UK Mail has issued a profit warning for this year because a high proportion of its parcels cannot be automatically sorted at its new central hub, forcing them to be handled manually at additional cost.
The company opened its hub at Ryton, near Coventry in central England, several months ago and started to roll out new automatic sorting technology that was supposed to reduce operational costs and increase service levels. It is investing a total of some £35 million in the new hub, including £20 million in sorting systems, to increase automated sorting to 80% of parcels from just 20% in the past.
UK Mail was forced to leave its previous hub in Birmingham because this is in the path of a planned new high-speed rail line from London to northern England.
But the company admitted on Friday (August 7) that “the move has caused a greater level of customer churn and loss of volume than anticipated, with an associated adverse impact on parcels revenue mix”, although parcel volumes for the first four months of the new financial year starting in April 2015 were about 4% ahead of the comparable period last year.
“In addition, a greater than anticipated proportion of current parcels volumes is incompatible with UK Mail's new automated sortation equipment, resulting in additional operating costs and therefore a delay to the full benefits expected from automation,” the company said.
A company spokesman told British media that up to 20% of parcels at the hub were too large to be sorted automatically rather than the expected 5% of hub volumes.
CEO Guy Buswell said: "This near-term setback to our financial performance is clearly very disappointing. However we are taking decisive action to address these issues and we are confident that they can be reversed. The completion of our new fully-automated hub represents the largest strategic development in our corporate history and the rationale for this significant investment remains compelling.
"We continue to believe that it will make us one of the most efficient and competitive operators in our markets and, with number of significant new customers keen to use our services as a result of this investment, we remain confident in our medium and long term growth prospects."
The parcel sorting problems at the new hub mean that UK Mail now expects profits for the year ending March 2016 to be “materially below current market expectations”, with profit before tax (before one-off exceptional items) now expected to be in the range of £10m to £12m. Some financial impact is also expected in the first half of the next financial year.
In the year ending March 2015, UK Mail increased revenues by just 0.8% to £485.1 million while pre-tax profits slipped 3.8% to £21 million.
In contrast, the company said its Mail business continues to perform well, with volumes up by some 6% during the first four months of the new financial year thanks to new customers, while the packets initiative also continues to make good progress, with a strong pipeline of opportunities in this market.
