High single-digit growth by GLS and moderate growth by UK parcels offset a continuing slump in letter volumes and helped Royal Mail to stable revenues in the April – June 2015 quarter.
The British postal group announced in a trading update today that the results were “broadly in line with our expectations” and said it will focus on cost savings in the coming months amid a very competitive trading environment.
CEO Moya Greene said: "In the first three months of our financial year we have seen a continuation of the overall market trends we saw last year. We have benefitted from the parcel initiatives that took effect in the second half of last year and a good performance from GLS. Our trading environment remains challenging and we are stepping up the pace of change to drive efficiency, growth and innovation, while maintaining a tight focus on costs."
Group revenue was unchanged compared to the same period last year while the UKPIL division, covering all activities in the UK, had a 2% drop in revenue. UK parcel revenues increased by a moderate 2% but letter revenues declined by 4%.
Parcel volumes were up 3%, supported by continued growth in low AUR import parcels and a 20% increase in Parcelforce Worldwide, the smaller express parcels unit. In account parcels, Royal Mail said it benefitted from the initiatives that took effect in the second half of last year, successfully targeted new sectors of the market and benefitted from opening the network later and at the weekend.
Parcel revenue growth of 2% lagged behind the 3% volume increase “due to the pricing environment which remains very competitive in all the major segments, in particular Parcelforce Worldwide and export parcels”, according to the group.
Addressed letter volumes decreased by 5% (excluding the impact of election mailings), within the company’s forecast range of a 4-6% decline per annum. Total letter revenue was down 4% as some customers downtraded to cheaper products, which partially offset the impact of letter price increases which came into effect in January and March.
In contrast, European parcels subsidiary GLS performed better than expected, largely driven by a continued good performance in Italy and a better performance in Germany. Its volumes were up by 9% and revenues were 8% higher, both on an underlying basis.
Royal Mail noted: “We are monitoring how the market is reacting to the change in German minimum wage legislation and continue to expect that GLS margins could be impacted by around 50-100 basis points this year.”
Looking ahead, Royal Mail said its guidance for the full 2015/16 year remains unchanged. “In particular, we remain focused on costs and continue to target flat or better UKPIL underlying costs for 2015-16. As in previous years, our performance will be weighted to the second half and will be dependent on our important Christmas period.”
Meanwhile, British regulator Ofcom has announced a “fundamental review” of Royal Mail’s market position, including in parcels, following the exit of Whistl from the final-mile letter delivery business, leaving the privatised national postal operator with a de facto mail delivery monopoly.
Ofcom is calling for views on future regulation to ensure “efficient and financially sustainable” provision of the universal postal service, and suggested in a discussion document that it might withdraw some of the commercial flexibility introduced in 2012. One measure could be price caps to ensure no excessive price rises take place.
In response, Royal Mail said it will “continue to participate fully in Ofcom’s review. In particular we will be highlighting the need for a consistent approach to regulation. Ofcom’s existing framework, put in place in 2012 was to have provided certainty for seven years.
“Royal Mail believes it has used the commercial freedoms granted by Ofcom in a responsible and appropriate manner to help secure the financial sustainability of the Universal Service in the face of significant ongoing change across the postal market.”
