Royal Mail today reported higher full-year group profits as parcels growth in the UK and at GLS compensated for the letters decline but GLS profits dropped on local losses and rising labour costs.
The British postal group’s reported revenue in the year ending March 2019 rose to £10.6 billion (for a 53-week year) while adjusted revenue (excluding the extra working week) increased by 2% to £10.4 billion. The reported operating profit improved to £160 million from the previous year’s £66 million, while pre-tax profit improved moderately to £241 million. But the adjusted operating profit dropped 34% to £411 million.
The UK business (parcels, letters and international) reported flat adjusted revenue of just under £7.6 billion, with good parcel revenue growth offsetting total letter revenue decline, and reported a small profit of £72 million compared to a £111 million loss the previous year. Addressed letter volumes (excluding political parties’ election mailings) declined by 8%, in line with revised expectations, and total letter revenue declined by 6%.
Parcel volumes in the UK were up by 8% to nearly 1.35 billion items and revenue by 7% to £3.75 billion. The core Royal Mail network delivered nearly 1.25 billion parcels, an 8% rise, while the small separate B2B business Parcelforce Worldwide increased volumes by 1% to 100 million parcels.
“Our UK parcels business is performing well,” the group commented. “Royal Mail domestic account parcels volumes, excluding Amazon, were up 8% as we won new customers and gained more traffic from existing customers. Royal Mail Tracked 24®/48® and Tracked Returns® volumes, our key e-commerce products, grew by 24%. Our propositions targeting fast growing sectors and major new features like estimated delivery times supported this growth. Strong Amazon parcel traffic growth resulted in higher volumes of letterboxable parcels. We benefitted from new volumes due to the extension of our customer Latest Acceptance Times (LATs) for our Tracked 24® product.”
Parcelforce Worldwide volumes increased by 1%, compared with 2% in 2017-18, largely due to a customer withdrawing from the online retail market during the year, the group noted.
In terms of international parcels from and to the UK, Royal Mail commented: “Our international parcels business continued to benefit from our initiative to attract cross-border traffic, mainly from Asia into mainland Europe and the UK. This accounted for around two percentage points of the underlying parcel volume growth and around one percentage point of the parcel revenue growth in the year. We saw improved import volumes outside our cross-border initiative. Contract export volumes declined due to the competitive market.”
GLS generates good revenue growth but profits slump on higher labour costs
International parcels subsidiary GLS delivered continued good revenue growth, up 8% to nearly £2.9 billion (€3.3 billion) on volume growth of 5% to 634 million items and selective price increases, with most markets continuing to grow.
However, its adjusted operating profit dropped 9% to £177 million (€201 million) as costs increased by 9% due to rising labour costs and due to losses in France and the US, and lower profits in Spain. The profit margin fell to 6.1% as a result. The reported operating profit, including £89 million worth of impairments for US subsidiaries GSO and Postal Express, dropped to £88 million from £177 million, halving the profit margin to just 3%.
Reporting on the main GLS geographical markets, Royal Mail said that Germany revenues grew by 9% driven by international volumes and improved pricing but the operating profit margin dropped due to increased cost pressures and driver shortages.
In Italy, GLS revenue grew by 5%, moderating in line with expectations. “We experienced lower growth compared with the prior year due to the competitive environment, including the impact of the launch of Amazon’s own logistics network in the country,” the group noted.
France remained “challenging” and losses increased by €5 million to €18 million despite a 4% increase in revenue due to improved pricing, including service fees for over-sized parcels and higher export volumes. GLS is now focusing on quality and targeting profitable segments to try to reduce losses.
“Despite the challenges in the domestic market, GLS France continues to be integral to the GLS network by supporting exports from other markets into France and allowing GLS to provide a comprehensive service across Europe,” Royal Mail emphasised.
In Spain, GLS increased underlying revenue by 7%, driven by higher international volumes. ASM has now been fully integrated with GLS Spain but integration of more recently acquired Redyser is proving more complex than anticipated and has resulted in network inefficiencies and one-off costs that are impacting profitability. An increasing proportion of domestic volumes from relatively low margin customers has also impacted profitability.
Elsewhere in Europe, GLS increased revenues in most developed markets, including strong B2C growth in Denmark, and achieved double-digit revenue growth in all developing/emerging European markets.
But the picture in North America was more mixed. The two US businesses, GSO and Postal Express, made losses of around €15 million due to restructuring measures to switch to a sub-contractor delivery model, refocusing the customer base, local cost pressures and other factors. Canadian parcel company Dicom, acquired last September, performed in line with expectations in the seven months since the acquisition.
Looking ahead to this year, Royal Mail Group expects UK parcel growth to outpace the addressable market growth of 4-5% while group adjusted operating profit after transformation costs should be between £300 million and £340 million.
