Hello, and a warm welcome from my side to our Q2 2021 conference call. As flagged, we have with us today Group CEO, Frank Appel, Group CFO, Melanie Kreis. Aim is to be done within 60 minutes, and therefore, right over to you, Frank.
Yeah. Good morning as well from my side. Today we are more or less confirming what we have said already a couple of weeks ago in our preliminary release about the second quarter. I think we can focus on certain elements of that. If you go straight away to Page 3. Yes, we are definitely in a very good spot, seeing a very strong recovery of the B2B markets, driven by the overall recovery of the economy, and B2C has still continued to grow up at a lower pace than in Q4 or Q1, not surprisingly.
Of course, that also will continue. Both trends will continue into the second year. What we intend to do, and have announced already, that we will let our employees participate in the tremendous success the company has at the moment. We believe in a service company. The difference is coming from our colleagues around the world. We are very happy to have already announced that they will get this year, and deserve it, I think as well, another EUR 300 COVID bonus, which we will pay in Q4.
We also have already, early July, upgraded our guidance now to above EUR 7 billion EBIT. Of course, that's driven by the strong trading we have seen in the first two quarters. The utilization is great. The improvement is driven by all five divisions. Overall, I think we are in very good shape. Today, we would like to focus more on volume development because, of course, that's important to understand as well. What happened, if I go to page four, in the last quarters, we have seen a recovery of B2B. In the second quarter, B2B growth was even stronger than B2C growth.
Of course, that shows the benefit for us that we are well-positioned in both markets, not only in the e-commerce market, but also in the B2B market. You can see that here across the divisions, that we have seen really significant growth in the revenue of volume. On Page 5, starting with e-commerce. You can see here the B2C growth in P&P. We had still a quite good growth in the second quarter.
Not as strong as in the first quarter, but not surprisingly. You see that the line is now getting closer to 2020. This is what we have said already in the first quarter, that we are expecting a normalization of growth rates through the year, and that trend will continue. I said even in some sessions before already, that we might see even in certain months, a decline in volume.
Overall, we believe that we will see in 2022 and 2023 higher volumes than we will see this year. Of course, the phasing is significantly impacted by the lockdowns we have seen in the last quarters in Germany. Overall, good shape. We are happy with the growth, but of course, the growth rate will not continue at the same pace as we had before.
On Page 6, you see similar pictures of that development in Europe and the U.S. Here you see that Netherlands is still very strong. Eastern Europe, strong growth. U.K. parcel had already some months where we were flat-ish or slightly negative. This is fully in alignment with our expectations. U.K. and the U.S. probably were earlier out of lockdowns, and that had impact as well.
We believe that we will see a normalization in the other markets as well. We also expect in the markets where we have seen no growth, we should see sooner or later again growth, because the fundamental trend with moving to e-commerce is still intact. Page 7. The balance between B2B and B2C shows as well in Express that we have seen a good growth in Express through the quarter, 20% more driven by B2B.
It's really great to see we have obviously a good balance. If you had seen the same growth in B2C in the second quarter as in B2B, probably our network had been quite overwhelmed by the volume. What we now see is really it's manageable for the network. The additions of airplanes is helping us. You see that later on in the profitability as well.
I think we are now really in the right balance by using our network. Of course, B2B will benefit more than e-commerce solutions of P&P from the strong global B2B recovery. You can see that across the regions. I think it's great reach to see. This is really a great model for us, that our global footprint, that we are benefiting from all these underlying trends. On page eight, starting with Express again, there's one element interesting as well, and that's a reflection of what I've just said, that the shipment growth is now lower than the weight growth. B2B has on average higher weight. It's also because stuff moved up from ocean to air freight and air freight to Express.
We fly more heavyweight, which of course is good for the revenue line somehow, and therefore, we expect that shipping growth will be slower than revenue growth in the coming months. Overall, as I said already before, Express still will benefit from very healthy growth on both. On all five divisions, I will show you now some examples of our digitalization agenda, which is in full swing.
Here we have, for instance, Vista is our new tool to manage our capacity better by having more visibility. Taleo helps us to recruit faster colleagues to getting on board. Yes, we added significant amount of people in the last year anyway. If you compare end of June with last year, we probably have around 25,000 people more on board. We are in the market and recruit, not only in Express, in all divisions, new people.
Customers classification with artificial intelligence is important. A good example is that we lost the de minimis in Europe, and of course, that is a challenging number, but I think these kind of things helped us that we haven't heard anything about that, I guess, that this was a problem because we were well-prepared and have managed that very well, despite as operation, quite a challenge.
Overall, Express in good shape, very good digitalization agenda. Global Forwarding Freight. We show here as well that we are now ahead of even 2019 before the pandemic. I think that's a consequence of what you see on the right, the roll-up of TMS. If you look into the detail, we have added significant volume without adding people. That shows that the system has really helped us to gain in productivity.
On top of that, we have, of course, very high yield as all the players have. I think in air freight, we are really in great shape, and we have grown our GP in ocean freight as well, and we are now back to the level we had before. The second element of digitalization on the right side is MyDHL+, a customer portal where they can book, track their shipments. It's well-received by our customers, and we are rolling it out to other markets as well as we speak.
Supply chain, very strong recovery. We are now significantly ahead of the margins we had in 2019 before the pandemic, and also the absolute profit, excluding even in 2019, 2020, where we had one-offs. This is really now these two years one-offs in 2021. We don't have any sizable one-off here.
It shows that the agenda Oscar de Bok is driven, is really now getting traction. The standardization, the automatization is leading to significant improvement. I have no doubt we will see that in the next quarters as well. This is mainly the B2B business. Yes, we have e-commerce, quite sizable as well, as we believe that e-commerce will continue to grow, we should benefit in that area as well.
We have a lot of digitalization and a quite busy digitalization agenda here as well. Just to name the collaborative robots, which of course are giving us productivity gains, which will help us to improve our margin further. Good activities here, and I'm very happy about that development. It was an excellent quarter, and I think there are more to come because the agenda Oscar put in place is really working well. E-commerce Solutions.
I talked already about the growth and the pattern we see. Overall, very strong growth. We are now significantly above the margin of 5% we anticipated for 2025. It's a consequence of a significant lift in volumes. You see that in these kinds of businesses, if you get more volume into the network and if you are above a certain threshold, you should see a very good development of the margin, as you can see here.
That's very positive. An example where we are working on digitalizations is our cross-European product, which will definitely grow faster also in the coming years than the underlying market will grow. I think we are well-positioned here to capture a lot of potential, and Ken and his team are working intensively to make it even better for our customers.
Finally, P&P Germany. You can see here that revenue and volume grew nicely in line, different from the last quarters. That is more a reflection of a year-over-year comparison, because last year we had a tremendous surge in private consumer products, mainly coming from smaller customers who didn't have a contract.
Of course, they pay in a retail outlet a higher price than a customer with a normal contract. We have a slight mix change impact here. That's the reason why revenue has grown in line, only slightly faster than volume different from the last quarters. That is an element of year-over-year comparison. Overall, focus is still on yield, and we continue to be on that. We have the same effect in mail. You can see that here. We have grown. Dialog marketing has grown much faster than the first-class mail.
That leads to significantly bigger volume increase than revenue. That, of course, leads, at the short end, always to some challenges with regard to how much profitability improvement you see. Overall, of course, we are happy to see that volumes in dialog marketing are coming back and that revenue is growing.
Long-term trend is still the same. We should expect a decline year-over-year by -2% to -3%. Of course, we are pretty pleased that we predicted what is happening now and even are slightly better. I think we are in good shape here as well. As I said, there are some challenges with mix in parcel, also mix in mail, and you can see that is also in our profitability development year-over-year. Digitalization. A lot of activities. I think we talked about some of them already before.
I think we don't have to go deeply into that. They have a very busy agenda in the digitalization to make our operations more productive and more customer-friendly. Finally, our ESG highlights of the first half. As you know, we have launched our roadmap in March. We are making good headwinds there. I'm very happy that we now announced two days ago our first purchase of electric cargo planes.
I know that they are carrying only around 1 ton, but they are nice replacements of our old feeder flights, starting in the U.S. We are also progressing with our offerings for our customers with regard to sustainable maritime fuel, as you can see here. A great place to work, of course, is important for us anyway. The second bonus, I think, sends a very strong signal.
We have, just in Germany, vaccinated around 40,000 people in Germany, and I think that is showing as well that we are taking our responsibility quite serious. Overall, also on the ESG agenda, I think good progress based on our strategy. Overall, all five divisions are in very good shape. That has led to these record results. Of course, we are very happy that we can enable and help our customers to grow their business as well after the pandemic has hindered them less to do good business. With that, I hand over to Melanie. Thank you for listening.
Yeah, thank you very much, Frank. Good morning to all of you also from my side. Turning to the condensed financial part of the presentation. When we look at our revenue development, I think Frank already explained all relevant trends. On Page 15, you can see how that adds up to revenue growth of, in absolute terms, EUR 3.5 billion in Q2, 22%. All DHL divisions also on an organic basis growing with more than 20% and Post and Parcel still growing with 7%. It was a very good quarter on the top line, and that was the foundation for them based on very good network utilization, translating that into a very strong EBIT development. On Page 16, you can see that with EUR 2 billion, EUR 83 million, we actually had our best quarter ever.
I mean, the interesting thing is when you look at the half-year EBIT number, adding Q1, Q2, we are close to EUR 4 billion. A couple of years ago, that would have been a great result for a full year. Now we have achieved that after six months. That's, of course, a pleasing development. What is great to see is that all five operating divisions are heavily contributing to those great numbers.
Of course, Express is standing out with more than EUR 1.1 billion EBIT in a single quarter. When you look at the margins, it's a very strong performance for all divisions. Express, 20% EBIT margin, DGFF and Supply Chain both with 6% and DHL eCommerce Solutions at 8%. Very strong performance across all the DHL divisions, and also good performance on the P&P side. Turning to Page 17 and the full P&L.
Yeah, I think the one consequence of a good performance is that we have to pay more taxes. That in combination with an increase in the tax rate, leads to a significant increase in the taxes line. I think that's the only thing to point out in addition on Page 17. Overall, when you add it all up, you can see that consolidated net profit and earnings per share are up more than 140%.
We are able to translate the good top-line development into good EBIT progression and ultimately, despite the increase in taxes, into a very pleasing progress on the net profit development. That's the accounting side. Now turning to the ultimate real thing, cash flow, Page 18. First of all, I want to point out that after six months in terms of free cash flow, we are at more than EUR 2 billion.
That again, would have been a couple of years ago, a number we would have been happy with for a full year. Obviously, the aspiration levels have gone up. When you look at the quarter in itself, I think there are a couple of points I wanted to comment on, because when you take a first look, you may say that, well, EBIT is up EUR 1.17 billion, but free cash flow is only up EUR 300 million.
Why is that? There are four main drivers which are all fully in line with what we had expected. The first one is when you look at the changes in provisions line. In the second quarter of 2020, we actually built provisions, for example, for the StreetScooter repositioning. The positive change in provision EUR 113 was a bit of an unusual thing.
What we now see in Q2 2021 with EUR -87 is a more normal thing. That is a EUR 200 million year-over-year swing. Like in the P&L, we of course also see an impact in terms of taxes paid. That's up EUR 140 million year-over-year. The business is growing heavily. We saw that in the top line, naturally that leads to a certain expansion on the working capital side, which is something we are monitoring very closely and over line with increase in working capital is in line with our expectations. On the cash flow statement also leads to a EUR -229 million year-over-year decrease.
The fourth point I want to comment on, obviously on the CapEx side, given the continued very strong network utilization and volume growth, we keep investing in line with our CapEx guidance, and you can see that in the increase in net CapEx. Those four elements together explain why there's only EUR 300 million in free cash flow improvement.
Again, for the half year, it's a free cash flow of more than EUR 2 billion, and that's all fully in line with our expectations. Much for Q2 and the past. Now turning to what is probably most relevant for you, what to expect going forward. We have included three slides before I come to the guidance page, to give you a bit of background to our thinking about the guidance. The first one is with regard to what we expect on the top line.
You can see that on Page 19. That is basically putting together the individual slides Frank talked about. You can see here in the bottom pack of lines, the B2B development, where we see this continued recovery. We clearly expect that trend to continue in the second half of the year. With regard to the upper pack of lines on the B2C development, we obviously see the normalization in growth, like we had expected for quite some time now. We expect that normalization to continue. It is probably going to be a little bit different country by country. We have to really see how that adds up. I think directionally it's very clear what we assume on the top line.
The big discussion we had is, okay, how do we prepare operations for the second half of the year and particularly for the peak season? When you turn to Page 20, you can see in the middle of the page, our guidance principle that here we really want to make sure that we have the capacity needed in the peak, and that we really want to focus on delivering great service quality for our customers. That means that we are going to plan for a dynamic peak, even though there is a certain risk that it could not be so dynamic, which would then of course lead to us having certain areas of overcapacity.
That is one of the reasons why our guidance for the full year in terms of EBIT may look a little bit conservative, because that is based on the case that, yes, we are incurring the costs to be ready. If volume then doesn't come the way we are expecting, that would lead to a certain cost overhang. That is a conscious decision.
Just to kind of explain that very concretely. For example, in Post and Parcel Germany, you saw in one of the slides Frank talked about that in the second quarter, in our parcel volumes, we were still at the same level like in Q4 2019. We were still running in Q2 on a peak volume. Normally the summer is of course always slower, and we tend to quite significantly reduce costs over the summer months.
We have not done that as aggressively as in the past in anticipation for the strong peak. We already know that this will have an impact on the EBIT margin and P&P in Q3, we believe that this is the right approach to then be ready for the peak season in Q4. That in terms of general philosophy, how we are preparing and managing the second half of the year. On Page 21, I'm not going to go through all the words on the page.
I think the basic message here is we of course understand that there is a lot of debate about inflation out there at the moment. I think for us running network businesses where we have always seen cost inflation over the last years, we are not going to develop something fundamentally radically new to deal with inflation. We will use our well-proven tools.
The most important tool here is our standard price increase mechanism, which we have been executing over the past years, and which we will of course do again, and where we are very clearly taking cost inflation into account to ultimately pass that on to the customers. With that, to the guidance page, which is unchanged compared to what we said on July 7th. We have increased our guidance for the group to more than EUR 7 billion. That fully takes into account the second COVID bonus Frank talked about. We are taking that into consideration. This was about EUR 200 million. Underlying, it would be more than EUR 7.2 billion.
When you look at the medium-term guidance, we have increased that to more than EUR 7.4 billion. We clearly expect a normalization in growth rates. We believe that also in the medium term, we have a good base for further profitable growth, and that is what we're aiming for. I'm not going to go through all the details of the other guidance elements because nothing has changed here. We can of course then cover that in the Q&A. With that, thank you very much from my side and Martin, over to you for the Q&A.
Right over to you, operator, for exactly that.
Ladies and gentlemen, at this time, we will begin the question and answer session. Anyone who wishes to ask a question may press star followed by one on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press star followed by two. If you're using speaker equipment today, please lift the handset before making your selections. Anyone who has a question may press star followed by one at this time. One moment for the first question, please. The first question is from Robert Joynson from Exane BNP Paribas. Please go ahead.
Good morning, everybody. Thank you for the presentation this morning. Three questions from me, please. First of all, on the 2021 guidance, you've been clear that you consider the guidance to be reasonably conservative, partly with respect to peak season planning and the possibility that the network may not be fully utilized.
Could you maybe just provide some color on what type of volume growth you're assuming from a capacity planning perspective versus what kind of volume growth you are factoring into the guidance? Second question concerns next year. Specifically one of the main debates within the investment community is whether 2021 earnings will prove sustainable. Obviously, you provided guidance for 2023, which shows ongoing EBIT growth. Maybe could you talk about 2022 specifically, and potentially whether you see a step down in EBIT during 2022? Third question, just on the outlook for parcel volume. You provided monthly volume data to June in the presentation, which was super helpful.
Maybe just given that lockdown restrictions were eased a little bit further during July, if you do have the July volume data as yet, could you maybe just provide some comments on whether you saw any material changes to the trends during July? Thank you.
Maybe I answer this second question, and Melanie, the first and third. The overall, we believe that if I look into the volume development, and that is, I think, is a driver for the financials. We believe that in 2022, we still have good growth in B2B, and we will see growth year-over-year in parcel volume. That should enable us to generate a positive development of our EBIT.
Of course, not of the scale we have seen last year and this year. We should expect that 2022 should be better than 2021, and that's based on the utilization of our networks. We are very confident that this will happen because I have not found any study yet which suggests that e-commerce will decline. It's always the opposite.
They might be even too bullish in how much volume and growth we will see, and that, of course, drives. What should be the reason why B2B volume should not continue to grow? In key parts of our business, we have network-based businesses. In other areas like Supply Chain, our own internal measures should help us to drive profitability further up. Profitable growth should be there possible as well, and that's the reason why we definitely believe that 2022 will be better than 2021.
All what is happening at the moment is actually something we have predicted already much earlier. We said second half will be climbing down. We will see no growth year-over-year. Maybe we see even decline in certain quarters. None of that is actually surprising. It was always, and some people said we are too conservative.
If you look into our guidance development for this year, we only upgraded that on the delivered numbers, but not on predicting anything greater for the future. That's the reason why we feel comfortable with above EUR 7 billion, because we still expect that we will see certain months where we will see a decline or a mix change or something like that.
Our mantra is, the best and the most important thing is keep going for service quality, and that will pay back next year. That makes me even confident, Robert, to coming back to the original part of your question, why is 2022 better? I'm very sure that we will deliver outstanding service quality in Christmas period, not knowing what would really happen with volumes. That is a great base to then gain market share on top of all the underlying growth next year. That makes me very confident that we will see a good continuation of EBIT growth next year. Melanie, may you take the other two questions?
On kind of volume trends, what we see in July, and what we expect in terms of volume growth and utilization for the rest of the year. In July, we haven't seen anything fundamentally new. We see this anticipated normalization of B2C growth, with B2C volumes staying on a high level. On the B2B side, across the B2B businesses, particularly in the forwarding area, we continue to see very good growth.
That is also what we now expect for the second half of the year. Obviously, good recovery on the B2B side. For the B2C networks, we directionally expect that there will be a peak. There should be, again, an increase. I think it then really depends on the network, whether this will be above the very strong Q4 2020, on the same level, or maybe here and there, slightly below. That is, again, the reason why we have been relatively conservative with our guidance.
Okay. Thank you.
Thank you.
Thanks. Robert, next.
The next question is from Muneeba Kayani from Bank of America, Merrill Lynch. Please go ahead.
Hi, Frank and Melanie. Just following up on July, actually. Just to clarify then, parcel volumes in July remain positive, but below the growth we saw in Q2. Would that be correct? That's my first question. Secondly, just with air freight rates remaining strong, can you help quantify what's the benefit of the strong air freight rates in Express during the first half? How that will impact Express margins as air freight rates potentially normalize over the next two years as belly capacity returns? Thirdly, we've heard from GXO XPO recently on their plans. How are you thinking about your supply chain revenue and margins over the next two, three years? Thank you.
Okay. First of all, on the July volumes, it really depends. We try to show that a little bit on e-com solution slides, with the development, Netherlands still significantly above, U.K. slightly below volume last year. Directionally, it is beginning to normalize more towards last year's levels. We still also have continued growth in some areas. Overall, I would say it's like a normalization with a slightly different timing pattern across the different markets.
On the Express question, I think that's a really interesting one. You saw that maybe in the Express side, where we are showing that the shipment levels are also beginning to normalize, but we see a very strong growth in weight in the network. The main driver for this increase in weight is actually not the spillover from air freight into Express, but the strong B2B recovery.
A B2B Express shipment has a higher average weight. The increase in weight in Express is primarily driven by the B2B volume growth as the volume recovery on the B2B side in the network. There is a bit of a spillover from air freight into Express, that is not the main driver. In terms of the one area where we do see also in Express, the significantly elevated air freight levels, that's on the ESS side. That's where we sell off free capacity in our Express network, into the forwarding market. Here we still see that pricing levels in air freight are significantly higher than the historical level.
In terms of supply chain, it's really nice to see that we now had a 6% EBIT margin in Q2. I think that clearly shows what is possible. I wouldn't say that this is now going to be the case in every quarter going forward, but I think that gives you a good order of magnitude to now aim for. Again, there may be a five-point something quarter in between, but I think that is directionally where we want to go.
In terms of top-line goals, Supply Chain, as you know, is our slowest moving, least network-y type of business. What we can expect here on the top line is less than in the network businesses, but a solid mid-single-digit growth is, I think, a realistic aspiration. I hope that answers your question.
Just a follow-up, please. On Express, is it possible to quantify how much of the revenue in the first half came from selling to forwarding?
Yes, that's a small chunk. When you look at our revenue overall, the prime revenue piece is from the core TDI, which normally is around 85% of overall Express revenue. We look at this ACS revenue as a cost offset. The fundamental way how we are managing things in Express at the moment is we still have higher costs on the aviation side. We use the ACS volume sell-off into the forwarding market as a cost offset. For the delta, which is still there, so the network costs, even despite ACS revenue, are still higher. We are passing on to the customers through this surcharge, which we introduced more than a year ago. That's the fundamental mechanism.
Thank you.
Thank you.
Thanks, Muneeba.
The next question is from the line of Cristian Nedelcu from UBS. Please go ahead.
Hi. Thank you very much for taking my questions. Also, three, if I may. The first one on P&P. Looking at the revenue per unit in Q2, could you talk a little bit about the building blocks, how much you had yield increases, how much was the headwind from mix or other effects there? Also, could you touch on your expectations for the second half of the year in terms of revenue per unit?
Secondly, some of your U.S. peers have talked about issues with availability of workers recently and wage inflation more pronounced than usually. Could you talk a little what you're seeing into your U.S. business in this sense? Thirdly, I think you flagged at Q1 that you are looking at some of the DHL segments at the midterm targets potential there, and pretty much you've delivered more than your midterm targets recently. Could you elaborate a little bit in terms of the timeline? Should we expect you to revise the situation there anytime soon? Thank you.
Yeah. Three good questions. Starting with the P&P question. Yeah, when you look at the revenue volume development in Q2, it obviously looks as if there's no real price increase there. This is really due to the mix effect, which Frank briefly mentioned. That had a very positive yield effect, which we also mentioned at this time. In the first lockdown, lots of private parcels were sent to grandmothers and so on, and lots of small shops also started sending out parcels to their customers. Then had a very positive yield effect in second quarter of 2020 as you already mention at this time. What we now see is a reversal of the trend, or not a reversal, a normalization. In terms of underlying price increases, we are continuing with our yield management approach in Parcel Germany.
That has not changed, and that is the clear focus going forward. You will probably still see this normalization effect in the second half of the year. Obviously going forward in 2022, you should, again, see a good development on the average price per parcel. In terms of U.S. situation, we also see shortages in the labor market and partially significant increases. That is part of the cost inflation we have to deal with, one of the reasons why we included the slide on how we manage cost inflation. It is, I think, for our U.S. colleagues, one of the top priorities at the moment. The feedback we are getting is that so far, they have been able to manage that successfully.
Yeah, last but not least, on what should be our margin aspirations going forward in both divisions like DHL eCommerce Solutions, which are significantly better than what we had originally aimed for. We are now in the second half of the year, going through our regular process for the budget and the new three-year midterm plan. That will be the basis for our guidance, which we are going to give next March.
I think that is then also the right point in time to talk about potential changes to our margin aspirations. I can assure you that it will be, like every year, a very intense discussion between the group functions and the divisions. We will, of course, take into account that they are doing much better than what we had originally aimed for in setting the new targets.
Thank you very much.
Next question is from the line of Andy Chu from Deutsche Bank. Please go ahead.
Thank you. Good morning, everyone. Just one question from me, please, and that's around capital allocation. The cash flow generation of the group clearly is in a very good position. You're already sort of covering your dividend and generating excess liquidity this year, and obviously you have excess liquidity sort of accumulated from prior years.
Given the sort of positive outlook out to 2023, I think you're roughly halfway through your share buyback program, so that could complete by the calendar year-end. Would it be possible for further share buybacks by the year-end given the strength of the cash flow generation and outlook? If not, why not, I guess, in terms of another sort of share buyback program? Thank you.
Yeah. Also a really good question, I think given how well we're doing on the cash side, also quite a natural one. First of all, in terms of where do we stand with regard to the current share buyback program, we are roughly 1/3 through, a bit over EUR 300, that is being executed in the way we announced it. I think our focus now is to really see how the second half of the year plays out. That will be the basis for our decision on the regular dividend. We would kind of like to take a look at the holistic picture once we have really closed the books on 2021.
Okay, thanks very much.
Thank you, Andy.
Next question is from the line of Sathish Sivakumar from Citigroup. Please go ahead.
Yeah. Thank you. Actually, I got a couple of questions. One is actually a follow-up on pricing and Express. The division has actually seen a quarter-on-quarter improvement in pricing. If you could actually comment on the exit rate, right, what are we seeing in June? Also, what are you actually seeing currently in the pricing in Express, and what is actually driving?
Is it underlying yield improvement, or is it also driven by surcharges given the disruptions that we are seeing right now? Secondly, again, pricing, but in Air and Sea Freight. What is your expectation in terms of normalization levels for both GP per ton and GP per TEU? Where do you expect it to normalize, and when do you also start to see that normalization levels? Thank you.
On the Express pricing, I think two parts in terms of answer. The first one is, our fundamental pricing mechanism in Express has always been our annual GPI process. I think that is still the fundamental driver for getting up the yield in a very continuous fashion and, of course, also compensating for cost inflation. We then introduced in Q2 of 2020 our emergency surcharge due to the tightness in the aviation market and the increased cost that brought with that. We have been relatively stable and consistent on that surcharge. We haven't modified the surcharging mechanism materially over the last 12 months. It is still in place, and it is working really well to offset the additional costs we have on the aviation side.
That is really offsetting the cost, so that is not the real driver for the margin development we are seeing. In terms of air freight, ocean freight rate development, yeah, obviously rates are still at very elevated levels both on the air and on the ocean freight side. We do expect a normalization, but it will be a normalization over time.
On the ocean freight side, it is probably going to be a bit faster than on the air freight side, but the clear expectation is that levels will stay high for the rest of the year. I think the next interesting point in time to really see a movement in the ocean freight rate development will be post Chinese New Year. Towards the end of the first quarter of 2022. On the air freight side, clear expectation is that particularly on the intercontinental side, it will take even longer for rates to normalize.
Thank you. Just a follow-up, actually, on the annual GPI process. Is it like any particular timeline that you do it a specific point in time, or is it more of a rolling contracts depending upon the customers? W ith the inflation expectations going into next year, what do you see the potential impact on that GPI would be?
Yeah. The general GPI process is a very established mechanism in Express that always happens in the second half of the year, where we then also very explicitly, country by country, announce our average price increase so that our customers can then plan for that also for their budgets for the next year. We take a number of factors into account. Of course, cost inflation being one of the most important ones.
There are also other elements in there in the global express network, like for example, currency developments. If you have a local currency which depreciates in a more lasting way, given that the aviation network is paid in hard currency, you then also have to take the currency development into account. There are a number of factors. It's a really well-oiled machine. That is also what will now happen in the regular way in the second half of the year.
If you take Express, P&P and eCommerce Solutions, where we have more rate card process anyway, you should always think of these will remain for the next coming years, capacity-constrained industries. The process to build the capacity for the tremendous volume growth we have experienced and now we continue near on that pace, will limit the capacity everybody has in the industry in total has.
In Express, we have seen great price discipline already in the past where we had not that situation. I can't see why we should not have price increase discipline in the future. That means, if we are faced with price inflation, of course, we will look that the customers are paying for that because they have to pay for the fantastic service we provide. In eCommerce Solutions and P&P, the same situation.
P&P, we have seen in the last years that we are leading the pack and our competitors have followed us. In e-commerce solutions, we will definitely follow the respective incumbent where they are larger, and they will do something as well. We will follow that as well, because this is still a supplier market. There will be more demand than capacities available, and therefore it will lead to price discipline, and that's the reason why inflation will be converted back to customers, I have no doubt.
We have seen that due to different reasons, and therefore, I'm not worried about that because we will find a way to push it back to the customers. If you talked about and asked about that, but that's a different model. There, the area is, yes, the rates will come down, as Melanie said, ocean first and then air freight.
We have also here a nice element. Our TMS is now in full swing, and we have not even captured. We have started to capture the potential which that offers for us for GP to EBIT conversion. Even if the GP growth is not continuing, we have still an opportunity to improve our GP to EBIT conversion.
In supply chain, it's different anyway. We have significant open book contracts and, of course, the contracts will reflect that as well. Typically, that if there's labor inflation, that the customers have to pay for it. It's different by division. Overall, to be honest, inflation is not my biggest worry because the industry, I think, is in a good spot to push it further onto our customers.
Okay. Yeah. Thanks. Melanie, thanks very much.
You're welcome.
Next question is from the line of Alexia Dogani from Barclays. Please go ahead.
Yeah, good morning. I had three questions as well, two on DHL Express and just one on Air Cargo. Just on DHL Express, I mean, clearly margin of 20% is extremely impressive. We understand that network utilization is really what is driving the performance here. Can you just give us a bit of an indication of where load factor is at the moment, and whether you think there are any structural reasons why you couldn't close the gap to sort of industry leader? Secondly, again on DHL Express, your recent decision to commit to 12 Eviation planes, is this within the CapEx guidance already? Can you just give us a little bit of your thinking behind that.
Finally, on the air cargo market, do you believe that post these past 12 months of significant disruption in belly and ocean, has there been any structural changes in the market that will be sustained, be it, I don't know, the share of Express operators or dedicated freighter networks? Just keen on your thoughts whether we are seeing a step change in structure post this period. Thank you.
On the load factors, it's really difficult to give an aggregate number here because that totally varies from lane to lane. I think for us, the important number we always look at to judge the overall performance in our aviation network, is a number which we call cost per kilo. This cost per kilo is including the offset by selling off the excess capacity.
When you look at the development we have seen in this CPK, it really moved up significantly in 2020. That was the reason why then on the revenue side, we had to introduce this emergency surcharge. We now see a beginning positive trend. When you look at the lines for 2020, it's significantly above 2019. We are now really getting closer to the 2020 and more normal levels. It is moving in the right direction. One important input factor for that is the quite good overall load factor we're seeing.
We don't see any structural change in the industry. What we see at the moment is that just because the integrators have capacity, they are also used for more air freight capacity. Historically, we always have seen if the economy gets weaker, then you have an up trading for an air freight to Express and a downtrade from air freight to ocean.
That probably will happen over the next cycle as well. Express will remain a niche in the whole air freight market. It's also from a decision-making point, a niche. People expect from this niche a superb quality, which we provide, and that's the reason why the margin is so healthy. We can lengthily discuss. We have our own view on the margins. We believe we are best in class and better than UPS margins.
It's a little bit how you look into the best numbers and what you combine, but I think we are providing now, and you can see that also in the second quarter, the total numbers, I think the total profitability of our group has never been more close to UPS total numbers, despite that they have a big machine domestically.
We are less dependent on any major market. You had a big question earlier about the labor market in the U.S. Yes, it's a challenge. It's for everybody a challenge, but it's for us a tiny challenge in comparison to others. We have it in the U.K., some challenges, yes. If you ask me, yes, it's also a tiny challenge for us in comparison to the group. That is the benefit of our portfolio somehow.
You see that in the second quarter, you easily can see that we are getting more profitable across the divisions and closing even in absolute terms, the gap to the largest, this is UPS. That is based on our overall portfolio. I don't see any structural change in that. I think we are so well equipped because we are benefiting around the world from B2C and B2B, and that makes me confident. We had a question around future outlook.
That's the reason why we deliver next year more profit than this year, and afterwards more, at least with a lower growth rate. The questions are all linked somehow to each other. We are pretty confident that we can keep a good margin. We are not guiding for margins, but also in our Express division, I think we are in a good spot.
The Alice question.
Yeah, the Alice question is, of course, included in our EUR 7 billion guidance. It will not materialize partially only, I think, in 2023. We have still a lot of lead time, of course, it will be accounted for in our EUR 7 billion. The incremental additional cost, not the total cost, because we have to buy airplanes and replace the current feeder flights anyway, we will accommodate that. I think we are not allowed to talk about the pricing yet.
No, we're not going to talk about numbers, but I think to put things into perspective. We are totally excited about this very innovative new technology and that we can really pioneer here in using electric planes. Those are small feeder planes. They carry a ton. In terms of overall CapEx, that is really from a group perspective, not a very significant number. I think we also have to be realistic in terms of CO2 reduction we will get through this. This is going to be a step in the right direction, but it's not going to be the big thing, I think for aviation for the next decade, given that it depends on the bigger aircraft, it is still about sustainable aviation fuel. That is the biggest driver of our EUR 7 billion, and nothing has changed here.
Alex, yeah, thank you for the question. Maybe that gives me the opportunity to say one more thing on the whole ESG thing, also in terms of expectation management. When we gave our guidance and committed to reduction in our CO2 footprint till 2030, we already had taken into account that we would not see a reduction in absolute CO2 footprint in the early years, because again, it's depending on sustainable aviation fuel being available in sufficient quantity, and that's just not the case.
What we clearly now expect for this year is that there will be an increase in our CO2 footprint, and that shouldn't come as a surprise to anybody, given the very significant volume growth we see in Express and air freight, particularly. Just wanted to use that opportunity to also clarify that.
Thank you.
Next question is from the line of Alex Irving from Bernstein. Please go ahead.
Hi. Good morning. Two from me, please. First one on margin development in P&P into the medium term. We've seen GLS announce their ambitions to grow in the B2C market. Does that mean rising competitive intensity in Germany? Could there actually be pressure on parcel pricing in that event?
If so, are there any offsets to this that you can accomplish? Where are you seeing margins in the medium term in that business? Second, one question on DGFF, please. The rollout of CargoWise is done. Conversion margins are starting to improve. Is there therefore now a case to start doing acquisitions in this business, which we've seen being quite accretive at some of your competitors? How are you currently thinking about that, please.
Yeah. Maybe I take both. On the P&P margins, I think you should, and I said that already before in calls. GLS were not particularly. That's a small business in comparison, so that's another player a nd of course, it's some challenges for them as well in the German market itself, that market infrastructure they have. But you should fundamentally think, we always said around 10% margin is something we are going for.
Much significantly more long term, it's probably difficult because then the regulator might say why we should increase pricing and on stamp price. I think a sustainable margin around 10% is, I think, the long-term ambition and I think realistic to achieve. We have seen that as well, DPD went into the market.
As I said already earlier, there will be more capacity constraints than enough capacity to fuel the growth and therefore I expect a good margin. On the M&A, we always say the same. Of course, if there is a good opportunity. There is no strategic must-have to do something. I think if there's a good opportunity to augment our capabilities, we would do that in supply chain, we would also do that in DGF.
We don't have a need. We have the biggest and most global network in the industry, different from some other players who were more active recently. That's the reason we don't have a need. If there's a good opportunity, we would consider that as well, because that is what you should expect as well as shareholders.
That we are looking into and make good use of the free cash flow we generate if there is a good target. It's a generic answer, unfortunately, but I can't say more about that. In principle, if there is a good target which would help us to grow our business faster, we definitely will go for it. Is there a need to do that? No. It's driven by, it's opportunistically by opportunity and not strategic movement. I think that is what we have said already before. We have looked in the past and look into the future in the same way.
Okay, thanks.
You're welcome.
Next question is from the line of David Kerstens from Jefferies. Please go ahead.
Hi. Good morning, everybody. Three questions on P&P, please. I was wondering if you have seen any impact on your volume trends, following the end of lockdown, which I think was in the middle of May, so right in the middle of the second quarter. It seems that your parcel volumes held up very well after the end of lockdown. Was there any impact maybe on the recovery and dialog marketing?
Also mail communication remains very resilient. I was wondering if that number might have been helped by some one-off mailings in the second quarter, for example, such as vaccination letters. Finally, you continue to expand the Packstation network now to 12,500 Packstations. I was wondering, can you give an indication of how much volume is going to these stations today?
I think at your Capital Markets Day, you were aiming for 10% by 2025. How much would that be with 12,500 Packstations? What is the optimal number of Packstations in Germany longer term? Do you expect that this could become the dominant parcel delivery method longer term in Germany? Thank you very much.
On the volume trends, first of all, on the parcel side, as you saw, we are still at very high levels. In the second quarter, we were on what was the peak in 2019. Still way more than 7 million parcels on average per day in the network. We are now seeing this normalization in growth, but it is clearly also after the end of the lockdown, staying at this elevated level, which we had anticipated. We indeed believe that there is a bit of a temporary boost on the dialog marketing volumes.
When you look at the year-over-year comparison, I think that is impacted by the really extremely low volumes we had in Q2 2020. We believe that there is also a little bit of advertising boost to get people back into the shops. When you look at the volume growth overall, and the trends in both, we believe that. With that e-substitution , COVID has clearly pushed us to a lower level than before the pandemic. The Q2 mail communication numbers are not meaning any significant change in trend.
We believe that we have gone down to a lower level, and our best expectation is that the normalization over time will take us back to the historical decline rate. I think that is what we will now gradually be setting in, probably not so much in the second half of the year, but more than towards 2022. With regard to the Packstation, yes, indeed, we are aiming to, over time, get about 10% of the parcel volume into the Packstation. The continued build-out is, of course, creating the infrastructure for that.
The Germans love their parcels to be delivered to their homes. We don't think this will become the dominant way of deliveries like we are seeing in some other markets. I think the 10% aspiration is still an ambitious target. We still have some way to get there.
Maybe coming back to the first question. We don't know yet because summer season is not over. Personally, I expect more impact from that people are going on vacation again than on the end of the lockdown on the volume growth. I always reflect what I see doing myself and my family is doing. You are also. Have you gone in the same way back to the stores as you have done before, or your partner or your kids? Probably not.
No.
Are you going on vacation again? Yes. Are you ordering a lot on your vacation? No. Therefore, the vacation, which we now see in July, August, and September, I believe will have a significantly bigger impact year-over-year than the end of the lockdown. That is speculation and observing myself. I was already on vacation, and I have not ordered anything during the vacation.
I have probably not had any two weeks in the past year where my family or I didn't order anything. That's the reason why that impact is bigger than the lockdown. To be honest, if I see not only my direct family, but also friends, they say, it's so convenient to get stuff home. Why should I go for that stuff in the city now? They go there for restaurants. They are busy. I see that as well here.
That is what humans are doing, and vacation is so fundamental. That's the reason why we probably will see relatively weak summer period, not only in P&P, but Melanie referred to that already. Knowing that, we say, okay, but now cutting capacity would be weird because then we might miss the service quality in autumn and Christmas, and therefore, be better that just to bullet and say, okay, we compromise on EBIT for a certain month or two.
We are well prepared. Next year, of course, we will be more back to normal, and then we will do what we have always done, learning from the past. It's not a lasting effect, even if you compromise. We did actually, you might remember, I said last year in May, we will compromise on EBIT, we will not compromise on service quality.
I think that was a good advice to the organization, and it has worked very well for us, and I have no doubt that this will work in the future in the same way. We are living still in volatile times. I think the priority for us is to focus on the best service quality and to protect our people.
Understood. Thank you very much.
Next question is from the line of Sumit Mehrotra from Societe Generale. Please go ahead.
Morning. Well, good luck with Alice. We all want this to succeed, yeah. Fully conscious of Frank's responses earlier, but still delving into the earnings durability aspect a bit more on Express. Yeah, 19% EBIT margins in first half. Can we expect similar levels in Q4 peak? From what can we draw confidence that 2022, we won't see any steep step down versus the 2021 levels in Express? That's for Express. In freight forwarding conversion rates, yes, quite impressive. How can you show that the conversion rates will stick, and they won't come down to, say, 15%-16% levels earlier we saw in 2019 and 2018? Thank you.
Yeah. On the Express margins, obviously, what we have now seen in the first half, 2% is really a very perfect combination of the right volume in a very mixed balance flowing through the network. I think that shows what the Express network is capable of. As explained, in general, we are now really focusing on quality and how good the margin and the utilization will be in the second half of the year will really depend now on the volume development. It should be on a very good level for Express. How good it is will now really depend on how exactly the volume patterns play out in the second half of the year.
Overall, I think we will also, in terms of absolute numbers, see a good performance from Express in the second half of the year. The good thing, coming to your 2022 question, is that we believe that we are now seeing the beginning of the normalization in B2C. That's probably going to impact the second half of the year in Express already. That is going to be a good basis for performance on the B2C side into 2022.
On the B2B side, given the general dynamic of the global economy, we also think that there is further growth potential into 2022, and that would, of course, benefit the B2B volumes for Express. That is the basis for our outlook for Express into 2022. Again, we will give the full 2022 guidance in next March when we really see and know how the second half of 2021 has played out.
With regard to the GP conversion in Global Forwarding, before COVID, yes, there was a time before COVID, even though it feels long ago. We had very clearly said that we want to improve our GP conversion based on the benefits of our new transport management system. We had aimed for 20% in 2020 in terms of DGF core GP to EBIT conversion, then gradually taking that up by 100 to 200 basis points year-over-year, based really on our fundamental internal process improvements, and nothing has changed about that.
This underlying improvement should still continue. Of course, at the moment, the abnormally high GP levels are boosting the conversion. There will be a bit of a fade-off on that, but this underlying progression should continue.
If you look into what can lead in drop in profitability in margin. We talked already about volume development. We are confident that we will see positive volume development on e-commerce B2C growth. Not even talked about B2B commerce, which will help us as well because it takes bigger pieces, pallets and containers down to parcel levels somehow more.
That should help us there. Pricing, I talked already about quite intensively that I believe we have a level for next year's capacity constraints, which should be good there. We don't expect a volume drop. We don't expect a price war somehow in the network businesses. Melanie referred already, DGF is different, but we have a lot of opportunities from GP to EBIT improvements.
If you look then into our guidance, we, of course, will not continue to grow the bottom line in the same way. That's a mixture of maybe, yes, we see a slight decline in some margins, but we definitely will see a continuation of growth. That's the reason why our numbers for 2023, I think are prudent and realistic and not dreaming that everything will be in the same way as it was in the last quarters.
The fundamentals like pricing, volumes, capacity will not change. In supply chain and DGF, I think we have a lot of opportunities for our internal measures to improve their profitability further. Finally, in the network business, you have seen what scale means. We had a target of 5% in eCommerce Solutions. Now we are at 8%, trading in the last two quarters. That shows you.
If volumes are not disappearing, and I can't see any reason that there's a fundamental shift of the margins to a higher level as we have seen. If that's at 20% sustainable on a lower level, that's a different question. If you take all elements together, you probably would come up to that our guidance for 2023 is a pretty decent one.
Thank you very much.
You're welcome.
Next question is from the line of Sam Bland from JP Morgan. Please go ahead.
Oh, thanks. I have two questions, please. The first one is on B2B volume. We've heard about how when we get through to Q4, for example, we might see some normalization on the B2C side. Can you talk about how depressed B2B volumes still were in the second half of last year? Could we see, although B2C is a bit lower, maybe year-on-year, we still get quite a nice boost from B2B.
The second question is, in Express, are we right in thinking that really the main driver of the higher profit in Express is the higher volumes? There's not some piece of the profitability that's going to unwind or isn't sustainable, whether it's the ACS, whether it's your air freight capacity comes back, whether it's surcharges. Is it really kind of just higher volume and that's what's driving the Express profitability? Thank you.
Yeah, I think the surcharges, of course, play a role. The Express industry has not played the game like in the forwarding industry. We can't do that with customers anyway. The customers understand that our costs didn't go through the roof. We had a higher cost for freighters instead of belly space, and of course, that has led to the ETS charge. If that goes away, there are certain costs are going away as well.
We will then operate less freighters on certain routes where we have belly capacity, and then our costs are down as well. I think the whole Express industry has treated customers with poor pricing differently from the forwarding industry. In forwarding, if you buy higher, you have to charge your customer higher.
That is fully understood by all customers that the forwarding industry is different from the Express industry. As I said already, when the prices in the forwarding industry are coming down, you see maybe our GP per ton and GP per TEU comes down, but our conversions can still go up from GP to EBIT. On B2B, I think your assumption is right. I can't see at the moment any reason why we should not have a very strong B2B growth in the second half as well. I agree to that.
Okay, understood. Thank you.
You're welcome.
There are no further questions at this time, and I would like to hand back to Martin Ziegenbalg for closing comments. Please go ahead.
Right. Thank you, operator. We sort of missed my 60-minute target. That is for the colleagues at Lufthansa to bear the consequences with their call. Okay. Thank you very much for joining. Before I hand over to Frank for his closing remarks.
Yeah, thank you for listening and for your interesting questions. I think they were all spot on, and of course, these are the questions we are discussing internally as well. Hopefully, you heard that, of course, nobody knows what will happen. We are quite confident that our guidance for this year is achievable and also beyond. It feels good.
The company is doing the right stuff. We have five divisions who are knowing what the program is, our strategy fits well, and that's the reason why I'm confident that we will deliver what we have promised this year and beyond. With that, thank you very much for listening, and hopefully in a not too far distant future, we might see each other again in person. Thank you very much. Bye for today.
Thank you.
Bye.