Trading update for the three months ended 24 June 2018 : Letters down by 6% : UK parcel volumes grew 7% : Revenue up 2%

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Royal Mail plc (RMG.L) today issued a trading update covering the three months ended 24 June 2018.

Rico Back, Group Chief Executive Officer, Royal Mail plc, said:

“Overall, trading in the first three months of our 2018-19 financial year was in line with our expectations.

“Our performance in UK letters and parcels was as anticipated and GLS continued to perform strongly. In the UK, we are making progress with the trials and initiatives under our new Pensions, Pay and Pipeline agreement. We, together with the CWU, are working with Government to enable the introduction of a Collective Defined Contribution scheme.

“Our outlook and other guidance are unchanged from that set out in our financial report for the full year ended 25 March 2018.”

Trading performance for the three months ended 24 June 2018:

Group -----------------------------------Underlying change1

Revenue ----------------------------------------------2%

UKPIL -----------------------------------Underlying change1

Revenue ---------------------------------------------------(1%)

UKPIL revenue was down 1%, with parcel revenue up 6% and total letter revenue down 7%.
Excluding the benefit of elections in the prior period, UKPIL revenue was flat and total letter revenue was down around 5%.


Parcels -----------------------------------Underlying change1

Volumes -------------------------------------------------7%

Revenue -------------------------------------------------- 6%

Parcel volumes were up 7%, largely driven by higher volumes from retailer account customers. Royal Mail Tracked 24®/48® and Tracked Returns® services saw volume growth of 24%.
Our international parcels business continued to benefit from our cross-border traffic initiative which accounted for around 2 percentage points of total parcel volume growth and around 1 percentage point of parcel revenue growth in the period. Outside of this initiative, we saw an increase in lower AUR import volumes. UPU price rises, effective from January 2018, accounted for around 1 percentage point of parcel revenue growth in the period.
Parcelforce Worldwide volumes were up 4% benefitting from better than expected volumes from contract customers. However, due to a customer withdrawing from the market, we do not expect this level of performance to continue throughout the remainder of the year.
Total parcel revenue was up 6%, reflecting trends in the domestic traffic mix.


Letters -------------------------------Underlying change1

Addressed letter volumes ------------------------(6%)

Revenue ------------------------------------------------(7%)

Addressed letter volumes (excluding political parties’ election mailings) decreased by 6%, in line with our expectations.
Some customers remain uncertain about the application of GDPR which came into effect on 25 May 2018. We are monitoring any potential impact closely. We continue to work with customers to find solutions for their marketing mail needs.
Total letter revenue (including marketing mail) was down 7%. Excluding the benefit of elections in the prior period, total letter revenue was down around 5%.


GLS -------------------------------------Underlying change1

Volumes --------------------------------------------------10%

Revenue ---------------------------------------------------- 11%

GLS continued to perform strongly, with volumes up 10% and revenue up 11%. Excluding the impact of working days across Europe, volumes were up 9% and revenue was up 10%.
Revenue growth was achieved in almost all markets, with continued strong growth in Italy, Denmark and Spain. Poland, where we have opened three new depots in response to demand, and our other Eastern European businesses all saw double digit revenue growth in the period.
In the US, work continues on the integration of GSO and Postal Express and we have seen growth in interstate traffic.
Redyser, acquired in February 2018, is being consolidated within our existing Spanish operations.


Recent developments

On 1 June 2018, Rico Back assumed the role of Group CEO of the Company and joined the Board. Sue Whalley was appointed CEO of UK Post and Parcels and joined the Board on the same date.

Ofcom announced it was commencing an investigation into our Quality of Service performance for the 2017-18 financial year on 1 June 2018. We welcome the opportunity to continue discussions with Ofcom about a number of factors that impacted our Quality of Service performance, as well as the actions we have taken to address those challenges. Were these factors taken into account by Ofcom, we estimate that we would have achieved our First Class and exceeded our Second Class Quality of Service targets in 2017-18. It will be for Ofcom to decide. We are participating fully in the investigation.

We are making progress on the trials and initiatives covered by the new Pensions, Pay and Pipeline agreement. We have launched our 01:30 later acceptance time service for parcels from our larger account customers. Trials of different delivery methods have started at eight sites. Trials using tools and technology to better align resource to workload are in train. Together with the CWU, we continue to engage with Government to make the necessary regulatory and legislative changes to enable a Collective Defined Contribution (CDC) scheme to be established. We welcome the recent report from the Work and Pensions Select Committee, which has recommended that the Government introduce CDC pensions in the UK.



Financial reporting for 2018-19

The 2018-19 financial year is a 53-week year ending 31 March. To provide meaningful comparison with 2017-18, adjusted Group and UKPIL revenue, costs (including operating costs, but not transformation costs) and operating profit for 2018-19 will also be presented on a 52-week basis to exclude the revenue earned during the 53rd week but only the incremental operating costs associated with that revenue. The Group’s balance sheet and cash flow statement will be presented on a 53-week basis. GLS reports on the basis of a calendar year ending 31 March.

The frontline pay award of £101m was paid in the first quarter of 2018-19. The £20m overage payment in respect of the sale of the Paddington Mail Centre in 2014 was received in April 2018. As a result of the timing of payments, we expect an additional outflow in ‘trading working capital’ in relation to VAT payments and in ‘other working capital’ related to monthly paid staff in 2018-19.

Current trading and outlook

Overall, our trading performance in the first three months of the financial year was in line with our expectations.

We maintain our outlook for addressed letter volume declines of between 4-6% per annum (excluding political parties’ election mailings). Due to the potential impact of GDPR and, or, if business uncertainty persists, we still expect to be at the higher end of the range of decline for 2018-19 and may fall outside the range in a period. In GLS, we continue to expect a good performance in 2018-19, although margins may be impacted by continuing labour market pressures in many of its markets.

Our outlook and other guidance are also unchanged from that set out in our financial report for the full year ended 25 March 2018.

The results for the half year ending 23 September 2018 are expected to be announced on Thursday 15 November 2018.



Note:

1All movements are on an underlying basis unless otherwise stated. Underlying revenue change is calculated after adjusting for working days in UKPIL, movements in foreign exchange, acquisitions (Redyser in GLS) and other one-off items that distort the Group’s underlying performance. For volumes, underlying movements are adjusted for working days and exclude the impact of political parties’ election mailings in UKPIL and the impact of Redyser in GLS. For comparison purposes all underlying adjustments are made to the prior period.

In the first three months of 2018-19 there were 74.8 working days in UKPIL (3M 2017-18: 74.8). In the first half of 2018-19 there will be 152.0 working days in UKPIL (H1 2017-18: 152.0 days). The 2018-19 financial year is a 53-week year (310 working days). The 53rd week occurs in the last quarter. For 2018-19 the estimated full year 52-week revenue and profit impact of working days in UKPIL is a decrease of around £15m (2018-19: 304.5 days; 2017-18: 305.0 days).

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Trading update April – June 2018 pdf

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Royal Mail has reported a further fall in the number of letters it delivers for businesses, after new data privacy laws reduced the amount of junk mail sent.

In a trading update ahead of its annual meeting in Sheffield on Thursday, where it could face a shareholder revolt over executive pay, the FTSE 100 company said letter revenues fell 7% in the three months to 24 June, with volumes down 6%. Excluding the boost from last year’s election mailings, letter revenues declined 5% year on year.

The General Data Protection Regulation (GDPR), introduced in May to protect European citizens from the misuse of their personal data, has deterred some businesses from sending junk mail, said Royal Mail.

“We are monitoring any potential impact closely,” it said. “We continue to work with customers to find solutions for their marketing mail needs.”

The group warned in May that the number of letters delivered would fall by between 4% and 6% this year. It said on Tuesday: “Due to the potential impact of GDPR and, or, if business uncertainty persists, we still expect to be at the higher end of the range of decline for 2018-19 and may fall outside the range in a period.”

Royal Mail’s parcel revenues rose 6% in the quarter, boosted by the growth of e-commerce. Overall revenues at its UK business fell by 1%. Royal Mail also has an international parcels business, where volumes rose 10% and revenues were up 11%.

The outgoing Royal Mail chief executive, Moya Greene, will step down from the board after the AGM. The postal service has come under fire for awarding her successor, Rico Back, who took over in June, a £640,000 salary, 16.8% higher than Greene’s. Two influential investor advisory groups have also called on shareholders to oppose Greene’s £900,000 termination bonus.

The company said Back’s and Green’s overall fixed pay, including pension and benefits, was broadly the same. It defended the bonus for Greene, calling her an “exceptional executive”.

Royal Mail had been locked into a long dispute with the Communication Workers Union over pay, pensions and conditions, but Greene struck a deal in February, and Royal Mail said it was making progress with trials and initiatives under the agreement.

Back added that the company was working with the union and the government on the introduction of a collective defined contribution pension plan, to replace the more expensive final salary scheme closed this year.

Ed Monk, the associate director at Fidelity Personal Investing’s share dealing service, said the company “scored a big victory” when it persuaded the union to back its pension plans. “It may not be enough, however, to soothe investors who have been increasingly wary that Royal Mail can’t win all its battles,” he said. “The shares have fallen by a fifth in the past two months.”

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Richard Hunter, the head of markets at online trading platform Interactive Investor, said: “The fact that letters and cards are slowly being consigned to history has long been known, but Royal Mail has, for the most part, been able to replace this lost business within a burgeoning parcels market. In particular, its European business, GLS, continues to shine.”

However, he flagged rising competition in parcels delivery from Deutsche Post and Amazon.


Royal Mail shares rose 3.5% in early trading.