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Deutsche Post AG
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Good afternoon, ladies and gentlemen, and welcome to the Deutsche Post DHL Conference Call regarding their Results of the Second Quarter in 2018. [Operator Instructions] Let me now turn the floor over to your host, Mr. Martin Ziegenbalg.
Thank you. And welcome and hello, everyone, out there to our Q2 2018 results conference call. As announced, we have with us here, Frank Appel and Melanie Kreis. And without any further ado, I will ask Melanie to start taking you through the presentation that you have in front of you, I take it, and then hand over to Frank, and then we go into Q&A. Melanie?
Yes. Thank you very much and good afternoon, everybody. Thank you for joining us today. I will briefly run through the Q2 financial results for the group. And I will cover the DHL division before I hand over to our CEO, Frank Appel, who will talk about the PeP division in his capacity as acting CEO of PeP. Starting on Slide 2. I think the main takeaway of the results for the second quarter is that, overall, they came in fully in line with the adjusted full year expectations that we had shared with you in June. For the DHL divisions, we see unchanged positive momentum, particularly with regard to Express and Forwarding where we see strong progress on the EBIT progression year-over-year. For PeP, we do see a bit of sequential improvement and the Q2 numbers were in line with our new expectations. Nevertheless, the principal cost inflation challenges didn't improve in Q2, which was also not what we had expected [Audio Gap] main point here is that we are moving forward with our plant restructuring activities, with our productivity enhancement measures and with the year's activities. All of this will be covered by more -- by Frank in more detail in a couple of minutes. And the last point I want to mention on the overview page is that we had a good operating cash flow performance in the second quarter, and that helped us to bring the half year numbers more in line with what we had achieved in the first half of 2017. We maintained, at the same time, the investment into our growth projects in line with our CapEx guidance. So the conclusion at bottom of the second page says it all. The PeP issues are still there, but they are being addressed. On the DHL side, we are fully on track. And on that basis, we confirm both our 2018 and our 2020 guidance. Moving over to Slide 3. We can see some of the details and drivers that we will also find again in the divisional P&L. And the first point I want to mention is, again, the currency impact on the top line. So for the group, the reported revenue increase was 1.4%. But when you look at it organically, it was a very good growth of 6.2%. When we look at the DHL divisions, we were able to translate this good revenue development also into an EBIT progression, but that was not the case in the PeP division due to the [ known ] operating challenges. And that was also then impacting the EBIT figure for the group. As already mentioned, underlying PeP EBIT was a bit better compared to Q1 in terms of year-over-year deterioration, but it was still a deterioration year-over-year even when you take out the restructuring costs we booked in the second quarter. So obviously, the numbers for PeP remained challenging. We booked in the second quarter EUR 61 million for restructuring and productivity measures in PeP. Again, those measures will be covered in more detail by Frank in a couple of minutes. Totally different picture at DHL. There's a double-digit increase in EBIT, driven in particular by strong performances in Express and Forwarding. And the financial results, we see the significant effect from IFRS 16, which we will go into more detail on the next page, and you should expect this to continue also for the full year. Coming to the tax line. I know that taxes were a discussion point during our last quarterly call and at the CMD, so I would just want to make a couple of comments on the tax number. First of all, due to the lower expected taxable result in Germany as a result of the PeP issues, we are able to reduce our full year tax guidance to 14%. That reflects that Germany has a higher-than-average tax rate. So based on the lower results in PeP in Germany, our new guidance for the full year tax rate is 14%. We have to adjust for that in the second quarter to bring the first half year down to the 14%. That led to a much lower quarterly tax rate of only 8.8% for the second quarter. In terms of medium-term outlook, what we had said at the Capital Markets Day, our expectation is that the tax rate as such will increase to the mid-20s by 2020. What I want to clarify here is though -- and I think there was a bit of a misunderstanding with regards to the cash taxes paid, the increase will be more slowly. And we expect the cash taxes paid increase to be more in line with the increase in profit before tax. Overall, when you look at the financial result, the negative impact in the second quarter by IFRS 16 and the tax line, the positive impact of the reduced tax rate, that balances out to a certain degree. So when we look at the net profit development, the decline here is really predominantly driven by the EBIT development and that, again, is driven by the development on the PeP side. Moving on to Slide 4. That's a slide we already showed you after the first quarter, where we want to give you transparency on what the accounting change, IFRS 16, is doing to our numbers. The total EBIT impact we had in the second quarter was very close to what we saw in Q1. It was EUR 47 million for Q2 compared to EUR 44 million in Q1. I know that we've guided for a full year impact of EUR 150 million. So obviously, by now, many of you will have taken out a pocket calculator and will have added up EUR 44 million and EUR 47 million gives you EUR 91 million times 2 take you to a full year run rate of EUR 180 million. The reason why we stick to the EUR 150 million guidance is linked to the way how certain real estate transactions are accounted for under IFRS 16. We do a lot of real estate venturing activities as part of our regular supply chain business. And those profits, they used to be accounted for at the point in time of sale. Now we have to spread it over time. So when we compare what we had in the second half of 2017 in the old IFRS world and what we now will have in the second half of 2018 when we have a couple of those real estate venturing projects in the pipeline, there will be a reduction in the impact due to IFRS 16. And we have netted that off, and that takes us to the overall number of EUR 150 million. When we look at the financial result, you can see a significant impact here in the second quarter, EUR 94 million. That's a structural effect due to the way we decided to apply IFRS 16. The simplified adoption approach leads, as a consequence, to a higher negative impact in the financial result in the early years, then a positive benefit in the EBIT line. Over time, this would even out. Turning now to group cash flow on Slide 5. Here, again, we see quite significant distortions by IFRS 16, which we are showing to you in the final column of the page. It obviously has a significant impact on our operating cash flow before changes in the -- and after work -- changes in working capital. I think the important thing to mention here is that taking out accounting effect, the operating cash flow has improved on the back of the DHL operating performance in the second quarter and, of course, the EUR 51 million PeP restructuring costs for the civil servant retirement were noncash. So that is also helping on the operating cash flow side. In the finance -- in the free cash flow line, the biggest drivers versus Q2 2017 are our higher CapEx, which is in line with our guidance and some smaller M&A activities for bolt-on acquisitions this quarter. Technically, a quick reminder. As you know, we have adjusted our free cash flow definition. We have the new line, net cash for leases, included here that ensures that free cash flow is really totally comparable year-over-year. With that, let's move to the net debt profile on Slide 6, which I hope doesn't bring a lot of surprises to you. The big change was the introduction of IFRS 16 that we already saw in the first quarter. The other important event now in the second quarter was the dividend payment, which happens every year. So I would say that Slide 6 is relatively unspectacular and in line with expectations. Yes. So much for the group overall -- overview, let's now get into the divisions on Slide 7, starting with Express. I know that when you read the news nowadays, you see concerns about global trade and trade wars and the impact of tariffs and political rhetoric. And of course, we get the question all the time, do we see it in our numbers. I think when we look at our Express numbers for the second quarter, we do not see an impact at this point in time because we continue to grow very strongly, both with regard to shipments per day and with regard to revenue per day. And that growth really came from all regions and it was not surprisingly boosted, in particular, by e-commerce. You may note some divergence in regional growth rates. This is due to our active yield management and selective customer focus rather than there being a specific regional effect. You probably also saw that, as hinted at in May, we have now signed an order with Boeing to acquire 14 new 777 aircraft for our Intercontinental fleet. And as already indicated, this will lead to EUR 200 million incremental CapEx this year. The first tranche, we have actually already booked in the second quarter. You'll see that in a second -- on the next page. I don't want to kind of go into a deep dive on the whole refleeting exercise. Just a couple of reminder on some key points which we already covered in May. So we expect that in the peak year of this refleeting program, we expect group CapEx intensity to increase by around 150 basis points. And so you can expect that in 2019, in this peak year, CapEx will be higher. We are planning to finance the aircraft via debt. And yes, we are fully aware that technically, accounting-wise, it, of course, impacts our free cash flow and our CapEx line. But when we think about excess liquidity, we will take the refleeting financing out so that it's not going to impact our excess liquidity consideration. And why are we doing it? As Ken explained that in May, we see significant operating and financial benefits for replacing leased older aircraft with those highly efficient [ owned ] planes. And that is going to really have the biggest impact naturally in the year 2022 when the whole refleeting exercise has been completed. Looking at the Express P&L on Slide 8. When you look at the revenue development, you do see the strong currency effect on revenue. Reported revenue growth was 7.9%. Organic increase was actually 12.1%. And yes, we also had negative currency headwind on the EBIT line. That was actually higher than the benefit from IFRS 16. So even more so, we are very pleased with the result from Express. EBIT increased by 10.2%. Margin now up to a record 12.8%. The next nice thing on this slide is that, yes, in line with what we usually expect nowadays from our Express division, they did succeed in translating the good EBIT development into operating cash flow. We are showing, for all of the divisions, clearly, the IFRS 16 effect. You note that it is material, but even excluding this, we had a very strong operating cash performance in our Express division. CapEx is up significantly year-over-year. The big driver here is the first tranche of the refleeting investment which accounted for EUR 69 million in the second quarter. Turning to Global Forwarding, Freight on Slide 9. You can see that our selective approach to volumes is paying off across-the-board, especially in air freight where you can see that gross profit per tonne was up by 12.8%. Despite currency distortions -- excluding that, it was even better and the same holds true for Ocean Freight. One important point to highlight here is not only is gross profit up, but we are also making progress on the GP to EBIT conversion. I think it's fair to say that Tim's Simplify program is delivering tangible results, which is quite pleasing to see. So on a quarterly basis, we're getting back to where we were before NFE, and that has always been our first immediate -- intermediate goal with regards to the Global Forwarding, Freight profitability development. Finally, the implementation of our new IT system continues to progress as smoothly and without any disruptions to the daily business. You can see all this reflected in the Global Forwarding, Freight P&L on Slide 10. Top line growth continues to be muted as a result of our selectivity and currency, but GP has a very solid development. And together with the improved conversion rate, we have been able to really improve the EBIT by 57%. With a 2.8% EBIT margin, we are now heading back into the right direction, but we know that we still have some way to go. We have also looked at what our competitors have reported. So clearly, 2.8% is not where we want to stay. But it is definitely moving in the right direction for Global Forwarding, Freight. The good operating performance, combined with working capital improvement, also led to an excellent operating cash flow result. IFRS 16 doesn't have much of an impact here. And as usual, CapEx for Global Forwarding, Freight is a very small amount. That takes me, finally, to the Supply Chain P&L on Slide 11. Like in Q1 and for the rest of the year, we see the effect of the disposal of Williams Lea. That has had, of course, a significant impact on the top line. Currency also had a negative impact this quarter. On an organic basis, top line growth would have been 2.7%. The EBIT performance for Supply Chain is solid with IFRS 16 benefit roughly balancing both negative effect from currency and the disposal of Williams Lea Tag. Despite the relatively large positive effect of IFRS 16 on operating cash flow, it was still lower year-over-year. Clearly, not a number we are happy with. The driver here is phasing on the working capital side. And that's a topic we now really have to focus on intensively in the second half of the year. And finally, similar to Forwarding, CapEx is low, in line with the Supply Chain business model and driven by the phasing of new projects. Yes. So much for the group and the DHL divisions. And with that, I will hand over to Frank for the PeP update, then I look forward to your questions later on. Frank?
Yes. Thank you, Melanie. So yes, let me talk about PeP. First of all, what we have seen now for many quarters is that we are well positioned in the market. We see the same trends continuing. Our decline in volume in the mail part is significantly less than our companies have -- or our postal operators have experienced. We have, in the second quarter, a volume decline which is 3.2%. Yes, we had 1 day more. But in exchange, we had last year already a significant increase in volumes due to the -- some of the elections and -- you might remember, we will have another impact in the third quarter from the election of the federal government. So overall, the underlying trend of 2% to 3% is continuing from -- that's our assumption here and we see that confirmed so far if we look into the whole year. On the parcel side, very strong volume growth and good revenue growth. But the revenue growth is smaller than the volume growth and we have seen that also for a couple of quarters now. Internationally, we are doing well. Business is growing. If you exclude currency impact, it's growing double-digit. And that's very healthy as well as you can see on the next page where you see the split of the EBIT number between Germany, International, e-commerce. We had a quarter which is balancing the negative result from the first quarter, International, e-commerce, parcel. But it shows also the underlying trend. If you look into the detail, the countries are improving across-the-board even if we have loss-making operations at the beginning. Germany had onetime impact of EUR 61 million, mainly for the early retirement program, but also some of the reinvestments we took already place. So overall, the result is not -- doesn't make us happy, but it's in line with what we expected after we changed our guidance for this year. So no further surprises. Operating cash flow is good and CapEx is the consequence of our investments into Germany in parcel operations and international parcel operations. So since we expected such a -- second quarter on Page 14, that's the reason -- and as a reminder, that's the reason why we reduced our guidance for this year. The underlying performance of the implied operating cost overrun is EUR 350 million because we had a pension reevaluation, as you know, in the first quarter of EUR 108 million. We will invest additional EUR 150 million to improve -- to help to improve our operational performance. And then we need EUR 500 million for restructuring, mainly for the early retirement program that led to the new guidance. So how is that splitted among the quarters? On Page 14, you see if you exclude this pension reevaluation of the first quarter, the underlying performance was EUR 140 million down. That had impact from higher transportation costs, higher salary costs, higher sickness rate. That's the reason why Q2, despite that it's better, we would not overstate yet, we have not really seen a significant cost improvement in that quarter. Nevertheless, it's heading in the right direction from the nominal amount. We will see better improvements in Q3 and particular, Q4. That is what our expectation is. We are working on all dimensions, as I already explained in a second -- will explain in a second, on all dimensions to really improve the profitability of the PeP division. So the challenge is not the market. We are very competitive. And you can see that on parcel and on air front, but we have an internal problem. Nevertheless, we can do a lot on all levers. On Page 16, reminder again, we will work on the remaining side on both parts. I come to that in a second. We need to improve our productivity, which is not in good shape and we have to think about what can we afford as an overhead cost structure. And I will explain already the -- some of the measures we have already taken. So on Page 17, you see what we do on both parts. First on post, we have a clear time line. We have, currently, discussions going on with the regulator. And I'm confident that we will see a price increase and adjustment by the end of the year, so late November or early December. And as I said, there are constructive dialogue. As a reminder, this is only for the -- about 3 billion regulated mail volume, not for the rest. What we do on that one is dependent on what the regulator decides on this area. On the parcel front, we have already started. We announced it already to [ red card ] customers, some small customers that they will see a rate increase by September 1. We are planning a significant price increase for January 1. We have already started and are implementing at the moment for heavy and bulky stuff a price increase. And due to the exchange we have between Express and the PeP division, we are learning from them how they manage more the ship-to-profile and yield management and I think there is plenty of opportunity. I have seen that, in the meantime, we can do better on that dimension as well. That all should help us to improve our yields in the parcel area. We are also talking to customers about the planning for the peak and how we deal with overrun and underrun of volumes. And I'm optimistic that we will see some impact there as well. So overall, I think that's important. We are market leader. We are quality leader. And in a tightening market with regard to capacity and resources, I think it's important that we are leading the pack and we'll do some price adjustments. And we have started already and we have clear plans which we already decided. But it's always publically talking about it is different than what we really are doing with our customers individually. On Page 18, you see what we plan to do and what we have started already on our productivity measures. We are thinking along the whole supply chain and different elements. First, we have standard operating procedures. But as I said already last time when we talked, we have seen a deviation from the standard operating procedures, which has negative impact on quality and costs which we have to readopt. We have to deploy First Choice significantly more rigid than we have done. I think we have good tools and we have enough trained people that should help us to improve the processes. And finally, the new technology, digitalization, automation will help us to renew these processes. You can read in the middle some examples. It's about training. It's about transfer of best practices because there are significant productivity gaps between best performing and lowest performing companies. You might have seen that we also now have hired for that division a colleague from DGF who helped us already on renewing their -- the IT platform, and he will now help me on the operations side in PeP. I think that will be a good move to focus on these areas of importance. So then on the next page, 19, these are indicators, what we are doing with regard to restructuring. The organization is too complex. We are working now and we are getting closer to the announcement, what we want to do. So that's an internal announcement, of course, how we simplify, how we rightsize and how we avoid duplications, but there is a lever. And I'm very confident that we will deliver over EUR 200 million-plus savings. We have already decided to shut down certain things which are not big, but important as well for cleaning up. So you can see them here. And finally, of course, we have worked on our marketing spend. We are reviewing our sponsoring activities and have already reduced the impact -- will happen probably more in '19 and '20 because, of course, they are contracts and we can't see the impacts right away. We are reviewing IT project and reshuffle certain things to more beneficial projects, as I call it. Page 20 is just a reminder of this early retirement, how they provision is built, and what's the P&L impact and cash flow impact? Again, the early retirement program has a positive and not a negative impact on our free cash flow as shown here. And it has a positive impact on our P&L as well. Until 2020, we expect around EUR 160 million and even slightly positive free cash flow. So that's important to understand that, that doesn't hurt our free cash flow because we are not paying upfront. We will pay in the respective year for the early retirees the money, and that's the reason why we have even a slightly positive impact on free cash flow. So overall, as I said, I'm confident that we can deliver EUR 200 million plus. On Page 21, you'll see where we are. We understand -- I think all our problems we have, all of them are internally focused. Of course, pricing measures [ there as a ] customer. And therefore, we have to monitor that very tightly. I believe, as a leader in our industry, we have to take that seriously. I'm very close to these activities, and we will review that very closely. I think pricing is always a key priority for the divisional heads. And I'm very confident that we are taking here very reasonable measures which help us to convert more revenue into profits. Direct cost, I just talked about, is the same. Indirect cost, yes, it's not all gone yet, but I think we have a clear plan. That leads me then to Corporate Incubations. And we're now coming again back more for my CEO role for the group. As we explained earlier this year, we bundled our certain activities, which, particularly, have -- are loss generating at the beginning. You can see that on the bottom, StreetScooter is getting more, more traction not only internally, but also through external sales. Nevertheless, we can't create miracles either. So therefore, we generate more losses this year than we had in the last year because we scaled our operations, but we are very confident that we can turn that around in the next years to come. SmarTrucking is our startup in India for premium trucking. I believe that this is a great idea as well and it gains momentum again here. We faced losses at the beginning after we didn't have any losses because we didn't even start last year. And finally, our SIMSme project. We are reviewing that against the backdrop of GDPR. Is there an opportunity for more? Confidential information and SIMSme is such a platform, and we might have an opportunity to leverage what we have built for a messaging service. So in summary, 23 and 24, we reconfirm today based on the second quarter, our guidance for this year. We are confident that we can achieve that not only in this year, but also that we have the right base for 2020. That's the reason why 23 has not changed at all. All the numbers, we have already shared 8 weeks ago with you when we changed guidance for this year.
But for the tax rate.
Sorry. The tax rate is -- yes, the tax rate is new. Sorry, that's true. We have reduced it as Melanie already explained. Then the wrap up. The Q numbers are in line with what we knew. I think we have a lot of positive. The DHL divisions are -- have a clear agenda and they're heading in the right direction. I'm very pleased to see the significant improvement in the first half for DGFF. There is a fundamental change. I'm also happy about the progress we have made on the IT front. Express is running very smoothly anyway. We have record margin there. Supply Chain, after some hiccups in the first quarter, I think, is back on track. That's good. And as I said, PeP has internal issues, but no market issues. That's the reason why we are confident that we are knowing what to do and we will execute accordingly, and we have all the right focus on the right subject. So overall, that's the base for our confirmation of the guidance for this year and 2020. And with that, thank you for listening. And I hand over now to you for any of your questions. Thank you.
[Operator Instructions] The first question comes from Andy Chu.
Three questions, please. The first one is on the additional OpEx investment, the EUR 150 million. Would it be possible to sort of phase that for us in terms of Q3, Q4? Second question is on DGF. When will you stop being selective on volumes? And when can we expect air and ocean volumes to trend more in line with market volume growth? And on -- my final question. On the parcel price increase, you alluded to some quite significant price increases, more sort of bulky items from the 1st of January. Would you be able to give us some sort of quantum of what sort of price rises you're thinking about that, please?
Sure, Andy. Let me take the first and the third question. Melanie then will talk about the second. So we have not finally decided which measures will really trigger which expenses. And therefore, it's too early to judge how much we will see in the third and the fourth quarter on OpEx. I think a solid assumption would be that we probably have 1/3 to 1/2 in the third and then more. But as I said, it's still a work in progress. On the price increases, we don't want to [ vote ] a percentage points. We will do more than in the past. We already have started on bulky and heavy stuff. It's not for implementation, January 1. It's going at the moment. Of course, we have contracts with customers which we can't change. And therefore, it will take months until we really see the full impact, but we have taken significant increases and we will see then in the next weeks how sticky customers are. I'm positive because I think the pricing level we had was too aggressive and not necessary, and that's the reason why we have taken that as a step. The more general price increase will happen on the January 1, except for [ red card ] customers. And that will be significantly more than in the past, but we don't want to talk about a percentage point of -- of a percentage points because that will be slightly different per customer. And therefore, it's individual negotiations.
Yes. So maybe a brief addition to what Frank said, and you asked about the phasing of the EUR 150 million on the OpEx. We invest -- the other question we get all the time is what about the restructuring? The EUR 350 million, we still have for the civil servants. And the EUR 100 million are the other. I think here, you should expect in terms of phasing that we will see a lot of the civil servant, EUR 350 million actually coming into the third quarter because we are now already working on issuing the announcements. Whilst the EUR 100 million is probably more moving into the fourth quarter. I think that gives you the full picture on the timing of the one-off effects in cap. With regard to Global Forwarding, Freight volume, I mean, it worked very nicely for the numbers now in the second quarter again. But we know that you can't shrink yourself to greatness forever. So obviously, we have to find the right point in time to go back into a growth mode. We will do that selectively and carefully. So it should move -- begin to move in the other direction, but at a slow pace. So don't expect volume growth yet in the third quarter.
The next question comes from David Ross.
With all the tariff and trade talk, I know that you haven't seen it in the numbers in terms of Express or air or ocean yet, but in conversations with the customers, everyone in the Supply Chain division, where they're locating facilities, how they're moving goods, are you seeing any impact yet? Or what are your customers telling you about the pending trade war?
So I think they are all watching and nobody really is thinking that we will get to a trade war. I think what concerns customers more is the potential of a hard Brexit. And we see more movements already that customers are starting to move operations from the U.K. to Mainland Europe. I think that's more imminent than a response to all the talks about trade war. I think there, what I hear is at least there is a quite reasonable approach to that. Nobody believes that this will get out of proportion, that's -- but we will see. But on Brexit, there's definitely preparation going on already. The people start moving their operations from the U.K. to Mainland Europe, which is, for us, not a major problem but it's not good. It is extra cost, and there is a fear of -- increasing fear that there would be a hard Brexit.
And -- yes. To follow up on that, related to the global economy, not just tariffs and trade. We've been very strong across all regions for some time. Are you seeing it soften anywhere? I know in some of your numbers, it's not related to delaying strength, it might just be customer pricing actions or taking a harder yield stance in Asia-Pacific, for example. But what are you looking out for? What are you worried about? And are you seeing any softening anywhere around the world right now?
Yes. I think the real concern is that the psychology changes. At the moment, I think the world economy is in a pretty healthy stage. And if the politicians don't disrupt that, then we will see a good continuation of that. And that's the biggest risk, I think, that we have, getting too much noise into the system. And then consumers are changing. If consumers are changing, then investments will change. And that's the risk, but we have not seen that in any part of the world yet.
The next question comes from Damian Brewer.
If I can get cheeky and ask 3 questions. Just 2 simple ones, first of all. Appreciate you can't tell on what the impact of trade, et cetera, is. But just for information in Q2, how much of the revenue base for the group as a whole was either within or going to from the U.S.? The second question, just on the PeP goals that you set. Can we just be clear, given the management change that's going on in PeP, were those set by the current management under Frank's direction? Or was -- are there elements of that, that are set by the outgoing management team within that business? And then the very final question. Just on -- Melanie mentioned the extra 150 basis points CapEx intensity for 2019, which is the peak year of the payments for the 777 freighters. So that feels like it's got EUR 900 million to EUR 1 billion of extra CapEx or what would be classified as CapEx in that year. Given that cash outflow you'll be seeing on top of the ordinary cash position of the business, the normal CapEx, how confident are you in terms of when this gets to the Supervisory Board that they will be quite confident and happy to pay the dividend out of equity if the dividend cost is going out bigger than your free cash flow?
Yes. So Melanie, may you answer the question with regard to the U.S.? But maybe on that subject, without talking about the numbers, the interesting thing is -- and I have seen that now in the last years already, so there is not a single root cause for what happens finally. The trade will change, but we have a big domestic business as well in Supply Chain that might have seen a positive impact short term and long term. Even the Brexit, it's cynical, but it might lead to better results for us because the complexity of a hard Brexit will drive complexity and that drives cost for our customers and potential profit pools for us. So it's unpredictable somehow. Therefore, I would not be too concerned because we are fortunate enough, depending on one region, one trade lane, we are really global. And that's the reason why. I'm more concerned about the overarching decline in growth than I would be about particular markets. The targets. That's a good question. We have the target of EUR 1.7 billion already before. But of course, after I stepped in, I reconfirmed these numbers with my colleagues. So the current management team under my leadership is fully convinced that this is doable. They have developed, of course, measures. And we have looked into these potential measures and the impact that we really can deliver. So the target was already before. But I think we have a pretty robust plan to go for the EUR 1.7 billion in 2020, assuming that not all our measures will deliver the maximum. So it's a balance of having more ideas, what we should do and knowing that not everything will materialize in a complete way. And that's the experience. But the team I have in PeP is very confident and committed to deliver that number. So these are old numbers, by definition, but they were reconfirmed by the current team.
Okay. So then maybe just to add some numbers to the first question. I mean, when you look at our annual report, you can see that for the Americas region, roughly 18% of the group revenue were in the Americas region, EUR 10.8 billion. And out of that, I would say that roughly, probably around 2/3 are in the U.S. But that's also a bit of a technical thing because that's a revenue built and recognized in the U.S., so the kind of like real geographical origin maybe completely different. I think as Frank said, overall, we feel very well balanced with regards to our revenue exposure across the different regions. And yes, we have seen over the last years and decades, oh there's one region going into one direction or the other. I think this is really a time when having this global balanced approach is going to be helpful. On your third question, I mean, first of all, it's always -- your math is, of course, right. So what have you calculated for the 150 basis points sounds like a very reasonable number. I think the important point here is that, of course, when we talked about this refleeting exercise with the Supervisory Board, we took -- look at the bigger picture, including dividend considerations and so on. And you know that our dividend is not linked to the free cash flow, even though, of course, free cash flow is a topic we take into consideration. It is linked to the earnings development where we have sufficient flexibility with our 40% to 60% corridor. So for the regular dividend, it's special. It's one thing I wouldn't be concerned with regard to the 777. With regard to excess liquidity consideration, that is why made the specific point that we will treat it as a separate category even though, of course, accounting-wise, it will go to the free cash flow numbers.
In May -- I would love to talk about because there are several questions with regard to you brought up U.S. and trade war. So I think it's, again, important to reflect about the portfolio of divisions. So if you think about DGF, let's assume there is a decline in growth, there is tremendous potential sell-through the sell -- help in the IT platform, which has not been kept, particularly the IT platform because that is still in the rollout. So that will help that division even if the growth -- and I have to say, we don't have -- we haven't seen any decline in growth. So therefore, it's just for the sake of the argument, DGF could help themselves through the measures I just explained. Supply Chain is late in the cycle all the time. So we will not see any major impact at the beginning. And Express and PeP will benefit tremendously from the structural change to e-commerce in any case, and that will continue regardless what the economy does because the trend is still intact. So that's the reason why our portfolio is pretty robust against these things. That's the reason why myself, as a citizen of this planet, I don't like what is going on because I believe globalization is good for the planet and has proven that very strongly. And therefore, I'm nervous about these kind of talks. But the impact in our company is, of course, there is some growth deterioration, but our business units have enough opportunities in their respective area of responsibility. And on top of that, we are very well balanced with our footprint around the world, which is I think good for us as a downside protection.
Damian, 3 questions, definitely 3 answers. Any more?
That was great.
The next caller is Edward Stanford.
You'll be relieved to hear I've only got one short question. And that's really picking up of one of Damian's points, which -- and could you remind me the -- of the profile of the CapEx on the freighters? It peaks in 2019. And then do we have 2 years beyond that of payment? Perhaps you could just help me out -- remind me of that, please?
Yes. So we expect around EUR 200 million now in 2018, then we expect to peak in 2019, followed also by a quite significant CapEx in '20. And then it will tail off in '21, and we will have all planes in operations by the end of '21, so that '22 will be the year when we really see the full operational benefits.
And we have a question from Dominic Edridge.
Just a couple also, connected questions on the PeP business. Now that you've reviewed all the operations in Germany and seen how things are set up at the moment, do you foresee any requirement to change the business model fundamentally? Obviously, some other countries in Europe, you are seeing some changes and some alterations to how they operate. Do you see that being an issue in Germany? Or do you feel -- are you fairly comfortable given the volume trends that's -- that's not something you require at the moment? And maybe you can say if there's been any been early discussions with the regulator about that? And then on a connected point on pricing. Do you see there and going forward, being a much more annual process of price rises in letters and parcels? And because I suppose one of the -- you could argue one of the lessons of maybe the last -- of this current year has been maybe you didn't put prices up when you could have done in the past? Can you just talk about how you view the pricing mechanism going forward in PeP as well?
Yes. So on your both questions, so I don't believe that we have to change our business model. I think we've -- our joined -- combined delivery of letters and parcel, I think is a good one, and we will continue to do so. You can even find somewhere in the pages that we want to extend the joint delivery for letters and parcels. I think there is an opportunity to change the steering logic. And maybe just to give you an idea of what I mean by that is, I think the linkage between what customers demand and what we accept from the sales side is not fully aligned with operations all the time, and we have to combine that more tightly. And because I have seen complaints from customers that the cutoff time to -- for pickup is too early, but they are not willing to pay the price, then we move that without increasing price. And that puts additional pressure on the operations. And I think these kind of things have to be circled much closer on a -- in a region than on a global area. I think that's not a change in the business model. It's more a change how we steer that. I think we need more accountability for the results down in the operations. And we have, at the moment, accountability for other revenue or costs. And I think that needs to be changed. On pricing, I think what we have done with stamp price or postage increase was right to take a longer perspective because that's better for the consumers and small customers, and that is impacting them in particular. On parcel, I think we have to be getting closer to that. We really review that in a constant way and probably come more to an annual price increase. But we have to learn out somehow. I think we can learn internally from Express and Forwarding. It's based on premium quality. And that's the reason why I'm telling our people all the time, quality, quality, quality is the name of the game. And we are not allowed to drop the ball because that's the right basis. Then we are unavoidable with our scale for any customer. And I think that's the objective. If we are unavoidable, then it gets easier with annual price increases as well. So I think that's way we have to go, and that's also a reflection of tremendous growth the industry has seen over last years. And capacity got tightened. And of course, the labor market in Germany is very tight already anyway. So I think there's an opportunity to do that more on an annual basis not on postage, but on parcels.
The next caller is Joel Spungin from Berenberg.
I just got a couple. If I can just start maybe just by asking about the early retirement program again. And just maybe if you could just give us an update about how advanced you are in that program. I see there'll be some sort of window where you'll make an offer to eligible employees. Has that process now started? How long is it likely to go on for? And then just related to that, in terms of the benefits from the program, I would assume that you would get the benefits from that program relatively quickly, but this Slide 20 would seem to imply only a modest benefit in 2019. I just wanted to make sure that, that was the correct way to read it. And then my second question was just a relatively simple one again on the airplane CapEx and excluding it from the liquidity. This may be really obvious, but just to understand why you're excluding it, is the debt in some way, nonrecourse? Or is it simply a decision that you've made in terms of how you're going to assess the business?
Yes. So the early retirement program is in full swing. We have already done for the first tranche and we get already acceptance for many. So therefore, there will be already be a benefit happening from probably September on. We are now have written letters to the next tranche, and we will learn from the next tranche how well the pickup will be. We have identified quite a long number of people, which we will take in portions, one after the other, to realize that. That's the reason why we felt that Page 20 is more a realistic reflection to conservative reflection what might happen. We have only done EUR 50 million so far. And to now say that's -- that pickup will be exactly the same for the next, I think, is too aggressive. And that's the reason why we think -- let's wait and see. We can tell you probably more when we release our third quarter numbers and how that really will phase in year-over-year. So I think that's, at the moment, the realistic perspective. The program is in full swing, and we are very optimistic about the pickup. But let's see for more evidence. The first tranche was well accepted by the people we asked.
Yes. Then maybe to the second question on the 777 CapEx and why we look at it slightly differently with regard to excess liquidity. I mean, when we had our internal discussion, should we go down the road of purchasing those aircraft. We've been very well aware that this is a deviation from how we have purchased a big chunk of our aircraft before. And we are replacing existing 747s, which are leased with purchased aircraft. We could have continued with leasing. But when you do the lease versus buy calculation, it's economically obvious that purchasing is the better way. We were, at the same time, however, aware, given our free cash flow generation and the amount of CapEx, particularly for '19 and '20, that this would have severe implications on our free cash flow generation and that this would be a significant deviation to what we have told you before about excess liquidity. So that was the one aspect we took into consideration, that we wanted to have some continuity how we think about excess liquidity and shareholder returns. At same time, we took into consideration the strength of our balance sheet and the fact that we have the opportunity to counter finance those 777 at extremely attractive rates in the debt market. And that this what we are doing now and are beginning to do now. So we are tailoring debt financing. Really, there's a timing of the delivery and the payment for the aircraft and also with the payback we get on the operating cash flow side from putting those more efficient aircraft in. So I think what we then came up with is this overall logic. Yes. Of course, accounting-wise, it is free cash flow and CapEx. But given that we counter-financed it, I think there is a justification to say for excess liquidity considerations with regard to shareholder return, we put it into a separate bucket. And I think that gives us the opportunity to do what is economically the right thing for the company, i.e., purchase those airplanes instead of leasing them without becoming inconsistent with what we have promised to our shareholders.
Yes. And to add to that again, somehow -- of course, we fully disclosed all these elements to the Supervisory Board. So they are fully aware that we are treating them separately as well and not as part of our normal free cash flow, which I think is important in conjunction with dividend and all these aspects. So that is fully aligned and understood by our old Supervisory Board.
Okay. If I can just ask one very quick follow-up. On the civil servant program, do you think you will have offered everyone who might be eligible by the end of this year?
Yes. I think in terms of phasing, we have just started the second wave on -- and the clear intention is to already book a significant chunk of the restructuring of the remaining EUR 350 million in the third quarter and definitely, by year-end. The reason why, in terms of phasing, it may still lead to some benefits coming in, in 2020 depends on when those people really go into retirement. And that's really depends on the 8 brackets and so on. But in terms of booking for the restructuring, EUR 50 million in Q2, expect a big chunk in Q3 and the remainder in Q4.
The next in the queue is Mark McVicar.
Three quick questions. I think 2 for Frank and 1 for Melanie. Just in terms of PeP, Frank, how long do you think you'll need to remain in direct control of the division? And when you look for your successor or whatever you want to call it, will that be exclusively internal or would you look externally for someone as well?
So I think that's an important question. Let me answer the question. I'm prepared for do that longer than just the year-end. I have a tendency to understand really all the issues and then put the master plan on the road. And I'm confident that different from the situation we had in DGFF, despite that, we will consider also external candidates. The people we have in mind will be relatively -- are short-term available for us. So I think -- let's see how progress -- the past progress we made. And if I'm confident that things are in good shape and on the right path, then we probably will also think about a successor in that division.
So around about the end of the year or getting into the...
No. I think it's probably longer than the end of the year, as I said. So I'm prepared to that longer than the end of the year.
Into '19.
Into '19. Yes.
Okay. And the second question I think for you, Frank, is of the EUR 500 million restructuring charge, you clearly told us where EUR 400 million is going. What sorts of things are likely to absorb the other EUR 100 million?
So that is some -- of course, some restructuring expenses for some of the shutdowns. It was mainly also related to staff costs, which we will expend also and we'll have restructuring outside of civil servants, and we have to then pay people, executives, packages. And that is a major chunk. We don't have major restructurings for other staff. There might be some write-downs in [ all you need ] for marketplace, for instance, because there is IT and all this kind of stuff, but it will be mainly related to severance packages for people.
Yes. So it's sort of non-civil-service-grade people, generally?
Exactly. Exactly.
And then my question for you, Melanie, was if I look at your -- the way the financing charge has developed this year, and I adjust it for what you told us was the IFRS 16 impact, which was to add EUR 350 million roughly I think for the year, it looks like the underlying number year-on-year has come down and stayed down quite significantly. What are the main bits that are driving that reduction?
Yes. So that observation is correct. One big driver in here is actually the development of our share price and the way we account for stock option programs, particularly for the board members. So that has been one of the big offsetting factors in the second quarter.
Okay. Which is not something anybody wanted to see, really, but they -- it's a -- every silver lining has a cloud or something. But...
[ Very good ]...
Working on it.
Yes.
Next question comes from Edward Stanford.
Just one follow-up I forgot to ask. With all the mention of the price increases in parcel, I mean, have you had time to gauge the reaction of your parcel customers of what that might mean? I mean, what's the -- how are you gauging the customer reaction to your proposed price increases?
So it's very early to say. So far on heavy stuff, they are not excited, but they didn't walk away. So on [ rate card ] customers, noise level is pretty low actually. So people expected something anyway after the announcements we did. And it doesn't come as a surprise because they see that the market is tightening and our competitors are talking about price increases as well. So far, so good. But we are still at the beginning. I think the bigger chunk will come by January 1, and then we really will see how good the big impact -- how good the stickiness will be and how much potentially we will lose volume. So it's too early to say, but I would say it's not discouraging what we have heard so far. So we just -- we are confident that we really have a good product in the market and people expected that something might happen anyway.
The next caller is Matija Gergolet from Goldman Sachs.
Three quick questions from me. Two more on the numbers and one more on, say, the corporate incubators. Firstly, just on the corporate incubators. I mean, you have now quite a few, say, startups in that business. You are generating a bit of an EBIT loss using the startups. When you think the next 2, 3 years, would you think that you would want to allocate more capital to that division? Or are you happy with the current, say, pace of innovation and also capital allocation, i.e., do you want to accelerate that further? Or is it more, "Okay, we have quite a few projects, so let's get these projects related to term profitable first of all"? And then secondly, two on the numbers. So you mentioned that there will be some shutdowns like in Allyouneed, the ones on Page 19. Is there any EBIT contribution at the moment from these subsidiaries? Or are they actually loss-making at the EBIT level? And then lastly, you mentioned that basically the working capital in Supply Chain had a quiet a negative swing in the first half. Is that an area of concern to you? Or do you already have a pretty clear view of what you need to do to get the working capital back to normal for that division?
So let me take the 2 first, Matija. So for the time being, we think we are well positioned to these three. There are 2 reasons why we put that out just to remind everybody. First is, it create more visibility the [indiscernible] was -- particularly this year, it has overshadowed our numbers. Let's assume we had not changed, I mean, changed our guidance for the PeP. I think we should separate that because you can't grow a startup by limiting them all the time to deliver numbers. And that's the reason why we said, "Let's do that." I think we will add more activities. You will see that these things are really working well. That's the reason why I would say for the time being, we will stick to these things and then we see how they progress. If they really create value for all the shareholders, so then we will consider other ideas. But for the time being, that is not planned. As we guided already, we assume that the losses of the EUR 70 million this year should be 0 in 2020. And we are optimistic that this is achievable. So on the other one, I can assure you, these are all loss-making activities. So we will not shut down our profitable businesses to refocus. Maybe yes, but these are all loss-making activities, and we will take that out of the P&L.
Okay. On the Supply Chain working capital. I mean, first to put it into perspective, I was highlighting that because it is a bit of contrast to the good development we see both in Express and Forwarding. That was the first 6 months of 2018. When you look at the root causes, I think there is one area which is really a timing thing. I mentioned earlier in the context of IFRS 16, those real estate venturing activities, which are part of the regular Supply Chain business where we currently have a couple of projects in the pipeline, which should materialize in the second half of the year, that is currently driving up the inventory position. So that is -- yes, clearly, understandable a phasing topic. I think the area where we really have to now work on intensively and the Supply Chain colleagues are all over that is on the receivable side where we weren't pleased with how the quarter-end for June 30 went. So that is something we have to correct. I think in terms of timing, the inventory stuff on the real estate venturing is probably to -- it's probably going to go over into the fourth quarter. On the receivable side, we clearly have to work on that already in the third.
The -- so for the last question comes from Andre Mulder.
A question on the stamp price increase. You said that it's probably not going to be an annual change. If I look at the other postal operators that implement a stamp price changes on a regular basis, everybody does that on an annual basis. What's the reason for you to do that in an -- let's say, a multiyear bracket? And the second question is should we, and again, expect a 3-year time frame like it was in 2016?
So I think that's a good question. We think -- if I -- we -- Have I see -- the responses to our last price increases, the biggest one was the last one, but it went very smoothly because people said, "Okay, fair enough. They do that for several -- for a longer time period, for 3 years. And therefore, it's better than having adding these annual small steps." So I think that's -- and the culture is different. I think that has worked pretty well. That's a part of the discussion at the moment with the regulator if that's for 2 or 3 years. We will see that in due course what the outcome will be, but it will definitely go up more than 1 year. That's at least our intention as well. And I think the regulator sees a benefit in that, too.
Okay. Thanks Andre. Are there any further callers out there?
[Operator Instructions] There seem to be no more questions.
Jolly good. Well then, I'd like to thank you for your focused Q&A round. And before closing, I want to thank Melanie and Frank. And for the final words, over to you, Frank.
Yes. So of course, after the -- a little bit bumpy road in -- of the last months, this quarter was in line with what we expected. Now -- having looked into, in detail into the PeP division. If I summarize our business, we have an Express division that were just now delivering record margins in our industry and growth is growing quite nicely. I think we have the right recipe for success created there. E-commerce helps there structurally, so that's in good shape. DGFF, we said that before and now you see first indications, we don't have any strategic disadvantage, neither by our footprint nor by our people. And now, I think the IT platform is working well, we see that. The benefits are not embedded in our numbers yet. Supply Chain, we are at the target margin, with our margin, but we have to accelerate growth. And I think that will be a significant focus for John and his team. And in PeP, we are the market leader and we are well positioned with our growth rates. We have to fix our homemade problems, and that's where I spend a significant amount of my time on. And that's the reason why I'm pretty happy we have a clear plan, and we have plenty of opportunities in all divisions because structurally, our industry is well positioned for what will happen going forward. And despite that we had not the record quarter, I think we have a very good logic and that we will see that in the next years to come until 2020. So we are confident that we can make our numbers until 2020 because wherever I look into, I think we have a good story to tell and a clear plan. So with that, thank you very much for participating today. And I hopefully see you soon somewhere. Thank you and bye-bye.
Thank you.
Thank you.
Bye.