Deutsche Post AG (OTCPK:DPSTF) Q2 2016 Earnings Conference Call August 3, 2016 8:00 AM ET
Martin Ziegenbalg - IR
Lawrence Rosen - CFO
Melanie Kreis - CFO Elect
Tobias Sittig - MainFirst Bank
Christopher Combe - JPMorgan
David Ross - Stifel Nicolaus
Damian Brewer - RBC Capital Markets
Matija Gergolet - Goldman Sachs
Mark McVicar - Barclays
Andy Chu - Deutsche Bank
Neil Glynn - Credit Suisse
Andre Mulder - Kepler Cheuvreux
Welcome to the Deutsche Post DHL Conference Call regarding the Second Quarter Results 2016. [Operator Instructions]
Let me now hand the floor over to Martin Ziegenbalg.
Thank you and hello and good afternoon to everyone out there, to our Q2 earnings call. I take it you've seen all the numbers and the presentation is in front of you and as flagged in our invitation. I'm sitting next to Larry Rosen. I'm handing over to Larry right away.
Great, thank you, Martin and thanks to all of you for joining the call today. I'm very pleased to review our Q2 first half results. Before we begin though with that, I would like to welcome Melanie Kreis to the call. As many of you know, Melanie will succeed me as Group CFO on October 1 and I'd like to invite Melanie to say a few words before we get started with the Q2 results.
A - Melanie Kreis
Yes, thank you very much for the introduction, Larry and good afternoon, good morning to all of you. I'm glad to be able to join this call today, two months before I will take over from Larry on October 1. Larry will take you through our Q2 numbers today and I will focus on listening, as this is a really good opportunity for me to get a first-hand feeling for your questions and your topics for discussion. I then hope to meet all of you sometime soon, potentially in the beginning of October for our capital markets tutorial workshop which Martin is going to introduce and tell you more about at the end of this call.
I certainly really look forward to working with you and with that, back to you, Larry, for our Q2 numbers.
Okay, thank you, Melanie. As usual, I'll start with the highlights for the quarter and then finish up with a review of our guidance for 2016 and also our 2020 targets. So let's now turn to the quarterly figures on page 2. Overall, after a good start to the year in Q1, we've seen a continuation of the positive trend in all four divisions in Q2. In PeP and express, volume, particularly in parcels and B2C, continues to drive growth. In our forwarding division, our turnaround initiatives are starting to bear fruit and our recovery is steadily continuing.
Similarly, in supply chain we continue to move forward towards our 2020 goals, as we continue to sign attractive new contracts while we work through our restructuring agenda. Finally, we had a strong cash flow performance in the quarter and we'll see more details on that in just a minute. So as we look into the second half, we're pleased to see that our key growth trends are intact and we're able to confirm all aspects of both our 2016 and 2020 guidance.
On page 3, you see some highlights from the P&L for the quarter and as we've seen for several quarters in a row now, foreign currency, lower fuel surcharges and also the new contract structure for our NHS business in the UK, all affect the revenue line. But excluding those effects, Group revenue would have been up 4.1% for the quarter, a nice acceleration from the comparable Q1 level of 1.4%. EBIT continues its strong recovery trend from our 2015 transition year, in particular in PeP, where of course we had the base effect from the strike in 2015. The DHL divisions also strongly contributed, in particular express and also forwarding and I'll further outline that in a couple of minutes. Financial results improved and the tax rate was 14%, as forecast which led to an overall 66% improvement in net income.
And on page 4, you see our cash flow performance for the quarter. And of course this quarter there is a significant distortion to operating cash flow, as the pension funding we did at the beginning of April in the amount of €1 billion moves through the change in provision line. Of course, we financed that pension funding with a couple of debt issues which had a positive effect on financing cash flow which of course is not part of the free cash flow calculation that you see here. Overall, we saw significant improvement in underlying operating cash flow generation, primarily as a result of our EBIT improvement, but also as well, good working capital management. Adjusted for the pension funding, free cash flow also significantly improved, despite higher CapEx and a lower contribution from asset sales. You remember we sold most of our shares in Sinotrans during the second quarter of last year and also the first part of our sale of the King's Cross real estate project in London.
So on to page 5, you see our net debt development which pretty much follows the usual trend toward the middle of the year, due to the annual dividend payment, due to the civil servant pension payment which we only do once per year at the beginning of the year. And this year, due to the pension funding of €1 billion, net debt was further affected by that pension funding. And the good news about it is that the funding more than offset the effect of the discount rate decline we saw during the quarter, so that our net pension provision is lower in absolute terms. Of course, you have to add to that the good asset performance that we had in the second quarter and the first half of the year. And that all brings our funding ratio to 67% which for us is, for the time being, quite a comfortable level. Also on a positive note, the recent European Court decision against the Competition Commission on our state aid case means that the €378 million that were in escrow since 2012 has been released back to us. Let me remind you that that has no effect on EBIT or on free cash flow, but it does reduce our net debt by that same amount.
Now let me come to the divisional highlights and starting with PeP on page 6. Our German post and parcel numbers show some distortion stemming from the strike that we suffered in Q2 of the previous year, as well as the higher number of working days in the quarter. So we had three more working days in Q2 this year compared to last year. And we do see lower per day volumes, but the full strike effect and thus the comparison base, is hard to quantify precisely during this quarter. We don't see, however, a fundamental change in trend at this juncture, so while we do see some price elasticity effects from the price increase at the beginning of the year, we stick to our long term forecast of 2% to 3% volume decline in the letter business going forward. Parcel Germany continues its strong volume and revenue growth and our international activities in parcel and ecommerce in Europe and also outside of Europe continue their successful expansion.
As announced in a separate statement earlier today, we're withdrawing from the long distance bus market and selling our bus business to FlixMobility GmbH, the market leader in Germany. As part of the sales agreement, Flixbus will take over bus line and bus stop permits, IT licenses and cooperation agreements. A marketing and sales cooperation agreement has also been signed with Flixbus and both companies have agreed to keep the purchase price confidential.
Now on page 7, to give some more color to the statistics, I want to highlight the recent opening of our new sorting center in Obertshausen in Germany. It's the largest and most modern of its kind in Germany and supports the steady growth of ecommerce. Today our customers demand ever-increasing levels of flexibility when it comes to delivery times, options for delivery and traceability and this new facility and others like it will be instrumental to meet those demands. And this network investment is one of many that enables us to maintain our leading position in the German market and also outside of Germany. Along the same lines, on page 8, we recently extended our same-day and also time-window delivery options for customers in Germany. Having launched same-day services already in 2012, we're by far the established market leader in that field, working with a broad range of customers. And you see some of those named on the right side of the chart.
We're covering all major metropolitan areas with about 30 million addressable consumers covered in those areas. We've now extended the delivery option towards time-windows across the whole day, starting already at 10.00 am. In order to further optimize our delivery options for the whole country, we've also extended our evening time window offering. Since July, i.e. last month, an evening delivery between 6.00 pm and 9.00 pm is now available throughout the entire country. And this offering is enabled by the network and technology investments like Obertshausen that we've made over the last years.
On slide 9 we have the PeP reporting KPIs and you see that Germany EBIT is significantly up, due to last year's strike, as well as the strong operating performance driven by parcel growth and also the stamp price increase. In our international activities, the continuing investments in our international delivery network continue as expected to offset underlying operating profitability. Despite that the bulk of the pension funding affected the PeP division and therefore, heavily impacted PeP operating cash flow, the cash flow performance was actually quite strong on the back of higher EBIT and also good working capital management.
And moving over to express on slide 10, global trends that we've seen now for numerous quarters continue with B2B growth being increasingly supplemented by rising high value cross-border B2C volumes. As we've seen in previous years, customer demand for our speedy and secure delivery service, fostered by our unparalleled geographic footprint and our commitment to quality, continues to outpace overall industry growth, leading to steady market share gains. And here all regions are playing a role.
On slide 11 we see the ongoing effect that both foreign exchange and lower fuel surcharges have on revenue growth only reported at 2%. But it would have been 7% if we adjust for both of those effects. At the same, we see our good volume growth combines with our increased focus on yield and also measures to manage the ongoing foreign exchange headwind to translate into very strong EBIT and cash flow growth. Our EBIT margin reached a record 11.9% in the quarter which is, however, partly also reflecting the lower reported revenue growth. As our CapEx figure shows, we remain committed to that strong growth track through our network investments in order to maintain best-in-class service quality and the right levels of both air and ground capacity.
And turning to forwarding on slide 12, we can see that the forwarding industry continues to be a tough space to operate especially on the air freight side. We maintain a disciplined selectivity in our commercial strategy which led again to below market air freight growth and growth in line with the market for ocean freight. So ocean freight we grew at 3% and we estimate the market grew at about 3%. Air freight was minus 4.7%. We think the market grew at about minus 1% in the quarter. This selectivity and focus on gross profit is important to our recovery. As one part of the turnaround measures which continue to drive improving operating performance. And we'll look at a few more details on that on the next page.
And here on page 13, I'd like to first address those turnaround measures in a bit more detail. As we said last year, our first priority was to adjust the organizational structure, re-empower the countries and implement incremental internal optimization measures with the objective of returning to our earlier profitability levels. Over the past five quarters, we have made substantial progress, but we still have much further to go and we continue a steady pace of implementation for all of those measures. This year, we've also begun the implementation of our new IT transformation which combines the rollout of existing internally-developed systems with a new, off-the-shelf transport management system or TMS.
This step-by-step very deliberate approach will have an overall lower OpEx and CapEx profile than NFE did while in the longer term allowing us to close the EBIT to gross profit conversion gap for the best-in-class competitors. And meanwhile on slide 14, we see how those elements came together in Q2. In particular, I'd like to highlight the strong improvement in EBIT from a low base despite the very subdued market volumes, especially in air freight. And it's the result of our focus on gross profit and our steady sequential gain in our EBIT to gross profit conversion ratio.
And now on page 15, we look at supply chain. Where we saw an increase in new signings, all while maintaining our very focused approach to new business in terms of financial attractiveness, risk profile and sector targeting. Retail, consumer and automotive continue to be the biggest sectors for the division. And we also continue to deploy the proceeds from the sale of our final tranche of our stake in the King's Cross development as planned. So if you remember, we've sold the rest of our King's Cross stake in Q1 and we're using that to fund the additional restructuring investments that we're making this year. In the first quarter, we had €25 million of restructuring expenditures. This quarter, €16 million so €40 million for the first half against a profit of around €60 million from King's Cross. So the expectation for the second half is for around €20 million of additional restructuring investments over the final two quarters of the year.
And now for the supply chain KPIs on slide 16. Yes, we continue to see the top line distortion caused by the contract change in our NHS contract. We've only got one more quarter to go and then that effect should be concluded. You'll be able to better see our underlying progress once more. If you adjust for the contract change, if you adjust for currencies and also fuel cost changes, we calculate a like-for-like revenue growth of 4.4%. The supply chain EBIT continues to pursue its restructuring agenda as we move towards positioning the division optimally to achieve our 2020 goal of 4% to 5% EBIT margin. This quarter, we had some cash flow volatility, primarily as a function of working capital improvement and also a very low comparison base in the previous year.
And on page 17, you see all the components of our guidance for 2016 and also 2020. And today, we reconfirm all the elements of our guidance. They remain unchanged today on August 3, 2016. Please note that we here exclude the effects of the pension funding from our free cash flow target.
Now to conclude, on page 18, we feel very confident that our performance in the first half has set the stage for us to fully deliver on our 2016 guidance. The ecommerce megatrend continues to drive growth expectations, especially for PeP but also increasingly for Express while we continue to make good progress in our restructuring and optimization programs in forwarding and supply chain.
As CFO and I guess others in the Company too, are particularly pleased by the progress that we make towards sustainable free cash flow growth. How that supports our finance policy which we introduced several years ago and which allowed us to be able to start a share buyback program for the first time in the Company's history earlier this year. So just on a personal note, looking back, the Company has made great strides in terms of focus, profitability, resilience to business cycles since I came on board in mid-2009 so I feel very comfortable and confident leaving the role in Melanie's very competent hands. I know that she's absolutely the right person to continue supporting our CEO, the other Board colleagues and the entire organization as we move forward towards achieving our goals for 2020.
At this point and before we start the Q&A session, I'm going to hand back to Martin to talk about the planned tutorial for October.
Yes, thank you, Larry. And yes, just as a bit of a heads up, as you've seen also the invitation this morning, we're glad to continue our series of tutorial workshops. And as you know, e-commerce, ever since the introduction of our strategy 2020 is one of the core growth drivers. And therefore we're pleased to set up this workshop on a Friday morning, hosted by Melanie on October 7. So a very early opportunity for you to meet with her in person. And we have presenting our Head of Corporate Development, we have of course presenting the CEO, DHL Parcel which is going to cover both German and Europe, obviously. Katja Herbst, the Chief Sales Officer is going to share with you how we tackle the market. But it's not confined to the PeP activities but also John Pearson and Charlie Dobbie, who you may know from earlier capital markets events. Are going to share with you how e-commerce is a reality in the Express network.
And therefore, we're looking forward to see many of you on Friday October 7. And with that little advertisement, we go into the Q&A round, please.
[Operator Instructions]. And the first question comes from Tobias Sittig from MainFirst. May we have your question, please?
Three questions from me if I may. Firstly, could you expand a little bit on the market share performance in the PeP division both in mail and parcel because we hear that Zalando has given some volume to Hermes? So just wondering whether it was the strength of the market overall or market share gains which drove the volume development there? Secondly, if you could walk us a little but through the earnings bridge on the supply chain side. I understand there's some currency headwinds and provisions and lower real estate gains. But given the restructuring you did, I would have expected at least some progress on underlying EBIT in the supply chain division and I don't really see that.
And thirdly, if you could update us on the tax rate and CapEx guidance beyond 2016? Will we be seeing normalized CapEx rates of around 3% of sales and also a normalized tax rate? How do you look at that from -- sorry, 2017 -- how do you look at that today? Thank you.
Okay, so yes, the market share in mail and parcels, we think didn't change much in Q2. Of course, because we're such a big part of the market for mail or for letters, we think that we're pretty representative of market growth and so we don't think there is much change there. So we had a very good growth rate in parcels, at 12%. But adjusting for working days, that was around 7%. We think that's pretty close to where the market was growing and so we don't think there's really been much change, at least in Q2, in the parcel business.
So in supply chain, indeed we had the €16 million of restructuring expense which made the result then look flat for the quarter. But we had some one-time effects also in Q2 of last year. So we actually had an underlying positive progression in our EBIT for the supply chain division in Q2. So in terms of our tax rate and CapEx guidance beyond 2016, I think I would like to leave that for future calls. In particular, at the beginning of the year, we traditionally are announcing our best call on the tax rate for the year as well as our CapEx guidance.
The 3% goal that we talked about for the CapEx in terms of 3% of revenues is still very roughly valid, although you have to take into account some currency changes from the time that we made that call. So as we're this year a little bit higher than 3%, some years we might be just a bit higher. But it's still very roughly a pretty good guide for where CapEx should go in the next years.
The next question comes from Christopher Combe from JPMorgan.
A couple of questions from me. First on working capital. In the past, you expressed an expectation to retain half or so of last year's substantial gains but this year, thus far, you seem to be hanging onto all of them. So has that perception changed? Are you perhaps a bit more optimistic? And then second, with respect to day counts you just gave us your assessment for the impact on parcels. How much day count effect would you ascribe to the mail result?
And then lastly, if we look at the pension liability, corporate yields appear to be comparable to Q1 2015 yet the liability is probably €1.5 billion lower like for like. Just wondering what the key drivers are there? Thanks.
Yes, so working capital, we're doing slightly better than we thought we would do. We have retained a big part of the improvement that we saw, especially in Q4 of last year. And we thought we'd give back about half of it over the year and it's turned out to be a bit less than half, so we're actually doing a little better on working capital. And it's both receivables performance and also payables performance that are both doing just a bit better than we thought that we were going to do.
Yes, the day count effect in mail, as I said, is hard to quantify or hard to characterize. For one thing, a three-day difference in a quarter is a huge difference. Usually the difference is one day or a half day or once in a while you get two days, but very rarely do you get a three day difference in the working day count and so it's hard to tell whether each day should be counted as a full day of revenues. And so we tend to discount the comparison for one thing, because of the day count issue, for another because of distortions caused by the strike last year. If you compare our Q2 of 2016 with 2014 and also 2013 then you see that we're much more in line with the 2% to 3% decline. And that's what we forecast for the future. And I would wait for another couple of quarters to see what the trend looks like and not give too much importance to Q2.
So in terms of pensions, we have done, of course, the pension funding. But we also have had quite good performance on the assets that are under management. So that's pretty much -- those are pretty much the biggest factors that are affecting the movement in the net pension provisions.
The next question comes from David Ross from Stifel.
Larry's it's been good working with you and only look forward to working with you in the future. I wanted to start off just by getting your overall view of the European economies. With Brexit not too long ago and a lot of moving parts over there as you see it at Deutsche Post DHL, you touch every country over there and you see all the trade lanes in and out, what's your general sense of where we're now and where it's going in the back half of the year?
And I guess the first thing to say is we haven't seen much of a change or not really any change at all, following the Brexit vote in terms of underlying business either in terms of the business that we have in the UK or cross-border trade between the UK and EU or between the UK and other countries. The only difference that we've seen so far is due to the weaker pound which we're working our way through and managing like we do other currency changes.
And so that leads us to ask the question, well just how's the economy doing in general? And I would say there's signs of very slight improvement. In Germany, we see some very small improvement from admittedly low levels and of course Germany is among the best performers in Europe. So the European economy, as it has for years, is muddling along with a very slight upward trend as far as we can tell.
And then you talked about the mix change going on a little bit at DHL Express. Certainly there's a lot of strength in B2C. Can you comment, I guess if you look at DHL Express as a whole, how much is B2B, how much you would classify as B2C and what different growth rates might be between those two segments?
Yes, so the growth rate is maybe slightly higher at this point for B2C. And so we're probably seeing close to double-digit growth in B2C and something like 7.5% to 7.8% versus the 8.2% overall average for TDI for the division in Q2. So there's not that much of a difference. B2C is still a small part but it's a small, fast-growing segment of the Express business, in particular, for high-value items. So jewelry and also things like wedding dresses is one of the biggest categories. I suggest that you wait for the tutorial on October 7 where we're going to dive deeply into such questions and be able to give you a lot more information directly from the division colleagues at that point.
And then just the last question is DHL Global Forwarding. With Tim having been there now for at least a couple of months, has he been there long enough to make any assessment on change in direction or what are his general feelings in terms of where DHL Global Forwarding is heading?
Yes, actually Tim has not joined us yet. By virtue of his contract at his previous employer, he was not permitted to join us just yet. We expect that he will be joining at the latest by some time in the second quarter next year.
Which is unchanged to what we expected when we announced.
Yes, the next caller is Damian Brewer, Royal Bank of Canada.
Two questions from me, please. First of all, could I just delve into the Express business performance? It looks like your TDI volume per employee grew by about 2%. But normally one would expect decreasing fuel surcharge and fuel costs to be slightly margin dilutive. So could you elaborate a little bit more on what drove the margin up so much and the progress you've made, particularly with the revenue management and yielding upside of the business? If you could provide a little bit more detail on that, that would be fantastic.
And then secondly on the mail PeP business, particularly on the mail side. Historically you seem to have temporarily closed sorting centers over the summer, moved to shorter working hours, but there doesn't seem to be any evidence of that this summer. So should we take that as indicative of the kind of volumes you're taking through the business? And when Oberhausen is fully up to speed, how does that rebalance the delivery and sortation balance of the network? And does that have any cost implications in terms of reduced cost going forward?
Okay, so let me come back to the first question. I think what's really had an impact on the margins first of all is the relatively low reported revenue growth because of currency but also fuel surcharges. But in particular, we've been very successful at taking a very disciplined approach to yield management. And we've especially seen some benefits from that, bigger benefits from that, than in previous quarters in Q2 of this year. So that's been a real positive in addition to the leverage effects or productivity gains that you've talked about and that are enabled by very good volume growth in the overall business.
So in the PeP business, in our parcel-sorting centers, along with our additional distribution assets and depots, the positive points of smaller sub-distribution centers are operating at a pretty high level of capacity utilization. There would be no need to have temporary closures of those facilities during the summer. Again, we had 12% growth in parcel volume in Q2. A lot of the investments that we're making are in progress. We've just opened the Oberhausen facility. And certainly that is helpful with having a higher capacity than all the other centers. A faster sorting speed. And that not only adds to our overall capabilities and capacity but also productivity in terms of processing time and costs for the sorting process.
Just surprised to see Express do market share gains and price gain. So good luck in the future, Larry. Thank you.
The next caller is Matija Gergolet from Goldman Sachs.
A couple of questions for me. The first one would be on the mail, so volumes and mix. So if I look at the second quarter, you have a 2% volume decline but 3.6% revenue growth so there's a 5.5% mix on price effect which is an acceleration compared to Q1. Could you give us a little bit of color around that and what should we expect for the second half of the year? And also similarly in parcels, it seems that the price and mix effect was around 3% in Q2 where it was around 1% only in Q1.
So are you able to put up prices and what should we be expecting for the second half of the year? And the third topic, still on prices, is on Express. You made a comment in the last call or two that you've put up prices in some markets to compensate for the FX moves. And again, you made a comment today. Has there been any further price increases, like in Asia in recent months and weeks? Thank you.
Okay, so all three are good questions. And I would say that in mail, the predominant reason for the difference between revenue growth and volume growth is indeed the price increase. The stamp price increase that we've had at the beginning of this year.
And in parcels, it can be a little bit more mix oriented. But we've also put in place some selective price increases for some categories of the parcel business. And in Express, there's been no major new announcements of price increases out of the ordinary that you would put in the category of mitigating measures to compensate for extreme movements in currency level.
Okay. And the acceleration in the price mix in Q2 versus Q1, what could that be due to?
I would have to look at it a bit further. But I would tend to say it's probably just mix effects as opposed to anything else.
The next question is Mark McVicar from Barclays.
I have two questions and they both relate to parcel Europe and DHL ecommerce. First of all, just on the network. I think we understand that in parcel Europe you're building, effectively, a pan-European e-fulfilment and 2C delivery capability. How much more is still left to be done to turn that into a complete network?
And related to that on the other side, obviously DHL ecommerce has picked a number of countries around the world to set itself up in. Do you see that being a stable portfolio now or do you see that growing with time?
I think that the answer to that, both in Europe and also outside of Europe, is we would expect further growth and further market entries both because we're still in the evaluation phase. And also for competitive and confidentiality reasons, I don't want to really tip our hand in terms of which are the next candidates for market entry, but only to say that we're not done expanding either in Europe or in the rest of the world.
That being said, we will not be entering every country. But in particular, outside of Europe, we'll be looking for countries with characteristics that we feel give us the best chance to succeed, to attain market leadership and to earn a really good return on the substantial investments that we're making.
And the sort of related question is that if we take those two together, you've now got an annualized revenue base of well north of €2 billion, but very close to zero profitability, plus or minus nothing. In your planning, when do you expect to start reporting profits and what sort of margins are you targeting?
One we're often asking ourselves. And it's one that's difficult to answer because as I said, we're still in the evaluation phase in terms of whether and when and indeed how we should participate in additional markets. So I think you said before that we'll be in last mile 2C business in all the markets we enter and actually that's not the case. In some markets, we will not do that. For example, in France, we're partnering and we'll only be represented at kiosk locations which is a big part of the French market and we feel able to fully participate in the market in France but without any 2C capabilities.
So the answer to that question will depend on decisions that we're taking now and in the near future about which are the additional markets we'll enter. And exactly how we're going to enter those markets, whether we're going to have partners, whether we do it ourselves. In particular, whether we have a 2C network. And so we're happy with the way things are going now. We feel like the balance of investment and growth generation and eventual profitability generation that we're able to engineer with the network expansion is going at the right pace.
We feel very good about our competitive position in each of the markets with our capabilities and market presence. And also the benefits that we get from the presence of the other DHL divisions. So yes, so I can't give you a precise answer to the question. But hopefully we'll be able to say more about that in the next years -- next quarters and next years as we get further on with our investment program.
The next caller is Andy Chu from Deutsche Bank.
Three questions from me, please. Just in terms of CapEx, I think Larry at the beginning of the Q&A was deferring CapEx comments until maybe beginning of next year. But just in terms of trying to help us in terms of a big chunk of cash flow that obviously goes to CapEx and obviously that's ramped up as you've grown the business very quickly, particular in Express, should we think of 2016 at the €2.2 billion as a peak level of CapEx at least out for the next two to three years or do you think in absolute terms, that number actually pushes on to support more growth initiatives?
Secondly in terms of restructuring charges. Obviously had a big raft last year. What should we think about -- how should we think about restructuring charges for this year? And I guess mainly they would come from supply chain or indeed could they come from elsewhere? And then last question on DHL Express. Just could you give us some flavor in terms of what the thinking would be in terms of how you would see the split of TDI and cross-border coming from B2B versus B2C in the longer term? Thank you very much.
Okay, so yes, CapEx, I think I would not want to comment beyond what I said before. We'll leave the guidance for next year to the call early next year and for future years. So I wouldn't want to say, really, any more than that on CapEx. In terms of restructuring, we expect overall the second half to be lower and the full year to be lower, if not significantly lower, than last year. That being said, I go back to the comment that I made before about the proceeds that we got from King's Cross and the decision to go ahead and invest those proceeds in additional restructuring in supply chain division this year.
So we had about €60 million of proceeds. We've already invested €40 million in the first half. So probably we will have around €20 million left to go in the second half of the year. And that should be the biggest part of restructuring that we will do in the Company. And the other divisions will either have none or very low levels of additional restructuring in the second half of the year. So Express, yes, again we expect the B2C segment to be a small segment of the overall Express business. It's going to continue to be dominated by B2B. But it's probably going to be a fast-growing segment.
We see continuing increases in cross-border demand for high value, very secure, door-to-door and very fast delivery. So if your wife's birthday is tomorrow and you want to get her a certain Rolex watch and you can only find it on a Hong Kong website then the way to go is with Express. And if you have to pay $30 or $40 to get it, it'll be worth it when you present it tomorrow to your wife on time, on her birthday.
So in other words Andy, there is no distinction between TDI and B2C. B2C is a TDI product, high service quality, high value.
Right. Luckily my wife's birthday is not for another nine months. Best of luck. Thanks very much Larry and best of luck going forward.
The next question is Neil Glynn from Credit Suisse.
If I could just ask two very quick ones. The first one, following on from Mark's question, I appreciate there's still something of a work in progress with respect to long term views on margins outside of Germany. But can I just ask simply are you holding parcel performances or parcel expansion outside of Germany to different return on invested capital targets to the capital that you deploy within Germany?
On one hand, of course there are more challenges outside of your home market. But as you said, Larry, you are clearly looking for markets where you feel like you can be the market leader. So just interested in whether you can confirm that? Yes or no? The second point, good working capital management has been mentioned a number of times and obviously we can see that in the numbers. But just interested in terms of, is there anything specific that you are actually changing in how you manage working capital?
For example, are you leveraging scale? You're clearly growing and getting bigger and bigger in Express and parcel as well as other parts of the business. I would have thought that may ultimately end up being helpful to working capital management? Thanks.
Yes, so I think the general answer to your question are our ROIC hurdles different for parcel investments outside Germany than in Germany, I think the overall answer is no. That at the end we expect to have the same ROIC minimums for approving investments outside of Germany as in Germany. The profile of the returns that we get on those investments may be a little different in that ones that we make in Germany have more of a near term return profile and ones outside Germany may be a slightly longer return profile.
And so generally, the ROIC targets are not different. What you should also recognize is that we're not only making capital investments but also OpEx investments in terms of organizational capability, in terms of IT capability and in terms of advertising. And so a lot of the initial investment when we enter a market is not CapEx but rather OpEx. So in terms of working capital management, there's really not something very special that we've done that would lead to a step change. We have re-dedicated ourselves to an intense focus on working capital management and we're very pleased with the progress that we've been able to make, especially on receivables management. And in particular on overdue receivables management where we're made good progress in the last couple of quarters.
Yes, there is one more question and it is Andre Mulder from Kepler.
Yes, firstly on the stamp price increase. I could have asked this question already after Q1. Have you given a thought to split the stamp price increase in three years? I think if you look at the situation, I think elasticity rises exponentially in line with the increase in prices. So possibly if you would have cut it in, let's say, three parts, there would have been a smaller impact on volumes. That's the first question.
The second on freight. Surprisingly strong in terms of EBIT in Q2 be it with a sales level that indeed performed better than we've seen in the last few quarters. Anything special there? How sustainable is that?
Okay. So on the stamp price increase, a little bit of it is expectation management and conditioning. I think when the public sees that there's no increase next year and the year after then their acceptance of or understanding of a large increase that might cover three years from 2018 or 2019, would be more understandable. This year was the first time it's ever been done in Germany and there was some surprise about the relatively big increase and not thinking so much about the fact that in the following two years, there wouldn't be an increase.
So I would expect that a multiple year increase which is done three years from now might have less impact than the one this year. That being said, the elasticity effects have not been disastrous. They're pretty much along the lines where we thought they might come out at something like 1% to 2%. And so we feel like it's been a useful thing to do, to do a single increase which covers a number of years. Not least also because if you do it once a year, there's costs associated with changing the stamp price and so it's more costly if you do it once every year than every three years.
So in terms of DGFF performance, it's clearly sustainable. But we would be disappointed if performance doesn't significantly improve even from these levels that we're at today. So in forwarding, we had about a 2% margin in Q2. Yes, it's been a big improvement compared to Q2 of last year, but it's far below even the best performance that we've been able to achieve in 2013 where we had a 3.2% margin. And still far from the industry leaders who are averaging somewhere over 5% in the forwarding business, 5% to 6%.
And we feel absolutely like we're going to get to those levels. And so we're really just at the start of the performance improvement that we can expect to see in the next quarters and years in our forwarding business.
And related to that, especially the smaller freight arm showed an EBIT of €15 million compared to I think it was €6 million in Q2 of 2015. That development, is that also sustainable?
We think it is. So first half of last year, they had an unusually negative or bad performance. This year recovered to more normal performance. But the freight business has been doing better in terms of being able to manage their costs very well and also at getting some pretty attractive new business onto the books.
No, there are no more callers.
Okay, well then I think that concludes also our Q&A. We're looking forward to seeing you on the roadshows and let me hand over for the closing remarks to Larry.
Okay everyone. Thanks for participating today. And I would especially like to personally thank you for your hard work and dedication vis-a-vis the Company and the analysis, the sometimes, many times very insightful analysis that you've been able to generate about the Company. About the very good communication lines that we've had with most, if not all of you, over the years. We thank you also very much for your patience with me and with us sometimes when there are questions that we can't answer or don't want to answer.
Your graceful acceptance of that was very much appreciated on my part. But most of all, I just appreciate the great working relationship that we've had over the years. I'm absolutely sure that you're going to have also a similarly good and productive relationship with Melanie. And that she is the right person to be the CFO of the Company going forward. And again, thank you very much and I wish you all the best.
The conference is no longer being recorded.
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