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Back broken: Royal Mail boss returned to sender after bumpy ride

16 May 2020, 12:18

https://www.proactiveinvestors.co.uk/co ... 19743.html

Things were difficult for the German parcels expert even before he took over

Royal Mail Group PLC’s (LON:RMG) freshly departed chief executive Rico Back and the postal group’s shareholders and workers might all be glad to see the back of each other after what has been an uncomfortable couple of years.

The year Back took over had all seemed to start well as Back’s predecessor Moya Greene agreed of a deal on pay, pensions and working hours in March, sending the shares to a high above 600p and sealing its re-promotion to the FTSE 100 index.

However, in the summer before Back took over as CEO, things were already turning against the German parcels expert.

In July, 70% of shareholders voted against the group's pay deal, including a proposal for Back to be paid a higher salary than his predecessor, and for Green to get a £0.9mln payoff.

Then, just a few weeks before Back got his feet under the CEO’s desk, Royal Mail was whacked with a record £50mln fine for breaking competition law and abusing its dominant position.

Quickly on the back foot

That might have seemed relatively small beer to a blue chip company, but it quickly became clearer that Greene had left while the going was relatively good.

While Back's former domain of parcels continued to go great guns, trading in the UK letters business was bad, with letters volumes down sharply as marketing mail was hit by ongoing structural declines and that year’s new GDPR regulations.

What’s more, it was revealed that Greene’s earlier deal with the trade unions was far from the panacea for the company that some had hoped, with UK productivity performance “significantly below plan” at 0.1% during the first half of the year and expected to be significantly below target for the year as a whole.

Greene’s earlier target for ‘cost avoidance’ of £230mln for the year was slashed to £100mln.

The shares were sent plummeting and by the end of the year the company had yo-yoed back into the FTSE 250 index.

Dividend slashed, industrial relations souring

By the spring of 2019, Back had been forced to take the dramatic step of chopping the dividend by 40% to pay for his new “turnaround and grow” strategy after annual profits fell 30%.

Back presented a “refreshed” five-year strategy, including an ambition is to “build a parcels-led, more balanced and more diversified international business” and to get profit margins gradually inching higher.

Analysts said that Back was pulling his punches by avoiding major job cuts to try and improve productivity, which was felt to be understandable given the risk of an adverse reaction with trade unions.

“But with staff costs circa 70% of UKPIL costs this would seem to be dodging the main issue,” said broker Liberum, with Jefferies saying the moves were “unlikely” to mitigate rising inflation in staff costs and pointing at Royal Mail’s UK low productivity resulting in profitability that was 70% below the sector average.

The City view was well encapsulated by Deutsche Bank: “in our view there are no easy short-/medium-term fixes for the Royal Mail as the business model is largely a fixed cost business, that is facing a material decline in letter volumes and has a unionised workforce”.

Strike called then blocked

Last August, the Communication Workers Union (CWU) called a vote of it members as it accused Back of backtracking on Greene’s deal, something the company denied as it pointed to two pay rises over the past year and reduced the working week by an hour.

“The workforce has completely rejected the company’s plans to set up a separate parcels business and allow UK postal services and thousands upon thousands of jobs to wither on the vine,” said CWU general secretary Dave Ward, pointing to increased workload pressure on members and Back’s “asset-stripping plans”.

In October the CWU said its ballot saw a turnout of 76% and a 97.1% vote in favour of strike action.

Analysts at Peel Hunt said they did not believe that Royal Mail was in breach of the agreement, “but rather suspect that the planned productivity gains have not materialised, which highlights the breakdown in industrial relations at the company”.

Taking to the High Court, Royal Mail averted a strike planned for the run up to Christmas and another general election, though efforts to overturn the previous year’s £50mln fine from Ofcom were unsuccessful.

Patience runs out

In February 2020, after seeing worker productivity decline over the Christmas period, Back’s patience with the unions seemingly ran out as he announced plans roll out a series of new automated parcel sorting hubs.

As the CWU corralled its members to a new strike ballot, Back said: “We want to reach agreement with CWU; but we cannot afford to delay this essential transformation any longer.”

He said the group was proceeding with national trials and local initiatives, including choosing the supplier for automation of the Warrington parcel hub, which is designed to handle 40,000 items per hour, as well as finalising the lease for a second fully automated parcel hub in the Midlands and exploring options for a third and final hub, as well as rolling out small parcel sorting machines, decommissioning letter sequencing machines and deploying “a range of much needed local change initiatives and key trials, which have been held up for many months”.

Back also publicly announced a new pay deal, effectively going over the heads of the CWU’s leadership, offering a 6% pay rise over the next three years, in other words below retail price index inflation.

Analysts said going public and “playing to an audience” in a bid to avoid a strike with a below-RPI offer was “ill-advised".

With the reality of the coronavirus dawning in the UK in March, despite a 95% vote in favour of industrial action, the CWU said it wanted to “set aside our differences” with Back and co, suggesting that posties could become an additional emergency service, helping support people working home, carrying out foodbank collections and bringing food parcels to vulnerable people forced to self-isolate.

This olive branch, however, was accompanied by a call for management “to step back from their attacks in the workplace”, with the CWU pointing to the imposition of “un-agreed changes” and “destroying” morale.

Back didn't attend the meeting and passed on the message that he did not want to meet the union during the pandemic.

Coronavirus and a new investor

In a trading update later than month, the group warned that the hit from the coronavirus outbreak on its UK and Italian markets was expected to contribute to its UK post business being “materially loss making” for the 2020-21 financial year.

While the parcel business was still the silver lining, with “strong” consumer volumes as more people shopped online during the lockdown, international and corporate business both faltered badly.

The board shelved the final dividend and said the outbreak will mean the targets for its Journey 2024 transformation plan for the UKPIL business will “now take longer to achieve”, with guidance for 2020-21 and beyond suspended.

Weeks later, it was revealed that Vesa Equity Investment, the vehicle for Czech billionaire Daniel Kretinsky, who owns Sparta Prague football club and has recently been snaffling stakes in other major European companies, had upped its stake in Royal Mail to a 5.35% stake, becoming the fourth largest shareholder.

A fortnight later and Back is gone.

A CWU spokesperson said change at the top should lead to “a change in strategy and direction”, highlighting how postal workers have valued and essential workers during the pandemic “and are ready to embrace innovation, new products and building on their role in every community in the UK”.

“It is absolutely critical that the new CEO wants to work with the CWU to overcome the challenges we all face and deliver the postal service the public and our members deserve.”

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