Deutsche Post AG (OTCPK:DPSTF) Q4 2019 Earnings Conference Call March 10, 2020 3:30 AM ET
Martin Ziegenbalg - Head, IR
Frank Appel - Chairman & CEO
Melanie Kreis - CFO
Conference Call Participants
Andy Chu - Deutsche Bank
Mark McVicar - Barclays Bank
Cristian Nedelcu - UBS Investment Bank
Matija Gergolet - Goldman Sachs Group
Tobias Sittig - MainFirst Bank
Samuel Bland - JPMorgan Chase & Co.
Adrian Pehl - Commerzbank
David Kerstens - Jefferies
Neil Glynn - Crédit Suisse
Good morning, ladies and gentlemen, and welcome to the Deutsche Post DHL Group Conference Call regarding the results of the 2019 financial year. [Operator Instructions].
Let me now turn the floor over to your host, Mr. Martin Ziegenbalg.
Hello, and good morning, everyone out there. Thanks for joining us at this somewhat unusual early time for the Q4 full year reporting call, as you know, with the Group CEO, Frank Appel; and the Group CFO, Melanie Kreis, with us. You know the procedure. We want to stick to the schedule. And therefore, let's start right away. Over to you, Frank.
Yes. Thank you, Martin. Good morning, everybody. Thank you for joining us a bit early today. I'm more than happy to talk first about the highlights of 2019, then Melanie will talk about the financials, and I will come back with the strategy outlook.
So let's go to Page 3, where I would love to summarize where we stand today. We are in very good shape as a company. I think we have tackled many challenges in the past years, and that's the reason that I'm saying quite often internally, and also today here, that we are in better shape than ever before. I know the company now for 24 years, first, as a consultant, and then as a member of the team and you now know me for 12 years as a CEO. And I think we really have built a great platform which will help us to execute our strategy.
Of course, we are not independent from the environment. That's the reason why we gave the market 1.5 weeks ago clear guidance that we are on the right path to deliver the €5 billion before the coronavirus impact, and we will address that later on anyway, and the StreetScooter and also our production operations. So we have shown you in autumn a very clearly defined strategy, and we reconfirm today that we want to deliver the €5.3 billion in 2022.
If I go to the next page. This is also well known, and I think when you talk about your annual numbers, it's good to remind us. We are talking about purpose for quite some time. We are calling that connecting people, improving lives. And actually, at the moment, you see that. We are fundamentally important to connect the dots and to help the world to recover from the impact of the coronavirus. We are fundamentally important to get things moving, and that's our focus.
To do that, we need a very engaged people. And we have improved that level because highly engaged people will provide great service and great service finally drives your top line, and that leads to good returns for the shareholders. We also made progress in 2019 on our carbon footprint, which becomes more and more important for people, that, as you know, we are working on that already since 2008.
If I go to the next page, which I said already, we have improved along all dimensions with our employee engagement. So that's the employee opinion survey results. So we are heading now to pretty high numbers. Don't forget that this is a blue collar organization. You tentatively get higher numbers for white collar people, but we are very happy with the high numbers. Many of them are already in the 80s, which is actually the bar to really have loyal employees. We get credits for that as well as externally, Great Place to Work. One of our divisions got the fourth in the ranking globally. We are qualified as a Top Employer in many countries. This actually is, long term, the most important indicator of all indicators because if the morale of the organization goes up, you definitely see good improvements on service quality.
And that leads me to the next page, where you actually can see -- where we measure then Net Promoter Score. You might ask why we are not showing that for P&P, because we only recently started to do that as well. I introduced that even to say need to measure the NPS score. That's the reason why you see here the number of complaints per 1 million shipments, they have relatively reduced in post and even more in parcels, which is a strong sign that customers are more happy. On the other divisions, you can see here, we have improved year-over-year. Again, Express is on a very high level already for a long, long time. And that is the reason why we have gained market share for a long time. The other divisions are getting close to that level now as well, which is very encouraging. Again, it's based on the good motivation of our people.
If you then go to Page 7. You see as well, we have done pretty well for many years now to reduce our carbon footprint. We have improved by 2 percentage points last year. So we believe that we are on a great journey to deliver our 2025 target to become more efficient with regard to carbon, 50%, on the basis of 2007, but also other indicators. We have a huge fleet of electric delivery vans. 30% of the deliveries are already carbon-free. We have increased further our green electricity. And we have, in the meantime, built even -- planted even 3 million trees. So all that is supporting overall our vision.
Overall, if we come now to the financials, that means what is in for our shareholders. We have delivered along all guidance indicators on the spot. So the group is in the middle with €4.1 billion. P&P is slightly above the middle point of the guidance. DHL is also in the range. The group functions are slightly above that. That's mainly related to the StreetScooter challenge. And what is really strong is for free cash flow, which is significantly above what we originally guided. And that shows the quality of earnings which we have definitely improved in the last year.
Page 9 shows -- gives you two important things. One is the resilience of our portfolio. We said that already two weeks ago, that, of course, we see two divisions are impacted. And you see them here on the right, the DGFF business and the Express business. But the others are pretty resilient against the short-term volatility. What equally is encouraging, and I think the reason why I would say we have never been in better shape, if you go through that, we have a very healthy trend to improving margins year-over-year. Express is known for some time, P&P has recovered nicely in the last year after we had a drop in Supply Chain, and DGFF are moving upwards in the right direction. In Supply Chain, we gave you quite some time ago already the range of 4% to 5% margin aspiration, and we are very close to the upper end. So that shows the resilience, and on the other side, the significant improvements we have done in the last years.
And since we have done so well, on Page 10, you see that we want to let our shareholders participate. That's the reason why we're increasing our dividend by €0.10. We believe that's a fair participation and is following exactly our finance policy. And we believe that this is a strong sign of confidence from our side as well because we are very confident that we can deliver, before corona, our €5 billion this year and then the €5.3 billion in 2022.
And with that, I hand over now to Melanie for more in-depth financial notes. Thank you.
Yes. Thank you, Frank, and good morning also from my side. Thank you for joining us so early. Like in the previous quarters, you will have seen that we have included management comments, and I will hence not talk about every number on the following slides. I'll just focus on some important key messages. Starting on Page 12 with the group P&L. And I think on that page, I can only echo what Frank already said. 2019 was a record year for us: €63 billion in revenue, €4.1 billion in EBIT, €2.6 billion in consolidated net profit. So we were able to really deliver in 2019 according to plan. And on that basis, with a 26% increase in consolidated net profit, we had a solid basis for the dividend improvement Frank just talked about. And we will naturally come back to corona and what is happening around us in a couple of minutes. But I think like in normal life, if you get a flu, you want to be in prime shape beforehand. You want to have a good immune system. And I think our 2019 somewhat show that we really started the year 2020 in excellent shape. .
Turning to Page 13 and the group revenue growth. I think the important message here is that despite 2019 being a year with limited macro tailwind, we saw growth across all our divisions. And I think what is particularly pleasing when you think back to the beginning of the year, looking at the Express growth for the full year, underlying organic growth of 4.2%. I think that also shows the strength of our largest DHL division.
Turning to the next page. We obviously succeeded in translating the top line growth with strong leverage into even stronger EBIT growth. On Page 14, we show all the reported one-off effects. If you take them out, we had underlying growth, excluding one-offs, of 7.6%. And I think here, again, the important message, also when you think about the 2020 step-up, is all divisions contributed. So in terms of underlying EBIT growth, we really had a year where all members of the family did their share in contributing to the EBIT step-up, which was very good to see.
Turning to the fourth quarter, on Page 15. I think that is also the message of what I just said for the full year for the Q4 performance. There's some nuances here. I think the first important message for the fourth quarter is when I look at what we had internally in for in the fourth quarter, all divisions delivered in Q4 against our internal plan. P&P and Express continued in line with the positive Q3 trends as we had aimed for. Obviously, both air and ocean freight, in terms of market development, didn't get easier in the fourth quarter. Nevertheless, DGFF kept delivering EBIT growth due to the internal improvement programs being successfully executed. On the Supply Chain side, and that is something we had flagged also in the Q3 numbers, we had some phasing in our real estate project, which led to an anticipated year-over-year decline in the fourth quarter. And on the eCommerce Solutions side, we had some final bookings for cost of change. We're done with that now. And I will talk about the underlying performance of eCommerce Solutions in a second. So overall, the fourth quarter was completely in line with what we had expected and led us to the successful finish of the year and delivering on our guidance of all dimensions.
With that, I will now go into some more detailed comments for the divisions, starting with P&P on Page 16. And I think the next 2 pages are going to be relevant for understanding what we also expect for 2020. So when we look at the volume trends in our Post & Parcel business in Germany in 2019, you can see that for the full year, the mail volume decline was minus 3%. So that was exactly in line with our long-term trend of 2% to 3% mail volume decline every year. And on the parcel side, we saw for the full year volume growth of 6% with a very good yield development. Revenue was actually up 9%. So the 6% for the full year, that perfectly leaves us in the range of 5% to 7% we had guided for.
Now when you look at fourth quarter, you will note that on the parcel growth, the number, the 3.9%, was lower than what we had seen for the full year trend. This was still extremely strong. And that is something I also want to flag for the year 2020 because what we have seen in Q4 and what we now expect also in the year 2020 is in-sourcing of Amazon. They're taking some of their volumes into their own Amazon Logistics network, something which doesn't come as a surprise for us, but which we have anticipated and have been also reflecting in the contractual arrangement with Amazon.
That takes me to Page 17, where we have tried to be extremely clear on what to expect for the P&P volume development in 2020. The first topic relates to the postal volume development, something which we had already flagged after Q3 in November and December. We have obviously put in the regular price increase on the 1st of July. We have seen very limited elasticity, and we have now, in the beginning of this year, reduced the rebates given to larger customers, so-called partial services. So that has been de facto a price increase for those customers. We do expect some electricity here, but from what we're seeing at the moment, that is totally in line with what we have seen in our previous price increases. Nothing we are concerned about, totally in line with expectations.
The special structural effect, which we will see in 2020, goes back to a court ruling we had at the end of October, where a court ruling specified that certain types of shipments can no longer be sent as dialogue mail but has to be sent as regular mail. The benefit of that is every one of those pieces now carries a higher price, the price of regular mail, but there are some substitution effect and we are losing some volume. And that is leading to a special effect in 2020, where we expect mail volume decline to be more in the 5% to 6% range than in the 2% to 3% range. This is really a temporary 2020 effect. I think the important element is that this is EBIT neutral because for the dialogue mail, which is moving over to regular mail, we get a significantly higher average price, so that on the revenue and on the EBIT side, the impact will be neutral.
That's postal side of things. Now turning to the parcel side. We expect continued insourcing from Amazon into their own Amazon Logistics network. We expect to continue growing healthily with other customers. But the overall balance will lead to a slower growth in 2020 than what we had seen in the previous years. We have given you a relatively wide range, 0% to 5%, because that will depend on how quickly Amazon will move forward with the insourcing. So we expect continued growth but more in the 0% to 5% range. That's the first important message here.
The second important message is that -- I mean, we are continuing with all our yield measures. But of course, also for large customers, if there is a different development on the volume side, that will have adjustment mechanisms on the pricing side. So the whole impact on the EBIT will be something which we have fully included in our internal planning and also, of course, in our guidance, which we have given to you for the P&P division.
That takes me to Page 18, a familiar slide. I just want to reconfirm that we are committed to showing the step-up in P&P to more than €1.6 billion in 2020. And we, of course, expect all 3 focus areas to contribute this amount shown here on this page to the step-up.
So that was P&P. Now briefly turning to the DHL divisions, and starting with Express on Page 19. You can see that after the first half of the year being impacted by the heavyweight campaign in the second half of the year, as we had hoped to do about a year ago, we were back on track and we saw good year-over-year EBIT growth in the Express division. The whole revenue shipment growth mix in the fourth quarter was solid and strong, and that was also a trend which continued into January and the start of the year. So we really had a very good start into 2020 in our Express division. I will talk about the corona implications in February and early March in a second, but I can really say the Express division is in fantastic conditions, and we are deeply convinced that, that will also help us hugely now dealing with the corona situation.
That takes me to Page 20 and the situation in air and ocean freight. Obviously, the market dynamic has weakened in the second half of the year. We can also see that in our volume development and also in the GP development. The important message is, however, that due to our internal improvement measures in DGFF, which we continue to execute and which are largely under our own control, we were able to show EBIT growth also in this challenging market environment in the fourth quarter.
And then we turn to Page 21. You can see that we were able to take the GP to EBIT conversion up to 16.6% for the year. So we are very pleased with the profitability development in the Global Forwarding division in the fourth quarter and for the full year despite the challenges in the market. And of course, this relatively weak volume development in the market was also visible in the beginning of the year. There, you also have the effect of the timing of Chinese New Year. So it is a bit of a different situation, I think, for the air and ocean freight markets going into corona than what we have seen on the Express side.
For Supply Chain, we have included a bridge on Page 22 to show you the underlying EBIT growth rate in 2019. So we have taken out the well-known one-off gain from the disposal of the Chinese business, the restructuring charge against this gain, and we have also taken out the loss in China contribution to really show you the underlying earnings growth in Supply Chain. And you can see here that Supply Chain showed an operating improvement of 8% in the year 2019, and that is at least what we expect for 2020 from our Supply Chain division.
Last but not least, our youngest family member, DHL eCommerce Solutions on Page 23. Yes, we booked about €80 million in restructuring charges. But when you take those out, and we saw that very clearly also in the second half of the year, we are in positive territory in terms of operating performance for eCommerce Solutions. And after they have delivered €29 million operating results in 2019 already, we felt that it was the right time to take the guidance for this division up to between €50 million and €100 million contribution in 2020. And again, we don't expect further restructuring in DHL eCommerce Solutions in 2020.
So much for the operating performance in the division. Now over to Page 24 and the free cash flow picture. We have added a number of slides on cash flow. I'm not going to talk about every single one. Obviously, 2019 was a year where we had a number of one-off effects, most notably, the €1.1 billion, the peak year for the 777 CapEx. We have the cash-in from the Supply Chain China transaction. If you take those big elements out, the operating free cash flow was around €1.3 billion, and we're very pleased with this development and also quite happy that we were able to overdeliver on our guidance for our free cash flow in the fourth quarter.
When you kind of like look at the different elements of our cash flow statement, we have tried to give you some interpretation support on Page 25 for what is happening in the operating cash flow because it is not entirely straightforward. I think the fundamental question about OCF is why did it only increase by €250 million when we had such a significant step-up in reported EBIT. I think there are a number of technical things you have to bear in mind. So for example, you have benefit from the Supply Chain China transaction in EBIT, but it's obviously taken out in the operating cash flow. We have movements between changes in provisions because we booked noncash restructuring provisions in 2018, which now turned into cash in 2019. I think if you take all that out, the main reason why OCF grew less than operating EBIT was taxes. Due to the higher earnings and an increase in the tax rate, we actually paid more taxes. So you can see in the middle of the page the step-up by €264 million in the taxes paid line. Very clearly, there was also a phasing effect in here. So we don't expect anything like that type of step-up for 2020. You will see in the 3 pages that we expect a much more moderate development on the taxes paid line.
In terms of Capex, yes, as discussed on many occasions, 2019 was the peak year for the 777 program, €1.1 billion. That will now come down to around about €500 million in 2020 and around €300 million in 2021. The fundamental Capex, the core CapEx in Express is to remain flat at around €1 billion. So for 2020, both Express CapEx and group CapEx will go down because of the phasing of the 777. I think one additional interesting comment from my perspective on the 777 is we now have 6 of those 777 in operations. Our aviation colleagues are super happy because the operational performance is outstanding. And from a financial perspective, we're also really seeing the savings coming in. So the whole re-fleeting 777 exercise is going according to plan.
Page 27. I think very good news from my perspective. Despite the CapEx peak year of 2019, we saw a nice improvement in ROCE, up to 11.4%, and this -- and that despite the definition challenge that we have included all the lease Capex, of course, in the denominator of the ROCE calculation even though the cash-out is really happening over the following years and is not already set. So very pleasing development here.
I will not talk about the next 2 pages. We have included them to give you some insight what do we expect going forward. And we're happy to answer questions on that. And also the IR team is, of course, ready to talk you through in detail.
That takes me to Page 30 and our guidance. There, nothing has changed in the wording compared to what we said 10 days ago on February 28. We had a good start into the year across all divisions and saw a solid trajectory towards the €5 billion. But obviously, we are seeing the impact of corona in February and so far on our Express and Forwarding divisions. What we now, with the books for February being closed, saw was that we were more at the positive end of the €60 million to €70 million range we had given you. So there was obviously an impact, but it was at the better end of the range we had given before. And what we're also very clearly now seeing in the early days of March is that China is on a path to normalization. We see that clearly in our Express volumes, but get also increasingly encouraging messages from the forwarders. And in the first week of March, for the Express business, we were actually back in positive growth territory. So obviously, in February, there was a decline in shipment. But now in the early days of March, we were back in positive growth territory, and we are beginning to put planes back on -- into the network.
So turning to kind of like the normal business and excluding corona, and of course, also excluding StreetScooter on Page 31. We are showing again our fundamental bridge of why we were still confident that we are on the right track with the operating business to get to the €5 billion. I talked about the P&P situation, where we see continued contribution from the overhead measures, from productivity improvements and from yield and pricing giving us confidence in the step-up for P&P. I think for DHL, we saw in 2019 that all DHL divisions delivered operating EBIT growth, when you leave the restructuring charges aside. And I think on that basis, yes, adding €520 million for DHL is not unambitious. But with all 5 -- with all 4 DHL family members contributing, we feel as a team that in terms of operating performance, that is achievable.
And naturally, we now have to see how the whole corona situation plays out. As mentioned, we are beginning to see some encouraging signs. But we don't have a crystal ball either, so we will have to see how this whole situation unfolds.
Finally, on Page 32, some other relevant guidance elements to bear in mind for 2020. After the good cash flow performance in 2019, underlying €1.3 billion, our guidance for 2020 for free cash flow is around €1.4 billion. And that includes the €500 million for the 777s, which we are planning for 2020. It also includes the ScreetScooter restructuring, as mentioned before on the 28th. So €300 million to €400 million restructuring charges are not going to have a significant impact on the cash flow. So the €1.4 billion has these figures fully included. But naturally, we have to see what impact corona is going to have on the operating results, and hence, ultimately, also on the free cash flow.
In terms of Capex, we are going to keep our fundamental Capex, excluding the 777, relatively stable at around €2.6 billion. And that is a number we are planning to invest into the future growth of the business in our core logistics activities, independent of StreetScooter and corona. And last but not least, for the tax rate, we expect the tax rate to be between 22% to 24%.
So much for the guidance for 2020. And with that, I'll hand back over to Frank for the outlook.
Yes. Thank you, Melanie. Then I move further on to Page 34. So on that page, this is exactly what we have told you in autumn. We are focusing on our core activities with our "Excellence. Simply delivered." approach. You can even say, if you read that, that we have taken a decision left or right for the StreetScooter as a logical consequence of strategy execution because we said we want to focus on that, and that's the reason why we either wanted to find an investor which we couldn't find, and then it's logical to say we wind it down to help to operate our fleet.
Digitalization plays a very important role in that strategy. And we have brought today only one highlight, which is part of the digitalization strategy of P&P on Page 35. Maybe I'll only highlight some elements. So for instance, from summer on, if you want, you can see the front page of all letters in a box in an app, which will be delivered and they'll be in your mailbox at the evening. So that gives you an early alert somehow. Or next to that, the tracking. We will introduce 2-dimensional bar codes to the stems, and then you can track your letter very nicely. We also, on the Parcel side, we give you from fall on this year, a 50-minutes notification that the parcel is coming soon. And you will also see this year more and more where your parcel sits. So these are just examples of the digitalization agenda Tobias Meyer put in place for P&P. We have equal strategies and road maps for the other divisions. And as you know, we committed to invest €2 billion into that to generate €1.5 billion benefits until 2025.
If you then go to the next page. These are our 2022 targets. I already said that we keep the minimum target for 2022 as more than €5.3 billion EBIT. The cumulative CapEx is the same as we told you already. And we have increased the free cash flow by €500 million on the lower and the upper end because we believe that we have the right trend at the moment, and that's the reason why we are confident that we can even generate more free cash flow than we originally anticipated despite that we have not changed the CapEx guidance.
So that leads me to the last page where I can summarize. We are in best shape ever. And we are -- as Melanie already said, our immune system is in great shape. This is the employee engagement. This is the customer satisfaction. That's our carbon footprint. That's our focus on executing the strategy. And that's the reason why we think we made great progress in 2019. That's the reason why we also proposed €1.25 as a dividend. And I think we have very clear priorities what should we have to do now.
And I think we are working already on corona, maybe just some last elements to that. I'm sitting together with the ops heads of all divisions on a daily call to align. Is what we are doing already enough? Can we do more? Is that fully aligned? And that's very productive, and our ops people are doing an outstanding job. That's the moment of truth for strong companies. I'm impressed by the agility and the mindset of our people who are doing our day-to-day operations. And that makes me very confident that we are on the right path, not only to deliver as much as possible and on the right path to potentially even deliver the €5 billion, depending on how impactful the coronavirus on overall volumes will be. And we will lay in this year even more the foundation to be successful midterm and deliver our Strategy 2025 and our goals for 2022.
And with that, yes, I hand then now the floor back to Martin and we can start the Q&A. Thank you for listening.
Thanks, Frank, Melanie. Straight to the point. Operator, initiate the Q&A round, please.
[Operator Instructions]. And the first question for today comes from Andy Chu who's calling from Deutsche Bank.
Three questions, if I could. Firstly, on Amazon. If I just look at 6% of your P&P revenues, I think that's about €1 billion of revenues roughly from Amazon. How much of revenues from Amazon do you expect to keep over the next couple of years?
Secondly, in terms of, Melanie, your comment on March and being back into positive growth. Is that in terms of TDI volumes? Is that a China comment? Is it a group comment? Is it an EBIT comment? Maybe more clarity there, please, on the March comment and comment on Express.
And then lastly, in terms of geographic exposure. I know that you give it out by sort of Asia Pacific and various regions. But could you kindly give us the exposure that you think that the group has to sort of China, and also please, to the U.S.
Yes. I may take the first, and Melanie, the second and third, Andy. So on Amazon, of course, that's very difficult to judge. I think our goal will be that we keep as much as possible. But of course, we want to grow and continue to grow and gain market share with the other vendors. And I think that has been our goal for quite some time. It doesn't surprise us that this is now happening. I said that several times that it's the right of every customer to do what they want is best for them. I think we are well positioned, particularly with the enhancements, that we even keep the volumes. I think we have delivered great service quality in the last 6 months to all these customers, and I think that's the right recipe. Not to forget that there's a broad range of remote areas where it will be very costly for anybody to deliver on its own.
But we have to wait and see and we will update that. We can't make decisions for Amazon. What we have done right, I think, we adapted to the commercial terms of contracts and to that expectation we are now seeing happening. And I think that's the right approach. We should really look into the contracts we have of large customers, if that is commercially right for us, instead of hoping that they keep volumes with us. The dependency will reduce significantly this year. And that is also good news, I think, in the long term.
Andy, to your second question, so I was talking about the Express TDI shipment growth, where we saw a recovery into positive growth territory in the first week of March. And that was also supported by a strong recovery in China on the Express side. In terms of speed of the recovery, we don't see the similar speed in forwarding yet for obvious reasons. And that is also in line with what we had said before. I mean, obviously, looking also back at previous crises, we'll refer to the recovery in Express. I think in the current situation, with so much of the passenger aircraft being grounded, having our own aviation network is going to be a super valuable asset for us.
And that is why we are really beginning to put flights back on. I mean, obviously, in February, we had also made some adjustments to the network, but given the strong volume trend now, we are really going to the other direction. One week in March doesn't make a complete end of the crisis. And I think there is still, as you know, a lot of volatility out there. But we also wanted to share that encouraging news with you. In terms of geographic exposure, so in terms of country ranking, I mean, Germany is obviously our largest country by revenue. The U.S. is #2 and China is number four.
Yes. Maybe on that one, if you look into our industry, I think, by far, we have the most balanced. And that is another element of resilience globally. Our revenue is not exposed particular to one region or one country, and that's across the divisions. And we have seen that in former crises, our -- and we said that. We have said that last year and the year before that our portfolio is a pretty resilient portfolio, and we actually see that at the moment.
The second element, the agility of our organization, is just outstanding. It's impressive, if you talk to the operators on a daily basis, how much they have answers to questions you have not even thought about. And that's great to see. And that's actually what I have experienced when we had the crises in 2008 and '09, but the company was in much more difficulties at that time. We have seen that when the ash cloud was over the Atlantic. We have seen that when Fukushima was happening. This is the DNA of our company, and I'm very proud if I see how reactive and agile our organization is.
The next question for today comes from Mark McVicar, who is calling from Barclays.
Two questions, really. First of all, with the labor negotiation coming up in May. What sort of wage increase expectation have you got? Or should we be thinking about as being embedded in your guidance? And the second question is how much flex is there on the core CapEx, excluding the 777? If things get a lot worse in Europe or the States, whatever, corona is still growing over here. Could you take that down by hundreds of millions? Or is a lot of it actually committed?
So Melanie can talk about more, and I will just say a general statement on that. The labor negotiation, we have not received any request. The time of high uncertainty where people talk about the session is, of course, an important factor that we are a very reliable employer, and people will appreciate that.
Also, the regulator have put a pressure on our parcel increases, and we have to pull it back, put pressure on the headroom. And I think that is well -- not received, but accepted by the unions as well. But we don't know yet what they will demand for. Of course, we have a ticket in mind and I don't want to share that publicly, otherwise, they know what we have put in our budgets. But of course, we have ideas about that, but let's wait and see now what they say.
Before Melanie can say more about that CapEx, I think what I tell the organization is these are the moments where you have to continue to invest. So it is the last resort to cut CapEx back. I think it's right to strengthen our footprint. We have a financial result despite that we are increasing the dividend quite a bit, and we should do that. These are the moments where you better not cut back on CapEx to improve on the short term. I think that's a moment where we have to continue and execute our strategy. But of course, we have some flexibilization. Melanie can talk about that. But I think that was -- would be the last resort, which I can't see that this is necessary. It's the opposite, I think it's right for the long term. It would be good if we continue to invest in the right way to improve our footprint we have globally anyway already.
Yes. So maybe just one addition, first, on the union side. I mean, I understand this is a timely innovation negotiation, right? So we don't have any of structural complexity. I think that should also be helpful in the process.
I think on the CapEx, we could flex CapEx. And that was, of course, the discussion we also had in the team now, given that we haven't given you a number now for 2020. But as Frank said, we decided, given the underlying strength of the company, to continue with our CapEx for now in line with spending. Should things change fundamentally and there is still a bigger room to reduce the numbers, but I mean, obviously, now we're also very much focusing on cash management. And I mentioned, for the working capital side of things, so I think CapEx is really kind of the last resort for us.
Next up, we have Cristian Nedelcu, who is calling from UBS London.
Three, if I may. Firstly, you've mentioned what's happening in China with Express volumes. Could you give us a bit of color what you are seeing in the first week of March in terms of pricing in your Express business in China?
Secondly, looking at Amazon's own logistics network in Germany, how much further scale do you believe they need in order to start to compete more meaningfully against you to -- on third party volumes?
And last but not least, on coming back to Express in terms of the cost split there. Could you help us by offering us a little bit more color in terms of fixed versus variable costs there when you look at purchase goods and services, when you look at other operating expenses? And any color you can add there on fixed versus variable nature of the cost base in Express?
So may I take the first two and then Melanie can talk about the loss. So pricing, it's not really 100% clear. But of course, in a moment, where you have tight capacity and you're in control of that, there should be upside pressure on pricing because customers need our capacity because many carriers, particularly the passenger airlines, have back on capacity. And as Melanie said, we are expanding capacity, and that has a price ticket. How much of that is -- I think it's too early to say because, of course, we have also contracts and all this kind of stuff.
On Amazon, that's a complex matter, which we can't answer just because it's unclear how much they really want to build their footprint. And then it's also, if they start selling products just as a logistics company has significantly consequences also of their market positioning because then they become a logistics company that they try to avoid so far. They are already a logistics company, but they claim that they are not a logistics company because then, of course, with dynamics, the regulatory and the antitrust things are changing. So it's a complex question, which is there's no easy answer to that. You better ask that question Amazon, what their plans are, because they probably have to think about all these dimensions. So we can't say that at the moment if that's doable at all because the regulation is -- to give you an example, the impact of this new regulation that you have to check for security payments of your subcontractors is valid for logistics companies and not for nonlogistics companies. And Amazon is not following that route because they say, we are not a logistics company. If they sell through third-party, they become a logistics company.
So maybe if I just add, is this -- Chris talked about that before. I think the situation in Germany is not one-to-one comparable this situation, for example, in the U.S. and in the U.K. When you look at the German partner market, there has been competition out there for many years, and we are the premium market leader. So we have had, for many years now, competitors with a lower service quality and lower pricing. And I think that puts us in a very solid position, also vis-à-vis potential new competitors.
In terms of fixed versus variable in Express, it is difficult to give a precise number here. I think what we have now shown again in February, when we did adjustments in the aviation network, there is more flexibility than what you would think. So it's not a static network, particularly on the flying side. There are constant adjustments, and that allowed us to offset some of the revenue shortfall in Express also in the month of February by taking out costs. And that gives me a lot of confidence independent on how things are going to develop. The Express team will react also very swiftly on the cost side.
The next question comes from Matija Gergolet calling from Goldman Sachs.
Yes. Three questions for me. The first one is on the free cash flow guidance. Can you elaborate a little bit why you're increasing your 2022 free cash flow guidance by approximately €0.5 billion? I'm not sure I quote that.
Secondly, on the taxes. So if I understand correctly, the tax rate should be increasing in 2020 versus '19, but the cash tax payment should be going down compared to last year. Can you just confirm on why is that the case? Or maybe what kind of, say, cash tax rate should we be assuming for the year?
And thirdly, sorry, the inevitable question on coronavirus. As you mentioned on the first week of March, can you give us a bit of color of what you're actually seeing in Europe, if you're seeing any material slowdown at this stage already?
You may let me start with coronavirus. The volumes were up year-over-year globally, so we have not seen a slowdown in Europe yet. If that happens, it's unclear. Maybe it will be slightly different because we have not shut down yet anywhere in Europe like we had in China, and one was, as you know, a quite important manufacturing side. So no -- in the first week of March, we have seen a global improvement, including Europe.
Okay. Then coming to your cash flow questions. I mean, first of all, in terms of why have we increased our cumulative free cash flow guidance for 2020 to 2022. I mean, if you get the feedback after the Capital Markets Day that you saw that as conservative in the first place. But given the performance and the over-delivery on the 2019 cash flow in light of our free cash flow guidance for 2020 of the €1.4 billion, still including €500 million for the 777, which is then going to fade out in the subsequent years, we really feel very comfortable with increasing the free cash flow guidance by €500 million for the period 2020 to 2022.
In terms of cash taxes paid and tax rate, so maybe I haven't been clear enough on that one. We saw this sizable increase in 2019 compared to 2018, which was due to 2 factors. First of all, our abnormally low situation in 2018, with all the restructuring expenses and so on. And then also some phasing, which is 2019. So on that basis, the guidance for taxes paid in 2020, which you can also see on Page 28 of the presentation, is that we expect income taxes paid to go up to around about €900 million. So there will be an increase from the €843 million, but that will be a much more moderate increase than the big step-up we saw from '18 to '19. And because of all the deferred tax liabilities, there is no one-to-one linkage to what is happening in taxes paid to what is happening in the tax rate. Indeed, we see an increase to 22% to 24% for 2020.
And the next question comes from [indiscernible].
Two questions from me, please. First of all, on CapEx. Like take a little bit of a longer perspective and think about how you see this developing over the medium-term being, excluding the Express refleeting that you've already talked about, how we should think about that ongoing spend and where you're planning to focus this.
And then, second, on DGFF, please. We saw a sharp increase in conversion ratios this quarter, and I'm just interested in what's driving that? How much is mix? How much is actual efficiency gains? And how you're thinking about balancing conversion improvements and volume growth going forward?
Okay. So let me start with the CapEx question. So I mean, our underlying CapEx guidance for this year is €2.6 billion. That's a small increase from the €2.5 billion underlying we had in 2019, and we expect that to be relatively stable growing moderately. So no peaks and spikes. Even at the €500 million, just starting off the 777s this year, €300 million next year. But then we expect a relatively stable, slightly increasing, but at a very moderate pace development in the fundamental CapEx.
As you know, we have two CapEx-heavy divisions, the largest one is Express, where we have explicitly said that for the next years, we expect around €1 billion in CapEx for Express. So for the rest, the second largest is P&P, where we will continue building out our parcel network. But here again, also a more healthier volume mix, coming back to the Amazon question, is also going to help us on the CapEx build-out side.
In terms of DGFF conversion, yes, I think what we're really seeing here is that all those measures, which we have been working on under Tim Scharwath's leadership for many quarters now, are coming together. So there is, as you know, huge IT component. You may have seen in the presentation that in terms of rolling out CargoWise for ocean freight, we're pretty much completed. We're now in the middle of the airfreight rollout, so obviously this is going to help us drive fundamental conversion up.
In terms of volume growth aspirations, I mean, our anticipation is this -- the market, hopefully, eventually normalizing that we will get back to growth in line with market. But what we are focused on at the moment is the stuff we can control, and that is moving out our internal improvement agenda.
The next caller is Tobias Sittig calling from MainFirst.
No weather milestones will be as fantastic. But I'd like to focus a little on volume. Can you give a little bit more granularity on the 0% to 5%? I mean, you guided for a 5% to 7% trajectory through to 2025. Do you think the Amazon sort of phasing out will be largely completed within 1 to 2 years? Or is that a longer-term dent to volume growth? Is there a component of B2B volumes not growing this year? Is the price sensitivities there are something that will phase out and you will regain some market share? So any granularity here would be much appreciated.
Air Freight forwarding altogether is still growing below market. You've been sort of thinking that you could keep up with market second half 2020, you did not yet. I mean, what's your scope for 2020 in terms of relative market share performance there?
And on Mail, what visibility on sort of the shift that you expect basically from direct mail to Mail Communication on the back of that regulatory change, which is driving the volume steady out there? The largest contracts already signed, so you'd have reasonable confidence that, that will actually happen? Or is it the risk that you may not get much of the volumes that you're losing on the direct mail side back in full-price letter?
Okay. So on the first question, Parcel volume growth also in the medium term. So I mean, in terms of the fundamental market growth, we still think that over the next years, 5% to 7% growth for the market is a realistic number. And we also expect continued growth for us with other customers, but there's clearly going to be the Amazon offsetting effect now in 2020, where it will depend on the speed of the insourcing, which is why we are giving you a relatively wide range of 0% to 5% for the current year. And we will then have to see where we stand at the end of the year to give you an indication for 2021.
In terms of Air Freight, yes, I think that is really difficult as a market to forecast. I mean, our aspiration is to get in a stable, steady state into a position where we don't lose market share anymore. But obviously, at the moment, the market was not in a normal situation prior to corona and is now in very volatile state. So I think we first have to see how things stabilize. But then our aspiration remains to get back to growing at least in line with market.
In terms of the shift from dialogue mail to Mail Communication, that is really going according to plan, which is why what we have mentioned in November for the first time, we cannot really reconfirm there's a lot of confidence. There will be the impact on the volume, but we don't see the impact on the revenue, as anticipated. So I think in November, it was an announcement. Now after the first two months in the new world, we will see that it's happening according to plan.
Can I just follow up on the Parcel side? I mean, you said that the market growth has seen 5% to 7%, and I hear between the lines that you think you grow lower because of losing the Amazon volume. But my take from your Capital Markets Day was that you also wanted to be in that 5% to 7% bracket and that you would compensate basically with market share gains elsewhere. Is that not the message you're conveying anymore?
No. I think we're talking about a different time horizon, yes? And so I mean, the 5% to 7%, that was always across kind of like the time period until 2025. What we are now talking about in 2020, it's kind of like a special year with the Amazon insourcing. But obviously, our aspiration is also to kind of like get back to growth in line with market, and what we're seeing from the rest of our customers is also continuous, healthy growth.
Okay. Sorry to follow up once again. But I mean, you say 2020 is a onetime effect. Does it mean that you expect most of the transition and the build-out to happen of Amazon in 2020 and then afterwards to have a more steady state?
Well, I would say that, obviously, we already saw that now at the end of Q4. We will see insourcing happening. So the relative rate of Amazon at the end of this year will be quite different to the end of 2019. So our ability to offset a further reduction in Amazon volumes just by shrunk relative size of Amazon will be different in 2021.
And next up, we have Sam Bland calling from JPMorgan.
Two questions from me, please. First one is on the impact from coronavirus. Just can you give a little bit of an insight on how in practice you quantify the impact on your EBIT from this? Obviously, the impact is quite sporting could be quite broad across the division. I just wonder how rigorous that process is of working out, okay, what's from coronavirus versus the more general weakness.
And the second impact -- second question, sorry, is on the impact of Amazon parcel volumes. I think you've given the 0% to 5% range. Obviously, you said it's quite a wide range. And I think of P&P as being a very operationally geared business. I just wonder why that doesn't result in a little bit more uncertainty at the EBIT level.
I think, first, on the corona impact quantification. I think this is also a bit uncharted territory for us. I think the helpful thing was that we have a relatively solid planning for what normally happens after Chinese New Year. So for example, on the Express side, and the good chunk of the impact in February was from Express. We have a clear pattern on how volumes normally normalize after Chinese New Year. And so we were able to now say, hey, this week, we should be at that level, but actually, we are kind of like X percent below, and that is how we were able to quantify the volume revenue impact. And then, of course, we were able to also quantify what offsetting measures we took on the cost side with regard to the network adjustments and cost-reduction measures. But obviously, that is now something we are also kind of like discussing in with the controlling team, how they're going to do that now going forward.
And for forwarding, we were saying, we were able to say, okay, how many of the stations will open? How much volume did we have? So I think for February, there was a relatively solid quantification, and that's really helpful that we always have some very detailed modeling around the whole Chinese New Year effect.
In terms of Amazon parcel volume, and so as I mentioned, naturally, we have a volume dependency in our pricing. And so we also will see if a customer gives us less volume that will have an impact on the average price. I think that's the first element. And the second element is that we had already in our planning for 2020 anticipated that there would be this insourcing and hence have planned accordingly on the OpEx side. So that the whole Amazon effect is covered in our internal budget and all in the guidance we have given you for 2020.
The next caller is Adrian Pehl, who's calling from The Commerzbank.
Yes. Just three questions from my side. Well, first of all, just quickly on corona again, obviously, since at least some time elapsed since the recent call. Nevertheless, the question is, if you see some anticipation in some markets of e-commerce purchases that does help you actually on the volume side, so people are simply ordering more, which might help you for this year.
And secondly, on Amazon, again, I'm just curious to hear your thoughts about how you think about market share, given that in Germany, obviously, you have 44% on the parcel side and Amazon, obviously, losing some volumes on that end. Would you allow actually drop market share below 40%, basically? Or is that a measure how you see or how you control your business actually? And a bit linked to that. The effects in other segment with your partner, Amazon, are there any from this deliberate reduction of volumes?
And thirdly, on DGFF, actually, we saw that in Q4, gross profit per tonne export was 13.5% in the quarter, while it has been up before that. Is it actually a little bit that the times of the more interesting volumes in the market, profit-wise, are now over for some time? Or how should we think of it probably net of corona?
Okay. So on the first question, corona and e-com, yes, I think there are different hypotheses out there at the moment. One is, obviously, if people are scared of corona, they tend to shop more online, and there are some elements pointing to that. There is also the question, are the e-commerce warehouses the first ones to run out of stock because many of them are supplied by ship. I think at the moment, it's too early to tell. So I don't think you have a consistent data picture on that one.
I think in terms of Amazon and market share, we don't steer the business by market share. So we don't have a market share target. We have a growth target. And yes, there is a volume element in there. But after 2018, we are very much focused really on yield and the bottom line contribution from our Boeing parcel business, and that is what we're focused on, and we're not back to one market share number.
In terms of implications of what we have now flagged for parts of Germany, is that having any implications on our other business relationships with Amazon? Clearly, no. This is really kind of like a domestic German business, and I think that is why it's also really important for us. I mean, we have a very long standing, very good partnership with Amazon. They are a much appreciated customer of our site. I think they are also a pretty -- as a supplier. So for example, when you think about the business we do with Amazon in the Express business, cross-border TDI that is not related at all to the domestic German parcels. So that is really kind of like a separate topic.
In terms of Air Freight GP per tonne development, yes, indeed, in the fourth quarter, that trend was negative. I think that has partially to do with the increase in the fourth quarter of 2018. So in terms of year-over-year comparability, it was a tougher benchmark than before. It would have been a very interesting negotiation season for Air Freight this year even without corona. I think, at the moment, it's a completely different game because the question is who has capacity and, obviously, in Express, we have the benefit of having our own network.
On the forwarding side, we also see the shortage in capacity. We are putting model in prices, so I think the whole asset pricing is in a very special state at the moment, and we will have to see how that develops once we're settled on corona.
Next up, we have David Kerstens, who's calling from Jefferies.
I've got three questions, please. First of all, can you give an indication on your total fuel bill? And to what extent do you think you can benefit from the recent collapse in the crude oil price? Then secondly, on the -- on DHL 4 in Air Freight, the 20% conversion target for 2020. Is that still a realistic target in the current environment with softer markets? Or will it be postponed until 2021?
And then you were talking about DHL supply chain guidance for EBIT growth of at least 8%. What is driving that continued strong momentum in 2020 when you are already at the upper end of your EBIT margin target?
So may take the second, and Melanie can talk about the other 2. So it applies the same as for the overall target. We believe that we can deliver the 20% conversion rate, of course, not knowing what the coronavirus impact might be. So nothing is changing, if any of our underlying guidance.
But as I said, the coronavirus might have also an impact on that part. But we should not say this is different from the others. It is what it is, and it depends very much how fast we see the recovery. If what we have seen last week globally is continuing, then there might be a chance to get there. If that gets worse in Europe before it gets better or in the U.S., then, of course, it's a different game. It's -- but we are still the goal to deliver 20% conversion rate.
Yes, on the other two questions. First, on the fuel bill. I mean, our biggest single oil price linked position is the jet fuel for our Express aviation fleet. We will be talking about the order of magnitude of around about €1.5 billion. But I think that also shows very nicely that it doesn't really matter that much for us because in Express, we have a fuel surcharge. So the fuel cost is either passed on to the customers for better or worse. There's a two month time lag in the adjustment mechanism. But fundamentally, fuel prices are passed on to our customers. There are temporary benefits and disadvantage phases. But ultimately, it's a pass-through.
In terms of supply chain, why are we confident that supply chain will continue to deliver nice growth even -- given that we are already at the upper end of the profitability range? I think as a supply chain business, it is our slowest-moving business, but we are now really seeing a fantastic dynamic. The team has driven best practices from the warehouse management system to labor management. So we are as standardized and as optimized as we have never seen before, and what we are now beginning to feel is digitalization really kicking in. There are so many opportunities in our supply chain business harvesting digitalization opportunities that we are convinced that will really give us a kick going forward on the supply chain side.
Can I ask a quick follow-up on the fuel exposure in P&P, please? Do you have a number for P&P as well? Because there -- I think it would be more of a margin benefit, right?
Yes, but it is significantly smaller. The number for kind of like oil fuel other than jet fuel is well below €1 billion across all the divisions. So...
The triple-digit for P&P, we are making good progress in reducing the fuel anyway by replacing with electric drive, right?
And the last caller for today is Neil Glynn, who's calling from Crédit Suisse.
If I could just ask two quick ones with respect to Express. The first one, the 777s are obviously continuing to come. Just interested in terms of, for example, the fourth quarter or the second half, how was cost per kilo or cost per con trending? Just to understand the other benefits are coming through.
Then the second question, on the competitive landscape in Express in Asia Pacific. Interested in your thoughts, a, does corona change anything here? I'm also conscious that, for example, FedEx has had major challenges in Asia as well as the TNT challenges of Europe. I'm interested in terms of how the 777s may advance your quest for high-quality market share in Asia.
Yes. May I start with the second question. So we always said and we believe that we are, by far, the strongest player in Asia. And we will, as I said, we will benefit from our global footprint in Express. How much? We will see in due course. But this organization is really focused on bringing volume back at the right price level and filling our fleet.
Melanie already said we are putting back some rotation into the business in Asia already because that's the right answer, the demand we see. And we always say we know Asia better than anybody else, and we will benefit from that in the current moment, for sure, because our trade line is not just Asia, U.S., it's all around the world. And that will help, I think, in these kind of situations. So the -- we believe that we will continue to gain market share in the Express business in the coming months.
Yes. On your aviation CpK question and the 777 impact, I mean, in 2019, towards the end of the year, we had four in, and it is a large fleet. So if you didn't have mega expectations, but we were quite happy with our CpK development in the fourth quarter. But I would really contribute that more to the general management of the network in -- to December particularly and not so much to the 777.
I think what we can confirm is that the full benefit from the 777, once they are all in place. We had said before that we expect a margin expansion by around 50 basis points, and that's the order of magnitude we are aiming for and which we feel directionally confirmed with the first six now.
Thank you. And operator, I think that's stealing them with all the questions that we have. So thank you very much for participating and keeping us in our time schedule at the same time. Looking forward to see you some time soon, hopefully, face to face again. And Frank, for your wrap-up, please.
Yes. Thank you for listening this morning. We believe that we are in very good shape as a company. And despite all the headwinds we currently see from the markets, we will go through that with the same consistency as we have done than in previous situation. The difference is we have never been better prepared for such a challenge as a company.
The StreetScooter is outside of all these business units. They can focus on their business' day-to-day operations, which is helpful. And yes, we will deal with that very well. Our immune system is in good shape as a company, and that's the reason why we are very confident in reconfirming that we will deliver the €5 billion this year before corona impact, and we will see what that means. But we are very sure about 2022 goals, and that's the reason why we also increased today the free cash flow.
So thank you for listening, and see you soon somewhere, and keep in good shape and healthy. Thank you. Bye-bye.
Thank you. Bye, bye.
Thank you for your participation. You may now disconnect.