Royal Mail kept underlying half-year profits stable thanks to good growth by its UK parcels business and GLS along with cost savings, including 3,000 job reductions, but predicts tough competitive conditions will continue for the rest of the 2015-16 year.
The British postal group had flat revenues of nearly £4.4 billion as higher parcel revenues compensated for lower mail revenues in the six months ending September 27. Underlying operating profits were stable at £342 million and the profit margin was an unchanged 7.8%.
But reported operating profits, including ‘transformation costs’ such as redundancy payments, dropped by 16% to £248 million and net profits declined to £183 million from last year’s figure of £217 million. Transformation costs increased, reflecting higher levels of voluntary redundancy costs as nearly 3,000 (net) UKPIL employees left the business in the first half-year, according to the group.
CEO Moya Greene said: “We have delivered a resilient performance in the first half, demonstrating our ability to respond to a competitive trading environment. As a result of an acceleration of our UK cost savings programme and a better than expected performance in GLS, group operating profit before transformation costs was flat in the first half.”
In the UK, revenues dropped by 1% to £3,651 million but operating costs were also 1% lower, keeping underlying operating profits stable at £284 million. However, transformation costs doubled to £94 million, pushing reported operating profits down to £190 million from last year’s £241 million.
Parcel revenues grew by 1% to £1,479 million with volumes up 4% at 518 million parcels but average prices were 3% lower due to pricing and mix effects. Volume growth was driven by new customer wins and initiatives in account parcels, and continued growth in lower AUR import products. The ‘core’ Royal Mail-branded parcels business increased volumes by 3% to 473 million parcels while Parcelforce Worldwide had a strong 17% increase to 45 million parcels.
Addressing analysts, Greene warned that UK parcel prices remain under pressure due to strong competition and an estimated 20% over-capacity in the market. She put the short-term annual average growth in the ‘addressable’ UK parcels market at only 1-2% in volume terms due to Amazon’s rollout of its own delivery network.
Meanwhile, letters revenues declined 3% to £2,172 million on a 4% volume decline, although this was at the better end of the forecast range of a 4-6% decline per annum.
Greene commented: “We delivered parcel volume and revenue growth in the UK, which continues to be a challenging market. Addressed letter volume decline was at the better end of our forecast range. We are driving through a range of product innovations and service improvements at pace, as well as targeting new areas of growth and enhancing our offering.”
Looking ahead at the UK business prospects, she added: “Given our strategic focus on costs, we now expect underlying UKPIL operating costs to be down by at least 1% for the full year.”
European parcels subsidiary GLS continued to perform well with an 8% rise in half-year revenues to €1,029 million and a 9% increase in volumes to 205 million parcels. The revenue increase outpaced a 9% rise in operating costs, leaving the operating profit slightly higher at €72 million compared to €69 million one year earlier. The operating profit margin fell back to 7% from 7.3%. Due to a 12% strengthening of the British pound versus the euro, the results showed lower revenues and profits when converted into pounds.
The good volume growth was benefitting from higher international volumes, while revenues were lagging behind due to pricing pressure and mix, impacted by lower parcel weights, Greene told analysts.
In Germany, its largest market, GLS increased revenue by 5%, driven by higher volumes from new and existing customers but had lower profits, mainly due to the cost impact of minimum wage legislation, Royal Mail noted in its half-year results.
In France, revenue grew by 6% and operating losses were slightly reduced to €8 million. Overall, revenue increased in all markets except Portugal, with stronger than expected 15% growth in Italy where GLS is likely to have gained market share.
Royal Mail said that given the half-year performance it now expects the GLS margin decline to be “at the better end of the 50-100 basis points range” in 2015-16 as a whole.
Looking ahead to the group’s results for 2015-16, Greene stated: “As in previous years, the full-year outcome will be dependent on our important Christmas period, for which we have extensive preparations in place.” She said that transformation costs for 2015-16 are now expected to be at least £180 million, due to the impact of the accelerated efficiency improvements in the first half, as well as higher project costs in relation to transformation in the second half.
