I'm just wondering, are you seeing again in 2014, as you look at capital structure and whether you are seeing any upward pressure on the rating? I see, obviously, you've increased CapEx a little bit. Then the final question, I just was wondering about the way you've moved to shift the foreign domestic parcels from DHL to Mail. Is that more, you see maybe more with e-commerce, let's say, wider ambition in the mail parcels business or just more a tidying up exercise where the Express business really is focusing on TDI? That would be great. Yeah. Stephen, let me answer the first. Larry will answer the second. I take the third as well. The guidance, I think you should not read something into that that is now somehow different. I think the EUR 200 million range, I think, is a pretty good range, and we feel comfortable with that at the current stage, and I think you should not read. Last year, we had EUR 250 million as a range, I think, and before we had EUR 200 million as well. I think there is no fundamental change in having more certainty. I think EUR 200 million, that's 10% or less than 10% of the total. I think that's still a very solid and good range. On parcel, domestic in other countries. First of all, of course, that's a decision from the board that we want to have Express more focusing on what they are best at, and we have seen tremendous capabilities in Mail, and therefore we move a business to the place where it fits the best. I would like to say, we will have a Capital Markets Day very soon anyway, and we would like to share a little bit more what we can do with some of these activities going forward. I would refrain from doing that today. Larry, may you answer the- Yeah. Let me take the second question in terms of rating pressure. I won't try to forecast whether or not we might get an upgrade, but would only note that Moody's has had us on positive outlook now for more than 12 months. They typically, if I understand correctly, like to make a decision within 12 to 18 months at the latest in terms of changing the rating. We might expect some action soon, either moving us back to neutral or upgrading us certainly with the very strong cash flow and the improvement in credit ratios that we've seen. For example, our funds from operation to debt moved up to almost 35% at the end of the year. Certainly, the entire leverage and balance sheet relationship is moving in a positive direction from a credit point of view. Okay, that's great. Thanks, Larry. Thanks, Frank. Thanks, Stephen. Welcome. The next question comes from Neil Glynn from Credit Suisse. May we have your question, please? Oh, good afternoon. If I could ask two questions, please. The first one, a simple one on Express. Obviously, TDI volume growth was 8% in 2013, was impressive. In simple terms, I guess we are becoming a little bit more positive on the macro-ish. Does that suggest that you can at least maintain that volume growth rate in 2014, or should we be thinking about maybe some competitive pressures making that challenging? The second question, just on Mail. Frank, you mentioned again the business is growing from a top-line perspective, which is reassuring. But does the fact that the underlying Mail EBITDA is suffering even modestly warrant renewed efforts to cut costs? Or how do you think about the cost structure within Mail currently? Yeah. I would not give a guidance for the volume growth this year, but you are right that we have no reason to believe that there will be more intense competition. I think the industry has been very smart in competing on service quality instead of on price. We have seen that the last five years always, and we hope that this will continue, and therefore we are remaining positive on the potential of growing with the market and even outperforming the market because the service quality is just outstanding. Some of our competitors also have other big challenges in their U.S. domestic market or have just changed the direction a little bit, talking about TNT. So we are confident that we can continue to grow, but we usually don't give any number with regard to volume growth. But we have no reason to believe that it is changing pretty rapidly. On Mail, yes, there is a challenge. We are working, of course, and we are not ready yet to disclose what kind of actions we can take. We told you several times that productivity reserves are getting smaller. I think we need to find some new answers, and we are working on those, but I think it is too early to disclose them. Of course, we need some discussions once in a while with the unions as well. The salary conditions are fixed until summer next year from the last negotiation, so we will not have massive negotiations soon. We had before the problem that we haven't seen any growth in this division. Now we see growth and of course, the ambition and now our commitment is that we convert it in more profit going forward. Despite that, at the moment, we want to stick to our guidance of at least EUR 1.1 billion next year. Nevertheless, there is an opportunity. We see that as an opportunity. That makes us very confident that we can deliver the 1.1, but the goal has to be that we improve that. The gearing on additional revenue into profit is definitely what we have to achieve. But as I said, negotiations will only be next year more than this year. Understood. Thank you. Thank you. The next question comes from Damian Brewer from RBC. May we have your question, please? Good afternoon. Thank you. Two question areas and one just area of clarity, please. First, on the Express business, I remember back in September in Leipzig, Ken was talking about all 220 countries converging on the same IT platform for this year. Given the targets you had on pickup and delivery and unit cost savings for 2013, first of all, did you achieve them? Then secondly, what is the incremental effect that you would be thinking about for 2014 on that IT convergence and the what one would expect probable productivity uplift that will come from that? On the freight forwarding side, could you tell us about how you think of the trade-off between pricing and volumes? Where is the tipping point where you have to start focusing on market share to ensure your purchasing power in that business? And as you do that, could you give us an update on where you are on the NFE program? What has gone on beyond the rollout in New Zealand, and what was the cost delta for the year of the NFE? And very finally, I am sorry for the questions. The 20% tax rate for 2014, is that now a sustainable tax rate going forward, or will that edge up as you exhaust the tax loss carryforwards? Yeah. So we actually made good progress in Express, and maybe Larry, you talk about the cost there of NFE and the tax rate. Yep So in Express, we made good progress, and we have seen the improvements I think Ken has envisioned in the last year. We definitely see additional benefits. As you know, we are shooting for next year of a margin of 10%, which we have not achieved yet. Therefore, we will expect additional operational benefits from that, and we are making very solid progress. Otherwise, it had not been possible to achieve all these improvements. So yes, we are making good progress, and we continue to do these things. This year, price volume, yes. So the situation in Global Forwarding, Freight is quite challenging anyway, because of course, the market is not very strong. We understand that we have to build volumes as well. There are good recent wins, which will kick in later this year, or even wins in the last quarter. You only see that with at least three to six months delay, but we are optimistic that we will see some good development because we have won some additional business as we believe. Of course, we have a tremendous focus on NFE at the moment. As we have learned from our external orientation in the last years, that gives us tremendous opportunities in Mail, Supply Chain, and Express, but also on the other side, if we are honest, we have a certain distraction as well, and you have seen that in some of the numbers last year. You cannot avoid that if you have such a massive transformation, and we will continue to do so with good progress. We have learned quite a lot from this New Zealand pilot. We will do an additional pilot very soon for some other countries, but we are confident that we found the right software. It's well-developed, and we can continue. Nevertheless, it's still an internal challenge to a certain extent. As I said, we have seen some encouraging wins in the last weeks. Overall, we believe that we have found the right balance between price and volume. Nevertheless, it will remain a challenge. Larry, maybe you can comment on the NFE cost and the tax rate. Yeah. The delta on NFE expenditures in the P&L was around EUR 20 million for 2013 compared to 2012. Most of that delta came in Q4. Up till Q3, we were pretty much on the prior year level. Most of it came in Q4. Now, in terms of the sustainable tax rate, that's a good question. We have to start with the realization that our natural tax rate, if we don't have any other benefits or disadvantages, is somewhere in the mid 20% to 26%, 27%. We're forecasting 20% again in 2014 because we believe that we'll be able to further activate tax loss carryforwards that we haven't yet been able to do. Also due to other optimization initiatives that we have on the board, but have not yet been implemented. I think that in the short to midterm, that we could expect for those two reasons, that the tax rate will stay below our natural rate of 25%, 26%. How far below, I don't want to forecast yet except for 2014, where we forecast 20%. Okay, very clear. Thank you very much. Okay. Thanks, Damian. The next question comes from Andy Chu, Deutsche Bank. Please proceed, your turn now. Good afternoon, gentlemen. Three questions if I may, please. Firstly, within the EBIT in Express in Q4, could you help and quantify what the impact of FX was, please, in Express in Q4? Secondly, just rolling on from the NFE discussions. When are you expecting that program to be fully implemented, and is an incremental EUR 20 million of cost into 2014 a good starting point? Then finally, in terms of Supply Chain, you've done some restructuring in Supply Chain, a lot of it coming in Q4. Is that European related and are you done on that front or are there more restructuring costs to come? Thank you very much. I think, Larry, you might answer the 2 first questions, and I answer the third. So for competitive reasons, I don't want to disclose an FX impact at the EBIT level for individual divisions. What I'll say is that for the whole company, we're talking about a high double-digit millions amount for the full year. Most of that impact came in the second half, in particular as we saw weakening emerging market currencies. So I'll let you draw your conclusions about how much that may affect Express. Obviously, Express is most exposed to emerging markets, so there was a significant effect for Express, but I don't want to exactly quantify it for competitive reasons. So we do expect 2014 to be the peak year of spending for NFE, with a similar kind of increase in 2014 over 2013 as we saw in 2013 over 2012. The spending and the project implementation should largely be done by around mid-2015, and so we should already start to see some small benefits this year and bigger benefits in 2015. Yeah, and in Supply Chain, the restructuring provisions are mainly related to Europe, that's true. We think we can make still the, particularly the overhead leaner, and we would like to do that, and that's the reason why we said we have to continue to do that. It's small in individual countries, but of course, collectively it's the amount which we have told you. But we don't see any additional needs at the current stage, and therefore, I think that is now fully reflecting what we plan to do for this year. Right. Thank you very much. Thanks, Andy. You are welcome. The next question comes from Dominic Etheridge from UBS. May we have your question, please? Yeah, hi there. Just a couple of things from myself, please. Firstly, I think we have already had, thanks so much for the answer for the last question on FX. My other question on that was assuming that FX rates stay roughly where they are, I think the implication is you will see a similar headwind in the first half of this year as you saw in the second half of last year. Can you maybe sort of clarify that just to sort of be clear on it? The second question is on Mail. Can you just discuss maybe some of the main regulatory issues that are outstanding at the moment, and what sort of things are going on in the market? What I mean is things like what is going on with the De-Mail versus your own E-Postbrief, and maybe if there are any signs that the German government is sort of encouraging people to move towards a more online invoicing, et cetera, whether there is any sort of secular signs that you should be more concerned about less mail volume declines than you have been in the last few years. Thanks so much. Let me take the first question. Indeed, because currencies, in particular emerging market currencies, weakened over the course of the year and in particular in the second half, there is indeed some headwind, especially in the first half of this year, though it would not be similar in nature or in size as the effect that we saw last year. It will be a smaller effect. It will be headwind, but a smaller effect we expect if currencies stay where they are than what we saw for the full year last year, and certainly the first half. Yeah. If we talk about regulatory issues, I think there are the old known ones, like the state aid discussion which is in court at the moment. We don't expect a ruling this year, but potentially next year. We are very confident that the decision will be in our favor. That's the reason why we put them as well in the risk as a contingent liability, but we have not built provisions, as you know. We have an ongoing antitrust topic, which is that the antitrust or competitors have complained that we have done something which is giving more rebates than we would be allowed to our customers. We are very confident that we followed the law very precisely. We don't know the outcome. We are confident that we made it right, but we can't exclude, as we said as well at the annual report, never can exclude that antitrust authorities might decide differently. But we think we are well-positioned. With regard to the postal law, after the change in the government, we don't expect any challenge of that law any longer. The Liberals, who are not in the parliament any longer, have challenged that in the last period. We don't expect that this will continue, so we see not really many challenges. The postage regime is now ruled for 5 years. We are now in the first one of that, where we think we are in predictable circumstances as well. With regard to De-Mail and our E-Post, as I said already, we have made last year EUR 100 million revenue. I think our competitors are far behind us. The reason is because we have really created around the real translation of the physical letter into the internet with confidentiality. We have put additional services around that. We see now that B2B and B2C customers are buying that. A good hunting field for us is mid-size and small customers are using an E-POSTBUSINESS BOX to direct their whole outbound mail through our system, and we will print them out and envelope them and deliver or end-to-end electronically. Our competitors can't provide that product because the De-Mail is not allowed to be used for hybrid mail. So we don't see really a challenge of our product to them, and our own experience is that the pure transfer of a letter into the internet is not sufficient to get traction in the market. We are well-positioned, and the reason why we increased our revenue from 20 million to 100 million last year is a result of adding additional features to that product. Therefore, we are very confident that we will benefit even if there is some push from the government, which is not expected at the moment. If there is more debate about confidentiality, I think we would have a very good product available to help customers and consumers in Germany. That is the reason why we feel very confident with our strategy, and we are very happy with the progress we have seen and do not see De-Mail as a particular threat for us. Thanks. Okay. Thanks, Dominik. The next question comes from Fabia Citik, MainFirst Bank. Now you have your question, please. Yes, good afternoon. Thanks for taking my questions, too. If I may, firstly, following up a little bit on Damian's question, I am struggling to understand a little bit the forwarding developments here. When I look at your peers, they all have better volumes, but also better gross profit trends in forwarding. It looks from an outside view that you are losing market share despite being more or less aggressive on price. So I am wondering what you do to fix that. You alluded to some business wins. Maybe you can expand on that a little bit. Is there anything changing in your push to the market over the past couple of weeks that would give us more confidence that you will actually start to grow the business again, also from a gross profit perspective? The second one is a technicality. Basically, on page 23, you have a bridge for the net debt development. There is EUR 370 million other effects from net debt 2012 to net debt 2013. Could you elaborate what these are? Thank you. I take the first one. We are definitely more disadvantaged than some of our competitors due to our massive footprint in air freight, and the trend has continued downtrading to ocean or uptrading to Express. As much as we benefited to that through the Express business, somehow we have a challenge in the balance. We also have by far the largest exposure to the tech market, and the tech market has lighter devices, and they are transporting significantly more on ocean than they did in the past, even the outstanding performing companies, and that hurts us more than some competitors. As I said, we have seen some nice wins in several areas, in particular also with smaller and mid-size customers. We are and have been more exposed to the large customers. Roger Crook has changed that already a while ago, that strategy that we are focusing more on the large customers than on the small and mid-size. But the impact is relatively small. It takes time to build that up. We had some customers where we lost more than EUR 100 million revenue before, one customer in this area, because some of them have downtraded quite a bit. If you have a big share of wallet, you, of course, are dependent on that as well. It is a journey. It doesn't change overnight. All the indicators are showing at the moment with regard to volume, new wins, winning also small and mid-size in the right direction, but it will take some time until that is visible in our numbers, I'm afraid to say. Basically, you would say it's all exogenous factors and nothing to do with your service levels or client approach? No, I think the service level is not the challenge. I think it's not external factors, because our customer base is as the customer base is. Okay If we are more dependent and have been very successful with large customers and they are downtrending, I would not call that external factors. I think the strategy to move to more mid-size and smaller customers is the right one. But if you lose with one customer, EUR 100 million revenue, you need a lot of small and mid-size customers to compensate for that, and therefore we have overlapping curves somehow, and some of them are showing in the right direction. Others are still challenged by our export. Engineering manufacturers is another area. Agriculture and road construction has not been very strong last year. Some of these customers have faced significant challenges as well. So we are a little bit a victim of our strong position in air freight. That you have seen for the whole year. The reason why we have changed strategy as well, to focus more on the small and mid-size, is that because we recognized, or rather recognized it already a while ago. On top of everything, of course, there is a challenge by making the organization different and implementing a new system. That takes time away as well. Therefore, we said that already 2013 and 2014 will not be the easiest years. We have, unfortunately, not the benefit of having a very strong economy at the moment where the fundamental trends are changing, and that's the reason why this business will be more challenged than the other three divisions, I think also in 2014. Thank you. Okay. Your second question was what is in the EUR 370 million. The biggest items are net interest paid at about EUR 120 million. We have put the incurrence of finance lease liabilities in the amount of about EUR 110 million in that group. We also have FX impacts of around EUR 42 million. Then we have some effects from buying out minority partners in joint ventures, which we did not include in M&A because we were already consolidating those entities, but rather included here. So those were the major points or major things that make up the EUR 370 million. Thank you. You are welcome. Thanks, Tobias. The next question comes from Joel Spungin from Merrill Lynch. May we have your question, please? Yeah, good afternoon. I've just got three questions, actually. If I can just start off with just a very general question on your 2014 and 2015 guidance. If you look broadly, you're sort of talking about adding EUR 500 million to get to the bottom end of your 2015 range in terms of EBIT. Given that sort of growth requirement, are we now into the realms where you need the economy to move in your favor to actually propel you to that target? Or are you still confident you can reach that target even if the economy doesn't pick up? Because I think if we look at the underlying EBIT growth trends for the last couple of years, you haven't really reached a growth rate that's anywhere near close enough to get you to that 2015 target. So I'm just keen to understand your confidence in that. That's my first question. My second question is just, again, on the Global Forwarding, Freight. I just wonder if you could comment also on the ocean freight side. Because obviously, you're also losing market share and you're seeing some GP pressure there. So keen to understand really what you can do to sort of reverse that, and whether, again, you intend to, over the longer term, focus on regaining market share and improving GP and your strategy to do that. Then finally, just in terms of the fourth quarter margin in Mail, just to understand what's happened there. Because I know you mentioned obviously staff costs, but if we look at the Mail P&L, it looks like staff costs were actually down slightly compared to Q4 2012. So just wondering what other moving parts are going on within the cost base there. Yeah, let me start with the confidence for 2015. Yes, we are still confident that we can make that, despite that when we gave the guidance to the market, of course, we have not anticipated such a long period with very little growth, and we have also not anticipated such a strong headwind from currencies. But at the moment, we believe still that we can make that. Why we believe that? Because, of course, there are still significant costs of NFE, which should be much smaller next year already, and that should help quite a bit. We are also confident that we can improve the margin in the Express business on a higher base than we had it a couple of years ago, up to 10%, which should deliver significant lift as well. And we see now as well, EUR 100 million more in the Mail division as well, than we have guided before. We believe that this is still doable. Of course, we would hope that the economy and currencies will not be further deteriorating, and we only will see that in the next couple of months. At the current stage, we are confident that we can still deliver the guidance as we have given that. Despite that, you are right, the lift on the guidance we gave you from this year to next year. As I said, there is a significant expectation that in DGFF, we see a good trend with diminishing cost in NFE and as well in Express, continuing to improve the margins. Ocean freight, as I said, the strategy is exactly the right strategy. We have to continue to focus more on small and midsize customers, and we are doing that already. The second is, we always said we need more processes which are state-of-the-art and better than all our competitors, instead of working with old-fashioned processes. That's the reason why we have started the journey with NFE. I wish that we see already some impact of that, but probably the full impact of that is only visible if we really have NFE deployed, and then we see the benefits of having much more standardized processes and the opportunity to take cost out. There will be no miracle where everything will be fantastic tomorrow. It will be, as I said already twice, there will be a challenge. I think all indicators we see with the win of new business, scale of the business, is heading in the right direction. Nevertheless, we have also at the same time a big transformation, and we will not change that now because we have seen in the last quarter some challenges with our profitability. I think it's right, the right strategy. The focus is right. Roger and his team is doing the right stuff, but it will take some time, and therefore, as I said already even to be as us, we will have still a continuous challenge in 2014, but we are optimistic that we can make a significant step after the implementation of NFE next year. Maybe the last few also with regard to the margin in Mail. Yes. In particular, the development on labor cost. The cost breakdown that we provide in the IR stat book is helpful but doesn't always tell the whole story on the face of it. If you just look at staff costs, we really mean by that line our own staff costs. So employees of Deutsche Post DHL. When we hire temporary employees or contract or agency employees, which we do to a pretty large extent, especially during the high season period in Q4, those costs are going into the line above it, which is purchase goods and services. You have to look at those two lines together, and you see the significant increase in that purchase goods and services. Most of that increase is actually labor-related. We also had pretty high absenteeism or sickness rates, especially in the second half of the year. We hired some temporary staff to fill in for the higher than expected sick rates. You really have to look at those two together. Thank you. If I can just make one quick follow-up, just with regards to your CapEx guidance, your EUR 1.9 billion. I am just keen to understand where the incremental spend will be focused in particular this year. I think a couple of years ago, you were saying that you would expect EUR 1.7 billion to have been the peak, and obviously, that is not the case. So keen to understand also a little bit more why that has changed. Yeah. I think to some extent, we are victims of our own success, and in that, we have now on a sustained basis been achieving very high growth rates in especially the parcel business and also the Express business. Those are the two most capital-intensive businesses that we have. We view it actually rather positively that we are able to find really good, attractive investments to improve our position in those two businesses even more. Those are the key drivers of the increase, and they are simply the identification of additional opportunities that we have both in the Express network and ongoing increases in parcel capacity and automation that we think are going to drive further great performance in the future. Understood. Thank you, Larry. Thanks, John. The next question comes from Wenchang Ma from JP Morgan. Please, it's your turn now. Thank you. Good afternoon, everyone. First of all, just want to confirm for the Leipzig hub expansion CapEx. Did I understand correctly from the slides that EUR 300 million is the amount that has already been invested, and there is another EUR 150 million coming for this project? How long will this project complete, please? The next question is on Express revenue per shipment. Almost the flattest year-on-year development for the TDI segment, that seems to be an improvement comparing to the previous quarters, especially when we consider the FX headwind. Could you maybe comment a little bit on the underlying trend? Do you indeed see an improvement in the yield environment? Thank you very much. Yeah. May I take the second question and start with that, and then Larry, you talk about the Leipzig CapEx there. Yes, we see improvement in yields in Express, which is quite encouraging. I said already that the whole industry behaves very rational instead of irrational. I think what you are saying is right. There is the trend in the right direction. I think it's too early to say that this is a sustainable trend because we never know. But overall, yield has improved or at least stabilized instead of deteriorating over time. That's definitely the case. Yeah. The Leipzig hub investments are, as you said, the $300 million are investments that we've already made historically, and $150 is what we're spending on this expansion. The expansion will be completed in the course of 2015. If that's the case, then how should we think about the phasing of that $150? Is that more front-end loaded into 2014? I think a big part of it will be in 2014, with the remainder in 2015. Okay. Thank you very much. The next question comes from Penny Butcher from Morgan Stanley. Penny, you have your question, please. Great. Hi there. Hi, Penny. Hi. Two questions from my side, as most of my original questions have been asked already. The first is to come back on the comment you made regarding, I appreciate the guidance for the gross CapEx is out there for 2014. But I think when you were talking about the cash flow, Larry, in the Q4, that you were talking about this sort of transitory CapEx that was going to kick into the cash flow for, I am gathering, maybe the first quarter of this year, in terms of outflows that were maybe a bit delayed. How should we think about the cash flow CapEx in 2014? Is the gross number of EUR 1.9 billion supposed to incorporate the timing effects as well, or will actually the outflows be higher than that? No, the EUR 1.9 billion is the accounting amount of CapEx that we expect to book in 2014, and it is the gross amount. There is always an amount somewhere around EUR 200 million to EUR 250 million, maybe at a peak, EUR 300 million of assets that we sell every year. And of course, you have to net that for the whole cash impact. We would expect, as in most years, that a part, maybe a smaller part of the EUR 1.9 billion will be deferred into the following year. I think 2013 was somewhat exceptional insofar as we had a pretty big deferral or a bigger than usual deferral of spending, i.e., cash outflow compared to the accounting CapEx figure. Does that help? Does that answer your question? Yeah. I guess it was just to sort of provide a bit of context that, say, your EBIT guidance as a starting point is sort of perhaps flattish to going to be up EUR 200 million. And when you delivered the EUR 1.6 billion of kind of free cash this year, with a slight increase in your accounting CapEx guidance that we would take into account. Should we suddenly assume a much bigger potential drop in the free cash generation because of CapEx timing? Or at the end of the day, that should probably wash out and maybe there is a bit of deferral into 2015? So again, we think that we tried to quantify what we call the transitory effect. So the amount of cash deferral that was cash positive in 2013 that we expect to flow back out in 2014 as between EUR 300 million to EUR 400 million. Right? So if you take that off of the top of the 2013 cash flow generation, and then you add your assumption about EBIT growth, and then subtract the minor increase in CapEx spending, then you kind of get to where your forecast would be for free cash flow in 2014. Okay. That is helpful. Thank you. And my second question, coming back to Supply Chain. When we think about sort of modeling it now into 2014, assuming there does not need to be any more European restructuring and maybe no other positive one-offs, how should we think about the sort of quarterly margin? Is it something that could now reset to a higher level? It has sort of been hovering at the low 2% until the Q4 with the benefit of the one-off. How should we think about that sort of contribution on a quarterly basis in 2014? I think we will see the same development in the past. Due to the situation that you sign three to five-year contracts, you always have a significant dilution of the better new business through the old one. Therefore, you will not see such a rapid evolution of the margins as you have seen that in the Express business in the last year. I think you should not be surprised. We will see a positive trend. That's our expectation for this year again. But it takes time, unfortunately, because if you sign a contract for a couple of years, you can't change too much during the course of a contract. That's the reason why, if we make 2 percentage points on balance, that's a quite significant statement if you mix and match the old with the new business. And therefore, we should see continuation of that. And of course, now with the new person, I think we should give him as well some time, despite that he has been, of course, engaged very much in the discussion of next steps anyway, before he really communicates more what he wants to do in addition to what we are doing at the moment. Okay. That is great. Thank you. Thank you. Thanks, Penny. I think we've got time for a few more callers. The next question comes from Robert Joynson from Macquarie. May we have your question, please? Good afternoon, everybody. Just one question remaining from my side, please. Just regarding cash payouts to shareholders. Given that the free cash flow performance during 2013 was so strong, around EUR 700 million more than you'll need to cover the proposed ordinary dividend, could you tell us whether any additional cash returns to shareholders beyond the ordinary dividend was considered, for instance, for a special dividend or a share buyback? In general, could you maybe provide some color on the circumstances that you would need to see for a special dividend or share buyback to be considered in the future? Thank you. Yeah. Thanks, Robert. 2013, we think of as an excellent year for cash flow performance. It was accentuated by the transitory effects that we talked about. Maybe the excess wasn't as great as it initially appears. We do expect, as we talked about Penny's question, that 2014 is also going to be quite a good year, and will at least be able to cover the now higher dividend, and even taking into account those mentioned timing effects from 2013. In 2015, I would say we would see as the time where we would generate then significant excess free cash flow and also have potentially higher credit ratings. We don't want to forecast when and whether the rating agencies are going to upgrade us, but we think if we stay on the current trajectory, we certainly have chances for higher ratings. But I think right now it's just too early to decide, in line with our finance policy, how that potential excess cash flow will be deployed and whether it's to further pension funding or to shareholder distributions. Then if it's the latter, in which form? It's just probably too early at this point to make a forecast about that. Yeah. Let me add one thing, which is not different from what Larry just said, but to remind you, I said couple of quarters ago that after we have fixed our problems, we have focused to earn the cost of capital. The next step is focus on cash flow. That was in the second half of 2012, and the impact how the organization has delivered better cash flow is tremendous. As I always said, let's make the money first before we talk about what we should do with the money. I think we have seen is good progress. That our executives are more incentives as well on cash flow has paid off. That is good news. But, we have to work hard again to continue to generate a significant free cash flow. Therefore I would second what Larry just said. I think, let's see that we continue to work hard on that, and then we will see what we want to do with the money. What I can reassure you, we have no major plans to make bold acquisitions whatsoever. We will remain to optimize our operations and grow at maximum speed organically. That's our goal and not to make any major acquisitions going forward. That's great. Useful color. Thank you, Larry. Thank you, Frank. Thank you, Robert. The next question comes from Robin Byde from Cantor Fitzgerald. Please, it's your turn now. Hi, guys. I guess as we're getting close to the end, I'll just ask one. On KfW, I think they still own about 21% of the company. Do you have any sense, given the share price recovery, that the federal government or KfW might be sellers? That is a secret for me as well. Unfortunately, that's a secret as well for me, because if it would not be, I would be in a difficult spot. I think the current government is definitely a different one than the previous one where the Liberals always said, sell the shares down of state-owned enterprises, and that's the reason why the last tranche they sold about between 15 and EUR 16 is a while ago. We don't know if they really plan to sell down further. We will learn that in due course as well. It's a political decision. You have seen that the German government is planning to have no budget deficit next year, so they would just do it out of political reasons. I think they still get a very good return on their investment from the dividend. It's also for them tax-free, I guess. Because they are German shareholders. We do not know, actually, Robin. We do not know, and we feel happy with them. I think they had not hindered us in any way to do the right strategic decisions for the company, and they have supported that very much as well. Therefore, we just have to wait what the political decision on that subject is. But with the Liberals not in the government, I think the likelihood that they continue rapidly is smaller than it had been when the Liberals were part of the government. I would guess. Understood. Thanks very much. Okay. Well, thanks, Robin, for being so mindful of our time and being so crisp. I think we have got one last caller that we could take care of. Yes, and it is Andre Mulder from Kepler. Please, your line is open now. Good afternoon. Two questions, if I may. First one is on the DHL target for 2015. At a previous Capital Markets Day, you said that the growth that you saw for DHL operations would also apply to each of the three divisions there. Do you still have confidence that all of these three divisions will meet their targets on a separate basis? Second question is, in the previous occasions, you said that Express made market share gains in all regions. Would that also be applicable for Q4? Let me answer the second question, Larry will comment on the numbers. We don't know yet because we have no market intelligence on the last quarter, therefore, we can't say if that's the case. We believe that our growth we have seen in the fourth quarter is partially driven by market share gain, looking into what our competitors have reported. But since we have not done any survey, that's more indirect evidence by seeing what their growth rate has been and ours. And ours has been another quarter above what our competitor has seen. I would say, I think we have gained market share and not different from probably for now, two and a half, three years in a row, but we have no really hard figures to support that except the volume growth of our competitors. On the 2015 guidance, we again today have confirmed the guidance in all respects. Just pointing out that we've made an adjustment for the shift of some smaller domestic parcel businesses from the DHL side to the Mail side, and we've decreased DHL to account for that and increased Mail by exactly the same amount. Overall, the guidance is not changed, nor are any of the underlying components. Okay, thank you. Okay. Operator, are there any further callers out there? No, there are no further callers. Okay, so that means we can stick to our little schedule very well. Thank you out there very much for taking the time. We are looking forward to seeing at least some of you over the next couple of days when we do our roadshow activities. And of course, we are looking forward to seeing you on our Capital Markets Day. A detailed invite will go out in the nearer future, obviously. Before closing, I just want to hand over to Frank for some concluding remarks. Yeah. To summarize that call, we are satisfied with the last year's numbers. We have met most of our guidances. For some of them, we slightly outperformed. On free cash flow, we outperformed them probably quite strongly. We explained why that is the case. We are satisfied with 2013. I think we have clear goals as well for 2014, and remain confident that we can make the guidance for next year. As I said at the beginning, it still remains hard work because the economy doesn't have too much, and foreign exchange doesn't have either. So the goal is challenging, but as I said, we are confident to make it happen. With that, I would like to thank you for joining us this afternoon and for all the nice questions.