Royal Mail today announced higher profits for 2014/15 driven by its growing parcel businesses in the UK and continental Europe (GLS) but warned competition will remain tough in the parcels business this year.
The British postal group increased revenues by 1% to £9.4 billion in the year ending March 2015 as overall parcel revenue growth exceeded expectations. Operating profits increased by 5% to £595 million, pushing the operating profit margin up to 6.3% from 5.2% last year, thanks to tight cost controls.
CEO Moya Greene said: “We have delivered operating profits in line with our expectations. Our continued focus on efficiency resulted in a better than expected UK cost performance, offsetting lower than anticipated UK parcel revenue. At the same time we have delivered a large number of innovations at pace as we transform our business.”
The UK parcels and letters business (UKPIL) had flat revenues of £7.75 billion, with parcels growth outweighing a letters decline, while operating profit improved 3% to £470 million, after transformation costs.
Royal Mail’s UK parcels business increased revenues by just 1% to £3.19 billion while volumes increased by 3% to 1.1 billion items. This included a 12% increase in Parcelforce volumes to 86 million items. In contrast, letter revenues dropped 1% to £4.57 billion and addressed letter volumes declined by 4% to 13 billion items, which was at the better end of the forecast range due to the improving UK economy.
Greene told analysts that the UK parcels market is growing about 4% a year, with B2C volumes up about 4.5-5.5% and B2B volumes at about GDP growth levels, but Amazon’s rollout of its own delivery network meant the ‘addressable’ parcels market for market leader Royal Mail was growing only about 1-2%. Combined with fast capacity expansion by competitors, this was putting pressure on prices, she explained.
The European parcels subsidiary GLS increased revenues by 7% to £1.65 billion (€2.1 billion) on an underlying basis (excluding currency effects) in 2014-15 and slightly improved its operating profit to £115 million (€146 million) from £108 million (€128 million) last year. The company slightly improved the operating profit margin to 7%, and increased volumes by 8% to 436 million parcels, including a strong rise in international parcels.
GLS achieved revenue growth in all its markets, Greene told analysts. In Germany, its largest market, revenues increased by 3% and sub-contractor costs stabilised prior to introduction of the new minimum wage but competition remained tough. In France, revenues grew by 7%, losses were reduced to €16 million and a turnaround is now targeted for 2016-17. Italy continued to grow strongly with a 16% revenue increase due to market share gains and acquisitions, although these effects are expected to slow this year.
However, GLS’ margins could drop by around 50-100 basis points in 2015-16 due to the combined impact of German minimum wage legislation and the disposal of DPD Systemlogistik in Bavaria, with a £96 million impact on revenue, Royal Mail warned.
Looking ahead, Greene said: “Our trading environment remains challenging, but we are now poised to step up the pace of change to drive efficiency, growth and innovation, while maintaining a tight focus on costs. At this early stage of the financial year trading is in line with our expectations, but as in previous years our performance will be weighted to the second half and will be dependent on our important Christmas period.”
