Royal Mail delivers record profits but transformation slows

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- Operating profits up 96 per cent
- Slowdown in transformation due to union talks
- Strike threat deterring parcel customers

Newly listed Royal Mail almost doubled operating profits in the first half but said delays to the resolution of union talks had not only slowed its transformation programme but deterred some corporate parcel customers.

The delivery company said since September there had been a slowdown in the rate of business customer acquisition in its parcels division as clients switched some business to competitors in anticipation of strike action.

Royal Mail said the result of this slowdown, depending on the strength of the Christmas parcels volume growth in late November and December, could be that parcel volumes would be flat for the nine months to December 2013 – although it stressed that it would still record significant revenue growth.

The dragging out of talks with the Communication Workers Union (CWU) also meant that Chief Executive Officer Moya Greene's major transformation plans slowed more than expected during the period, with some activity deferred into next year.

This week the group was forced to extend the discussions on industrial stability, pay and protections for at least another seven days, although it claimed “significant progress” has been made.

Nevertheless, Greene said: "Our first-half financial performance was in line with our expectations of delivering low single-digit revenue growth and margin expansion.

“The combination of increasing [earnings] and moderating investment spend underpins value creation for our shareholders."

Group results showed revenue grew 2% to £4.5bn primarily due to changes to pricing and products in the UK and European parcels business offsetting the expected decline in letters revenue, with transformation costs flat and operating profits after these costs increasing 96% to £283m.

Broker Panmure Gordon said that excluding one-off costs, operating profit before exceptional items would have increased by close to 17%.

Broker Investec noted that like-for-like operating margins are heading in the right direction, up 190 basis points to 5.2%, and within the key businesses there were no major new surprises. "Letters is on track and, whilst Parcel volumes were subdued (as expected), revenues were good," it said.

Earnings before interest, tax, depreciation and amortisation increased 19% to £483m, with underlying earnings per share up 175% to 16.8p. Cash flows were strong and net debt was pared by £183m to £723m at the period end.

In the absence of unforeseen circumstance the board said it intends to propose a final dividend of £133m for the full year.

Total investment reduced from £270m to £212m mainly as a result of a decrease in transformation capital expenditure and business transformation payments.

UK parcel revenue grew 9%, driven by size-based pricing with parcel volumes broadly unchanged as strong growth in account parcels and Parcelforce Worldwide was offset by lower volumes in consumer channels, driven by the impact of size-based pricing and a temporary slowdown in e-retailing growth due to the good UK summer weather.

Letter volumes declined 6%, at the outer envelope of its expected range of 4-6% but a marked improvement on the 9% decline in the same period last year.

The smaller European parcels business, Global Logistics Systems, grew revenues 6% to £940m and operating profits 6% to £62m.

Investec analyst John Lawson pronounced that "Royal Mail has started life as a listed entity well, with a solid set of interims, and we believe that consensus forecasts - ignoring one-offs benefits in the first half - may move upwards today, in part as the group may be spending less on operational transformation costs."

Panmure's Gert Zonneveld added: "The company continues to be focused on delivering revenue growth, margin expansion and underlying free cash flow growth for the full year. The letters business has had a good start to the seconds half of the year and has particularly benefited from energy company mailings. GLS continues to perform well."

Shares in Royal Mail were up 5.53% to 562.5p at 13:20 on Wednesday.