DPSTF - Deutsche Post AG (DPSTF) Q4 2022 Earnings Call Transcript

2023-03-09 12:28:06 ET

Deutsche Post AG (DPSTF)

Q4 2022 Results Conference Call

March 09, 2023 03:00 AM ET

Company Participants

Martin Ziegenbalg - Head of IR

Frank Appel - CEO

Melanie Kreis - Group CFO

Tobias Meyer - Incoming Group CEO

Conference Call Participants

Alexia Dogani - Barclays

Muneeba Kayani - Bank of America

Alex Irving - Bernstein

Cristian Nedelcu - UBS

Robert Joynson - BNP

Sam Bland - JPMorgan

Sumit Mehrotra - Societe Generale

Nikolas Mauder - Kepler

Patrick Creuset - Goldman Sachs

Johannes Braun - Stifel Europe

Andy Chu - Deutsche Bank

Presentation

Martin Ziegenbalg

Thank you, and a warm welcome from my side to our Q4 full year '22 conference call. As announced in the invite, I've got with me Melanie Kreis, Group CFO. We've got Frank Appel, CEO; and also as announced Tobias Meyer, incoming Group CEO. And with that, we don't want to lose any time. Over to you, Frank.

Frank Appel

Yes. Thank you for joining us. And let me start with the overview somehow and then my colleagues will give you more detail in the outlook for this year and 3 years. So if we go to Page 3 of the deck, we have summarized some nice highlights here. We really had a very strong financial year with a record EBIT number, but also a very strong free cash flow.

[indiscernible] somehow the health of our business. We also have continued to deliver on our comprehensive ESG strategy, and I will show some details later. And finally, as good practice for many years now in our company, we have a quite nice participation of our shareholders as well by increasing the dividend to €1.85 and increase our share buyback program until 2024. If we look into some of the developments, which has driven that, you can see on the next page, first, the B2C volumes for 3 divisions. Structurally, the volumes are much higher than they were in 2019 before COVID.

But of course, the cooldown of the economy had impact as well on our volumes. You can see that here, overall, very strong growth long term. Last quarter was down against last quarter 2021 in 2 divisions and flat in the third. That's not surprising, taking into consideration higher inflation, consumption is down in many sectors, retail and e-commerce. You have seen that with some e-tailers as well.

And of course, [indiscernible] in our volumes. Nevertheless, we believe, a structural growth. We have seen before COVID, and we will see in the future is in the high single digit -- mid- to high single-digit growth rate underlying, and we believe that this will come back if things have normalized. B2B on the next page is impacted significantly more. Very similar to what we have seen in the financial market crisis, volume drop in B2B at that time was quite strong as well.

But it's also -- embeds and somehow some opportunities for the future. You can see here that in Global Forwarding and Express volumes are even down against -- in B2B against 2019. Despite that, the economy is still bigger than in 2019, so if volumes are dropping that much, they have to come back because the underlying economy is much larger, and we have seen exactly the same pattern in the financial market crisis. B2C remains relatively flattish. B2B volume dropped quite a bit.

And we remember that we have seen at that time, a pretty [indiscernible] recovery later on.

Supply chain is the exception, very resilient business, not surprising as well. We have seen that in the former crisis as well, they're stable. But in addition, we see underlying good growth, healthy growth, gaining market share, and that has driven the top line quite a bit in supply chain.

Let me come now to the financial numbers. You can see on Page 6. The fourth quarter, where we see already the impact of the volume development you have just seen, nevertheless, still almost €2 billion, a bottom line, almost €25 million revenue. In total, record revenue number and record EBIT number driven by -- particular by Global Forwarding, which was significantly up but also supply chain has the best year ever and Express kept the tremendous level we have now, €4 billion quite nicely. So very encouraging signs.

E-commerce solutions, also a couple of years back, at a 0 profit is still around [€400]. And yes, in P&P, we have seen a decline driven by a significant revenue decline, not surprisingly, the long-term trend in volumes in Mail is still the same and Parcel volume dropped, and that has, of course, significant impact. So we have reduced our profit in this segment.

If you look now, the question is always, and that's a good question. And I think we have clear answers to that, what will happen in the next months. We don't know, and we will come to that later. But as I said, maybe there are some signs already that heading in the right direction, but it's too early to celebrate. We have very clear approval levers to reduce cost.

The Express team has worked diligently on reducing our capacity for Express business. You have heard that from us often we have a very flexible structure with short-term ACMI contract to own airplanes for a long term, that helps. We also have flexibility to reduce operational costs and also indirect costs. Of course, we put a hiring freeze in place. We have reduced travel quite a bit.

These are all normal practices we have done again and again. So nothing surprises, but that will help us to stabilize the situation if volumes are not recovering. Long term, I think we have to continue what we have done well in the last [indiscernible] always continued to invest into our operations. And that's the result is that we have been able in moments where it was necessary to produce significantly more volume. Yield is very high on the agenda.

We discussed that in all BRMs with the divisions. It's much higher on the agenda than 10 years ago and we will not change our view that ESG can become a competitive advantage as much as digitalization, and that's the reason why we will continue [indiscernible]. If we look into digitalization as the first of these 2 drivers, here you can see, first, what we intend to do. First, we want to make the customer experience better by better taps with digital touchpoints. The same is true for employees or we make our operations more effective or efficient.

On the bottom and I will not go through them, you see many different examples where you really have digitalized the organization significantly more. The nice thing is I have now started to travel again and throughout the world I have been in town halls. 5 years ago, I got many questions about digitalization. Will I lose my job. I get not only digitalization question, can we not accelerate even further.

So we have demystified and took the fear away from all people. The people see that this makes the jobs better, our operations better, our customer experience better, and that's the reason why our organization is very much engaged, and that makes me very optimistic that we will see a further acceleration of digitalization [indiscernible] . ESG, I think we have ticked all boxes this year, all the targets we give ourselves, we have achieved. It is great to see on an environmental, we have invested into our carbon reduction, and we delivered 1 million tonnes carbon reduction through decarbonization efforts. We have kept our high engagement of our people.

As you know, we are Great Place to Work, number one. And the number dropped only from 84% to 83%, but it's still above -- significantly above sort of 80%, which we think is outstanding.

And on governance, all our training, our mandatory trainings have been delivered at the ratio. This is a very high number. If you look into other companies or you might ask other companies what their compliance with training effort is there to begin the 50% or 60%, so that's a very good achievement. We will introduce now a new KPI for governance, which is cybersecurity that is based on BitSight. They are measuring that.

And the result last year was 700, and we want to go now to the bottom of the best quarter of all companies, not only in the industry but across many industries. And that's a new goal. I think that's a very important indicator. It's still early phase with cybersecurity ratings, but I think we want to make a start there and want to measure ourselves against 3 indicators. Going forward, next page, I think we are well positioned to weather the 2023 challenges.

We have the right measures in place. We have discipline in the organization. It is actually a quite interesting portfolio because we are defensive and relatively stable in the moment of crisis, and we will definitely benefit from the recovery of globalization in e-commerce in the next quarters if it comes back. And we are particularly proud that we have a very agile and energetic organization with now 600,000 people, which will help us to get through that. So overall, a very good year.

Outlook at the moment is more challenging, but we believe that we are well equipped. And with that, I hand over to Melanie for more details on the key financials. Thank you for listening.

Melanie Kreis

Yes. Thank you very much, Frank, and good morning to all of you also from my side. Let me briefly start with the full year P&L on Page 12, where yes, after what you just heard from Frank and what you already know, you can obviously see some new record numbers in terms of revenue, EBIT and net profit. I think the interesting thing is, as we have already flagged in our implied Q4 guidance last November, we have seen a change in the development and the market trends over the course of the year. Frank showed you the Q4 P&L.

So Q4 EBIT was down year-over-year from a record Q1 '21 with €2.2 billion to €1.9 billion.

However, when you also put that into perspective to the volume trends, which Frank showed, I think that was still a very, very strong quarter. And I think it shows the resilience of our portfolio and also our ability to deal and manage successfully a period where the volume dynamic is weaker, and that was clearly the case in the fourth quarter. So we're very pleased with bringing the year home in line with expectations on the P&L side. And of course, now turning to Page 13, we are also very, very happy that our cash flow focus continues to pay off. As we translated record full year EBIT into a very strong free cash flow excluding net M&A, €4.6 billion, above €3 billion when you take into account M&A, particularly the €1.5 billion for Hillebrand.

So we are ahead of our previously increased guidance. And you know my obsession with cash flow. I'm, of course, very happy that we are also able to report record numbers on the free cash flow side.

So I guess that takes us to the question now that we have that nice cash flow, how do we use it? And in line with the commitments of our finance policy, we are using part of this strong cash generation for our multiyear share buyback program. We are now increasing the overall size by €1 billion to a total amount of €3 billion until the end of '24. €800 million, the first tranche was fully executed in '22. We are well on our way with the second tranche, €500 million, which will be completed by the end of the month.

And in line with our aspiration for share buybacks to be almost continuously in the market, we are preparing for the next tranche to follow up right after our AGM in May. So increase in our share buyback program, that's one use of cash.

Of course, another very important element is our continued investment into future growth of our business. That takes me to Page 14, where I want to highlight 3 important messages. First 1 is that we are very disciplined with our capital allocation. Overall, how much capital we allocate to the digital division and then, of course, also BCA basis when we look at the individual investment projects to ensure that we generate a good return on capital employed. You can see on the left side of the slide, the development of return on capital employed over the last years.

And of course, that is something we know also bear in mind when we see, as you will have seen in our guidance, a phase where there's less EBIT growth. We will, of course, also look at making sure that we stay at very respectable levels for ROCE going forward. That takes me to the second important point and the question, how do we steer CapEx in the current environment? Tobias will talk about our full year guidance, we have already included on this page the range we are giving for CapEx guidance. And I think you can see with that range that we do have flexibility.

So it's not that our CapEx is a given. We have flexibility, and we are using the flexibility, and we will post that in the course of the year, depending how the volume development plays out.

The third important message is that we will do so as we have done over the past years, in a balanced way. I think the good news for us is we have a very experienced team who is not going through a volume downturn phase for the first time. So we know to strike the right balance between focus on cost, cutting back on CapEx whilst also making sure that when spring comes and there will be spring eventually, we are ready to really pick up in a smooth way and then really harvest the upswing again.

So now turning to Page 15 and to round up uses of cash dividend. Page 15 shows our long-term track record of progressive dividend increases, something that is very important to us, including the proposal for the full year '22 with €1.85. We know that this is at the lower end of the 40% to 60% corridor, so I think it has to be seen in conjunction with the share buyback increase. But I think what is also very important for us is dividend continuity. We are also really looking ahead, bearing in mind our EBIT guidance for the year '23.

As this is Frank's last year -- last full year announced results, I also took the liberty of including some numbers taking a bit of a look back to the year 2008, when Frank took over as the CEO of the company. And I think we can show some very impressive numbers of what happened over these last 15 years. We spent more than €23 billion on dividends and share buyback and shareholders have received more than €15 accumulated dividend for each share held over the period. And when you look in terms of total shareholder return, I mean, 2008 was obviously also quite a challenging year. But from that starting point, we were able to generate TSR of 8%, well ahead of market, and I think something we are very pleased with.

So that was a bit of a look in the rearview mirror. Now we turn to the future. And with that, I hand over to our incoming CEO, Tobias Meyer, for outlook.

Tobias Meyer

Good morning, everybody. I'm very happy to join this round and give you the outlook for the first time. Let me start with 2 pages of context, one on the macro and one on the business portfolio. You turn to Page 17. We reflect a bit where we are in the cycle.

We have seen in 2022, the normalization, some recessionary signs in the second half, the substantial rate cliff from very high levels that we've reached during COVID, substantial destocking and also some supply issues, particularly out of China and we've seen declining but not a collapse of demand.

And if you compare this on the right side of the page with the financial crisis, the signs that we see now in the freight markets are quite similar. So we have a pronounced decline of Air Freight volumes and some decline also in Ocean Freight and Express Volumes. Volumes in February and early March still show declines, but Frank alluded to it, we do see some bottoming out and also some first positive signs after that sharp fall in Q4. Yet it seems too early to tell whether this is really now leading already into recovery or whether it will take some while. We need to be prepared for all of these scenarios, and this is why we also thought it's helpful to provide the guidance in that context and use the scenarios that you see on the left side.

So in the L shape scenario, a recovery would only really set in end of the year, but predominantly in 2024. U-shape, a bit earlier and then the V-shape, which seems well possible, but too early to tell that we already see some signs of recovery in the U.S. and Europe also at the end of Q2, middle of the year.

So the second piece of context is on Page 18, which I think is very important to remember, our portfolio has changed dramatically over the last 15 years. 15 years ago, we had the majority of earnings in our German Post and Parcel business. While now the great majority, 86% in the DHL divisions and only 14% is in Germany in our traditional business. And also, if you look at the lines of business on the right side, yes, we still have 8% of structurally declining Mail business but 61% of our portfolio is growing GDP plus in areas like Express, supply chain, Parcel in Germany, and also E-commerce Solutions, which obviously has a specific exposure to e-commerce, which we believe will continue to structurally grow.

Having said that, on Page 19, our outlook for the year against those 3 scenarios. In the L-shaped scenarios, we see an EBIT at a minimum of €6 billion, U-shape at €6.5 billion and with a faster recovery at the midyear, we should be around €7 billion. That's our outlook for the year, given that macro uncertainty that we still see how the earnings would turn out. If we break this down on the following page, Page 20. You see that, obviously, the predominant part is in the DHL divisions.

We see P&P with specific uncertainties at around €1 billion. The group functions with a negative contribution, the usual number that we had for many years of €0.45 billion, which overall leads to the range of €6 billion to €7 billion. On the free cash flow, we see this around €3 billion. That's because of the compensating effects. Would we have higher earnings, operating cash flow would truly increase, but we would have some higher working capital and would also then spend a bit more CapEx.

Adversely, if the recovery takes longer, we would be more prudent on CapEx and would also expect less money tied up in working capital. So that's why we feel quite comfortable that the free cash flow should be around the €3 billion.

Gross CapEx, Melanie already mentioned that, the range of 3.4% to 3.9% and the tax rate in the usual range of 28% to 30%. Turning to the midterm. For 2025, we see EBIT above €8 billion again. Free cash flow at €9 billion to €11 billion cumulatively for that 3-year period and gross CapEx at €10 billion to €12 billion. Turning to Page 21, in terms of management priorities.

Surely, we need to be attuned to the current macro situation. Cost management is going on very well. I think we have a very good team. Frank already mentioned it. I have to say I'm very proud of what Express did in aviation in terms of adjusting the network, keeping service high but taking cost out in a very skilled manner.

We will be disciplined in terms of pricing. We have established very good mechanism and tools over the years to make sure pricing stays adequate and also in terms of CapEx spending will delay some projects, but we'll be ready to take advantage of the upturn as well.

When it comes to the fundamental drivers of our business, we still see a lot of opportunity in globalization. The pattern is changing. We want to strengthen our presence in fast-growing economies while being mindful of geopolitical developments. Digitalization, the company still has opportunities to take, which we're working on. E-commerce, still has a decade plus to go as a key driver of growth in logistics.

And sustainability for us is not only a must do, but we also see increasing signs of this being midterm a real commercial opportunity. So we'll also definitely continue to work on that. Which leaves Page 22, our key investment highlights of the business. I will not go through it in detail, I think most of it is known to you. Just the highlights here.

I think we can say that Frank is handing over the company that is in great shape. And with that, I will turn it back to Martin for questions.

A - Martin Ziegenbalg

Right. Thank you, Tobias. And operator, I think it's a good time to start the Q&A now.

Question-and-Answer Session

Operator

[Operator Instructions] We have the first question from Alexia Dogani from Barclays.

Alexia Dogani

I just had 2 questions, please. Just firstly, on DHL Express. You talked about B2B weight being now 15% above in 2019. So we've had 2 quarters of close to 10% sequential kind of decline. Do you think that that's kind of the level where it's set of postpandemic given we've seen kind of the return to normality, if you like, of Air versus Sea freight premiums, so that's one.

And then secondly, on the biases yield comments, could you just elaborate a little bit what you mean about your renewed focus on pricing? And for instance, give us some examples in sort of the post division or Express kind of yield management is being managed differently perhaps from the past.

And then if I can sneak in a third one. On the sourcing and kind of changes in supply chains that you've seen, can you again elaborate of what you're seeing, whether there's a bit of diversification away from specific countries or not happening already?

Frank Appel

Maybe Melanie will take first, Tobias second, and I'll take the last one.

Melanie Kreis

Yes. Okay. So on the first question, Alexia. So on the B2B weight in the Express network, I think that is, of course, a question we get quite frequently. How much of the Airfreight is still overweight.

Do you still have sitting in the Express network. So I mean just looking at the numbers in Q4, we had a 7% decline in shipments and a 9% decline in weight, which means that the weight per shipment decline was relatively small. So that already shows you that this is not a land slide where we're kind of like losing enormous amounts of weight.

I think the biggest chunk of what had unnaturally moved over from Air Freight into Express that has gone already, Air Freight capacity is available, is also available at attractive rates. So we believe that what we now have in higher weights in the Express network is there for a reason because those customers really appreciate the quality of the Express network.

Tobias Meyer

Yes. Taking the question, Alexia, on yield management. So particularly in the network business, this is obviously particularly important. And we have a much more settled and a physical approach to the matter. We've seen still competitors that go out with certain discount campaigns for instance.

We generally don't do that. We approached the topic analytical where is the willingness to pay, where do we win them, where do we lose business and bids. And that informs our pricing very much driven by the willingness to pay of customers.

In [indiscernible] Germany, there's a specific opportunity given the change in cost structure for many of our competitors. You might know that we had quite a substantial increase in the minimum wage in the country that affects our cost base, not in the same way than our competitors. So that provides a specific opportunity, but also in partial. Again, the approach is much more systematic and data-driven. We really price much more out of the machine, you could say, in terms of analyzing where there is willingness to pay and that is informing our yield management.

Melanie Kreis

And if I could just add to that. As you asked specifically also about Post and Parcel. So we have introduced 2 new elements, which we already had successful in other parts of the business in the parcel pricing now for the current year, an energy surcharge and a peak season surcharge. So as Tobias said, we are really taking the whole driving to a new level in terms of sophistication and data-driven support.

Frank Appel

And before I come to the last question, we are a premium provider and we demand premium pricing. That's what we should do, and we do actually. And of course, customers are challenging us on that, but they admit that we are providing across the divisions offsetting performance quality-wise somehow. So sourcing, yes, a lot of stuff is going on, but it's more [indiscernible] . Of course traveling around the world in all continents.

And what you hear is that there is a tendency to China plus 1 at least. Customers are looking for more resilience of our supply chain. Nearshoring, I think, is a phenomenon of very few industries where CapEx costs for a plant is much higher than labor cost, and therefore, you can go anywhere. For instance, the ship industry, but many others are still looking for labor arbitrage. What good news about that is we are present everywhere.

So we lose a business potentially in China, but we win it somewhere else because customers see us as a solution provider for complexity in their supply chain. That's long term, of course, a tremendous advantage we would have as a global organization because nobody of our competitors has a footprint like we have.

Alexia Dogani

That's great. And I don't know if it's your last presentation, Frank, but I just wanted to say congratulations for a great 15 or more years at Deutsche Post.

Frank Appel

Thank you, Alexia.

Martin Ziegenbalg

Thanks, Alexia. The next question, please.

Operator

The next question comes from Muneeba Kayani from Bank of America.

Muneeba Kayani

So firstly, just on Express pricing, can you talk about the GPI increase? How successful have you been in putting that through and how we should think about the unwind of surcharges this year? Secondly, just wanted to get comment on February, March volumes kind of bottoming. Can you give some color on where you're seeing that across Air, Sea, Forwarding or Express and kind of geographically? And then related to that, then why do you have the L-shape €6 billion scenario in your guide, if that's kind of what you're seeing?

And then third, if I may, what's your wage assumption on the '23 guide?

Frank Appel

Melanie, you would take maybe the first two. And maybe Tobias, can you answer the question with regard to the outlook.

Melanie Kreis

Okay. So in terms of Express pricing, so we have put in a very sizable GPI in Express. Of course, that is, as usual, country-by-country decision-making, the average order is about 7.9%. But of course, it really varies a lot depending on the inflation environment, the currency environment and so on country by country. And as always in Express, we are very strict about making sure that this is then also really implemented and follow through, and we see very encouraging signs of it sticking.

On the second part of the first question, the surcharges. So we see a slow phasing out in the emergency surcharges, which we had always seen as a cost offset. So that is something which we constantly monitor. It's still there, offsetting the still higher cost on the aviation side particularly, but of course, we assume a certain element of normalization here.

In terms of if there are first signs of spring coming as Frank and Tobias said, why do we still need an L-shape scenario and the lower end of the guidance range with the €6 billion. I think we have seen so much volatility over the last 12 months and also now in just the last couple of weeks that we feel it's prudent to give you a feeling for the different ways the next quarters could play out. And I think for me, actually, the €6 billion also is an encouraging number because even if there would be a prolonged winter and we would see no recovery in the global economy in the course of '23, we would still be above €6 billion and hence on a new level compared to where we were 3 years ago. So it is a bottom floor in a very gloomy winter scenario. But even in that case, we would be at a new altitude.

Tobias Meyer

Putting some more context to this in terms of the volume development you asked about February, March. I mean for us, the beginning of the year was very difficult to read because Chinese New Year was in January, earlier than last year. Obviously, the COVID situation in China beginning of the year made it also difficult to read. Now we've seen the decline basically bottoming out now across the different modes. We see some, but that's really the last 2 weeks more in some European countries, encouraging parcel volumes.

So these are very early signs. And whether that is a trend, it's just too early to say. We, on the other hand, see that inflation in Europe is still high. The Central Bank is acting against that. I think there's reason to believe that it will kind of cycle out a bit as the comparables in the previous year are higher when it comes to energy, in particular, which is rather coming down, but that is yet to be seen, and this is why we found it prudent to have the L-shape scenario also in the mix.

Frank Appel

But in addition, the outlook now is definitely better than 6 weeks ago. And one driver of that is that China is now out of COVID. And this is the second largest economy in the world, and that will, of course, help the global economy without a doubt. And that's also visible in the volume trends, but a week or 2 doesn't make too much difference. But as I said, I think the outlook is significantly better than 6 weeks ago.

Martin Ziegenbalg

Okay. Thank you. A few more calls coming in. So next question, please.

Operator

The next question is from Alex Irving from Bernstein.

Alex Irving

Three, if I may, please, all the medium-term outlook. So first on your 2025 EBIT target. Until November, you were thinking about €8.5 billion in 2024, which I would take by-location is higher in 2025, why is your assessment of the normalized earnings level changed over the last couple of months?

Second, I know you don't guide specifically by division, but could you please talk qualitatively about in which divisions your view has become more negative. To what extent this is a question of volumes, price or margin? And then finally on CapEx. So your run rate CapEx looks to be coming a little bit lower, in which areas are you reducing spend, in which areas are you preserving it? And why?

Melanie Kreis

Yes, let me start with the first question. I mean we have this mechanism of giving a rolling medium-term guidance plus 2 years for the current year. So we gave the guidance for '24 in the spring of last year for the first time. And obviously, the world has changed a lot since then. I think what changed now to the last time we reiterated the '24 number is that we have seen volumes coming down since November faster than anticipated and the discussion about global recession in '23 and kind of like how long will it take to have the global economy get back has obviously heated up in the last weeks of '22 going into '23.

So now also considering the new baseline, our scenarios for '23, we feel that this outlook, we will get back to above €8 billion by '25 is the best reflection of the current uncertain state. So we have to see how the scenarios in '23 come about, but we are confident that by the year '25, we will be back at above €8 billion.

In terms of '23, what's behind it? Well, so I mean, first of all, you can see in the individual guidance for the P&P division that we do expect a further step down in P&P EBIT from about €1.3 billion we had in '22 to around €1 billion in '23. There's a lot of moving parts at the moment as we still have to conclude the union negotiations that's the P&P specific case. In terms of the DHL part obviously, the division where we expect the biggest normalization is in Global Forwarding. You can also see that very clearly in the consensus, which anticipates an order of magnitude €1 billion step back in Global Forwarding.

And I think overall here, we really have to see whether it's L, U or V shape and how we will actually end up. In terms of CapEx, we have flexibility. When you look at the big CapEx division, I mean, the biggest one is Express where we are, of course, making adjustments in capacity built out in our aviation re-fleeting depending on the volume projections. So we are slowing down a bit here. The same, of course, in Post and Parcel Germany.

And then you have divisions like supply chain, where CapEx is predominantly driven by the implementation of customer projects where we are seeing new projects coming in. So that's probably a division where we won't see much change, more continuity. And then, of course, we have a division like Global Forwarding Freight where CapEx is a nonevent in any case.

Operator

The next question comes from Cristian Nedelcu from UBS.

Cristian Nedelcu

The first one on Express. It is getting cheaper for you to purchase air capacity out there. Could you maybe talk a little bit about the time line of the aviation cost normalization? Would that happen towards the end of '23? Or is it same for 2024?

The second one on Global Forwarding. In your Q4 conversion ratio was around 33%, slightly below your target, could you elaborate a little bit on the trajectory going forward for the next few quarters, how you see the EBIT conversion ratio developing? And last one, on Post & Parcel Germany on the negotiations with the union, could you give us a bit more color on the sticking points in the discussion and maybe some color on the differential between your latest offer and the union request in terms of wage increases.

Frank Appel

I take the last one, Melanie, you take the other 2 questions.

Melanie Kreis

Okay. Good. So in terms of normalization on the aviation cost side, I think for us, the most important element in making cost adjustments is the capacity adjustments we are making. And here, we have already reduced capacity by 15%. So given that we mainly operate a dedicated network, really adjusting this capacity in a flexible and agile way is key.

And I'm very pleased with how rapidly the Express colleagues have moved on that over the last weeks and months. In terms of Global Forwarding conversion ratio. Yes, I think that is something where I wouldn't overvalue the number in an individual quarter. So I mean, obviously we are now going through a rapid and probably faster than anticipated volume normalization period on the forwarding side. Overall rates are still relatively high.

So our medium-term aspirations around 35%, that's unchanged, but there may be some wobble around it, which I wouldn't over value.

Frank Appel

Maybe on the negotiation. So first of all, we have put something in place, which was higher than what we offered ever, and it's in comparison to other negotiations in other industries, but also in our industry, at the high end. And we don't see any further headroom. The union is not very clear what they want, except that they gave us a significant [indiscernible] at the beginning. So they asked for 15%, we offered now 11.5% with a longer run rate but that's normally the case.

So we will get today the vote of our employees, where it would be a big surprise if it didn't -- don't vote in favor of a strike because union members, of course, are not undermining whatever their union heads are saying. So it would be an embarrassment for them if that would be different.

So we expect that we get a negative vote, and we have then to look to negotiate again. We have seen that in many years again and again, I think the mood of the union at the moment is a little bit [indiscernible], not clear about themselves and let's see what we get -- how we get through that. But of course, we are prepared for any scenario that we get an agreement soon or if we have to take a strike, we have to take the strike.

Operator

The next one comes from Robert Joynson from BNP.

Robert Joynson

Three questions from me, please. First of all, on the EBITDA outlook for this year. When you talk about a V-shaped recovery, which involves recovery starting around Q2, could you provide some more color on the strength of recovery that you're referring to? For example, are you saying that volumes simply improve from the Q4 run rate, which I guess you've kind of confirmed already? Or are you saying that volumes return for the 2021 level?

So any color in that respect would be helpful.

And then the second question on M&A. There was an article in Manager Magazine in December, which claimed Deutsche Post has become "very interested in acquiring DB Schenker." Could you maybe comment on both that article specifically given it did move the share price quite significantly on the day? And also more generally, what you're thinking regarding M&A in general?

And then the final question is just a higher-level question concerning the name of the group, i.e. we all know that some investors avoid investing in postal companies for obvious reasons. Therefore, the name Deutsche Post can sometimes discourage investors from looking at the stock. Now given that P&P Germany accounts for just 15% of group EBIT and Post specifically, I would imagine, is now a mid- to upper single-digit share of group EBIT. So it's very different over the time of the IPO when Post was pretty much all the business, could it be a good idea to change the name of the group, is that something that you've considered before, Frank?

And Tobias is that maybe something that could be a possibility going forward?

Frank Appel

May I start Robert, with the last one and then Tobias can comment, and maybe I give you some flavor as well on the Manager Magazine article, but for Tobias is more important that it looks beyond May 4. So the reason why we have never changed the name and of course, we discussed that is we still have 160,000 people in that operation. And I always find investors are smart enough to understand. We are not talking about retail investors. We are talking about institutional investors who understand and read through that this company is more than just a German post.

I think it would -- it had been bad for the employees in Germany, bad sign, and they're not important any longer, and it had declined only very recently because the other performance of the other division was so much stronger.

That's the reason why I've said we should not change the company name and that will definitely continue until May 4, but Tobias can say something about that. Manager Magazine is writing stories without any facts and figures. And nevertheless, on Schenker, I said that before, I said that publicly such an asset comes to the market and the process is delayed and delayed, as you know, we have to look into that. We have a very clear strategy. We need to answer the question, does that company make us better.

Is it easy to integrate. And is it accretive? That means if we pay a decent price for that. If these three questions are answered, yes, then we probably would put a bid. If one of these questions is answered, no, we will not put a bid in.

But it's, I think, better for Tobias to answer that question. And the other -- the first 1 on the outlook as well, I think so. So you can talk about the name again, but it will not change until May 4, Robert, because I'm deeply convinced that this is a right decision and not a wrong decision. But what happens in the future, I have no influence on.

Tobias Meyer

So on the naming, I would echo I also share the view that investors are intelligent. We are not a chocolate bar yet. It's a fair point that you still make that, obviously, the name is not reflecting what's in the box fully. So we'll probably always once in a while have that discussion. But so far, we decided that we believe people will figure out what's really in the box.

I think on M&A, there's nothing to be added really. The strategy is not going to change. The criteria are the criteria that I mentioned. And according to those, we'll look at it. Integration one, whether that's easy or not is definitely something that is very important in any case, in any scenario that we look at.

We need to be certain that can be done. Elsewise, the strategy as it relates to M&A is not going to change, and Frank already described it.

To your first question on EBIT 2023 in the V-shape scenario, our volumes are generally seasonal and the pattern is a bit different in the different freight markets. So that makes it difficult to judge from a Q4 run rate on to Q2 or Q3, which are traditionally lower. So we would more see the recovery starting with a return to growth in terms of the year-to-year comparable. Again, we haven't seen that yet in most markets, at least not for a longer period. There are first signs of it bottoming out, but return to growth in terms of year-to-year is what we typically see as that sign of recovery.

Martin Ziegenbalg

Thanks, Rob. We have 5 more calls in the queue. We got to be a bit mindful of time. So short and to the point questions will yield the same type of answers.

Operator

Next question comes from Sam Bland from JPMorgan.

Sam Bland

I have 2 please. The first one is on German letter pricing. I think it's due to go up as it stands in 2025. If we get into a more difficult, whether it's macro or labor situation in that division, is there scope to bring the price increase forwards?

And the second question is, Melanie, I think you mentioned Express capacity has been reduced 15% in recent weeks or months, has that happened sort of earlier this year? And does that roughly point to 15% lower volume expectations?

Frank Appel

So I'll maybe take the first one on the German letter pricing. So the anchor price for the private letter goes through a quite lengthy proceeding, and we currently do not expect that to be opened. However, for the rest of the portfolio, which is covered by that process but it's not -- [indiscernible] as we call it, so it's not a prescribed price. There is some flexibility if other parameters change. And obviously, we would look at that.

But we currently do not expect that the anchor price for the private letter would change.

Melanie Kreis

Yes. And then to your second question, I mean, you saw that in Q4, TDI shipment per day was down 7%. Rate was down 9%. So we already started with the capacity adjustments at the end of last year. And then as Tobias mentioned before, I mean, January was a slow month also because of the phasing of Chinese New Year.

So we had decided that we would really kind of like take a strong move on capacity and I think now we really have to see and react in an agile way. March looks a bit more encouraging than Jan and Feb but it is very volatile. I think for me, the most important message is that the Express colleagues have shown that this flexibility we have always talked about is not only a theoretical concept, but that we can really implement and adjust in a flexible way.

Operator

Next question comes from Sumit Mehrotra from Societe Generale.

Sumit Mehrotra

Sumit Mehrotra from Societe Generale. [indiscernible] questions have been asked. The EBIT trajectory into 2025. I just want to understand how much of this headline step back to above €8 billion 2025 guidance is reflective of you having this L-shaped scenario still in your guidance mix? And should there be a quicker recovery as you point out in your 2023 guidance this can automatically be higher, the 2025 EBIT guidance?

That's the first one.

Second one, Melanie, working capital release, €650 million already, the quantum we can expect in 2023, please, from the DGFF activity, that is second. Third, okay, the midterm free cash flow guidance is really wide, €9 billion to €11 billion, €3 billion you expect in '23, why do you still have the lower end as low as €9 billion in this guidance range?

Tobias Meyer

I'll start with the first one. So EBIT 2025, we guided above €8 billion. So obviously, supportive macro would help us to surpass that but we would expect to also in a prolonged slowdown into 2024 to then be able to reach that number in 2025. So that's the way we would read it.

Melanie Kreis

And then to the second question on the working capital development. Yes, indeed, we have seen a good development in the fourth quarter of '22. I mean in the fourth quarter of '21, we had a very strong buildup of working capital, particularly in Global Forwarding. We have seen the beginning of the reversal, and we do expect to see a continuation into the first quarter. And then it really depends on what scenario we are going to be in.

Tobias alluded to that in the effect of our €3 billion free cash flow guidance for '23. So if it is more dynamic, and we see volume and revenue growth picking up, we will then, in the second half of the year, also see some working capital build up as you would expect from a growing business.

Of course, if it's more sluggish, we would see more of a release situation also for the full year. I think what is very important for us when you look at kind of like DSO, DPO, underlying KPIs, we have really reached a very mature position and we are focusing on resolving the underlying quality of our working capital management and then the volume dynamic will be what the volume dynamic is.

In terms of the medium-term free cash flow guidance, I think for me, the important first message is when you look at the lower end, the €9 billion, I mean, then there was a time when we were struggling really hard, and the time was not so long ago to get to above €2 billion. And I think what we are very clearly saying for the current year, but also beyond that €3 billion is in all scenarios, kind of like the new must-have floor. If we then see a dynamic uptick in the period, yes, we will then see working capital growth. We will also start investing again more on the CapEx side, so in line with the upper end of our CapEx guidance. And that is why we came up with this range of [indiscernible] .

Operator

The next question comes from Nikolas Mauder from Kepler .

Nikolas Mauder

Nikolas Mauder with Kepler Cheuvreux. Three questions, if I may. I appreciate it must be hard to give a guidance for P&P Germany on top of wage inflation and likely freight cost. There is a reform of German postal law in summer coming up. On the latter thing, do you have any thoughts on the impact of -- on the business, it might have?

That's the first question.

Secondly, what kind of gross profit yield normalization have you baked into your freight forwarding guidance? And then finally, keep it as short as you want, can you provide any color on how the Chinese reopening has affected the business so far?

Tobias Meyer

Maybe I'll start with the P&P and the reform of the postal law. As we have publicly said, our industry reform is overdue. The law is 25 years old, several elements also in terms of how to serve the customer that are just out of sync in terms of digitalization aspects, but also how the universal service obligation is funded going forward, what is needed as footprint and so forth. The process that other countries have also gone through. So we expect that to be concluded within the year.

And obviously, that is relevant that we have changes there for P&P and we expect those changes to have.

Melanie Kreis

With regard to the GP, normalization in Global Forwarding. I mean, first of all, you will have seen in our Q4 numbers that we are still at a very good level in terms of GP per tonne and [indiscernible]. And what you're currently seeing is a bit of the normal -- normalization development where you always have a lag in the adjustments. So we actually expect that Q1 also will be at a reasonable level.

I think the interesting thing is what will be the outcome of the currently ongoing tender season. Everybody is in the market. So I think we will get a bit better clarity on how things are playing out with the second quarter.

In terms of Chinese reopening, we do see encouraging volume signs, particularly on the Express side. There mid-February, we do see a positive shipment growth and that is encouraging. In line with picture, which Tobias showed earlier, how does the typical downturn cycle play out, we would expect Express also to be the first ones to show a bit signs of life. So there's more life there than on the Air and Ocean Freight side yet.

Operator

The next question comes from Patrick Creuset from Goldman Sachs.

Patrick Creuset

Just to clarify your yield or revenue per shipment outlook in Express for 2023. You've basically said weight is expected to be stable now on current levels while the GRI is sticking. So does that imply you're baking in a year-on-year increase in yields in -- across your guidance range? Second question is, should volumes actually stay weak and yields continue to normalize in freight forwarding, how much are you prepared to take costs out in this business this year?

Melanie Kreis

Yes. I think on the first question, to be very precise here, yes. So I mean, what we see in terms of rate per shipment, we had this 2% decline in Q4, and we don't expect any land side shift there. In terms of the B2B volume development is weak given that the B2B shipments are heavier, we will still see a rate decline. And that's one of the reasons why we are making those adjustments on the aviation capacity side.

That's the weight element.

When we look at the core GPI, the 7.9%. There, we do expect what we always call our base revenue per kilo development to be favorable in line with that. What you then see on top, when you look at revenue per shipment in our stat book are things like currency which had a very important impact when you also look at the quarterly phasing in '22 and things like fuel surcharge. So I think it is very difficult to give a precise number for how revenue per shipment is developing. I think the one thing I'm very confident about knowing the Express cost base revenue per kilo will go up in line with the yield measures that we are taking.

On the second question, cost measures in Global Forwarding. Let me start with a general comment. We are not a company which makes big announcements about all we are taking people out here, and we are doing drastic actions there because I think if you are in such a situation, something has really gone wrong. For us, it's important that we make cost adjustments in a balanced and appropriate way in those parts of the business where it is required. And if we have a business where we now see significantly reduced volume levels for a prolonged period, we will and we are making the necessary cost adjustment, but we are doing that in a more quiet and, yes, balanced way.

Martin Ziegenbalg

Great. Thank you, Patrick. And 2 callers, but I understand you only have 1 short question each.

Operator

Will be from Johannes Braun from Stifel Europe.

Johannes Braun

Yes, I can only ask one. I would come back to the potential change in the German Postal law because as far as I understand, it especially related to the current obligation to deliver 95% of all letters within 2 days. And my understanding is that the intention here is to relax that rule. So could you give as a rough feeling what that would mean for you, especially, I guess, in terms of cost release, mainly labor costs, I guess.

Tobias Meyer

So generally, we have to say that what has been publicly discussed is probably not the most important topics. The lead time that you mentioned, yes, it has a positive impact on cost. But we have to see how that then balances out in terms of the net effect. It is needed that those changes are made to ensure that the universal service obligation remains affordable for also consumers that prices are not rising as quick. That is also a joint objective that we have with the regulator because fast rising prices drive substitution.

So a balanced approach on that is needed, and it's a good sign that the regulator looks at these things and there is, I think, building support that such lead time demands that we currently have in the postal law that, that is thought over.

And also looking ahead the next 20 years, where we do expect mail volumes to further decline that we have something that provides the flexibility that we can adjust. Whether that has a significant net impact on our earnings is to be seen, but there are definitely a positive development in that regard that will help us to stabilize the P&P business, continue to transition a more parcel-based business and thereby continue to be able to deliver in that structurally changing market.

Martin Ziegenbalg

Okay. I think we have Andy Chu concluding Q&A round with 1 question, please.

Operator

Yes. The last one is from Andy Chu from Deutsche Bank.

Andy Chu

My question is for Tobias. I wonder if you could just maybe talk about your sort of leadership style and linked to that, what may change going forward, particularly from a strategic standpoint?

Tobias Meyer

Well, Andy, thanks for that question. Look, it's rather difficult to talk about oneself's leadership style. I think it's good -- if you maybe have a chat with my Board colleagues around it. I think what we -- what I can assure you, we have a very good team that works together in a very cohesive fashion. I think it's the strongest team that we ever had with heads of the divisions that truly know what they're doing.

So I'm very comfortable with that.

We will talk about the necessary strategic development in due course. There will be no short-term changes. I think the platform is extremely solid. We have a strategic framework that has guided us very, very well and I have no intention to do damage by just changing things for the sake of changing it. We have obvious developments in the global economy, in the specific markets that we need to react to, and we talked about some of those aspects today that is currently the key priority and should be the key priority for the management.

And then in due course, we'll discuss in which area we can do more, how we can accelerate growth further. But overall, the strategic framework that also provides guidance for our 600,000 employees was extremely successful, is extremely solid, and we'll do careful changes to that only, not to confuse our workforce, our customers and also you.

Martin Ziegenbalg

That concludes the Q&A round. Thanks for your interest and participation. And I'm going to hand over now for Frank for his remarks when closing this call.

Frank Appel

Yes. Thank you all. It's indeed, as Alexia pointed out, is my last appearance in this call. 61 quarters are now behind me as the CEO of this company. I will not come on the call on May 3rd, that's the day before our AGM because I think it's right that Melanie and Tobias to report on that already because it's my second last day working for this company.

Let me summarize a little bit how I see the base somehow going forward. The company is in excellent shape. We are an employer of choice. We are great provider of choice for many customers, and we have the best profitability, the best cash flow and the best challenge -- the strongest balance sheet ever before. And as Tobias has already outlined, I believe that this is the best team we ever had in this company.

But in particular, I want to highlight 2 things on my colleagues. One is the operators, as Tobias said, are amazing. You will keep the best CFO you can ask for. Melanie is an outstanding individual and a fantastic CFO and she will stay on. I always said CEO who should succeed you should be either different or better, I think you get with Tobias both.

He will be not only different for myself but also better. And the great thing is I could observe it already that Melanie and Tobias are working extremely well together.

The nice thing as well is I will not come back in any form to the company. I will not -- have no intent to become a member of the Supervisory Board of the Chairman that gives the management team under Tobias leadership or the opportunity to change whatever is needed to be changed. I think that's a good governance approach. And that's the reason why I'm handing over with pride a company with this in good shape. And I have no doubt that we will get to newer highs with a new team under Tobias' leadership.

So thank you very much for all your interest, your support and your challenges. And I hope that I see you in other settings. As you know, I'm already Chairman of Deutsche Telekom and on the Supervisory Board of Fresenius, maybe see each other in different settings again, even in a different role. So thank you very much for all your trust and support, and see you in different situations. Thank you very much and goodbye for today. Thank you.

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Deutsche Post AG (DPSTF) Q4 2022 Earnings Call Transcript