UK Mail’s parcel volumes have outgrown capacity in recent months pushing up costs and resulting in lower profits in the year ending March 2015, the British company announced today.
The listed company increased revenues by just 0.8% to £485.1 million in 2014/15 while operating profits slipped 3.8% to £21 million.
Revenues in Parcels, covering the business-to-business (B2B), business-to-consumer (B2C) and international parcel delivery services, were up 3.7% to £228.1 million. This was a 4.3% rise on an adjusted basis, taking account of the one less working day. But the unit’s profits declined by 4.5% to £21.4 million and the operating margin dropped to 9.4% from 10.2% last year.
UK Mail achieved volume growth in both the B2B and B2C market segments in the period overall, with Parcels average daily volumes increasing by some 7.4% compared to last year with an on-going volume mix change towards the lower margin B2C segment. Volume growth in the final quarter was particularly strong at some 12.9%, largely due to the volume gained as a result of the collapse of City Link.
“While clearly positive for the business for the future, this has caused some inevitable challenges as we continue to digest the new client volumes and establish, based on profitability, the volumes we want to retain for the longer term. This has taken our parcel volumes temporarily above our current optimal operating capacity, resulting in above normal operating costs being incurred in the fourth quarter of the financial year. While this will be resolved when the new hub becomes fully operational, this impacted the parcels operating margin and operating profit for the year,” the company explained.
However, UK Mail stressed it is making “good progress” with parcel product innovations, such as the growing ‘ipostparcels’ online-based consumer service. In addition, the enhanced next day delivery service, which offers advance-notice one-hour delivery and collection windows, is now fully operational, providing opportunities for B2C growth.
The company’s new Ryton Hub is now operational and automation rollout has commenced. “The immediate priority for our Parcels business is to complete the transfer to the new hub, and then roll out automation to our target levels. This will allow us to increase capacity, while reducing operating costs and further increasing service levels,” UK Mail stated.
Revenues in the Courier business, which provides same-day delivery services, increased by 2.0% to £16.5 million but operating margins decreased to 13.4% (2014: 17.0%) leading to a decrease in the operating profit by 19.6% to £2.2 million.
However, the business has been undergoing a period of transition away from the traditional same-day courier operation towards one that provides specialist service support to the Parcels business, which has resulted in the loss of some business in the year. UK Mail has now decided to integrate the small operation into the larger Parcels business, especially as it represents a key part of the parcels-based Retail Logistics operation.
Meanwhile, Mail revenues decreased by 1.9% to £240.5 million, which was a 1.6% fall on an adjusted basis, taking account of the one less working day compared to last year. The revenue drop was largely caused by a mix change towards Customer Direct Access (CDA) mail, which carries a substantially lower revenue per item, following a “very significant” public sector CDA contract during the year. Average daily mail volumes increased by some 4.7% compared to last year. Mail operating profits decreased by 1.7% to £12.5 million and the operating margin remained at 5.2%. UK Mail said it would target the growing packets markets in future to improve mail revenues and profitability.
UK Mail confirmed that its Pallets business was closed down at the end of March after a challenging few years with revenue and profitability declining in an increasingly competitive market. The business reported a loss after taxation of £10.8 million for the year, which includes the exceptional impairment of the goodwill arising on the acquisition together with the costs of closure, largely relating to redundancy and dilapidation costs.
CEO Guy Buswell said: “After a strong period of growth, with the volume of parcels handled within our business doubling over the past five years, UK Mail is in the midst of a period of major investment and transition at a time when our markets are undergoing significant change. All this has created some inevitable challenges but also significant longer-term opportunities.” In particular, the new fully automated Ryton hub will create extra capacity and reduce operating costs.
Referring to the insolvency of City Link and Whistl’s exit from end-to-end mail deliveries, he added: “We see significant opportunities in both the parcels and mail markets, in part from the changing competitive landscape and our strong value-added positioning within it, and in part from the new initiatives we continue to pursue such as imail, imailprint, and the opportunity to expand significantly in the packets market.”
Buswell observed: “Parcels is a growth market that is rapidly polarising between high quality, innovative and sophisticated operators and those at the opposite end of the value scale. We are in the midst of a phase of substantial strategic investment to place us at a significant competitive advantage in the value-added segment of this market for the medium and longer term.”
