Deutsche Post's (DPSTF) CEO Frank Appel on Q1 2019 Results - Earnings Call Transcript

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About: Deutsche Post AG (DPSTF)
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Earning Call Audio

Deutsche Post AG (OTCPK:DPSTF) Q1 2019 Earnings Conference Call May 10, 2019 4:00 AM ET

Company Participants

Frank Appel - Chairman and CEO

Martin Ziegenbalg - Head of IR

Melanie Kreis - CFO

Conference Call Participants

Matija Gergolet - Goldman Sachs

Andy Chu - Deutsche Bank

Damian Brewer - RBC Capital Markets

David Kerstens - Jefferies

Daniel Roeska - Sanford Bernstein

Edward Stanford - HSBC

Ed Steele - Citigroup

Per-Ola Hellgren - LBBW

Joel Spungin - Berenberg

Andre Mulder - Kepler Cheuvreux

Martin Ziegenbalg

Good morning to everyone out there on this Friday morning. As you've seen in the invitation, we're going to take you, as always, with Frank Appel, our CEO; and Melanie, our CFO, through the Q1 deck that I take it, you have in front of you. And we're happy to deal with your questions after that.

And with that, over to you, Frank.

Frank Appel

Yeah. Good morning as well from my side. So let us turn straightaway to the first page, where we highlight the Q1 results. So overall, we are satisfied with the start into the year. We had a relatively slow start. The volumes in parts of our business, but that has accelerated quite a bit in the quarter, and it confirms our perspective that we will see this year, a solid growth in the global environment.

We have also worked in all of our agenda points intensively, and we see already impact from that, starting with the draft mail regulation, which is helping us now going forward. It's higher than the original ruling, and it's at the upper end of the potential outcome we expected. So that's good news.

The parcel price increases are working as I will show you later. Volumes are growing still, very nicely, but revenues even growing faster. We expected relatively little or none growth on EBIT in the first quarter in Express, because in October last year, we took volumes above 300 kilograms out, and that has led to a lower utilization rate of our airplanes as expected. And that has led to no further progress on the bottom line, but this is perfectly in line with our expectations.

DGFF had another very strong quarter, very nice development in both parts. Supply chain as well have, if you take our transaction out and some restructuring expenses we have booked as announced, we have seen very strong development there as well. That's the reason we are very confident that we can deliver this year and next year's guidance. The quarter overall is fully in alignment what we expected.

So we are happy with that. That's the reason while I can go back - straightaway back to Page 4, where you can see the revenue development for the quarter by division. So with PeP, we had a relatively small growth, but that's in line with our expectations. We didn't get in this quarter any postage increase. We knew that already before. But of course now, for more than 3 years, no postage that has impact parcel continued growth and mail volume declines.

Express grew development, but as I said, due to the change from heavier weight to lower weights, we have not as strong growth as we have seen in previous quarters. DGFF, good development as well, particularly on yield. Gross profit is developing nicely. Volume, still declines, but also as expected, supply chain, good momentum on the top line, and also good growth in our new division, eCommerce Solutions.

So overall, this is, as I said, in line with our expectations. If I go now to the growth of the different divisions, on page 5, you can see here the development and I would like to highlight two things. One is that the overall volume decline is still on the range of 2% to 3%, 3.1%. But that includes also a shift of one smaller product to parcels. You can see here very nicely that volume have grown still on the upper end of our loan guidance, 5% to 7%, and nevertheless, we had even stronger revenue growth. That shows us for the first time that our price measures are working.

It's definitely too early to declare victory that all customers are sticky, but it's very encouraging that you see such a strong growth in volume, despite significant price increases. And don't forget, we have a mix effect, our larger customers, our business customers have grown faster than our private customers. And of course, private customers are paying significantly more. So if you look into individual customers, you'll see even higher increase of prices, which is very encouraging.

Second, we are still working with some customers on the implementation of price increases, but anyway, it's a very encouraging sign. What we have done here is working. It shows also that our quality is better as we monitor that very precisely. We had a great Christmas performance in quality, and we have, equally, a great Easter performance. So that shows that the fundamentals are heading on the right direction.

Express. You see here that the revenue per day growth is smaller than the shipment today. So we still see very healthy shipment growth, and that was started weaker and accelerated quite a bit in the quarter. But this mix effect from having taken large heavyweight out, is of course, leading to that the revenue growth per day is slower than the volume growth, because if you take high-yield product and a lot - very few shipments out, then you have that effect. That should normalize in due course, and we are fine. We have redevelopment we have seen in this quarter. And as I said, it has been expected by us as well.

On page 7, you see still that on volumes, there still some work to be done. Our focus on profitable customers is still working as you see on the overall development, with the GP per ton and GP per TEU. So that's right, and of course, the agenda now will change that we start to grow profitable and Tim and his team have worked very hard, but overall, we are very satisfied, particularly because this growth profit has churned into higher EBIT as well, as you will see later.

Then, I turn to page 9. This is the EBIT development for all. So the development in P&P Germany is fully in alignment with what we expected. I'll explain in a second, more or less, what - how we were facing. We had, last year, a significant one-off, which we, of course, have taken out - and even if you take that out, we are still down year-over-year. But that doesn't come as a surprise for us.

We have put additional measures in place in the first quarter to improve productivity and the benefits are not there yet. And second, of course, we haven't had a price increase, which had been supporting the business quite a bit. In fact, that had already taken place in the first quarter.

As I said, I will comment in a second about the overall development, as I said, this is in line what we expected for Q1. Express is stable year-over-year. I explained the reason is not that we have no volume growth or that we see a significant slowdown in the economy. It's really a reflection of a significant measure we have taken because we took the heavy stuff out.

DGFF, very nice development, a significant increase in the bottom line. It's definitely one, if not, the best first quarter in the last 10 years. So that's very encouraging. So the journey to close the gap in our margins to our competitors is continuing, which is great.

In Supply Chain, if you take out the China benefit in our restructuring expenses, double-digit bottom line growth as well, which is also good. And in eCommerce Solutions, despite that there's a small number - if you take the restructuring numbers out, we are up year-over-year as well. So overall, very good in Corporate Functions.

Finally, we have not seen the expected ramp-up cost in this scale as we planned for. So that's the reason why we had a good start here as well. So overall, all what we see here is in line with what we have expected for the first quarter in all measures. If you go through all divisions, we see that they are generating impact.

Next page, Page 10. Yes, if you go through that, you, of course, have several impacts. We had no price increase. That will now take part in summer. I'll come to that in the - what the next steps are in a minute. The cost of price increases are working. We see a reduction in direct cost.

What we said in the last months already, that takes always longer than you expect. We have enough measures. We have a good pick up of the early retirement, but it takes times until the people are really leaving the company.

So we will see acceleration of decline in indirect cost but we have not seen since August every month was lower than the previous year. But it takes time.

And finally, the productivity measures. That, of course, is back-end loaded, as already said. So we should see the second half significant more impact from that already than in the first quarter. And that's the reason why we see here that, of course, first quarter will be still down year-over-year, but second quarter will show improvements in alignment with our guidance we have given you. And next year we shall see then the full impact. So what I see in detail is very encouraging, even if it's not visible in our numbers yet.

On Page 11. And before I come to the process, the agreement you see here. We appointed a new colleague to that. Tobias Meyer has worked for me already when I was in charge of that division as the COO and Head of IT. He has done a great job there and helps me to define the agenda, which is described here.

So we are following here exactly our normal procedure. We have an interest to become employer of choice, provider of choice and investment of choice. We are very clear that we have to intensify our certified program, and we have done that in other parts of the company very successfully, in particular in Express.

We have to improve the equipment in the sites, so we have probably a little bit too less invested in the last years into that. And if you don't enable our people, you shouldn't expect great service quality. We have to focus more on an open dialogue culture and on focusing at the same time on improving performance, which is happening already. That stems from the top very much, and I think Tobias does a great job there.

On the provider of choice, if you go through that, of course, we have to follow the standard operating procedures. And that has improved significantly, quality, I see that as well and are still monitoring that on a daily basis, despite that I handed it over because I think that's a recipe for success.

We have significantly better forecasting where we also use some artificial intelligence to predict better, which has helped and the focus on service quality, service quality, service quality is very clear. We have now brought some of these parts under operations so that there's a closer link between customer service and operations.

On the investment price increases, we'll continue - we feel very encouraged with what we've seen. Anecdotally, we also hear that our competitors are doing something so that our customers are telling that, we are not the exception.

And that is helpful. As much as they really do, I don't know, because we have no visibility about that, but it's more anecdotal evidence that this is working. On indirect, I talked earlier about, and we have good ideas - or very good ideas what we can do to improve the forces we have seen, a stabilization of productivity declines in the first quarter already. So this is again heading absolutely in the right direction.

So last page for me, on Page 12. So we got another new proposal that is 4.8 to 10.6, which is a very good step. The final decision, after they listen to comments from interested parties, will be decided end of May. The proposal will then translated in real price. A suggestion which needs to be approved by the regulator as well and hopefully by July 1, we then can implement that. And as we are very confident that this is now the right journey.

So that's the process appearing that's the reason why we're not today talk about that, what the real final price increase will be. But the regulation gave us now significantly more headroom, more than twice what we have regulator in the first place. And that definitely will help to achieve our goals this year and next year.

So with that, I hand over to Melanie, and she will comment more on the EBIT numbers, the cash flow and these kind of very specific smaller group and divisions.

Melanie Kreis

Yeah. Thank you very much, Frank, and good morning, everybody. I will now start by covering the DHL divisional EBIT results in a bit more detail, starting with Express on Page 13.

When we presented our full year numbers in March, the global macro situation showed a lot of uncertainty and somehow that hasn't changed. At that time, we saw a rather slow start to the year versus a high comparison base.

In March, we began to see signs of normalization so when you look at our expressed phasing over the quarter, January and February were definitely significantly slower than March. And by March, and now also going into April, we saw again solid growth in Express TDI volumes. And I think it's important to mention the timing here because of course we were fully aware of this dynamic when we issued our guidance for the full year 2019.

You can see on Page 13 also that mascot for our heavyweight campaign. As we have communicated in March, have actively managed heavyweight shipments out of the network, and that led indeed to the effect I mentioned two months ago of slower revenue per day growth compared to the shipment per day growth, as you saw in Frank's slides. Albeit, still 5% TDI shipment growth, about 150 basis point difference to the revenue per day growth, and that was really driven by the heavyweight campaign. This effect will still be visible in the second quarter, but should diminish as we lap the start date of the heavyweight campaign in the third quarter.

Currency is obviously always a topic for a global business like Express, and for us that's a normality and a reality of life. In the current quarter, we have seen a strong year-over-year increase in the dollar versus euro rate. And that has increased our sales, but cost even more so. So if you would look at the Express EBIT, excluding those FX movements, the numbers would be slightly up.

To summarize it, all these effects made for a more demanding start to the year, but we are confident that Express will remain a strong growth engine for DHL. We currently see growth again on more solid levels and the very experienced management colleagues at Express really know which levers to pull.

That takes me to page 14 and global forwarding, where it was a very good start into the year. We see a continuation of the upward trend in global forwarding, and we are very pleased to see now in the first quarter conversion ratios back to previous peak levels. So I think we are on a very good way here to reach our numbers for 2020.

The global forwarding improvement agenda is clearly more than IT. But IT does play an important role as an enabler. And we are, hence, pleased to see good progress in the rollout of the new IT systems, now both in ocean and in air freight. But we still have a way to go before both have reached full implementation status and deliver full benefits. So it will be a gradual ramp up over time as we have discussed in the previous quarter.

Turning to Supply Chain, obviously, the Q1 numbers are distorted by the closing of the transaction in China, with SF Holdings and the proceeds from this transaction allow us to undertake some restructuring, primarily in the UK, that I had already mentioned last year. We began with those measures in Q1 and have, so far, used a bit less than half of our cost of change budget.

And on that basis, we are confident that we will, for sure, recoup the lost EBIT from the disposal of the business in China, and that this will really boost also the profitability in the region, UK, Ireland.

That takes me to our overall group P&L for the quarter. We have already talked about revenue and EBIT, where, obviously, we see the various onetime effects. Two lines I want to mention here on that slide are the financial result, the increase in financial result or the - more negative financial result line is due to 2 effects. The first one is the impact of the mark-to-market of long-term incentive plans based on our now higher stock price, and we also see the higher interest cost from leases, a normal development in line with more leasing due to more business growth.

And finally, the tax rate in the first quarter was 22%, in line with our guidance range of 19% to 22%. And we also have a higher profit before tax back base, hence the increase in taxes.

That takes me to cash flow and balance sheet topics, starting on Page 18. So the first thing I want to mention is that in the first quarter, our cash flow is always negative due to seasonal effects, and in particular, the annual payment for the civil servant pensions here in Germany.

Having said that, the cash inflow of the SF transaction had to counteract the normal Q1 effect. So that the free cash flow in Q1 2019 was significantly negative than in the usual year.

We also, as we have now one full year of IFRS 16 implementation we have clear year-over-year comparison numbers. And you can see, in the net cash flow leases that year as well due to the growth in the underlying business and the underlying lease portfolio, mainly for land and buildings for new supply chain we are in contract, we have an increase in this line.

So that is the standard slide on cash flow, but we are obviously aware that cash flow is one of the big topics on your mind. And in recent investor meetings, we got a lot of questions regarding free cash flow, which is why we have now included 2 rather detailed slides on Page 19 and 20, to give you an indication for how to think about the key elements in our cash flow guidance for 2019.

Page 19 first shows the bridge from EBIT to operating cash flow. And here, we have two technical aspects, which are worth taking into account. In 2018, we built €400 million in provisions for the early retirement program in P&P. And we expect roundabout €100 million of cash out from this program in the course of 2019.

So that is obviously impacting the changes in provisions line. So second thing is that, there's more and more people accepting and going into early retirement. We will see accounting reclassification from provisions into other liabilities and so there will be a technical move, which is also going to impact the changes in provision line, which is why this line will be higher than our normal roundabout €400 million in this line.

The second technical thing to point out is that obviously, we have to eliminate in the operating cash flow the impact of the onetime gain in EBIT from the China Supply Chain transaction. So that as well is impacting OCF. And you can then see this effect, turn into Page 20 in the net M&A line.

Otherwise observation remains that the two biggest cash utilizations on our way to free cash flows are the investments we are putting into our operations through both CapEx and ongoing cash flow leases. I think there's no surprise here that is in line with what we had talked about in the past quarters. And as you know, from what we had said before, 2019 is the peak year in our spending on the 777 investment plan.

So in 2020, CapEx will be significantly lower than in 2019, although, again, we remain very keen to invest into attractive return opportunities with our business. You can see that overall lower CapEx and lower M&A gains will essentially net in 2020, which is why 2020 free cash flow will be driven by EBIT growth, which we expect to be substantial as we will feel the full benefit of our P&P and other restructuring assets.

That takes me to Page 21. A couple of comments on the balance sheet. I think here the key message is that we have a strong balance sheet, which allows us to support the level of investment, including the exception of 777 Boeing, which is peaking this year. We are showing here some leverage ratios, and to put those into historical context, generally speaking, we have always delevered over time.

But in 2018, as you obviously see, due to the implementation of IFRS 16, we had an upward step change, but the leverage still remains very reasonable. Now our rating agencies have both confirmed the debt rating, so they are fully aware of what we're doing from the 777s to our cash flow outlook for this year.

So naturally, over time, we will strive to generate free cash flow in excess of what we need to pay our dividend. However, we are not concerned about paying 2018 or 2019 dividends in excess of our free cash flow. Also, because we are confident that, over time, our CapEx, including and particularly with regard to the 777 program, will improve returns.

So finally, just one last sentence on the 777, because they are also always coming - questions on that topic. That is a discrete program and is not intended to be a permanent step-up to that level of CapEx intensity.

That takes me to a very easy slide, page 23, because that slide is fully unchanged. Nothing new here. Based on what we have seen in the first quarter, we confirm our guidance both for 2019 and for 2020. We are, however, aware of a certain element of skepticism with regard to the achievability of our 2020 guidance. Frank already talked about what levers we see in P&P to get to those numbers. We have now included Page 24 to give you a little bit of a feeling for why we, as a management, also believes in the DHL guidance for 2020.

What we are trying to do on this slide here is take out one-off effects. So when you look at 2018, excluding the €92 million one-off effect and supply chain, we're talking about a starting point of roundabout €3 billion. And so we want to go from €3 billion to €3.7 billion by 2020, which means, on average, €350 million year-over-year. We have it a little bit back-end loaded as you can see here because some of those restructuring activities in 2019 are going to dampen 2019 and then put the full swing into 2020.

I think the important thing is, a, when you look at what we have achieved in terms of step-up from '17 or '18, we had a year-over-year step-up of more than €400 million in DHL. So that is not an unrealistic order of magnitude we are talking about here as such.

But b, unlike in the past, when most of the DHL growth - or pretty much all of the DHL growth year-over-year was coming from just one division, Express, we now see a much more balanced situation. And that is one of the really positive things for me with regard to the Q1 numbers. We said it in March that we expect all 3 big DHL divisions to really contribute to 2019.

And what we nicely see in Q1 now both forwarding and supply chain on an underlying basis have really delivered a very good year-over-year growth. So I think the order of magnitude is clearly ambitious, but it's not unrealistic and the key ingredient here is that this is really a 3-cylinder game, which will take us to 2020.

So to conclude, yes, the growth in Q1 was slightly slower, but we had growth across all divisions. And it was in line with what we had expected when we issued our 2019 guidance in March. We are making good progress on all of the planned improvement measures, and they will start to deliver more and more going forward throughout the year.

And on that basis, we are confirming our guidance both for 2019 and 2020. So much from my side, and I think that now takes us to the Q&A part.

Frank Appel

Martin, over to you.

Martin Ziegenbalg

Thank you, Frank. Thank you, Melanie. And operator, if you start the Q&A session, please?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] The first question comes from Matija Gergolet, calling from Goldman Sachs. Over to you.

Matija Gergolet

Yes hello. Good morning. It's Matija from Goldman Sachs. Three questions on my side. Firstly, when it comes to say to the guidance for 2019, you mentioned that when you provided the guidance in March, there was some uncertainties, slow start of the year. No clarity yet on the tariff - say, on the increase for regulated mail, okay.

We don't yet have the final confirmation for the regulated mail increase, but now, do you now feel more comfortable about the guidance or about which you say the upper part of the guidance, given that as you said, the mail price increase is at the high-end of your expectations? That will be my first question.

Secondly, in July, when you get the price increase for the regulated mail, will you also be considering increasing prices to business customers? And then, thirdly, still on the PeP. With regards to the €150 million of say, you call it, restructuring automation costs, just wanted to double check that these were basically the same cost that you have already signaled last year or whether these are incremental costs for the division? I think there's a comment about that in the press release. Thank you.

Frank Appel

Yeah. So I take the two first, and then, Melanie, on the last one. So on the guidance, as long as we have gotten a final decision of the regulator, Matija, you answered more or less your question, we will not narrow down the guidance, and that's the reason why I'm not commenting now where we end up.

As I said already, it also considering how much restructuring we will do, and we have work on that as well in conjunction with the regulation and that I have to say, we are still saying, we are very confident that we can get into this range as we have given.

With regard to the stamp price, we have not taken a decision yet what we will do January 1. We will take a decision [ph] now...

Melanie Kreis

July 1.

Frank Appel

July 1, that we are not doing anything in July 1. We have communicated that already. If we take some increases for business customers January 1, we have not decided yet.

Melanie Kreis

Okay. And on the €150 million, this is nothing new. Those are the €150 million we have been talking about since last summer. It's just a hint that, obviously, we didn't have the impact from those in Q1 2018 so the €28 million in Q1 2019 don't have a comparison in Q1 '18, which is why we're highlighting it. But it's nothing new.

Matija Gergolet

Thank you. Sorry, clarification. You mentioned that on business customers, you have not yet taken a decision whether there will be a price increase in July. Is that correct?

Frank Appel

No. No. No. Maybe I mixed it up. So we have taken a decision not to do any price increase in July 1. We communicated that already, because we believe we can't do that with business customers who have budgets and all this kind of stuff. What I added in addition, we have not taken a decision if we don't or don't do or don't do something in January 1, 2020.

Matija Gergolet

Okay, very clear now. Thank you very much.

Frank Appel

You're welcome.

Martin Ziegenbalg

Thanks Matija. And over to the next caller please?

Operator

The next question comes from Andy Chu, who's calling from Deutsche Bank. Over to you.

Andy Chu

Hi, good morning. Three questions, please. Firstly, on Express. Several parts though. Just in terms of - could you just sort of quantify what you mean by sort of solid levels of growth in Express as we exited the quarter? Do you mean sort of more like 8%, which has been sort of more your run rate of TDI volume growth? And what levels of capacity will be freed up by taking your sort of over 300-kilogram shipments of?

And in terms of sizing of Express, will you still be down in Q2, given that you mentioned that you're looking at sort of price product mix effects should continue into the first half of the year. Will EBIT be down in Q2 in Express?

And then on P&P, you took the €400 million charge for the early retirement of civil servants, why are we not seeing any of that impact already coming through in Q1? And when you look at the sort of FTE equivalent numbers in P&P, it was 159,000 in Q1 versus 155,000 last year. Clearly, you'll be adding more people in the growth areas such as parcels. But can you just give us some flavor as to what sort of FTE equivalent run rate you'll be looking at going forward in P&P?

And then, lastly, just in terms of the restructuring and cost - investment cost of €150 million in supply chain, €60 million in DS and the €100 million of investments in corporate. Is there any sort of terms of say that you can give us in terms of the quarterly phasing of those costs? Because obviously that's pretty hard to sort of nail down from the outside. Thanks very much.

Frank Appel

Yes. So may I take just the €400 million in the FTE run rate, and Melanie answers all the other question. So on the €400 million, yes, we see already a reduction in headcount, but it's phased. And we will see in the second quarter, in the third quarter, in the fourth quarter, an acceleration of how many people. The reason for that is it's a very clearly defined process.

So first, people - we can announce it. Then people can raise their hand that got considered. Then, we have to take, accordingly, restructurings of the organization. Some of them are still happening, in our operations, which is a significant part of the overhead, is only taking place middle of this year because they are in negotiation with the unions. If the people are then identified, then we have to send the paperwork to the - not in regulator, but to an area...

Martin Ziegenbalg

Agency.

Frank Appel

We have to check if that's right, what we have suggested. So there's a significant time delay, and that's the reason why we now see, every month, that some people are leaving and that is accelerating through the year. That's the reason why you haven't seen the impact in the first quarter. May we have better explained that already earlier, but there is a significant time frame before you raise your hand until you get really - or leave, really, the company.

Moving now to FTE, that uses a reduction in indirects. The increase you see in our numbers is exclusively coming from operational increases. We are adding people there. We always refused to give headcount reductions because they are ending up in the wrong moment. We confuse people only, we never said how many people will leave, and that's the reason why - and we will not tell you now what you should take into consideration.

What I can tell you, the number of reductions would always be slower than the addition of people for the operations. So you will see a continuation in the year of headcount because we are growing, 7.7% growth in parcel is quite a bit, so you should expect that this number will grow. But on the other side, we see that the indirect people are leaving and we have seen already a reduction in the headcount. But we have never disclosed that and I will not do that today either.

Martin Ziegenbalg

And there are seasonal fluctuations, particularly from Q4 into Q1, right?

Frank Appel

Of course. Yes. That is also...

Martin Ziegenbalg

Yes.

Melanie Kreis

Yes. I think what I would add, Andy, I mean like when you look at our staff book and the staff gross line for P&P, it is a bit confusing this year because obviously, last year's number is depressed by the €108 million. So I think when you look at the underlying development, the first important message is on the indirect cost, which is predominantly staff cost, we see that it is down year-over-year, Q1 '19 versus Q1 '18. But in terms of run rate, this has to pick up in the course of the year, but that is also what we had planned for.

Under operating staff cost side, we see the impact from the wage increase of the 3% we had on the 1st of October last year, and we also see the increase in headcount, so probably the right number is roundabout 4% of growth here.

That takes me to the Express question and the general cost of change question. So I think in terms of - looking at the growth pattern in Express across Q1, I think first of all, in terms of weight, January and February together are roundabout the same order of magnitude of revenue compared to March. And growth was very slow in Jan and Feb.

So after Chinese New Year, not a lot happened, and then also the pickup after Chinese New Year was more subdued. I think by March, we were getting back into more normal growth territory, but not to the peak levels we had seen before. The encouraging thing is that April is more moving in - with March, and not this January and February. And so we expect now to be back in solid growth territory but a little bit less dynamically what we have seen in the past.

In terms of how the heavyweight stuff and the aviation capacity are going to play. I think for us, the main a focus here was not to really take down capacity by getting rid of the heavyweight stuff but to really slow down the rate at which we have to expand capacity. And that means that we somehow have to grow into it, which is also what we have tried to show on the Express slide with the elephant in the short term. This has a negative impact, but in the medium term, as we are growing in the freed-up capacity, this will have a positive impact on our aviation core KPI cost per kilo. And of course, we also expect benefits on the ground ops side.

With regards to the second quarter, based on what we see at the moment and the April dynamic being more in line with March, it should be a bit more dynamic than Q1. But obviously, we will still see the impact from the heavyweight campaign. So the bigger uptick will be in the second half of the year, but the two should already be a bit more dynamic than Q1.

With regard to cost of change. So both in supply chain and in eCommerce Solutions, these booked a little bit less than 50% of the allocated cost of change budget in Q1. We expect the majority of the remainder to go into the second quarter so that we get a big chunk of overall cost of change will have happened in the first half of the year. Benefit of that is also going to be that we should see some benefit already coming into the second half of the year.

And with regard to our cost functions, cost of incubations, as you may have seen, we have a new management team in StreetScooter and they are currently coming up with their business plan going forward. And we said, we clearly give them the time to do thorough job here. I think one set is finalized. We will have a better point of view on the phasing of the impact we expect in P&P Deutschland.

Martin Ziegenbalg

So Andy, does that help modeling in? Anymore?

Andy Chu

That's it. Thanks very much.

Martin Ziegenbalg

Next caller then?

Operator

Next up, we have Damien Brewer, who is calling from the Royal Bank of Canada. Over to you.

Damian Brewer

Good morning everybody. Three questions, please. First of all, just coming to DGFF. Obviously, across the market, pricing per unit has gone up. But yours looked like it's gone up a little bit better. Could you talk a little bit more about how much that GPP unit increase has been down to your mix and efforts? And how much was market and therefore, how much will probably spill over into Q2 as well?

Secondly, coming to P&P, given that sort of identified the issue early in 2018, could you give us some updates on where your staff and customer surveys are going there? Are they improving? Is there some sort of support from the metrics there? Or anything else you can elaborate on would be appreciated.

And then very finally, you hinted at it already I think already in one of your last answers, could you give us an update on some of the group structure whether there's any tidying up you're envisaging there? For example, StreetScooter or any other part of the operation which are in focus at the moment? Thank you.

Frank Appel

Yes. So may I take the second and third questions? So on the staff, we only do annual survey, which took place in autumn and it was very encouraging that we have seen that our U.S. data went up the most of all divisions. The group went up. P&P division went up to most, which is very encouraging despite all that. It went then up the most was in operations.

So the people apparently saw already that we had taken the right direction that we are communicating differently. That is well received. And I believe that has not changed. We also see a significant improvement in the underlying operations, and that has led in the last months to a start in decline in complaints of customers about service.

You can read in the news all this, what happens to what the regulator counts, but regulator counts one complaint for 2.3 million shipments, letters and parcels, so that's very low. We see the early indicators, which are customer's complaint coming down. And that is very encouraging. So there's response to the better performance and their performance is better because people are more engaged. So that is making me very confident that we are taking the right actions and heading in the right directions at P&P.

So on the group, I think we have made significant cleanup in the portfolio of P&P. On our aspects, we might sell some small pieces as we have done. It seems to me recently but on the bigger scale, StreetScooter, we have a new management team. I think they have the very good understanding of what should happen. We always say that we don't want to be forever the owner, but we are not in a hurry, and we will consider that in due course,

I'm very encouraged what I've heard from the new management team with a lot of expertise in this field. We had a great innovator with the previous CEO who created a product, which is working well. I asked, as well, of the new CEO what is the feedback, what he sees, because he has worked in that environment.

He says we have a great product. External customers are happy with our product. Internal customers are getting happier every moment, so - or every month, so that's the reason why we think we have a very good product, and that makes us confident that there is a journey with - for StreetScooter as well.

And now I had over to Melanie to answer the first question.

Melanie Kreis

First question was on the DGFF, GP per ton, PTU development. That's a trend which we are seeing now for a couple of quarters because we have taken this cautious approach on being selective with regards to volume and to focus more on profitability.

So I would still say that what we see in the first quarter is more attributable to our selective approach than to what we see in the market. Obviously, our aspiration is to get back into growth mode in the course of 2019 but in a very controlled and selective way and not at the expense of our profitability, which is why we are obviously focused on doing that.

Frank Appel

May I add to the whole - because you asked as well about the mood in P&P. Maybe I commented as well about the mood in this division. That is now really black-and-white to 2 or 3 years ago. There is high energy in that division. They understand fully that you really can't drive yields and at the same time, improve your - or streamline your operations. They are very positive about the rollout of the IT.

So these are all green lights for me. So I'm very happy. The changes we started already before Tim came, and Tim has accelerated. That is working well. So that's very encouraging and that's also reflected in the mood of the organization, if you talk to them. And I'm traveling after I hand it over the division, I'm traveling significantly more again myself outside of Germany and it's very encouraging what I hear from the DGFF colleagues. And that's great news.

Damian Brewer

Thank you.

Martin Ziegenbalg

Thanks, Damian and right onto the next?

Operator

And the next question comes from David Kerstens who is calling from Jefferies. Over to you.

David Kerstens

Yes, hi. Good morning everybody. It's Dave Kerstens from Jefferies. Three questions, please. First of all, could you give an indication of what you expect the volume decline in mail would be following a 10.6 price increase based on the elasticity that you've seen in the past? If any, I think the price was relatively - or the impact was relatively limited in 2016.

Then secondly, on DHL supply chain. What is behind the improving earnings momentum in the first quarter? I think you said double-digit underlying EBIT growth despite the fact that you missed the Chinese asset in the first quarter. Also, I heard you say that the lease portfolio has expounded largely due to Supply Chain, was there a factor of that? So what was behind that improvement in earnings momentum?

And then finally, maybe on Express. You're highlighting that you expect volume momentum to improve going forward. What could be an impact, if any, from the increased tariffs - U.S. tariffs on Chinese imports to 25% this morning? Thank you very much.

Frank Appel

So may I answer the first and the third? So of course, we have analyzed it as well. Of course, the lift is slightly higher if you compare that than what we got last time, so we can't really predict. But of course, we have some assumptions made and we have not taken for granted that there will be no price elasticity.

We have to watch that. Last time, it was not very strong, but we have, of course, calculated that in our assumptions here that we see some elasticity, which is larger than the last time, but not massive either. That's mainly for the small and medium and private consumers. So yes, there will be impact but not huge, but higher than last time. That's our assumption at the moment.

The impact on volumes of Express is very difficult to judge. We have seen in Asia different patterns and China had a very good development. Other parts of China were weaker. Maybe that will now change because there are ways, of course, to move stuff around and for some manufacturers as well that might change when trade lane traffic. Overall, we still believe that we will see a continuation of the economy.

We have seen not so much for pricing I believe, but for the public more, that U.S. had a very strong quarter first year. China not in our numbers, but I mean the economy. Europe was better than expected. China was better than expected and I don't expect this will fundamentally change, because we still have a pickup, an increase in employment around the world and we still have a continuation of increase in middle-class and that drives fundamentally both things, the B2B and the B2C growth we have seen in Express.

All these noise is not healthy. You see that in the Capital Markets Day, they respond to that very volatile but we have not seen that in the last four quarters or five quarters. This volatile is happening. Yes, there might be one month weaker and then stronger, because maybe now people will ship even or delay now shipments, because they want to now wait so it could happen that May is then weaker on the short end, but then if things are changing then again, then June will be very strong. Overall, the fundamental growth dynamics have not changed. That's our conviction.

Melanie Kreis

And that takes us to the Supply Chain question. And I'm really glad that you asked that question. I think the supply chain colleagues will be delighted because I think what we now see in the first quarter is actually what we have seen in most of the Supply Chain regions for some time. So I mean, in Q1 underlying this year growth in operating results by around about 12%.

We had that dynamic in most of the regions already in 2018, but it was unfortunately overshadowed by the step back we have in the UK, Ireland. So for me, what we are beginning to see here now is the underlying growth potential of supply chain. And that is driven by the standardization agenda, the automation agenda, which the team under John Gilbert's leadership has been pushing for the last year.

They're now really beginning to see the benefits. And on that basis, what I already said in March is, in 2018, we had lower forwarding beginning to really deliver year-over-year step up to the DHL progress. And in 2019, I'm definitely convinced that Supply Chain will also be a significant contributor on an underlying basis. And that is indeed very encouraging to see this coming through in the first quarter.

With regard to the leases, that was actually - I'm not pointing as unusual development, but obviously, the nature of the Supply Chain business is that many of the warehouses are leased, in line with the duration of our underlying customer contract. And so that's natural growth driver for the leased portfolio, nothing unusual.

David Kerstens

Alright.

Martin Ziegenbalg

Thank you, Melanie, David.

David Kerstens

Thanks very much.

Martin Ziegenbalg

Very good. Okay, then.

David Kerstens

Yes, very thank you.

Martin Ziegenbalg

Over to the next caller please?

Operator

The next caller is Daniel Roeska is calling from Bernstein Research.

Daniel Roeska

Good morning, everybody. Just a little bit more detail on Forwarding, if I may. You already commented on GP. Could you touch a little bit on conversion? How much of the conversion improvement in Q1 is really due to the GP mix that's different? Then how much is it really due to underlying productivity gains and OpEx improvement? And kind of as a follow-on, if there are significant OpEx improvements here, how much of that is already driven by new IT?

Melanie Kreis

Okay. So at the beginning - at the beginning, we're seeing benefits particularly the rollout of CargoWise. I mean, the aspiration is to get to the full output - for full freight by the end of the year. At the moment, we are in the co-existence phase. And so we currently don't have significant benefits from that.

However, the IT transformation is more than just that CargoWise rollout. So we see benefits from a number of other systems and process optimizations. So I will say at the moment, it's a mix and the big benefit from particularly the CargoWise rollout is going to come beyond 2019.

Daniel Roeska

Maybe one point to follow-up. One of the strategies of Tim was to kind of manage the mix, go for higher yielding, grow a little bit slower. And that's something we have seen over the last couple of quarters. How long can that kind of strategy kind of still continue, kind of the slower growth margin optimization in your view?

Melanie Kreis

Yes. I think the aspiration is that in the course of 2019, we want to get back to a more normal growth level because we all acknowledge that you can't shrink forever. Obviously, now in the first quarter, the whole market dynamic both in air and ocean freight wasn't that buoyant. So I think for us, the focus is very much on profitability but acknowledging that we have the slowly get back into a growth mode, and that is what the team is focused on.

Martin Ziegenbalg

Daniel, that was question two, out of two or you have anymore?

Daniel Roeska

Thank you. No further, I have no follow up. Thanks very much.

Martin Ziegenbalg

Good thanks. And over to next.

Operator

Yeah. The next one is Edward Stanford is calling from HSBC. Over to you Mr. Stanford.

Edward Stanford

Good morning, everybody. Two, please. Following up on an earlier question about the decision to remove or discourage large volume in Express. You mentioned that this is a way of reducing the capital needs of the business. Are you able to quantify how much you think you'll be saving in this initiative?

And secondly, again, following up on previous questions. Just looking at the kind of return. I may have missed this, return to growth in freight forwarding, do you think growing volumes in the current market environment is achievable given competitor activity?

Melanie Kreis

Yes. On the heavyweight question, I don't want to quantify the savings here. And again, this do not lead us - leads to our cutting back on the network. It will be a slower expansion than what you would have seen otherwise. How much it is actually attribute will also depend on fundamental growth dynamic of - as we said before, we expect things to pick up in the second half of the year, but that's a little bit a moving, continuous improvement game.

I think the important thing here is that the great experience we have in our Express management team. They really know how to play this and are able to react also on a relatively short notice. And that is why we have also kept a whole aviation capacity in the right balance between firm commitments on owned aircraft and also shorter term lease commitments. And so it depends on how - there's a small stuff for the capacity now in the next quarters and we will adjust accordingly. And I think on the

Forwarding question. I mean, obviously, returning to the growth path is easier when you have some tailwind from the general market, which wasn't there in the first quarter. And that is why we don't have specific targets, that's the date by which we want to see a volume growth again. I think it's more managing for profitability and finding the right balance. If the market picks up more dynamically, it will be a bit earlier, but we're really not fixed on a specific date here.

Frank Appel

Let me add, because the transformation of Leipzig gives us more visibility, our customers more visibility and helps as well. I'm talking at the moment more about sea freight and air freight is to come, more stability and service quality. And you'll see there as well in the industry, our best-performing competitor has, without a doubt, a very aggressive recipe to grow even in a difficult environment.

And that's based on similar IT in the core and very stable processes, great service quality. I think there's, of course, opportunity even to grow in a challenging environment. But we are not in a hurry, because I - and Tim sees it exactly the same, we are - we have - the focus on service quality is important.

And we will never compromise on that just to gain business, so we have to be sure that what we win, we also can execute to the expectations or even better of our customers. And I think this focus from him, despite all the transformation and to make it leaner, will give benefits. But we are not in a hurry. If it takes a quarter longer, I'm equally happy, the focus has to be to provide the best possible service for all our customers.

Edward Stanford

Thank you.

Martin Ziegenbalg

All right.

Operator

And the next question comes from Ed Steele who's calling from Citigroup. Over to you.

Ed Steele

Good morning all. Thanks very much. Two areas I'd like to ask about, please. The first is the incubation extra cost of €100 million that you guided for this year, that seems to impact the first quarter. I think that's mostly in the StreetScooter. So I guess if the currency is still same, that implies the run rate on a quarterly basis will be €33 million a quarter for the last three quarters of the year rather than €25 million.

Obviously, that provides a bigger offset required next year. Do you still think there is enough momentum going on there that you'll get enough revenue and gross margin to offset that higher number, please?

And then second area, obviously, your - on the customers, putting forward your proposal to the regulator for the implementation of the stamp price rise, Is - I mean clearly, there's a range of options there for you still, but one of course would be to delay the bulk of that across the various categories until the January 1, which of course, will then give a bigger percentage gain out of the contribution to the 2020 profit number. And is that something you're considering? And if so what do you think would be the implication for the next stamp price agreement given that you obviously had a higher average rate going into that, please?

Frank Appel

Yes, so I'll take the first one. We have currently, with the intention to make a price increase in July 1, but of course, you're thinking about all these dimensions but we believe that we should do something there, which is helpful. Whatever run rate is, it doesn't have any weight because in 3 years' time, the data will be compared with our original proposal. And then if the stamp price is higher, the regulator, if that's too high from the mathematics because we delayed it, then they will say, you have to reduce prices.

So you don't get a long-term benefit if you just push it backwards, and say, of course, you can say, if we wait half a year and then you get two years and forever a higher price. The regulator is smart enough to figure that out. And that's the reason why there that does not work in such a way. So we have currently the intention to increase by July 1.

Melanie Kreis

To your first question, the EUR 100 million for corporate funds, corporate incubations. You're right, that is mainly targeted at StreetScooter where we're still very much convinced of the growth potential and hence, the opportunity to get a good return on the invest here. Internally, we continue to be a very strong buyer of StreetScooter, and our P&P colleagues are not the easiest customers.

So they really want a robust product for the P&P operations. What is encouraging is that we are now also beginning to sell to completely new customers externally, be it a completed deal with Yamato to also go international with StreetScooter.

As mentioned before, we have the new management team. There's a lot of automotive experience now on board. And we are giving them the time to really come up with their plan and phasing in their plan so we'll probably be able to comment more on the exact timing in all this when we talk about Q2 numbers.

Ed Steele

That's great. Thank you very much.

Martin Ziegenbalg

Thank you Ed. And I think we've got two more callers waiting?

Operator

Yes Next, we have Per-Ola Hellgren who is calling from LBBW. Over to you.

Per-Ola Hellgren

Yes, good morning everyone. I've got only one question, and it indirectly relates to your guidance for 2020. The question is, what effect, if any, do you see in terms of your business coming from the IMO 2020 measure and the likely effects that this will have on world trade? Obviously, your Forwarding business will be affected in the first level, but generally, there would be repercussions due to fuel cost for demand worldwide coming from this.

So the question is have you quantified these effects in terms of your business? And alternatively, if you don't see any major issue out of this, could you please elucidate as why you don't see any effects coming from this? Thank you.

Melanie Kreis

Yeah. So this is so for us, not the most material effect and hence, we don't have a precise quantification model for this. I think, when you look at the overall volatility in rates and the general pricing level driven by numerous macro factors and capacity factors, we still see that not as the main driver. I think the good thing is given that's an industry upswing, we expect that to be then more of a general uplift in the market, of which, yes, customers will have to adapt to. So overall, it's not our number one very on the priority list.

Martin Ziegenbalg

Okay. Over the next caller, please.

Operator

Thank you. And the next caller is Joel Spungin and who's calling from Berenberg.

Joel Spungin

Yeah, hi. Good morning. I've got three. So maybe if you can just start by asking about your pricing initiatives in parcels in Germany. I was just wondering if you could sense of like how far you are now through the process of implementing price rises, maybe how much of the volume has now seen some kind of year-on-year price increase? I know that you still have some outstanding negotiations with larger customers. But if you could give us a sense of how much more we might expect from that side, it'd be useful. That's my first question.

My second question is again on Express, just in terms of understanding some of the dynamics there given the changes in the weights, I know it's not a number you normally give out, but in terms of understanding underlying pricing, maybe you can give us a sense of what's going on with maybe revenue per kilo, that would be helpful.

And then, finally, just on the additional detail on CapEx developments and the investments in the new 777s. I mean, obviously, you've highlighted there that there will be quite a stepdown in 2020, I think €600 million stepdown in CapEx relating to the 777 in 2020. I just wanted to check, is that new information? Is that the first time you disclosed that? Because in my head, I thought it would still going to be quite elevated in 2020 and then come down in '21. And so I just wanted to check whether your thinking on the investment pattern has changed.

Frank Appel

Okay. So on the first, I'll answer the price initiative. So I would say we have about - if you take the average of the first quarter, I would say we have probably two thirds, maybe up to three quarters for service or something to come but of course, that has already developed through the quarter somehow. But there still something to come in the course of the year.

Melanie Kreis

And of course, we will continue to see a year-over-year step up. And I think, the second of one thing is this is clearly not a onetime exercise. But I think the other important focus is to now like we have in Express get into a regular, general price increase in an annual pattern in parcel. I think there's captured a big chunk for the 2019 volume, but obviously, this is supposed to be a continuous exercise.

Frank Appel

Yeah. So one other thing, we have definite best-in-class guys in Express to work on yield management. And of course, they helped the team - I got and some of the guys were new in P&P when I took over last year, and they have learned a lot from our Express colleagues. Probably, they are the superstars in yield management, I believe. And they learned a lot in P&P in the meantime. And therefore, we monitor that, and I have not seen the last statistics, but it's probably, as I said, two thirds or three quarters, which is already visible in the first quarter.

Melanie Kreis

I think there's a nice read-through to the next question on the base revenue per kilo development in Express, which is I think you a very relatively question in the current quarter. I can assure you that this development is still healthy. Also, that is one of the reasons why I'm so confident with regard to Express development for the rest of the year.

We clearly can see that the impact on revenue per day is driven by the weight per shipment and not by the revenue per kilo. And then, with regard to the 777 CapEx, that is nothing new. That is in line with what we have said before, and I think it shows again a lot of relatively.

You can look at it that it's a big step down in 2020 from 2019. But it is still elevated compared to our normal CapEx level, so I would say 2020 is just going to be on our past normalization, but you will still clearly see the impact from the 777 CapEx.

Joel Spungin

Thanks very much. Just maybe very quickly follow-up on the domestic parcel pricing initiatives. Do you think the rate in the first quarter is a reasonable guide to where you'd like to be for the rest of the year?

Frank Appel

Will you say that again?

Joel Spungin

Certainly. In terms of the revenue per item in the general parcels business, do you think that what you achieved in the first quarter is a reasonable guide for the rest of the year in terms of the price increases?

Frank Appel

I would say that's definitely on the lower end of what I expect. So it should be better.

Joel Spungin

Okay. Thank you.

Martin Ziegenbalg

Thank you Joe. And our last caller?

Operator

Yes. The last question today comes from Andre Miller who's calling from Kepler Chevreux. Over to you.

Martin Ziegenbalg

Andre, one question you heard it.

Andre Mulder

A question on the heavyweight again. Would you be able to quantify what that did to growth and possibly to margins? Secondly, for how long will this focus there continue? Should we expect another few quarters or longer there?

Melanie Kreis

No. So the heavyweight campaign was started in the second half of 2018, which is why we still see the visible impact in Q2. And then, it will normalize out in the course of the third quarter. I think in terms of number of shipments, this is a relatively finite number of shipments but of course, in terms of kilos, its [Technical difficulty] impact and that is why it has this distorting impact on the revenue today versus rest of shipment of today growth. So it will continue in Q2, and then it will phase out in the second half of the year.

Andre Mulder

Any specific size? Did it depress growth by 1% or so?

Melanie Kreis

I think you don't see the impact on shipment today growth-wise because it's a small number of shipments. So the 5% shipment per day growth is not impacted by the heavyweight campaign. The delta between shipment per day growth and revenue per day growth, that is due to the heavyweight campaign. I think that is why it's important that the underlying revenue per kilo development is healthy. Also the area there you see the impact is really in the spread between SpD and RpD.

Andre Mulder

Okay. The final question, a short one on CapEx, 3.7, 3.5. What's in between there?

Melanie Kreis

Sorry. I didn't get the question.

Andre Mulder

I saw 2 numbers for CapEx. The 3.7 and 3.5. What's in between that?

Melanie Kreis

Yeah. The 3.7 is our gross CapEx number and the 3.5 is the impact in the cash flow statement because of course, we also have a disposal of assets. So I think, that's our historical number. I think the number we have had for a couple of years quite stably now that this is €200 million delta into the gross CapEx for the balance sheet and what we've seen in the cash flow statement.

Frank Appel

So that's mainly when we are selling vans we have used and trucks which we have used to a lower price, but of course, generates a positive cash flow.

Andre Mulder

Okay. Thanks.

Melanie Kreis

Again, nothing unusual, it would be in line with previous years.

Martin Ziegenbalg

Alright. Andre anymore?

Andre Mulder

No thanks.

Martin Ziegenbalg

Good. Well, okay. Well, I think then, that's concluding the Q&A round. And Frank, you want to close the call with your comments?

Frank Appel

Yes. So as we said already, we had a solid start to into the year. If we go through the different divisions as we did, we see positive momentum of our actions we have focused on in the last couple of months. So that's the reason why we feel very confident that we can deliver this year the guidance - and this has been a very good pace to deliver next year's guidance, which confirmed today as well.

So as I said, I'm traveling around the world, and wherever I go, I see very positive momentum and mood of our organization, which is very encouraging. For me because, obviously, we have taken a lot of broad decisions last year and now we start seeing the benefits from these actions. So with that, I would like to conclude. Thank you for listening this morning on a Friday, and talk to you soon. Bye-bye for now.

Martin Ziegenbalg

Bye-bye.

Melanie Kreis

Thank you. Bye-bye.