Corona crisis drives Royal Mail UK into red and hits GLS profits

Royal Mail’s UK business is set to plunge into the red in the coming financial year, which starts in April, while GLS profits will take a hit as B2B volumes slump due to the coronavirus crisis impact on business activities.

Moreover, the British postal group has suspended forecasts for the 2020-21 financial year and warned that COVID-19 hit could delay its medium-term turnaround strategy.

Royal Mail Group said today in a detailed update on the impact of the coronavirus on its UK and international businesses that it still expects adjusted operating profit (before IFRS 16) of £300 million - £340 million in the year ending March 2020.

Looking ahead, however, there is “significant uncertainty” for the coming 12 months, and it now expects its UK business to be “materially loss making” while GLS profitability will be “significantly reduced”.

CEO Rico Back said: "We are focused on protecting our people, company and the communities we serve during this unprecedented crisis. We are putting the health and wellbeing of colleagues and customers first. At the same time, we are delivering the parcels and letters that are a lifeline for those who cannot leave their homes.”

Operationally, Royal Mail Group underlined that it is following government and local authority guidelines and advice in all its markets. While levels of sickness absence vary from market-to-market, the overall trend is an increase in absence from work due to the pandemic, and the group cannot rule out reductions to services as COVID-19 develops.

On finances, Back emphasised: "We are entering a period of significant uncertainty in a good financial position. We have a strong balance sheet. We have substantial levels of liquidity and low levels of debt. We are taking immediate steps to further reduce our costs and protect our cash flow." 

B2C parcels surge in UK business

Like at many other European postal operators, Royal Mail has seen B2C parcel volumes rise strongly during the last two weeks, supported by an increase in e-commerce as people have shopped more online.

Its Royal Mail Tracked 24®/48® and other standard products have performed well, while Tracked Returns® volumes have been lower than expected due to weaker volumes from the clothing sector.

But B2B volumes “have seen a significant negative impact, although this only accounts for a small proportion of our overall parcel volumes”. Royal Mail International has seen lower volumes given restrictions in certain countries, especially into and out of China, and reduced air freight capacity.

In the letters business, business mail volumes “have been resilient to date and broadly in line with previous expectations” but advertising mail has dropped significantly as marketing campaigns have been delayed or cancelled. “Whilst it is difficult to accurately predict how letter volumes will evolve over the coming weeks we do expect downward pressure to continue,” the company noted.

GLS B2B volumes slump

Meanwhile, the corona crisis has had a “very challenging” impact on international subsidiary GLS, although this differs from country to country. “There has been disruption in key markets, particularly in Italy, France and Spain, where the most severe restrictions on movement have been imposed,” the group confirmed.

“In the last two weeks Business to Business (B2B) volumes have fallen significantly in some markets. Whilst we have seen growth in business to consumer volumes, driven by e-commerce, this has not offset B2B declines. We expect the declines in B2B volumes to continue,” Royal Mail Group stated.

Financial hit in 2020-21

In terms of the financial impact, Royal Mail warned: “For 2020-21, there is the potential for sharp and sustained economic downturns in many of our core markets. Due to the rapidly-evolving and fluid nature of the COVID-19 pandemic, it is too early to accurately predict the impact. However, it is likely that UKPIL will be materially loss making in 2020-21, with profitability at GLS significantly reduced.”

The group continued: “The previously highlighted delays to our UKPIL transformation plan, when combined with uncertainty around the length and impact of the COVID-19 pandemic, means we now believe it will take longer than expected to achieve the targets laid out in our Journey 2024 plan. Therefore, the Board has taken the decision at this time to suspend guidance for 2020-21 and beyond. We are undertaking a review of our Journey 2024 plan and will update the market when practicable.”

As a result of these developments, Royal Mail Group is delaying the announcement of its 2019-20 full year results, previously scheduled for 21 May 2020.