Royal Mail delivers record quality of service with GBP355m operating profit

Royal Mail today announced a 17.5% increase in operating profit to £355 million in 2005-06, a year in which new quality of service records were set with the vast majority of letters exceeding their targets.

All four of Royal Mail’s businesses – Letters, the Post Office®, Parcelforce Worldwide and the European parcels business, GLS – improved their financial performance.

The outstanding financial result has triggered a £418 Share in Success payment to Royal Mail’s people, amounting to a payout of nearly £100 million.

Allan Leighton, Royal Mail’s Chairman, said: "Royal Mail and its people have delivered record quality of service to customers and achieved an outstanding financial performance in 2005-06.

"The results show that Royal Mail has consolidated the gains it made during its three-year renewal plan when the business returned to profit and began to hit service targets instead of routinely failing them.

"I’m proud of our people for the hard work and commitment they’ve shown. But there can be no let-up, especially as the market is now open to full competition with rivals last financial year handling more than one billion letters under access arrangements, a number set to hit three billion in two years’ time, if not sooner."

Discussions continue with the shareholder, the Government, on Royal Mail’s investment case to modernise the company so that it can compete successfully in the future.

Mr Leighton said: "We have made tremendous progress in our discussions with our shareholder and I am pleased to say we have reached agreement in principle on our overall investment case. Obviously, there is a huge amount of detail to be worked through in coming weeks and a key part will be ensuring we get the right incentive scheme in place for our people. We believe that giving our people a stake in the business will be key to delivering that investment plan – and we know this is something they want and would respond to. This sound commercial investment from our shareholder will give us the opportunity to modernise and transform a company which serves homes and businesses throughout the country and is vital to the success of UK plc.

"We await the outcome of final discussions with the Chancellor and the new Secretary of State but I am confident we will reach a successful conclusion in the near future," he said.

The Report and Accounts for the financial year to the end of March 2006 show:

• Turnover was a record £9,056 million. The £355 million operating profit was £53 million better than the previous year and represented a 3.9% return on sales.
• Royal Mail’s letters business made a £344 million operating profit – £1 million more than the previous year. There was decline in inland addressed mail, exacerbated by some bulk mail customers switching to lower-priced services, primarily under access arrangements with rivals. There was a below-inflation price rise while Royal Mail’s unique commitment to delivering to the UK’s 27 million addresses at prices among the very lowest in Europe was underlined by continuing losses in First and Second Class stamped letters. Business mail, which amounts to around 90% of all mail, continues to subsidise stamped mail.
• The Post Office® made a £111 million operating loss, a £12 million improvement on the previous year – a significant achievement as the year saw the end of pension and benefit books, which had previously generated annual revenues of £327 million. Losses of £2 million a week are unsustainable in the long run and constructive discussions continue with the Government on future funding of the rural network and a replacement after 2010 for the Post Office® Card Account, currently used by 4.2 million customers.
• Parcelforce Worldwide made its first full-year operating profit – £5 million – after a long haul involving a focus on business customers, getting out of loss-making contracts and cutting costs.
• GLS, which is consistently rated as an outstanding competitor in the European parcels market, delivered another star performance with a 37% improvement in operating profit to £100 million with a 9.6% margin on revenues that grew to £1,037 million. It is now established as a significant contributor to the Group’s profits, and aims to improve its performance further.

Adam Crozier, Royal Mail’s Chief Executive, also paid tribute to Royal Mail’s postmen and women for the record quality of service they had delivered.

"They have achieved a world-class performance and they can justifiably take pride in their achievements," he said.

A key challenge facing Royal Mail remains the funding of its pension fund deficit, which grew last year to £5.6 billion.

Mr Crozier said: "Royal Mail faces a challenging future – the need to modernise, securing the future of the Post Office® network, increasing the focus on customers and improving service yet further, generating the cash to ensure the pension fund continues to meet its obligations, and all the time bringing our people with us.

"It’s going to be very hard work by everyone in Royal Mail. I am confident our people can meet the challenges ahead. It’s crucial we remain profitable so that we can continue to provide all our customers with the services they need. But the key to future success is to ensure that the investment plan, which has been approved in principle by the shareholder, is brought to a successful conclusion with the right incentive plan for our people who are, as always, the key to our success."

Ends

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www.royalmail.com/group

Notes to Editors

1. Royal Mail announced earlier this week that letter quality of service was the best on record with 94.1% of First Class letters arriving the next working day after posting (target: 93.0%), and 98.8% of Second Class arriving within their target of three working days, against a target of 98.5%.
2. Royal Mail Group’s reported operating profit of £355 million ie equivalent to a profit from day to day operations (before increased pension costs) of £609 million, up from £537 million the previous year.