Earnings Transcript for DPSGY - Q4 Fiscal Year 2023

Martin Ziegenbalg: Thank you, and good morning to everyone out there. We're going to do this in a straightforward fashion. I've got here with me, as announced, Tobias Meyer, Group CEO, and the Group CFO, Melanie Kreis. Both going to take you through the presentation, I take you have in front of you. And then we're going to deal with Q&A. And with that, over to you, Tobias, please.

Tobias Meyer: Good morning, everybody. Thanks for joining us today for our full year 2023 update, especially with a focus also on the fourth quarter, starting with the headlines on Page 3 of the presentation. We finished the year within our guidance range. And particularly on cash flow, I think we delivered very well also because we spent less CapEx in those areas where growth was a bit weak. I think we can say that the Q4 was characterized by still a relatively soft environment both on the macroeconomic level but also as it relates to global trade, which obviously for us is even more relevant. GDP is an important indicator, but trade is what really matters for us. And especially on the B2B side, we see continued softness, but we can also say that the structural eCommerce trend is clearly reestablished after the short normalization phase after the pandemic. And we also make good use of technology to drive yield management, better efficiencies and also sustainability and provide some more details on this during this presentation. So the self-help journey in some of our divisions is still very well underway, but we are lacking a bit the support of a reinvigorated global economy. This is also what you see on Page 4 where we take a look at our B2B volumes. You see that across Express, air freight and ocean freight we are still below 2019 levels, especially also in Express, and we haven't really seen a recovery in Q4. We were flat on average or across the Express network in terms of shipments. Now, if we look at it a bit deeper, you will see that there was quite some weakness in Europe, whereas that also had an impact on our network. And the flow-through air freight is very much I think reflecting the market. And then ocean freight, we basically see a bottoming out and into this year maybe a little bit of growth, which is not yet the case for Express and air freight. So we also see that this year of 2024 is up to a relatively slow start. So that is what we are currently seeing, but we also clearly still expect that we have a better second half where also the comparables become much easier for us given that the second half of 2023 was already quite soft. On Page 5 you see the B2C picture that we hear kept a lot of this enormous upswing during the pandemic. B2C shipments in Express, for instance, up 45%. So that is something that continues to provide growth. We've also, in Q4, seen a peak mainly out of China, which for us is a lane that isn't as profitable and accretive as other parts of the network. So that peak we would've liked to see a little bit broader, but again that wasn't happening due to the overall macro picture. In eCommerce, we continue to trade up. It's also the case for our business in Germany. Again, that trend towards a higher share of online is fully reestablished and intact for P&P, Post & Parcel Germany. We have to keep in mind, if we look at this full year graph that we had also the Amazon insourcing, which created that stronger dip post pandemic, that is entirely absorbed and we are back there on a trajectory of growth. Page 6 lays out some of those measures and tools that we use to manage yields. That is very well established in Express, but also in Parcel Germany, and increasingly so in our eCommerce division. It is also increasingly irrelevant for our B2B business where we apply methods like this as well. And in Supply Chain, we can really say that the investments in technology, in the quality that technology also helps us produce is translating into higher GP and more flow-through. So that is a journey that we feel very confident about. There's always some phasing topics in Supply Chain from quarter to quarter, but the underlying positive development of that division is fully underway. We also see that on Page 7 as it relates to structural efficiency improvements, the flexing especially of the intercont network, but also its optimization as it relates to fuel and block hours is one of those programs that we continue to drive. The deployment of robotics in the Supply Chain division especially is really reaching scale. So it's not only gimmick projects that look nice, but don't deliver value at scale, but we clearly now make it into the scalable phase that makes a difference to the business overall. And that's the case definitely also on those technologies that help us interact with our customers better. Here an example in the presentation of Global Forwarding, that's a journey that we continue to push. So obviously a lot of things happening, also what we can do with AI in those areas. So that is going to remain an area of focus. Page 8 has the highlights as it relates to our ESG targets. We basically made the target on realized decarbonization effects spot on. Employee engagement is calibrated through the annual employee opinion survey that we already did in September. And on cybersecurity, we really had a good year. We used that BitSight metric which provides us some input on certain areas and we have really made very good progress on that. So that score took a substantial increase. So that brings me already to wrap up before I hand over to Melanie to deepen some of the financials and the outlook. So overall, I think we are satisfied with our performance in 2023, given the weak environment and that lack of macroeconomic tailwinds which again we do also see cautiously for the first half of 2024. So we'll remain in a cautious mode. Also as it relates to cost management, we will invest where it makes sense where we make our business better. We will, I think, remain very much focused on value creation when it comes to the deployment of capital. And we have good opportunities organically and by doing smaller and mid-sized acquisitions that really create an opportunity for us, a unique position to drive value. So that's the journey we are on. And we see a clear opportunity that the second half of 2024 is going to be better year-on-year because of the easier comparables but also because we do see that we are progressing in the cyclical development of the economy and that the hike in interest rates, which took a long time to be absorbed by the broader economy, that that is coming into the next phase. With that, I hand over to Melanie to give you some more details.

Melanie Kreis: Yes, thank you very much, Tobias, and good morning to all of you also from my side.I will now cover the main noteworthy points on the divisional numbers. I will talk about cash flow and our guidance, and then we will of course open the floor for your questions. So looking at Q4 on Page 11, we have seen, as Tobias already explained, quite a good volume development on the eCommerce side, in line with the usual seasonal trends. So there was a peak season and this has been supportive to P&P and eCommerce EBIT. I know the big question this morning on your side is why don't we see this volume development flow through to the Express results. And in order to understand that, you have to look at how those volume flows are spread across the network. You can also see that in our stat book where TDI volume growth was clearly coming out of Asia, out of China, whilst Europe volumes were still down by almost 5%. So those volume flows were very imbalanced in the network, still depressed, particularly in terms of profit, very important European network. And so unbalanced outbound Asia outbound China that they actually came with a detrimental cost development on that lane. And that is the reason why in the fourth quarter the, yes, more encouraging overall volume in Express where we were back to positive growth in terms of shipments was not translating into EBIT yet. That maybe takes me to a bit of a sneak preview on what we expect for this very important division or also in the start of the year. Peak season is over and we do not see a meaningful acceleration in the B2B volumes so far, particularly not in Europe. And on that basis we also expect a rather low run rate in express going into the year. And that is reflected in our guidance assumptions. But even though we are still in winter at this point in time, spring will come eventually. And once the volumes return, which we currently assume more in the second half of the year, we will also see a return to operating leverage in Express. So this is more of a temporary thing from our perspective and nothing to be fundamentally concerned about. Turning to Global Forwarding. Yes, I think here we have seen a development in line with market trends and also anticipated we saw a further normalization on the rate side and that in an environment with weak volumes that led to the expected GP and EBIT decline. One special topic to point out in the Forwarding numbers is that in the fourth quarter we had a one-time positive accounting benefit linked to the reevaluation in connection with the acquisition of our long-term joint venture partner in Global Forwarding Dubai, which we are flagging transparently in other comments here. Supply Chain continued to deliver good numbers. Yes, EBIT is just slightly down year-over-year but it is really driven by currency headwinds. So on an organic basis, we had another quarter of growth in DHL supply chain, and we continue to see a strong pipeline of new contract signings. So the structural growth trend is fully intact here and should also be visible in the first half of '24.In DHL eCommerce volume development was good in the fourth quarter, but on the cost side, we do see the effects of our investments into future growth. One highlight in the fourth quarter to be pointed out for Ecom was the successful closure of the MNG Kargo acquisition in Turkey. And with the first months of the new colleagues being on board, we are very, very happy with that acquisition. Last but not least P&P. After a challenging year, it was a rather encouraging fourth quarter with solid parcel growth. I think that is also quite remarkable because unlike competition, for the first time, we did apply the peak seasons surcharge in November and December. Nevertheless, still good parcel volume growth. And we also had a very good and solid cost management, and that allowed us to deliver on our guidance in P&P and to even invest a little bit into the future of this building, small restructuring position which will help us going forward. So that was what happened in the divisions. If you kind of like add it all up for the full year, on Page 12, you can see that in terms of group EBIT '23 we have delivered on our guidance, although in the lower half. And yes, that was linked to the fact that the macro development was unfortunately also on the last stretches of '23, in line with our most cautious L-shaped scenario. So I think in this environment, let me repeat what we have already said, we are quite satisfied with the full year numbers. I think you also have to bear in mind really that B2C -- B volumes are experiencing the longest period of declines since the great financial crisis. So for more than 15 years. And in that environment, our group EBIT remains significantly ahead of our prepandemic record levels. And why is that? I mean Tobias has already explained how eCommerce growth and our disciplined work on efficiencies on costs and on yield management have driven that sustainable step up. I will come to our guidance in a minute but I think we can already say that we stay cautious in the short term as volume development remains weak at the start of '24. But eventually we'll, to reiterate that, we will end up benefiting from positive operating leverage once B2B volumes pick up again. Now turning to a slide which I think is very positive, Page 13, and our cash flow development. So despite all the headwinds, despite the normalization on the EBIT side, we were able to deliver a free cash flow of around €3 billion. When you kind of like look at it all-in, €2.9 billion, excluding M&A €3.3 billion. So that is for me a very, very positive sign that the underlying substance is in good order, and that we are also structurally more profitable than we were before. How did he achieve this good result on the cash flow side? Yes, we talked about it also in the previous calls, we have a flexibility to adjust our CapEx spending to the volume development. Lower volumes obviously require less CapEx, and that serves as a strong counter cyclical protection for our free cash flow. That has been visible in our numbers. At the same time, given that we have this very strong balance sheet and that we are in such a financially healthy position, we are able to keep investing into future growth. With the continued focus on organic growth, hence, the CapEx numbers but also on the M&A side as evidenced by, as opportunities in Turkey and the Middle East. So we are continuing to do things in a balanced way, investing into future growth both organically and in organically. And here, the most important thing for us is finding the right targets. And as you probably will have seen by now, we have today confirmed that we consciously decided not to participate in the Schenker process as we did not see this as the right target along our well-known M&A criteria. Last comment on this slide, which you can tell obviously I enjoy talking about, is our cash conversion. This is one of the regularly-used during KPIs. But I think when you look at the graph on the right, it nicely illustrates how our improved operating performance also translates into sustainably improved cash flow. Yes, that takes me to logical next topic, shareholder returns. I think the first important message is we fulfill our commitment to maintain a stable dividend despite the anticipated earnings decline in '23. You may recall that a year ago we had questions, why didn't we increase dividend further on the back of the fantastic year '22. Well, we had obviously planned ahead and assume that '23 would be the year of normalization. And it was already then for us very, very important that we will put ourselves into a position where we could at least maintain the dividend at €1.85 and that is what we have now added. And the second important message on the page, which you will have seen by now as well is that we announced an additional extension of our share buyback program by €1 billion to now the end of '25 a total €4 billion program. And we are also executing on that program quite swiftly. Actually, we have already spent more than €400 million in the current year. So €1.6 billion are still open for further execution. Yes, Page 15 summarizes what I have already kind of like touched upon. So thanks to our strong cash generation, thanks to the good balance sheet, we can execute a well-balanced capital allocation. We keep investing significantly into organic growth and selectively into inorganic growth. And we make sure that you as our shareholders participate in the form of reliable returns and that is of course all in line with the principles set out in our finance policy. Now, turning to the future and our guidance. Let me first explain a little bit our convictions and guidance assumptions on Page 16. First of all, when we look at the line structural factors, we believe that there are good growth opportunities for us going forward, and that the relevant megatrends are in place. So structural growth from e-commerce, a good opportunity to pass cost inflation to our customers through disciplined yield management. Benefit increasingly from digitalization and of course, also from our continued investments. And yes, global trade patterns are changing, but that also creates opportunities. When you think about omni-shoring, when you think about the greater complexity in our customers' supply chains where they do need the support of a competent logistics partner, now probably more than ever. However, we also have to take into account external factors. And the main question here remains when B2B volumes will once again correspond with GDP growth. That's not yet the case. But eventually it will bottom out and we will see a return to growth also on the B2B volume side. So let me now look at our guidance assumptions and how that also will play out in our expectations over the course of the year. We are cautious with regard to the first half of '24. We are still going against higher comparison bases in Q1, Q2 compared to '23. And we will see, of course, continued cost inflation. For example, in P&P, we have the wage increase coming in on the 1st of April. And yes, as long as the B2B volume recovery is subdued, that will probably lead in balance to decline year-over-year in EBIT in the first half of the year. But we then expect things to bottom out and to get into a growth territory again in the second half of the year. Putting all that together, on Page 17, so with regard to '24, the sum of the 2 halves and the different assumptions for H1 and H2 leads to a guidance range between €6.0 billion and €6.6 billion for the group in '24. And over time, looking at the midterm guidance, which affected operating leverage to return, we are convinced that in a period of more normal economic growth conditions we will get back to the around €8 billion earnings level, which we have reflected in our '26 EBIT guidance with a range of €7.5 billion to €8.5 billion. And then on the CapEx side, as already mentioned, we have CapEx flexibility. We have consciously chosen quite a broad range for the CapEx guidance in '24 because, again, we will adjust CapEx spending to the volume dynamic we see. And last but not least, when you look at the free cash flow guidance, both for '24 as well as for the cumulative midterm guidance, you can see that we expect a continued strong cash generation, which of course will then also be the basis for further balanced capital allocation decisions like we have shown today with regard to '23.So to conclude, on Page 18, in a not very dynamic, rather challenging macro environment, we have shown in '23 the strength of our well-diversified portfolio. We will stay agile as needed in the short term, and we will benefit as soon as volumes pick up again. With CapEx flexing up and down accordingly, this drives a strong cash flow generation through the cycle as evidenced in '23, but also visible in our guidance. And with that and our rock-solid balance sheet and attractive shareholder returns, I hope that with the dividend and share buyback decisions that we've also been able to meet your expectations today. Yes, with that, Martin, back to you for the Q&A.

Martin Ziegenbalg: Excellent. Thank you, Melanie. And operator, please initiate the Q&A.

Operator: [Operator Instructions] Our first question comes from Kayani, Muneeba with Bank of America.

Muneeba Kayani: So firstly, just on the eCommerce side and this Asia outbound volumes, kind of what have you seen in 1Q so far? Was this kind of driven by the likes of SHEIN and Timo in fourth quarter? And how do you kind of see that playing out for the rest of the year? And then secondly, kind of can you help us understand, last year you had given us the U-shaped and V-shipped outlook for the guide. Can you help us understand how you've thought about it at the low and high end of your guidance? I know you've talked about the 1H down and 2H down, but is that a V-shaped recovery that you're expecting on -- especially on the B2B in the second half?

Tobias Meyer: Thank you for these 2 questions. So first on eCommerce Asia outbound. I think it's important to remember that customers like SHEIN and Timo only use Express for a relatively small proportion of the overall portfolio. So the massive volumes that is currently coming out of China is far, far larger than what ends up in the Express segment. It goes different ways. And those players do differentiate quite sophistically on what is worth a higher value shipment. The basket size is obviously one driver in that equation. So we play in that market, but we play selectively with our Express network, where there is a willingness to pay, and that will evolve. So we will obviously provide capacity and provide the offering, but we will see to which extent this goes into the premium segment and to which extent it goes into other modes. That is generally where we seek in the Express segment to play to have those customers that have larger basket size for those shipments that we're looking at. The overall trend of eCommerce coming out of Asia and particularly coming out of China, I think, is fully intact also in the first quarter. But again, for our earnings situation, that is not as relevant. In terms of the guidance, and Melanie might add to that, we haven't -- we have decided against scenarios because we see currently that we are still progressing in the economic cycle, and we're now at the point where it flattens out. Europe again showing some weakness in Q4 and into Q1. That for us is a relevant market. So that is something that clearly affected our views. We do see the second half of the year due to the comparables but also the economic forecast around that are more converging now that we are progressing in the cycle and that we see as we go along, some very gradual increase in economic activity and trade. So that's what we've based it on, very cautious on Q1, Q2 and then a more normalization as we have seen in past economic cycles. Again, for our business for global trade, the trough has already been exceptionally long. So we do expect that there is some progression.

Martin Ziegenbalg: Thank you, Muneeba. Next question then, please.

Operator: The next question comes from Tobias Fromme, AB Bernstein.

Tobias Fromme: If we strip out the one-off [indiscernible] impact of your Forwarding EBIT, your Forwarding conversion rate is only 23.7%. Can you please explain what caused that and how this is developing in the early months of the year? And you also mentioned a desire for bolt-on acquisitions. What areas will you be looking at? And what would you like to expand into?

Melanie Kreis: Yes. So let me start with the Forwarding question. Yes. So indeed, the conversion rate is around 24%, if you correct for the onetime accounting gain in the fourth quarter, which I think given the very low volume environment is actually not unusual. I think what we're also seeing is that, at the moment, the average rate per shipment and hence the GP on file is also coming down. So that's kind of like in a extended downturn quite a typical pattern. In the beginning, you really lose a lot of volume and weight in parallel. At the end, customers start ordering stuff, but in smaller quantities and then you have a relatively low GP profile, which of course still produces the same amount of work, which is why in such a period getting to a good productivity is really challenging. I wouldn't overvalue it because it is obviously a number, 24%, at a given point in time. The aspiration is still what it was before that over the cycle we will be in the mid-30s. And I think the other thing I also want to point out on that occasion, when you look at our stat book, you can also see the numbers there. We have actually made adjustments to the workflows in Forwarding. So FTEs in the fourth quarter are down by 5.1%. Organically it's even closer to 6%. All that in a very noise-free way, but we are taking measures. And that of course should also then support the conversion rate going forward.

Tobias Meyer: So then on the question of bolt-on acquisitions, maybe start a bit broader how we think about capital allocation. And I think we have good organic opportunities. And I think we've proven this over the years that we have good returns with a very low risk profile or relatively low risk profile. So if we look at organic versus inorganic, the risk factor is obviously also very important for us. In our industry, M&A generally carries a relatively high risk. So the upside that we see in these opportunities just needs to be very significant to justify the potential downside. So that's how we look at this. Now what does this translate into in eCommerce, this is clearly a business that has network effects. So economies of scale in a given market matter. We have that much less in supply chain and also much less in Forwarding. And geography, adding a geography makes a difference because we have cross-border flows, and we increase our attractiveness as a pan-European and as a global player in that market. So that is very important to really have an upside case that has that leverage, which we also have, if we add specific capabilities in contract logistics and potentially also in Forwarding. So certain sectors where we're lacking the expertise, we want to do, for instance, more in returns management. That's something we're looking at because we can leverage what we already have and provide such an acquisition with a significant positive growth momentum. So that is what creates value, and that's how we look at this. So this gives, I think, you a bit of a general idea how we think about acquisitions and with Ecom and certain specialized capabilities in supply chain in DGF, that's what we are looking for.

Martin Ziegenbalg: All right. Coming then to the next caller, please.

Operator: Our next question comes from Sathish Sivakumar with Citigroup.

Sathish Sivakumar: I've got 2 questions here. First around the B2B volume, actually you did say that, yes, you need to see a bit more destocking come through. And if you could just share some colors like across different words within B2B and then also by regional trends where you do see more unwind to come through? Yes. So that's one. And then the second one is around freight forwarding. If you like look into the comments from some of your peers, say, one of the peers like focuses on SMEs for gaining wallet share or to grow market share whereas some have commented about focus on large accounts, where does DHL freight forwarding stand here? And where do you see upside in terms of market share gains?

Tobias Meyer: Thank you for these questions. In terms of the B2B volume, as Melanie also described, what we currently see is that weakness also intra Europe. I think you also see this in latest trade figures. I think Germany published some this morning that imports are relatively weak. So that matters, particularly obviously for Express as well, whether the growth is to the imbalance or to the balance. And that is something that clearly currently and in the fourth quarter is rather growing in the imbalance side, which then doesn't provide the same operating leverage. We do see some export pressure out of Asia, particularly out of China, that does translate gradually into growing ocean again. It doesn't really transpire and lift airfreight as of now. But the I think relatively subdued economic environment in China has visible export pressure in certain sectors. I think it's very visible in renewable energies, for instance, particularly into Europe where you have some tax changes, but also the relatively open market for Chinese producers relative to the U.S., for instance. So we see those shifts, but general, I think, softness across and tech is something maybe that leads a bit over to your second question where we traditionally have quite high exposure, and this is clearly very cyclical. So that is also affecting particularly in the Forwarding side our volume figures and our revenue figures. We, I think, aspire to serve all customer segments. We have a particular program for SMEs in place as well. And it's always good to have that a bit more stable share, but we also need to be realistic as a global large forwarder. If the customer gets too small, it is also not really accretive for us. So we want a healthy pipeline of very small businesses. But for us, it's particularly important to follow macro trends to be part of the journey of a customer growing, and that is where we focus our attention. And there's definitely also where we want to do more, especially also in Asia, in the Middle East. So that's where we currently have a particular focus to develop our Forwarding business.

Martin Ziegenbalg: All right. Next caller then, please.

Operator: Our next question comes from [Emily] with UBS.

Unidentified Analyst: So firstly, on the B2B volume development from the industry data, we have seen that air and ocean freight volumes have started to rebound from September, October last year. And on what you said before, what really explains the divergence between the growth we're seeing in air and ocean freight and the lack of B2B recovery in Express? And secondly, on the 2026 EBIT guidance of €7.5 billion to €8.5 billion. Firstly, what kind of volume growth is needed in Express to get to the lower end of that guidance? And can you also touch on what the incremental drivers are to get us from the €6 billion to €6.6 billion in 2024 to the 2026 guidance, please?

Tobias Meyer: So I'll take the first question, Melanie will then elaborate on the second. So I think what is right that on the ocean freight side we can still see more growth or more volume again in the market. The quarter-on-quarter development was positive in 2023 as it relates to Q4. That wasn't the case really the year earlier. So there we, I think, have progressed further. I think on airfreight, the sectorial split is something that does matter. And we don't see that spillover into the broader Express market. I think what if you compare ourselves against competitors and also having the discussion with the colleagues in the different markets, I think in Express we are definitely doing very well relative to our competitors. That's at least the sense we have. But it's right that the broader momentum doesn't translate yet. It's not a typical, if you look further back in history, we had similar situations before. And especially the intra-European volumes, the B2B volumes intra-Europe are relatively weak, and that's what you see in our overall numbers.

Melanie Kreis: Yes, just to kind of confirm that and I don't go to overlabor this European issue. But again, when you look at our stat book numbers, you see that the volumes in the U.S. were down, 4.7% in Europe, and that's a big chunk of kind of like the overall volume. So that explains a bit the divergence from Global Forwarding. Indeed, it was good to see that ocean freight volumes were slightly in positive growth territory again and airfreight only down 3.6%. So in terms of the '26 question, what do you have to believe in for Express to get back to a reasonable level of profitability. And I think that's obviously more in line with the number we saw in '22. I think you have to believe that on the B2B volumes, trade flows get more back you think with GDP growth. I mean those few who are on the call who have been around for a longer time you may recall the time when there was kind of like this 1.5 or 2x correlation between trade flows and GDP. I think that's not coming back. So our B2B assumption is that trade flows will get back in line with the GDP growth, and that's the basis on the B2B side. And then for eCommerce, also in Express, we do expect a more structural -- more boosted growth. So that would be more in the mid- to high single-digit volume growth numbers.

Martin Ziegenbalg: Emily, good enough for you? All right. Good. Still a few names in the queue. So the next caller, please.

Operator: The next question comes from Andy Chu with Deutsche Bank.

Andy Chu: Two questions, please. First one, maybe for Melanie. Melanie, just in terms of just trying to help us maybe in terms of the phasing. You mentioned the first half, we could see some decline year-on-year. Maybe could you just help us in terms of magnitude that you're thinking in terms of a decline or maybe there's just the seasonality between Q1, Q2 or the first half versus the second half given the seasonally strong Q4. And then, Tobias, maybe just a question for you in terms of inventory restocking as a sort of big topic. Clearly you're well-positioned for that restock. Within the organization, what do you -- where are you looking for in terms of the first signs of that inventory restock, which I guess it will be in Express but which region, which sector do you think is sort of going to give you the sort of trigger for signs of an inventory restock?

Melanie Kreis: Yes. Thank you, Andy. Let me start with the first question, give you a bit more flavor on the H1 statement, which of course varies between the divisions, right? So I think, first of all, on the Forwarding side, we are obviously, when you compare to Q1, Q2 of last year at a point where rates have come down quite a bit since then. So for Forwarding, it will be a decline driven by the now lower rate environment and still assume subdued volume situation. In Express, as you may recall, the first half of '23 also saw some benefits from the fuel impact. So here we have cautiously assumed that we won't have these type of supportive tailwinds and that volume will be more sluggish, so no operating leverage yet. On the supply chain side, on the contrary, we see no reason to assume that it shouldn't be a continuation of the good development we have seen over the last quarters. And then maybe on P&P, because I think that's also important to bear in mind, we will probably have a bit of a difference between Q1 and Q2 because in Q2 we will see the not insignificant step-up in salaries. So probably a slightly better Q1 development compared to the Q2 development.

Tobias Meyer: In terms of your second question, inventory restocking, I think it's really hard to judge at this phase because when we talk to customers, it's just extremely heterogeneous. I think the area where we're really closely watching it and expecting it to changes in tech, where we had that ongoing quite severe downturn in terms of volume. In the other areas, our focus is more shifting towards what are sub-verticals, EVs, renewables, definitely Ecom in the parts we play as well as this omni shoring trend. So where do customers change their manufacturing footprint, where they -- do they reconfigure their supply chains? And what opportunities does that bring? What needs in terms of logistics do they have? That's our focus. That's where, for us, we see bigger success to spend time in terms of discussion with customers. Are you planning to put up a manufacturing indication for EVs in Europe, that is something where we want to be on the wagon and part of the journey because things business across brings Express business because all of these projects have some of the other Express need then as well, and those supply chains need stabilization. So that's where we spend our focus in terms of customer selection and customer development. The restocking question for us is really hard to judge, except for tech where this will make -- has a big influence.

Andy Chu: May I ask one follow-up just on the sort of the weighting. Is it fair, therefore, when you put everything together that you could actually see materialize sort of 5% plus year-on-year decline in the first half and then obviously the flip side in the second half?

Tobias Meyer: In terms of earnings or revenue or volumes, what's the minus 5%.

Andy Chu: So in terms of your EBIT versus in terms of the €6 million to €6.6 billion EBIT guidance for '24. Just thinking about the first half, could you be materially down year-on-year in the first half, say, more than 5%. Then obviously the flip side, then obviously materially up in the second half. Just from Melanie's comments around the divisions, trying to put everything together, I'm just trying to get a sort of flavor of the kind of weighting in terms of first half, second half.

Melanie Kreis: Yes. So I wouldn't put a specific number to it. I mean, it's still relatively early now in the year. We're just kind of like getting in the February numbers where obviously we now have to look at Jan and Feb together after Chinese New Year. But I think the fact that we are flagging this so clearly means that it should be noticeable in Q1 and not just kind of like a 1% order of magnitude. But how big it is, I mean, for example, for Express, March is always kind of like Jan and Feb together. I would really like to see a bit more how the trading now develops.

Tobias Meyer: And again, it also has to do with the previous year. We shouldn't forget that because the first quarter first half was still influenced positively by the pandemic effects, and that is obviously now cycling out. So I think it's the development over the year, but it's also the year-on-year comparison that drives that.

Martin Ziegenbalg: All right. Andy, thank you so much for that question, and we continue, please.

Operator: Our next question comes from Parash Jain with HSBC.

Parash Jain: And if I may, I have 2. First, maybe on Schenker, if you can share some more granularity on what are some of those quantifiable metrics, whether it's a return, whether it's a culture, whether it's regulation, which drove your decisions. And on the same line, assuming some of the large players acquired this, is it fair to assume that you will see somewhat gain in volume as 2 large players combining together probably will force some of the larger customers to leave them for the sake of diversification. And maybe I'll have a second question after that.

Tobias Meyer: Okay. So in terms of the decision on Schenker, I think I tried to elaborate a bit how we think about capital allocation and how important for us, particularly when it comes to M&A, it is to see very substantial upside from this. And the larger it gets and the more similarly you are in those industries where you don't have scale effects and I would claim that in Global Forwarding beyond the business size of €20 million, €30 billion, the economies of scale are very limited, right? Very different from our last-mile network businesses. You just don't have that case. Elsewise, it's a bit -- the bride is looking for a husband and it's not you, it's not so nice to then say, well, it was because of A, B and C, I didn't like her or him. So that's something that we wouldn't get into. But just in terms of the value generation potential it has for us, right? And that can be very different for others, and I'm sure the bride will find a husband. For us, this was very clear that this just doesn't have -- doesn't stack up to the value generation that we are looking for. Now whether we will benefit from another player acquiring and customers looking for diversification, I think, is entirely unclear because we don't even know which harbor this ship will lend in. So let's just wait and see. And we will stay focused on the markets. It is challenging as it is, the forwarding space at this time and focus is something that we like. So we very much stay here on the path to develop our capabilities to strengthen our quality and take good care of our customers and then we'll see what happens with Schenker and how the year will develop.

Martin Ziegenbalg: And number 2.

Parash Jain: If I can ask a -- yes, and if I can ask my second question. It's more with respect to the e-commerce players going global out of China. Is it fair to say that, that will also bring a very intensified competition from the Chinese e-commerce players, perhaps the reason why many of the large express players or global freight forwarders shy away from Chinese domestic express market. Is it fair to assume that a large part of growth from those players is something that a global player, such as you, will find this very hard to gain market share, especially on price competition?

Tobias Meyer: So I'm not sure whether I read this question correctly. So if this goes the wrong way, please let me know. We do serve also Chinese e-commerce players quite intensely when it comes last mile activity across different markets, Germany being one. We participate in that. And obviously, with all large customers, you can have interesting discussions around price and so forth, but it is something that we feel very well-prepared to engage in. Now players have different setups, how they manage the middle mile, the airline haul from China. This is not really so different from U.S.-based players, how they thought about it, what to do themselves. -- how to segment within their shipment profile, high-value shipments and high-value customers was the lower end. So I don't think that there is a real dramatic change in the logic of that industry. Now the China domestic market is something different, that has its own rules, that has its own set of players, it's very competitive, has a bit of different setups as well. If you look at the delivery models, [Loca], [Poodle] playing a certain role, also certain technology being used, that is face recognition and other things that are not so applicable to other markets. So that's for us is a different topic. It's a market that we currently don't play in for a variety of reasons. But as it relates to global e-commerce, we think that our portfolio has a match with quite a significant chunk of this, but certainly not all. And large players will always think about managing certain parts of the value chain a little bit different.

Melanie Kreis: And again, just to add to that, that is also fundamentally new, right? So I mean also in the Ecom space, we had customers in the past which saw a spectacular growth for a period and then things changed. Just coming back to the famous fidget spinners as an example, where we were flying for a period charter planes. So I think message from me on this is we know how to manage that in a disciplined way, both on the cost and on the yield side. And I think that is important to make sure that we grasp the opportunity that is also in the bottom line enjoyable.

Martin Ziegenbalg: Thanks, Parash. And we continue with the next caller, please.

Operator: Our next question comes from Bland, Samuel with JPMorgan.

Samuel Bland: First one was on the volume. I think you said earlier that we didn't need volume on B2B above GDP to get to the 2026 guidance. Wouldn't you think if we're in a sort of cyclical downturn in trough on volume at the moment that there would be sort of a recovery, the bulwark goes into reverse and you would see volume above GDP for a period of time as you recovered out. And the second question was on the P&P guidance. I think I'm right in saying in 2024 there's a quite large wage headwind. How do we get sort of back up to the €800 million guidance? What are the sort of levers to offset that year-on-year headwind from wages in that division?

Melanie Kreis: Yes. Let me start with clarifying what I meant on the B2B volume trends. So I was talking kind of like about our average expectations that across the cycle we would assume B2B volume to be in line with GDP, and B2C a bit higher in this mid- to high single-digit order of magnitude. Of course, there can also be a bit of a rebound if things kind of like get into spring mode, but the number I quoted were more about the averages we assume over the cycle. In terms of P2P, yes, you are correct that we will see an impact from the wage increase coming in April. At the same time, and that is for me one of the encouraging developments in the fourth quarter, we are in a much better position with regard to cost management. In P&P the first half of last year was negatively influenced by the union negotiations. So coming out of the peak season, we were not able to flex down on the staff side because we were preparing for strike action. This extra cost burden will not be there in the current year. The pricing we are doing on the parcel side, have proven really effective. I already mentioned the peak surcharge, which we implemented successfully in -- for the first time in the peak season '23. So there are countermeasures. But given that we won't be able to do anything on the latter pricing this year, we won't be able to get back to above €1 billion. That is clearly the aspiration and what we need from '25 onwards. And that is of course also assumed in our '26 guidance that after this transitionary year '24 when we don't have the new postal law in place, P&P will get back to €1 billion plus.

Samuel Bland: And if I could just, so we write the sort of the working assumption is, at some point B2B freight volume sort of troughs and we get into recovery and then it starts growing at something like GDP from that point, whatever that is 2%, 3%, 4%. And that gets you that level of volume growth in B2B and in freight forwarding, that will get you to the 2026 targets, is that right?

Melanie Kreis: Yes. So I mean the interesting thing is if you kind of like -- were to look at kind of like the Express development over the last decade in terms of how has EBIT progressed over that time, and you extrapolate it out to the year '26, right? You would come to a number, let's say, of around €4 billion, what we had in '22. So I think this kind of like over-the-cycle average assumption is working quite nicely. And now we have to see H1, H2 this year between '24-'25, how is the dynamic. But I think in terms of average modeling, there is quite a clear trend.

Martin Ziegenbalg: Thank you, Sam. And one more caller, please.

Operator: The next question comes from Johannes Braun from Stifel.

Johannes Braun: Two more specific questions, I guess, left. First of all, on the Forwarding division, the job cuts there. I think there was another 5% in Q4. Question would be, how much more can you do there to improve productivity and to leverage the CargoWise system, I guess? And then secondly, any updates or any updated thoughts on the post law? I think this still needs to pass the German Parliament in Q1. So any update on the timing, any update on your thoughts what the benefits and the drawbacks are, thinking about the margin cap, the recent decision on the VAT exemption and all that?

Tobias Meyer: So maybe on both questions, I think in Forwarding we have shown that we can flex as it's required. It might take 1 or 2 quarters. But generally, the structure that we have there allows for that flexibility. Now we want to also grow in that business as we definitely head through the year. So we have to see how that goes, but there are no concerns regarding not being flexibly enough if that's required to also adjust. It's a quite, as you know, distributed organization. So the flexibility, I think, is there. In terms of the postal law, I mean it's progressing. The cabinet has passed it just before Christmas, as the first round in the German Bundestag and also had a round already in the state chamber where there were some suggestions which are currently debated. I think there's great recognition that the reform of this law is absolutely needed. Now we don't like all aspects of it, and maybe that's to be expected, but there are some elements in there which we think are somewhat nonadequate or outdated, but there are also some elements in there which are clearly needed to stabilize the universal service provision in the country, which is an obligation that the government needs to fulfill towards its citizens. So we do expect that this now goes into the parliamentary recession, so to say, in the debate of the subcommittees and then passes in Q2, the Federal Parliament as well as the state chamber and then comes into effect in Q3. That is our current expectation, what our planning is also based on.

Martin Ziegenbalg: All right. Now we are 1 hour into this, and we work down the queue to 3 remaining callers. Operator, please.

Operator: Our next question comes from Sumit Mehrotra with Societe Generale.

Sumit Mehrotra: So FY '24, Melanie, €6 billion to €6.6 billion. Could you please share what you've built in for Express behind this €6 billion scenario, bottom end? And secondly, sticking with Express. I noticed network profitability impacted by trade lane imbalance. Normally, APAC volumes generally believe to be good for Express, but this has turned out to be a problem. I want to understand how big of a problem it is really and whether this was something manageable and we can see some changes here.

Tobias Meyer: So maybe I can take the second question before Melanie comes to the first. I wouldn't say that -- it's not fair to say that APAC volume is a problem. I think you have to -- if you look at the overall headline number of volume development in Express, it is just subdued. I think the bigger problem is the lacking B2B volume in Europe. And that is kind of in the overall numbers compensated by the peak season that we have seen in APAC, which is just not as profitable incrementally than the missing, so to say, European volume is. This is what we try to lay out with this comment on the trade imbalance, especially if it's a growth on the head haul, so China outbound, it is naturally not as accretive as having additional volume in available capacity, so to say, in the European network, that is what the comment on trade imbalances is mainly referring to.

Melanie Kreis: And I think with regard to the guidance, so I think for good reasons, we are not breaking out the individual DHL division. So I mean when you see this €6.0 billion to €6.6 billion, it tells you that we are kind of like centered around the numbers from '23 as a starting point. And so there's obviously a little bit of up and down assumed for the lower and higher scenario for all of the divisions. But I wouldn't want to kind of like single out the Express range here.

Sumit Mehrotra: Maybe I can hazard a third one. Free cash flow at €3 billion with a very wide CapEx range. Shouldn't we see this as a waiting to excel kind of scenario developing after 2, 3 years of taking back CapEx? So what are your comments on this, please?

Melanie Kreis: Yes. I think what we have also shown last year is our ability to flex CapEx with volume development. And so if we now assume that volume, including a recovery work to develop more slowly over the 3-year planning horizon, we would also have less CapEx build-out that would boost the free cash flow, which is then slightly lower operating cash flow. If on the other hand, the dynamic is more favorable, and we have to accelerate the build out that we'll have a negative drain from CapEx. On the free cash flow, we would then see a better operating cash flow, hence the relatively wide range.

Martin Ziegenbalg: Next caller, please.

Operator: Our next question comes from Nikolas Mauder with Kepler Cheuvreux.

Nikolas Mauder: Just one question from my side. Most of them have been answered. Can we get a comment from your side on the situation in the Red Sea? I think the consensus is here is that air freight is so far not impacted, but any color you can provide would be helpful.

Tobias Meyer: Nicolas, thanks for the question. The situation is indeed different than it was during the pandemic because the overall supply/demand balance is just much more relaxed in ocean freight at present. And it doesn't look like the Red Sea incident, even if it continues to be there is going to change that because there's tonnage still coming into the market. Now that there is so limited overspill in airfreight is indeed interesting. That is -- we do see some discussions around that with some customers who have one or the other shipments, but it's just not across the spectrum of customers, just because also the demand in Europe is not as strong. That's our conclusion. Now we also know that if 2 or 3 of these things accumulate, that might drastically change. We still have a bit of concerns around the Panama situation, right, that being limited, was limited for quite some time and also absorbing some tonnage there. So we'll continue to monitor that. But currently the situation is exactly as you outlined, there is a limited overflow into the air freight market and the stimulus to the rate situation in ocean freight is there, but it's also limited.

Martin Ziegenbalg: Thank you. And it looks like we're coming to the last caller for today's session.

Operator: Our last question comes from Patrick Creuset of Goldman Sachs.

Patrick Creuset: Melanie, just can I come back to your opening comments on the trade imbalance and the fourth quarter miss in Express on EBIT. Just to be clear, I mean, does the imbalance basically mean that you had to purchase more third-party capacity on Asia outbound in Q4? And then can you roughly quantify the cost impact kind of the extra cost from that and also confirm it's a bit of a nonrecurring event, right, as you look into Q1 and 2024.

Melanie Kreis: Yes. So indeed we needed extra capacity because that peak out of China was stronger than we had anticipated. And I think there was also in an environment where others were equally looking for capacity because also on the forwarding side some of those Chinese e-com players actually generated more demand than what has been assumed in the market. So it was a bit of an unexpected capacity crunch leading to higher rates. And that is indeed something which we see more temporary in nature and fading out.

Tobias Meyer: Generally, we like people to join the bus and not demand the taxi. So that's a little bit the situation there. But we obviously need to take care of our customers' demands as well to make sure that they feel well-served and stay with us. So that's the balance we struck in Q4.

Patrick Creuset: Okay. I think that's quite an important point. I mean, the D&A was a lot higher than usual. I think purchased goods and services looked a little high. I mean, can you give a rough idea of what the impact was, double-digit million, triple digit?

Tobias Meyer: I think we shouldn't single out the China topic because, again, it is also the situation on other trades, including inter-Europe that overall leads to this effect. So I would not over-judge China only. It was just, I think, worth highlighting because it drove volume. And in the overall network and that volume wasn't as accretive as you used to this accretiveness from us, and this is why we highlighted it.

Patrick Creuset: Okay. And then just finally, you mentioned the FTE reduction, gradual FTE reductions in Forwarding. Were there any -- what's the ballpark cost associated with this, please, in the fourth quarter?

Melanie Kreis: Yes. So I wanted to highlight this number for 2 reasons. So first of all, to show that we have been on this. But I think we take tried in doing this in a relatively noise-free way without making announcement of any target layoffs. So 5.1% down organically, it's actually 5.9%. And we also did not mention the cost of change because for us that is part of the normal flex we have to…

Martin Ziegenbalg: Thank you, Patrick. And that indeed concludes our Q&A round. Before I hand over to Tobias for his closing remarks, I want to thank you out there for your excellent focus in this call, and we're looking forward to seeing you over the next number of weeks. Tobias.

Tobias Meyer: Yes. Thank you for your good questions. And again, 2023 is the year that we are satisfied with. We would have liked a bit more tailwind in terms of the macro development, but it enables us to stay very focused on our core segment, continue to invest on an adequate level to produce good returns and gradually develop our business with some bolt-ons that we have discussed for the main focus on organic, so that you can also expect from us going forward and going through the year 2024. And I do think and tell that also to my colleagues internally, some of our competitors have some other distractions and us staying focused provides a lot of opportunity in the different markets, and that's what we're going after and what we're going to stay focused on. Thank you.