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Earnings Transcript for DPSGY - Q2 Fiscal Year 2024

Operator: Ladies and gentlemen, thank you for standing by. I’m Sagar, your Chorus Call operator. Welcome, and thank you for joining the DHL Group Conference Call. Please note that the call will be recorded. You can find the privacy notice on dhl.com. Throughout today’s presentation, all participants will be in a listen-only mode. The presentation will be followed by a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Martin Ziegenbalg, Head of IR. Please go ahead.
Martin Ziegenbalg: Well, thank you and a warm welcome and good morning to all of you here from a sunny summer morning in Bonn. Numbers are out. You got it in front of you. As invited, we got our CFO, Melanie Kreis, with us. And let’s start with your presentation right away, Melanie.
Melanie Kreis: Yes. Thank you very much, Martin, and hello to all of you. Welcome also from my side. Thank you for taking the time for us today on a busy reporting day. Yes. Let me start, as usual, with the main takeaways on Page 2. I think the very short version for Q2 is that the quarter developed very much in line with our owned as well as in line with market expectations. And that on that basis, we today also confirmed our full guidance set. I think that is the very short executive summary for Q2 2024 for DHL Group. One key ingredient here is, of course, the status of the B2B volume cycle, which we show on Page 3. And ocean freight volumes maintained mid-single-digit growth rates versus the low comparison base of last year. And Express B2B volumes have also moved just back into growth territory. So the curves are picking up. But what does that mean? Whilst I would not over interpret this also against the background of disruptions in certain parts of the freight market, it is encouraging to see that B2B volumes are again more closely realigning this overall GDP and trade growth after a rather long period of destocking. In a nutshell, as we call it on our slides, it’s not a broad-based acceleration yet, but some signals of the expected improvement in market conditions seem to be emerging. Taking a look at the divisional Q2 performance on Page 4. As I already said, the trends in Q2 were very much as expected and guided for. I will talk about Express and Forwarding in more detail in a moment. So let me cover the other three divisions on this page here. Starting with supply chain. In supply chain, we see an ongoing strong performance with EBIT eventually even coming in slightly ahead of the high Q2 base number last year. As a quick reminder, Q2 2023 was due to phasing the by far strongest supply chain quarter. So it may look like only 3% year-over-year growth, but I think €279 million from supply chain is a very good number. And the basis is that structural tailwinds are clearly intact and feeding a very strong pipeline of new signings for our supply chain division. Turning to DHL eCommerce. The division is executing on its growth plan, and we saw strong B2C volume growth in Q2, which for me confirms the structural shift towards online shopping. EBIT, on the other hand, was held back by our conscious investment commitment for this young and growing division. Overall, a solid 4% EBIT margin. In P&P, we have seen very pleasant parcel revenue growth of 8.5%. You can see in combination between volume growth that we also have a good yield element in here. And that, together with strong cost control will support the P&P division to deliver on the full year target of more than €800 million EBIT for the current year. I will talk about the new postal law and the outlook for P&P in a couple of minutes. But for this year, I think we are also solidly on track to deliver on the P&P guidance. Now turning to Express on Page 5, and I guess that will probably be also the center of many of your questions in the Q&A. And I know it’s a busy slide, so let me talk about the different parts here. Starting with the middle block and the volume developments in Express. We already noted that B2B volumes were back in growth territory while B2C volume was down 8% year-over-year. But that was as we had expected and it also reflects our yield measures on China e-commerce. So we expect this year-over-year decline in B2C to continue in H2. But more importantly, for the Express bottom line is the uptick in B2B volume growth, which we had already shown in Page 3 and the fact that this is also translating into gradual positive momentum in B2B weight. And that is what you see on the middle of the page here. There are still marked regional differences with APAC leading versus Europe lagging, but you can also see that in the course of the quarter, the yellow, the white and the blue line, all moved in the right direction. On that basis, our global GI weight load factor, which you can see on the right side of the page, improved sequentially in Q2. But we see that also on the right side, in comparison to the historical levels, it is still on a rather low level. So overall, as I mentioned it earlier, it looks like we have started to move into the right direction, but it’s not a broad-based acceleration yet rather a very gradual turnaround. That takes me to the last element I want to mention on the page and that is on the lower left side. And I think it’s a very important element, which I will also come back to when I talk about the guidance for the rest of the year. DHL Express has announced the introduction of a demand surcharge coming into effect as of September 15th and that will clearly support the Express numbers in the second half of the year and most importantly, in the fourth quarter. Now turning to DHL Global Forwarding, Freight. I already talked about the volume development in air and ocean freight. And on Page 6, you can also see the GP evolution, where as a forwarder, our GP per ton or per TEU is relatively stable sequentially despite the very volatile market and rate conditions through the quarter. Just as a reminder, I probably don’t have to mention it, I do it anyway. We are a fully asset-light broker in the business. So we will not have the strong earnings volatility driven by spot rates like an asset owner, sometimes for better and sometimes for worse. From global trade to a topic specific to our German postal business, the new Postal Law on Page 7. So since our last reporting in early May, political process on the new Postal Law has reached its final conclusion. The new law is enforced since July 19. I think that is the first good news here. We have a clear new framework, so we know what we have to deal with. The new Postal Law is particularly relevant for us with regard to more operational flexibility in how we deliver on the universal service obligation and with regards to price regulation. Overall, the new law better reflects the changes in consumer behavior by allowing for longer delivery times and it then creates a more stable basis for mail pricing as our benchmark is going forward, no more link to the profitability of listed postal peers, one of the issues with the old Postal Law. So overall, even if the law also has a series of drawbacks for us, the new framework should allow P&P Germany to continue serving the USO on a financially self-sufficient basis, which means in numbers with an annual EBIT of at least €1 billion as of full year 2025. That is what we, as a group, have always asked of that division so that they are self-sufficient and not burdening the group. Let me complete my Q2 review with a somewhat more detailed than usual look at our quarterly free cash flow. The reason for that is that there were some movements worth explaining line by line in the quarter, which we do on Page 12. At the end of the day, it’s all quite normal operational development. It’s – the main observation for me on that page is, that the EBIT change of around €360 million year-over-year led to only €100 million reduction in free cash flow, and the main offset here came from our active CapEx gearing. So beyond the details explained on the slide, Q2 was, for me, a good testimony on how we managed to stay on track to deliver, again, a strong free cash flow, full year guidance, excluding M&A of around €3 billion. We have put our CapEx evolution in a broader multiyear context on Page 9. We start with the CapEx peak in 2019. Some of you may still recall that that was related to our bigger fleet order to replace long-distance leased planes this brand-new 777s. And you also know that this worked out rather well for us in terms of timing in hindsight. That’s a different story. So coming back to the page here, in terms of CapEx, we have, as promised, come down pretty quickly from the 2019 peak towards our more normal run rate. And since the volume growth, especially in Express turned negative in 2022, we have actively flexed down CapEx spending even further, which is, as we have just seen on the cash flow side, strongly supporting our cash flow generation again in this second quarter of 2024. In H1, Express CapEx as a percent of revenue was only 3%, in line with the group number overall. Small caveat here for Express and the group overall, CapEx is always higher in the second half of the year than in the first half. So, don’t expect the 3% for the full year. This brings me to our guidance assumptions on Page 10, a slide, which we first introduced in March when we gave the guidance for the current year. And on this slide, everything is unchanged from our initial version, except for the status assessment in the bottom right corner, which says what I mentioned earlier and repeatedly already, markets and our performance developed in line with our assumptions so far. And therefore, there is no reason to change assumptions nor guidance. That being said, I am fully aware of – I guess, we will get a couple of questions on that. I am fully aware that our full year EBIT guidance, of course, implies a significant acceleration in EBIT run rate for the second half of the year. And we have, therefore, included Page 11, a bridge, which tries to explain the main positive drivers, which should help us to deliver at least on the lower end of our guidance. The biggest impact on the way to this low end of our guidance range is very simply seasonality. Here, we have applied the basic historic H1, H2 EBIT pattern, the 47%, 53%, which you can see on the slide. The second element leading us to the €6 billion are incremental benefits from our cost and yield measures. On the cost side, we expect further productivity increases in H2. And on the pricing side, this bucket also includes our new measure, the demand surcharge to be introduced by Express for the peak season as of mid-September. The final step up is related to the improvement in economic conditions part of our guidance assumptions. I think it’s pretty obvious how a cyclical volume acceleration would lead to operating leverage effects on our EBIT, in particular in Express. This is the element and EBIT contribution, which is obviously not under our control, and therefore, the remaining variable in our guidance range, with potential outcomes still in a wide range as of today. Still, let’s be clear, and we also mentioned it on the slide, the positive, but slow momentum at the moment points to the low end of our guidance range, which I think, is also adequately reflected in current consensus, which stands at €6.57 billion as per our consensus tracking, which we also regularly update on our IR website. Finally, with regard to phasing Q3, Q4, both seasonality and yield measures like the demand surcharge are much more relevant for Q4 than for Q3. So for Q3, we will also have to see how the macro component develops. August is always a weak summer months. And so particularly in September, we have to see how the volume trend actually plays out. I think for now, to be on the conservative side, I would expect Q3 to be more in line with the €1.3 billion-ish quarterly run rate, we saw in Q1 and Q2. After that long guidance introduction, I can actually win time back for your Q&A by just saying that Page 12 nothing changed. The full guidance that is unchanged and untouched. And that brings me on Page 13 to the wrap up. Q2 developed as expected. There is some progression visible on the current freight volume cycle. For us, that means keeping the right balance between cyclical cost and CapEx control on the one side and ongoing investments to tackle the attractive structural growth opportunities in our industry on the other side. That’s the balance we are aiming for. And I think that was the balance we achieved in the second quarter. Talking about structural growth opportunities, please note down September 24 when we will introduce our Strategy 2030 and then we will talk more about growth going forward. We already look forward to seeing you there live in Frankfurt or online. But that’s the outlook. Now turning back to the second quarter and your questions. Martin, over to you.
Martin Ziegenbalg: Excellent. Thanks, Melanie. And I do see a list of callers so let’s take the Q&A around. Operator, please start.
Operator: Sure. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from the line of Andy Chu from Deutsche Bank UK. Please go ahead.
Andy Chu: Good morning, Melanie. Good morning, Martin. I just wanted to explore that €1.3 billion number, which I think I found quite surprising, if I’m totally honest, because it would then imply obviously a very large Q4 almost like a sort of COVID quarter to get you to the €6 billion. So I just wanted just to probe a bit there in terms of assumptions, how much of the €300 million that you pointed to in the bridge, how much of that is expected to impact Q3? Thank you.
Melanie Kreis: Yes good morning, Andy. So a good question, fair question. I mean, as I said, we have to see how the volume develops in the course of the third quarter. August is always at a relatively weak summer months. So we have to see how September plays out. I just wanted to flag clearly that we will have a back-end loading towards the fourth quarter
Andy Chu: And Melanie, why are you taking out costs for the time where you think that things are improving or at least stable, I assume, on mix in terms of signals?
Melanie Kreis: Yes. I think on the one hand, we are, I think, on a good path, particularly on the indirect costs. And that is where we decided that we will remain very cost focused, for example, with regards to FTE replacements in the indirect cost finance. In the direct cost area, it is also a little bit about how much do we now flex up. So, traditionally, we flex the networks down in the summer. And we then start ramping up for the peak season. If you do that now more moderately, that will, of course, give you a productivity improvement. So, we should see then some good operational benefit. But I think, as always, we try to really do these things in a balanced way. And yes, so probably it’s a little bit this year on the sweating the assets if volumes really come back very dynamically side of things.
Andy Chu: And finally, just in terms of the €300 million, how much of that is across those three buckets that you highlighted, please?
Melanie Kreis: Yes. So we expected the question, but we consciously decided not to kind of like do a percentage between the different categories. But as I already mentioned, the last category, the new elements and demand surcharge have a significant role to play in the €300 million.
Andy Chu: Okay, thank you very much.
Melanie Kreis: Thank you, Andy.
Martin Ziegenbalg: Thanks, Andy. And operator, please call up Cristian Nedelcu for the next question.
Operator: Thank you. The next question is from the line of Cristian Nedelcu from UBS. Please go ahead.
Cristian Nedelcu: Hi, thank you very much for taking my question. The first one is on Express B2C volumes. Now we are seeing a lot of luxury companies profit warning recently. So I wanted to ask you if we clean up the headwind to volumes from the e-tailers contract renegotiation, what was the clean volume development year-over-year in B2C in Q2? And maybe in relation to this for a few quarters now, we’ve been seeing a depressed volume development for B2C Express. I guess, my question here is, what gives you confidence there is no structural issue here, like down trading or anything else that is holding back the B2C volumes? And the last one, if I may. It’s a bit similar to Andy’s question, just zooming here on Express, in Q4. If I account for seasonality, if I account for the surcharges that you mentioned, it does look to me your Q4 Express EBIT, in order to get to the €6 billion low end of the guidance, you probably need to be somewhere around €1.1 billion of EBIT in Express in Q4. And this is the peak level you’ve achieved in Q4 2021 when your volumes were higher, your capacity was higher than today. I just wanted to check, can you confirm that this is directional in the level that you’re targeting for Q4 or am I missing any moving parts? I guess, this also assumes that seasonality would play a usual role and you will get that benefit in Express from seasonality, which in some years, there were different developments that were ahead of that. So any comments you could make there? Thank you.
Melanie Kreis: Yes. Thank you, Cristian. Let me start with the B2C question. So minus 8%, I mentioned the fact that we took these measures on the Chinese e-comm players. That is, as you correctly spotted, only part of the explanation. Also, if you take that out, we had a volume decline B2C because particularly some of the high-end Express using B2C customers didn’t see a dynamic volume development in the second quarter. So that has an impact on us. That takes me to your structural question for Express, and we always made it clear, there is only a small slice of the cross-border B2C market, which is attractive. And we have seen over the last years, much more rotation in customers in this segment than on the B2B side. And that has to be managed totally differently for Express, but also totally differently to the domestic e-comm businesses. And I think our Express colleagues are really the masters in that art. So with regard to this small flavor of a relatively high value cross-border shipments, we don’t see that as a structural change, but more obviously have to do with consumer attitude at the moment, there is currently less spending than over the cycle. So we would expect that to improve over time. But again, in combination from the Chinese side and the general situation, B2C volumes will be down for Express in the second half of the year. I’m pretty sure about that. And that is a natural lead over to your second question. What do we have to assume for Express in the fourth quarter? Yes, we clearly have to get EBIT back to above €1 billion for Express in the fourth quarter. In combination with the now improving operational leverage, which you also saw in the slight improvement in base load factor in the second quarter, but also thanks to yield elements like the demand surcharge, the team is confident that they will be able to deliver on that. That’s obviously also very important for both the DHL and Group guidance overall.
Cristian Nedelcu: Thank you very much.
Melanie Kreis: Thank you.
Operator: The next question is from the line of Muneeba Kayani from Bank of America. Please go ahead.
Muneeba Kayani: Good morning, Melanie and Martin. So you’ve talked about this new demand, peak season demand surcharge. Can you help quantify what the surcharge is? And why do you think customers will accept it and kind of any feedback you’ve had in terms of stickiness of this demand surcharge? Then secondly, on the Forwarding side, if you could talk a bit more on your expectations around the Forwarding contribution in your third quarter. We’ve heard quite a positive commentary from some of your peers during the earnings season in terms of 3Q yields. And also like how that is compared with your expectations at the start of the year? And then a third one, if I may ask. Just in terms of 4Q of last year, when you did have these Chinese e-commerce volumes, how did that impact your EBIT? And kind of how do we think about that unwinding on a year-on-year basis into the fourth quarter of this year? Thank you.
Melanie Kreis: Yes. Thank you, Muneeba. Let me try to tackle the three questions, starting with the demand surcharge. So we have only introduced the demand surcharge today. So communication is now also going out to our customers. We are publishing a lot of material on our website. The basic structure of this demand surcharge is that it will be original trade lane based. So you can see a grid now where we communicate the surcharge for the different relations. Not surprisingly, outbound Asia, it will be the highest, but it will be differentiated lane by lane. How are we going to explain that to the customers? I think we simply have to acknowledge and that is why we are introducing this demand surcharge. Seasonality got more extreme over the last years. The situation, particularly on the aviation side, got much more complex now with arrival of the Chinese e-comm players, capacity constraints out of China, out of Asia overall has become even more pronounced. So we will have to spend more to make sure that we deliver the expected service quality to our customers. And in order to be able to do so, we are asking for the demand surcharge. In terms of Global Forwarding expectations. Yes. So I think the positive news is that we now had this mid-single-digit growth, both in Q1 and Q2 for both air and Ocean Freight. So since the mere fact that there is something like a peak season again in Ocean Freight is more of an encouraging sign. And we would now also expect that there will be a good volume dynamic hopefully in the third quarter. But how strong and pronounced that is part of the unknown macro element. I think the one topic which was different, obviously, in the course of the year compared to what we expected last fall when we said the budget was the whole ocean freight rate development where we had assumed nine months ago that we would see a continuation of the normalization also in light of the significant additional capacity coming into the ocean freight market. Here, obviously, the distortions Red Sea and the likes have changed the picture, have kept rates higher, that is benefiting the carriers, the shipping owners, of course, more than the forwarders, because we also have to buy higher. But – so that is probably the one area where things developed a bit differently compared to what we had originally assumed. What does that mean going forward? Yes, I also heard that some competitors were very positive about further increases. I would take a slightly more conservative approach here. I think that will really depend on the further demand supply balance development now in Q3 and Q4. And then on the last question, the Chinese e-comm players and their impact on Q4. Yes, I think what we said for Q4 was that the degree to which they absorbed airfreight capacity in the fourth quarter was unseen and really a surprise to all players in the industry. And this sudden run for capacity was not necessarily good for our profitability. And we saw the impact of that both in Express and also in airfreight. And that is one of the reasons why we have taken these very strong yield measures now in Express, leading to the volume decline as we already discussed. So the expectation is that in Q4, we will have a positive – more positive impact from them than in Q4 2023 now.
Martin Ziegenbalg: Hey ready for the next caller.
Operator: Thank you. The next question is from the line of Tobias Fromme from Bernstein. Please go ahead.
Tobias Fromme: Hi, Melanie. Hi, Martin. Thank you very much. I have just two follow-up questions to the question that was already asked on the Express side. You just mentioned B2C volumes will be down in H2, which you obviously reflect before, I think you wanted to walk away from the lower yielding stuff. But could you please confirm that the peak season will be definitely coming. And then could you also elaborate a little bit on utilization and whether this is improving? The second one on the Freight Forwarding division, could you specifically talk about the unit GP for both Air & Sea in Q3 and Q4 because we’ve obviously seen the sequential some trend in Air and whether this will be improving? And then lastly, I had a question on the Postgesetz. And the whole customers now obviously would have the option for a three-day delivery instead of two. Could you please elaborate on what impact that will have on the run rate cost decreases, if you can share anything on that end? Thank you.
Melanie Kreis: Yes. Great. Tobias, thank you very much also for helping allowing me to clarify something around the B2C volume statement because as you rightly asked, I’m not saying that we won’t have a peak in B2C. So we will have a peak in B2C Express, very clearly, Q4 will be much stronger than the other quarters, but year-over-year, also because of the year’s management we’re doing, it will see a decline, but there will be a peak very clearly. In terms of utilization in Express, yes, we try to show that for the aviation side with the weight load factor, it is still significantly below the historically normal levels. But in the second quarter, it started to move into the right direction. One element which is very important here, particularly on the aviation side is not just what is happening with regard to volumes, but also what is happening with regard to weight. And here, we also saw a positive development, which should help us to improve the operating leverage in the second half of the year. With regard to Global Forwarding, GP per ton in Air Freight Q3, and Ocean Freight Q3, Q4, I’m very reluctant to make a definitive statement here on how that will develop because we have seen so many moving parts here. So I think it’s fair to say that on the Air Freight side, normalization after the pandemic has pretty much happened. So I think we are now in a more normal market environment. There, again, one of the interesting elements to manage in the second half of the year with the Chinese e-comm player demand, which is already leading to distortions out of China. And on the ocean freight side, yes, it was interesting to see how stable the situation was overall. And here, we have to see how it develops. And then lastly, thank you for asking also a question to the Postgesetz. So we are not quantifying the different contributions from the elements, price increase, cost measures and so on. I think the important thing is that there is a complete concept on how we now want to use the additional operational degrees of freedom to improve our cost position going forward. And just to be clear, it’s still an upper battle because we still have tariff inflation. So it’s really about using those elements to dampen the cost increase, including the continued further rollout of the joint delivery district.
Tobias Fromme: Thank you.
Melanie Kreis: Thank you.
Martin Ziegenbalg: Thank you, Tobias. And on to the next question, please.
Operator: Next question is from the line of Parash Jain from HSBC. Please go ahead.
Martin Ziegenbalg: Good morning, Parash, if you’re speaking, you’re do it on mute.
Parash Jain: Can you hear me?
Melanie Kreis: Yes. Now we can.
Parash Jain: Lovely. I have two questions for me. First, with a lot of uncertainty around Red Sea, can you talk about if any of your business has seen front-loading as we have been hearing in many parts of the businesses. And going into the second half, you see the increased freight rate in the first two quarters, especially on the ocean? Will have any tailwind into your Freight Forwarding business? Thank you.
Melanie Kreis: Yes. So I think on the Red Sea and front loading, I think there are many hypotheses out there. I think there are limited hard facts on saying that’s a huge front loading. I think for me the best summary is still that there is something like the ocean freight peak season, and that’s a good thing in itself. In terms of to what degree will we benefit from the increases in ocean freight rates, that’s what I meant earlier. So we are not the asset owner. Of course, that is an environment where the ones will benefit first are the carriers and you thought that they increased their guidance. For us, as a forwarder, the important element is to make sure that we pass the increased rates on to our customers. That’s not entirely easy because the situation we now had in Q2 was – in many cases, we had just concluded a new rate agreement with customers. Then the carriers came to us and introduced emergency surcharge and we had to go back to the customer and make sure that it kind of like carries through. So for us, this whole thing is kind of like more of a pass-through element and doesn’t give the same uplift compared to the carriers.
Parash Jain: Okay. Fair enough. Thank you so much.
Melanie Kreis: Thank you.
Martin Ziegenbalg: Thank you, Parash. The next caller line would be Cedar.
Operator: Thank you. The next question is from the line of Cedar Ekblom from Morgan Stanley. Please go ahead.
Cedar Ekblom: Thanks. Thanks very much. I just wanted to come back to this demand surcharge topic. Would it be fair to say that the demand surcharge is being put in place to try and deal with the e-commerce customers out of China? And how do we think about that in the context of your wider customer group? Because at the end of the day, it seems like these high volumes from these e-comm customers, which are actually not particularly profitable for the Express business, is the broader issue around Express profitability? And isn’t this demand surcharge a bit of a blunt instrument to try and solve that problem? It just seems a little bit -- it seems a little bit strange to be going with the demand surcharge to try and improve profitability for a group of customers that maybe shouldn’t be Express customers to start with. Thank you.
Melanie Kreis: Yes. Thank you for the question. I think it’s a good opportunity to clarify that. So the e-comm, the Chinese e-comm players are predominantly not using Express, right? There’s a very small portion of their business, which actually goes to the three big integrators. The biggest chunk is either in direct charters or with forwarders. And so when you look at the several thousand tons of uplift out of China every day for the Chinese e-comm players, there’s only a very small portion which hits this Express. And that’s profitability topic. We have addressed already with the yield measures we have now taken at the beginning of the year. So that is not what we need the demand surcharge for. And I would agree with you if we would have to use the demand surcharge to fix the e-comm -- Chinese e-comm player topic that would be a very rough approach. The foundation and the reason for the demand surcharge is this very strong increase in seasonality overall where, of course, from the market dynamics, the Chinese e-comm players are contributing to further enhancing that. But it is something that we have seen over many years and there we have already introduced similar elements in other parts of our business. You may recall that we introduced the peak season surcharge in parts of Germany for the month of November and December. So what we are now trying to do here with the demand surcharge in Express is really addressing this cyclicality enhancement and the resulting capacity constraints in the fourth quarter.
Cedar Ekblom: Okay. And then if I could just have a follow-up. So that clarification on the e-commerce volumes between sort of Freight Forwarding and Express is helpful. But also Express is a very, very small percentage of the total sort of global logistics market. And so isn’t there a potential that while the majority of e-commerce volumes are not going through Express, small swings into the Express part of the logistics chain can actually have a very meaningful impact to profitability? So actually, e-commerce matters a lot for those e-commerce volumes out of China matter a lot for the Express business, even if it’s a tiny percentage that’s actually going through that Express network? If that question makes sense.
Melanie Kreis: Yes. So I think it is correct but, of course, the enormous capacity in AR being absorbed by the Chinese e-comm players also has an impact on Express. So we have our fleet, we have our stable base network. But of course, also on the Express side, we have to flex up for the peak season, and that is when we need additional capacity. And getting this additional capacity is not getting easier because obviously, a lot of capacity is being absorbed by the Chinese e-comm players. So the Chinese e-comm players are significantly enhancing out of China peak season demand dynamic, which was already there beforehand, but which is now being augmented and which needs to be managed, which we do with the traditional measures making sure that we have enough capacity secured, regular yield measures and also as part of the overall peak season management, the demand surcharge now.
Cedar Ekblom: Okay, thank you.
Melanie Kreis: Thank you.
Martin Ziegenbalg: Thanks. Onto Patrick Creuset.
Operator: The next question is from the line of Patrick Creuset from Goldman Sachs. Please go ahead.
Patrick Creuset: Hi, Melanie and Martin. Just given the stock reaction, can we just come back to your third quarter comments and just make sure we really got the right message here and basically understand to what extent you’re just setting a conservative baseline that you’ve done in Q2. So if we look specifically at starting with Freight Forwarding, if I look at the second quarter, your yield development is pretty much in line, I think, with your Forwarding peers. And I think that’s consistently guided kind of good reason to think that yields improved there. Just wanted to make sure that as you think about second half guidance and including into Q3, you really don’t expect a meaningful improvement in Forwarding EBIT? And if so, why? And then secondly, in Express, you have an interesting slide in your press suggesting that the exit rate in terms of B2B volumes in June was much more positive. It looks like maybe mid-single digit up year-on-year versus the January to May trend. Again, just what’s the -- basically -- what’s the B2B volume growth run rate as you go into the third quarter in Express? Thank you.
Melanie Kreis: Yes. So thank you, Patrick. So maybe I’ll start with the second question because that was also a little bit triggered by the first questions. We had published upfront where you asked about this development in the course of the quarter, and that is one of the reasons why we included this slide where you see how the rate per day development in Express evolved. We are, indeed, you can see that it got better month after month. Europe, clearly still lagging behind. APAC leading the pack. So we concluded the quarter in positive growth territory. And I think now we really have to see a bit after the kind of like summer period, how this continues into September. And maybe come back to the 1.3 comment overall after talking about Forwarding. Yes, I think the way you said is that our Q2 was not very different from what the others published. I also don’t see a reason why we should now fall back and do completely different things compared to what the others are doing. I just think there is still quite a number of moving parts out there. And that is why we are not commenting with the same specificity on certain elements. We have to see what comes out of that. And that leads me to my Q3 commentary. So the first point I wanted to bring across is that we will see a more back-end loaded development in the second half of the year due to seasonality and due to some of the measures like the demand surcharge becoming of more impactful in the fourth quarter than in the third quarter. And that is why I wanted to say that if volumes stay more on the not very dynamic side in more of a floor scenario, the third quarter would be more around the 1.3. The main point for me was to make sure to have the phasing between Q3 and Q4 rate. And on the Q3 side, don’t expect that the big explosion will happen in Q3. How much it then is, in the end, we will have to see. But again, the important thing is, for me, that is in line with what we had expected.
Patrick Creuset: Can I just add one? Looking at 2025.
Melanie Kreis: Yes, sure.
Patrick Creuset: If we think about how you generate earnings growth again into 2025, 2026 towards your midterm guidance, does bolt-on M&A become more of a tool again, especially in Forwarding, eCommerce, I guess? And when do you start to drive those eCommerce margins to, let’s say, industry standard?
Melanie Kreis: Yes. I think the 4% for me are at this point in the development phase of e-comm, okay. It’s clearly not the long-term aspiration. And I want to present with you, we then have to kind of like get more to market standards. In terms of M&A, inorganic opportunities we said that for the right opportunity, we would be open at the right price. In terms of divisional focus, it would be in e-comm and supply chain and potentially bolt-on targeted in DGFF.
Patrick Creuset: Thanks so much
Melanie Kreis: Yes, thank you.
Martin Ziegenbalg: Thanks, Patrick. And the next caller will be Marco Limite from Barclays.
Operator: Thank you. Next question is from Marco Limite from Barclays. Please go ahead.
Marco Limite: Hi good morning, thanks for taking my question. Sorry to go back again to the topic of the demand surcharges. But are you now afraid that by increasing prices, you’re actually going to, let’s say, lose volumes. So what gives you confidence that you’re actually going to keep market share while increasing prices? Do you think also competitors are having a similar, let’s say, pricing behavior? And second question is on Express but slightly different topic. So if I look at staff cost per volumes in Q1 and Q2, we have seen high single digit, let’s say, salary inflation, while from a price perspective, there’s still quite a lot of pressure. So yes, I’m just wondering, well, first of all, where -- if there are specific geographies where salary inflation is coming from? And second, do you think you just haven’t well calculated these headwinds to the staff cost base and therefore, the price increases you have pushed through at the start of the year have just not been enough? Thank you.
Melanie Kreis: Yes. Thank you, Marco. So on the demand surcharge and will we lose market share, I mean that is the eternal art to make sure that between profitable growth, you have equal emphasis on both words. And we always very specifically in Express, I want to make sure that the profitability adds up in the right way. And sometimes, that can mean that we will let go of volume. And so on the B2C volume side, we are currently losing market share, but that is totally okay for us. So we want to have the right level of volume in the network. At the moment, it’s more about B2B volume and B2B weight and the right profitability. With regard to demand surcharge and what are competitors doing, so the competitors have a similar construct in place, demand surcharge. I mean, they have to take their own decisions on how they manage the additional costs associated with the peak. But I think the fundamental challenges of this much more pronounced seasonality in Express than what we had 10 years ago, the additional complexities of the capacity shortage out of Asia. That’s the same for everybody. So I think the tools are very similar. With regard to staff cost per volume and salary inflation and did we target the right level of price increase? So we have a very detailed GPI mechanism where in the fall of each year, country by country, John Pearson personally discusses the GPI with the countries to make sure that local inflation on the ground, development of network costs, competitive situation and so on are all taken into account. And I don’t think we got that fundamentally wrong. I think at the moment, when you look at staff cost per volume, what you’re really seeing there is the volume element. And yes, that is what we have been talking about all along. At the moment, if we have room in the network and when the volume and the rate comes back, we will see a good operational leverage.
Marco Limite: Thank you.
Melanie Kreis: Thank you.
Martin Ziegenbalg: Thanks, Marco. And we move on to Johannes Braun, please.
Operator: The next question is from Johannes Braun from Stifel. Please go ahead.
Johannes Braun: Yes. Good morning, thanks for taking my question. So firstly, back on the German Post Law. Can you give us any broad flavor of what to expect in terms of letter price increase next year? And also would it be kind of a onetime increase? Or would you rather target threshold price increases over the years? And then secondly, any comment on the GP EBIT conversion rate in Forwarding being at, I think, 28% in Q2? So again, below your 30% or even 35% target. Are you still confident to reach the target for the full year?
Melanie Kreis: Thank you, Johannes. So first on the Postgesetz. So in terms of Postgesetz, we have now filed our application for the letter price increase with the network agency. They are currently reviewing our application and we then expect to have clarity towards the beginning of the fourth quarter on what price increase we will be granted. So I can’t comment on any numbers and so on. I think what is clear, however, is we got a 4.5% increase for the last cycle, which comprised three years, 2022, 2023, 2024. So we still have quite a bit of inflation recovery. So I would expect that we should see a more pronounced increase than in the past. And we would then, of course, also try to get that in rather front-end loaded weight for the future years. In terms of GP per EBIT in Global Forwarding, Freight, yes, so we are targeting this kind of like around 35% over the cycle. It’s not specifically for one year, but it’s kind of like over the cycle. And I think at the moment, despite the volume now beginning to come back, we’re clearly not in a dynamic part of the cycle. That’s why I’m actually quite satisfied with the 28%.
Johannes Braun: So that would be the run rate for the full year then?
Melanie Kreis: I think that really now depends if there is this very dynamic positive environment in -- I think, with a lot -- more positive guidance range, then we could also go beyond. But yes, I think it really depends a bit on how the cycle develops. The third column in our bridge to the full year guidance.
Johannes Braun: Okay, understood. Thank you.
Melanie Kreis: Thank you.
Martin Ziegenbalg: Thank you, Johannes. And we come to the tail of the queue. Cristian Nedelcu dialed in a second time.
Operator: We have the follow-up question from Cristian Nedelcu from UBS. Please go ahead..
Cristian Nedelcu: Thank you very much for allowing me to add the question. I’m just looking on your surcharge website. And I see out of China, you have a surcharge per kilogram of between €1.5 to €2. If I say 7 kilogram on average per shipment, and I compute, I calculate versus your average shipment value, that seems to me at 10%, 20% price increase associated with the demand surcharge. Now the question, I guess, is do you think this is sustained? I could understand maybe this year, we have the Red Sea disruption and trans model shift and capacity squeeze. But do you think this level can be sustainable going forward? And secondly, just to make sure I understand it. So out of the benefit to EBIT from the surcharge, is that a net benefit? So does that account to the incremental -- also to the incremental costs you’re incurring in the peak? And does it account for potential loss volumes? Or are you guiding for a net benefit in that €300 million on the Slide 11? Thank you.
Melanie Kreis: Yes. So second question, yes, we are guiding for a net benefit here. First part of the question, that is why we call it a demand surcharge and not a peak season surcharge because we will apply it selectively based on the circumstances on the different trade lanes. And I think my clear hypothesis is that it will not stay in forever, and that amount will vary over time, because it will be adjusted on the situation also on the cost side, because it is predominantly also a cost offset.
Cristian Nedelcu: So is it fair, I guess, when you do the EBIT bridge towards 2025 and 2026, we could assume that a good part of that €300 million will not be here to stay? Is this how we should sort of think that the EBIT – the clean EBIT in 2024?
Melanie Kreis: I’m struggling with a word clean EBIT here, right? Because I think this is now one more element where we have many elements on fuel surcharge and so on to deal with the distorting elements on the cost side. My assumption would be that we will keep seeing more extreme volatility and volume fluctuations in the course of the year. And there will be a justification for a normal demand surcharge in certain periods of the year going forward. How high that will be will then depend on the circumstances.
Cristian Nedelcu: Thank you very much.
Melanie Kreis: Yes. Thank you.
Martin Ziegenbalg: So next caller then please.
Operator: The next question is from the line of Erik Back from SEB. Please go ahead.
Erik Back: Yes. Hi. Thank you for taking my question. Just a question on your Forwarding division. When looking at some of your larger Forwarding peers, they seem to be targeting volume growth and market share gains in Air and Ocean. Could you please elaborate on your strategy related to volumes and market share in Air and Ocean, particularly in the context of your comments about yield management.
Melanie Kreis: Yes. So when you kind of like look at the picture in Q2 now, I think on the Air side, we were – when I look at DSV, Kuehne and us, we were a bit behind in terms of volume growth, but not far from Kuehne. So I would say we were a bit in line with this market. On the Sea side, we actually had the strongest volume growth. So I would say, overall, we are in the middle of the pack and rather in line with market at the moment.
Erik Back: And is it also your target going forward to stay there?
Melanie Kreis: My main target is the right profitability. So if I had to choose between a bit less volume and a better profitability, I would always go for the latter. But of course, you also have to do that within certain boundaries. So yes, finding the right volume weight in making sure that we don’t buy market share.
Erik Back: That’s very clear. Thank you.
Melanie Kreis: Yes, thank you.
Martin Ziegenbalg: Thank you. And now we come to Sathish from Citi.
Operator: Sure. The next question is from the line of Sathish Sivakumar from Citi. Please go ahead.
Melanie Kreis: Sathish, we can’t hear you.
Operator: Your line is unmuted, Sathish. Please proceed with your question.
Sathish Sivakumar: Hello. Can you hear me now?
Melanie Kreis: Yes.
Operator: Yes, sir. Please go ahead.
Sathish Sivakumar: Yes. Sure. So I’ve got two questions here. So firstly, around the P&P, you got a comment saying that going forward, we expect the EBIT to see in more than €1 billion annual run rate as of FY 2025. So does it imply that you start to see the benefit of postal law in terms of cost side? Coming in 2024, how should we think about the bridge from 2024 into 2025? It should be more than €200 million of increase in EBIT. And then the second one is around the TDI weight load factor improvement. If I look at the volume that we have seen in B2B, which has outgrown B2C, so that I’m just trying to understand is that underlying B2B volumes that you are seeing actually seeing a growth in weight? Or it’s just the function of the B2C volumes have underperformed and that has contributed to the improvement in this growth factor? Thank you.
Melanie Kreis: Yes. Thank you, Sathish. So on the first one, in terms of postal law benefit. So in 2025 and also explaining the step up from 2024 to 2025, we will have two main benefits from the postal law. The first one is that we do assume we will get a reasonable price increase now based on the new pricing mechanism. And the second one is that we hope to really reap the operational benefit. That is going to be a multiyear continuation of our optimization journey. But very clearly, we already expect also in 2025 benefits from the higher degrees of flexibility we have in operations now under the new postal law. With regard to the weight load factor impact from B2B growth, I’m not sure I fully understood the question. So just to clarify what we are seeing in Q2, we saw the volume growth on the B2B side, and we also saw weight growth from B2B. And that’s helped us on the overall network utilization. In terms of overall, we had shipment decline of 3%, and we were still slightly negative in terms of weight quarter-over-quarter when you combine B2C and B2B. And in that context, I think seeing the weight load factor move in the right direction is actually an encouraging thing. That shows that we are taking lots of actions like, for example, also using [indiscernible] space of passenger aircraft, very systematically. Those are also in the €300 million pillar. Those elements there beyond the demand surcharge and the yield measures, we’re really very actively managing the cost and capacity side.
Sathish Sivakumar: Okay. Thank you. Can I just have a quick follow-up on the P&P bridge? So basically, into next year, the main driver would be a pricing increase, rather than from a cost improvement because – as you’ve pointed out, it’s going to be multiyear, and we are not going to see any benefit in 2024 postal law [ph].
Melanie Kreis: So it’s a multiyear optimization journey, which we have already done over many years. And of course, we don’t expect also a cost benefits in 2025 from the additional degrees of freedom from the postal law.
Sathish Sivakumar: Okay. Thank you.
Melanie Kreis: Yes. Thank you.
Martin Ziegenbalg: Great. Thanks Sathish. And we got a follow-up from Cedar.
Operator: The next follow-up question is from the line of Cedar Ekblom from Morgan Stanley. Please go ahead.
Cedar Ekblom: Thanks very much. I just wanted to come back a little bit around e-commerce and this demand surcharge. So your Q4 EBIT that you talked about in Express of more than €1 billion. Obviously, your cost base is potentially a bit leaner than you were the last time you made that level of profitability. And so I wanted to understand, does the demand surcharge make that low weight e-commerce volumes out of China a structurally more profitable business for you that you can actually make that level of peak profitability with that structural shift in mix in the business? And if it does, then should this not be a business that you should actually be going after medium term? In other words, is the Express network actually needing to structurally shift to service a different type of customer because the question is, if that’s not the case, then it seems like that Q4 bridge is just way too ambitious because you basically be needing to talk about a structural uplift in your profitability for very different volume and weight mix, if that makes sense.
Melanie Kreis: So the Chinese e-comm players for DHL Express are a very small portion of the overall business in DHL Express. And the intention at the moment is clearly not to grow the share. To the contrary, as I commented on when we talked about the minus 8% B2C volume decline in Q2, we are actually seeing that we are yielding or through active use measures managing these type of volumes out of the network. The fundamental approach for DHL Express has always been and that has not changed. This is our premium network. It’s a very expensive network. And we have to be super selective what type of business is actually sensible in such a network. And that is why we always address only a very small portion of the overall cross-border e-comm market with DHL Express, and that has not changed. The demand surcharge is not addressing the Chinese e-comm customers in the Express network. The demand surcharge addresses the fact that, overall, the market development in the course of the year has become much more complex and much more expensive, particularly in the peak season. And that is why in order to make the economics work because there is a shortage of supply and a significant increase in demand in the fourth quarter in order for us to make sure that the cost increase we experienced in the network in the end of the year, we have introduced the demand surcharge.
Cedar Ekblom: How do we think about the network being really tight and meeting that demand surcharge in the context of volumes still being relatively sluggish and your guidance implying an improvement but not necessarily sort of ramp and recovery and activity because this is what I don’t understand. I don’t understand why we need a demand surcharge when ultimately you’re saying the market is getting a bit tighter, but the backdrop doesn’t appear as tight as we had in previous peaks. That’s what I’m trying to square. It doesn’t make sense to me.
Melanie Kreis: The problem is that it is also on the global trade lane perspective, much more in balance than it ever was. So if you’re not seeing demand explosion in Europe, we don’t have a demand/supply imbalance in Europe. There is a very clear demand supply issue out of China, which also has implications for other parts of Asia. So for example, what we’re seeing at the moment because there is so much demand in Southern China. Carriers are moving aircraft away from Vietnam into South China. So there is a very regionally distorted trade lane imbalance. And that is what got worse over the years, and that is what we saw very clearly in the fourth quarter of last year, and that is also the clear expectation for what we will now see in the second half of the year where everybody is already trying to secure that precious capacity out of China. And then, that is why with the demand surcharge, we are also taking a differentiated approach, really different surcharges depending on the different lanes.
Cedar Ekblom: Okay. That’s really helpful. Thanks for the clarification.
Melanie Kreis: Thank you.
Martin Ziegenbalg: That [indiscernible] the next caller please.
Operator: Thank you. The next question is from the line of Henk Slotboom [ph] from The Idea. Please go ahead.
Unidentified Analyst: Good morning. Thanks for taking my question. I’ve got one and that’s on e-commerce – on the e-commerce division, that to be correct. And I’m very much aware of the fact that it is a relatively small business and that it comprises both operations where you have your own feet on the grounds like in the Netherlands, and operations why you work together with partners like in Belgium and in Austria. But there’s a lot happening in the European market at this moment. Look at the stuff that’s happening in the UK, for example, we’ve seen some moves in Central Europe. Is – how do you look at these things? And is that a trigger or could that be a trigger for DHL to change it’s or adjusting strategy in e-commerce? That’s my question. Thank you.
Melanie Kreis: Thank you, Hank. So yes, indeed, in e-comm, we have a pick-and-choose approach for the different European countries. Yes, in certain countries, we really run our own last mile delivery force. In other countries, we work with partners. So that is something which has given us more flexibility and has also simply acknowledged the very different market positions we have in different parts of the European market. So I wouldn’t say that there is a fundamental change to our approach on that end.
Unidentified Analyst: Okay, clear thank you.
Melanie Kreis: Thank you.
Martin Ziegenbalg: And one last follow-up, and then we are also sort of at the end of the time. Johannes Braun, once more please.
Operator: The next follow-up is from the line of Johannes Braun from Stifel. Please go ahead.
Johannes Braun: Yes. Thanks. I need to follow-up on this demand surcharge again. Because correct me if I’m wrong, but my understanding was that this is roughly speaking, basically a replacement or even another name for the emergency surcharge, which covered the quite significant volatility during the pandemic. And I think the emergency surcharge was still in place last year or at least to some extent. So I’m not sure about the year-over-year benefit in Q4. Does it come from basically because the demand surcharge is higher than the emergency surcharge is, I guess, the imbalance out of China is so significant? Or is there any other reason why this year-over-year benefit?
Melanie Kreis: Yes. On the emergence, I mean, first of all, technically, your observation is correct in the sense that how to now technically implement such a surcharge is based on the kind of like technical skeleton developed for the emergency service surcharge. In terms of year-over-year impact, the emergency service surcharge was phased out in the course of end of 2022 into 2023. So it didn’t materially support the second half of 2023. So what we should really now see is the year-over-year benefit from the demand surcharge.
Johannes Braun: Understood. Thank you.
Melanie Kreis: Yes. Thank you.
Martin Ziegenbalg: Thank you. And I think that concludes our Q&A round. Melanie?
Melanie Kreis: Yes. So a long debate about the demand surcharge, which is obviously a very critical element in our bridge from €2.7 billion after 6 months to €6 billion as a minimum for our guidance in 2024. I think there is obviously a step up. We are totally aware of that. We are taking the right measures on the yield side, on the cost and capacity management side to make sure that we deliver on the at least €6 billion for the full year. I think for what we have seen so far, the year has developed in line with what we had expected. Now it would be nice if we would see a bit more volume dynamic in the second half of the year but we don’t hope on that, we take action to make sure that also if that doesn’t materialize, we will be able to deliver. So thank you very much for listening in. A good summer to all of you. And then let’s see how particularly the September volume dynamic actually plays out. Thank you very much.
Martin Ziegenbalg: Thank you. Bye-bye.
Operator: The conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.