Earnings Call: Q4 2012

Mar 5, 2013

The conference is now being recorded. Good afternoon, ladies and gentlemen, and welcome to the Deutsche Post DHL conference call regarding DP DHL full year results 2012. 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 good morning and hello to everyone out there to our full year 2012 conference call. I take it that you have all the material that we sent out this morning in front of you or accessed it via the web. You are aware that the annual report, including the notes, will, as we said, be published next week, March 12th. With that, I would say let's turn to the presentation by Frank Appel, our CEO, and Larry Rosen, our CFO, right away before we go into Q&A. Frank, please. Yeah. Thank you, Martin. Welcome. Good morning. Good afternoon, wherever you are. I'm happy to present to you now the overview about what the impact about our strategy has been and how the structural trends will sustain our growth into the future. If I go to page 3, you can see the summary of the year-end. We are very happy that we have seen a very strong performance in Q4, that we have met all our targets we have laid out earlier. The business is supported by the fundamental trends we have shared with you before. The very strong parcel growth, as much as our strength in the developing countries, and our focus on simplifying the customer experience and to optimize our processes. That is the basis for the EBIT guidance for this year, which Larry will explain later on in detail, where we are looking for a EUR 2.7 billion-EUR 2.95 billion EBIT target. On page 4, you see the comparison of our guidance with our actuals. We are very happy that we met all these figures, at the group level with EUR 2.67 billion on the Mail, just in the middle of range, the DHL division slightly above, and the Corporate Center of us as well around the EUR 400 million. On page 5, you see that this has been supported by all divisions. We are very pleased that Mail is now flat on the top line. You see here minus 5% development, but please don't forget that we had earlier last year, the settlement of a 12-year VAT dispute with the government, which had impact in the Mail division of EUR 150 million. If you exclude that, we had even seen an improvement year-over-year. Express, very nice top-line growth. Bottom line is up as well. We should keep in mind that EUR 100 million of that came from releases due to not needed provisions for the restructuring in the U.S. But even if you exclude that, we are now at above EUR 1 billion, slightly above EUR 1 billion and have a nice year-over-year growth. Forwarding, relatively flat on the top line. You will see that later on as well. Volumes are not particularly strong, but the bottom line has improved against the industry trend. Supply Chain, good growth, and very nice development on the EBIT level as well. Overall, we have seen 5% growth and 10% EBIT development. We think that's a pretty good set of numbers. Next page. We will continue to let our shareholders participate in our success, even if we keep the dividend flat. We are now going to a more normal level of the 53% dividend of our underlying profit. It is still a very attractive yield for the shareholders. It's, as I said, in the midpoint or close to the midpoint of our range we have given you a couple of years ago already. On page 7, the development of the Mail volumes. Unfortunately, the trend of declining volumes in the core Mail communication business has not changed. Further decline we observed last year, but fortunately, it was compensated by very strong growth through the whole year on the parcel front. Maybe two things to remember. We are probably less impacted by the decline than many other postal operators because we had always significantly less volumes per capita than our competitors. You see that here on that page, the comparison. But the decline has been much smaller as well. We always said that in several conference calls, we can't lose the same volume twice. In the financial institutions business, which is still very strong in some markets, was already gone a while ago, and we can't lose that again. The upside potential is shown on the bottom. We are now more or less break even with the revenue increase in parcel in comparison to the decline in Mail. The good thing about that is what we have mentioned several times, different from some other postal operators, we have, for most parts of Germany, an integrated delivery. If we replace revenue, which we lose on the Mail side by revenue which comes with parcel, it is helping us to serve the costs we have for an integrated network. Of course, we will continue to optimize the cost, and we have also these price increases effective January 1st for 2012, which makes us confident to make the guidance for this year again. Express on page 8, continuation of the nice volume development and the revenue development we have seen throughout the year. We are confident and convinced that we have gained market share again. This is a result of our clear focus on TDI and our very strong market position in especially Asia. We are perceived in many surveys we did as a best provider with regard to satisfaction and loyalty, and we have continued to invest systematically in our network, as you might remember from our opening of the North Asia hub. On page 9, forwarding freight. The numbers are not as nice as that of Mail and Express. We see a decline in the air freight, even if it slowed down in the fourth quarter. It is a consequence of downtrading from air freight to sea freight. It is also a result of the relatively weak overall growth we have seen around the world. Finally, it is also impacted by our strong footprint in the high-tech industries or the high-tech industry, which has downtraded probably more than some other industries. On the other side, on ocean freight, we have seen the market growth, and we probably have grown through the year similar to the market. The good news is, different from the trend in the industry, we have improved our gross profitability in a good way, and that has led definitely to an EBIT improvement, too. In addition, we had significant costs already in 2012 for NFE, the New Forwarding Environment, and we would continue to do so in 2013. But the good news is, it is well on track, and we are very happy with the progress we have seen so far. Final division, Supply Chain. Another year of good new signings. The good news is the signings have higher margins than the wins in 2011 and 2010. We see that as a sign that we are now better paid for the high quality we provide. That is very encouraging because that should midterm lead or even short to midterm lead to better margins in that business as well. This is the status quo with regard to how much we have delivered in 2012. Let me look into the future. Let me talk about the structural trends. On page 12, you see what has happened in the recent years with regard to the revenue share of the emerging markets, Asia, Pacific, LATAM, and Middle East, Africa. You see here a very healthy trend. The share of revenue which comes from those regions has increased in all divisions. It is a reflection of our very strong market position being number one in Express, being number one in air freight and number two in ocean freight, and also being the market leader for contract logistics in many of these major markets. We have no doubt that this will continue, and we will see further growth in these parts of the world. As you might remember, we have the goal to generate 30% of our revenue for the group out of Asia. On page 13, another trend which is sustainable and we expect to continue for the next years is the e-commerce trend. We had in December an all-time parcel volume record. We set more than 7 million per day. We continue to invest in that infrastructure, as already communicated earlier. We are providing new services, being the easy return in the Mail division or the premium product we offer for time-critical B2C shipments, which is growing as well in the Express division. Also the end-to-end service for web shops. We have expanded, and we have some very nice wins as well in that area for fulfillment. Page 14. That is only a reminder for all of you. You probably have seen that several times for different sectors. We are very proud of our capabilities, our scale of our sector teams, like in this case, 4,000 experts. We have very industry-specific products which are now growing nicely, and we continue to invest in our infrastructure. That makes us confident that we can continue to gain share and grow profitable. On page 15, as a summary, since the fundamental trends are intact and we had a very good year where we met all the expectations in 2012, we are confident that we are on the right track to deliver our midterm target we gave you at the last Capital Market Day with our EUR 3.35-EUR 3.55 for the group. We think we can continue to stabilize the EBIT of Mail above the billion, as we have done already in the last 3 years. We will continue to grow our EBIT based on 2010,000 total between 13% and 15%. So far, 2010 to 2012, it's 15.3. Equity development, and you see on the bottom, that is a result of the significant margin improvements we have experienced in all the 3 divisions. That will be the focus going forward, in addition to the growth, that we improve our margins, as explained at the last Capital Market Day in detail going forward. That's what I wanted to share. We are happy with the progress we have seen in 2012. We think the structural trends are intact. That should position us well for further growth and keeps us on the track to deliver our 2050 targets. With that, I would like to hand over to Larry for more detail on our financials. Thanks. Good afternoon to everybody. Good morning to those joining from the States. I'm very pleased to continue with our report on Q4 and the full year. I would like to focus now on financial performance for the year and then finish up with a review of our guidance for 2013. Over to page 17, here's our profit and loss statement for the full year 2012. We'll look at Q4 on the next slide. Revenue increased by over 5% helped by positive currency effects and a flat organic revenue performance in Mail and Global Forwarding and Freight was complemented by good revenue growth in Express and in Supply Chain. EBIT was up 9.4% with a small decline in Mail and very good double-digit growth in all 3 DHL divisions. We had some one-off effects, as most of you know, during the year, but they ended up mostly offsetting each other and if we use the word underlying, it would have been just slightly higher than what our reported EBIT ended up being at EUR 2.66. The financial result was impacted both in 2011 and 2012 at the beginning of the year by the final adjustments related to the Postbank sale and by the 2012 VAT settlement from summer of last year. We were very pleased with the tax rate development during the year as our improved performance allowed us to activate more tax loss carryforwards, especially in the U.S. That allowed the tax rate to come down to 20.5% compared to our original forecast of 27%. Net income was up around 43% for the year, though it was also impacted by those final Postbank adjustments. Adjusting for all one-off effects, net income was up by a little over 10%, very much in line with the growth in our operating income. Now over to page 18, the fourth quarter P&L finished the year on a very positive note with 827 million of EBIT, an increase of 38% versus last year. It was our highest quarterly performance since Q4 of 2006. The strong year-over-year increase was somewhat influenced by charges of around 100 million, which we had in Q4 of 2011, but was nevertheless a very solid performance influenced by seasonal factors and very good cost and efficiency management. Net profit almost tripled and was up 47% on a clean basis over Q4, excluding the Postbank transaction adjustments. Now on to page 19. I want to spend some time on two subjects that are very much in focus for us. The first being cash flow performance, and the second being pensions. Let's start on this page with cash flow performance. You see here the evolution of our debt during 2012. Excluding one-off or special effects, our net liquidity would have remained about constant for the year at around EUR 900 million. So you see towards the right side of the slide, the EUR 880 million, it would have been down just slightly from the EUR 938 million where we started the year. However, a number of items contributed to a debt figure of just under EUR 2 billion at the end of the year. First, pension funding increases net debt, but is really from an economic point of view, the exchange of one kind of long-term liability for another. In fact, we believe this transaction is credit rating neutral and will also be earnings and cash flow accretive. Then we add the two non-recurring events, the historical VAT settlement, and also the state aid payment totaling together close to EUR 800 million. Finally, we had some leftover payments of EUR 140 million from our U.S. restructuring that we charged to the P&L in 2008 and 2009. As a reminder, last year, it was just over EUR 200 million. So it's coming down quickly, EUR 140 million in 2012, and we expect it to come down further. So that's the balance sheet perspective on cash flow and liquidity. Let's have a look now on the cash flow statement perspective on actually the next two slides. So on page 20, we've taken out all the special effects, which you see in the bubbles, to show our ongoing cash flow performance. Starting with our EBITDA of around EUR 4 billion, we have the usual changes in provisions cash out, primarily for pensions and other employee-related matters that we had booked through the P&L in prior years, in some cases, i.e. pensions, very many years ago. Our working capital performance was, frankly, a bit disappointing in 2012, and was influenced by both the discontinuation of a factoring program and by a pretty big swing from the end of 2011 to the beginning of 2012, especially on payable levels. After reducing CapEx and interest payments, or after excluding CapEx and interest payments, we were left with the EUR 723 million of free cash flow, around EUR 100 million less than needed to cover our dividend payment for the year. That is something that we want to change beginning this year, and you will see in a few minutes that we are now making it a formal part of our guidance starting in 2013. Over to page 21. Here you see the add back of those special and non-recurring items leading to the reported free cash flow of around EUR 1.9 billion at the end of the year. But again, the pension funding is more accounting than really negative cash flows. Again, one has to differentiate between accounting convention and real economic and credit quality effects. Our pension funding simply exchanges one kind of long-term liability for another and should not be seen as an overall increase in debt. That is our view, but importantly, also that of the rating agencies. Now on to page 22. What is in store for the future in terms of cash flow development? We believe that Deutsche Post DHL is set for a significant improvement in cash flow performance in the next years. Consistent with our 2015 EBIT guidance, our operating income will increase by EUR 700 million to EUR 900 million per year compared to 2012. Pension payments will tend to decline slowly and cash layout for restructuring, where we had the EUR 140 million this year will decline somewhat faster. Working capital and taxes will require a bit more cash as we continue growing the business over the next years. An investment should decline from the 2011 to 2013 peak of EUR 1.7 billion to EUR 1.8 billion per year. After 2013, it should begin to reduce a bit. All those factors should contribute to a sharply increase in cash flow generation over the next years. That is our plan and our expectation. On to page 23. Let us take a look at the second subject that I mentioned, pensions. There are a number of effects here that happened mostly at the end of 2012, and then some more which will happen in 2013, which I will review on the next slide. First, we had a good year investing the plan assets with returns of over EUR 400 million. Second, the decreasing interest rate environment led to a calculated increase in our defined benefit obligation, our DBO, and in the unrecognized gains and losses. Finally, the EUR 2 billion funding we did in December reduced the unfunded liability by the same amount and increased our overall funding ratio to 66%. That compares to 56% at the end of 2011. Now on to the next page. In 2013, the introduction of the new accounting standard, IAS 19R, means that we will no longer be able to use the so-called corridor method to amortize unrecognized gains and losses. Instead, the EUR 3.1 billion of unrecognized losses that we had at the end of 2012 will be added to the pension provision and countercharged to equity. This means that the level of the provision and equity will be highly sensitive to changes in interest rate levels in the future. For the P&L, we expect the accounting change will be about neutral for EBIT, but positive for financial expense. Of course, this accounting standard change has no impact on our cash flow performance. On to page 25, and a closer look at the Q4 performance by Division, starting with the Mail division. Revenues were almost exactly the same as prior year, which was also almost exactly true for the entire year 2012 compared to 2011. This reflects the effect of parcel growth offsetting the decline in letter Mail. EBIT performance was very good as the usual seasonal impact was felt. Cost management continued to be very effective. For comparison, in 2011, we had non-recurring effects related to the then new labor agreement. Cash flow was heavily impacted by the pension funding, but was reasonably strong on an underlying basis. CapEx was dominated by spending on our comprehensive upgrade of the parcel network. On to the next page and the Express division. Revenues and EBIT continued to reflect the trends from prior quarters, where we continued to grow faster than market and EBIT margins stayed relatively constant. The margin development reflects the benefits of volume growth or operating leverage offset by higher costs we are absorbing from investments in the business. These investments include expanding our air fleet and hub network, upgraded customer service and quality measures, and increased employee training. Accordingly, CapEx remained at a relatively high level in Q4 in the entire year 2012. Now on to page 27, and the Global Forwarding and Freight division continued to perform very well despite negative growth in air freight and only slow growth in ocean freight. Gross profit margins continued on a favorable level as the carrier supply-demand relationship remained overall favorable. In addition, intensive cost management, especially overheads, more than offset the additional expenses we had for the implementation of our transformational and NFE project, which some of you may remember. On to page 28. Last but not least, our Supply Chain division had a very strong close to the year with EBIT margins increasing to over 3% in Q4. This reflects the continuously increasing benefits from optimization of the contract portfolio. This is in turn made possible by very disciplined contract acquisition and renewal and the ability to win attractive new business based on our sector and solution capabilities. Cash flow is very strong in Q4, reflecting a very good trend in both EBIT and also working capital levels. Now let me turn to our guidance for the full year 2013 on page 30. For Mail, we expect EUR 1.1 billion to EUR 1.2 billion of EBIT. This is on par or slightly less than 2012 and on a clean basis, i.e., without the EUR 150 million VAT charge. Here we see continuing parcel growth and the price increase that we had starting January 1st being offset by further moderate declines in letter Mail volumes and moderate factor cost increases. Of note is that we remain clearly above our midterm target of at least EUR 1 billion EBIT per year. DHL EBIT is expected in the range of EUR 2 billion to EUR 2.15 billion. In thinking about the year-over-year trend from 2012 to 2013, it is important to remember that we benefited in 2012 from the release of a restructuring provision, if you remember, in the middle of the year, around EUR 100 million. That 2013 will include incrementally higher spending for NFE in the high double-digit million range. With Corporate Center remaining around EUR 400 million total EBIT, should therefore be in the range of EUR 2.7 billion to EUR 2.95 billion. To emphasize the cash generation improvement we see, and its importance to us, we introduce cash flow guidance for the first time and expect to generate, at a very minimum, sufficient free cash flow to fund the dividend, which we pay out this year. Now to sum up on the next page. In 2012, we had successful delivery on all of our targets in what was a volatile and in some ways difficult year. We continued our strong focus on further optimization of our businesses in line with our strategy. For this year, we expect to have an EBIT increase, which will in turn drive a stronger free cash flow performance. Despite the still lower than trend level macro environment, we are committed to deliver on our 2013 and on our longer-term targets. Thanks for listening, and we would be happy now to hear your questions. Ladies and gentlemen, if you would like to ask a question, please press 9 and star on your telephone keypad. In case you want to cancel your question, press 9 and star again. Please press 9 and star now to state your questions. The first question comes from Stephen Furlong from Davy Research. Please go ahead with your question. Yeah. Hi. I just want to ask actually about forwarding. Maybe you could just talk about where is the NFE project in terms of the IT rollout? How much management time does it take? Then maybe just in general on forwarding, maybe you could just talk about whether you see maybe air freight volumes making a comeback this year, or do you think it is just structurally moved from air freight to sea freight? Do you have any view where you see maybe pricing going in air and sea freight as well? That would be great. Thank you. Yeah. Let me start with answering the question with regard to management attention. Of course, such a change program always takes significant time because we are going through a transformation of the business model. That was already the case in the last 18 months. Therefore, I am quite confident that we will see good progress in 2013 again, because the organization has already digested that for 18 months. The organization is an organization which has digested two major integrations with Exel or with AEI. So we think there is, of course, attention to that point, but it has not taken us away from growing the business profitable. I think that is. The other two elements, how strong the markets will really develop, is very much linked to the overall market development. The next six months will remain challenging, and there might be a chance for an upswing in the second half or latest in 2014. There is definitely, as long as the markets are weak, there is a trend for them away from air freight to, on one end, Express and to ocean freight. As much as we have had challenges last year with regard to air freight, we benefited on the Express side to a certain extent and a little bit as well on the ocean side. So that is what we see currently. We have not more insight in this than the market overall has. So it is very much dependent on the overall economic development. Okay. That is great. Thank you. The next question comes from Mark McVicar from Nomura. Please go ahead with your question. Hi, Frank. Hi, Larry. Two or three questions from me. First of all, on the dividend, which is obviously quite important today. Are we to take what you said as meaning that you have now rebased it back to the middle of the range, and therefore it should start to grow again from 2013 onwards, as net profit grows? Sure. Let me take that one. I think you have to go back to the last couple of years and ask why we were at the very high end of our policy range. It was most of all to demonstrate to you, outside the company, the confidence that we had in our strategy and in the changes that we were making in the company, which were not always as visible a couple of years ago as they might be today. I think you should see the dividend recommendation today as a step toward normalization. We are still in the upper half of the range. But absolutely, we would expect further dividend progression in the future as we continue to increase income in line with our midterm forecast. Okay, thank you. Next question was: central costs obviously were up a bit in the year. You are still happy that these will be down at EUR 350 million by 2015, but it is just a bit more tail-end loaded, yeah? Sure. Let me take that one, too. One of the main reasons that the Corporate Center costs had increased this year is related to our stock-based compensation program, which is a cash program. We had more costs than we had forecast at the beginning of the year as we, in effect, marked to market and the significant increase that we had in our share price meant that we had more costs for that program. Otherwise, we were very much on target with our costs. Yes, it is very much still our intention to be at EUR 350 million or below by 2015. Okay, that is great. Next question. Obviously, the tax rate was much lower than you had expected at the start of the year. What should we be using for the purposes of modeling for the next couple of years? Well, yeah, we did. I know it's a difficult one because there's a lot of moving parts. After having given guidance the last two years that ended up being much higher than what the rate ended up being, we were reluctant to give guidance again this year. To be conservative, we don't figure in further activation of tax loss carryforwards, which after the last two years experience, one might view as extremely conservative. Nevertheless, we don't do it. Therefore, we probably would go back to a rate of around 27%, but with some upside potential based on our ability to further utilize tax loss carryforwards or activate tax loss carryforwards. Okay, thank you. I have one more quick last question. Could you just remind us, what the final cash costs of the U.S. restructuring are going on, and how much more we can expect until it's actually a completed program? Let me take the last part first. We have still around EUR 500 million of provisions left related to the U.S. restructuring, which potentially could stretch out over a number of years. There is, in particular, some real estate matters where it just made sense or was impossible to get out of the obligations, and we are stuck with those for some years. But we should start to see a downward trend in the amount of the cash cost each year. In terms of the total cash amount, let me come back to you on that in just a minute. Okay, that is great. Thank you very much. The next question is from Jingxuan Ma from JP Morgan. Please go ahead with your question. Thank you very much. Good afternoon, everyone. My first question is about Mail. Given the full year 2012 actual and expected 2013 Mail EBIT level, would you consider the existing 2015 guidance of EUR 1 billion to be conservative? Let me say it as the following. We have worked hard on last year's numbers, and we are very happy that we were about EUR 1.2 billion if you exclude the VAT. We have a price increase now, but we also will have soon negotiations with the unions about salary adjustments going forward. The decline of Mail volumes is still continuing, and as long as we not see really a fundamental change in the trend, that means we see growth of the top line again, I would be cautious to commit now and say that's a conservative. I think two years ago, the market was not convinced that we can stabilize at above a billion. We have now demonstrated it in three consecutive years. I would keep it at the moment as that's definitely our target, and we will see in due course how much we really can grow the top line again, and that is linked to many aspects like the German economy, the fundamental trend of parcels, and also the decline of Mail. So I would refuse to say that this is the conservative. I think that's what we always have promised, and we would like to stick to that for the time being. Okay, thank you. Also, the second question on Express. Could you comment a little bit on the volume and yield trend in Europe for Express, please? I don't know the volumes by heart. I don't know, Larry, if we have a volume. What we can say is that we have seen volume growth in Europe. Despite the fact that some economies have been weak. We think that is mainly driven by the trading is still developing better than domestic GDP, even in the southern European countries. In addition, we believe that we have gained market share, but we can maybe probably in the data we provide, usually this should be included as well, or it's not? No. Typically, for competitive reasons, we're not giving exact figures by region for Express. We did have positive growth, and we believe that we gained share in Europe last year as well as the year before. But more precise than that, we don't want to be. Okay. That's all right. Finally, on the forwarding side, is it possible to comment on how much was the NFE implementation cost in 2012, and how was it spread by quarter, please? Thank you. Without being very precise on the spread by quarter, it was reasonably well spread throughout the full four quarters of the year. The investment in 2012 was in the high double-digit million range. You would say for 2013, it will be similar amount. Is that right? No. It will be an incremental increase, again, in the high double-digit range. Okay. Thank you very much. The next question is from Damian Brewer, RBC. Please go ahead with your question. Good afternoon. Thanks for taking the question. Three questions, and let me give them to you all at once. First of all, on the TDI side, the quarter-on-quarter development there in the fourth quarter is the strongest I think we've seen for about six years. Could you give us some idea of what drove that? It looks particularly impressive just from that seasonal impact, and how much that sort of strong demand has had on the ability of the rate increase to put in in January to fully stick. Then secondly, you mentioned trading down from air to ocean on the forwarding side and also to Express. With your account management, do you have a feel for how much of that trading down is still being captured within the group, i.e. revenue out of one division is being picked up in another, and how much that's sticky? And then very finally, on the tax rate, do you have a feel for how much or what level the unutilized tax losses sit at the moment? Other than simple profitability, is there anything else that could trigger their utilization? Let me take the two first. You are right. It was a very strong growth, and I think that has two main. The real fundamental reason behind that is that our service quality was better than ever before, globally, last year. We are convinced that the strategy Ken Allen has laid out with his team to focus on the international product and to train our people very carefully in line with that product has paid off significantly. It is a mixture of underlying growth. There is more and more growth from B2C premium product, and there is gain of market share from our competitors. Therefore, we have seen a very strong development in the last quarter, and we are optimistic that we can continue because our service quality is great. How much we really capture in the group is very difficult to assess because despite that we have some large customers, it is very difficult to judge from outside how much is really kept and how much is moving on to others because there are so many customers who are not detailed tracked from a separate organization. I would say it is probably difficult to really judge how much we really have captured in the group. But if I see the development of TDI, if there is a movement as we believe, we probably have captured quite a bit. Otherwise, the strong growth had not been possible. With that, Larry, may you comment on the tax? Right. The amount of tax loss carryforwards not yet activated remain in the billions of euros. Almost all of it is in Germany, about two-thirds in the U.S., about one-third. The primary factor that will allow us to do further activation is indeed improved performance. That is the single best way to be able to utilize more of those net loss carryforwards. There may be other ways, i.e., restructurings, that we might be able to do, but we do not count on anything and do not really have any specific plan in that direction. We would rely on improved performance to allow us to activate more of those NOLs. Okay. Thank you. Can you just coming back on one question, just the rate increases in Express put in the beginning of this year, how well have those stuck? I think it's too early to really make a definitive comment about those. In particular, we've had the Chinese New Year in between. I think it would be too early to really make a definitive statement about those. Okay. Thanks very much. Thanks, Damian. Next caller. The next question is from Can I Go ahead. Sorry. Sorry. I just wanted to come back to Mark McVicar's question on the total cost of the U.S. restructuring. Since we started to book it in 2008, it is EUR 2.7 billion. Again, around EUR 500 million are left as provisions. Okay. Okay. The next question is from Andy Chu, Deutsche Bank, London. Please go ahead with your question. Thanks very much. Good afternoon, Frank, Larry, and Martin. Two questions, if I may. Firstly, Frank, I wonder if it's possible to give us some flavor of current trading. I guess it's early on in the year, but we're two months in. Maybe some commentary around TDI volume growth and parcels. Secondly, on Supply Chain, a nice improvement in margin. I just wonder if there's any reversal there in terms of capital intensity of contracts, because clearly it's a balance between capital and being asset light, and whether some of that margin improvement is actually coming at the expense of being a little bit more capital intensive within Supply Chain. Thanks very much. Yeah. The year has just started, and I think it would be fair after we released the guidance for this year that the year has started so far in line with our expectations. Otherwise, we had not given that type of guidance. Beyond that, I think it's too early to say because there are some special items like, we have a stamp price increase. We had Chinese New Year later than last year, and we had one working day more in January. I think it's too early to really comment beyond what I've just said. I would not say that the increase in margin is related to more capital. I think it's really more related to the willingness of customers to pay for great service and high quality. I think that's more the fundamental trend we see around the world, that even in the emerging markets. I visited just recently Thailand, for instance, and I saw there as well that we have a good development with margin improvements without putting more capital behind that. I would not say that this is the driver. Capital is not the driver. It's, I think, our own performance. Frank, could I just ask you in terms of parcel volume growth, and I just see comments from the press, which may be sort of secondhand, but are coming to me, that sort of comments over, so maybe tempering sort of expectations on parcel or volume growth. Yet, the company has delivered that 10% volume growth in Q4. I know it's only one quarter. It is an acceleration versus Q3, but maybe you could maybe sort of clarify if there is any clarification to be made as to sort of outlook for the parcels business, please. Yeah. I only repeated what we have shared with you until 2020 at the Capital Market Day, where we said it's 5%-7% underlying market growth. That's the basis. We have not changed our mind on that. Of course, we should always strive to further growth, but I think for saying, and my statement was until 2020, to say that business will grow double digit until 2020, I think that would be, in 2013, by far too bold statement. Therefore, I kept the statement on the level we gave you in the Capital Market. Can we grow faster at the shorter end? We have just demonstrated that in the fourth quarter, and of course, we will work hard to continue. But that's too early to say if it's possible in 2013 again. So my statement was not for 2013 in particular. It was more related to what we expect until 2020 for this market. Yeah. Maybe I'll just add to that. The 5%-7% is not just our forecast. It is the forecast of several external groups who have a lot of insight from different angles to that market. Our experience the last couple of years has in fact been better than that, and we're very pleased about that. We believe the market has grown faster, and we may have gained just a little bit of share, but it's primarily been market growth. Should we see categories, especially in FMCG, fast-moving consumer goods like groceries, drugstore items, begin to take major share, then we might revise our growth forecast upwards. But we think it's just too early to do that yet. All right. Thanks very much. Okay. Thanks. Andy, next caller, please. The next question is from David Ross from Stifel. Please go ahead with your question. Yes. Good afternoon, gentlemen. Can you comment on the Express lane strength? Was it Asia exports to the U.S. that were the strongest growing? Was it Asia/Europe export? Any color there would be appreciated. We have been surprisingly, in percentage terms, growing the fastest in the Americas. We are having tremendous success with the international business focus in the U.S. as well as in the rest of the Americas. We continue to have really good growth in Asia and other emerging markets like Africa, Middle East. But the one growing the very fastest is the Americas. I guess same color on the forwarding side, whether it be air or ocean freight. Are there lanes that stand out as being the strongest or weakest performers in the quarter? Just focusing on Q4. The Asian lanes started to pick up towards the end of the quarter. Although, again, we saw continued negative growth in air freight. It was lower negative growth than we had seen in the previous quarters. So, if you could call that encouraging, it was. Although we start to compare it to some soft comparisons already at the end of 2011. So, if you could say any lanes were stronger than the rest, probably we started to see some strength out of Asia towards the end of the year. Yeah, because we saw actually positive air freight growth from Asia to the U.S. in the quarter. So maybe Asia to Europe was a little bit weaker to offset that? Yeah. I think we would refrain from commenting on specific lanes for competitive reasons. Okay. Last question is just on the European package and freight market. After the TNT-UPS merger fell apart, what do you see as the new competitive dynamic there? Have things changed materially or any of the market share gains that you won when all of that was going on, gone back to the former carriers? We have not seen. It's too early to say for this year because that decision came only in January, so the impact is definitely not visible yet in the numbers. In the fourth quarter, we still have the same trend as you can see from the reported numbers that we gain market share. I think it's too early. We don't expect that you might be concerned about a price war. We have no indication that this is taking place. TNT still have to consolidate their activities, and they are doing that. But we have not seen a very heated, competitive landscape currently, but that's too early to say because the announcement was only mid-January. Thank you very much. You are welcome. Thanks, David. Next caller, please. The next question comes from Julia Wintersoul from HSBC. Hi, Julia. Hi, good afternoon, everyone. Can we just go back to slide 20? I have got a couple of questions on this. The first one is, if you look at the changes in provisions, and we have EUR 301 million from pensions. The additional EUR 300 million, can you clarify exactly what that is and whether we should expect that on an ongoing basis? Then on the changes in working capital and others, I understand around EUR 400 million of that is working capital, but what is the others? Again, should we expect an additional EUR 300 million on an ongoing basis there? I have got one other question as well that I will come back to after that. Yeah. In the EUR 600 million, you are right, by far the single biggest item is the pensions. The next biggest or next important item is other employee programs like early retirement, partial retirement programs. The remainder are a collection of smaller items. I would say that, if anything, they would tend to trend down over time. But I say that without a huge amount of conviction. The same thing with the others, including changes in working capital. It is really a collection of a whole number of small items. I would say small, likely, they are more likely to trend down than up, but it is hard to predict on a year-to-year basis. Okay. Thank you. Julia? One other question. Just on your guidance, the EUR 3.7 billion to EUR 3.95 billion EBIT. Can you give any sort of indication on the DHL side what kind of revenue growth you are promising that on by division? Yeah, we usually don't give revenue targets, as you might remember from the last years, and therefore we would not do that. What we can say is, of course, we will achieve the lower end of that guidance if the markets are very weak. If we see a good trend during the year in improvement of the economy, then we should get closer to the upper end. So I think at the moment, that's the reason why we gave you a rather broad range, because the uncertainty is still pretty high. We usually refrain from giving top-line targets in addition to our bottom-line targets, because of course we are very much focused, in particular in areas like Supply Chain and air freight, that we are not focusing on making revenue targets but profitability. Not always a significant new contract leads to significant improvement of the bottom line, and therefore we usually don't steer through the top-line growth, despite the fact that we want to gain market share in all divisions. Yeah. Okay, that's very helpful. Something that could be helpful in that regard is not our revenue projections, but our underlying assumption about the overall economy. There we see 2013 likely to be, again, a below average year in total, with some chance that we'll see some improving trend throughout the year, with the second half being better than the first half. Overall, we see a global real GDP growth in the range of 2.5%-3%. So similar to what we saw overall for 2012. Okay. Julia, that's good for- Okay, thanks. Thanks. Next caller, please. The next question comes from Neil Glynn from Credit Suisse. Please go ahead with your question. Oh, good afternoon, everybody. First of all, if I could ask a question with respect to Mail. I appreciate labor negotiations are ongoing, which will impact the costs on the staffing front. Can you give us an indication as to what level of headcount 2013 guidance is based on? I trust that headcount should fall slightly. Second of all, an update on the Shanghai hub, seven months after its opening, would be helpful. Interested in terms of how it's developing in terms of customer accretion, how it's performing relative to other major hubs. Then one final one on Supply Chain. It's obviously quite a heavily consumer-focused company, exposed division. How do you view credit quality there? Are there any issues across the broad customer base that concern you, Bay? So maybe, Larry, you answer the last question. First, the performance of the hub is we have a very good performance. I think we are not commenting exactly about the performance of these individual hubs with regard to customers, because that's just a part of the global performance, and this is a significant part of that. To say the growth we have seen in the fourth quarter is linked just to that activity is probably not appropriate, because of course, we have invested significantly around the world in other places, too. Therefore, we usually refrain from linking growth and winning new customers just to that activity. Of course, we have improved our cutoff time through that, and the performance of the hub was very good through the last quarter. With regards to the development of headcount, we don't have that goal as an internal goal. We look into cost development and productivity, and therefore, we optimize continuously independent of what the growth in parcel is and the decline in Mail. Therefore, we are not steering through a certain headcount reduction. What we are doing is we have measures in place to optimize our productivity, and that should help us to deliver the guidance we have given. Beyond that, we don't disclose that detail. Maybe with that, Larry, you can comment on our process to manage the credit risk of smaller customers. Yeah. So in Supply Chain, as in other divisions, we are doing an extensive credit review process for any new contract that we enter into. In some ways for Supply Chain, it is even more critical than our other businesses because the contracts are medium and long-term. It can happen that you enter into a contract with a healthy customer that runs into financial difficulty at some point during the contract, and then it becomes a risk. We saw that a couple of years ago with Arcandor, it was an especially big example of that. The good news is that we do not see anything out on the horizon that remotely looks like an Arcandor-sized case. Again, we think we have tightened up the credit review process even over the last couple of years, and we really have not experienced anything similar since 2010. If you look into the past, particularly related to U.S. customers, which are huge customers of ours, if they go into Chapter 11, we are always perceived as a mission-critical supplier, and therefore we are preferred paid. Therefore, we had very little impact from some of the Chapter 11 activities in the last years. That comes with our services, and therefore, we are better protected than some other suppliers, if companies go into Chapter 11. That does not protect us completely, and therefore, what Larry said, it is important that we revisit that continuously as we do, that we also have a slightly advantage over other industries who are supplying to some companies who are in Chapter 11. As we highlighted in our workshops on the contract lifecycle management, of course, this issue is one of the hard criteria before entering any new contractual relations. Okay, Neil, that is going to be good enough for you? That is great. Thank you very much. Thanks, Neil. Next caller, please. Next question comes from Robin Byde, Cantor Fitzgerald. Please go ahead with your question. Robin Byde from Cantor Fitzgerald. Good afternoon, guys. Just on Supply Chain, on that profit margin, is 3% the new normal? Could it go higher? What might drive a higher margin? For example, would that be more sort of life sciences contracts versus fewer automotive consumer contracts? Thanks. It's always a good question, what is the new normal there? Because, in Supply Chain, the return on sales is the most tricky one because, in some cases, we have huge pass-through revenue, which dilutes that. Or we have negative working capital with low margins as well. I think at the end of the day, we believe we can improve the margin further, but the key focus is really on onboarding profitable business, which has higher profitability than the current business. As Martin already said, these contract lifecycle activities should help us as well to protect the margins more. At the end of the day, what counts here to grow the top line with the fastest speed without creating new risk. Some of our competitors are growing faster but creating continuously higher risk. We are very much focused on absolute profitability and less the margin, because the margin is a little bit a result of the split of industries. But I have no doubt that there is more margin improvement possible, and we should see that. It takes quite a while, because if we replace customers every 3 or 5 years, it takes some time to see the impact of new higher-margin wins in the numbers. Can I just come back? Sorry. Maybe without giving any specific margin target, you know that it's our intention to grow operating earnings 13%-15% per year. We would expect that to be a higher growth rate than revenues, implying that we would expect some increase in margins from here at least through 2015. You're exactly right. I think it goes back to our solutions expertise, our ability to continue to add more and more value to customers. That's what we're concentrating on. Okay, thanks, guys. Thanks, Robin. The next caller, please. The next question comes from Robert Joynson from Macquarie. Please go ahead with your question. Good afternoon, Frank, Larry, Martin. I have three questions, please. Let's take them one by one. First of all, just on translational FX issues. With a large share of DHL profitability coming from outside of the Eurozone, could you maybe provide some color on how much of a benefit the weak EUR provided for DHL EBITs in 2012? And potentially how much of a headwind that could provide or the stronger EUR could provide in 2013 if exchange rates remain where they are? Sure. For the size and breadth of our company, it turns out to be surprising how well-balanced we are in terms of net exposure. Yes, in 2012, we had some benefit. We also do some hedging activities. The net amount of benefit for the whole company ended up being in the low double-digit million range. Within a reasonable range of expectations for 2013, even though you are exactly right that it has kind of turned around at least at the beginning of the year and headed in the opposite direction, we would expect not to be dramatic at all for this year. Okay. Thank you. Just a question on cash conversion. Just on the color on some color points on the extent to which the non-recurring cash provision benefits are actually factored into the 2015 EBIT guidance. For example, if we go back to slide 20, which Julia Wintersoul mentioned before, I was just wondering if you could provide some color on what the change in provisions number could look like for 2015. Yeah, I think we would hesitate to give a specific forecast. What we have said is that we would expect the pension figure to slowly go down from the EUR 301 million level that we had in 2012, as the population of retirees tends to slowly decline over time. Not in the slide on page 20, because we removed it as a non-recurring effect, the restructuring cash of EUR 140 million we would expect to go down as well by 2015. Okay. Thank you. Just the final question, it is a bit of a technical question actually related to the Mail guidance and the impacts of revised IAS 19. In 2012, I think I am right to say that Mail EBIT was depressed by a charge related to the amortization of unrealized pension losses, which I assume was around about EUR 50 million. That will not impact EBIT in 2013 because of the accounting changes caused by revised IAS 19. Am I looking at that in the correct way, or am I missing anything there? You are looking at at least half of it in the correct way, and you are pretty much right about your assumption of 2012. You are right that we will avoid the amortization of those unrecognized losses as we were doing before the introduction of the new standard. However, offsetting that will be the increased service cost if discount rates remain at the current low level that we will have. We expect those two effects to pretty much offset each other and for the net effect to be close to neutral on the EBIT level. Again, we expect a significant positive effect on financial expense, both from the funding we have done at the end of last year, but also from the lower discount rates. That is very helpful. Thank you. The next question comes from Tim Marshall, Redburn. Please go ahead with your question. Hello, everyone. Richard. In Express, you reported a 10% increase in the underlying EBIT for the year. The revenue is up by about EUR 1.1 billion. Materials, staff, and depreciation combined for a EUR 1.2 billion increase. All the profit growth came from a reduction of about EUR 200 million in the net other operating expense. I think almost all of that came in the second half of the year. Can you just talk through what is in that number and what we should expect it to be in FY 2013? Let us come back to you in a couple of minutes with that answer. Okay, great. Thank you. The next question. Okay. Okay. The next question comes from Alexia Dogani, Liberum Capital. Please go ahead with your question. Oh, hi. It's Peter Hyde, actually. A couple of questions. Firstly, you talked, I think, about a factor cost increase in the Mail business, and I just wondered if you could explain that. Secondly, in Express, I was interested in any comments you're willing to make by region. I know you don't disclose anymore, but are there any regions where margins actually went backwards in 2012? Or could you comment on the spread of margins between different regions? Then finally, on Express, the third question, when you talk about investment for quality of service, do you think you're at the end of that at the moment? Or could you just give me some timeframe as to where you've been and where you think you're going, and whether you've got the level of quality of service you want to drive at? Because it seems to me that that's quite clearly one of the benefits, or one you're beginning to report some of those benefits of improved quality of service in your EBIT. Thanks. On the first question on the factor cost increase, the one that we know is in the first quarter of the year, have a 4% increase in labor costs compared to last year because the new tariff agreement, labor agreement that started last year started on April 1st. For the first quarter, it is a 4% difference. After that, it is subject to the current negotiation that we'll be entering into with the union in the very near future for determining what that increase will be for the remaining three quarters of the year. On the second question, in terms of region profitability and differences by region, again, we don't disclose that for competitive reasons and we think of the Express business anyway as very much a global network business and of course, there's differences from country to country and region to region. Sometimes they are not that meaningful and, again, for competitive reasons, we prefer not to be any more specific about differences between regions. Can we increase service levels further in Express? We absolutely can and continue to have that as a goal. We have done a great job. We ourselves have measured that, but external organizations have also measured it and we have achieved some significant strides in overall customer service levels. But it is our belief and our intention to increase further and continuously improve over time. Okay, thanks. The next question comes from Joel Spungin from Merrill Lynch. Please go ahead with your question. Hi there, guys. Actually, my question was related to, I think, Tim Marshall's question earlier regarding the cost movement in Express and just following on from that, whether that is the sort of drop through that you would expect in terms of volume leverage going forward in that division. I know you obviously commented that you would expect the margin to improve in 2013. So that was question one. And question two, I am afraid back on this working capital issue. Larry Rosen, I think you said that the underlying performance was not as good as you would hope it to be. And following on from Julia Wintersoul's comment about EUR 400 million trade working capital movement in there. Could you just sort of try and quantify what the movement has been, I do not know, in terms of days outstanding on either the payables or receivables, and whether going forward, I know you said you expect it to grow with the business. Just trying to reconcile you saying it is an unsatisfactory performance in 2012 with growing with the business going forward. Yeah, I think actually our overall and average working capital performance in terms of DSOs and DPOs has actually been quite good for all of our divisions. Has remained constant to having slightly decreased in some areas. What was disappointing was the movement on payables that we had between the end of 2011 and the beginning of 2012. In effect, we kind of over-emphasized the cash flow generation in 2011 to the detriment of 2012. That is something that was much less accentuated between the end of 2012 and the beginning of 2013. And that is the kind of trend we would expect to continue over time, so that you do not have such huge movements between the years. Okay, fine. Just to be clear, would you expect the working capital volatility that we saw in 2012, where it was very volatile over the course of the year to be less so this year? I would tend to think that there will be a decrease in overall volatility over the quarters of the years and from year to year going forward. Okay. Then I do not know if you had a chance to look at it, but if you have got any comments on the cost development in Express. Yeah. So, one of the things that is playing a significant role is the release of this provision that we had in the year. So that is probably the biggest factor in the movement between the different cost categories from quarter to quarter and year to year. Okay. Going forward, is there anything you can say in terms of leverage? May I say? So definitely, the investment into the network will be this year significantly smaller than in the last two years, or particularly until last summer. We have brought much more wide bodies into the system. So despite that we have good utilization of these airplanes, we should get, if the volume development continues, we should see good leverage because replacing air freight by courier products should help us to improve the margins. You might remember at the Capital Market Day, Ken said that last year was the target to gain market share, and this year is the year for margin expansion. That is one key driver behind that. Okay, thank you very much. You're welcome. Thanks, Joel. Operator, do we have any more questions out there? No, there are no further questions left. Okay. Well, then that brings us to the end of this call, well inside the 90-minute mark. Yeah. Let me summarize. I think we delivered as promised to the market the numbers for 2012. We are very committed to improve our EBIT numbers this year again, to make one step into the direction of our midterm target 2015. We understand that there is a need for improve the free cash flow generation further, and we are very committed to do that. That's the reason why we go for the first time a target on free cash flow to the market. We will push that very hard into the organization after we have done other stuff before. I am confident that we will see the impact of that activities more in 2013. We saw already some of that in the second half of 2012. We are very committed to continuing our growth path on the top line as much as the bottom line. With that, I would like to thank you for listening this afternoon. Thank you and bye-bye. The conference is no longer being recorded.