Deutsche Post AG (DHL) Earnings Call Transcript

Ladies and gentlemen, thank you for standing by. I'm Vicki, the Chorus Call operator. Welcome, and thank you for joining the DHL Group conference call. Please note that the call will be recorded. You can find the privacy notice on dpdhl.com. [Operator Instructions] I would like now to turn the conference over to Martin Ziegenbalg, Head of IR. Please go ahead, sir.

Thank you, and a warm welcome and good morning to everyone out there. Thanks for joining on our Q1 call. Well, it's less than 9 weeks ago that we sat here talking to you through Q4. So here we are this time around with Melanie Kreis, our Group CFO, who will take you through the presentation. And after that, we're looking forward to your questions. Melanie?

Yes. Thank you very much, Martin, and hello, and good morning to all of you also from my side. Thank you for joining our Q1 call today. Yes, as Martin said, it was only 9 weeks ago that we gave the guidance for the full year and talked about what to expect. So when we look at our Q1 results today, the quick summary is that the Q1 developments have actually been very much in line with our expectations as we discussed in March. So I think the first key message is no surprises. Looking at the bigger picture and kind of like where do we stand in the whole macro development. There are some encouraging signals, but we have, so far, not seen any strong and dynamic acceleration in end demand. And that, again, is totally in line with our guidance assumptions. And on that basis, we fully confirm our guidance today. Against the current macro background, CapEx and cost control remain our main focus for now but, as we always have done, in a balanced way, meaning that we also continue to invest into attractive future growth opportunities and that we implement cost actions with the aim of structurally improving productivity so that it's not so much just a short-term focus but also positioning well for the medium- and long-term perspective. And this balanced approached is also made possible by our financially healthy position. Yes, earnings and cash flow numbers are down from pandemic peak levels and year-over-year, but we are posting very good earnings compared to 2019, especially with regard to free cash flow. And I think that is a very encouraging sign also in light of the prolonged cycle low in the industry. Yes, talking about the industry and the cyclical movements. Turning to Page 3, we are showing the B2B volume development in our most cyclical businesses, air, ocean freight and the B2B volumes in Express. And on the next pages, we will talk about how have we reacted to these movements. So now we have seen a nice rebound in air and ocean freight volumes with plus 5% growth and plus 7% growth, respectively. And that shows that our Global Forwarding division is participating well in the volume rebound. However, for the market itself, the growth is mostly reflecting the double-digit declines seen in Q1 of last year, and inventory destocking was still in its most pronounced phase. On a sequential basis, and that is something you can also see in our DGF chart on Page 14 in the appendix, there is no real dynamic acceleration in end demand just yet. So year-over-year growth but also impacted by the comparison level in Q1 '23. When we turn to the Express B2B volumes, they have shown, as usual, a much less pronounced swing over the cycle. So when you look at the yellow line, the whole volatility was much less than the red and dark gray line. But here, well, we see no underlying acceleration in growth yet. That does compare well to growth rates seen in TDI-equivalent products in the industry. So it is really for us the market. The fundamental Express engine is fully intact and ready to ignite again when volumes come back. Turning now to Page 4 and our short-term priorities on the cost side. So what is different about this fight cycle is the prolonged length of the downturn. For us, this means that we are executing our well-established earnings protection plan, EPP, since late '22. And that is clearly not an enjoyable experience for the organization, but the colleagues understand why we are doing it. EPP has, among other effects, brought down our FTE numbers in Express and forwarding. And that now drives a significant improvement in DGF productivity now that the volumes swing back. Driven by these measures, we can also see a bottoming out in Express productivity metrics. I'll talk about that again in a couple of minutes when we take a look at the overall Express flow through the network. Besides the classical cyclical countermeasures like adapting our air fleet to the volume development, we have also continued to drive structural improvement in our indirect costs across the group. That's what I already mentioned on the first page that we are really looking for opportunities also through digitalization to fundamentally improve how we do things, which will also benefit us going forward in the [indiscernible]. Now turning to Page 5 and CapEx. You will have seen in our free cash flow development that we flex down our CapEx spending. And like with the cost measures, we are here as well acting out of a position of strength, meaning that we have cut CapEx on those projects that would have secured more short-term volume growth. However, we have not implemented cuts that would harm our long-term positioning. So we have pursued investments in structural future growth along the examples shown on this page. I think nothing new. You've seen that before, but it is worth pointing out that as well. All these measures, turning to Page 6, have supported our Q1 performance, which developed overall in line with our expectations and guidance assumptions. I've already mentioned that a couple of times, but that is really one of the key themes, obviously, for Q2 -- for Q1. So now when you look at the different divisions on Page 6, starting with the DHL division, which had again nice year-over-year EBIT growth. Supply Chain, this division continued its steady earnings growth path. In the current macro context, that is mostly driven by its strong pipeline of new contract start-ups. The other division, which posted year-over-year EBIT growth, P&P, that is, of course, quite pleasing to see. We have seen a rebound from the strike-impacted previous year's numbers. So a good start into the year. And with the Q1 results, P&P is now well on track towards the full-year guidance. But I think that also has been mentioned not yet on a sustainable earnings level. We will need the new postal law to provide us more flexibility on mail pricing and costs to get to a sustainable earnings level for P&P. That is in the making. So a good start into the year under the conditions of the old postal law for P&P, well on track also for the guidance, '24, but the big future factor is the new postal law. Yes. Forwarding EBIT is, as expected, down versus the still-elevated postpandemic levels of last year, but the quarterly run rate is stabilizing, supported by the return of volume growth. And e-commerce is seeing continued top line growth from the structural shift to online shopping. So the business model is intact. When you look at the year-over-year decline, I think what you have to bear in mind is that we keep investing into the growth of this division. So the biggest element in this decline in EBIT is actually the increase in depreciation, and that is, of course, this conscious decision to invest into future goals. Yes, that takes me to Express, which, I know, is in the center of your attention. I think here, the clear message is that Express division delivered on expectations for Q1. We have repeatedly received the question why the prolonged downturn seems to have an incrementally worsening effect on Express. And that is why we have now included 2 extra slides where we currently -- to explain where we currently stand in Express and what drivers will be supporting our growth path towards '26. So look, Page 7, we call it Express: Deep-Dive. What we have tried to show in this slide is the typical path of a TDI Express shipment through the network. And I think what this graph illustrates is that the countermeasures can mitigate but not fully offset the negative operating leverage across the network. Of course, we have significantly reduced our air capacity, but we also want to maintain a premium quality transit time in our network. And that is why we don't flex down even more on the aviation side. We could, but that will then have a detrimental effect on service quality. So I think we are currently taking the conscious decision to run at these low weight load factors in both the intercontinental and the regional air networks. On the positive side, when you look at kind of like local operations, we are beginning to now see a turn into the positive direction. So for example, daily pieces per FTE in our hubs, stops per on-road hour and pickup and delivery were again slightly up year-over-year in Q1. That is where we see the impact of our cost countermeasures taking effect but also a slowdown in the volume decline. So when you look at it overall, the whole network is currently still less utilized than it should. But key KPIs are now bottoming out. And I think the most important news is that operating leverage will return and will work in our favor once volumes come back and volume growth reaccelerates. That takes me to the midterm perspective. As we show on Page 8, our current measures and the improvements implemented over the last years allow us to post a higher EBIT level today than prepandemic. That's what you see with the yellow bar. And that's despite the comparably much lower weight load factor. That's the red line. We also do support the expected cyclical turnaround by further dedicated actions to leverage additional growth opportunities on the one side and to foster incremental sustainable productivity gains, notably supported by digitalization on the other side, not very much different from what we are also doing in the other divisions and across the board. So the current feature both with regard to the short-term countermeasures as well as with regard to our midterm EBIT growth expectations is the established yield management toolbox. That's an element which is important both short and in the long run. And here, our general price increase is, of course, extremely relevant. And we see here, again, a very good stickiness in the first quarter of '24. This brings me to our guidance discussion and Slide 9 and 10. And these pages are actually totally unchanged compared to what we showed you in March. But the current market development confirms our expectation that the first half of '24 will not yet benefit from any dynamic market acceleration. At the same time, the return of volume growth in forwarding as well as the uptick in economic indicators and growth expectations can be taken as encouraging signals that should point to an improvement in the second half of the year, again, as we have assumed in our guidance. So what does that mean for the current quarter? It's obviously still early in the quarter, and there are mixed signals, but for now, I would not expect significant quarter-over-quarter EBIT improvement yet, i.e., I would expect Q2 to be more in line with Q1, but that as well is in line with our full year guidance assumptions. Yes. So Page 10. Assumptions look right so far. Guidance on Page 10 is fully confirmed across all metrics. And that already brings me to the wrap-up on Page 11. And there are probably 3 key messages I hope you will take away from today's call. So the first one is, as industry metrics have not yet accelerated dynamically, we remain fully focused on cost and CapEx control, but we do that in a balanced manner. And that means that we always take the structural perspective and do what will really make us more efficient in a sustainable manner so that we exit this downturn in a structurally better cost position. And the third message is a message which we also strongly push internally. We just had a town hall. We have another one this afternoon. And I think here, one clear message to the colleagues is, yes, the current market is not entirely easy, but there are opportunities out there, opportunities which will allow us to drive growth, for example, in areas around e-commerce, sustainability, in attractive regions and verticals. So in that sense, and that's the third headline here on Page 11, '24 is also a year of opportunities. Overall, we are fully confident that we are finding the right balance to manage the short term while we will clearly benefit once markets we reaccelerate. And with that, I look forward to your questions. And Martin, over to you.

Thanks, Melanie. Nice and quick. And with that, operator, please initiate the round. We will have the sequence like we received your registration. In order to make sure that all got the opportunity to ask their questions, I would encourage you to limit your number of questions in the first round to 3. And let's go now, operator, with the Q&A.

[Operator Instructions] The first question is from Muneeba Kayani, Bank of America.

My first question, I just wanted to follow up on your comment on 2Q and don't expect a significant quarter-on-quarter improvement. Can you just give us some more color on what you're seeing right now in terms of the B2B and e-commerce demand across the segment? That's the first one. And then secondly, on the forwarding segment, so we've heard from your competitors looking to increase market share with a focus on large customers. How do you -- generally like putting aside the macro developments, how are you viewing the competitive environment in forwarding? And kind of what is the DHL's strategy here and especially to kind of improve from the current conversion ratio?

Yes, thank you, Muneeba. So starting with the current trading and what do we see now as we're just closing books for April. I think it's not very much different to what we saw in terms of dynamic in Q1. So on that basis, and again, it's early in the quarter, we feel that probably the prudent assumption is that Q2 will continue still in a similar way to what we now saw in Q1. Mixed picture, some indicators turning back into growth. Also e-com in terms of volume growth, a fundamentally very healthy story but no fundamentally change in dynamic growth of the global macro environment. With regard to the forwarding competitive environment, yes, that's an interesting question. There's obviously quite a lot happening. I mean, first of all, we obviously still have the Schenker sale ongoing. That company has now been in the market for quite a long time, and that is never an easy situation, and that is also something which we see. On the Kuehne side, obviously, their internal decisions to make organizational changes have shaken the organization quite a bit, which is something we also see and hear quite loudly in the market. We focus on our approach and our strategy. So I think in terms of sector focus, we have some very clear sectors, which we pursue in Global Forwarding as attractive growth sectors. So for example, there are nice chunks of e-comm growth business out of Asia, which are attractive for the forwarding colleagues. We are focusing and have done that for a long time on the B2C. The business customer segment, we are also now on the back of our better digital visibility and the easier onboarding procedures. We can now target those smaller customers in a much more effective and efficient manner than before. So we have a very clear path for us, and we're convinced that this will now give us good growth opportunity going forward, which takes me to your question on the conversion. I mean we are at 28% conversion, which, I think, is a good number at this point of the cycle. Aspiration is obviously to get back to above 30%. We are always a bit reluctant to compare 1 to 1 with what competitors are posting for the same KPIs because there are different definitions and what is really included, so for us, the benchmark is with ourselves to really make sure that we get back well into the 30% area. Hope that answers your question. Thank you.

Next question from Sathish Sivakumar, Citigroup.

I've got 3 questions here. Firstly, on the Express segment. Can you like comment on the Asian e-commerce impact that you had an impact on the network cost back in Q4? What does it mean into quarter 1? Have you seen similar impact or this kind of now kind of sorted out in terms of network imbalance? And again, on Express, across your portfolio, like what is the impact of airport tariff charges? Does it have the same impact, say, what the passenger, [ the other lanes ] face in terms of airport tariff going up? And what does it stand for DHL Express network [indiscernible]? And the third one is around -- again, just in Express again. In terms of weight impact, you did flag that B2B volumes are actually having an impact on the weight mix. And is there any regions or the market that actually stands out in terms of this weight mix impact playing out? So do you -- like just keen on, like, is it mainly European-driven or North American-driven in your portfolio? Yes.

Yes. Thank you, Sathish. So on the first question, the Asian e-commerce impact Q1 compared to Q4. So the Q4 impact was more pronounced because that was also happening in the peak season when there was really this surge of volume out of China, and that led to capacity constraints on the aviation side. So obviously, off peak in Q1, the tightness of the situation is eased, and that is also something which we saw in less imbalance now in Q1. The second important thing is that it's also something we talked about in March. So we are, of course, also constantly reviewing pricing and conditions for those more volatile customers, and we have implemented some price measures here, which will come into effect in the second quarter. So that is something which we haven't seen in Q1 yet, but -- which is taking effect in Q2. On the second question, if I understood it correctly, airport surcharges that have a similar effect for Express compared to passenger aircraft, the answer from my perspective is no because, of course, we have different arrangements with the airports, especially for our larger hubs. Those are very long-term arrangements. And on the B2B weight mix and kind of like the regional question, is there a region where we see things in a more pronounced way? Probably the one region I would point out overall, because here B2B is weaker than in other parts of the world, is Europe. And of course, given that B2B shipments are heavier than B2C shipments that then also has a weight impact. That is also one of the reasons for our H1-H2 phasing because H1 '23 was still not so bad for Europe in Express. It then got more challenging in the second half of the year. So for Express Europe, particularly, the comps in the second half of the year will be much easier.

Okay. Got it. Just a follow up on that price increases for Asian e-commerce. That's -- I assume that's just very specific to the Asian e-commerce names, right? Or is it [indiscernible]?

No, that's very specific there. And that's probably also one thing I can already flag because that is something I now expect for the rest of the year. So those shippers in certain lanes gave us quite a lot of volume with relatively little weight. So if we are now taking pricing action and reduce the number of shipments in the network, that will be a bit of a headwind on the TDI shipment per day volume growth but not necessarily at the detriment of the profitability development.

And it's not like a surcharge. It's just a flat price increase, yes?

Yes. Yes. It's really kind of like the core pricing where -- and we know that from other e-com customers, and something we have also talked about for a number of years now, you just have to be very agile on pricing for these customers that's very different to a steadily growing, more predictable B2B customer.

Next question from Johannes Braun, Stifel Group Europe.

So 2 questions from my side. The first one, there was some renewed talk recently, and I think it's mainly in German press, about the structure of the group that, that would make sense to separate the German Mail and Parcel business from the rest of the group or whether DHL Express was better off alone. Obviously, all not really new, but I guess it reflects, to some extent, the frustration of investors about the ongoing low valuation of the group. So I was just wondering, any updated thoughts on those topics, new ideas on how to improve the valuation of the company and crystallize value? And then secondly, just a quick one on Express. What was the impact from currency and fuel in the quarter? And where do we stand in terms of emergency surcharge and the fuel surcharge at this stage?

Yes. Thank you, Johannes. So on the group structure, yes, indeed, we had questions about particularly P&P at the AGM on Friday. There, Tobias, a clear answer was that we think that we are the best-suited company to provide the universal service obligation here in Germany. But what we need in order to do that in a financially reasonable way is the new postal law. So I think as we already said, unfortunately, in '23, but it also holds true for the year '24, we are in this in-between state where we make a reasonable profit in P&P last year, EUR 817 million. Now we have a guidance for more than EUR 800 million. That is not enough in the medium term if we want to keep investing into profitability for the future, transformation from letters to parcels and into sustainability. We need to come back to more than EUR 1 billion for P&P. And for that, we need the new postal law. If we get the new postal law, then we are confident that we can achieve that. And then it's very clear that with this, over time, becoming the dominant parcel player in the largest European economy, there is a place for P&P in the family. So long answer, but because I also wanted to explain a little bit the overall thinking around P&P. In terms of the valuation, yes, of course, that is something we are observing as well. I think at the moment, we have to get the new postal law. There is also the lagging effect of the sell-down of KfW. So I think we keep calm and carry on and focus on delivering solid numbers. That takes me to the currency and fuel question. So we didn't quantify it because it was not such a dominant effect like in Q1 of last year. It's a headwind in Q1, but we don't want to make it a habit to kind of like always explain what is happening here. So it is a headwind but, for me, more part of the ordinary course of business.

Thank you. And Alex Irving, I think, is next.

Next question, Alex Irving, Bernstein.

Two from me, please. First of all, you're talking about encouraging signals for H2 demand. Could you please expand on that? If I look at it maybe slightly naively, European manufacturing PMI is contraction area, has been getting worse for the last few months. What are you seeing that makes you more optimistic for H2? Second question, really helpful color today on the impact of cyclical weakness in Express volumes and how that impacts the network. But what do you expect shipments or even EBIT to look like once we get through the soft patch? Should we just taking, say, GDP growth versus 2019 and adding an estimate for the increase in e-commerce penetration? Or is there more nuance we should be taking into account here?

Yes. Thanks, Alex. So 2 interesting questions. So first of all, on the H2 optimism, I mean, we don't have a crystal ball either. I think at this point in time, when you look at the different macroeconomic indicators, if you want to be positive, you find positive signs of encouragement. So for example, spot rates, ocean, currently up. Asia to Europe, which could be interpreted that there is a little bit of a revival in the European economy. At the same time, you find statistics, which show that people are not totally optimistic. So it is a totally mixed bag. I think for me, the biggest support for the expectation that things will get more dynamic in the course of the year is that this is really an extraordinarily long, a period of macro sluggishness. So our inventory levels completely depleted. That really depends on the region and the sector. But given how long we have now gone through restocking, it is quite obvious that once demand picks up again, there will also be the need to move stuff around, and that is what we will see eventually. I'm quite convinced of that. In terms of Express cyclicality, what to expect, where to go to. Yes. So I mean, we saw under the pandemic in the years '21, '22 what Express is capable of in terms of absolute EBIT but also in terms of EBIT margin. So in a situation when we get a good operating leverage and good volume into the network, we are quite confident that over time, we should move back into that direction. That is obviously also a very important pillar for our '26 overall group guidance. I think the other ingredients, being extremely smart and experienced on the pricing side, tapping growth opportunities early on, developing customers, the new customer portfolio, I think the Express colleagues are really the most experienced team out there. And that gives me confidence if you get a bit of volume tailwind, the other pieces will fall into place.

Alex, thank you very much. Good. Making good progress. Next caller, Parash.

Next question from Parash Jain, HSBC.

If I may have 2, first, on the extra side. Given the last 2 quarters where we have seen some sort of dis-synergy or -- with respect to the route mix. How should we think the trajectory in a, let's say, not a sharp recovery on a B2B volume? Do we have a structural cost that we take out? And is it fair to assume, therefore, that we have seen the trough EBIT margin for the Express business? And secondly, for your freight forwarding business, with the Red Sea situation, it stands for the remainder of the year, how should we see the normalization [ upscale ] for your freight forwarding business? Are we almost there? Or because of the Red Sea means that one situation normalizes, probably there is some more way to go for freight forwarding before it finds its feet?

Yes. Thank you. On the Express question -- in terms of Express structural trade lane balance. So I think what we talked about in Q4 that was a bit linked to what Sathish already asked about the kind of like Asian e-commerce peculiarity, where we really had this very strong demand search in Q4 out of China. I think overall, our Express network is fairly balanced. So we also have a very good experience in adjusting the network to different growth patterns. For many, many years, we had the statistics showing which region was growing fastest in each of the quarters. It's still in the stat book. So I think we are in a very good position to adjust the network and the cost base to where growth will pop up first. In terms of Global Forwarding and the rate normalization question, yes, I mean, that's quite interesting. When you look at the forwarding page in the backup of our presentation, you can actually see that GP per ton and per TEU was up in Q1 compared to Q4, but I would not overinterpret that, right? So I think that is also a little bit linked to Q4 where we also saw a little bit of the China outbound impact in forwarding. When you look at where do we stand in the normalization, I would say that on air freight, we have come a long way. On ocean freight, comparing that to historical levels and also taking into consideration how much capacity will be coming into the market in the next quarters, I think that directionally, we have more way to go in terms of normalization. As usual, you can then have the short-term bubbles. Is it Red Sea, is it a short-term spot rates peak from Asia to Europe, but that's for me, more part of the normal forwarding business. So I think directionally probably more normalization to come on the ocean freight side.

Thank you, Parash. And next would be Andy Chu.

Next question, Andy Chu, Deutsche Bank.

A couple of questions, please. On Express in terms of the emergency surcharge, what was the impact, please, in Q1? And in terms of Express for Q2, have we seen the bottom in absolute EBIT, do you think, in Q1? And then my second question is around what your customers are telling you. Clearly, you're at the forefront of supply chains. Are your customers overall being a little bit more confident on the outlook to support sort of a second half recovery?

Yes. So on Express, the impact of the emergency service surcharge, I mean, that has now been going down for many, many quarters. And we had, in Q1, again, a negative effect year-over-year from the ESS, but it's not so material that we made a big noise out of it, and I wouldn't even call it kind of like a onetime effect. That's part of the normal business. So yes, a bit of headwind from ESS in Q1 but not overly dramatic. In terms of Q2 EBIT for Express, I mean, it's still early in the quarter, so I'm not going to give you a specific indication for the Express Q2 EBIT. I think what I said generally about Q2 that we expect that to be more in line with Q1 before we then anticipate acceleration in the second half of the year, and that would also hold true for Express. And then on the customer question, are they more confident or not? Here, again, it's a very mixed bag. And you have very positive customers. You have people who are still more skeptical. I think maybe one interesting trend I could highlight here is, a big debate is at the moment the impact of the Chinese e-comm players, what they are doing to the airfreight capacity market out of China overall because that has been really a little bit of a seismic shift in the fourth quarter. And all of a sudden, some players popped up, which hadn't taken up a lot of air capacity before and are now really impacting the overall dynamic. And that is one of the structural questions, which is very high on customers' minds.