Royal Mail plc (RMG.L) today announces its results for the half year ended 29 September 2019 - CHIEF EXECUTIVE OFFICER'S REVIEW

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Royal Mail plc (RMG.L) today announces its results for the half year ended 29 September 2019 - CHIEF EXECUTIVE OFFICER'S REVIEW

ROYAL MAIL PLC
RESULTS FOR THE HALF YEAR ENDED 29 SEPTEMBER 2019

Royal Mail plc (RMG.L) today announces its results for the half year ended 29 September 2019.

Rico Back, Group Chief Executive Officer, commented: "Our profitability performance is in line with our expectations for the half year, despite considerable UK economic and political uncertainty. Group revenue was up 5.1 per cent, including our best UK revenue performance in 5 years. UK parcel revenue growth more than offset letter revenue declines. GLS revenue, up 14.1 per cent including acquisitions, underlines the strength of our international operations. We continue to expect to deliver adjusted Group operating profit of between £300-340 million (before IFRS 16) in 2019-20, in line with guidance. The business has delivered good in-year trading cash flow, supporting our new dividend policy. As a result, the Board has declared an interim dividend of 7.5 pence per share.

"The UK letter revenue performance in the first half is our best for 5 years. It will also benefit from the General Election in the second half. But, the outlook, excluding elections, for the letters business in the UK is challenging. Lower than anticipated GDP and lower GDP forecasts for 2020-21, together with business uncertainty, are expected to have an impact on addressed letter volumes. For 2019-20, we now expect addressed letter volume decline (excluding elections) to be in the 7-9 per cent range. In 2020-21, we expect letter volume decline (excluding elections) may be in the 6-8 per cent range.

"Our transformation is behind schedule. We are investing more because of the industrial relations environment, the General Election and Christmas, to underpin our Quality of Service at this key time. This is likely to impact our productivity for the remainder of the year. When combined, revenue and cost headwinds could possibly result in a break-even or loss-making position for the UK business in 2020-21. We maintain the ambitions associated with our Journey 2024 plan as set out in our full year results in May.

"People are posting fewer letters and receiving more parcels. We have to adapt to that change. The challenging financial outlook in the UK means now, more than ever before, we need to make the changes required - and accelerate them - to ensure a successful UK business. We remain committed to investing £1.8 billion in our transformation. We want to change, working with our unions, but we can only do so through an affordable resolution. We have changed many times before. We will do it again."


CHIEF EXECUTIVE OFFICER'S REVIEW

Introduction
Earlier this year, we announced our five-year strategy - Journey 2024. We aim to deliver sustainable shareholder value in the medium-term and underpin the UK's Universal Service. We want to become a more parcels-led, more balanced and more diversified international business. By 2023-24, we aim to generate annual revenues of £12 billion, and deliver Group adjusted profit margins of over 5 per cent. Our objective is that 70 per cent of our revenue will come from parcels; with a growing proportion from our international propositions.

Our profitability performance is in line with our expectations for the half year, despite considerable UK economic and political uncertainty. Group revenue was up 5.1 per cent, including our best UK revenue performance in 5 years. UK parcel revenue growth more than offset letter revenue declines. GLS revenue, up 14.1 per cent including acquisitions, underlines the strength of our international operations. We continue to expect to deliver adjusted Group operating profit of between £300-340 million (before IFRS 16) in 2019-20, in line with guidance. The business has delivered good in-year trading cash flow, supporting our new dividend policy. As a result, the Board has declared an interim dividend of 7.5 pence per share.

The UK letter revenue performance in the first half is our best for 5 years. It will also benefit from the General Election in the second half. But, the outlook, excluding elections, for the letters business in the UK is challenging. Lower than anticipated GDP and lower GDP forecasts for 2020-21, together with business uncertainty, are expected to have an impact on addressed letter volumes. For 2019-20, we now expect addressed letter volume decline (excluding elections) to be in the 7-9 per cent range. In 2020-21, we expect letter volume decline (excluding elections) may be in the 6-8 per cent range.

Our transformation is behind schedule. We are investing more because of the industrial relations environment, the General Election and Christmas, to underpin our Quality of Service at this key time. This is likely to impact our productivity for the remainder of the year. When combined, revenue and cost headwinds could possibly result in a break-even or loss-making position for the UK business in 2020-21. We maintain the ambitions associated with our Journey 2024 plan as set out in our full year results in May.

People are posting fewer letters and receiving more parcels. We have to adapt to that change. The challenging financial outlook in the UK means now, more than ever before, we need to make the changes required - and accelerate them - to ensure a successful UK business. We remain committed to investing £1.8 billion in our transformation. We want to change, working with our unions, but we can only do so through an affordable resolution. We have changed many times before. We will do it again.

The pressing need for change
Breaking the cycle of decline and returning the UK operations to growth is at the heart of our strategy. Our "Turnaround and Grow" plan is rooted in two key realities of the UK markets we operate in and, consequently, our business model. Firstly, around a 50 per cent decline in addressed letter volumes since their 2004 peak, with further falls expected over the next five years. Secondly, continued growth in parcels, driven by online shopping. Our UK network, however, is primarily configured to quickly and efficiently deliver letters. We want to invest £1.8 billion to ensure we can more efficiently and effectively process and deliver the changing traffic mix. In short, we want to change from a UK letters company that delivers parcels, into a parcels-led, international company that also delivers letters.

We want to change, working closely and at pace with our people and our unions, in line with our existing Agreements. We have honoured our side of the 2018 Agreement. Whilst we are in the early stages of the transformation we want to make, we are not making the progress we would like in some key areas of the Agreement, like the introduction of new technology, because of a number of factors, including a lack of co-operation by CWU. New digital tools, like our electronic "clocking in, clocking out" system, are amongst the key ways that we can become even more efficient and effective. They are also the means by which we can work with the CWU to seek to fund other elements of the 2018 Agreement, e.g. the Shorter Working Week. Conversely, in other areas, like route planning technology deployment and PDA Outdoor Actuals, we are making good progress.

We want to enter into discussions with CWU, without preconditions. We want to reach resolution. Industrial action, or the threat of it, can only hurt our company, and our colleagues. That is because, in today's postal market, our customers have choices. Consumers can send a text or email when they would once have written a letter; and shippers can choose from a wide range of delivery companies, not just Royal Mail.

We know we are asking a lot of our hardworking colleagues. But we cannot stand still. Change is essential if we want to remain one of the UK's largest employers, with the best terms and conditions in our industry. Unlike many of our peers, who operate in the "gig economy", over 99 per cent of Royal Mail employees are on permanent contracts. The pay of a postman or woman (base salary only) is around 30 per cent higher than the Voluntary Living Wage. In contrast to the UK average of around 23 per cent, employee turnover for 2018-19 was 7.2 per cent.

We know we cannot deliver a high quality service unless we offer good jobs with a sense of purpose. We have made a commitment to our colleagues that - if we can successfully deliver our plan, at pace - there will be a job for everyone who can and wants to work for us. We will roll out digital tools to make Royal Mail a fairer place to work. And, we will continue to deliver the UK's Universal Service.

Our overall performance
Against the backdrop of a challenging and uncertain macroeconomic environment, our performance is in line with our expectations. Group revenue was up 5.1 per cent. Adjusted Group operating profit was £165 million2, down 13.2 per cent, reflecting margin compression as expected. In-year trading cash inflow was £152 million2. This is mainly due to lower trading working capital outflow and the impact of adopting IFRS 16. The net impact of IFRS 16 on in-year trading cash flow is an increase of £67 million. The Board has declared an interim dividend of 7.5 pence per share, in line with our new dividend policy, announced in May 2019.

In the UK, growth in parcel revenue underpinned overall UKPIL revenue growth of 1.8 per cent, our best performance in 5 years. UK parcel volumes growth exceeded the expected annual rate of growth in our addressable market. Addressed letter volumes, declined by 5 per cent, or 8 per cent excluding the impact of European parliamentary elections. Productivity improved by 2.2 per cent, and we avoided £86 million of costs. Total adjusted operating costs increased by 2.9 per cent; the largest contributing factor being people cost pressures (including frontline staff and managers' overall compensation) which was not fully offset by productivity gains. GLS performed in line with our expectations, despite increasing labour costs across Europe and headwinds in certain markets. We continue to expect a GLS operating profit margin of 6-7 per cent per annum over the plan period.

"Turnaround and grow" the UK
Our five-year transformation is about returning the UK to growth, after a period of margin compression in the early years of the plan. In this, the foundation year, our focus is on productivity and operational excellence. In the second stage, we want to build our extended network and embed digital tools and harvest key benefits. In the final phase, we want to roll out and operate our extended UK network. The staging of our plan means significant investment is needed early on; while many benefits will come through later.

i. Renewed focus on productivity: operational excellence and key work tools
While letters are in structural decline for the reasons I have set out, we expect parcel volumes in our addressable market to grow by 4-5 per cent per annum. The majority of our parcels are currently processed by hand: just as they were in the Victorian era. Automation is therefore a key focus. It ensures day-to-day productivity gains and makes parcels easier and quicker to handle. We have now installed 16 automated parcel sortation machines. We have increased the number of parcels we sort automatically from 12 per cent during 2018-19, to around 26 per cent at the half year. We want to increase that to over 80 per cent through the installation of automated machines in all our Mail Centres by 2023-24, and through building 3 dedicated parcel hubs.

We want to introduce digital tools that help us to better align resource to workload. This will make us more efficient, and make the workplace a fairer place too. PDA Outdoor Actuals, alongside our digital routing tool, will materially help our managers to allocate duties more evenly and support effective revisions to reflect the changes in letter and parcel volumes. It will also help us provide even more accurate estimated delivery windows for our customers.

The data from PDA Outdoor Actuals complements other work tools, like Resource Scheduler. Aimed at helping managers resource more effectively, Resource Scheduler allocates duties based on historic and projected workload, and other workplace information. This tool is in the early stages of development. Further work is required before we can confirm "proof of concept" and move towards roll out. Automated Hours Data Capture (AHDC), on the other hand, automates what is currently a paper-based system to record the hours our people work. It provides more accurate information about who is on and off-site. This will improve colleague safety - our first priority. It will also test if we have the right resourcing on site for each shift. We have completed "proof of concept" trials of AHDC at four trial sites. Further roll out is on hold, as this is part of the "point of principle" dispute with CWU.


In Processing, we are trialling automated guided vehicles (AGVs), to replace inefficient manual movement of yorks (large trolleys used to move mail items) between work areas. Following successful deployment of an AGV system in Heathrow Worldwide Distribution Centre, we are identifying potential suppliers to deliver national deployment. In Delivery, we are looking at new methods to reduce the amount of time postmen and women spend prepping the mail indoors. This includes putting proper enablers in place, including strategic workforce planning and better workflow forecasting. We want to introduce these tools together with CWU. See the Industrial relations update.

ii. Extending our UK network
Due to the major changes in our markets - more parcels and fewer letters - and greater demand for the delivery of larger parcels and Next Day items, we want to enhance our UK network. According to data from John Lewis, night-time online shopping rose by almost a quarter in the past year.7 Our plan is to complement our existing processing and delivery of letters and small parcels with a new element of the overall network that is better equipped to handle large parcels and Next Day items. We believe this strategy has many benefits. Firstly, it enhances the good economics underpinning the current combined delivery. In fact, we expect to deliver more small parcels in this way in the years to come. Secondly, we will be more competitive in the large parcels and Next Day items categories. This is strategically important to us at a time when the growth rate for Next Day parcels, for example, is expected to outpace the rate of increase in other delivery time categories. In short, the separate processing and delivery of larger parcels and Next Day items is expected to deliver significant benefits for Royal Mail and the Universal Service.

Over the next few years, the successful delivery of our plan is expected to change the dynamics around the respective contributions of letters and parcels. Currently, we estimate for every 1 per cent of letter volume decline, we have to grow parcel volumes by over 2 per cent to make the same contribution. By making these changes, that ratio improves significantly over the plan period. The UK parcels market is highly competitive. We need to change quickly in order to ensure that we maintain our leading position and grow in new areas.

We want to build three new, fully-automated parcel hubs to handle the Next Day and larger parcels more effectively. The design of the technical fit out for our North West parcel hub in Warrington is well-progressed. When operational, the Warrington hub will be able to process more than 600,000 parcels per day. Employees from our North West Distribution Centre have moved to the site to work on high volume parcel streams, coming from shippers in the North West. We have identified a site for our second parcel hub in the Midlands, set to be operational in 2022-23. We are exploring options for our third (and final) hub. There is no impact on our existing Mail Centre estate as a result of these changes.

iii. A major geographical presence and enhanced customer service
Alongside our parcel hubs, the network extension plan includes 7,000 separate van delivery routes for larger and Next Day parcels, routed through potentially 200-300 of our existing, larger Delivery Offices. A planned trial of van deliveries out of Swindon Delivery Office is on hold, as it has become part of the "point of principle" dispute with CWU. As we said at the time of our 2018-19 Results, we want to work closely with our unions on our strategy, detailed design and deployment, including a trial for the separate van delivery.

If we can successfully put the new parcel hubs and separate van deliveries in place by 2023-24, this will result in a major increase in delivery frequency for consumers and small and medium-sized enterprises (SMEs). Accordingly, we will introduce two deliveries a day in most parts of the country. Firstly, consumers will receive the usual letters and small parcels delivery. Secondly, there will be a delivery later that day of larger or Next Day parcels they have ordered, in many instances, less than 24 hours before.

iv. Becoming a parcels-led business; letters remain important
UKPIL parcels
UK parcel volumes increased by 5 per cent. Revenue was up 5.6 per cent, with Tracked 24/48® and Tracked Returns® performing particularly well (with volumes up 20 per cent)6. We are winning and retaining customers based on our high quality service. During the period, we won new business with Game and Monsoon Accessorize. Parcelforce Worldwide volumes increased by 2 per cent. Despite challenges in export, new business wins have driven good performance in its account parcels.

In October 2019, we completed the roll out of 1,400 parcel postboxes, enabling 24-hour access for customers sending or returning parcels. This is the first UK-wide network of parcel posting boxes, and the biggest change to the postbox in its 160 year history. We have enhanced the Royal Mail App to include a UK "industry first" Augmented Reality (AR) Parcel Sizer. It enables customers to work out the right postage and then pay directly via the App. Users can also track a delivery using Alexa by saying a code name they have assigned to a mail item. Over 500,000 people are already using the App.

UKPIL letters
In the first six months of the year, addressed letter volumes were down 5 per cent. Excluding political parties' election mailings connected with the European parliamentary elections, they were down 8 per cent, due to the negative impact of GDPR in the first few months of the year and the impact of weakening GDP and ongoing business uncertainty. Total letter revenue was down 1.4 per cent, benefiting from targeted pricing actions and the European parliamentary elections6. This was the best performance in 5 years.

UK addressed letter volumes are in structural decline. They have fallen around 50 per cent since their 2004 peak. The rate of the decline is impacted by a number of factors. They include e-substitution, the impact of GDPR and UK GDP and business uncertainty. See Outlook for our view on 2019-20 and 2020-21 letter volume decline.

Despite the continuing structural decline in letter volumes, the UK still has a high number of letters per capita compared with many other countries. We continue to promote the value of letters. We have refreshed our product portfolio and optimised our pricing strategy, using automation in the network to capture insight and drive efficiency. Business mail makes up the majority of our addressed mail volumes (excluding International and elections) at around 60 per cent. Advertising mail is around 30 per cent. Our range of products, incentives and offers are designed to demonstrate how mail can help their businesses. One example is our new Partially Addressed product. Aimed at advertisers targeting new customers, it allows them to reach recipients without using personal data. Customers can access strictly non-personalised geo-demographic data, from fully consented individuals. Another product, Late Bookings, for unaddressed mail, enables customers to access additional postcode sectors at a significant discount.

Scaling up and growing GLS
GLS is one of the largest, ground-based deferred parcel networks in Europe. The company has a growing presence in the Western US and Canada. It is a key part of our strategic ambition to become a parcels-led, more balanced and more diversified international business, with a strong presence in the UK. Our ongoing focus on profitable revenue growth, primarily in B2B services, resulted in strong revenue growth of 14.1 per cent including acquisitions (8.9 per cent excluding acquisitions). Volumes were up 7 per cent including acquisitions, or 5 per cent excluding acquisitions, with growth in domestic and international volumes in most markets.

Including acquisitions, GLS achieved adjusted operating profit of £90 million, an increase of 16.9 per cent. Operating conditions in the majority of its markets were impacted by wage inflation and tight labour markets. To offset these cost pressures, we have increased prices, where appropriate, and focused on yield management activities. These factors contributed to an adjusted operating profit margin of 5.9 per cent - broadly in line with our forecast annual range of 6-7 per cent per annum over the life of the plan.

GLS' performance in eastern Europe has been particularly strong. Countries including Croatia, Hungary and Romania delivered double digit revenue growth. GLS Germany is the largest GLS market by revenue. Its revenue grew by 10.8 per cent, driven by higher international volumes and improved pricing.

There is a specific focus on improving performance in some of our key markets. We are experiencing ongoing challenging conditions in GLS France's domestic markets. It continues to be integral to the GLS network, by supporting exports into France, and allowing GLS to provide a comprehensive service across Europe. We are focused on improving quality to secure new customers in more profitable segments. GLS Spain revenue decreased by 6.3 per cent due to lower domestic volumes. However, losses have reduced compared with the second half of 2018-19, due to yield management activities to exit low margin customers. We are making progress integrating Redyser, which is expected to be completed by the end of the financial year.

Selective bolt-on acquisitions in key geographies form a fundamental part of GLS' 'scale up and grow' strategy. In GLS US, we are continuing with our previously announced plans to integrate GSO and Postal Express. Losses have been reduced through a combination of yield management activities and cost optimisation. We acquired Mountain Valley Express (MVE) on 30 September 2019, which offers less-than-truckload services to a broad range of customers in the Western US. This acquisition expands our presence in North America. The geographical overlap of MVE's network with our existing operations has the potential to provide cost synergies and revenue growth opportunities. In Canada, Dicom is performing in line with expectations. Revenue in the period was £82 million and operating profit was £8 million.

We are investing in GLS to provide a platform for future growth; with a number of network infrastructure improvements in plan. These include hub extensions in Denmark, Romania and Hungary, as well as a new euro hub in Germany and a new depot in Poland. New technology, including hand scanners, depot IT infrastructure upgrades and software development aim to improve our B2C offering and secure delivery cost efficiencies.

Enhancing our cross-border proposition
Cross-border trade is a key growth area for us. Group cross-border revenue was up 4.2 per cent, as the cross-border letter revenue decline of 8.3 per cent was more than offset by cross-border parcel revenue growth of 6.9 per cent. Combining the best of Royal Mail and GLS will enhance our product portfolio and enable us to benefit from cross-selling opportunities. Our cross-border initiatives to connect the Royal Mail and GLS networks are progressing well. We expect this to fuel further growth by providing added value to our customers through an enhanced product portfolio with global reach and a stronger focus on Europe, Asia and North America.

In September 2019, it was confirmed that the United States will stay within the Universal Postal Union (UPU), having previously given notice to withdraw from it by October 2019. Under the agreed solution, the US will be able to self-declare its terminal rates for post received from abroad from July 2020.

The UK's position on the reform was ultimately a decision for the UK Government. We welcome the fact that the reform maintains the global postal network. We are committed to working with the UPU and its members on a range of options to minimise any impact on our customers. It is regrettable that the reform could lead to price rises for UK consumers and small businesses sending postal items abroad. We would expect any necessary price increases to take effect as part of our regular pricing review.

Industrial relations and contingency planning
We are proud to be the best employer in the UK delivery industry. Earlier on in this section, I set out some of the ways in which we differentiate Royal Mail from its peers through the provision of high quality jobs. This is especially important when you take into account that Royal Mail employs one in every 192 working people in the UK.

i. Our managers
Royal Mail employs approximately 9,500 managers across the UK, of which approximately 6,300 are in operational functions. The contribution of all our managers is crucial to the performance of our business. We were pleased to confirm in October 2019, managers who are members of Unite/CMA, voted in favour of a pay agreement recommended to them by their union, following extended discussions with the Company. Under the agreement, managers will receive a pay increase of 2.6 per cent this year, backdated to 1 September 2019, and a pay increase of 2.7 per cent from 1 September 2020. Managers will also receive a £1,000 Annual Bonus advance in December 2019. This amount will be deducted from any final bonus individuals may receive.

ii. Honouring our Agreements with CWU
In May 2019, shortly after the announcement of our five-year plan, CWU informed the Company that it considered that we were not honouring and deploying our 2018 Agreement. While the Agreement brought us significant financial benefits - in particular, through the agreement to close the Royal Mail Pension Plan to future accrual in its previous form - an analysis of the productivity and efficiency opportunities in it found the cost of the Agreement is significant. To fund it, there needed to be a step change in the pace and focus of the initiatives it contains, and a greater focus on day-to-day operational excellence. These points are central to the delivery of the "Turnaround and Grow" plan.

We have honoured the 2018 Agreement. We awarded two pay increases (five per cent and two per cent respectively). We implemented the first hour's reduction of the Shorter Working Week, although we did not obtain all the cost saving measures to pay for it. Taking all these together, our frontline colleagues have seen base pay increase by 10 per cent in two years. We have worked closely with CWU, and continue to do so, to lobby Government to enable Collective Defined Contribution (CDC) pension schemes under UK law, for the first time in the UK.

iii. Industrial relations
On 13 November 2019, the High Court granted an interim injunction against CWU's postal ballot of Royal Mail employees for industrial action. The interim injunction means no industrial action can be taken before the completion of a lawful ballot, with a result in favour of action, and formal notification of action.

We are pleased with the High Court's decision. Trade union legislation is designed to safeguard democratic integrity by ensuring union members can vote in the privacy of their own homes, rather than in any public process. As is the case with any electoral process, it is vital our colleagues can vote without any constraint imposed on them by any other party.

We never wanted to resort to legal action. We wrote to CWU on a number of occasions, setting out the information on which our case was based. We asked CWU to confirm it would refrain from taking industrial action, due to clear evidence we provided that CWU had interfered with the ballot process. CWU declined to do so, leaving us with no alternative option.

We stand ready to engage with the CWU. We want to enter into discussions without preconditions. We will continue to pursue every avenue possible to avoid or curtail industrial action. We remain committed to reaching a resolution which is within the spirit of the 2018 Agreement, is affordable and helps secures a sustainable future for our Company and the Universal Service.

The CWU lodged an appeal against the ruling with the High Court on 20 November 2019. As you would expect, we will continue to monitor the situation carefully. We are investing more because of the industrial relations environment, the General Election, and Christmas, to underpin our Quality of Service at this key time.

iv. Parcelforce Worldwide
Royal Mail's application to the High Court did not apply to employees within Parcelforce Worldwide. They are the subject of separate ballot notices, which have resulted in two separate ballots in favour of industrial action. The first relates to honouring our Agreements with CWU. I have set out above the ways in which we are meeting our obligations.

The second relates to our proposal to transfer Parcelforce Worldwide into a new legal entity and TUPE Parcelforce Worldwide's 5,000 colleagues into the new company. The transfer aims to increase management accountability and help Parcelforce become a more agile, responsive business, while remaining part of, and retaining the backing of, the wider Group. We have made a series of commitments to CWU, Unite/CMA and colleagues about the legal separation. As a result of the transfer: i) job responsibilities would not change; ii) continuity of service would not be affected; iii) terms and conditions of employment would not change; and iv) existing agreements with our unions would not change. Employees will continue to participate in employee share plans, Company pension schemes, and other employee benefits schemes.

We do not believe there are any grounds for industrial action. We are committed to further talks on many of the issues the CWU has raised. We continue to urge Parcelforce Worldwide's people not to participate in industrial action.

Key external issues
i. Brexit
Following the agreed extension of Article 50 of the Treaty on the Functioning of the European Union until 31 January 2020, the shape of the future relationship between the UK and the EU still remains unclear. It is therefore not possible to predict with any degree of accuracy the impact the UK's departure from the EU could have on the Group. Internal procedures are in place to monitor and manage ongoing risks associated with the UK leaving the EU. Material risks are reported to and handled through a Brexit steering group. This is comprised of senior executives.

As previously disclosed, the main issues for the Group relate to any potential economic downturn and changes associated with customs and VAT processing. We believe the immediate risk to our domestic operations is low. We are working with key suppliers to ensure our supply chain remains secure.

The impact on cross-border parcel volumes will depend on the nature of the UK's future trading relationships, and what the future EU/UK customs and VAT arrangements will be. In a 'no deal' situation, we expect the rules which apply to non-EU imports to be extended to EU items. Similarly, we would expect the EU to treat UK imports as it does non-EU imports today. We are well placed to manage the impact of changes to customs processing. Changes in the UK's customs arrangements in the event of a no-deal Brexit are a decision for Government. We are therefore working closely with Government and other stakeholders to put in place systems to ensure the movement of cross-border parcels continues to operate effectively.

ii. Regulatory environment
We have exceeded both our First Class and Second Class mail annual regulatory Quality of Service targets for the first six months of the financial year. We delivered 93.3 per cent of First Class mail on the next working day, against a target of 93.0 per cent. 98.8 per cent of Second Class mail was delivered within three working days, exceeding the 98.5 per cent regulatory target. Separately, we are cooperating fully with Ofcom's investigation into our 2018-19 Quality of Service. Quality of Service is a key priority for us. We are focused on delivering high levels of customer satisfaction while introducing more innovation into our services.

We confirmed in February 2019 that, due to an error on our part, our new Second Class stamp price of 61 pence was one penny above the existing regulatory safeguard cap for seven days. We apologised for this mistake as soon as we realised. We sought to put it right by donating the revenue that we expected to collect from the error - around £60,000 - to our chosen charity Action for Children, which helps young people at risk of developing mental health problems. We are cooperating fully with Ofcom's investigation into this matter.

On 14 August 2018, Ofcom published its decision following its investigation into whether Royal Mail had breached competition law. The investigation was launched in February 2014, following a complaint brought by TNT Post UK (now Whistl). Ofcom found that Royal Mail had abused its dominant position in the market for bulk mail delivery services in the United Kingdom by issuing Contract Change Notices on 10 January 2014 which introduced discriminatory prices. It fined Royal Mail £50 million. Royal Mail lodged an appeal with the Competition Appeal Tribunal (CAT) on 12 October 2018 to have both Ofcom's decision and fine overturned. On 12 November 2019, the CAT issued its judgment, which upheld Ofcom's decision and fine. Royal Mail is considering all legal options, including whether to seek permission to appeal and to request that payment of the penalty, which would otherwise become payable, be stayed pending any appeal. In October 2018, Whistl filed a damages claim against Royal Mail at the High Court relating to Ofcom's decision. Whistl's High Court claim is on hold until after the completion of the appeal process. Royal Mail believes Whistl's claim is without merit and will defend it robustly if Whistl decides to pursue it.

Royal Mail's current regulatory framework is scheduled to remain in place until March 2022. To check that the framework remains fit-for-purpose, Ofcom has started a review of the needs of postal users as an initial step in its wider review. This involves market research and analysis looking at the extent to which the postal market is meeting the reasonable needs of users. It plans to publish preliminary findings in Q4 2019-20. We will be engaging fully with Ofcom during its review.

Outlook

2019-20
We continue to expect to deliver adjusted Group operating profit of between £300-340 million (before IFRS 16) in 2019-20.

Addressed letter volumes (excluding elections) in the first half declined by 8 per cent due to the negative impact of GDPR in the first two months of the year, the impact of weakening GDP and ongoing business uncertainty. In the second half, continuing weak GDP and ongoing business uncertainty are expected to have a negative impact such that we now expect addressed letter volume decline (excluding elections) to be in the range 7-9 per cent for the full year. Letter revenue will benefit from the European parliamentary and General elections as well as the letter price increases effective from January 2019.

2020-21
The rate of addressed letter volume decline in 2020-21 will be dependent on the level of GDP growth. The current outlook for GDP is below the level needed to support the medium-term outlook of 4-6 per cent addressed letter volume decline. In addition, there is expected to be continued business uncertainty. As such, we expect that addressed letter volume decline (excluding elections) may be in the range 6-8 per cent in 2020-21.

Changes to terminal dues rates, including the rates we pay to the US postal service to deliver mail which come into effect from July 2020, are expected to add costs to our international letters and parcels business which may not be fully mitigated by pricing actions.

In addition, the current industrial relations environment is slowing our rate of change in the UK operation. This is likely to impact our rate of productivity improvement. As a result, we continue to expect further margin pressure in UKPIL in 2020-21.

These revenue and cost headwinds, when combined, could possibly result in a break-even or loss-making situation in UKPIL.

Nevertheless, we are expecting a continued good performance from our UK parcels with volume growth above our addressable market and GLS is again expected to perform well, delivering adjusted operating profit margin of 6-7 per cent.

It is essential that we find an affordable resolution to the currently ongoing industrial relations dispute. We are doing everything we can to secure the success of our plan for the UK business. We will again seek to leverage value from price increases where we believe the service offering justifies a change.

We will continue to honour our Agreements and will act in the interests of all our stakeholders to make sure we secure a successful and sustainable future for the UK business. Alongside our plans for growth in parcels, improved efficiency and cost reduction will be key to our success.

Journey 2024
We maintain the ambitions associated with our Journey 2024 plan as set out in our full year results in May 2019.



Rico Back
Group Chief Executive Officer
21 November 2019

[rogersh]

"We have honoured the 2018 Agreement. We awarded two pay increases (five per cent and two per cent respectively). We implemented the first hour's reduction of the Shorter Working Week, although we did not obtain all the cost saving measures to pay for it. Taking all these together, our frontline colleagues have seen base pay increase by 10 per cent in two years."

The actual pay rises implemented;

April 2017 would normally be the point for the pay review.
In May 2018 the 5% pay increase was awarded & backdated to October 2017.
In October 2018 the first hour was implemented which was effectively a 2.6% increase to the hourly rate.
In April 2019 the 2% pay increase was awarded.

So my calculation is a 9.6% increase over 3 years

According to the four pillars agreement the next pay review date will be 1st April 2020.

[Deadly]

That hasn't gone down well on the markets, shares down over 40p at the moment.

[Celgar]

There were two different news articles on RM on radio two this afternoon. The first one said how well we had done then the second one was saying how badly we have done. Can't trust anything RM put out or say.