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Deutsche Post AG
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Ladies and gentlemen, thank you for standing by. I'm Stuart, your Chorus Call operator. Welcome, and thank you for joining the Deutsche Post DHL Group Conference Call. [Operator Instructions] I would now like to turn the conference over to Martin Ziegenbalg, Head of IR. Please go ahead.
Hello, and a warm welcome from my side to our Q2 '21 conference call. As flagged we have with us today, Group CEO, Frank Appel; Group CFO, Melanie Kreis. Amidst to be done within 60 mins and therefore, right over to you, Frank.
Good morning, as well from my side. So today, we are less -- more or less confirming what we have said already a couple of weeks ago in our preliminary release about the second quarter. Therefore, I think we can overturn to certain elements of that. So if we go straight away to Page 3. Yes, again, we are definitely in a very good spot, seeing a very strong recovery of B2B markets are driven by the overall recovery of the economy and B2C still continue grow at a lower pace and in Q4 or Q1 not surprisingly and of course that also do continue both trends, we continue into the second year. What we intend to do and have announced already that we will let our employees participate in the tremendous success of the company.As of the moment, we believe in a service company, the difference is coming from our colleagues around the world and we are very happy to have already announced that they will get this year and deserve that I think as well another EUR 300 COVID bonus which we now pay in Q4.We also have already, early July, upgraded our guidance now to above EUR 7 billion EBIT and of course that's driven by the strong trading we have seen in the first two quarters, the utilization is great and the improvement is driven by all 5 divisions.So overall I think we are in a very good shape. Today, we would like to focus more on volume development because that's important to understand as well. So what happened if I go to Page 4, in the last quarters we have seen a recovery of B2B in the second quarter B2B growth was even stronger than B2C growth and of course that service, the benefit for us that we are well positioned in both markets not only in the e-commerce market, but also in the B2B market. And you can see that here across the divisions that we have seen really significant growth in revenue or volume.On Page 5, starting with e-commerce you can see here the B2C growth in P&P, we had still quite good growth in the second quarter, Nordics is strong as in the first quarter but not surprisingly, and you see that the line is now getting closer to 2020.This is what we have said already in the first quarter that we are expecting a normalization of growth rates for the year and that trend will continue. So I said even in some sessions before already that we might see even in certain months a decline in volume.But overall, we believe that we will see in 2022 and 2023 higher volumes than we see this year. But of course, the phasing significantly impact by the lockdowns. We have seen in the last quarters in Germany. So overall, good shape. We're happy with the growth. But of course, the growth rate will not continue at the same pace as we had before. On Page 6, you see similar pictures of that development in Europe and the U.S. here, you see that Netherlands is still very strong. ASM Europe, strong growth. U.K. parcel had already some months where we would have letted or slightly negative. And this is fully in alignment with our expectations. U.K. and the U.S. are probably were earlier out of lockdowns and that had impact as well. We believe that we will see a normalization in the other markets as well, but we also expect in the markets where we have seen no growth, we should see soon or later again, growth because of the fundamental trend with moving to e-commerce is still intact. Page 7. The balance between B2B and B2C shows as well and express what we have seen a good growth in Express through the quarter, 20%, more driven by B2B. So it's really great to see. We have obviously a good balance. And if we had seen the same growth in B2C in the second quarter as a B2B probably our network had been quite overwhelmed by volume. So what we now see is really it's manageable for the network. The additions of airplanes is helping us. You see that later on with the profitability as well. So I think we are now really in the right balance by using our network and, of course, B2B will benefit more than e-commerce solutions of P&P from a strong global B2B recovery. And you can see that across the regions. I think it's a great reach to see this is really a great model for us that our global footprint that we are benefiting from all these global like normalized trends. On Page 8, starting with Express, again, there's one element interesting as well, and that's a reflection of what I've just said, that the shipment growth is now lower than the weight growth. B2B has, on average, higher rates, but it's also because stuff moved up from ocean to air freight and air freight to Express. So we fly more heavy way, which, of course, is good for the revenue lying somehow. And therefore, we expect that shipment growth will be slower than revenue growth in the coming months. But overall, as I said earlier before, Express still, will benefit from very healthy growth on both. On all 5 divisions, I will show you now some examples of our digitalization agenda, which is in full swing. Here we have, for instance, Vista is our new tool to manage our capacity better by having more visibility. Taleo helps us to recruit faster colleagues to getting involved. And yes, we added significant amount of people in the lastyear. Anyway, if you compare end of June of last year, we probably have around 25,000 people more on Board. So we are in the market and recruit not only in Express in all divisions, are new people and customers, classification with artificial intelligence is important. A good example is that we lost the de minimis in Europe. And of course, that is a challenging number, but I think these kind of things helped us that we haven't heard anything about that, I guess, that this was a problem because we were well prepared and have managed that very well despite this operation is quite a challenge. So overall, Express in good shape, very good digitalization agenda. Global forwarding freight, we show here as well that we are now ahead of even 2019 before the pandemic. I think that's a consequence of what you see on the right, the rollout of TMS. If you look into the detail, we have added significant volume without adding our people. That shows that the system has really helped us to gain productivity. And on top of that, we have, of course, very high-yield as all the players have. So I think in air freight, we are really in great shape, and we have known our GP in ocean freight as well, and we are now back to the level we had before. Second element of digitalization on the right side is myDHLi, a customer portal where they can book, track the shipments. It's well received by our customers and we are rolling it out to other markets as well as we speak. Supply chain, very strong recovery. We are now significantly ahead of the margins we had in 2019 before the pandemic and also the upside profit, excluding even in 2019, 20, where we had one-offs. So this is really now -- these 2 years one-offs in 2021, we don't have any sizable one-off here. So it shows that the agenda of Oscar de Bok has driven is really now getting traction standardization. The automatization is leading to significant improvement. And I have no doubt we will see that in the next quarters as well. And this is mainly the B2B business. Yes, we have e-commerce quite sizable as well. But as we believe that e-commerce will continue to grow, we should benefit in that area as well. We have a lot of digitalization and a quite busy digitalization agenda here as well. Just to name the collaborative robots, which, of course, are giving us productivity data, which will help us to improve our change over. So good activities here, and I'm very happy about that development with an excellent quarter, and I think there are more to come because the agenda of Oscar for the employees is really working on. Ecommerce Solutions. I talked already about the growth and the pattern we see overall, very strong growth. We are now significantly above the margin of 5% we anticipated for 2025. It's a consequence of a significant lift in volumes. And you see that in these kinds of businesses, if you get more volume into the network and that's the sudden threshold, you should see a very good development of the margin, as you can see here. So that's very positive. An example where we are working on digitalization is our cross European product, which will definitely grow faster and also in the coming years, then the underlying market will grow. So I think we are well positioned here to capture a lot of potential and Ken and his team are working intensively to make it even better for our customers. Finally, P&P Germany. You can see here that revenue and volume grew nicely, but in line, different from the last quarters, but that is more a reflection of a year-over-year comparison because last year, we had a tremendous surge in private consumer products, mainly coming from smaller customers who didn't have a contract. And of course, they pay in a retail outlet, a higher price than a customer with a normal contract.So we have a slight mix change impact here. It's the reason why revenue has grown in line or slightly faster than volume different from the last quarters, but there is an element of year-over-year comparison. Overall, focus is still on yield and will continue to be on that. We have the same effect in Mail. You can see that here, we have grown Dialogue Marketing has grown much faster than the first class Mail that leads to a significantly bigger volume increase than revenue. And that, of course, leads of the short and always to some challenges with regard to how much profitability improvement you see. But overall, of course, we are happy to see that volumes in Dialogue Marketing are coming back and the revenue is growing. Long-term trend is still the same. We should expect a decline year-over-year by minus 2% to 3%. But of course, we are pretty pleased that we predicted what is happening now and a slightly better. And I think we are in good shape here as well. But as I said, there are some challenges with mix in Parcel, also mix in Mail, and you can see that is also in our profitability development year-over-year. Digitalization, a lot of activities, I think we talked about some of them already before. I think we don't have to go to that. They have a very busy agenda in the digitalization to make our operations more productive and more customer-friendly. Finally, our ESG highlights of the first half. As you know, we have launched our road map in March. We are making good headwinds there. And I'm very happy that we now announced 2 days ago our first purchase of electric cargo planes. I know that they are carrying only a tonne -- around a tonne, but there are nice replacements of our old feet of flights, starting in the U.S., and we are also progressing with our offerings for our customers with regard to sustainable Maritime, as you can see here. Great place to work. Of course, it's important for us. Anyway, the second bonus, I think, sends a very strong signal. We have just in Germany vaccinated around 40,000 people in Germany, and I think that is showing as well that we are taking our responsible series. So overall, also on the ESG agenda, I think good progress based on our strategy. So overall, all 5 divisions are in very good shape that has led to these record results. And of course, we are very happy that we can enable and help our customers to probably business as well after pandemic has hindered them less to do good business. And with that, I hand over to Melanie. Thank you for listening.
Yes. Thank you very much, Frank, and good morning to all of you also from my side. So turning to the condensed financial part of the presentation. When we look at our revenue development, I think Frank already explained all relevant trends. And on Page 15, you can see how that adds up to revenue growth of, in absolute terms, EUR 3.5 billion in Q2, 22%. All DHL divisions was on an organic basis growing with more than 20% and Post and Parcel still growing with 7%. So it was a very good quarter on the top line. And that was the foundation for them based on very good network utilization, translating that into a very strong EBIT development. On Page 16, you can see that with EUR 2.83 billion, we actually had our best quarter ever. I mean the interesting thing is when you look at the full -- at the half year EBIT number, adding Q1, Q2, we're close to EUR 4 billion. A couple of years ago, that would have been a great result for full year. Now we have achieved that after 6 months. So that's, of course, the pleasing development. And what is great to see is that all 5 operating divisions are heavily contributing to those great numbers. Of course, Express is standing out with more than EUR 1.1 billion EBIT in a single quarter. But when you look at the margins, it's a very strong performance for all divisions, Express a 20% EBIT margin, DGFF and supply chain, both 6% and the DHL eCommerce Solutions at 8%. So very strong performance across all the DHL division and also good performance on the P&P side. Turning to Page 17 and the full P&L. Yes, I think the one consequence of a good performance is that we have to pay more taxes, and that in combination with an increase in the tax rate significant increase in the taxes line. I think that's the only thing to point out in addition on Page 17. Overall, when you then add it all up, you can see that consolidated net profit and earnings per share are up more than 140%. So we are able to translate the good top line development, good EBIT progression and then ultimately, despite the increase in taxes into a very pleasing progress on that net profit development. So that's the accounting side. Now turning to the ultimate real thing, cash flow, Page 18. So first of all, I want to point out that after 6 months in terms of free cash flow, we are at more than EUR 2 billion. So that's again would have been a couple of years ago a number we would have been happy with for the full year, but obviously, the aspiration levels have gone up. When you look at the quarter in itself, I think there are a couple of points I wanted to comment on because when you take a first look, you may say that EBIT is up by EUR 1.17 billion, but free cash flow is only up EUR 300 million. Why is that? There are 4 main drivers, which are all fully in line with what we had expected. The first one is when you look at the changes in provisions line in the second quarter of 2020, we actually built provisions, for example, for as a StreetScooter repositioning for the positive change in provision, EUR 113 million was a bit of an unusual thing. What we now see is the EUR 221 million with minus EUR 87 million is a more normal thing. That is a EUR 200 million year-over-year swing like in the P&L, we, of course, also see impacts in terms of tax paid of EUR 114 million year-over-year. As the business is growing heavily, we saw that in the top line and naturally, that leads to certain expansion on the working capital side, which is something we are monitoring very, very closely and over line with some increase in working capital in line with our expectations. But on the cash flow statement also leads to a minus EUR 229 million year-over-year decrease. And the fourth point I want to comment on, obviously, on the CapEx side, given the continued very strong network utilization and volume growth, we keep investing in line with our CapEx guidance, and you can see that in the increase in net CapEx. So those 4 elements together explain why there's only EUR 300 million in free cash flow improvement. But again, for the half year, it's a free cash flow of more than EUR 2 billion and then all putting in line with our expectation. So much for Q2 and the past. Now turning to what is probably most relevant for you, what to expect going forward. And we have included 3 slides before I come to the guidance page to give you a bit of background to our thinking about the guidance. The first one is with regards to what we expect on the top line. I mean you can see that on Page 19 that is basically putting together the individual slides Frank talked about. You can see here on the bottom the pack of the lines on the B2B development, maybe this continued recovery, and we clearly expect that trend to continue in the second half of the year. And with regard to the upper pack of lines on the B2C development, we obviously see the normalization and growth like we have expected for quite some time now. So we expect that normalization to continue. It is probably going to be a little bit different country by country, and we have to really see how that then adds up. But I think directionally, it's very clear what we assume on the top line. The big discussion we then had is, okay, how do we prepare operations for the second half of the year and particularly for the peak season? And then when you turn to Page 20, you can see in the middle of the page, our guidance principle that we really want to make sure that we have the capacity needed in the peak and that we really want to focus on delivering great service quality for our customers. That means that we are going to plan for a dynamic peak, even though there is a certain risk that it could not be so dynamic, which would then, of course, lead to us having certain areas of overcapacity. That is one of the reasons why our guidance for the full year in terms of EBIT may look a little bit conservative because that is based on the case that, yes, we are incurring the costs to be ready. If volume then doesn't come the way we are expecting, that would lead to a certain cost overhang, but that is a conscious decision. Just to kind of like explain that very completely. So for example, in Post and Parcel Germany. You saw in one of the slides, Frank talked about that in the second quarter in our Parcel volumes, we were still at the same level like in Q4 2019. So we were still running in Q2 on a peak volume. Normally, the summer is, of course, always lower, and we tend to quite significantly reduce costs over the summer months. We have not done that as aggressively as in the past in anticipation for the strong peak. We already know that this will have an impact on the EBIT margin and P&P in Q3, but we believe that this is the right approach to then be ready for the peak season in Q4. So that in terms of general philosophy of how we are preparing and managing the second half of the year. On Page 21, I'm not going to go through all the words on the page. I think the basic message here is, we, of course, understand that there is a lot of debate about inflation out there at the moment. I think for us, running network businesses, where we have always seen cost inflation over the last years, we are not going to develop something fundamentally relatively new to dwell this inflation we will use our well proven tools. And the most important here is our standard price increase mechanism, which we have been executing over the past years and which we will, of course, do again and where we are very clearly taking cost inflation into account to ultimately pass that on to the customers. So with that to the guidance page, which is unchanged compared to what we said on July 7. We have increased our guidance for the group to more than EUR 7 billion. That's fully taxed into account the second COVID bonus Frank talked about. We are taking that into acceleration is about EUR 200 million. So underlying, it would be more or less EUR 7.2 billion. When you look at the medium-term guidance, we have increased that to more than EUR 7.4 billion. So we clearly expect a normalization in growth rates, but we believe that also medium term, we have a good base for further profitable growth, and that is what we're aiming for. I'm not going to go through all the details of the other guidance elements because nothing has changed here, and we can of course then cover that in the Q&A. And with that, thank you very much from my side. And Martin, over to you for the Q&A.
And right to you, operator, for to start with that.
[Operator Instructions] The first question is from Robert Joynson from Exane BNP Paribas.
Three questions from me, please. First of all, on the 2021 guidance, you've been clear that you consider the guidance to be reasonably conservative, partly with respect to peak season planning and the possibility that the network may not be fully utilized. Could you maybe just provide some color on what type of volume growth you're assuming from a capacity planning perspective versus what kind of volume growth you're factoring into the guidance? Second question concerns next year. And specifically, one of the main debates within the investment community is whether 2021 earnings will prove sustainable. Obviously, you provided guidance for 2023, which shows ongoing EBIT growth. But maybe could you talk about 2022 specifically? And potentially whether you see a step-down in EBIT during 2022? Third question, just on the outlook for Parcel volumes. You provided monthly volume days as of June in the presentation, which was super helpful. But maybe just given the lockdown restrictions were eased a little bit further during July, if you do have the July volume data as yet? Could you maybe just provide some comments on whether you saw any material changes to the trends during July?
Yes. So maybe I answer this second question and Melanie will first and third. So overall, we believe that if I look into the volume development and that is, I think, is a driver for the financials, we believe that in 2022, we still have good growth in B2B, and we will see growth year-over-year in Parcel volume, and that should enable us to generate a positive development of our EBIT. Of course, not of the scale we have seen last year and this year. But we should expect that 2022 should be better than 2021, and that's based on the utilization of our networks. And we are very confident that this will happen because there is -- I have not found any study yet, which suggests that e-commerce will decline. It's obviously opposite. They might be even too bullish and how much volume growth we will see. And that, of course, drives and what should be the reason why B2B volume should not continue to grow. And in key parts of our -- in our business, we have network-based businesses. In other areas like supply chain, our own internal measures should help us to drive profitability further up. So profitable growth should be very possible as well. And that's the reason why we definitely believe 2022 would be better than 2021. And all what is happening at the moment is actually something we have already much earlier. We said second half will be coming down. We will see no growth year-over-year. Maybe we see a decline in certain quarters. None of that is actually surprising. It was all based. And some people said we are too conservative. If you look into our guidance development for this year, we only upgraded that on the delivered numbers but not on predicting anything greater for the future. And that's the reason why we feel comfortable to above EUR 7 billion because we still expect that we will see certain months where we will see a decline or a mix change or something like that. But our mantra is the best and the most important thing is keep growing the service quality. And that will pay back next year. That makes me even confident, Robert, to coming back to the original part of your question, why is 2022 better? I'm very sure that we will deliver outstanding service quality in Christmas period, not knowing what will really happen with volumes. And that is a great base to then gain market share on top of all the underlying growth next year, and that makes us very confident that we will see a good continuation of EBIT growth next year. Melanie, may you take the other 2 questions.
Yes, kind of like volume trends, what we see in July and what we expect in terms of volume growth and utilization for the rest of the year. So in July, we haven't seen anything fundamentally new. We see this anticipated normalization of B2C growth, but the B2C volumes staying on a high level. And on the B2B side across the B2B businesses, particularly in the forwarding area, we continue to see very good growth. And that is also what we now expect for the second half of the year. Obviously, good recovery on the B2B side. For the B2C network, we directionally expect that there will be a peak. So there should be, again, an increase. I think it then really depends on the network, whether this will be above the very strong Q4 2020 on the same level or maybe here and there, slightly below. And that is, again, the reason why we are relatively conservative of our guidance.
Your next question is from Muneeba Kayani from Bank of America Merrill Lynch.
Just following up on July actually. So just to clarify then, Parcel volumes into live remain positive but below the growth we saw in 2Q. Would that be correct? So that's my first question. Secondly, just with air freight rates remaining strong, can you help quantify what's the benefit of that -- of the strong air freight rates in Express during the first half? And how that will impact Express margins as air freight rates potentially normalize over the next 2 years as that capacity returns? And then thirdly, we've heard from GXO, XPO recently on their plans. How are you thinking about your supply chain revenue and margins over the next 2, 3 years?
Okay. So first of all, on the July volumes, I mean, it really depends. We try to show that a little bit on the eComm Solutions side, but kind of like the development Netherlands still significantly above U.K., slightly below volumes last year. So directionally, it is beginning to kind of like normalize more towards last year's level, but we still also have continued growth in some areas. So overall, I would say it's kind of like a normalization. It's a slightly different timing pattern across the different market. Yes, on the Express question, I think that's a really interesting one. And you saw that maybe in the Express side, where we are showing that the shipment levels are also gaining to normalize, but we see a very strong growth in weight in the network. The main driver for this increase in weight is actually not just over from air freight into Express, but a strong B2B recovery. The B2B Express shipment has a higher average rate. So the increase in weight in Express is primarily driven by the B2B volume growth and the volume recovery on the B2B side and the network. There is a bit of a spillover from air freight into Express, but that is not the main driver. In terms of the one area where we do see also in Express significantly elevated air freight levels, that's on the ATS side. That's kind of like where we off free capacity in our Express network into the forwarding market. Here, we still see that pricing levels in the air freight are significantly higher than historic level. And in terms of supply chain, I mean, it's really nice to see that we now had a 6% EBIT margin in Q2. I think that clearly shows what is possible. I wouldn't say that this is now going to be the case in every quarter going forward, but I think that gives you a good order of magnitude that we now aim for. Again, there may be a 5-point-something quarter in between, but I think that's directionally where we want to go. And in terms of top line growth, I mean, supply chain, as you know, is our slowest moving lease networking type of business. So what we can expect here on the top line is less than in the network businesses, but solid mid-single-digit growth is, I think, a realistic aspiration. I hope that answered your question. Yes.
A follow-up, please, on Express. Is it possible to quantify how much of the revenue in the first half came from selling to forwarding?
Yes. That's, I mean, a small chunk. I mean when you look at our -- for all the prime revenue piece is from the core TDI, which normally is around of 85% of overall Express revenue. We look at this ACS revenue as a cost offset. So we still -- I mean, fundamental way, how you're kind of like managing things in Express at the moment is we still have higher cost on the aviation side. We use the ACS volume sell-off into the forwarding market as a cost offset. And then for the delta, which is still there, so network costs, even despite ACS revenue, are still higher. We are passing on to the customers through this surcharge, which we introduced more than a year ago. So that's the fundamental mechanism.
The next question is from the line of Cristian Nedelcu from UBS.
Also 3, if I may. The first one on PeP, looking at the revenue per unit in Q2, could you talk a little bit about the building blocks? How much you have yield increases? How much was the headwind from mix or other effects there? And also, could you touch on your expectations for the second half of the year in terms of revenue per unit? Secondly, some of your U.S. peers have talked about issues with availability of workers recently and wage inflation more pronounced than usually. Could you talk a little bit what you're seeing into your U.S. business in this sense? And thirdly, I think you flagged at Q1 that you are looking at some of the DHL segments at the midterm target potential there and pretty much you've delivered more than your midterm targets recently. Could you elaborate a little bit in terms of the time line? Should we expect you to revise the situation there anytime soon?
Yes. So 3 good questions. Starting with the P&P question. When you look at the revenue volume development in Q2, obviously looks as if there's no real price increase there. This is really due to the mixed effect, which Frank briefly mentioned. So in the second quarter of 2020, we saw very strong growth from small customers. In the first lockdown, a lot of private partners were sent to grandmothers and so on and lots of small shops also started sending our partners to their customers. That had a very positive yield effect in second quarter of 2020, which we also mentioned at this time. So what we now see is a reversal of the trend, or not reversal, normalization. And in terms of underlying price increases, we are continuing with our yield management approach in parts of Germany that has not changed, and that is the clear focus going forward. You will probably still see this normalization effect in the second half of the year. But then obviously, going forward in '22, you should again see a good development on the average price per partner. In terms of U.S. situation, we also see shortages in the labor markets and partially significant increases. So that is part of the cost inflation we have to deal with. One of reasons why we included the slide on how we manage cost inflation. It is, I think, for our U.S. colleagues, 1 of the top priorities at the moment. But the feedback we are getting is that so far, they have been able to manage that carefully. And last but not least, on what should be our margin aspirations going forward in both divisions like DHL eCommerce which are significantly better than what we had originally aimed for. We are now in the second half of the year going through our regular process for the budget and the new 3-year midterm plan. That will be the basis for our guidance, which we're going to give next March. And I think that is also the right point in time to talk about potential changes to our margin aspirations. But I can assure you that it will be, like every year, a very intense discussion between the group functions and the divisions. And we will, of course, take into account that they are doing much better than what we had originally aimed for in setting new targets.
Next question is from the line of Andy Chu from Deutsche Bank.
Just one question for me, please, and that's around capital allocation. The cash flow generation of the group clearly is in a very good position. You're already sort of covering your dividend and generating excess liquidity this year. And obviously, you have excess liquidity sort of accumulated from prior years. Given the sort of positive outlook out to 2023, I think you're halfway through -- roughly halfway through your share buyback program, so that could complete by the calendar year end. Would it be possible for sort of further share buybacks by the year end given the strength of the cash flow generation and outlook? And if not, why not, I guess, in terms of the sort of share buyback program?
Yes. So a really good question. And I think given how well we're doing on the cash side, also quite natural one. So first of all, in terms of debt, we stand with regard to the current share buyback program, we're roughly 1/3 through, a bit over EUR 300 million. And so that is being executed in the way we announced it. I think our focus now is to really see how the second half of the year plays out. That will then be the basis for our decision on the regular dividend, and then we would kind of like to take a look at the holistic picture once we have really closed the books on 2021.
Next question is from the line of Sathish Sivakumar from Citigroup.
Actually, I've got a couple of questions. One is actually a follow-up on pricing in Express. The division has actually seen a quarter-on-quarter improvement in pricing. So if you could actually comment on the exit rate, right? What have we seen in June? And also what are you actually seeing currently in the pricing in Express? And what is actually driving? Is it like underlying yield improvement? Or is this also driven by surcharges given the disruptions that you are seeing right now? And secondly, again, pricing, but air and sea freight. What is your expectation in terms of normalization levels for both GP per tonne and GP per TEU? Where do you expect it to normalize? And when do you also start to see that normalization levels?
Yes. So on the Express pricing, I think 2 parts in terms of answer. The first one is, I mean, our fundamental pricing mechanism in Express has always been our annual GPI process. And I think that is still the fundamental driver for getting up the yield in a very continuous fashion and, of course, also compensating for cost inflation. We then introduced in Q2 of 2020, our emergency surcharge due to the prices in the aviation market and the increased costs that brought with that. And we have been relatively stable and consistent on that surcharge. So we haven't modified the surcharging mechanism materially over the last 12 months. It is still in place, and it is working really well to offset the additional costs we have on the aviation side. So that is giving a good to the top line over the last 12 months, but it is really offsetting the cost. So that is not the real driver for the margin development we are seeing. In terms of air freight, ocean freight rate development, obviously, rates are still at very elevated levels, both on the air and on the ocean freight side. We do expect a normalization, but it will be a normalization over time. Obviously, on the ocean freight side, it is probably going to be a bit faster than on the air freight side. But the clear expectation is that levels will stay high for the rest of the year. I think the next interesting point in time to really see a movement in the ocean freight rate development will be post Chinese New Year. So at the end of the first quarter of 2022. And on the air freight side, clear expectation is that particularly on the intercon side, it will take even longer for rates to normalize.
Got it. Just a follow-up actually on the annual GPI process. So is it like any particular time line that you would do at a specific point in time? Or is it more of a rolling contracts depending upon the customers? And with the inflation expectations going into next year, what do you see the potential impact on the GPI would be?
Yes. So the general GPI process is a very established mechanism in Express that -- all this happens in the second half of the year. That we then also very explicitly country by country announce our average price increase, so that our customers can plan for that also for their budget for the next year. We take a number of factors into account. Of course, cost inflation being one of the most important ones. There are also other elements in there -- in the global express network like, for example, currency developments. If you have a local currency, which depreciates in a more lasting way, given that the aviation network is paid in hard currency, you then also have to take the currency development into account. So there are a number of factors. It's a really well-oiled machine, and that is also what will now happen in the regular way in the second half of the year.
Yes. Well, if you take Express, P&P and eCommerce Solutions, where we have more rate card process anyway, you should always think of these will remain for the next coming years capacity-constrained industries because the process to build the capacity for the tremendous volume growth we have experienced and now we continue nearing that pace will limit the capacity everybody has in the industry in total house. Since in Express, we have seen great price discipline already in the past, but we had not that situation. But I can't see why we should not have pricing discipline in the future. And that means if we are faced with price inflation, of course, we will look better customers are paying for that because they have to pay for fantastic service you provide. In eCommerce Solutions and P&P, the same situation. P&P, we have seen over the last few years that we are leading the pack, and our competitors have followed us. And in eCommerce Solutions, we will definitely follow the respective incumbent where they are larger, and they will do something as well. We will follow that as well because this is still a supplier market. So there will be more demand than capacities available. And therefore, that will lead to price discipline, and that's the reason why inflation will be converted back to customers. So I have no doubt, and we have seen that due to different reasons. And therefore, I'm not worried about that because we will find a way to push it back to the customers. You talked about and asked about that, but that's a different model. They are the areas, yes, the rates will come down, as Melanie said, ocean first and then air freight. But we have also here a nice element our TMS is now in full swing, and we have not even captured. We have started to capture the potential which that offers for us for GP to EBIT conversion. So even if a GP growth is not continuing, we have still an opportunity to improve our GP to EBIT conversion. And supply chain is different anyway. We've significant open book contracts. And of course, the contracts will reflect that as well. Typically that if there's labor inflation that the customers have to pay for it. So it's different by division. But overall, to be honest, inflation is not my biggest worry because the industry, I think, is in a good spot to push it further on to our customers.
Next question is from the line of Alexia Dogani from Barclays.
I had 3 questions as well, 2 in the DHL Express and just one on air cargo. Just on the DHL Express, I mean, clearly, margin of 20% is extremely impressive. And we understand that network utilization is really what is driving the performance here. Can you just give us a bit of an indication of where load factor is at the moment? And whether you think there are any structural reasons why you couldn't close the gap to sort of industry leader. And then secondly, again on DHL Express. Your recent decision to commit to 12 aviation planes. Is that -- is this within the CapEx guidance already? And can you just give us a little bit of your thinking behind that? And then finally, on the air cargo market, do you believe that post this past 12 months of kind of significant disruption in belly and in ocean, have there been any structural changes in the market that will be sustained, be, I don't know, the share of Express operators or dedicated freight or networks. Just keen on your thoughts whether we are seeing a step change in structure post period?
Okay. So on the load factors, it's really difficult to give an aggregate number here because that totally varies from lane to lane. I think for us, the important number, we always look at to touch the overall performance in our aviation network is a number which we call cost per kilo. And this cost to kilo is kind of like including the offset by selling off the excess capacity. When you look at the development we have seen in this TBK it really moved up significantly in 2020. And that was the reason why then on the revenue side, we had to introduce this emergency surcharge. We now see beginning positive trend. So when you kind of look at the lines for 2020, it's significantly above 2019. We are now really getting closer to the 2020 and more normal levels. So it is moving in the right direction. And one important import factor for that is the quite good overall load factor we see.
Yes. We don't see any structural change in the industry. What we see at the moment is that adjusts because the integrators have capacity there also used for more air freight capacity. Historically, we always have seen if the economy gets weaker, then you have an up-trading for an air freight to Express and a down trade from air freight to ocean. And that probably will happen over the next cycle as well. But Express will remain a niche in the whole air freight market. It's also from a decision-making point a niche. People expect for this niche superb quality, which we provide. And that's the reason why the margin is so healthy. Yes, we can -- let me discuss if -- we have our own view on the margins. We believe we are best-in-class and better than UPS margins. It's a little bit how you look into the best numbers and what you combine, but I think we are providing now. And you can see that also in the second quarter, the total numbers, I think, the total profitability of the group has never been more close to UPS total numbers despite that they have a big machine domestically. We are less dependent on any major market. You had a question earlier about the labor market in the U.S. Yes, it's a challenge. It's for everybody a challenge, but it's for us a highly challenging comparison to others. But we haven't, in the U.K., some challenges, yes, but if you ask me, yes, it's also a tiny challenge for us in comparison to the group. So that is the benefit of our portfolio somehow. And you see that in the second quarter, you easily can see that we are getting more profitable across the divisions and closing even in absolute terms, the gap to the largest. This is UPS. That is based on our overall portfolio. And I don't see any structural change in that. I think we are so well equipped because we are benefiting around the world from B2C and B2B, and that makes you confident any question around future outlook. That's the reason why we deliver next year more profit than this year and afterwards more, which was a lower growth rate. So the questions are all linked somehow to each other. So we are pretty confident that we can keep a good margin. We are not guiding for margins but also in our Express division, I think we are in a good spot.
GLS question.
GLS question is, of course, included in our EUR 7 billion guidance. It will not materialize in -- partially only, I think, in '23. There's still a lot of lead time, but of course, it will be accounted for in our EUR 7 billion. The incremental additional cost, not the total cost, because we have to buy airplanes and replace the current freed-up flights anyway, so we will accommodate that. But I think we are not allowed to talk about the pricing yet.
No, we're going to talk about that but I think to put things into perspective. So I mean we are truly excited about this very innovative new technology and that we can really pioneer here in using electric planes. But those are small aeroplanes, and also they carry a tonne overall CapEx, that is really from a group perspective, not a very significant number. I think we also have to be realistic in terms of CO2 reduction we will get through this. This is going to be a step in the right direction. But it's not going to be the big thing. I think for aviation for the next decade, given that it depends on the bigger aircraft, it is still about sustainable aviation fuel. And that is the biggest driver of our EUR 7 billion and nothing has changed here. But I'd like to thank you for the question. Maybe that gives me the opportunity to say one more thing on the word you see thing also in terms of expectation management. So when we gave our guidance and committed to science-based target and an absolute reduction in our CO2 footprint till 2030. We already had taken into account that we would not see a reduction in absolute CO2 footprint in the early years because again, it's depending on sustainable elevations, fuel being available in sufficient quantity, and that's just not the case. And so what we clearly now expect for this year is that there will be an increase our CO2 footprint. And that shouldn't come as a surprise to anybody given the very significant volume growth we see in Express and air freight particularly. So just wanted to give the opportunity to also clarify that.
Next question is from the line of Alex Irving from Bernstein.
Two for me, please. First one on margin development in P&P into the medium term. We've seen GLS announce their ambitions to grow in the B2C market. Does that mean rising competitive intensity in Germany? And could there actually be pressure on Parcel pricing in that event? If so, are there any offsets to this you can accomplish? And where are you seeing margins in the medium term in that business? Second question on DGFF, please. The rollout of CargoWise is done. Conversion merchants are starting to improve. Is there, therefore, in other case, to start doing acquisitions in this business? You seem being quite accretive at some of your competitors. How are you comfort thinking about that, please?
Yes. So maybe I take both. On the P&P margins, I think you should -- and I said that already before in calls, GLS is not -- that's a small business in comparison. So there's another player. And then, of course, some challenges for them as well in the German market infrastructure they have. But you should fundamentally think we always said around 10% margin is something we are going for much significantly more long term probably difficult because when the regulator might say why we should increase pricing on same price. So I think a sustainable margin around 10% is, I think, a long-term ambition and I think realistic to achieve. We have seen that as well. DPD went into the market. As I said earlier, there will be more capacity constraints and enough capacity to fuel the growth. And therefore, we expect a good volume. So on M&A, we always say the same. Of course, if there is a good opportunity -- so there is no strategic must have to do something. I think if there's a good opportunity to augment our capabilities. We will do that in supply chain, we would also do that in DGFF, but we don't have a need. We don't -- we have the biggest and most global network in the industry, different from some of our players, who were more active recently. And that's really we don't have a need. But if there's a good opportunity, we would consider that as well because that is what you should expect as well as shareholders that we are looking into and make good use of the free cash flow we generate, if there is a good target. So it's a generic answer, unfortunately, but I can't say more about that. But in principle, if there is a good target, which would help us to grow our business faster, we definitely will go for it. Is there a need to do that? No. So it's driven by -- it's opportunistically by opportunity and not a strategic move. I think that is what we have said already before. And we have looked in the past and look into the future in the same way.
Next question is from the line of David Kerstens from Jefferies.
Three questions on P&P, please. First of all, I was wondering if you have seen any impact on your volume trends following the end of lockdown, which I think was in the middle of May, so right in the middle of the second quarter. Seems that your Parcel volumes held up very well after the end of lockdown or was there any impact maybe on the recovery and Dialogue Marketing. And also Mail Communication remains very, very resilient. I was wondering if that number might have been helped by some one-off mailings in the second quarter, for example, such as vaccination levels. And then finally, you continue to expand the packstation network now to 12,500 packstations. I was wondering, can you give an indication of how much volume is going through these stations today. I think at your Capital Markets Day, you were aiming for 10% by 2025. How much would that be with 12,500 packstations? And what is the optimal number of packstations in Germany longer term? Do you expect that this could become the dominant partial delivery method longer term in Germany?
Yes. So on the volume trend, I mean, first of all, on the Parcel side, as you saw, we are still at a very high levels in the second quarter on what was the peak in 2019, it was way more than 7 million parcels on average per day in the network. And we are now seeing this normalization growth, but it is clearly also after the end of the lockdown staying at this elevated level, which we had anticipated. We indeed believe that there is a bit of a temporary boost also to the Dialogue Marketing volumes. When you look at the year-over-year comparison, I think that is, a, impacted by the really extremely low volumes we had in Q2 2020. But we believe that there is also a little bit of, yes, advertising to get people back into the shops. When you look at the volume growth overall and the trends in Post, we believe that with regard to eSubstitution on COVID has clearly pushed us to a lower level than before the pandemic. And also kind of like the Q2 Mail Communication numbers are not meaning any significant change in trend. We believe that we have gone down to a lower level. And our best expectation is that the normalization over time will take us back to the historical decline rate. And I think that is what we will now gradually setting in probably not so much in the second half of the year, but more than towards '22. And with regard to the packstations, yes, indeed, we are aiming to, over time, get about 10% of the Parcel volume into the packstations and the build-out and to continue to build-out is, of course, creating the infrastructure for that. But the Germans love their parcel to be delivered to their homes. So we don't think this will become the dominant way of deliveries like we are seeing in some other markets. I think the 10% aspiration is still an ambitious target. We still have some way to get there.
Yes. Maybe coming back to the first question. We don't know yet because some of sales is not over, but personally, I expect more impact from that people are going on vacation again then on the end of the lockdown on the volume growth. And I always reflect what I see doing myself and my families. And you are also -- have you gone in the same way back to the stores that you have done before or your partner or your kids? Probably not. Are you going on vacation again? Yes. Are you're ordering a lot on new vacation? No. So that for the indication which we now see in July, August and September, I believe, will have a significant bigger impact year-over-year than the end of a lockdown. But that's a speculation, I'm observing myself, I was already a vacation, and I have not ordered anything during vacation. And I have probably not had any 2 weeks in the past year where my family or I didn't order anything. So that's the reason why that impact is bigger than the lockdown. And to be honest, if I see you're not only my direct family, but also friends. I say it's convenient to get stuff home. Why should I go for that stuff in the city now? They go there for restaurants. They are busy. I see that as well here. So that is what humans are doing. And vacation is so fundamental. That's the reason why we probably will see relatively weak summer period, not only in P&P, but when I referred to that already. And knowing that, we say, okay, but now cutting capacity would be weird because then we might miss the service quality and autumn, and therefore, be better in Christmas. And therefore, we better digest the bullet and say, okay, we compromise on EBIT for a certain month or 2. But then we are well prepared. And next year, of course, we will be bought back to normal, and then we will do what we have always done, learning from the past. So it's all a lasting effect even if you compromise. But we did actually -- you might remember, I said last year in May, we will compromise on EBIT, we will not compromise on service quality. And I think that was a good advice to the organization and it has worked very well for us. And I have no debt that this will work in the future in the same way. So we are living still in volatile times I think the priority for us is to focus on the best service quality and to protect our people.
Next question is from the line of Sumit Mehrotra from Societe Generale.
Well, good luck with Alice, you all want this to succeed here. So fully conscious of Frank's responses earlier, but still delving into the earnings durability aspect a bit more in Express. You have 19% EBIT margins in first half. Can we expect similar levels in 4Q peak. And what -- and from what can we draw confidence that 2022, we won't see any steep step down versus the '21 levels in Express? That's for Express. In freight forwarding, conversion rates, yes, quite impressive. How can you show that the conversion rates will stake and the won't come down to, say, 15% to 16% levels earlier we saw in 2019 and 2018.
Yes. So on the Express margins, I mean, obviously, what we have now seen in the first half, 20% is really a very a combination of the right volume in a very mixed balance flowing through the network. I think that shows what the Express network is capable of. As explained in general, we are not really focus quality and how good the margin and the utilization will be in the second half of the year will really depend now on the volume development. It should be on a very good level for Express. But how good it is, will now really depend on how exactly the volume patterns play out in the second half of the year. But overall, I think we will also in terms of absolute numbers, see a good performance from Express second half of the year. The good thing coming to your '22 question is that, yes, we believe that we are now seeing beginning of the normalization in B2C, that's probably going to impact the second half of the year in Express already. That is then going to be a good basis for a solid performance on the B2C side into in '22. And on the B2B side, given the general dynamic of the global economy, we also think that there is further growth potential into '22, and that would, of course, benefit the B2B volumes for Express. And that is the basis for our outlook for Express in 2022. Again, we will give the full '22 guidance in next March, and we really see and know-how in the second half of '21 have played out. With regards to the GP conversion in Global Forwarding, before COVID, Yes, there was a time before COVID, even though it was long ago. We had very clearly said that we want to improve our GP conversion based on the benefits of our new transport management system, yet aim for 20% in 2020 in terms of DGF core GP to EBIT conversion and then gradually taking that up by 100 to 200 basis points year-over-year based really on our fundamental internal process improvement and nothing has changed about that. So this underlying improvement should still continue. Of course, at the moment, the abnormally high GP level are boosting the conversion. That will be a bit of a fade off on that, but this underlying progression should continue.
Yes. If you look into what can lead to -- what can lead in drop in profitability in margins. So we talked already about volume development. We are confident that we will see volume -- positive volume development on e-commerce B2C growth, not even talked about B2B e-commerce, which should help us as well because it takes bigger pieces, pellets and containers down to parcel limits of board. So that should help us here. In pricing, I talked already about quite intensively, but I believe we have a live for next year with capacity constraints, which would be good there. So we don't expect a volume drop. We don't expect more price war somewhere in the network businesses and Melanie referred are DGF is different, but we have a lot of opportunities from GP to EBIT improvements. And that's the reason why. And if you look into our guidance, we, of course, will not continue to grow the bottom line in the same way. And that's a mixture of maybe, yes, we see a slight decline in some margins, but we definitely will see a continuation of growth. And that's the reason why our numbers for 2023, I think are prudent and realistic and not dreaming that everything will be in the same way as it was in the last quarters. But the fundamentals like pricing, volumes, capacity will not change. And in supply chain, in DGF, I think we have a lot of opportunities for our internal measures to improve their profitability further. And finally, in the network business, you have seen what scale means. We went -- we had a target of 5% in eCommerce Solutions, now we have 8% trading in the last 2 quarters. So that shows you, and if volumes are not disappearing, and I can't see any reason that there is a fundamental shift of the margins to a higher level as we have seen if that's at 20% sustainable on a lower level, that's a different question. But if you take all elements, you get them that, you probably would come up to what our guidance for 2020 is a pretty decent one.
Next question is from the line of Sam Bland from JPMorgan.
I have 2 questions, please. The first one is on B2B volume. We've heard about how when we get through to Q4, for example, we might see some normalization on the B2C side. Can you talk about how depressed B2B volumes still were in the second half of last year? And so could we see -- although B2C is a bit lower maybe year-on-year, we still get quite a nice boost from B2B. And the second question is in Express, are we right in thinking that really, the main driver of the higher profit in Express is the higher volumes. So there's not some piece of the profitability that's going to unwind or isn't sustainable, whether it's the ACS, whether it's our air freight capacity comes back, whether it's surcharges. Is it really kind of just volume -- higher volume and that's what's driving the Express profitability?
Yes. I think it's more -- the surcharge, of course, the Express industry has not played the game like in the forwarding industry. And this, we can't do that with customers anyway. The customers understand that our costs didn't go through the roof. We had a higher cost for freight does instead of belly space. And of course, that has led to the ETS charge. And if that goes away, there are certain costs are going away as well with regard to the because we move it then let operate less freighters on certain routes, but we have value capacity and then our costs are down as well. So I think the whole Express industry has treated customers if we look at pricing differently from the forwarding industry business. In forwarding, if you buy higher, you have to charge your customer higher. And that is fully understood by all customers that the forwarding industry is different from the Express industry. And as I said already, the new prices in the forwarding industry are coming down. You say, maybe our GP per ton on GP per TEU can stand, but our conversions can still go up from GP to EBIT. On B2B, I think your assumption is right. I can't see at the moment any reason why we should not have a very strong B2B growth in the second half as well I agree to that.
There are no further questions at this time. And I would like to hand back to Martin Ziegenbalg for closing comments. Please go ahead.
Thank you, operator. And so we sort of missed my 60 minute target. That is for the colleagues at local areas to bear the consequences with that call. Okay. Thank you very much for joining. Therefore, I hand over to Frank for his closing remarks.
Yes. Thank you for listening and for your interesting questions. I think they were all spot on. And of course, these are the questions we are discussing internally as well, hopefully. You heard that, of course, nobody knows what will happen, but we are some quite confident that our guidance for this year is achievable and also beyond. And yes, the company is, it feels good. The company is doing the right stuff. We have 5 divisions, who are knowing what the program is on screen as well. And that's the reason why I'm confident that we will deliver what we have promised this year and beyond. So with that, thank you very much for listening. And hopefully, and in not too far distant future, we might see each other again in person. Thank you very much. Bye for today.
Thank you.
Bye.
Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.