Royal Mail today unveiled a dramatic improvement in its half-year profits as strong parcels growthoutweighed a letters decline, paving the way for the British postal operator to be privatised next
year. GLS profits dropped back, however.Royal Mail’s group profits soared from just £12 million in the 2011-12 half-year to £144million in the April – September 2012 half-year. The profit margin rose to 3.3 per cent from only0.3 per cent one year earlier as group revenue increased by 3.3 per cent to £4,355 million.
Parcel delivery services were the key growth driver thanks to the continuing boom ine-commerce. The group’s half-year parcel revenues rose by 4.6 per cent to £2,059 million, thusrepresenting 47 per cent of overall revenues, and volumes were 4.2 per cent higher.
Royal Mail stated in its half-year report: “We are in the midst of one of the largesttransformation programmes in the UK, as we adapt a network, traditionally focused on letters, toone which handles more and more parcels. Our strategy is to create a more customer-focused company,run on commercial lines, where we convert increases in parcel volumes into profitable growth andmanage the structural decline in the letters business.”
CEO Moya Greene said: “The transformation of Royal Mail is well underway. We have madesignificant progress across all fronts, but more needs to be done. We are focused on continuing theturnaround of our business and securing the external capital we need to complete the transformationof Royal Mail.” She confirmed that preparations are now underway for the sale of Royal Mail butstressed that the structure and timing of any privatisation was a matter for the Britishgovernment.
Today’s half-year results are seen as a key step towards a Royal Mail IPO next year thatcould raise up to £2 billion. An investors’ roadshow could take place early in 2013 and a flotationin the second half of the year, according to several UK media reports.
In the April – September 2012 half-year, Royal Mail’s core business, UK Parcels,International and Letters (UKPIL), completed a financial turnaround and posted a profit of £99million compared to last year’s £41 million loss, generating a profit margin of 2.7 per cent. Thedivision delivered a 6.1 per cent revenue increase to £3,635 million. Despite an expected 9 percent fall in addressed letter volumes due to e-substitution, letter revenues went up by 2 per centbecause of a sizeable price increase in April this year.
UKPIL parcel revenue grew strongly by 13 per cent to £1,347 million, with volumes up 5.6 percent to 491 million items, thanks to e-commerce growth. Volumes in the core Royal Mail network,including B2C and C2C parcels, increased to 459 million from 434 million one year ago. Expressparcels unit Parcelforce Worldwide increased volumes fractionally to 32 million. Last month Greeneannounced a £75 million four-year investment programme for Parcelforce, covering a new hub, morethan a dozen new or expanded depots and about 1,000 new jobs.
GLS, the European parcels subsidiary, had flat underlying half-year revenues of €886 millionwhich showed a fall to £712 million when converted into pounds sterling. Its volumes were stable at182 million items. Royal Mail said that GLS revenues were “resilient” given a fall in Francefollowing sale of the ‘Innight’ business and “more than offset” by growth in Germany, Italy,Belgium, Denmark and Austria.
But the operator’s half-year operating profits dropped back to €56 million from last year’s€67 million, and showed a decline to £45 million from £58 million after currency conversion due tothe weaker euro. The profit margin fell back to 6.3 per cent. Explaining GLS’ lower profits, RoyalMail highlighted “significant cost pressures in Germany” that had impacted on profits in thecountry, and which were only partly offset by higher profits in Italy, Denmark and Romania.
Outlining GLS’ strategy, Royal Mail said the operator would aim to protect margins inGermany, further expand in Italy with selective franchisee acquisitions and in Spain with networkexpansion, and was monitoring whether to launch start-up operations in Eastern European countriesseeking to join the EU.
“GLS aims to continue the expansion of its European parcel network through organic growth andacquisitions, where appropriate, focusing principally on standard parcel deliveries. Itsground-based network and geographical reach leaves it well-placed to deliver parcels in thiscategory while maintaining control of costs,” concluded Royal Mail. This statement could beinterpreted to rule out any interest in TNT Airways, which some recent reports suggested GLS mightbe interested in buying from TNT Express as part of the planned acquisition by UPS.
Looking ahead, Royal Mail said: “We expect our UK businesses – both parcels and letters – tocontinue the performance established in the first half. We again see significant growthopportunities in parcels and our focus is on turning that into profitable growth. In continentalEurope, GLS will maintain its focus on high quality service, margin and profits despite thechallenging conditions in a number of the markets in which it operates.”
Responding to the results, Business Minister Michael Fallon said: “Today’s results from RoyalMail are encouraging, showing how Royal Mail staff and management together with the Government’sreforms, have put the company on the road to sustainable health and long term viability. Parliamentdecided, via the Postal Services Act 2011, to inject private capital into the company in order tosecure the future of the universal postal service. The structure and timing remain open, butGovernment is committed to doing that to ensure the ongoing viability of the company.”
But the British postal workers union CWU said the improved results proved that “modernisationcan be successful within the public sector”. Dave Ward, CWU deputy general secretary, said: “Thereis no need for privatisation as a solution to business transformation. Change is being successfullydelivered by postal workers daily throughout the company. Postal workers are Royal Mail’s greatestasset and should be recognised as such.” He also called for the postal regulator Ofcom to protectthe universal postal service in the UK which he claimed was being undermined by competition.
