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“While the rate of e-substitution remains in line with our expectations, business uncertainty is impacting letter volumes,” said Royal Mail boss Rico Back
Royal Mail Group PLC (LON:RMG) cut the upper range of its 2019 profit guidance and expects letter volumes next year to decline more than previously estimated and parcel deliveries to slow.
In reaction, shares plunged 8.8% to 274.2p in morning trading.
The postal operator has been struggling with falling letter volumes as more consumers and businesses switch to electronic communication.
READ: Christmas spirit could be lacking for Royal Mail as ejection from FTSE 100 index beckons once again
Last year, new General Data Protection Regulation (GPDR), which aims to give individuals more control over their personal data, added pressure on the letters business as it meant less marketing material was sent in the post.
Royal Mail said it continues to estimate a 7-8% drop in letter volumes in 2019 after an 8% fall in the first nine months of the year, reflecting the impact of GDPR and a “relatively strong” year-ago period in comparison. Letter revenue decreased 6% in the nine-month period.
Letter volumes to miss expectations in 2020
For the fiscal year 2020, it anticipates addressed letter volume declines, excluding elections, are “likely to be outside our forecast medium-term range”.
“While the rate of e-substitution remains in line with our expectations, business uncertainty is impacting letter volumes,” said chief executive Rico Back.
Growth in the company’s international business, Global Logistics Systems (GLS), and the UK parcel delivery arm mitigated falling letter volumes in the first nine months of 2019 to achieve a 2% rise in total revenue for the period.
UK parcel volumes and revenues both increased 6% while GLS volumes and revenues rose 5% and 8%, respectively.
Back said the group had a busy Christmas period, handling 164mln parcels in December alone, up 10% compared to last year.
Royal Mail cuts top end of 2019 profit guidance
"Overall, our recent trading performance was broadly in line with our expectations,” said Back.
“We now confirm that we expect to deliver adjusted group operating profit before transformation costs of £500-£530mln for 2018-19.”
Previous guidance was for profit of £500m-£550mln.
Back said GLS continues to face cost pressures in Europe and the US amid tough competition but prudent pricing initiatives and cost mitigation actions mean the firm continues to target an adjusted operating profit margin of more than 6% for the year.
But the decision to protect margins means Royal Mail expects the rate of GLS volumes to slow next year.
Capital markets day pushed back
Royal Mail said its capital markets day (CMD) is now expected to be delayed from March until after the full year results in May.
"Given the importance of understanding management’s long-term strategy to turn the business around, this is disappointing," said analysts at Liberum.
"The hope must be that more radical options are being contemplated, requiring further time for planning and consultation."
Liberum repeated a 'sell' rating on the stock, saying it sees downward pressure on consensus forecasts for next year due to the cautious guidance on UK letters volumes and GLS growth.
Nicholas Hyett, equity analyst at Hargreaves Lansdown, said news that CMD has been pushed back suggests that the all-important cost savings may also be proving harder to deliver than hoped.
"Those efficiency gains remain central to the Royal Mail investment story, and if they can’t be delivered then there’s nothing to protect the group from the pains of an economic downturn in the UK," he said.
"Those worries explain why the group currently offers a prospective yield of 8%, investors are nervous.”