Deutsche Post AG (DPSTF) Q1 2022 Results - Earnings Call Transcript

Deutsche Post AG (OTCPK:DPSTF) Q1 2022 Earnings Conference Call May 3, 2022 4:00 AM ET

Company Participants

Martin Ziegenbalg - Head, Investor Relations

Melanie Kreis - Group Chief Financial Officer

Conference Call Participants

Cristian Nedelcu - UBS

Alex Irving - Bernstein

Muneeba Kayani - Bank of America

Alexia Dogani - Barclays

Robert Joynson - BNP Paribas Exane

Andy Chu - Deutsche Bank

Carolina Dores - Morgan Stanley

Johannes Braun - Stifel Europe

Sathish Sivakumar - Citigroup

Sam Bland - JPMorgan

Parash Jain - HSBC

Sumit Mehrotra - Societe Generale

Martin Ziegenbalg

Warm welcome and good morning from me to our Q1 call. I take it that you have all the material that we have put on our reporting app available to you. With me, as announced today, Melanie Kreis, the Group CFO. And without further ado, Melanie, over to you.

Melanie Kreis

Yes. Thank you very much, Martin, and good morning to all of you also from my side, and welcome to our Q1 earnings call. Before we turn to the Q1 numbers, allow me to open by saying that our thoughts continue to be with our colleagues and all people suffering from the war in Ukraine, which has by now been going on for more than 2 months, bringing death and destruction and violence to uncounted innocent people. It is against this background that we today report our Q1 numbers. But we are here to talk about our Q1 numbers. And as far as our business is concerned, we can report a very strong financial performance today with a double-digit increase in revenue, EBIT, and EPS; you can see some of the highlight figures here on Page 2.

We also confirm our guidance today on all metrics, taking into account updated macroeconomic circumstances. And before I talk about the main business development by division, let me provide you with a short update on the 3 key external developments that we are all faced with currently.

So turning to Page 3, starting with the impact of the Ukraine war. In terms of limited direct exposure, as already mentioned, in March, you can see that we have a very limited direct exposure with revenue in Russia, Ukraine and Belarus, below 1%. And you can see that we have done a €30 million impairment in Russia, with which we have actually fully written down all long-term assets, that gives you a feeling for the order of magnitude we are talking about also with regards to the asset exposure.

The current lockdowns in parts of China are in terms of impact on the global supply chains, probably having a larger short-term impact than the war in the Ukraine. They are clearly limiting local activity levels, and that is also visible in our Express and Global Forwarding volume developments. While we expect to see pent-up demand to be released later on, there will likely also be a ripple effect on the global economy as seen on previous occasions in the last 2 years.

Finally, inflation is showing the expected strong acceleration. You may recall that we already talked about inflation as a risk and how we mitigated in our Q3 results call back in November. And we are now executing on the measures, as we will also show in more detail in a slide later on. So when you take it all together, we, hence, see increased risk for global GDP, but also further and longer imbalances in transportation markets with the resulting impact on rates.

As these two effects impact our profits in opposite direction, we today confirm our guidance despite factoring in more cautious GDP growth in line with the general market expectations. General very important observation for our business is that we see all these moving parts, of course, affecting activities in one or the other direction. But the broad footprint of our logistics portfolio also provides a good balance. And I think that has proven again in the first quarter to make our group performance resilient. Yes, we saw the normalization on the B2C volumes, but we also saw good development in other areas. So I think the strength and the resilience of our portfolio has proven once again.

And now turning to Page 4, we can see, for example, how that balance worked out quite well within DHL Express. As expected, B2C volumes are going through a normalization phase. You will see that also in e-Commerce Solutions and in Parcel Germany, following the very strong growth in the last 2 years. But when you now look at the Express results overall. We still saw revenue growth driven by higher rate from the B2B side, by higher prices, also fuel surcharge. And on balance, Express has been able to deliver EBIT in Q1 on the high levels of last year, despite the temporary impact of lockdowns in China, despite the situation in Russia, the mentioned asset impairment, and also despite the time lag in the fuel surcharge.

Turning to Page 5. In DHL Global Forwarding Freight, we are navigating very challenging market conditions with success and that was visible in the record high conversion rates, €600 million profit in the first quarter. That’s the highest quarterly profit from Global Forwarding Freight ever. And in the first quarter, it was also the division with the highest revenue contribution in the group.

In terms of outlook, obviously, in light of the additional disruptions I just mentioned, we do not expect any sudden or quick normalization of the current rate environment. One other important factor for Global Forwarding in the first quarter was the successful closure of the Hillebrand acquisition in the late days of March. Because it was so late in the quarter, there is no P&L impact of Hillebrand in the Q1 numbers of DGFF. You will start seeing the Hillebrand numbers in the P&L as of April. But we have already included Hillebrand in the balance sheet with the Q1 close.

There are two more points, which I briefly want to mention. And I think, yes, obviously, the rate environment has helped the good results of DGFF in the first quarter. But I think it is more than just that. When you look at the volume growth development, 3% growth in air, flat ocean freight volumes. I think that shows that we are clearly taking market share. And I think that speaks for the fact how we support our customers in the current type markets, and that’s also the feedback we get from our customers. I think that will be a very important factor for long-term success. I think the second important element is that we are making continuous progress on our internal productivity agenda. And that will be also a foundation for maintaining a very good GP to EBIT conversion if and when eventually rates will normalize which, again, is probably not going to happen in the very near future.

Turning to Page 6. I think another division, which had a very strong performance in the first quarter, DHL Supply Chain. Here we are really seeing the benefits of the work the division has been doing over the last quarters and years, driving the successful standardization agenda. We have now seen accelerated top line growth, notably from e-commerce, and that is translating into an attractive EBIT growth with a reliable 5% plus margin.

And when I think about the future, with customers increasingly aiming to make their supply chains more resilient, more digital, more suited for e-commerce, DHL Supply Chain will also be a very reliable growth contributor to the group’s top and bottom line in the next quarters and years. And as a small advertiser and teaser, you see that on the bottom of the page, Oscar and the supply chain management will host a management update and site visit next week in Florstadt near Frankfurt. So if you have not yet signed up for that, please contact our IR colleagues. I think it will be a great look behind the scenes to show you how exciting supply chain is these. So I talked about the group portfolio as a basis for our higher resilience, and this also implies that with the B2C normalization against the tremendous growth during the lockdown period, we will have an impact in the more B2C e-commerce affected divisions.

And as you can see on Page 7, we have seen a normalization on the volumes in DHL e-commerce and was in the mid single-digits. But due to good yield measures and a strong cost focus, the division still delivered a triple-digit EBIT in absolute terms at the 7% margin. So a very strong performance in the middle of the growth B2C normalization phase. Looking forward here, with tough comparables in the full H1 ‘21, we expect a similar volume pattern in Q2. And for the full year, probably overall roughly flat EBIT performance, and that will then be the basis for growth going forward beyond ‘22.

Like DHL e-Commerce Solutions, now turning to Page 8. Parcel Germany is, of course, also going through the B2C normalization against very high lockdown-driven comps from Q1 ‘21. On the positive side, Mail volume was up against the historic trend in Q1. But as a caveat, that was mainly driven by dialogue marketing, so I think the fundamental trends are still at play, obviously. In overall terms, I mean, we had talked about our full year P&P guidance in March, anticipating a decline in EBIT to around €1.5 billion for the full year. And what we now saw in Q1 was fully in line with this expectation. It is too early to talk about fundamental consumer sentiment in Germany, but there was some apparent caution in consumer spending during the first weeks of the war in Ukraine, and volumes stay quite volatile still. So I think we really have to see now also towards the summer and then against the more normal H2 comparison base, how the volume pattern will really play out. So those were the quick overviews over what is happening in the five operating divisions.

When you put it altogether on Page 9, I think you can say there are a lot of moving parts, but again, against this uncertain overall macro environment, with the normalization in B2C against the very high Q1 ‘21 comps, it is quite pleasing to see that our diversified portfolio in Q1 overall delivered double-digit growth in revenue, in EBIT and in earnings per share. And that is basically what you can see here on Page 9. You can also see we had quite an increase in taxes because obviously, earnings before tax were up and the tax rate, as anticipated, is up to 29%. And that is also one of the elements you have to take into consideration when you look at the development of our cash flow on Page 10.

And we overall had a very good flow-through from EBIT, EBITDA to operating cash flow. The two elements I want to point out on operating cash flow are that we also had a significant increase in cash taxes paid by more than €100 million, as you can see in the first comment on the right. And then given the very strong 20% top line growth, there was some outflow from working capital. But when you look at the overall working capital KPIs, we are still pleased, yes, it is quite tightly controlled, so overall, €2.4 billion in operating cash flow.

When you ignore M&A activity and you just look at the free cash flow generation from the operating business, it was actually on the very high level of Q1 ‘21, more than €1.1 billion. So, a very good start into the year also with regard to cash flow. We did close the Hillebrand acquisition, as already mentioned. That also meant that we had to pay the price for Hillebrand. The net purchase price paid at the end of March was €1.4 billion. Yes, and then last comment, we have now started our share buyback program. Numbers in April were still very small. I think the important message is that we are in execution mode also for our €2 billion share buyback program.

Turning to Page 11, I think despite all the focus on what is happening in China and Ukraine war, the ESG agenda is still as important as ever before. And that is why we also wanted to include an update here with just some highlights on what you’re doing in the ESG arena. So just as a couple of examples, we have launched our dedicated GoGreen Plus product now also for airfreight in Global Forwarding Freight. You will hopefully have seen that we announced a very sizable sustainable aviation fuel deal with Neste and BP, covering more than 800 million liters of sustainable aviation fuel. And of course, we keep investing in greener infrastructure, in green buildings, in the electrification of last mile delivery vehicles, and also increasingly in the decarbonization of the long haul. So clearly, this is a longer journey, but we are committed and we have a clear road map how we want to achieve our unchanged commitment to reduce our CO2 emissions to below 29 million tons by 2030, so much for what was achieved in Q1.

Let’s now look forward. And before I show you our confirmed outlook, I want to talk about our associated assumptions as well as the actions that we can take if and when things would develop differently. So on the assumptions on Page 12 that is a page we already showed you in March. And most of what is written on this page is unchanged. What we have changed is marked in bold, and that is the expectation with regard to global GDP growth and the freight market outlook.

So obviously, there is an impact from the war in Eastern Europe and from the situation in China. And you will have seen that, obviously, in the updated macro assessments and we are, of course, also not immune to that. Hence, our expectation is now for GDP growth to be below to inline with the long-term trend. I think the general consensus at the moment is that there should still be GDP growth, but obviously more subdued than what was assumed a couple of weeks ago.

There is probably now even more pressure on global supply chains, as you can see in rates. And on that basis, we do anticipate that the gradual normalization in freight markets will take longer. As you can see here probably towards the end of the year the earliest and in terms of headwinds from the Chinese lockdowns, yes, that is impacting volumes. We saw that at the end of March in Hong Kong, Shenzhen. We obviously see it now in April in Shanghai and other parts of China. But we expect to turn this pent-up demand into some volume searches when the lockdowns are lifted.

So in terms of, yes, B2C P&P trends inflation, I think that is unchanged to what we said before. So we just added a very busy slide, Page 13. And don’t worry, I will not go through the small print on that page now. I think the important message on this page is volume fluctuations, inflationary development, that is nothing which we are facing for the first time. Across all operating divisions, there are well-established mechanisms to deal with such an environment. It’s not always easy, obviously. But I think the colleagues in the divisions know what has to be done. There are also some firmly established mechanisms, for example, the future charges, which help us to pass on some of the significant inflationary trends to the customers. The main topic for me is that this needs active management. And again, we have already talked about that in November when we showed you our Q3 numbers. So I can assure you that this active management of volume fluctuations and inflationary trends is in full swing.

And on that basis, turning to Page 14, we confirm our 2022 and 2024 guidance based on the realistic updated assumptions I just talked about. And based on our conviction that we can also show resilience to changing circumstances as we have demonstrated in the past and now also in the first quarter of 2022, I won’t read out all the numbers because nothing has changed in the end. I think the key message is that we are confident to deliver on the record levels of EBIT and cash achieved in ‘21, also in the current turbulent year with an outlook for further growth towards ‘24 when we aim to have a group EBIT of around €8.5 billion.

Page 15, finally, illustrates again what I mentioned a few times in the last 15 minutes. Our diversified portfolio which is, of course, not immune to everything happening out there in the world around us, but which is providing a very nicely diversified exposure to the different moving parts like we discussed now in the past 15 minutes. And finally, on that basis, the three key features of our equity story also remain unchanged and valid. Resilient e-commerce-driven growth above GDP, attractive free cash flow generation and shareholder returns. You are probably aware that we have our AGM coming up on Friday, where our shareholders will vote on the dividend proposal, which is around a 4% yield, and continued investments, notably into digitalization and our leading ESG agenda.

We will host a number of divisional management sessions. I already mentioned the supply chain session. We have a deep dive on P&P Germany and DHL Forwarding Freight coming up before the summer break, where you will have the opportunity to get some more insights also from the divisional colleagues. But in the meantime, I’m, of course, happy to answer all the questions we have today.

So thank you very much. And I think with that, over to you, Martin.

Martin Ziegenbalg

Thanks, Melanie and I see that you have started to raise hands. We are ready. So Emma, let’s begin questions and answers, please.

Question-and-Answer Session

Operator

[Operator Instructions] First question is from the line of Cristian Nedelcu with UBS. Please go ahead.

Cristian Nedelcu

Thank you, operator. Thank you very much for taking my questions. Maybe the first one on Express volume trends in the second quarter. We are seeing increased signs of economic deceleration, especially on the consumer side. We have the lockdowns in China. So, can you give us a bit of color for Q2? Secondly, in Express, the 13% increase in revenue per unit. Could you please help us split that in fuel surcharges, mix and price increases and how do you see this evolving in Q2 and the rest of the year? And the last one, please, the PeP parcel volume decline of 19%, can you isolate between market volume decline versus Amazon reducing volumes and how you see this evolving in Q2 as your comps are getting easier? Thank you.

Melanie Kreis

Yes. Thank you, Cristian. Three great questions. So first of all, in terms of Express volume trends, so what we saw in March was the impact of the lockdowns at that point in time in Southern China, Shenzhen and Hong Kong. We have our Central Asia hub in Hong Kong. So we already felt the impact in Q1. And then obviously, April was very much impacted by the lockdowns in Shanghai and Eastern China and a number of other provinces. So that will have an impact on the Express volumes going into the first quarter. The current expectation is that eventually, there will be an easing of the restrictions and we will then see probably a spike in volume from the pent-up demand. We also can’t tell you precisely when that will happen. There are some first encouraging signs. So, one of the big challenges was connecting the hub in Shanghai or our Northern Asia hub with the service centers, because it was virtually impossible for trucks to get through. That has improved. On that basis, we have yesterday started accepting inbound shipments into Eastern China and Shanghai again. So there is a bit of normalization. But how the Express volumes will ultimately look like in Q2 will very much depend on the normalization in China. I think that is probably the bigger factor than the B2C side of things. In terms of what has driven the growth in revenue per shipment. So there is, first of all, the underlying yield management based on our annual GPI, but that is more in the kind of like a single-digit order of magnitude. So we have a heavy impact here from the fuel surcharge from the increase in weight. Those are the more dominating factors here.

And then to the P&P question, the 19% decline in volumes, there is obviously an impact from Amazon in here, but also excluding Amazon, there has been a drop in parcel volumes of a significant order of magnitude in Q1. That was anticipated because, obviously, Q1 ‘21 was at a very extraordinary level in the lockdown situation in Germany. For me, the important thing is, when you compare now to Q1 2019, you will see that on face value that is also a 19% decline. However, when you kind of like take out the Amazon development over the whole period – not a decline, sorry, a 19% growth. So compared to Q1 2019, it’s of course, a 19% growth. And when you take out the Amazon development, the growth is actually even more significant. So that is the clear point that the structural acceleration has happened. And the positive thing is, with the net 19% growth over the 3 years, we are really able to digest the Amazon in-sourcing and the share of Amazon is now below 5% in terms of P&P revenue overall.

Cristian Nedelcu

Thank you so much.

Operator

Your next question is from the line of Alex Irving with Bernstein. Please go ahead.

Alex Irving

Hi, good morning. Can I please follow-up on this question around structural changes in e-commerce growth? So on P&P, I appreciate that the 19% increase on a 3-year stack for parcel volumes does include some Amazon volumes. But are you able to put a figure on sort of how much the structural growth or the structural pull forward in e-commerce has been over the 3 years versus 2019, please? Second, a similar question on e-commerce for Express. So clearly shipments per day, that’s up 18% over 3 years. How does that growth look between e-commerce and non-e-commerce-related volumes, please? And again, what are you seeing in terms of the level of structural growth being pulled forward? And then third and finally, thanks very much for the color on pricing actions to offset inflation. What gives you the confidence to put these through given that your customers industry has faced some cost pressures and not just in logistics? Sort of how worried are you about the effect on demand and therefore, volumes? Thank you.

Melanie Kreis

Yes. Also three great questions, Alex. So on the first one, P&P, so when you look at the kind of like face value, 19% growth over 3 years, you would say, yes, that’s just kind of like around a bit over 6% per year. So more in line with market. I think you can easily add a bit on top when you factor out the Amazon element. So I think the fundamental thing that we have moved forward to e-comm penetration we normally would have seen 2, 3 years’ time down the road. I think that statement is still valid. And I think that is also the case for Express. So obviously, we are now seeing also in Express the normalization in the B2C volume growth. What is driving Express at the moment is, as we already discussed for Q3, Q4 last year, the growth in heavier weight shipments.

And with regard to inflation, I think the first positive element is that for pretty much all of the DHL divisions, we have quite well-established mechanisms to pass on some of the main cost inflation elements, for example, the fuel is a very significant factor. But then you think, for example, about our supply chain business, we have quite a number of cost plus contracts where additional cost inflation is passed on to the customers directly. So I would probably say the division there, again, it is a bit more challenging than for the rest is P&P, because obviously, here, we have the latter side of things, there opportunities to increase prices are limited. And on the parcel side, it is a competitive environment. But again, that was something we already anticipated in March when we gave the full year guidance for P&P, and that was one of the reasons why we have only guided for around 1.5%, plus/minus 10% for P&P.

Martin Ziegenbalg

Plus in Parcel Germany, we have the introduction of minimum wage in the second half of the year coming up, pushing up the cost base for basically all of our competitors here, and I think that translates into a positive environment for any price measures.

Alex Irving

Thank you, both.

Melanie Kreis

Thank you.

Martin Ziegenbalg

Thanks, Alex. Emma?

Operator

Your next question is from the line of Muneeba Kayani with Bank of America. Please go ahead.

Muneeba Kayani

Hi, good morning. So I just wanted to follow-up on the initial question around Express volumes. If you could give possibly the exit rate for volumes in Express at the end of 1Q, and also actually for Parcels Germany? Secondly, on fuel timing impact, is there any way that you could help us quantify impact on EBIT or margins in Express in 1Q from the timing thing? And then can you talk [Technical Difficulty] that impacted 1Q Express, given surge in air freight rates that we’ve seen? And how do you see that contributing for the rest of the year? Thank you.

Melanie Kreis

Okay. Thank you, Muneeba. You broke up a bit on the third question, but I think that was around air freight rate impact on the Express, if I got it correctly.

Martin Ziegenbalg

That’s how I got it. Muneeba?

Muneeba Kayani

Yes. And the ACS contribution in Express from that.

Melanie Kreis

Yes. That was when the line was a bit disrupted. Yes. So starting with the Express volume trends at the end of Q1 going into Q2, so we still had a negative volume development at the beginning of the second quarter. And that is obviously driven by the lockdowns in China. And so I think that now really will depend on the timing of the easing of restrictions in China, how much recovery we will already see in the second quarter. And for Parcel Germany, we also still have a negative trend at the beginning of the second quarter, as Q2 ‘21 was also still on a very high level. And we also see the continued Amazon in-sourcing in Q2. So as we had already guided for H1 for Parcel Germany, we will see this decline and normalization. In terms of fuel surcharge, yes, so good question. That’s a 2-month time lag, which we always have. So it is hitting us in March in double-digit million order of magnitude in Express. So mid-double-digit impact in March. And we will also see a negative impact in April. And then as of May, it will kind of like balance out because then the higher surcharges will take hold.

And to your third question, so overall, it was a super dynamic quarter for the aviation team in Express. They had to rejig the network quite a bit to accommodate for a loss of over flying rights over Russia. We had to replace some aircrafts where we had used Russian carriers. So a lot of rejigging happening. That led to an increase in cost in the aviation network. And then yet as a positive offset to that, the ACS sales, so our selling off of excess capacity in the Express network into the forwarding market. Here, we clearly benefited from the increase in rates. However, that was just helping us to compensate the costs a little bit. Overall, aviation cost was still up in terms of cost per kilo. And that is one of the reasons why we have now increased our emergency service surcharge, which will also help us to compensate cost increases in the course of the second quarter.

Muneeba Kayani

Okay, thanks for answering the questions.

Melanie Kreis

Yes, thank you.

Martin Ziegenbalg

Great. And Emma, please.

Operator

The next question is from the line of Alexia Dogani with Barclays. Please go ahead.

Alexia Dogani

Good morning, thank you for taking my question. I have two questions, please. Just firstly, on the freight forwarding. Can you discuss a little bit about your strong performance in ocean with basically flat volumes against the market that was down around 7% to 10%? What kind of activity have you won over? Are there kind of specific industrial verticals, or again, what type of contracts that you’ve won? And if you can give us a bit of color in terms of the strong performance overall of the freight forwarding division, how much is driven from self-help versus the tightness in the markets, that would be quite helpful. And then secondly, just going back to Express and margins. I mean, clearly, the 15% margin was quite below the Q4 rate. Do you expect the margin outlook to be more volatile quarter-on-quarter because of these timing issues of the fuel surcharge, the emergency surcharge? And similarly, on these volumes, you flagged out from kind of China being weaker. Can you give us an indication of sort of the swing in the weight load factor that these volumes drove to understand kind of the volume versus kind of capacity growth equation as well? Thank you.

Melanie Kreis

Yes. Thank you, Alexia. And first of all, thank you for the question on ocean freight. That is indeed the development we are extremely happy with. So following the introduction of CargoWise almost 3 years ago, we used the opportunity on the ocean freight side to clean up the portfolio. We had a period where we were not growing in line with market. And we really feel that we have now done our homework. And clearly, the new visibility, the new sales focus based on the new systems and processes is really paying off. So we are very, very happy with this volume development, which has really driven from a broad basis, and that also gives me some confidence that, that trend should now hopefully continue.

In terms of DGFF overall performance, I mean, obviously, the current rate environment is having an important influence on the very strong results. When you look at the GP to EBIT conversion in the global forwarding part of 50%, there is clearly the market element in there. What we set for kind of like the normalized medium-term aspiration around 35%, I think that’s still good in a normal market type of aspiration. However, we clearly expect the market normalization to take longer than anybody had expected at the beginning of the year and that should be the basis for continued good earnings in Global Forwarding also in the second quarter.

With regard to the Express margins, yes, I think Q1 was really a bit of a very special quarter with lots of moving parts. We talked about the very strong fuel increase and the time lag in the fuel surcharge, which already gave us, yes, mid-single-digit headwind on EBIT. We had the Russia impairment going in there. We only increased the emergency service surcharge late in the quarter. So I think there were, on top of the usual seasonality, a number of factors coming together. So I would not overinterpret this development on the margin side. I think given for how much movement there was in the quarter, I think looking at the [indiscernible] results and margin, it was a good quarter. And I think what we said in March that we fundamentally want to grow absolute EBIT and hold the EBIT margin around the 17%, that is still the aspiration.

With regard to weight load factor, I think that’s quite interesting because, yes, we saw this decline in volume out of China. At the same time, we also had to make a number of adjustments because of no more overflying over Russia [indiscernible], which we had operated with Russian carriers. So there was no super dramatic drop in the weight load factor in overall terms. I hope that answers your questions, Alexia.

Alexia Dogani

That’s great. Thank you very much.

Melanie Kreis

Thank you.

Martin Ziegenbalg

Thanks, Alexia. Emma, please.

Operator

Your next question is from the line of Robert Joynson with BNP Paribas Exane. Please go ahead.

Robert Joynson

Thank you, and good morning, Melanie, Martin. A few questions from me, please. So first of all, on Express. On the Q3 conference call from last year, I think it was Frank who mentioned that Express would be more profitable effectively if we didn’t deliver any parcels, but rather just sold off its capacity for air cargo. Now with Express volumes obviously declining, and therefore, presumably more spare capacity available to sell to forwarders, is that still how you see things today? So that’s question number one.

Second question on forwarding on Hillebrand, when the deal was announced, I think the suggestion at the time was that Hillebrand could provide an annualized EBIT of maybe €100 million or so. But just in the context of all forwarders are seeing profitability up significantly this year versus previous years. Is that still the kind of run rate that you’re looking at? Or maybe could it be something materially higher? And then the final question just on P&P Germany and the parcel volumes, obviously, down 19% or so in Q1. Melanie, you already mentioned that March was weak. But could you maybe just provide some more specific numbers on that? For example, with parcel volumes in March down in the mid-20s, high 20s or maybe even the 30s, any color would be great? Thank you.

Melanie Kreis

Yes. Thank you, Robert. So in terms of how much capacity do we have in Express to sell into the forwarding market. Again, there are many moving parts, and that makes it impossible to say, you have volume decline and that translates one-to-one into a freed up capacity. The first element you have to bear in mind is that whilst we have a volume decline, we actually have an increase in heavier weight shipments. And that is helping us also on the revenue and on the yield side. But that is, of course, also then taking up capacity on the aviation side. The volume decline does not mean freed up capacity, you have to look at weight. And then the second element is you also have to look at how much capacity we have. And here, again, we had some rejigging to do due to the macro circumstances.

In terms of Hillebrand, yes, you’re right. We talked about kind of like the order of magnitude €100 million EBIT contribution we would expect. That was before everything got even more extreme in the world around us. So I think directionally, there should be a bit of upright to that number. Hillebrand had a good first quarter and we did not include in our P&L. But I think it’s a bit too early to now talk about what will that concretely mean. We will also have a bit of integration cost this year. So we are now really working through updating the synergy calculation, updating the growth projections, and I think on that basis, with Q2, we will give you a better figure for what we anticipate.

The important thing for me is that our business plan assumptions, which has been the basis for our valuation and the purchase price calculation, they are still fully intact. So we are still very happy with that acquisition. And then on P&P, so the minus 19%, so I think you should not think that in March, it was like minus 20%, minus 30%, and that is now the trend going into April, yes. So it’s not that it kind of like gotten worse in the quarter, it was relatively evenly balanced. And while I still think that we will have this double-digit decline in Q2, I would say it shouldn’t get materially worse than what we now have.

Robert Joynson

Very clear. Thank you very much.

Martin Ziegenbalg

Excellent.

Operator

Your next question is from Andy Chu with Deutsche Bank. Please go ahead.

Andy Chu

Good morning, Melanie. Good morning, Martin. Two questions, please. Apologies if I missed this, but in terms of the phasing of profits of the €1.5 billion in P&P Germany, how should we think about that? I guess, obviously, the comps are going to be tough as you’ve described in Q2. So I guess I’m just trying to think about sort of phasing of the remainder of the year. And then around the sort of pension deficit, which is coming down quite quickly to a net pension deficit below €3 billion. Any sort of help on what that might look like, given where yields have moved and looking at that pension deficit going forward? Thanks very much.

Melanie Kreis

Yes. Thank you, Andy. Thank you also for the second question, which gives me the opportunity to very briefly talk about the balance sheet. So indeed, I mean, it is quite remarkable how our pension deficits have developed, as you rightly say, now just about €3 billion. That’s, of course, a position we are very comfortable with, so 80% funding ratio. The positive news is, at least there is one area where rising interest rates have a positive impact. We had already talked in the past quarters about the fact that the whole pension area is not a worry and obviously, directionally, the trend to continue to be our friend in that area. I think also just as a quick mention on the other balance sheet elements, I think we also saw some very good development here with regard to equity ratio. One interesting side fact is, as mentioned, we included Hillebrand, not in the P&L, but it’s fully consolidated in the balance sheet. It led to an increase in goodwill of €1.6 billion. But nevertheless, our equity ratio is up. So I think that shows that also on the balance sheet side, we could really nicely digest that acquisition.

In terms of phasing for P&P, yes, so Q1 and Q2, the time before the summer, that will probably be the toughest period where we will see the normalization against the very high comps from ‘21. And then also in the second half of the year, as Martin already mentioned, it will also be very interesting to see what will happen in the market. So everybody is obviously feeling the inflation from fuel, transportation costs and so on. But on top of that, there is going to be the increase in minimum wage at the end of the third quarter, which is going to put significant additional cost pressure on competitors. So I think that may also give us some more opportunity in the market. So a tough H1 and potentially some more normalization and opportunities in the second half of the year.

Andy Chu

Thank you very much.

Martin Ziegenbalg

Thanks, Andy.

Melanie Kreis

Thank you.

Operator

Your next question is from the line of Carolina Dores with Morgan Stanley. Please go ahead.

Carolina Dores

Hi, good morning, everyone. I have three questions. Just following up on the P&P question from Andy and circling with your guidance. Is it fair to expect then Q2 to be the weakest quarter this year? My second question on the DHL B2B across several divisions. If you could also give us some color on key verticals, strength and weaknesses. Is there anything particularly where you see a vertical with reducing orders and others more resilient? And my third question is with probably higher concerns on global economy, at the same time free cash flow is better, is the M&A market for freight, I guess, more attractive for you to look at deals at this point?

Melanie Kreis

Thank you, Carolina. Also, yes, great questions also on the M&A. So on the P&P, so clearly, kind of like Q1, Q2, they will be the low point. And in terms of overall phasing, I think, yes, Q2 will be another challenging quarter for P&P, but that’s fully in line with what we have said for our expectation. Although I think at the moment we are kind of like really sailing in the direction of [Technical Difficulty] full year guidance.

Carolina Dores

And for the group as well, Melanie?

Melanie Kreis

Yes. So, I think we fully confirmed the group €8 billion plus/minus 5%, as discussed, lots of moving parts. But we felt that, yes, this guidance really reflects our best feeling overall. There are factors which could have moved to the upper side. There are factors which could give us more headwind. But I think overall, we feel very comfortable and that’s why we confirmed the guidance without any changes. On the second question with regard to what do we see in terms of verticals, it’s really difficult to kind of like give a broad statement across all of the divisions. We gave some color. So, for example, when you look at supply chain, here, we have really seen a good recovery in the consumer and retailer segments, also driven by e-commerce. In Express and Global Forwarding, the whole China element, of course, plays a role. But to kind of like interpret that in a sense of saying, oh, there is one sector where demand is really kind of like changing in a sustainable way, I think it’s way too early for that. Yes. And then on the M&A side, as we said in March, focus is and remains on organic growth. But if opportunities come up, which will fulfill our three criteria in our [Technical Difficulty], financially accretive, good quality company with a clear path to integration, I think we would be open to it. As said before, there aren’t that many fantastic opportunities coming up on a weekly basis. But if and when we find something, I think we have shown with Hillebrand, what we are interested in.

Carolina Dores

Okay. Great. Thank you.

Martin Ziegenbalg

Thanks. Next caller please.

Operator

Next question is from the line of Johannes Braun with Stifel Europe. Please go ahead.

Johannes Braun

Yes. Thank you for taking my questions. Actually, a lot of questions already answered, so a good job, but maybe two short ones. Firstly, on the free cash flow in Q1, I think you already made one-third of your full year guidance after only one quarter of the year. So, anything that would suggest that the current free cash flow run rate cannot be maintained in the course of the year? And then secondly, the share buyback program, €2 billion, would you front-end load this program given the share price weakness, or will the €2 billion still be spent equally over the 3 years?

Melanie Kreis

Yes, well spotted with the free cash flow. And yes, so I understand if you say that the free cash flow guidance at this point in time could look a bit conservative. There is, of course, an element of phasing in here. So, for example, on the whole CapEx side, that is back-end loaded. I think we now really have to see also how the whole top line and the working capital develops, which is why we also kept the free cash flow guidance, so it will have a better feeling after Q2. But I think the main reason why you can’t multiply by four is the phasing of the CapEx. Yes, and on the share buyback, I think we already mentioned that in March that we are kind of like doing this in tranches and we have now started the first €700 million tranche, which is due to be spent until the fall. And so I think that we are willing to already spend a sizable amount of money in ‘22.

Johannes Braun

Okay. Thank you.

Melanie Kreis

Thank you.

Martin Ziegenbalg

Thank you, Johannes. And let’s continue Emma please.

Operator

Next question is from Sathish Sivakumar with Citigroup. Please go ahead.

Martin Ziegenbalg

Sathish continue. Once in every call, so that’s great.

Sathish Sivakumar

Good morning. I have got only three. First on PeP, actually. In terms of the volume development, if you could actually give some color on how it was into the conflict and how this actually seems since conflict and how has been the recovery? So, I just wanted to understand like what has been the impact of conflict, specifically on PeP volumes? In Parcel pricing again in PeP, if you look at Q1, pricing is up 5%, EBITDA up actually 3% compared to Q4. Given the pressures from the volumes, do you see further scope to increase prices here? And then on Express, given the three hour to four hour detour that you got to do now due to the closure of the sites, so a fixed payload for an aircraft and that carrying an additional fuel will have an impact on volume, i.e., lower volume. So, what has been the load factor within the network, say, in March versus start of the year? And then last one is actually on supply chain. You said about the contribution from e-commerce and 18% revenue growth. So, how should we think about it into the remaining part of the year given the pressure on consumer spending? Yes. That’s it for me. Yes. Thank you.

Melanie Kreis

Right. So, there was some noise in the line. I hope I got all your questions correctly. I think the first one was about the mail volume development in P&P and what impact the conflict had on that. I would say, relatively limited. So, I think what we now see is the growth in Q1, which of course, is unusual in itself to have volume growth in mail volumes. That was really driven a lot by dialogue marketing. So, advertising is back and stores are trying to get consumers back to shopping. But I think that was relatively independent of the conflict.

Martin Ziegenbalg

Yes. I think you see, particularly in Germany, also e-commerce vendors sending out printed material out, so trying to accelerate traffic on their web shops.

Melanie Kreis

Yes. So, you still get dialogue mailing from Zalando and the likes. So, they used the old-fashioned paper to augment the online selling.

Martin Ziegenbalg

And what we have seen in the first weeks of the Ukraine war, similar to the early weeks of the pandemic, you have got a certain consumer sentiment shift short-term, where you see stuff like, say, dog food maintaining its volume. However, other sectors like the fashion or garden equipment showing some temporary weakness, reflecting the way consumers are reacting to the first weeks of the crisis.

Melanie Kreis

Then on the second part, the Parcel pricing development, yes. So indeed, you can see that Parcel pricing has worked. We worked over the last years on establishing a general price increase mechanism also in our Parcel division and that has been successfully implemented. And that is, of course, now helping us on the Parcel top line. We now have to really see how things develop in terms of volumes and inflation over the next weeks. And I think it’s too early to talk about kind of like an out-of-cycle additional price increase in Parcel Germany. But of course, the team is closely monitoring the development and reassessing that situation continuously. With regard to the Express, load factors and kind of like the whole aviation cost impact from the Ukraine war and China lockdown, so first of all, in terms of flying around Russia, yes, that had an impact on us. But I think what is helping us to a certain degree here is that our hub in Hong Kong is relatively far south. So, the exposure to Russian air space, for example, that we fly from [indiscernible] to Hong Kong is more limited compared to having a hub more in the north of Asia. So, I think that has not been the biggest impact. As I already said, we had to re-jig some aircrafts because we lost Russian carriers. That altogether has impacted the available capacity for the negative. But then at the same time, we saw the decrease in volume outbound from China, which tends to be one of the fully loaded super-congested road lanes. So, I think overall, there hasn’t been any dramatic development on the load factor. And then in terms of supply chain revenue, yes, I think first of all, there is good growth across the sectors. I think this trend towards, yes, making supply chains more resilient, working with experienced logistics partners, that will help us overall. And the good thing is also quite a lot of stuff which we have in our supply chain warehouses are relatively independent items. So, the cornflakes boxes for breakfast, and yes, the toiletry articles and so on, they tend to be used, which is [Technical Difficulty]. So, in the graph, GDP dependency, supply chain on the more resilient side. So, I am not overly concerned about recession or a potential recession choking off the growth in supply chain.

Sathish Sivakumar

Thank you very much. That’s quite helpful. Yes.

Martin Ziegenbalg

Thanks Sathish. Emma, I see we have got three more callers waiting.

Operator

The next question is from the line of Sam Bland with JPMorgan. Please go ahead.

Sam Bland

Yes. Thanks for taking the question. I have got I think three. The first one is just following up there on the domestic German Parcel increases you are talking about. Obviously, you are putting prices up. Is your impression that market pricing is also moving up. You all maybe said that we have a bit of spare capacity in the market now with the volume declines and that might be a drag on pricing? Second question is on unit margins in Forwarding. Obviously, they have increased a long way, but were they quite stable through the quarter, or did they particularly, let’s say, increase after the start of the Russian-Ukraine conflict, or was there any sort of step up following a significant event, maybe it was China congestion or anything else? And then the final question is actually related to that again. Kind of how do you reconcile very strong unit margin increases, but actually, in ocean, if anything, spot rates coming down a little bit. And in air freight, rate indices probably going up, but nowhere near to the same extent as your unit margins are? Thank you.

Melanie Kreis

Yes. Thank you, Sam. Yes, great question. So, starting with the Parcel pricing, Germany. I think you are absolutely right. Probably at the beginning of the year, when, against the very high comp level, everybody saw that volumes were going back. There was a fierce competition for volumes, and there were also, when I think, to some discussion by the sales colleagues we didn’t understand the pricing proposals by competitors. I think that has really changed now over the last weeks, because obviously, now also for competitors, the name of the game is how to deal with inflation. And so I think this very short-term, would it make sense to go into more aggressive pricing, theme is clearly off the table since the end of Q1. In terms of unit margins in Global Forwarding, I think the biggest word here is for me, volatile. So, I mean at very elevated levels, but very volatile. I spoke to our Head of Ocean Freight the other day, and he said, yes, spot rates have come down a bit out of China, for example. At the same time, longer term rates are still at a super high level. So, it is still extremely volatile. Just have to say compliments to both the ocean freight and air freight colleagues who are really navigating so profitably in this very dynamic market environment.

Sam Bland

Yes. Understood. Alright. Thank you very much.

Melanie Kreis

Thank you.

Operator

Next question is from the line of Parash Jain with HSBC. Please go ahead.

Parash Jain

Thank you, Melanie and Martin. And most of my questions have been answered. But I just wanted to dig a bit more on the demand outlook, both going into this peak season and probably more into the whole of this year and perhaps next. It’s fair to say that the risk to demand has risen following the Russia-Ukraine flare-up, rising commodity prices, gas bill. But at the same time, is it fair to say that in an otherwise flattish growth environment, disruption started from Shenzhen in March, leading up to Shanghai in April and probably part of May. And at the same time, retailers are preparing to order well in advance. Does it create an artificial peak season going into the third quarter? And is that the message when you talked during your presentation about the pent-up demand? And secondly, if you can share any color on the inventory situation, both probably with your customers in Europe as well as in U.S. And what they are seeing both with respect to your freight forwarding as well as your B2B Express business? Thank you.

Melanie Kreis

Yes. Also very holistic questions. So, I think on the first one, that’s what we call the many moving parts, right? So, yes, I mean obviously, kind of like the general demand outlook, you can say, with cost inflation and the general outlook getting more negative, that will be a drag. At the same time, given the disruptions we saw, as you also just mentioned in Shenzhen, Southern China in March, moving over to East China, now North China. I think that is clearly creating a bottleneck situation. So, indeed, we do expect a surge in volumes when the lockdowns are eased. And I wouldn’t say it will have kind of like a peak season dimension, but there should clearly be some pent-up demand then really showing also in the volumes. And that will, of course, also have an impact on the rate situation, because there will then be even more volume than available capacity. On the inventory situation, I think that is super difficult to answer in a generalistic way because it very much depends on the sector. There are obviously areas where kind of like production lines are desperately waiting for parts with no inventory levels at all. Others who had the opportunity have stocked up quite a bit. So, I think this is really impossible for me to answer in a meaningful way.

Parash Jain

Yes.

Martin Ziegenbalg

Generally speaking, for finished goods, inventory levels are probably still low. In the manufacturing processes, I mean if you see a component is missing and the other components are available, but production is halted, then that is going to have a high inventory level there short-term.

Parash Jain

Maybe just if I can clarify myself, because we get to see a lot of the data points when it comes to the U.S. retail inventory, for instance. But on the Europe side, any color? Especially following Russia-Ukraine war, are you seeing more and more customers are showing resistance in terms of ordering, and despite being low inventory, they still are going to run down on that before they come back and place the orders, or there is not so much anxiety about the situation as much as the market is fearful or penciling in?

Melanie Kreis

I think the big fear in Europe, and I think that’s a very justified fear, is that obviously, the ships which have not been leaving the Chinese ports over the last weeks are now going to be missed in Rotterdam and Hamburg. So, I think that is going to probably aggravate the situation in Europe in the course of the second quarter, kind of like the China ripple on effect.

Parash Jain

Fair enough. Thank you so much and have a good day.

Melanie Kreis

Thank you.

Operator

Last question is from the line of Sumit Mehrotra with Societe Generale. Please go ahead.

Sumit Mehrotra

Good morning Melanie and Martin. So, the last one, for the first question, I would like to know about free cash flows. You touched upon, yes, on annualization, but I wanted to know, for working capital and taxes, could there be an annualization of what we saw in the first quarter? Secondly, wage headwinds for Germany. So, on the upcoming CLAs, what is the expected impact percentage wage increases you should expect? And when should that be effective, if you could remind me? And lastly, it’s largely a philosophical question. I mean what makes us believe that the B2C normalization would only be confined to 2022, and we will not see it also next year onwards? Thank you.

Melanie Kreis

Great philosophical question to close off the call. So, let me start with the technical question first. So, in terms of free cash flow, yes, with regard to taxes, as we have talked about in the past, we are using up – or we have used up a substantial part of our tax losses carried forward. That is why we have in the P&L 29% guidance for tax. On the cash tax side, that is still with a time lag. So, as you would have seen for the first quarter, we are around the 20%. I think that is probably also what we would expect for the full year. So, you will see an increase in cash taxes paid also for the rest of the year. In terms of working capital, that will really depend also on the top line development in the remainder of the year. So, it is difficult to predict. I think when you look at our DSO, DPO performance, we are holding a very well-controlled working capital. But that is one of the reasons why there is also a bit of a range in the free cash flow guidance. On the CLA in Germany, that’s coming up in the first quarter of ‘23. So, nothing to be concerned about for the current year. And in the current hugely volatile environment, it’s also too early to predict how that will go. I think that’s something to really start preparing for after the summer. And then we have to negotiate in Q1 ‘23. And then I think on the last question, B2C, fundamentally, time will tell. But when you kind of like look at where the volumes are also in the part of the business where we have now seen the normalization, they are well above 2019 and 2020. So, I would say, at this point in time, we really see the anticipated normalization. But once this normalization is out of the system in the course of the current year, the fundamental growth drivers for e-commerce are still intact. And I don’t see any reason why we shouldn’t then go back to the historical trends in B2C volume growth.

Sumit Mehrotra

Thank you very much.

Melanie Kreis

Thank you.

Martin Ziegenbalg

Thank you, Sumit.

Operator

There are no further questions at this time. I will hand back to Martin Ziegenbalg for closing remarks.

Martin Ziegenbalg

Well, thanks, everyone, for your time and interest and the really great questions. Before I hand over to Melanie for her closing remarks, we are having our AGM this week. And after this week, we are looking forward to be on the road again and looking forward to seeing you face-to-face. Melanie?

Melanie Kreis

Yes. Thank you, Martin. And again, also from myself, thank you all for the fantastic questions. I think we really covered all the relevant topics. And I hope that we have shown to you, with the Q1 numbers, but also with the discussion now that, yes, we are not immune to the world around us. But this very broad and balanced portfolio across the different businesses in the group, across the different regions, across the different sectors and customer groups really gives us a very solid basis to react in a very resilient way to all the moving parts around us. And we are actively managing the turbulences, be it re-jigging the aviation network, be it dealing with cost inflation. And on that basis, we have been consciously confirming our guidance today. And I think with Q1, we have laid a solid foundation for delivering again this guidance. So, thank you very much, and hopefully, see you all soon. All the best.