Royal Mail shares rise after interims

Jo Francis
Friday, November 20, 2015

Royal Mail’s revenues from marketing mail grew by 3% in the first half of the year, boosted by an increase in DM spend and in its own data activities.

The group posted sales down 1.8% to £4.39bn in the six months to 27 September, while a big jump in restructuring costs resulted in operating profits that were down 17.6% to £248m. Pre-tax profits fell 30% to £116m.

The bill for ‘transformation costs’ doubled year-on-year to £94m, in part because of higher voluntary redundancy costs. Almost 3,000 workers left its UK Parcels, International and Letters (UKPIL) business, most taking voluntary redundancy.

Royal Mail said it had reduced costs by some £200m in the last three years, and had more than 70 projects underway “targeted to avoid around £500m of annualised costs by 2017-18”.

Its share price jumped by 21.9p, or 4.82%, to 476p after the results announcement.

Sales in the UKPIL business were down 1% to £3.65bn, with flat operating margins of 7.8% prior to restructuring costs.

Addressed letter volumes fell by 4%, which was at the lower end of Royal Mail’s expectations. Marketing mail grew by 3%, and parcel volumes were up 4%. It said more than 1.5bn letters have now been sent using Mailmark, which provides users with web-based reporting and analytics.

However, unaddressed door-to-door letter drops were affected by “a reduction in marketing spend in certain sectors”.

Regarding the Ofcom review of the regulation of Royal Mail that is currently underway, it said it had submitted its response in September, and stated: “To sustain the Universal Service the regulatory environment must allow us to be innovative and competitive.”

Royal Mail also stated that it had not made any provision for potential penalties in relation to the complaint to Ofcom by TNT Post UK (now Whistl) about Royal Mail’s access pricing. “We continue to maintain that we have not infringed competition law and our representations to Ofcom will be on that basis,” it said.

In its parcels business Royal Mail is targeting growth with services aimed at retailers and etailers, and has signed up new contracts with several big names, including John Lewis, Waterstones, ASOS and House of Fraser.

It is poised to install its first automated parcel sortation machine in Swindon next month, and is trialling doorstep collections for SMEs and marketplace sellers in the North West who sell via sites such as eBay.

Royal Mail is also pushing the use of 2D barcodes for parcel tracking. “We are working with our customers to put 2D barcodes on as many parcels as possible,” it said.

It plans to grow its business in the fast-growing market for same day deliveries, and agreed to acquire £19m turnover eCourier earlier this week. The firm specialises in same day deliveries in the Greater London area. “The combination of eCourier and Royal Mail Sameday will create a significant player in the national same day delivery market,” it said.

However, although that market is growing at 4-5% per annum, Royal Mail also warned that stiff competition in the parcels market, where Amazon has rolled out its own delivery network, meant overall parcels growth was likely to be limited to 1-2% in the short-term. 

At its General Logistics Systems (GLS) parcel delivery wing on the continent, sales grew 8% to £741bn and volumes by 9% to 204m. Operating margins were down from 7.3% to 7%, largely due to changes in the minimum wage legislation in Germany, its biggest market.

Losses were trimmed from €9m to €8m in France, but Royal Mail admitted that the next phase of its turnaround programme there would be “more challenging”.

GLS also made a £31m profit on the disposal of German subsidiary DPD Systemlogistik earlier this year.

Chief executive Moya Greene reiterated that the performance for the full year would be driven by the upcoming festive season. “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.

It will take on 19,000 temporary workers to handle the Christmas rush, and will open 10 parcel sorting centres for the period. 

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