Deutsche Post AG

Hello and welcome everybody out there. Pretty straight-forward event on the occasion of our half year 2017 reporting.

We have with us our CFO, Melanie Kreis to discuss the specific highlights of the second quarter 2017, in particular. After that, as always, there will be time for question and answer as well.

And without further ado, let me hand over to you Melanie.

Yes. Thank you, Martin, and also from my side good afternoon or good morning wherever you may be.

And thank you for joining us today to discuss our second quarter 2017 numbers. I assume you have the presentation in front of you.

I will just quickly run through some of the key figures so that we have enough time for your questions at the end. So, let's start with some key highlights on slide two.

When you look at the quarter, I think overall we showed again that we continue to deliver profitable growth. Topline growth maintained good momentum.

We had some currency headwinds, organically, we grew with 4.9% and we were able to translate this topline growth into a double-digit EBIT increase. Express led the way with a record margin of 12.5%.

PeP EBIT rose 4% as Mail volume decline normalized after the relatively weak start to the year. Global Forwarding, Freight came in in line with we had expected after the first quarter.

It's clearly still not at a level where we wanted to be in the longer run and we'll talk more about the dynamics also in the wider market. Supply chain continued its steady growth path.

When you correct for the cost of change one-off in the second quarter of 2016, you saw a healthy 5% EBIT growth. So, overall, good progress on the EBIT side.

With regards to cash flow, we will have a look at the second quarter and also at the six months cash generation for the half year, which shows that our cash flow performance is strong and puts us on track to meet our full year targets, despite some growth driven working capital build up in the second quarter. And of course we continued to expand our eCommerce footprint through targeted investments in all divisions.

Overall, I would say we saw strong progress towards our financial and strategic targets in the second quarter. Turning to slide three, let's quickly go through our group financials.

So, I guess you've already seen the numbers. So, I'll be relatively quick.

Revenue growth 4.4%, organically, 4.9%; EBIT €841 million, our strongest second quarter yet; and I think what is very nice to see here is that both PeP and DHL came in in line with our general trends expectations and contributed to the overall EBIT growth. On the financial results and taxes side, nothing surprising, they were stable and in line with what we had expected and on that basis, we were able to translate the EBIT development into an 11.3% growth on the consolidated net profit, which was up to €602 million for the second quarter.

Let me turn to page -- to page four, you can see our cash flow for the second quarter. I think you all remember that we had this €1 billion pension funding here in Germany in the second quarter of 2016, which is, of course, distorting the numbers.

We have hence corrected for that to make it easier to compare Q2 2016 adjusted with Q2 2017. On this basis you can see that on the OCF, before working capital, we saw a reflection of the good EBIT development, whilst in the changes in investment capital line, we saw for the second quarter standalone the buildup of working capital across most division.

We'll take a look at that in a second on the half year basis which gives a little bit of a difference. But clearly for the second quarter, we saw cash out from working capital.

That was balanced to a certain degree by lower CapEx in the quarter, which you will see on the divisional numbers, but I think, overall, that is more of a phasing topic. So, we expect some catching up on the CapEx side in the second half of the year.

On the next page, page five, you can actually see exactly the same picture, but for the first six months of the year. And I think here we had a good feeling for the underlying trend.

The first important point is that our EBIT year-over-year progress really translated pretty much one-to-one to an increase in OCF before changes in working capital. And that is in line with what we have also said in May when we talked about our half time report, EBIT growth will be the main driver of our cash flow performance going forward and we can see that working very nicely here in the first six months of 2017.

On the working capital side, we always have a cash out from working capital in the first half of the year, but you can see that on a year-over-year comparison, despite the strong topline growth, we actually had a lower cash out from working capital €89 million less than in the first six months of 2016. With regard to CapEx, I talked about the short-term phasing effect and we confirm our €2.3 billion growth CapEx expectation for the full year.

So, indeed that means that we will see an acceleration in CapEx spend in the second half of the year. Some of the big projects are continuing now into the second half of the year.

The year-over-year movement in M&A spend in H1 mainly relates to the proceeds from the King's Cross disposal last year, a topic you're all very familiar with. So, in summary, on the free cash flow for the first half year, operating performance is key and is delivering; working capital has been quite strong so far even though we saw some growth related build up in the second quarter; and for CapEx, we will see an acceleration in the second half of the year.

Putting all that together, we see the first half of the year, on the cash flow side, as a strong basis to deliver on our expectation of at least €1.4 million in free cash flow for the full year. That takes me through the net debt page, page six, where quite frankly, there's nothing surprising on that page.

You can see our traditional second quarter pattern following the payment of the dividend which, this year, was close to €1.3 billion. I think the most interesting element on this page is actually the comment at the bottom of the page.

There you can see how raising interest rates are really reducing our pension liability. So, the next pension provision has come down from €5.4 billion at the end of Q1 to now €4.6 billion at the end of the second quarter, which implies a funding ratio of 73%.

So, I think that is also quite a comfortable position to be in. That was the group overview.

Let me now quickly go through what is happening in the different divisions and I will start on page seven by taking a quick look at the quarterly results of PeP. I naturally recall our discussions in May about the PeP numbers where there were some questions asked after the first quarter with three more working days, especially on the Mail volumes, we see an acceleration in the structural decline.

When we now look at the second quarter, where we actually had three working days left and we put the whole thing together and look at it for the full year, there's no working day distortions, we very clearly see that there is no acceleration compared to the historical trend. On the contrary, the first six months of the year are actually quite strong.

We had put together for a Mail communication for the six month 1.1% decline. There were some elements from the elections in there, but even if you're very harsh and strip all that out, we are actually minus 2.6% taking everything out smack on this in the corridor of 2% to 3% which we have seen historically.

On the Parcel Germany side, you can see that we had again solid volume growth 6.3%; the revenue grew only by 1.3%, that is something we have already commented on in the previous quarters. We see some product mix changes here, so that does not mean that there is an underlying deterioration of the profitability on the Parcel side.

And finally, outside Germany, you can see here very strong growth numbers for parcel Europe, 61.5%. We had the U.K.

Mail effect in there. So, if you look at that on an organic basis, we still see a 21% year-over-year growth for Parcel Europe and a 15% growth on the DHL eCommerce side.

So, I would really say that the PeP growth story on the parcel and eCommerce side continues and with regard to the Mail volumes, we are back in the historical trend. And after six months, we can really see that the acceleration concerns from the beginning of the year have gone.

Taking a look at the PeP financials on page eight, revenue grew plus 4.8% including the U.K. Mail acquisition, organically that was 1.9% and it's very pleasing to see how that has really translated into a 4% EBIT increase driven by the normalized Mail volume decline, strong positive growth and also solid cost management.

On the operating cash flow side, you're probably all aware that PeP is the division, they are the pension funding has the most distorting effect in 2016. So we have to adjust on the PeP side by €955 million.

When we do that, we see that cash flow is actually slightly down and that is mainly due to working capital development in the second quarter. Yes, that takes me to page nine and Express.

And Express had a very, very strong quarter. The Yellow Machine is running smoothly and you can see that on page nine.

Shipment per day growth was 8.5%. Revenue per day growth was even stronger 12.7% that was partially due to higher fuel surcharges.

But we also see the benefits of disciplined yield management. In terms of geographies, the two big regions Europe and Americas proved very solid, it was 11.6% and 10.8%.

Asia-Pacific, you will recall from the previous quarter that we are going through a yield exercise that we started last summer. So we still saw -- see the effect of 3.2% reduced growth, but that's really a conscious decision and from this summer 1.35 onwards now we will see that fading out.

So very strong development on the topline and that was of course the basis to then deliver a strong operating performance. When you look at page 10, you can see that EBIT for the quarter rose to €469 million, up 12.2% was a record margin now of 12.5%.

And also very good performance on the operating cash flow side. On CapEx.

Express is one of the reasons why CapEx is a little bit behind in terms of phasing, that really has to do with some of the big cup extensions which are going on in Express at the moment, were it's more of a timing and phasing question. That brings us to page 11 and Global Forwarding, Freight and what we see here is a continuation of what we had already discussed in May.

We continue to see strong growth both on the air and on the Ocean Freight side. You can see that on the left side of the page, Air Freight volumes up 11.4%, Ocean Freight up 6.6%, but freight rates are at a high level and we are still working on passing on the increased freight rates to our customers.

So the margin squeeze on the gross profit side continues and that is what you then see in the right part, Air Freight gross profit was down 10.6%, Ocean Freight gross profit down 5.6%. And clearly, whilst that came in line with expectations for the second quarter that is not a number, we are pleased with.

We are taking a close look at implementing the measures to make sure that the good volume trend will translate also into a good gross profit and ultimately EBIT development in the second half of the year. And that takes us to page 12 on the Global Forwarding, Freight financials.

Yes, I think, we have already talked about the relevant drivers. You can see the outcome now here in the numbers.

Revenue was up 5.5%, gross profit down minus 4.2%, EBIT slightly below last year. And on the operating cash flow side, we also saw a negative development which was particularly on the forwarding side yet quite a bit of working capital build up.

And CapEx, as you all know is a relatively minor number for the Global Forwarding, Freight division. Yes and that takes us last but not least, Supply Chain on page 13.

In terms of order intake, there's a very clear focus on making sure that we get profitable business in and despite this more selective approach we are well on track to again achieve for the full year a number of €1 billion and more. And I think one other interesting thing to mention in supply chain is the speed with which new technologies are really being tested together with our customers in many of our operations.

We started using drones for inventory stocktaking. We're using robots in our warehouses to transport picked materials.

We are using vision picking, so there's really also a lot of technology exploitation going on in the supply chain division. And that is all part of the supply chain operational excellence agenda and this operational excellence agenda is paying off in the financials and that is what you can see on page 14.

EBIT growth at face value was 21.6%. If you take out the €16 million restructuring spend in the second quarter of 2016, we had an increase of 5.1%.

I think both on the EBIT and also on the topline, we should mention that we are seeing some adverse currency effect. So, when you look at the revenue number of minus 0.7%, when you adjust that for our currency, we actually had an organic growth of 1.9%.

That takes us to page 15. Our guidance page and there's actually no change to that page.

So we confirm our guidance goes for 2017 and for 2020, absolutely no changes to the same page we showed you in May. To wrap it all up, both our second quarter and our year-to-date, confirm our progress towards our financial and strategic targets.

We have a unique global footprint which allows us to leverage organic growth opportunities across the value chain, in particular servings of sustained ecommerce growth trends. And our EBIT performance demonstrates our operating leverage and believe us we have to improve efficiency across divisions and that's of course in line with our 2020 targets.

So I think, we believe, we have found in the second quarter, the good balance between generating attractive short-term returns, but at the same time, investing into the long-term set up and future growth for the company. On page 17, you can see the summary of our investment profile.

I will finish with that and I think it's time for your questions now. Thank you very much for your attention.

Yes, good afternoon. Hi, Melanie.

Hi, Martin. Thanks for taking my question.

Four, if I may firstly, UPS explicitly mentioned the TNT cyberattacks as a source of volume growth for them, can you feel the same? Can you quantify how big those impacts of market share gains were in the quarter and what that did to your European volumes?

Secondly, Parcel prices when I calculate rightly is down 4.6% which is a bit counter-intuitive since you get the same day volumes of Amazon Fresh, which should have probably have a slightly higher yield. Can you explain what's driving the price decline in Parcels here?

Thirdly, on the gross profit on gross margins and forwarding they are down quite sharply and can you elaborate on how much is sort of rising rates being slow to be passed on and where do you see maybe a normalized GP per ton, or GP/T of the business you're currently signing? And lastly, Middle East Africa volumes up 25% and revenue up 5%, how does that fit together probably you haven't lowered your prices by 20% what's in there to make that match?

Thank you.

Yes, thank you very much, Tobias. As usual a very comprehensive list of questions.

So, let me start with the cyber-attack and what that means for our volumes. And so I mean, fortunately, we were able to bring sense the impact of the attack on us quite quickly.

We were also impacted in the Ukraine, but were able to really get that under control quite quickly. What we have seen subsequently is that indeed because of the difficulties some of us had and have; we have seen an increase in volume, particularly, in Express Europe that had a small effect on the second quarter numbers because quite frankly, it was more starting towards the end of the quarter.

We are still in the middle of this volume search at the moment and at the moment, we are focusing very intensely on making sure that this extra volume is not leading to a deterioration in our service quality, because of course, I mean cater and our network for growth, but especially, in some of the [neural] points in our European network like Leipzig, we are really feeling the volume. So, intense focus is on making sure that we can cope with that on a high quality level.

And so we hope that it will give us a positive contribution, but it's nothing we bank on as a permanent trend. I think that would be premature at this point in time.

With regards to Parcels, yes, it is a number which jumps into your eyes immediately that on the back of 6% volume growth, we only had a 1% revenue growth. Structurally, that is something we saw already in the previous quarters.

We have done some cleaning up with customers, for example, in the 2-Mann-Handling business where we have had relatively high revenues associated with those customers and marginal volume counts. So, when we take them out, we lose a lot of revenue and not a lot of volume and that leads to this distorting effect.

When you look at the underlying Parcel pricing levers, they are overall stable. So, we don't see a huge deterioration the way you could calculate just looking at the 1.3% versus the 6.3% in the numbers.

Then on Global Forwarding and the gross profit margins they and you're absolutely right, the performance is not satisfying and I think it's actually a combination of both buying and selling side. So, on the buying side, we were caught on to a certain degree by surprise by the speed with which the rates went up, particularly, on certain lanes and also by the level in which the rates now were in the second quarter.

We have taken action on this basis for the second half of the year, but clearly the buying side is an important element. And the second element is, of course, in all our selling where we are working with great focus on passing on the increased rates to all our customers.

With some customers, that's the short-term thing, but there are also larger customers where we have longer term contracts where it's more of a time-consuming negotiation. And so I can say that we are fully through yet, but the clear expectations also from Tim Scharwath and the Forwarding team is that we will see the benefits of this exercise in the second half of the year.

And the fourth question with regard to Middle East and Express. Yes, that was actually driven by a handful of customers in Saudi Arabia, which is partly third billing and business.

So, we are looking at this because it was quite a lot of volume with profitability, which we have to take a closer look at. So, I wouldn't over interpret the growth for Middle East on the Express side.

I think what you see from Europe and Americas is a more normal thing. I hope that answers your question.

Yes, very clear, very precise. Thank you.

Thank you.

Thank you, Tobias. Next caller please.

Hey, good afternoon.

Hey Andy.

Yes, good afternoon, three questions for me please if I could. Just in terms of the CapEx, obviously, you're looking therefore to potentially spend over €1.4 billion of gross CapEx in the second half.

Just one, did you -- you touched on the halves, but what exactly is the CapEx gain into Cincinnati, into Leipzig? And what is the rest of that -- some of that actually slips into 2018?

Second, we stay on cash flow, could you just help us in terms of working capital expectations for the full year. Is it right to think of a sort of a small triple-digit outflow for the full year?

Obviously, you pointed to some quite strong volumes obviously within Freight Forwarding, that's given us quite a big working capital outflow within DGF. And then just coming back Freight rights, in terms of expectations, or maybe I missed this right at the end of your explanation, but when do you think you will actually see positive GP per unit territory?

Thank you.

Okay. Yes, so on the CapEx side, maybe, first some backward looking explanation on where has the CapEx gone.

So, the PeP side, when you look at the first six months, it was again the biggest kept CapEx consumption on the German Parcel network that side and we can see that as the continued area of investment. So, nothing structurally in terms of change there.

I think the biggest CapEx consumer in the second half of the year will be our Express division. When you look here at where this CapEx go so far, we actually had something like €150 CapEx year-to-date which went into our air fleet, actually half of that into maintenance and half into the rejuvenation of the aviation fleet.

That will continue. But actually the big driver also for the second half of the year with the continued build out of our hub infrastructure.

We still have some big projects going on like the completion of the hub in Brussels, we are extending in Cincinnati, but we also have things like our ground hub in Mexico, our biggest service center in Singapore. So, it's really a lot of investment also in the ground infrastructure to.

quite frankly. cope with good volume growth we are seeing.

For the biggest CapEx pool in the second half of the year will be form Express with well-known areas of spending. With regard to working capital, I mean we said in our longer term outlook that with a growing business, we do expect that there will be some cash out from working capital.

On that basis, we are actually quite pleased with our first half year performance. We will fight very hard to keep the increase under control and when you really look at our DSO and DPO performance, we are on a very good basis.

So, I think with DSO and DPO, it won't be that easy to optimize further. And we also see some interesting strength, maybe just as a side remark, so for example, on the Ocean Freight side, you all know about the capacity constraints on some of the route which has led also to some of the ocean carriers being much stricter with payment terms.

So, they also use on certain routes the advantages of the high demand. To say if you want to get on board, you better pay on time.

So, we keep a close eye on it. But with the growth of the business, it will be more of a more cash out from working capital for the fall with all current expectation.

And finally, on the gross profit per unit for Global Forwarding, when do we expect this to turn into positive territory. I mean very clearly our expectation and my expectation is that in the second half of the year, we will be able to turn the good volume development also into a good gross profit development and should see that really flow through to a year-over-year increase in EBIT.

That's the very clear expectation.

Andy?

All right. Thanks Melanie, thanks Martin.

Thanks Andy.

Good. Next caller please.

Hi, good afternoon Melanie, good afternoon Martin. Three questions if I may.

First one on the eCommerce growth throughout Europe, where we're seeing revenue increase, but the EBIT for the Parcel in Europe isn't really taking off. I just wanted to ask you if you could provide some comments around the maturity curve and how you would expect EBIT margins throughout Europe to shape up in the long run, possibly in comparison to the German market.

How would you think about kind of the maturity curve of the different markets you are launching throughout Europe? Second question also on DGF, but maybe more in terms of specialty logistics within DGF.

I think you commented before that the main improvements will be in DGF around volume, efficiency, and then also more Specialized Freight. Could you give us some more color around how you would envision that to play out in terms of what's the current percentage of revenue or tonnage, especially, logistics, how would that develop over time and drive margins in the business?

And lastly, probably, a short update on U.K. Mail integration timeline, plan changes, how is that work progressing?

Any color you could provide would be helpful.

Okay, let me start with the Parcel Europe question. As you rightly say we are seeing strong topline growth organically when you take out the U.K.

Mail effect and currency effect, we're talking about the 21% of revenue increase and on the eCommerce side, outside Germany 15%. What we show you in terms of EBIT is the combined number for parcel Europe and also for the rest of the world.

You also see the impact there of some of the new startup operations outside Europe just for completeness. In terms of maturity, I mean not surprisingly given the way we're building our European Parcel network, we are at different maturity levels.

I mean we had some countries where we integrated existing profitable businesses from within the Group. And we also have countries where we are really in a startup phase.

So, it is in terms of maturity a bit of a mix back and we really look at it also from a portfolio perspective where we see that the whole portfolio is moving in the right direction. In terms of profitability, yes, now this quarter is minus 5% for the whole PeP operations outside Germany and I think that's in line with our guidance that it will be hoovering around the zero line for this year as we are in the startup phase.

So, I'm really not concerned about the minus 5%. Maybe adding to that your third question because I think content slide its fifth year, U.K.

Mail, we are very satisfied with the progress on the U.K. Mail integration.

We are now beginning to use U.K. Mail as the delivery network for some of our cross-border streams coming from Europe into the U.K.

That was one of the big synergies we were expecting from the acquisition that we can use the U.K. Mail network as our delivery arm.

At the same time, we are now beginning to cross-sell our pan-European capabilities to the U.K. Mail customers.

So, that is all going according to plan. Then with regard to Global Forwarding and the Specialized Freight business.

I assume that is relating to the others line that you can [see in our stat] book. I think one important element here which was not doing so well over the last two years and is now really coming back is Industrial Project business that is quite dependent on the oil and gas industry.

And hence the last two years weren't the easiest, but that is now really nicely coming back with some good new projects and also some of the existing customers recovering.

Okay. Thanks.

Maybe to clarify on the first one. Do you have a target level for the EBIT of the European Parcel network in mind where you'd like to see the individual portfolio of countries kind of to go into in the long-term; is that around the German level, below significantly different or different for each geography?

Yes, I mean it is quite different in terms of set up from operations in Germany. So, for example, when you look at our German PeP operation, we do pretty much all the delivery with our own workforce, completely different approach outside Germany.

Because of the high labor cost class in Germany, we are automating to a very high degree here in Germany because our parcel sorting centers and also further down towards the last mile. In a different country where we have lower labor cost, where we use subcontractors, the approach is a different one.

So, even in terms of comparing target profitability, it's not as simple as looking at the EBIT margin because you really have to look at how much capital are we injecting into each of the countries and what are then return expectations. And there very clearly we have an idea where we want to go, but that is something which we also very clearly review to make sure we always find the right balance between growth and profitability.

For any further reference, Daniel, you may want to take a look also at the material and the transcript that we have on our half time reports event done in Mail -- done in May where we also covered that EBIT. Okay?

Thank you. Thanks Martin.

I know. Thank you.

Thanks Daniel. Any further questions today on Q2?

Good afternoon everybody. If I could ask three quick ones please.

We dealt with -- certainly Melanie I remember your comments with respect to APAC volume management in Express around the first quarter. I'm just interested -- clearly we've had the same dynamic I guess into the second quarter and I think that's the end of a four-quarter cycle.

But it's come at the same time as you've seen considerably higher growth rates in all the other regions. And I'm just interested is that a coincidence or is that a deliberate strategy to compensate for the management of those APAC volumes.

Then a second question again on the Express, following on from an earlier question on free cash flow. You mentioned obviously the spend in the first half of the year, but if I look to free cash flow to EBIT conversion in the first half, it has been the highest in the last few years.

And I'm just interested in terms of can you -- do you have confidence that as we get into 2018, we might start to see a structurally higher level of free cash flow conversion given the fact that the EBIT margin certainly continues to expand on that. And then a final question following on from the last question, you touched on leveraging U.K.

Mail to cross-sell into your pan-European capabilities within the Parcel business. Just interested can you give us some flavor.

I assume your key USP there is quality, but as to how price competitive are you needing to be to win market share in the U.K. market?

Yes, so starting with your first question on the APAC volume, what we see there is the result of a conscious decision, which is really linked to specific situation also outbound from Asia. Their flying capacity is quite constrained and so we had number of planes -- or our planes out of Asia quite full and we took the conscious decision that with before adding additional flights, we want to go for the optimum on the U.S.

side. So, we managed out some lower yielding business.

I mean that's a continuous process. We do all the time in the network.

But from airline capacity perspective, it made particularly sense from Asia and that has led to those reduced volumes that we now seen for the last three quarters where we expect things to get more normal in terms of growth rate in the second half of the year. In terms of will we see structurally higher contractual margins from Express?

When we said for Express that this year is going to be the peak year on the CapEx side, but it will stay at a high level. That, of course, always depends on the volume where at the moment; we are on the upper end of what we had assumed for the volume growth.

So, I think it will develop in the right direction, but that will also always be a balancing decision on making sure we get the optimal returns on our investments and I think what we see from the Express economics, again, in the first two months of this year, the equation is working particularly well for the Express division. And that takes me to your leverage U.K.

Mail question. I mean the nice thing is U.K.

Mail was more of a small player in the U.K. market, which we consciously chose also because of the quality of service.

We just feel that this is more compatible with our network approach. The service quality plays an important role.

We all know that the U.K. market is very competitive, so pricing is a topic, but it's generally not our strategy to buy market share at stupid prices.

Clearly understood. Many thanks.

Yes, thank you.

Thanks Neil. And the next caller please.

Hey Damian.

Hello. Good afternoon.

Three questions please. Two on the DHL and one on PeP.

First on DHL, could you elaborate a little bit more on what happened with the headcount productivity? It just looks like the volume per employee was up nearly 5% in Q2, what historically run at about 2% productivity on employees.

Has there been any significant change there? And if so, can you elaborate on what caused it?

Secondly, I noticed that Cathay Pacific put out a press release saying you sold out your stake in Air Hong Kong are planning to do so. Could you say a little bit more about how you're thinking about capital allocation and like capacity, ownership or rental in the Express business, particularly on the air cross side and whether that has any indication or stakes in their logic or anywhere else within your aviation side of the Express business?

And then finally on PeP, can you remind us how long the current labor agreement runs to and obviously, the positive side of inflation is the rising bond yields would have helped your pension liability. But can you tell us a little bit more about the issues and parameters you think of as you position in for the next leap in negotiation?

Thank you.

Okay. So, maybe I'll start backwards.

In terms of labor agreement, so the current labor agreements were Deutsche Post AG runs until January 2018. We have other increase 1.7% which will come in on the 1st of October.

So, for the next month, we have planning clarity and then we will have negotiation for our main entity Deutsche Post AG in January 2018. With regards to the deliveries, our subsidiaries where we hired a new partner -- people with our collective agreement for the logistics industry for different areas in Germany and there we have ongoing negotiations one region after the other is coming up.

So, I think this year we have already concluded negotiations for I think at least three of those areas. So, that is more of an ongoing process.

But our big internal negotiation will be in January of 2018. With regard to Cathay Pacific, I mean this joint venture construction was historic construction where the contract was now coming to a point where we had to take a view on what is the best way to continue our very, very good working relationship with Cathay.

So, we will continue to use Cathay as a partner. We have a new long-term agreement with them concluded.

It's just a more efficient way for us to structure the relationship going forward because the new set out will be a more standard set up which gives us higher operational flexibility that will important element for us. Aviation constructions are always special because of the legal restrictions in terms of foreign ownership and flying rights.

So, there's not a one size fits all approach. It really depends on the geography and AeroLogic is, of course, an easier situation because it's a German entity with a German partner for us as a German company.

And the whole legal situation is much more straightforward than in the case of Hong Kong. I think we have now simply chosen a more straightforward and more simple set up.

And then in terms of the headcount productivity, I assume you were referring to DGF? Yes.

Noted to Express?

To Express, okay, because you said -- I just wasn’t sure. So, I think on Express, there is nothing extraordinary.

I mean I have to say it was so unspectacular that I haven't looked at the numbers over the last two week, but from what I recall from my last reviews, productivity is good. The two important KPIs, -- look at was the operational performance in Express on the one hand side, our cost per kilo for the aviation network, we're actually making good year-over-year progress.

And the second important KPI is something which we call up [cost per move]. And there we see the impact from the investment in the infrastructure, so it's a little bit up year-over-year, but in line with what we had planned.

So, I have not seen any things concerns me in the Express upgradation of the KPIs]. Did I misunderstand your question?

No, no, no, I was just noting the [employ]; you're up 4% on 8.5% TUI growth. But thank you, you've answered the question.

Okay. Well, thanks for bringing it up.

And next question please.

Good afternoon everybody. Just two questions on Forwarding if I may.

It looks as if you have been growing a little bit faster than the markets depending on how you measure it. And your gross profit per unit has, as you said, come under a bit of pressure.

Is there a relationship with that? Can some of that be rectified by being a little bit more cheesy on the volumes that you take?

And are you prepared to do that? And secondly, just on the working capital, it does seem to be a bit of a problem across the Forwarding sector at the moment.

Is this a step change in the industry or do you think you can squeeze some working capital in the second half?

Yes. So, both very good questions.

The first one is ultimately about finding the right balance in this dynamic market between keeping good volume growth momentum, but making sure that it finds its way down to GP and EBIT. So, it is something where you can't give a generalistic answer.

It's something you really have to look at trade lane-by-trade lane and customer-by-customer. And that is what we are doing at the moment.

Tim Scharwath just spend the last week in Asia, really doing in-depth reviews on the pricing on the different trade lanes. Because you have to decide to trade lane-by trade lane on what is the right balance between volume growth and profitability.

Unfortunately, it's not a mathematical equation, where you put in the parameters and then you get the one right answer. It is, to a certain degree, more of a balancing art.

And its -- that's a core focus of our attention. With regard to working capital, and that's also an interesting question.

So, we have worked quite hard, especially on Forwarding on optimizing our working capital. I mean three years ago, we stood at pretty high numbers in terms of aging receivables.

We have really managed that down a lot. So, I think for us, the usual tricks of structurally improving things we have really worked very effectively.

I think the second thing is and I mentioned that briefly with regard to Ocean Freight, we also see that, yes, some of the suppliers in the industry are using their power in the current supply constrained pocket to put more focus on payment conditions than they did in the past. I mean clearly when you have a comparatively cost resource that is also a lever you can pull.

So, there is currently I think a bit of structural headwinds on working capital in the Forwarding industry.

Okay.

Okay Ed. I think that's answering that.

And the next caller please.

Hi, good afternoon everybody. Two questions please.

First on Parcel Europe, you highlighted the 21% growth excluding the U.K. Mail acquisition effect seems faster than some of the incumbent operators have published.

I was wondering if there's a purely organic number or does it still benefit from the expansion in new markets last year? And which were the most important ones that still contributed to the 21% in the first half of the year?

Then secondly on the DHL Forwarding, and Freight, you now derived about a third of your profits from the Freight business, the Road Freight business which doubled the EBIT in the first half of the year on a stable gross profit. I was wondering what's driving the improvement in the EBIT gross profit conversion ratio?

And is this now sustainable profitability level for your Road Freight business going forward? Thank you very much.

Yes. So, maybe to the first question what we took out for this organic growth number, the 21% were, first of all, the -- I think €27 million in extra revenue we got from U.K.

Mail and we also corrected for currency effect. So, the growth we got from the new businesses that we are building up is included in the organic number and naturally that is the main growth driver here.

And that is what we were expecting and what we need to over time get the return on our investment. So, I would be concerned if we would grow only at the pace of the incumbent.

So, that is what we would expect in business which is in the buildup phase. On your Road Freight question that is really a business that is doing very, very well.

And we have one effect here that you can see in our second quarter numbers which makes the gross profit to EBIT conversion look even better. So, we decided to restructure our U.K.

Domestic business in Freight, which was unlike the rest of all our Freight business, relatively asset-intent. So, on this relatively asset-intent business, we needed a higher gross profit margin and that is why actually the gross profit came down a little bit in the second quarter when you look at the freight numbers.

That's the one distorting element there. I think, overall, we are really moving in the right direction.

The Freight business, we have a new CEO who has been managing this part of the business since the 1st of January, who has great aspirations where he wants to take it for the rest of the year. So, that's really -- Forwarding Freight a nice topic to look at.

Okay, David?

Great. Thank you very much.

The next caller then please.

Hi. Just two [Indiscernible] -- just two questions from myself.

Firstly, in terms of obviously the Freight Forwarding business, are you sort of happy that the systems you have in place there sort of give you reflection of profitability, i.e., are any of the issues that's around the numbers you're reporting in terms of profitability, have they anything to do with maybe the issues you've had with the systems in the past? Or are you happy that basically the systems in place and the people are -- it's just a case of an industry-wide situation there?

And then the second question more generally is -- obviously, it feels like many, many of your businesses are seeing very strong volume growth. Obviously, you are adding capacity in.

In terms of any -- where would you say the greatest limitations are for you at the moment in terms of the capacity? And in the short run, is there anything out there that you would say could mean the growth rates do slowdown quite a bit from the point of view of yourselves putting the brakes on?

Thank you very much.

Yes, on the first question if I understood it correctly, DGF numbers and that they looked -- the way they look is not due to some system topics. I think that is really an accurate reflection of the current state of affairs.

We are working on our general IT upgrade for Global Forwarding and there will be also some advantages with regard to financial transparency and flexibility going forward. So, for example, on flexibility of coming up with pricing decisions, the new systems will give us advantages.

But in terms of reporting accuracy, that is not going to change. So, the way the numbers look is not due to some system challenges.

With regard to capacity limitations, yes, I mean one of the things where you see that in action at the moment is what I mentioned earlier, our Express growth out of Asia. It would have been very easy for us to show significantly higher volume growth rates out of Asia, but that would have meant that we would have to add additional airplanes, which is an expensive decision and we will add additional airplanes eventually.

But I think that is really one of the things where you have to look very carefully when is the right point in time, how long do you want to go for yield management? That is now the approach we had taken, making sure that we first get the profitability up.

So, this whole capacity management is more of a continuous process. The area where I think you need the most forward thinking is with regard to the hub extension, yes.

I mean, if you have significant volume surges in some of your critical hubs that is nothing where you can double capacity within six months. So, particularly on the hub side you need some planning ahead.

But here we are beginning to see the benefits of the extensions we have now been doing over the last years.

And then, sorry, just a follow-up on that last point in terms of -- obviously, you have spent quite a bit of money in the last few years. Do you feel because of that and because obviously what you are doing going forward, there's no real big humps we should be expecting going forward in terms of you've got the network where you want it to be and you might -- and you will have to add continuously, but it's not like there is any sort of big step ups that we should be expecting over the next few years even if volume growth continues to surprise on the upside?

Yes. I mean, what we have said is that this year will be the peak year for the Express CapEx, but that we expect it to then stay at a relatively high level.

So, don't expect it to drop down because we are done with expanding. So, I don't think there's a risk that we move too much on the upside, but you also shouldn't expect that it's going to half in the next two years.

All right. Thanks very much.

Thanks Dominic. And the next caller please.

Yes, good everybody. Just 25 questions, if I may please.

Yes sure.

Joking. Could you just talk about the current air freight environment through July and into August here?

We've seen a lot of strength; it started about a year ago. So, do you think we are just getting to the point of more difficult comps and it should slowdown or is there something you're seeing in the air freight market where you expect strong growth to continue well into next year?

Well, that was only one question instead of 25. Okay.

So, I think my answer to that would be, at the moment we don't have any reason to believe that the volume development slows down. I also I mean saw some clippings yesterday that some people say it's not as buoyant as it was in the first six months.

That's not what we are seeing. So, at the moment, also from the discussions with our customers, we don't see a slowdown.

So, we expect the dynamic to continue now for the third quarter for sure.

And to be clear, you don't see a slowdown in the growth rates or in the absolute volume of air freight tonnage?

Yes, I mean in the -- I would say that in the fourth quarter, we will see a bit of effect from the strong -- especially towards the end of the year a stronging up fourth quarter. But, no, really at this point in time, we don't see a slowdown in the growth rates.

I'm not guaranteeing that that won't happen in the fourth quarter, but really based on what we see at the moment, the dynamic continues.

And then, lastly, on the Ocean side of things, are you seeing any different patterns there? Is Ocean not as strong, strengthening, weakening?

Yes, I think Ocean was really one of the surprises in the first half of the year, where we also saw all of a sudden volume surges and capacity constraints on lanes where I think nobody had seen that in this way before like on some of the Europe to Asia trade lanes. I would say on that, it's not -- it is normalizing a bit, so it's not on the same tightness level which we have seen to a certain degree unexpectedly in the first half of the year.

But the market is also not cooling off in a dramatic way.

Excellent. Helpful.

Thank you.

Okay. thanks Dave.

And we are doing reasonably well on time, but I think we have got time for two or three further questions. Operator?

Good afternoon. I have two questions, first one on the international EBIT in PeP.

In Q1 you saw a tripling of that number with the help of, for example, U.K. Mail.

That will also have played a role in the second quarter, but there we saw a reversal. Can you comment on that?

Second question is, I noticed a sort of hiccup in depreciation in Express in Q2. Can you comment on that?

What was happening there? There's seems to be an additional €30 million or so.

And to what extent has that hurt the performance of Express in Q2?

Yes, so on the first question, the international EBIT, I mean for me that it's in line with our guidance that it will be hovering around the zero line. It may be up 10, it may be down 10.

I think that really depends a little bit on the phasing of some of our build out activities, which on the international Parcel and eCommerce side are predominantly OpEx-driven. So, it really has to with timing of certain startup activities both in Parcel of Europe, but also in the operations outside Europe.

So, I wouldn't over interpret a single quarter on that number. With regard to the Express line in depreciation, yes, well spotted, that's absolutely correct.

But it's nothing to worry about. In this second quarter we had a positive development on one of our very old U.S.

reseller cases, which gave us an EBIT upside, and in line with our aviation re-fleeting plan, we accelerated the depreciation on some older aircrafts. Both elements together had a zero impact on the EBIT and a zero impact on the cash, which is why we didn't mention it proactively because it's not distorting the numbers at all neither on the EBIT, nor on the cash side.

That's the background to that.

Okay. And a follow-up question on your first answer.

You said it will be hovering around 0. Can you give us any indication of how long that will be hovering around 0; should we expect the next two or three quarters or longer?

Yes, I mean we discuss it also in the context of our Strategy 2020 halftime report. So, I mean, clearly when you look at where our PeP EBIT is coming from at the moment, it's Germany and that is also the basis for our 2020 guidance that we want to grow on this on average 3%.

We don't expect a massive contribution from our Parcel Europe and eCommerce activities. So, this -- around the zero line trend will continue for some quarters.

And then quite frankly, it will depend also on the success of all these activities, how we take it forward. Because if -- I mean, we are launching some early stage eCommerce operations, for example, in Thailand, we have now launched in Vietnam.

If those things go extremely well, that may also be a motivation to accelerate the investment. So, very clearly for this year and the upcoming quarters the profitability development in PeP will be driven by the German development.

Okay Andre?

Okay. Thanks.

Good. All right, then the next caller please.

Hi, good afternoon. Just one question.

We currently have the situation that the bankruptcy of Hanjin, GDP growth and the more discipline in the entire liner business is pushing up freight rates. And then it comes to the Freight Forwarders and the Express business and there is also -- there is capacity restraints and more discipline and you can also push something going up to the customers.

How is the reaction of customers you are currently sorting out? Is there any risk that you are getting squeezed going forward, if customers are regaining some bargaining power going forward maybe in the next half year or in two years whatsoever?

Or do you really think that there is some structural change that not only the liners can push through rising freight rates because of discipline, but also the entire structure of Express and Forwarders can also push through their intention of higher profitability? Thank you.

I think to a certain degree -- I mean, especially when you look at Ocean rate, what we see is part of the normal forwarding cycle, where in times of raising rates you always have a delay as a broker between the increase in your buying rates and passing it on to the customers. And I think that is something where, yes, the forwarding business is used to and you now have to kind of like work that through.

Ultimately, I think on the Ocean freight side, we had pricing levels which were not healthy. I think I said that on one of the previous occasions.

I mean, when it's cheaper to transport a container from Asia to the U.S. than to do the [Indiscernible] transport within the U.S., I think something is wrong with the pricing and we were at those levels.

So, I think it is especially on the Ocean Freight side more of a normalization, where we now have to work through our pricing to the customers. I think the dynamic on the Air Freight side have been more volatile.

I think rates haven't been as low as on the Ocean Freight side. But now really the dynamic in the first month of the year were also very peculiar.

I think that takes a bit more of a convincing to sell it to the customers. But I think here ultimately the customers will be very interested that their stuff gets transported in good quality and that is I think the ultimate discussion.

Yes, if the rates don't work, you can't service that customer anymore. I normally hope that it doesn't get to that point, but those are, yes, the difficult pricing discussions our sales people are currently going through.

Okay. Have you lost some important customers in that entire process or some bigger customers not only in the Express business, but also in the Parcel business, which you sorted out not coming back and taking as their forwarders or express companies?

So, what is the amount? Has it increased in a meaningful amount or by a meaningful amount in the next -- in the last 12 months?

So, I would say -- I mean, on the Express side, clearly no. And that was really mainly kind of like areas where we were not satisfied with pricing levels and worked in it from our end.

I think the Global Forwarding market; the willingness to change is traditionally higher than in some of the other businesses. And there we have lost customers, also bigger customers, but we have also regained and won customers.

So, I think it may be a bit more dynamic than what it has been historically, but that is also really part of the Forwarding business.

Okay. Thank you.

Thanks Christian. And operator, any further callers out there?

Great.

All right. Well, I think that concludes our Q&A round and our Q2 2017 call.

My thanks to you, Melanie. And -- well, we're looking forward to seeing you over the next number of weeks, or if you do some vacationing, you enjoy that.

Anyway, wish you a nice rest of the summer and talk soon. Bye, bye.