Royal Mail warns industrial dispute could hit full year earnings as it reports lower first half profits

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Royal Mail reported a drop in first half profits even as revenue edged higher on the back of strong performance in its European parcels business

Royal Mail PLC (LON:RMG) has warned that an industrial dispute could hurt full year profits and that the struggles at its letter delivery business persist.

In the post office company’s first half results, it said it faces “increased cost pressures in the second half” from the potential impact of industrial action over pay and pensions. Royal Mail is in talks with union leaders to settle the row after the High Court blocked a postal strike.

Chief executive Moya Greene said: "As previously announced, we are now in external mediation with the CWU (Communication Workers Union). Our priority is to reach agreement with the CWU to help underpin the sustainability of the business."

Increased pension costs hit profits in the six months to September 24.

Profits fall, revenues rise

Statutory pre-tax profit fell 30% £77mln, despite a 2% rise in revenue to £4.8bn on an underlying basis compared to a year earlier.

The European parcels delivery business, General Logistics Systems (GLS), posted revenue growth of 9%.

Revenue was flat at UKPIL, the UK parcels and letters delivery business, with a 5% rise in parcels and a 3% drop in letters.

The company cautioned that its letters business could deliver a fall in volumes at the higher end of its estimated range of between 4-6% per year if business uncertainty in the UK persists.

“The steady decline of letter revenues is far from ideal for Royal Mail, but with the growing GLS and UK parcels businesses now accounting for almost 60% of total revenues that should be becoming less and less of a headwind," said Nicholas Hyett, equity analyst at Hargreaves Lansdown.

Competitive pressures in UK parcels

The UK parcels market also remains highly competitive. In response to the challenges in UKPIL, the firm has taken steps to cut costs and is on track to deliver about £190mln in savings this year.

"New age competitors are far slicker operations than Royal Mail," said Hyett.

"The contrast between Amazon or even Ocado’s robotic warehouses and Royal Mail’s sorting offices is stark. If the group is to win in a highly competitive sector it needs to modernise, and at some pace."

Full year performance depends on Christmas

The group's preferred measure of adjusted operating profit, which excludes the costs of its restructuring and one-off expenses, rose 7% to £323mln on an underlying basis.

"We had a good start to the year," Greene said, adding that the full year performance will be dependent on the key Christmas period.

"We are opening six temporary parcel sort centres and recruiting over 20,000 staff," she said. "We are also extending opening hours at many of our enquiry offices to help retailers and consumers.”

The company lifted its interim dividend by 4% to 7.7p.

Shares rose 3.70% to 404.10p initially before falling back 0.46% to 387.20p in late morning trading.

Liberum repeated a 'sell' rating and target price of 385p, saying: "Even if Parcels revenue strength can be extrapolated into the long term, which is by no means certain given ongoing competition, cost savings and productivity improvements are still needed. The troubled state of industrial relations and rising inflation make these harder to deliver."