Deutsche Post Ag S/Adr

Thank you and a warm welcome from my side to all dialed in for our Q2 conference call. I've got with me Group CEO Frank Apple and Group CFO Melanie Price. Before we start into the Q2 content, just let me remind you with a little advertisement. We are planning for September 8th a management update and site tour for our express division. We will send out a reminder later this week and encourage you to participate. Okay. Now, with that, Frank, please start us off.

Good morning as well from my side. I will hand over in a second to Melanie who will lead you through the presentation. Just a couple of words at the beginning. Yes, we live in a very volatile, uncertain time at the moment. We are taking the war in the Ukraine as a first and then all the consequences which we have from that and COVID is still around. we definitely have no better insight than many of us, but what we have seen in the second quarter, and we are very proud of that, that we have managed that storm quite well. Sometimes one division is better than another division is better. Some trends are stronger here than other strongs are there, but I think the portfolio overall has demonstrated the tremendous resilience we have. We had a very good result. It was a the best quarter ever, even stronger than the last year, fourth quarter. So that shows the resilience of the portfolio. And we believe that there are some positive signs coming. You know, commodity prices are now starting to come down. Also, rates in our industries are coming down slowly. And we see also a transfer from air freight back to ocean freight. All these things are signs of stabilization of the situation, which is good. You know, still very high employment is also good. Of course, it increases some cost pressure as much as, of course, it needs when our activities that we get the right people as we could find the right people so far. So overall, complex situation, but I think we have demonstrated that we can keep the existing level we reached last year and And that's the reason why we also confirmed today the guidance for this year and for 2024. With that, I hand over to Melanie now, who will lead you through the presentation. Thank you.

Yeah, thank you very much, Frank. And good morning also from my side to all of you. And thank you very much for your interest in our Q2 numbers. When preparing the presentation, we somehow had the feeling that you would be even more interested in talking about the outlook than about the Q2 numbers. So you will have seen in the presentation that we kept the Q2 summary very, very brief. Of course, you find additional information in the appendix in our I Asked That book. And if you have any more detailed questions about Q2, I'm happy to answer those as well. But in all brevity, when you kind of like look at page two, Yeah, as Frank said, the second quarter of 2022 was another very, very successful quarter for Deutsche Post DHL Group with an operating result of 2.3 billion euros. It was actually, as Frank said, our best quarter ever. And when you combine that with the first quarter, which had been the third best quarter in the company history, you will actually see that for the first half EBIT now stands at 4.5 billion euros. I'll talk a bit more about the individual contributions by the different divisions in a second. But I mean, bottom line, we have really seen the strength of the portfolio. Some of the divisions are going through the e-commerce normalization, the B2B divisions kicked in, so a very solid result from the group all together. I think the key message today is that based on this performance in Q2, in the first half of 2022, we confirm our full guidance set. and we are going to talk a bit more about the sensitivities we see for the rest of the year. Obviously, there is a lot of uncertainty out there. There are some very unpleasant potential macro scenarios out there. But we are confident that also in the case of a sharp downturn in the second half of 2022, we will be able to deliver on our guidance. In that case, we will be more towards the lower end of the guidance range. And equally, if the business dynamic continues more in line with what we have now seen in the first half, we also see potential upside to the current guidance range of 8 billion plus minus 5 percent. So much for the super high-level overview. When we now turn to page three, that's the page where we have tried to summarize on one side what is happening in the different divisions. And here you can very clearly see how the portfolio comes together between the B2B divisions and the B2C divisions. As expected, DHL Global Forwarding Freight was again the strongest performer in the portfolio. The division with the highest revenue in the quarter, more than 8 billion, and as you can see here, 746 million in EBIT. That's of course a new record, and that is due to the market situation on the one hand, But we should also not forget that we also increasingly see the benefits of our new IT systems and that is of course the part which will be sustainable also if and when a normalization in the market environment occurs. The second very much B2B driven division where we saw a very strong performance was DHL supply chain, strong double digit growth and you may have listened to Oscar in the recent management update and you will know that on that basis this is nothing that is just happening but that is really the very systematic approach to standardization, the digitalization activities, all that really nicely coming together delivering 244 million euros in EBIT for DHL supply chain. DHL Express, as you know, we have a mix of B2B and B2C volume developments, delivered a very good absolute EBIT result, 1.1 billion. Yes, it was a bit down compared to the absolute record level we had in the second quarter of last year, but I think considering that we here see the expected normalization in B2C volumes, And, of course, also the impact of the China lockdowns in the second quarter, that was a very good performance leading to 1.1 billion euros in EBIT. And then in the very much B2C e-commerce driven divisions, DHL e-commerce solutions and post and past Germany, we have indeed seen the normalization as anticipated as we already discussed in the first quarter. I think important message here is that when you compare Q2 to Q1 you already saw that the rate of normalization is normalizing and that is of course also what we then expect in the second half of the year to continue and then eventually we still anticipate a return to the structural growth patterns in the e-commerce divisions. Turning to the group P&L on page 4. Well, I think there's actually not much need for deeper explanations. You can clearly see that we were able to translate the EBIT development into growth in consolidated net profit despite the tax line going up due to higher profit before taxes and the 29% tax rate. But I would say a very pleasing and expected flow through from the top line to EBIT and then ultimately to earnings per share. That takes me to cash flow on page 5. So first of all, it is a coincidence that you see the number 254 here three times. So we had 254 million more EBIT year over year. But you can see that on the EBIT, we were down year over year. There are two main drivers for that. The first one is that, as expected, we had significantly higher tax payments. So they already explained about half of the difference. And then the second element is a working capital effect. which is not due to a significant worsening in DSO or DPO. It is really mainly driven by the very strong top line growth we have been experiencing. It's something we are watching very, very closely, so I would say it's nothing to be fundamentally concerned about, but given the significant top line growth we have now seen for several quarters and given how much we have optimized DSO and DPO over the last years, that is something we will have to live with and manage. But nevertheless, when you put it all together, you can see that we still have $2 billion in OCF. And then you kind of like look at the H1 free cash flow with $1.8 billion. We are well on track to deliver our free cash flow guidance. And I also want to use that opportunity to quickly comment on the share buyback. As you will have seen, we accelerated that, and execution is in full swing. So as we had said, we now want to kind of like get the 500 done by the end of this month. We're well on track to do that. And then we'll continue with executing the first tranche of 800 million until the fall. The last page before I come to the outlook is a topic which is, as you know, very close to our hearts and is not forgotten despite all the other super relevant topics like inflation and energy prices and so on, which we will discuss in a second. We are still convinced that global warming is the biggest challenge for mankind and so we are and we remain totally committed to pushing forward with our decarbonization agenda. One point we want to highlight here on page 6 is that Based on all the really deep green initiatives from our electric delivery fleet to sustainable aviation fuel to sustainable maritime fuel, we are now at a point where we are really able to offer green products to our customers in all divisions. And those are not offsetting green products, but they are really kind of like deep green products. It's too early to tell. how big the uptake and how the willingness to pay will be on the customer side, but we are really receiving encouraging signs because obviously particularly the large customers who have also committed to science-based targets, they are also very keen to decarbonize their supply chain and we are helping them to do that. So much for kind of like what happened so far. Let me now switch to the outlook and let me start with a slide on page 7, which we have shown in a similar format a couple of times before, but I think it is probably as relevant as ever, and that is how to think about our portfolio. So, as you know, we are very well diversified. We have a very well-balanced portfolio with the different divisions, with the mix between B2C, B2B exposure across regions, across factors. And that of course does not make us immune to what is happening in the world around us, but I think this gives us a really solid foundation to deliver throughout the economic cycle where the different elements will have a different dynamic at any given point in time. But having said that, it's not that we kind of like sit on the sideline and just watch what is happening to us. I hope we have shown to you over the past quarters that we are also really actively managing the volatile environment around us. So also in the asset heavy divisions like DHL Express, There is flexibility in the network. So, for example, based on the current volume developments, we are already folding in third-party aviation capacity into the network. So, adjustments are continuously ongoing in the asset-heavy divisions. And, of course, we also have the asset-light divisions where cost adjustments are particularly in a sharp downturn even easier. and of course overall we have a very strict and established cost management we know which levers to pull should that be necessary. I'll come back to that in a second, but maybe first on page 8 Let me address the three main themes which I know are probably relatively high on your agenda and probably I should say on your very list, inflation, energy prices and interest rates. So let me maybe start on the right with interest rates. rising interest rates are not really a significant direct topic for us. You know that we have a very strong balance sheet, we have relatively small financial interest costs, the bonds we have outstanding at fixed rates, so we have no meaningful risk on that end. And to the contrary, the rising interest rates have actually improved one position in the balance sheet quite materially, and that's our net pension provision. It's actually down by an amazing 2.4 billion year-to-date, down to now only 1.4 billion euros. Some of you may remember there were the days when we were talking about seven or eight billion in terms of a pension deficit, so that's kind of like a positive side effect of the rising interest rates. Regarding energy prices, moving to the middle column. First of all, a big topic here in Germany is obviously gas at the moment. I think on that one we can give you a very clear message that we only have a very small exposure to gas. It's not critical for our production processes compared to, for example, what you hear from some of the chemical companies. We need it prominently for heating and we are of course also working on alternative plans should there be a significant gas shortage over the winter. The bigger impact for us are fuel costs, including jet fuel, but here, as you know, we have well-established pass-through mechanisms, so we are, in some cases with a time lag, in most cases able to pass on fuel increases to customers. Which takes me to the left, inflation. So inflation is, of course, a relevant topic for us, as I guess for any other company at this point in time. And of course, one very important factor for us is wage inflation. So at the moment, I think we are really well positioned to manage that also very strongly on the yield side by making sure that cost increases are passed on to customers. But of course also the other programs we have been driving, digitalization to increase productivity, are now really helpful because they are also an important lever to offset inflation. So overall, I'm not saying it's a non-issue, I'm not saying it's easy, but I think we have it well under control and we know how to manage that topic as well. Which I think takes us to page 9. It's a bit of a different way to say what I have pretty much already said. We are, of course, aware of all the uncertainty out there. And, for example, when you think about the cost topic, we have not gone into a significant cost-cutting mode now, but we know exactly what would have to happen should the situation get worse. We're not doing that for the first time in all of the divisions. As you know, we have very experienced colleagues, so you can rest assured that should that become necessary, we will take the action. I think the key focus at the moment is actually on the pricing pillar to make sure that the inflationary trends are passed on to customers. The starting point here for us is actually service quality. So to really support our customers with reliable logistics solutions was probably never as relevant as it is today and customers do appreciate it and on that basis you of course have a completely different discussion on price increases than if you had a poor service quality. So, as I said, we are not immune, we are prepared, but as you will have also now seen in the Q2 numbers, we are quite experienced and equipped to deal with the uncertainties out there. And that brings me to our guidance set on page 10. which is unchanged and again we are of course aware of the discussions and worries out there and when you particularly look towards 2023-2024 there's a very broad portfolio of scenarios and sensitivities you can play with I'll talk a bit more about the sensitivities we have thought about for 2022 in a second. With regard to 2024, fundamentally in kind of like the base case range of scenarios, we stay on track to deliver in line with our medium-term guidance. Now turning to the 2022 guidance in a bit more detail. provide you with some more concrete sensitivity around our guidance range. So we have achieved 4.5 billion euros EBIT in H1 and despite all the headlines we have also not seen that things fall off a cliff in July. Yes, there are some areas where demand is weakening but I would say so far we are on a very solid track. In our base case scenario, we have assumed that there will be a decline in global GDP growth, so macro will slow down towards the end of the year. And we have looked at two variations of that, should there be a sudden sharp decline, which is not what we're seeing at this point in time, to be clear. Should there be a sharp, sudden decline in global GDP in the second half of the year, we are still confident that we will deliver within our guidance range, but that would then take us to the lower half of the guidance range, between 7.6 and 8 billion euros. Should there be a decline but not as sudden and as sharp, more kind of like moderate and more towards Q4, that would then take us probably towards the upper half of our guidance range, 8 billion to 8.4 billion. But obviously clearly based on the current solid business momentum, which as I indicated is more also what we see in July, there should also be some scenarios where we could end up above the $8.4 billion. So we are quite confident that we will definitely not surprise with some negative headlines, and there is, yeah, depending on how the next months play out, a scenario where you could also see some upside potential. So much from my side, and I would now hand over to Frank for the wrap-up.

I may on the last bit. We called the presentation Resilience on a New Level because we believe that A fundamental structural trend to e-commerce will help us continuously in the next couple of years. The B2B volumes and globalization will continue as well. That enables us to deliver higher earnings than before. The cash flow orientation has improved significantly in the last couple of years as well, which is, I believe, attractive to our shareholders. In other aspects of the business model, be it digitalization or ESG, I think we are front-run in our industry as well, and we believe that we will generate for us competitive advantages through that. So overall, we are, of course, very happy with the outcome of the second quarter. We are not stupid. We understand that the world is complex. I said that at the beginning. You know, there are some challenging signs, but also some encouraging signs. It's not all black, and that's the reason why we feel confident in any scenario we definitely will deliver our guidance, and if things are better than expected at the moment, we might even have upside potential. So with that, I hand over back to Martin. Thank you for joining us, and now we are happy to listen to your questions.

Operator, you initiate the Q&A session, please.

Okay, thank you. Ladies and gentlemen, at this time, we will begin the question and answer session. Anyone who wishes to ask a question may press star followed by one on their touchstone telephone. If you wish to remove yourself from the question queue, you may press star followed by two. If you're using speaker equipment today, please lift the handset before making your selections. Anyone who has a question may press star followed by one at this time. One moment for the first question, please. First question is from the line of Alexia Dogani from Barclays. Please go ahead.

Good morning. Thank you for taking my questions. I had three on DHL Express, please. Just firstly, clearly this is one of the divisions that has materially improved its performance to pre-pandemic levels. If you can kind of talk us through what kind of industry dynamics do you see? Clearly we've seen UPS and FedEx both talk about you know, kind of revenue quality, having no significant growth capex planned. What does that mean for the stability of the industry and therefore your prospects within it as the industry leader? Secondly, I think we've talked about before that a lot of that performance has been driven by strong volume growth, initially B2C, but kind of supplemented now by the B2B recovery. I think you've said in the past that there is still some volume in the network that would not naturally be suited to the express network. I'm kind of thinking tires, for instance. Do you have a sense of how much that stuff still represents in your volume mix that we can take a view of whether it stays or not. And then finally, a more short-term question. I was a little bit surprised that in Q2 the margin didn't improve from Q1 more because of the introduction of the surcharges and the timing. Why is that? And when we look forward, is there a positive tension between the surcharging recovery and the fuel price coming down? Thanks.

Thank you, Alex. I take number one and three, and Valerie takes number two. So, you know, you answered your question almost rightly. You know, we have a very healthy industry dynamic. You know, we have been clear for a while that we want to compete on service quality and not just volume gain share or something, and that's the reason why we have very diligently on pricing and yields. UPS joined us already a while ago. Now FedEx want to join us in that game as well. I think that's very good news for the overall industry that we want to compete on service quality and not on volume. I think that creates tremendous opportunities for us going forward because, as you said, we are market leader globally and, of course, will benefit from the global recovery of operations. On the margins, you know, I have said that in many discussions with investors as well, don't go too much obsessed about the quarterly margin development because we will see distortion due to many reasons. Why the margin of the second quarter is not as strong has several reasons. First, we had, you know, unbalance in the network. We had high price increases which we couldn't push immediately through. We have currency headwinds because we pay everything in dollar and you know that euro has weakened. And therefore, you should look into margin development year over year, not quarter over quarter. But fundamentally, you are right. You know, the worst is probably behind us with regard to that. And year over year, we should see a normalization than in the second half in Express. But, you know, the quarterly comparison, you can also see that in the first quarter and You know, the more important thing is, and we have seen that in the past as well, you know, do we see good trajectory year over year on the margins? And we think we will have another very good year in express with regard to the margin. And with that, I hand over to Melanie for the, you know, maybe she has some more information about the mix in the air. I doubt that we have that at hand, but anyway.

So, I mean, just maybe to kind of like add to the margin question, because it's So, for me, the express margin is of secondary importance. The important topic for me is the absolute number because, like I said before many times, the denominator in the margin is inflated or deflated by future charges, by currency and many different factors. So, the important thing is what's the absolute EBIT number. And I think here I'm super pleased that also in this quarter where we have the lockdowns in China, where we had the significant increase in fuel, where we have a two-month time lag until we can pass it on to the customers, where we had currency advent, that we still delivered 1.1 billion euros. So I'm actually quite happy with the express result. And just one additional, because that's also kind of like one of the nice additional information we give in our IRs, that book. So when you look, for example, at the whole currency topic, which we normally don't make a big fuss about because that is something you just have to manage, but for the quarter, a third of the expressed revenue growth was actually currency related. So 340 million out of the billion increase was actually currency. That was a tailwind on the top line. Actually, in the case of Express, it was a significant headwind on the EBIT, and they still digested that and delivered the $1.1 billion. So just to put it into perspective. On what are we seeing in terms of weight dynamics? We are seeing a bit of a normalization overall along the supply chains that some of the heavy stuff which had moved into the express network is going back into air freight and some of the ocean freight stuff like docking stations which had traveled with air freight is now moving back to ocean because the reliability is getting a bit better on the ocean freight side. It's something which, from the express perspective, the team is managing very well. So we are still seeing, due to the B2B factor, a good impact on the weight side. So it's not that we have significant withdrawals to expect here. I think it's more of a moderate normalization over time. Excellent.

Thank you very much.

But I think those were kind of like, yeah, I think obviously that's a big topic. So I think the fundamental message from us on Express is, yes, some of the tailwinds which we saw in the second half of 2020 and 21, the very strong volume growth have become more difficult. But I think we are really managing this new environment very successfully.

Excellent.

Thanks, Alexia. And operator, the next call.

The next question is from the line of Sam Bland from JP Morgan. Please go ahead.

Good morning. Thanks for taking the question. I have two, please. The first one is the 2024 guidance. Do you think that's still achievable if we have that sort of sudden sharp GDP deceleration scenario in the second half of And the second question is talk about sort of by 2024 having more balanced freight markets. I guess that might be a headwind to forwarding margins. But do you think that will have much of a impact on TDI pricing as freight markets become less congested, less disrupted? Thank you.

We got both some flavor to that. So on the guidance, you know, it's so difficult. The earlier, you know, a massive drop in iconic activity happens, the stronger 2024 will be, as we have seen. And the later it comes, the more challenging it will be. So it's quite unpredictable. That's the reason why we came to the conclusion that we probably will be out of the woods in 2024. And that's the reason why we at the moment can say, yes, we can probably continue to deliver that. If things are happening later, then the situation is different, but then the outlook for 2023 is better. So it is unpredictable. And before we change something just for the sake of change, not knowing what really will happen, we believe that it's at the moment the most realistic scenario that we probably will be out of the woods by 2024. And that's the reason why we can deliver that result. On the second thing, I think the impact on TDI is significantly less than on freight because we intentionally have never squeezed the margin to the extent we could. We kept our customers on the airplanes with TDI products despite that we could easily sell the freighters for higher prices in the air freight market. We have done that by intention. because our customers understand what our cost base is in the airline industry because we operate them dedicated, and that's the reason why we have not squeezed our margins or the margins benefited from squeezing prices or pushing prices up to the extent which was possible. We haven't done that. That's the reason why if things are normalizing, the negative impact on yield will be significantly less in TDI than it's in F-rate. And maybe, Melanie, you want to add something in addition to that?

Yeah, I think, I mean, when you kind of like look at the whole pricing in Express, and I think it's a bit linked to Alexia's question on the industry dynamics, right? So it's an industry where we have a finite number of players, and they all operate very expensive fixed-cost networks. I think having a good fundamental pricing discipline has been always absolutely paramount. And we are doing that through our general GPI, where, of course, this year, when we go into the GPI season now in the fall, we will take the inflationary effects fully into account. And that is something which is not going to go away, even if kind of like the air freight markets normalize. What has been unusual and really due to the distorted aviation market has been this emergency service surcharge, where, however, we have not overdone it, as Frank said it. We have always used that as a cost offset. And so when things normalize and the cost base also normalizes on the aviation side because there's more belly space available and so on, then we will see the positive impact on the cost side and then we will work with the ESF. which may actually be then one point in time where you will see kind of like a contracting effect on the top line and a margin booster, even though that doesn't immediately have an impact on the absolute number, another reason why the EBIT margin is taken with a bit of caution. But to put it all together, Fundamental underlying pricing discipline will make sure that TDI pricing is going to hold up going forward. And then some of the extras on the surcharge side will normalize over time if and when markets get more normal.

Understood. Thank you very much.

Thank you, Sam, for giving us the opportunity to also cover that. Next caller, please.

Next question is from the line of Munea Kayani from Bank of America. Please go ahead.

Good morning. So just going back to the earlier questions, is it possible to quantify how much benefit Express had from kind of spillover from air cargo and then whatever you were selling on the general air cargo market and that kind of normalizing is my first question and then secondly on the TDI revenue per day being up 15% into Q can you help break down how much of that was driven by weight and how much was the yield and and then thirdly In your 24 outlook, what have you assumed for express volumes and margins for express?

First of all, on the impact of the heavy stuff and the air freight market mix, I think there are two elements in here. First of all, how many heavy shipments do we have as TDI shipments really traveling express with us? There we had a bit of an inflow, but I think it's really nothing you should overestimate. I think what we have now seen in terms of weight development has been more a general rebalancing between B2B and B2C shipments. The big difference is that B2B shipments tend to be twice as heavy as B2C shipments. So whenever you have a stronger development on the B2B volumes or a stronger decline on the B2C volumes, that has an impact on weight per shipment and that was much more pronounced than the spillover effect from the air-fade industry. On the second part, we are indeed selling off empty excess capacity into the forwarding market and that's an area where we have benefited from the high rate levels, but that is something which we manage as a cost offset. So that has been one of the factors to help us offset the higher cost of flying overall. That has not been enough to cover the increase, and hence we have put on the emergency service surcharge to help make sure that the aviation cost in total after the ACS offset is adding up. In terms of yield, we always peel the onion and try to compare kind of like the previous year revenue composition like for like when you kind of like adjust for trade lane and weight and all those effects and then we come to something which we call the base yield increase. And here the positive news is that this is very much in sync with our announced price increase, so it is in the mid single digits exactly where we want it to be. In terms of outlook for 2024 and what have we assumed for Express, I mean, Like everybody else, we're doing a zillion scenarios at the moment, and I think the good thing is on Express is you can get to a solid number through a number of combinations. So if we see a stronger economy with more volume, then we of course have to add additional cost. If we have kind of like a lower volume, we will fold in cost. The express number contributing to the mid-term guidance is relatively stable under a number of scenarios. I think the important thing is fundamentally... All these normalizations, we do expect that Express will return to the around mid-single-digit growth rate, which we had always given you in the last capital market presentation, and John will talk more about that on September 8th in the Express tutorial. Thank you. Thank you.

Thanks, Monique. Next caller, please. Next question is from the line of Clementine Flinois from Bernstein. Please go ahead.

Hi, good morning. I have three questions, please. So first, continuing on Express, how do your freight loads evolve? Have you seen – well, we have seen chargeable weight go down and the capacity go up, yet the load factors are also going down. So how has it evolved for you this quarter, and how are they in July? Second question is your exposure to end industries in P&P and Express. How do you see them evolving? And final question on R&C contracts. What are you seeing in terms of contract length? Are they evolving more towards long-term, one-year contracts, or are they still very much on the spot at the moment? Thank you.

Thanks, Clementine. The line is a bit shaky. I'm not sure we got the second question incomplete. You're asking for the exposure to what?

To industries on PMP and Express. What industry are you talking about?

Vertical mix.

The vertical mix.

All right. Good. Thanks.

Yeah, so maybe I take the last one and Melanie takes the other one. So, we have seen a significant trend, particularly in the ocean freight institute, to longer contracts. You know, with the starting of the rates are coming down, of course, you know, this will now move in the other direction again, but we are definitely not a spot market business again yet. What we have done is, of course, when we had committed long-term contract with carriers, We have back-to-back contracts with customers as well. Nevertheless, there will be obviously a discussion with regard to that. So, of course, what happened is in the moment when the market gets tight, the willingness to sign long-term contracts is big. If now the markets are turning the corner, we see the opposite trend. I think that needs to be managed in the same way as we have managed the other way. And I think the AFRE team is very well equipped to do that somehow because, you know, we have not – you know, bought capacity without having clear commitments from customers for this capacity. So maybe that gave you some opportunity to find some data for the other two questions.

Yes, so on the Express rate load, I mean we have seen a very dynamic development in the Express network in the last month, so obviously after February 24th we had to rejig the network to kind of like accommodate the overflight ban on Russia. We had to kind of like deal with losing the Russian aviation capacity. Then we had the China lockdown. So it was very dynamic and there are quite a number of differences when you look at the different trade lanes between the rate load factors. I think on balance we are still holding the weight load factor at a very good level when you compare it to historic weight load factors, but it's no longer at the kind of like super optimal, perfectly utilized level which we had kind of like in kind of like the second half of 2020 going into 2021. With regard to sectors, so that is also difficult to answer kind of like in total. Good growth, for example, in retail in our supply chain division. We are seeing the e-commerce normalization, for example, the fashion down trading in part of Germany. We see a very strong balance still across our express network. So that's not the one sector I would really want to pick out overall here.

there's no single sector exposure. And I think that's exactly one of the reasons why you see this resilient performance. Of course, in each customer industry, there's always something for or against them. But if you have a broad exposure to each and every industry like we have, then this pretty much balances out. All right. Clementine? Okay.

Yeah, perfect. Thank you very much.

Great.

And next caller, please. Next question is from the line of Satish Sivakumar from Citigroup. Please go ahead.

Thank you again. So I've got three questions here, actually. One is just related to the follow-up on the exposure by vertical. So within your B2B footprint, right, can you comment on what is your European industrial customer exposure, not just in express, actually, across all segments? And what has been your discussion with those customers in these verticals as we go into, say, H2 or Q4? And the second question is around supply chain. What is your cost exposure to energy, given that it's more warehouses and quite energy intensive, right? After labor costs, probably that would be your biggest cost input there. And given all the energy costs are outpacing inflation, How does this impact your contracts, both open and closed book portfolio? Would you even be able to pass on the energy-related cost here? And the third one, on the post and parcels, in Q2, the parcel segment has seen a pricing up by 3%. How should we see this evolve into H2 and catch up with the inflation? Thank you.

Okay. In terms of exposure to the European industrial sector, I have to say I don't have the number readily available because that is not, I mean, as Martin said, we have a very broad base across different customers and verticals, so it's not kind of like the one dominating exposure. It is an element in there. However, quite frankly, we haven't seen a dramatically negative development at this point in time either.

May I add to that even that we don't have that information at hand shows that we are not managing along these lines because it had not been historically a problem. So we are not looking in the respective development of certain sectors because what we have seen is that always there are some sectors stronger than others weaker. and on that it had hardly any impact on our P&L. That's the reason why we don't know this information, Melanie and I, because we don't manage along these lines because it was proven that it's not necessary.

Then on your second question, the kind of like energy risk in supply chain, I mean, so first of all, energy for us overall is not a super significant cost driver. Yes, I mean, when you look at Express, you have the fuel impact, but neither division has kind of like energy costs as the main cost factor. And in supply chain, we are in most cases actually protected through the contract. In the open book contract, it's very simple because open book contract means that you pass the costs on to the customer, so that's not a problem. But even in the closed book contracts, in the majority of those contracts, we have energy price adjustment mechanisms. So again, it's something which has to be managed, but it is something where we feel quite confident that the team is on top of it and can deal with that. And then on the parcel pricing. We did a bit of a price increase for kind of like the standard rate card customers and the discounts at the beginning of the year. We did the increase now on the 1st of July for the private customers, which is a small portion of the parcel volumes that will come into effect. The big discussion is now what to do in terms of parcel pricing for 2023.

Just to clarify, the next big uplift in parcel pricing would be start of next year.

Yeah, so we felt that, I mean, for our customers, that is also something where, yeah, they need also planning security. Of course, I mean, when we now have a very large customer where a contract is up for renewal, then, of course, energy prices and general cost inflation is discussed as part of individual price negotiation. But in terms of adjustments to the general rate cards, yeah, This is something where, like in Express, we have now gone for a yearly price adjustment mechanism. So the big activity would then be at the beginning of next year.

Okay, yeah. Thanks. Thanks, Melanie, Frank, and Martin. Thank you.

Thank you.

And the next caller, please. Next question is from the line of Andy Chu from Deutsche Bank. Please go ahead.

Good morning, Frank, Melanie, Martin. Two numbers questions from me, please. Could you give us an EBIT number form for the Hillebrand acquisition for Q2, please? And in terms of the DHL Express Chinese disruption, what do you think that was, please, in EBIT terms in Q2? I guess that potential will flow into the next quarter. Thank you.

Okay, so I can be very precise on your first question. So the underlying EBIT contribution from Hillebrand in Q2 was 37 million. That was better than what we had assumed. I mean, we had always talked about kind of like 100 million run rate for a full year, so we were very pleased with the 37. That was not the net impact in our P&L in the first half of the year because we also booked transaction costs, so a rough order of magnitude not just in Q2 but kind of like across the last month is around 20 million. Fundamentally, I think Hillebrand is well on track to deliver and over-deliver on what we had assumed when we negotiated the purchase price. On the China topic, that is really difficult to kind of like put an individual number on because there are so many moving parts also around the aviation cost impact that all had. I would say the important number for Express as a network business at the end is the 1.1, the overall EBIT achieved even under those circumstances as a network in Q2.

Andy, happy with that? We lost him already. We lost him. Okay. Okay, so maybe Andy returns. In the meantime, operator, please to the next caller.

Next question is from the line of Johannes Brown from Stifel. Please go ahead.

Johannes Brown Yes, good morning. Thanks for taking my questions. First question would be on the working capital in Q2. I want to better understand that working capital buildup of more than $800 million in the quarter. I think it was more than $400 million higher than last year. Was that more driven by volume or more by pricing? And also to what extent will that $800 million unwind later in the year? Second question, any new thoughts on the upcoming wage talks for the German stuff? And then thirdly, obviously we have seen a lot of chaos at European airports the last weeks and even months. Was that impacting your operations as well, or was your operation more or less isolated because I guess the express hubs are outside of the main passenger hubs in Europe?

May I take the second and the third? The wage discussions, we can't judge yet what really will be the demand. It starts only in January. You know, we will now monitor, of course, what happens in other industry, what happens with Verdi and other sectors. You know, inflation, let's see how the inflation develops in the next weeks because, you know, there are also some trends which are heading in the other direction. If you see, you know, that commodity prices are coming down in some areas at least. So we don't know yet. It will definitely be a difficult discussion. But, of course, it's linked as well. What we will do then on pricing for parcels, at least on postage, we have no opportunity to do something. So it will be, of course, an interesting discussion. The importance of that is relatively less than it was in the past. If I see just the second quarter, the profit of P&P, despite that it was not a bad quarter, is just 10% of a total. And, therefore, the impact, of course, for the group is significantly more limited than it was in the past. I think at the end of the day, we probably will find a reasonable solution. The Union understands that as well, that the profits are not growing in that sector that much as in the other sectors. On the hubs, we have not seen a significant impact. In many places, we control ground operation anyway ourselves. And we have not seen really impact from that. We have seen impact from the tight labor market, but we have started already early to hire also in Germany from people from other countries where particularly youth unemployment is higher than in Germany, and we will continue to do so. And the express division is a great place to work, number one, and that is visible in the market as well. So, you know, it's the labor markets are tight. But as I said earlier, that's good news, not bad news, because that is a significant stabilizing factor for the economy. But we have not seen any major disruption due to the problems. You know, I would even say people said all days that we have a beneficiary of the COVID. You know, we have seen volumes up 50 percent and down 25 percent. We lost overnight the Russian airplanes and we had to manage that as well somehow. We had uncertainty more volumes than I think some airports and passenger airlines. I think, you know, we have managed it very well. Our team is operational excellence and that's what we see on a daily basis. They cope with these problems instantly and that is, and I'm proud of that, that, you know, the folks have done in all divisions a great work despite the tremendous unpredictability of volumes. They cope with that, not only financially, but also operationally, and I think that's a great sign of the strength of the company.

Then on the working capital question, yeah, so indeed we had more than 800 million cash out from working capital in Q2. We are monitoring that very closely. It was actually 450 million worth than Q2 last year, and the main contributor here is really third-party trade receivables, where we see the general volume, the general revenue trend coming through. So it's not volume-driven, it's kind of like the same stuff which drives the revenue, also surcharges and so on which need to be collected. Clear expectation is that we will see an easing in that line in the second half of the year. And when you think about our cash flow guidance, there is actually quite a natural hatch. So should there be a better EBIT performance, we will also have better OCF before changes in working capital, but then we probably also have revenue growth, so it will be a bit more of a drain on the working capital. If the economy slows down, we have less revenue growth and hence less OCF before changes in working capital, then we will see a release in working capital. So that's one of the reasons why we're also quite confident on our free cash flow guidance for the current year.

Okay, perfect. Thank you.

Okay. Hannes, next call.

Next question is from the line of Nicholas Mauter from Kepler-Chibreau. Please go ahead.

Good morning. Three questions from my side, please. The first one is on space utilization in your supply chain business. Can you please comment here? And assuming it is high, can you perhaps split it into the effect of a pull forward from customers worried about even higher prices in the future, some even overstocking maybe on the one hand, and on the other hand, to what extent it is driven by structurally higher inventories across verticals? That's the first. And then two questions, shorter ones, regarding earlier messages on the tickers. You said you're looking at M&A based on your strong balance sheet. Has this been narrowed down in recent months? Anything specific you're looking at? And then finally, you already recognized 31 million impairments regarding your Russian operations, and there's supposed to be more to come in Q3. Can you quantify that, please?

Yeah, so maybe, Melanie, you have better insights in number one than I have. In Russia, you can comment as well easily on M&A. I think we have last time, maybe with the release of the annual numbers, we talked about our clear strategy that we want to do something which is strengthening our product offering. Hillebrand and Cameron are great examples for that. They should be straightforward, integrable products. which we can see with definitely already Hildebrandt, and they should be accretive pretty rapidly. That's how we look into that. We are not making a big search and say just we want to buy something just to buy something. We do a search and look into where we can get really these benefits from. And there's always some activity going on at the moment. We have some smaller activities we are looking at. but it's not clear yet if that materializes or not. We have done that in the past as well, where you probably are referring to that, of course, if you say the press, you have a strong balance sheet in the conjunction with M&A, they'd immediately be suspicious. The truth is we don't have a need to do something, but we have the opportunity to do something, and this is how we would manage that somehow on M&A.

Then on the first question, space utilization in supply chain, that's again a question which is super difficult to answer in an aggregated way because when you think about a consumer warehouse in India, that's a completely different story compared to a high-tech warehouse in the United States. I think the common trend is that Our customers in all divisions, but of course very strongly also in supply chain, are interested in making their supply chains more resilient. So they're talking with us about optimizing their warehousing setup in general with more of a medium-term perspective. So I don't think we see any current mega abnormalities. trend for more strategic thinking about how to manage inventory across the supply chain in a more resilient way. With regard to Russia, yes, we impaired the fixed assets in the first quarter. We haven't had any material impact in the Q2 number, and we now expect that as we ramp down our domestic express business in the third quarter that we will see a negative impact both on the P&L and on the cash side. that should probably be in the same order of magnitude as what we talked about for the fixed asset impairment in Q1. So, amidst single-digit millions, an order of magnitude which is totally manageable and which we have, of course, also factored into our guidance.

Thank you very much.

Thank you.

Thank you.

Next question is from the line of Christian Nadelku from UBS. Please go ahead.

Hi, thank you for taking my questions. The first one on Express, over the last one to two months, have you seen any trends in Europe in Express of your clients trading down to cheaper deferred products? Usually we saw this during past recessions. Secondly, in Express, you mentioned earlier that in the price negotiations this year, At the end of this year, you will include the higher inflationary pressures. Historically, you raised least prices in Express 5%, 6% every year. Is it fair for us to assume now another 4%, 5% on top of that just to account for the higher inflation for next year? And the third one, if I may, looking at your scenario for this year with a sudden drop in GDP, That implies in the second half of the year, you will have an EBIT of 3.3 billion euros. Now, if 2023 is the recession year, can we annualize this and say that 6.6 billion is an annual EBIT floor for a sharp recession or any other moving parts there?

On the first one, No, we don't see kind of like a fundamental down trading in Express in Europe towards cheaper means of transportation. I think we are of course watching closely the general volume development. As I mentioned, there are some signs in the last four to six weeks both in DGF and in Express that volumes are getting a bit softer on the demand side. but we don't see that as a consequence of people are looking for cheaper ways of transportation. On the Express GPI, this is a very structured, well-established process where we really go through it country by country, looking at the inflation on country level, looking also at what the currency is doing in the respective country. John Pearson, the Express CEO, is personally involved in this, and we will really have this differentiated approach. Hypothesis, I think, correct that the aggregated number will probably be a bit higher than the around 5% you saw in previous years, but it's too early to now say will it be kind of like plus 3, plus 4, plus 5% that will be the outcome of this structured process. In terms of extrapolation from a potential recession scenario, second half, 22 EBIT into a 23 EBIT, It's too early for that. We will give the 23 guidance next March as always. But I think the key message, which you also see in the title of our presentation, we feel that we will stay on a new level compared to what it was three, four years ago. Details to follow in March for 23.

Excellent.

Thank you very much. Thanks, Christian. And I think there's one final caller on the line.

Next question is from the line of Sumit Mehrotra from Societe Generale. Please go ahead.

Advantage of being the last good question already asked, I'll venture one. So have you assessed a little bit your exposure to the geopolitical tensions should they come through for Taiwan and China? What kind of resilience mechanism would you have in place? And will all the divisions be equally impacted or some more than others? So some thoughts on those. Secondly, without making you look like a bad negotiator, you mentioned M&A opportunity. Do you think the valuations by and large are better than they looked last year? Thank you.

Yes, so of course we are monitoring not only just like the trip of Ms. Pelosi to Taiwan, the situation, and of course it is always on our radar what these dynamics have. I think we don't know what the impact might be for that. There is a mutual dependency of China and U.S. on trade at the current stage anyway. The answer to that is I think what we have to do is we have to keep our global network in good shape because if we see movements here and there, then we should balance that somehow, and we have seen that already. Due to the lockdowns, we have benefited in other parts of the world by movements of our customers to other locations, and that's the strength of the company. Of course, if we have really more intense sanctions between China and the U.S. or whatsoever, You know, that has impact on global economy and will impact sooner or later on us as well, but not more, probably less on us than on other companies because we have other activities in other places somehow. So, of course, we monitor that. If you ask the divisions, supply chain has sold their China business a while ago already to SF Express, as you might remember. DGF and Express have significant footprints in China. e-commerce solutions and P&P, of course, are not present there some more. So there is a different exposure of the divisions to China. But the divisions I've mentioned, of course, are very strong in other parts of Asia as well. As we have seen in the lockdowns, you know, we have seen significant volume drops temporarily in China and still both divisions have very good results because they can move stuff to other places that we can support. But overall, If there are more tensions between China and the U.S., that's not good news for anybody on the world.

And then maybe on the M&A question, I mean, our approach to M&A has been and will be we are interested in high-quality assets at the right price. So we are not in a position where we strategically need something under all circumstances and would be willing to overpay. So when you look at the Hillebrand acquisition, as I just said, in terms of what they now delivered in the second quarter, that's actually better than what we had assumed in our business plan. So we feel that both with Hillebrand but also with the acquisition in Australia, we acquired high-quality assets at a fair price.

Attentively, I think multipliers are coming down. You can see that as well in our stock, but not in our competitors. So it looks like that there is a normalization of multipliers, which should create better opportunities going forward.

Thank you so much.

All right. Well, thank you. And thank you, Melanie Frank. Thank you out there for the very focused Q&A session. And I'm looking forward to seeing you all, most of you, September 8th in Cologne for the Express tutorial and the hub visit. And with that, I want to hand over to Frank for the closing remarks.

Yeah, nothing too much to add. Resilience on a new level, I think, is how we call the presentation. And I think we have really demonstrated that despite all the challenges, You know, we have seen in the last three years, we are pretty robust against any of these crises, regardless of what it is. And I think that shows the fundamental strength of the company, which is based on, you know, that we are people-centric, employee-centric organization. And the people have done a great job in the last two years to really deliver great service to all our customers. And that is a base, I think, for future success. In any case, we can't influence what is happening in the world. We can only influence what we can influence, and that's our own business, and I think we will continue to use our strength to continue to invest into our capabilities, and I think we will gain even more in the next, or we will gain equally as we have gained over the last two or three years relatively to the competition. With that, I want to like to thank you for participating and Hopefully, sooner or later, we can see each other again once in a while in a personal meeting. Thank you for today, and have a great day. Bye-bye.