UK Mail today disclosed a “very disappointing” slump in half-year profits and reiterated a full-year profit warning due to major operational problems following its move to a new central hub this summer.
The listed British parcels and mail group warned that it could take up to a year to solve the problems and emphasised that it will be handling the forthcoming additional peak season volumes “very carefully” with a focus on profitability and service levels.
UK Mail increased revenues by 4.5% to £237.6 million in the April – September first half of the 2015/16 business year. But pre-tax profits slumped from £12 million to just £2.2 million, including net exceptional cost of £2.7 million from the hub relocation.
The parcel business increased half-year revenues by 5.3% to £124 million with a 9% rise in average daily volumes resulting from new customer wins and more B2C business. But this changed sales mix and higher operating costs meant operating profit declined to £7.9 million from last year’s £12.6 million.
UK Mail relocated to the £35 million new hub at Ryton, near Coventry in central England, in July. It was forced to leave its previous hub in nearby Birmingham because this is in the path of a planned new high-speed rail line from London to northern England.
But in early August the company admitted it was facing major operational problems because a high proportion of its parcels could not be automatically sorted as planned since they were too large for the sorting system, forcing them to be handled manually at additional cost. The company had aimed to increase automatic sorting from just 20% of parcel volumes to 80% via new sorting systems.
UK Mail explained in its interim report: “A detailed plan is underway to address the issues and return our Parcels business to its target levels of profitability, and service levels are already back where they should be. In the meantime, we will be manging our customer acquisition and overall volumes very carefully as we approach the peak Christmas period with an absolute focus on profitability and maintaining high service levels.
But the firm added: “It will take long than originally anticipated to resolve the issues but we expect to achieve this over the next 12 months.”
CEO Guy Buswell said: “The current period of major investment and transition will deliver significant long term benefits. However, as we advised in August, it has become clear that the near-term challenges associated with the transition have been more significant than first anticipated.
“Trading in the initial weeks of the second half, and overall trends within our individual businesses, have been in line with our revised expectations. Our expectations for the current year therefore remain in line with previous guidance. However, due to the timescales required to fully resolve the challenges, our expectations for the next financial year have softened slightly.
“Whilst this is disappointing, the strategic rationale for the transformation we are undertaking is as compelling as ever, and we are confident both of our ability to restore our parcels business to previous levels of profitability and to build from there. The medium term operational and financial benefits will place us amongst the most efficient and competitive operators in our market.”
Meanwhile, the Mail business increased revenues by 3.6% to £114 million with an 8.1% rise in daily volumes, although profits weakened by 17% to £5.1 million due to strong competition in the mail market.
