Royal Mail’s CEO today promised rising profit margins and claimed the company was betterpositioned than any other postal operator to deal with the structural decline in mail volumes
because of its exceptionally strong position in the thriving UK parcels market and an improvedregulatory market in the UK.Moya Greene told journalists and investors at Royal Mail’s first-ever financial resultsconference for analysts, following last month’s IPO, that revenue growth from the group’s parcelbusinesses, combined with a falling burden of restructuring investment, meant that operating profitmargins from the group’s core UK operations were expected to increase to between 7% and 8% over thenext few years from their current level of less than 5%, making them among the best in theindustry.
The company reported solid first-half results for the six months to 30 September, with revenuegrowth of 2% to £4.52 billion (€5.42 billion) driven by strong growth in parcel revenue in thegroup’s core UK Parcels, International and Letters (UKPIL) division and its European deferredparcels operation, GLS, “which offset letter revenue decline”. Parcel revenue now accounts for 51%of group turnover, the company revealed.
Group operating profit after transformation costs stood at £283 million, benefiting from aone-off VAT credit of £35 million, lower depreciation and amortisation of £10 million, as well as£50 million lower transformation costs. Group operating margin on a like-for-like basis, excludingthe costs of the company’s “transformation” restructuring programme, increased to 5.2% from 3.3%the previous year, boosted by another strong performance by GLS. GLS grew its revenues by 6% to£940 million, with its operating profits rising by 11% to £62 million (see today’s separate GLSstory).
UKPIL revenues grew by 1% to £3.71 billion, and margins for the UKPIL business rose to 4.8% from2.7% last year, thanks to 9% parcel revenue growth, driven by the impact of new size-based pricing,offsetting a 4% decline in letter revenues. “As expected”, parcel volumes were broadly unchangedcompared with the same period last year, with strong growth in account parcels and ParcelforceWorldwide volumes offset by lower volumes in consumer channels, driven by the impact of size-basedpricing and a temporary slowdown in growth in e-retailing “due to the good summer weather in theUK”.
But Greene was confident that the underlying trend of parcel volume growth would continue,driving the business’s profitability in the future, while it focused on three key areas: parcels;the structural decline in letters; and a focus on customers.
“A big part of our turnaround has been our success in the parcels business. We have had tochange a lot of things in that area,” Greene said, adding that she was “proud we are the number onein the parcels business in the UK” delivering more than half of all UK parcels.
She said the UK was likely to see 16% growth in e-retail spending again this year. “The UK hasthe highest e-retail spend of any EU economy, and that growth does not show any signs of abating,”Greene observed. “The reason we have been able to be successful is that the core growth is B2C, andwe deliver to 29 million addresses.”
She said managing the structural decline in letter volumes was “a fact of being in thisbusiness. But I think Royal Mail is better placed than any other company in this sector. We havesuch a high level of our business in a growing market – parcels – and the regulatory changes in ourmarkets are very important, not least our ability to manage the decline of letters. We don’t havethe regulatory caps that held us back several years ago.”
CFO Matthew Lester observed that the combination of the growth of UKPIL parcels and GLSwere “sufficient to overcome the decline of letters. So we can target single-digit revenue growth,and because we are past the peak of our transformation investment, we can target cost reductionsunderneath revenue growth, and that improves margins.” He confirmed that he expected groupoperating profit margins “in line with our competitors, over three to five-year period – i.e. 7%-8%margins”.
Greene said she was pleased to see that the rate of decline in the company’s letter volumes hadreverted to the expected range of 4%-6%, having dropped to around 6% after declining at around 8%last year.
She said marketing mail currently made up 12% of mail revenues, but said direct delivery was “akey risk. TNT is moving direct delivery into another urban area, Manchester. I think unchecked,direct delivery can very quickly undermine the cost structure of the universal service, and if youcherry pick high-density routes, it is not difficult to see you can undermine the economics of theUSO very quickly.” She said Royal Mail was working closely with the UK postal regulator to look atchanges in this market over the last seven years.
But she insisted that letters were still an important revenue generator for the company, and itwas working on its Mailmark programme to put a barcode on every item of business mail. She saidthis would be completed by 2016, but would be trialled from next year.
Greene said she was confident that the company could look forward to a positive industrialrelations climate in the future, after narrowly averting a threatened national strike last monththanks to a last-minute agreement with unions. Following several weeks of intense talks from bothsides, she said the agreement had reached the “drafting” stage with legalrepresentatives.
However, she added: “Since September, as expected, there has been some customer reaction to theindustrial relations situation. To date this has been limited to a slowdown in the rate of businesscustomer acquisition in parcels and switching of some volume to competitors in anticipation ofstrike action.”
Depending on the strength of the seasonal parcels volume growth in late November and December,this may result in Royal Mail reporting broadly unchanged parcel volumes but significant revenuegrowth for the nine months to December 2013, the company indicated.
