Deutsche Post Ag S/Adr

Ladies and gentlemen, thank you for standing by. I'm Stuart, your chorus call operator. Welcome and thank you for joining the Deutsche Post DHL group conference call. Please note that the call will be recorded. You can find the privacy notice on dpdhl.com. Throughout today's presentation, all participants will be in a listen-only mode. Presentation will be followed by a question and answer session. If you would like to ask a question, you may press star followed by one on your touchtone telephone. Press the star key followed by zero for operator assistance. I'd now like to turn the conference over to Martin Ziegenbach, head of IR. Please go ahead.

Thank you, and a warm welcome from our side to anyone up there to our Q3 conference call. As flagged, I've got with me Frank Epple, CEO, Melanie Christ, CFO, and we go with the procedure you're all familiar with, We're going to start with the presentation and leave sufficient time for Q&A. And with that, Frank, over to you.

Good morning as well from my side and welcome. Thank you for joining us. Let's go straight away to page three, the executive summary. Of course, we are very happy that we have seen in the third quarter, again, profitability for the group more than $2 billion, a lift up year over year, despite that Q3 last year was already very strong. I'm particularly happy about the free cash flow performance, which is even stronger than in our preliminary announcements, so that's very good, 45% up year over year. I think that shows that we really are focused on free cash flow generation. Going forward, we have increased our guidance to around 8.4 on the EBIT level and more than 4.2 billion on free cash flow, which shows our confidence in this year's numbers. Going forward, of course, there will be challenges without a doubt. We have seen that already in the development of B2B volumes in the third quarter. So we expect as well that there will be a cool down of the economy, but we feel that we are well equipped to manage that and start from a very strong standpoint. On the next page, you can see what happened to B2C volumes. As we have predicted, we will see a recovery of year-over-year development. You can see that here. Two out of the three divisions have seen a B2C growth in the third quarter. That is in alignment with the reduction in growth we have seen last year. As you remember, the first half of 2021 was extremely strong volume growth over 2020. And of course, that has led to the decline in the first half of this year. So we are very happy that we have now a stabilized situation overall. On the right, you can see how much more volume we now move in our networks than before COVID. I think particularly impressive is Express and e-commerce solutions. Part of Germany is more or less in alignment with what would happen anyway if you think about a 5% to 7% growth from 19 to 22, but the other two divisions have grown significantly stronger, and that shows how well we are positioned in both in the respective markets. So that's good news. The more challenging news is on page five. You'll see that we have seen a decline in volumes year-over-year in air freight and ocean freight, if you exclude Hildebrand on ocean, and that even in comparison to 2019, We have not such a strong volume. We have even the decline. But that might show as well that a recovery could come faster than we think because we are moving already less volume in 2019 and the world is not smaller than it was in 2019. So I think customers are concerned short-term and we will see how Christmas comes and then what happens in the new year. On Express, this is more resilient. The B2B shipment has dropped less than in Airfreight. In particular, in the area of weight, we have mentioned that several times that this is something which has supported our growth quite nicely. That's the reason why we have seen a strong EBIT in Express and in DJF, we have still seen a very good conversion rate. And of course, that is a consequence as well of our deployment of a new IT system, which will help us in the rest of this year and next year as well. In an express, we see the benefits of the virtual airline because we can really adjust volumes to a lower level if it happens by stopping then using third-party suppliers. So overall, we see the same what the market sees, that B2B volumes are dropping. Maybe too fast and too much if you compare that to 2019. And since we don't see a recession in consumer demand, that can't go on forever because sooner or later the warehouses will be empty again. But maybe it's a good sign. And it's a particularly good sign for us because we still have traded very well despite the volume decline we have seen. That confirms on page six. What I've just said, that we are very good in yield management. We have increased prices consistently, and we have a very good established surcharge mechanism. But we do the same in the other divisions, also in supply chain e-commerce solutions. We have done well in adjusting our pricing. In P&P, we always are more limited because the stamp price regulation is as it is. On the cost side, We are well positioned as well. That's not the first time that we see change. In particular, I remember very well the drops in 2009 in volumes were even bigger than what we observe at the moment after the financial market collapsed. Despite all of that, we have not stopped to execute our ESG agenda. Well, our electric airplane, which we want to use soon, is made in flight. We have continued to enlarge our electric fleet. We also sell our products to customers, which is encouraging to see. Last week, we signed another deal on buying even more sustainable maritime fuel. to really make a big step forward also on the ocean front. On social, the employee opinion survey was in alignment with last year. As you remember, we had record numbers last year, so we kept that high level. That's great news. And DHL Express became another great place to work, number one, which no other company has ever done before. On the highly trusted company, We have revamped our Sustainability Advisory Council and Melanie, Thomas Ogilvie and I have recently had a session with them, which was very encouraging because we got good feedback, but very encouraging words as well that they are very happy and impressed by the progress we have made. On compliance, which of course is important, I'm very proud that we have, through a very tight process, very high compliance. I talked to many other companies. Typically, you have 50% to 60% of mandatory trainings done. In our case, it's above 97%. So that's fantastic news, and I think that shows that we are really serious about that subject. On the next page, we celebrate, again, our success. The good news is that not only Express is a great place to work, number one, we see tremendous progress The CEO of Great Place to Work had a session recently with us, and he said really what he sees in our company is that we are really employee-centric and doing a lot of stuff, and that is not just PowerPoint. That is really embedded in the culture because he exchanged with our top 100 team, and that is encouraging to see if an external person says what we are doing is really a role model. Let me conclude before I hand over to Melanie. Yes, we are a great place to work, number one. That's a base for our great service quality, and that great service quality enabled us to win market share in the last couple of years and drive the performance up. We upgraded our guidance for this year. Melanie will show later on the detail. And overall, we are confident that we can keep a very high level Even if now the next quarters will become more challenging, but still if you compare that before, in comparison to the pre-COVID level, we believe that we can keep a significantly higher level than before COVID, despite all the risks we face. So with that, thank you very much for listening, and I hand over to Melanie to give you more detail on the numbers. Thank you.

Thank you, Frank, and hello to all of you also from my side. I will start the numbers section with the pretty straightforward Q3 group P&L, which you can see on page 11, and which simply shows double-digit growth from top to bottom line. As Frank just mentioned, this performance includes an already weakening macro environment, so the increase is not volume-driven, but mainly the result of our effective yield and cost-managed wealth as well as the often mentioned balance provided by our portfolio, which gives us resilience also in the current environment. One thing to point out is the accelerated top-line growth includes currency, fuel surcharges and pass-through of other cost increases, and this is important for the margin perspective. These measures help to offset higher cost inflation, but they also technically lead to a margin dilution, As EBIT is divided by a technically inflated top line, we see the expansion in revenue but no corresponding increase on the EBIT side. And you can see that quite clearly in the margin development in DHL Express, turning now to the Express figures on page 12. Full year-over-year margin decline is attributable to higher revenue due to FX and fuel surcharges without equivalent EBIT contribution. On the contrary, in the case of Express, fuel surcharges and FX actually had a combined net negative effect on EBIT in Q3. So currency and fuel inflated the top line, but actually led to some headwind on the EBIT side, hence the margin dilution. But when you look at the EBIT number overall, 1 billion, I think that's a very strong number in the current environment. And I think that number reflects that we have been able to adapt our network timely to the volume and weight developments which Frank talked about earlier. I think maybe a little bit of a forward-looking how do we prepare for Q4 statement. So we do expect currency and fuel to potentially also have a negative EBIT effect in Q4 and have also factored that into our 2022 guidance upgrade. Turning to global forwarding freight, I think we all knew that there would be a normalization in freight markets eventually, and it turns out that it got started by weakening and demand in the third quarter. Page 13 still shows tremendously strong Q3 numbers for our freight forwarding operations, even if volume continued to weaken. In line with general expectations, we also expect these numbers to soften into Q4 and into 2023. However, again, this normalization was well expected and we will remain on structurally higher earnings levels versus the pre-pandemic profitability levels in this division. I think one very important factor here is that we still see increasing benefits from the fundamental internal changes we have implemented based on the new IT systems and improved processes and that should help us to manage the normalization in the forwarding market with really putting some further internal improvement measures against the market normalization. Turning to DHL supply chain, page 14 shows the expected continued top and bottom line growth with also here margins somewhat technically impacted by successful path on of cost inflation. When we think about this division going forward, we see a continued strong order intake, structural growth as fulfillment, long-term contract structures. I think overall DHL supply chain is well positioned for structural continued outsourcing growth, and it's clearly one of the divisions which will provide resilience to us also in a downturn. Turning to DHL e-commerce solutions on page 15, I think the numbers here reflect the expected normalization of B2C volumes, where we obviously saw volume declines in the first half of the year, as Frank already showed earlier on. But in the third quarter, the division was back not only to reported but also to organic top-line growth. We saw positive volume trends, for example, in the Netherlands, but we also saw very good yield management. As you know, e-commerce solutions is for us one of the growth divisions, which is why we are really investing here with a very structural long-term perspective. And so when you look at the EBIT development, it was slightly down in the quarter, reflecting general cost inflation, but also the conscious investment to enlarge our networks for further long-term structural e-commerce growth. Turning to post and parcel Germany, our German parcel business has seen similar B2C trends, as you already saw earlier from Frank's slides, with Q3 volume and revenue also up again year over year in Q3 after the normalization on the volume side in H1. However, despite intensive focus on productivity measures, this was not enough to offset the accelerated cost inflation as well as the structural mail decline and that is also reflected in our 2022 guidance update for the P&P division. That was a quick overview over the five operating divisions and I look forward to discuss some of these divisional developments in more detail with you in the Q&A. I think overall when you put it together, I hope this overview of what is happening in the different divisions was also a bit of a reminder on how the different divisional drivers provide diversification across our portfolio and why we are confident to have effective cost and yield levers to also weather a tougher market environment relatively well. This confidence that we are well positioned to whatever comes next also relies on our strongly improved cash generation and our strong balance sheet. And we have summarized some key figures on page 17 and 18. Starting with the cash flow, the third quarter free cash flow excluding net M&A was up to 1.9 billion, a very strong result. And that was driven by strong operating performance, as you can see in our OCF before changes in working capital, but also supported by working capital inflows. as the freight market normalization also drives a reversal of the higher capital that was tied up in receivables. In line with our strategy, we keep investing into the structural growth of our leading core logistics operations. Of course, also for us, CapEx is one potential lever, direct free cash flow generation in a downturn. We know how to do this. We have shown that in the past. However, so far, we have not decided to rein in capex spending. The second major cash use probably does not need much explanation for you. So given the balance sheet strength in line with our finance policy and with what we have announced, we have completed the first 800 million tranche of our 2 billion euro share buyback program and have now launched the second tranche of 500 million euros. So on that front, we are executing quite swiftly. Page 18 shows our key balance sheet metrics. I'm not going to go through all the details here, but I have to say, whilst we remain very confident in our ongoing cash generation, it is, of course, a comforting feeling to go into the current uncertainties with such a strong liquidity and debt profile. One element that I want to point out on this page is our net pension provision, which has reduced significantly with the rise in interest rates. So even rising interest rates can have some positive side effects. Some of you may remember times when our net pension liability was above $6 billion. Now it's down to $1 billion. So that is obviously further strengthening our balance sheet. Now, let's get to the part which I guess you are all most interested in, our updated outlook. So turning to page 19, we had shared three potential scenarios for the year 22 with you in August when we presented our half-year figures. Based on the strong nine months, 6.5 billion in EBIT, The first lowest scenario has turned out too cautious as we have not seen any sudden sharp GDP deterioration. The Q3 business trends described earlier show some continuation of positive momentum, for example, in supply chain and regarding the e-commerce normalization. At the same time, we also clearly see the slowing macro environment and higher risks and a lot of uncertainty. So consequently, our new 22 EBIT guidance of around 8.4 billion euros sits between scenario 2 and scenario 3, so at worst in the upper half of our initial guidance range, but potentially also above. Page 20 shows the full guidance picture. As expected and also reflected in recent consensus evolution, the guidance upgrade is driven by the DHL divisions, while we expect PNP to only reach the lower end of its initial range. With 3.7 billion of free cash flow, excluding Net M&A, achieved by end of September, we also raise our 22 free cash flow guidance to more than 4.2 billion euros. Now looking beyond the current year. I know you're all interested in what will happen in 2023. We will, as usual, provide the comprehensive 2023 guidance at our full year release in March. However, I don't want you to misinterpret the strong numbers in our 2022 and 2024 guidance as us not seeing what is happening in the world around us. We are well aware that there are some quarters with a tougher economic environment ahead. And so in combination with the expected trade market normalization, this may well lead to some step back in 23, despite our proactive cost and yield actions. Such a potential development is actually meanwhile also reflected in the 23 consensus, which anticipates a step down for 23, but also clearly foresees a significantly higher level than before the pandemic, which is also very clearly our own internal expectation. So you can, of course, also make different assumptions to come to other numbers. But overall, we are convinced that our group will deliver relatively stronger absolute numbers in a downturn and recover even stronger. This confidence is ultimately based on the few undisputed facts that we have summarized on the last page of the presentation. These are just some hard numbers on our strong market position, on our cash generation, our balance sheet, as well as our shareholder return profile. So we are not immune to what is happening in the world around us. We are well aware of the challenges, but we feel that our broad portfolio, our experienced teams, and the internal improvement levers we can still further play will help us to weather whatever development lies ahead quite successfully. And with that, over to Martin for your questions.

Thanks, Frank. Thanks, Melanie, and Stuart, initiate the Q&A.

Thank you, Martin. Ladies and gentlemen, at this time, we'll begin the question and answer session. Anyone who wishes to ask a question may press star followed by one on their touchtone 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 Alex Irving from Bernstein. Please go ahead.

Hi, good morning. Three for me, please, all on Express. So first on the network, how are you currently planning your flying activity as the economy softens? And what cuts, if any, have you made to the network so far or are planning into 2023? Second, on Express pricing. So we're seeing reports of a general rate increase in the high single digits Is this what appears to be subinflationary level enough to offset cost pressures? And why is it the right sort of level? And then third, a little bit longer term, we've seen an increase in the global order book for freighter aircraft over the last couple of months. How concerned are you about the global supply and demand balance as it evolves into the 2020s? Thank you.

Yeah, thank you, Alex. So on the first question on our aviation network, yeah, I'm actually glad that you're asking that question because I think what really sets us apart is that we have a lot of flexibility built into our aviation network. We always kept the healthy balance between own aircraft and leased aircraft, and on the leased side, we have short, medium, and long-term leases, and that allows us to really make adjustments to the aviation capacity when volume patterns change. And we have indeed already canceled some capacity in the third quarter. So our Express team has been extremely proactive on that end, and that has been an important factor for the Q3 profitability of Express. Looking at the express yield measures and the announced GPI, we have announced a GPI of 7.9%. That's, of course, a gross average number. This is a decision which is really taken country by country. It's a top priority for John Pearson himself. He really goes through the country pricing calls, and for each country, the decision is taken based on inflation on the ground, currency development, competitive situation, and so on. what is the right GPI per country. Now you could say, is 7.9 enough in the current environment? I think what must not be forgotten is that this is kind of like the price increase. On top of that, we have mechanisms like the fuel surcharge, which allow us to deal with volatility, for example, on the energy side in a separate way. So we feel quite comfortable that on that basis we should be able to manage inflation for Express. And then on the last question with regard to freighter aircraft, I think the situation is different to what is happening on the ocean side at the moment. I think the orders are going up, but in a more palatable order of magnitude. I think we also have to see that there is still less passenger space available on certain routes, and also that with the new incoming passenger aircraft types, belly space going forward will probably be more limited. So we don't see the additional aviation capacity as overly concerning.

Super.

Thank you very much.

Thanks, Alex. And the next caller, please.

Next question is from Muneeba Kayani from Bank of America. Please go ahead.

Good morning, everyone. So on your guide for this year, the $8.4 billion implies 4Q EBIT would be down 16% year-on-year, which is a significant worsening. So can you talk about what trends you've seen post the end of 3Q and to suggest kind of a worsening in the fourth quarter and kind of a sense of what you're assuming for the holiday peak in express and parcels. And then secondly, on slide five, you showed B2B express volumes are down minus 1%, while air freight volumes are minus 11%. So what do you think is driving the B2B express volumes holding up better than the air freight volumes in forwarding? Is this a timing impact? I'm curious to know. Thank you.

Yeah, great. Thank you, Muneeba. So maybe I'll start with the second question. I think that's a very, in this uncertain world, fact-based and straightforward. So I think what we're seeing on the air freight side is clearly that volume, which has moved over from ocean freight, is also going back into ocean freight, and that is combined with a general weakening of demand. On the B2B side, the volume decline sees less of a... and I think that is something which we and John have always talked about. Yes, of course, there was some stuff in the express network over the last two years which is not going to be there forever, tires and so on, and they are pretty much gone, but we are able to successfully hold on to quite a lot of the heavier stuff. So it's a different normalization pattern between express and air freight. Now coming to the guidance question, of course you are technically correct, the 8.4 implies Q4 down year-over-year, more so on the P&P side than on the DHL side. But also on the DHL side, I think that also reflects that the trends towards the end of the third quarter have not gotten any more positive. So obviously the volume decline on the air freight and ocean freight side is continuing into the fourth quarter. And there is a lot of uncertainty out there. what will happen to fuel, what is going to happen to FX. So I think in this environment, it is probably the right approach to be a bit on the cautious side.

Maybe let me add on B2B. We have seen in the past as well, when economies got weaker, that we have seen down trading to ocean, up trading to express. And I think that will happen now as well. The reason is that customers are saying, okay, I don't need that now very rapidly in the destination market. Therefore, they put it on ocean. But if they make a misjudgment, they want to have that delivered on time and that's expressed. So that's a normal pattern we have seen. The second is what Melanie mentioned. I think a lot of customers on heavyweight have learned that the service quality on heavyweight you know, on Express is significantly higher than Airfreight and the price differential doesn't, you know, compromise on using that for longer term. So we expect as well that there is higher stickiness because COVID helped there to let customers experience a much better service quality. So these are probably the two drivers and that's the reason While we are pretty optimistic that we can keep a lot of air freight on our express freighters.

You're not happy with that?

Thank you. Okay. Next question is from Satish Kumar from Citigroup. Please go ahead.

Thanks again for taking my question. So I've got a couple of questions. One is around the seasonality impact, and the second one is around the capex. So on the seasonality, right, obviously last year there was peak season surcharges, and the general expectation this year is that there won't be any peak season. So what is your expectation on, like, the margin unwind that we'll see in Q4? And also related to that is that if you see previous years between Q3 and Q4, there's normally $400 to $500 million in step-up in staff costs. Obviously, that is related to seasonality. And how should we think about this evolve this year given the softening demand? And the second one is around the CapEx. You did mention in your presentation that there is some flexibility. So out of this $12 billion, right? What type of flexibility are you going to see? It's like deferring some of your freighter orders or cutting back CapEx within the solutions supply chain on warehouses and so on. How much do you think that you can actually defer this CapEx out of this $1 billion? Thank you.

Okay, so I think on the seasonality, it is quite clear that on the forwarding side, the peak season did not happen, nor are we seeing a peak season on the air freight side. I think the big unknown at the moment is on the B2C e-comm side of things. How is that going to play out? There will probably be regional differences. I think there are many hypotheses around are people now going to wait until last minute in December to see how they are coping with the household income and then there will be a super peak in December. I think that is really a crystal ball reading at the moment. So I think fundamentally we are not preparing for the big dynamic peak increase we saw in the last two years when this was obviously also influenced by the COVID situation, but we do expect a seasonal increase in the B2C businesses. That takes me to the second part of your question, which is, of course, a very good and relevant question about how do we prepare on the staffing side for that. That is something which we really, of course, country by country level. I think fundamentally we do expect the seasonal uptick but with less buoyancy and that is what we are preparing for on the staff side. I think in specific situations like for example here in Germany we are very much focusing on the quality aspect and also at the expense of potentially incurring slightly higher costs. That's one of the reasons for the reduced P&P guidance. In terms of capex, yeah, I mean, for this year, the $4.2 billion, that is kind of like basically done. There may be some phasing on, is an aircraft coming in December or January, or is a real estate transaction closing on the 25th of December or the 5th of January, but fundamentally, this year is in the books. Flexibility going forward is obviously on the aviation side in Express. Very clearly in the speed with which we build out further sorting capacity in our network businesses in Express, in PNP, in e-commerce solutions. It's less so on the supply chain side, as you mentioned that, because here CapEx is really very much driven by customer implementation. So when we win a big outsourcing deal for a customer and we need a new location for that, that then brings the CapEx along. So I would say overall, we have done that in the past. We know how to postpone and cancel CAPEX projects. But I think what we have also experienced over the last two years is that this is something where you shouldn't rush into decisions. So I think we have the list of things we could do, but we are taking a conscious, regular assessment of what would be the right triggering point to actually execute on it.

Okay, thank you.

Okay, thanks, Satish. I'm looking forward to the next caller then.

Next question is from Sam Bland of J.P. Morgan. Please go ahead.

Thanks. Interesting question. I have two, please. The first one is we're seeing weaker sort of B2B volume, but still B2C actually staying quite strong. Is your thinking that this at the moment is more a sort of a de-stocking cycle rather than lower volume because end consumer demand is falling. And the second question is volume is clearly getting a bit worse. I think that started around sort of maybe August time. Could you just talk about does it feel as if volume has kind of reached a bottom yet or is it still kind of getting worse month on month, week on week? Thank you.

Yeah, two good and difficult questions. I think on the first one, is it kind of like destocking and consumer demand is still strong? I think it is clearly driven by the fact that in certain areas inventory levels are quite high and there is a focus on destocking. And I think in many cases that is coupled with the fear that winter is coming and that consumer demand will slow down. So I think many customers at the moment see high inventory levels and are speculating on reduced demand going into the new year and are hence going back on orders. I think we have seen in the past how quickly such an assessment can turn. And that is also one of the reasons which gives us some medium-term confidence. Yes, there may be some further challenging quarters, but once the tide turns, we have also quite a swift uptake again in volume, which is again one of the reasons, coming back to the previous questions, But we really try to take a medium perspective also on the capacity we held available in the network. And on the Q4 volume development, I think at the moment the cautious approach has to be to expect a further decline in the B2B volumes in the fourth quarter. And on the B2C side, as said, we don't expect a big mega peak, but we expect some seasonal development on the B2C side.

This is actually the first question. The unknown, of course, but it's interesting to see Despite that, we still have very little rise in unemployment, as you know. That means people are still in their jobs. We have seen in many markets salary increases. Yes, energy costs are going up. A lot of governments are supporting, I think, the citizens, particularly in Europe, and getting over that point. Gas reserves in Europe are full. Weather in Europe helps quite a bit at the moment, as you can see. The warehouses are full and they now probably get empty again, and that's a consequence of supply chain disruptions we had. Many customers have said, okay, we have to sell stuff and we have to order more because there might be problems in the supply chain. If you see what happens to the ocean freight rates, They came down to the pre-COVID level almost, at least on some routes. You see that there's obviously not enough demand at the moment, despite that consumers have not dropped demand. And that is what I said at the beginning. We might see a much faster recovery on B2B than we expect if Christmas season is normal. And we don't see many insolvencies due to the energy crisis. And nobody knows what will really happen, The massive decline, it can't go forever that we have 15% less ocean containers and no decline in consumer demand. That will not work out. And that's the reason why it's interesting to see what will happen in the first or second quarter next year already. And I think this is... where we are thinking all the time, how can we create enough flexibility? I think we have proven that we can easily adjust to 50% more volume and 25% less volume in the last two years. So the COVID crisis was a really test case for our company to adjust their capacity to more and less demand on a very short notice. And I think we have proven that our business is pretty resilient. So it's unknown, but this is the ultimate question, but I think That recession is not there yet, despite volume in ocean and air has dropped, is encouraging, not discouraging. Because if a recession doesn't come, that will not go forever, that volumes in ocean and air are low.

Yeah, understood.

Thank you very much. Great. The same and the next caller.

Next question is from Andy Chu from Deutsche Bank. Please go ahead.

Thank you. Good morning. Three questions for me, please. First one's on P&P and with a step down in guidance now to 1.35 billion of EBIT. In the past, you've talked about maybe sort of one and a half billion being a sustainable level. You've clearly got some potential cost headwinds with a wage deal yet to be sort of renegotiated. So just wondered what your thoughts are and how you feel about the sort of sustainable one and a half billion. Secondly, I wondered if you could quantify maybe the year-on-year effects in DHL Express for fuel and FX. And then in terms of capex and free cash flow, that balance that you mentioned for 2023, are you basically thinking of basically cutting capex to meet your sort of mid-term guidance of around 3.5 to 4 billion of free cash flow? And if so, I mean, why are you kind of thinking about adjusting capex? Because I guess you've got a lot of network businesses. The balance sheet's in a good position. You kind of want to be investing, and you have invested in sort of downturn to sort of take advantage of downturn periods to emerge stronger. So I'm just interested in more sort of comments around capex and free cash flow. Thank you.

Yeah, maybe I take the first. Of course, since we said one and a half billion might be the level, we have seen tremendous inflation pressure. Of course, it very much depends what will happen in the next quarters. Also, our negotiation with the union or, of course, the expectations of the people is pretty high. So that pressure doesn't go away. You know, we have a stamp price set for three years that limits that somehow. So, you know, 1.5 looks now much more ambitious than it was looked probably at the beginning of this year. So we have to see what really comes out of the negotiation of the union. And we know that before we give a guidance for next year. And of course, what might change with the postal law, where we are still in discussion, of course, with not only we, but many with the legislator. you know, how that works out. So if we get decent results on both, you know, then it might be possible again. If we don't get, then it might be more risky to get to that level again. So that we can only see, but hopefully we have more foresight in that in March. On investments, Andy, you know, the nice thing about our balance sheet is that we can potentially take advantage of the situation by building capacity where we think we might gain market share long term. We don't have to cut investments just to deliver numbers. We would do that if we say it doesn't make any sense to spend money now unnecessarily, and of course we have done that in the past. But the strong balance sheet gives our company opportunities to do the right moves in organic investment, but also inorganic investments if they come across. And I think that is something we always should consider, and we have done that in the past as well. Crises are the moment where strong players take advantage and get stronger out of a crisis. And I'm deeply convinced that at the other end of whatever happens in the next 12 months, we will be relatively stronger than the competitors. Maybe, Melanie, you take the middle one.

Yeah, so the middle one around the fuel and FX impact on the express numbers. So if you strip that out and you look at kind of like underlying revenue growth excluding currency and fuel, that actually would have been around 4.3%. So nicely actually in line with the EBIT development of 4%. And again, that is even more remarkable because on the EBIT side, the strong dollar and the high fuel price was actually an EBIT headwind for us.

And maybe because we have not talked about that, but of course I have traveled physically now again in the last weeks to Europe, Asia, and Middle East, Africa. And if you visit these countries, despite all the challenges, you sense a tremendous energy level. You know, the people are not looking, oh, it's a crisis. They say, okay, let's pull up the sleeves and do the best for the company and best for our customers. And that is amazing consistently across the divisions and across countries. And I think that's something which is reflected in Great Place to Work, number one, but that goes beyond that somehow. And that makes me confident, despite we don't know what will happen, despite that faster drop now might be better for 2023, than such a never-ending slowdown, which comes in small steps. So we don't know. We have seen very sharp recoveries in the last 15 years, as you know. COVID was even sharper than the financial market crisis, but the financial market crisis, I remember where the times saw we had a recession or a W recession, you name it. The same with COVID. Nothing of that happened. The world recovered pretty rapidly from the challenges somehow. But the spirit of the organization is tremendous.

Thank you. Andy, thanks for your questions and

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

Thank you. So first on Express, so Melanie, I hear you state the dollar and the fuel has been a net negative indicator. EBIT headwind for you which a kind of sense has been disappointing for you and splitting IC fuel you have got proper support from you know indices and transfer mechanisms offsets apart from the timing effects but currency I remember Melanie saying earlier that you should ignore the percentage margin impacts the timing effects but to see an absolute impact on the EBIT levels will be worrying. So is the effects that are uncontrollable that is hurting your earnings more than expected now? Secondly, again, on Express, how you position from the air capacity perspective, really, we understand the flex that is there, but how do you feel placed with more freighter aircraft deliveries through this year and the next year that have come in? And lastly, thirdly, I understand fully your message on earnings. But what is really the reason for the free cash flow being a bit light for fourth quarter? I see a 250 million implied decline. Can you share thoughts on how much support we could expect from a working capital release from DGFF from here on? Thank you.

Thank you. So with the first question, express FX and fuel, yes. So first of all, you're absolutely right. On the fuel side, we have a mechanism which allows us to pass on fuel price increases to customers with a two-month time lag. I think what is really quite unique is that over the last month, we have seen an increase in fuel and at the same time a massive strengthening of the dollar versus euro and that's a movement we have not seen in such a way before and that is of course a challenging situation for us because fuel has to be paid in dollar, so more fuel in dollar with a weaker euro. What are we doing about this? What we are always doing on the currency side, if we see a fundamental deterioration in certain currencies, we have to make sure that we include that in our GPI. So that was a very important element. discussions country by country. So it is something we have to master in the short term and I think here again the fact that despite this very unfortunate combination in the third quarter we delivered the billion I think is a very reassuring message and then over time we will recover currency on the pricing and yield side. On the aircraft flexibility, indeed we are still receiving new aircraft and will continue to do so throughout 2023 and beyond. But what we always have as a basis of our aviation refleeting plans is making sure that we still maintain the right balance between own aircraft, medium, short-term leases. And that is not going to change fundamentally. So if we now have new aircraft coming in, we will still have enough flexibility to further decrease should that be necessary. And I think this is again something where we benefit from the fact that we have a super experienced team here who also in this third quarter reacted extremely proactively. They were not caught off guard, but they really adjusted very early on. In terms of free cash flow and why does Q4 look a bit light, I think it's a combination of two factors. The first thing is that compared to previous years, so when you look at the past 16, 17, 18, we quite often saw all our free cash flow coming in only in the fourth quarter. We worked very hard in having a more consistent cash flow performance over the year, including not only doing year-end working capital measures, but doing that on a much more ongoing basis. And that has now led to the very strong 9-month free cash flow. But of course that also means that compared to the past, there are less low-hanging fruits now for Q4. So it's a more evenly balanced phasing over the year. That's the one element. The second element is when you look at our capex guidance, there is, of course, still quite a bit of capex which is going out in the fourth quarter, and those are the two reasons for the Q4 free cash flow guidance.

I missed a bit about the working capital expected from DGFF, if you're willing to share.

Yeah, so DGFF was actually one of the divisions or the main division now also in the third quarter. I mean, we had this very strong increase in forwarding revenues about a year ago, Q3, Q4, that led to the very strong working capital build-out. Whilst we still had a strong year-over-year revenue growth in forwarding, when you look at what happened between Q2 and Q3, that was already flattening out. So on that basis, we already saw a very good working capital development in forwarding in the third quarter. It's more evenly split across the years and not all just coming in the last days of December.

Thank you. I can see we've got two more callers waiting.

Next question is from the line of Johannes Braun from Stiefel. Please go ahead.

Yes, thank you for taking my questions. I have two on Express and one on the kind of 2023 outlook. So on Express, can you elaborate a little bit on the geographical trends in Express? I can see that the slowdown on the Asian trade lane has actually slowed down in Q3, while the Americas has now turned negative with volume declines. I would actually have expected it the other way around. So maybe some explanation on that one. And then secondly, the revenues per day in Express TDI were up by 19% in Q3, which is actually up versus Q2, which was 15% up. And this comes despite the volume decline. So can you elaborate on that? To what extent has that been driven by, I guess, weight, rate increases, surcharges, mixed currency maybe? And then lastly, on 2023, you mentioned that you would expect in line with the consensus a decline in EBIT next year. So is it fair to assume that you, at this stage, therefore feel comfortable with the, I guess, $7 billion or so that Consensus has penciled in so far? Thank you.

Yeah, so I think on the express geographical question, so I think at the moment we see again that we are not overly dependent on one specific region and I think the one region I would actually positively want to highlight here is Europe. So I think Europe, in terms of volumes and revenues, has been much more resilient than you would assume looking at the news about the state of affairs in Europe. I think fundamentally, now maybe also looking broader between express and global forwarding, clearly the weak area at the moment is outbound Asia. In America, the number is a bit impacted on the volume side by certain B2C volumes, which you can also see in the fact that the revenue development was still quite positive. So I think my general message is for express volumes, very surprisingly strong and resilient in Europe. I think the concern area is outbound Asia and America is also holding on overall. In terms of revenue per day, yeah, I think that goes back to what we talked about earlier, the effect from a few surcharges, currency, and so on, that is, of course, impacting also the revenue per day number and leading to the stronger increase whilst volumes are less dynamic. And then coming back to the 23 outlook. So, I mean, obviously, there is... a lot of uncertainty out there, right? And you can kind of like look at the depressing macro outlooks or you can think about previous recoveries where when volumes came back it actually turned out more positive. We will give the complete 23 guidance in March. At that point in time we will know what start we had into the new year, where we actually ended up with the current year. I think the prudent approach is to prepare for some tougher quarters, particularly on the forwarding side with the volume sluggishness and the rate normalization, but also for us compensated by internal improvement measures, and then we also have to see what is happening on the express side. On that basis, when I look at a consensus which foresees a step back in 2023, but to levels which are still significantly higher than what we had pre-pandemic, I can follow that logic.

Thank you. I think there's one last caller. Two, actually.

Next question is from Nicholas Mauter from Kepler Chevro. Please go ahead.

hi good morning three questions if I may first one you were quoted on the ticker saying that current business environment creates takeover opportunities from a competitor we heard in an earlier call that sellers were still reluctant to write down price expectations could you elaborate please what kind of assets could become takeover opportunities perhaps in terms of size and geographies the second question is minimum wage increase has been Become reality in Germany since the first of October if you already seen some impact on the business Quality at your parcel Germany competition and the third question There's numerous press reports out there on mail delivery issues in Germany Is there any read through for Christmas service quality levels?

Thank you Yeah, so maybe on M&A You know, of course, you know if If a crisis comes, maybe some assets become under threat and with our balance sheet we have opportunity. We have a very clear M&A policy as you know. We were looking to what makes strategically sense for us. We are not buying just companies for the sake of buying them. We want to do that. They should be straightforward, integratable. and they should be accretive. I think we have demonstrated that for supply chain, you will see that very soon for the free acquisitions we made recently and also for Hillebrand where we are well on our way and the integration is working and we will keep that policy. And you're probably right, so far we have not seen that prices for assets came down quite a bit, so that remains the policy. We see some signs of the minimum wage because there is cost pressure for some. They are looking for price increase and they have announced that already. We see some pressure on the mail companies as well because they struggle as well to remain profitable. But it's too early to judge. We are only in that now four or five weeks or so. Therefore, I think the impact so far is significant. limited but of course that we will see that in the next quarters and of course it should have impact you can't create miracles if your salary costs are going up by 20 that has impact on your p l um yes we have uh on the on the other side we have challenges we had significantly higher covered infections than the year before just in july for instance we had last year 100 and this year 7 000 that has impact on our operations and the labor market is very tight, particularly because many people went back to their previous profession and supply stopped. You know, Ukrainians can't work here as much and Russians, and that has impact on the overall labor market. And we work, you know, at our best possible way to find enough people, but it will be definitely a challenging fourth quarter for us operationally as well. But that's a priority at the moment that we provide the best service possible and might even compromise on profitability for PAP in the fourth quarter.

Thank you.

Thank you, Nick. And now I think we come to the last caller, at least the last caller on the list.

Last question is from Alexia Dogani from Barclays. Please go ahead.

Oh, thank you. Thank you for taking my questions. I had three. Firstly, following on Frank's opening remarks that the world is bigger now than in 2019, how do you assess the semiconductor industry's efforts to reshore production to the west and diversify away from the east? Is this something that would have um kind of material implications to some of your businesses that's one and then secondly in terms of the emergency service surcharge for dhl express given air freight capacity is recovering and is this service search are still in place and what would be the trigger for its removal and then finally on melanie's comments about the differences in demand from different regions. If we think about the weakness outbound out of Asia, is that where Express has already reduced third-party capacity? And would you say the reduction in capacity is in line with the volume decline, or have you taken preemptive kind of lower third-party capacity out? Thanks.

May I take the first, then the second and third? So if I understood the question correctly, so we don't believe that there will be a massive reshuffling of supply chains from one region to the other. It might be for some, but for most, it will be more reshuffling in the respective region. When I was recently in Asia, I heard that consistently in the markets I have visited, I was not in China, because it's still, as you know, difficult to travel, but I was in other markets, and what you hear is that many customers are looking for diversification in a more resilient supply chain for their business, and that's a consequence of the COVID policy of China, which doesn't look to be changed soon anyway. But, you know, there are very few customers who are saying, I want to transfer everything from Asia to Europe. If they go somewhere else, they go to Africa, Middle East, or South America, and that is good news for our business because we are well positioned to capture these opportunities because we have the most balanced global footprint of all players. So what happens here is it creates more resilient supply chains for our customers which are typically more complex and that's good for us because we can manage more complex supply chains better than many others. And that's what I referred to. Hopefully, I understood the question right, but that would be my outlook for what happens to globalization. Actually, it's confirmed by our trade atlas, which we published recently. It shows exactly these kind of things based on the New York University assessment help from us as a company. So with that, Melanie, may you answer the second question? Third question, please.

If you had to particularly ask about the semiconductor rebalancing, I think that's an industry where with all the incentives, now CHIP Act, US, Europe, it will take a very long time to reverse things. I think in the 90s, 80% of the CHIP production was in the West and 20% in the East. Now it's the other way around. So obviously there is a strategic interest to reduce dependency, but particularly in the semiconductor business, that will take quite a long time. On your other two questions, ESS, is it still in place? Yes, overall it is, because we also see elevated costs on the aviation side, and that was the reason why we introduced the ESS in the first place in Q2 2020, but that is of course under permanent observation and revision, and the intention is When the aviation cost comes down as air freight rates are normalizing, we will also make adjustments on the ESS side to make sure that it's EBIT neutral, which has worked quite successfully over the last two years. On the Asia outbound weakness and the question, have you made adjustments to the aviation capacity there, the clear answer is yes. And obviously, if volumes remain sluggish, that will continue to be a focus for us.

Great. Thank you very much. Thank you.

Thanks, Alexia. Stuart, I think that's completing the Q&A round.

Yes, there are no further questions at this time, and I would like to hand back to Martin Siebenbaum for closing comments. Please go ahead.

Thank you, and thank you to all of you for this very concise and focused session, just above one hour, so that's a very good comparison. Looking forward to see you over the next couple of weeks on conferences and rotos and the likes, and with that, I want to hand over to Frank's closing remarks.

Yeah, thank you for listening first and your questions. Second, you know, it's always reassuring if we have delivered now another very strong quarter, knowing that things are getting more difficult. But I think it's important to go with maximum strength into a crisis, which definitely is coming, if I see the volumes. How long the crisis might last is, I think, the big unknown. As I said, B2B and B2C are behaving very differently at the moment, and we will learn more in the next 8 to 12 months. And maybe the outlook might be much better than we believe now as a global economy somehow. And that's the reason why we go into that with a high-motivated workforce around the world and with a very strong balance sheet. And I think that gives me comfort that the next quarters will be difficult, but we will get through them, and we will be stronger after that in any case. And with that, thank you very much, and see you soon, I hope.

Bye-bye.

Thank you. Bye-bye.

Ladies and gentlemen, the conference is now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.