Royal Mail: Half year trading statement 2008-09 (UK)

Royal Mail Group’s operating profit more than doubled from GBP 86 million to GBP 177 million in the first half of the 2008-09 financial year compared to the same period the previous year despite a further fall in mail volumes, the company announced today.

The strong financial performance came alongside a rise in customer quality of service with the most recent figures showing the vast bulk of mail hitting or exceeding its targets.

Operating profit grew by GBP 91 million in the first half of the year compared to the same period last year. The company’s continued focus on reducing overheads as competitive and economic pressures mount played a significant role in the financial uplift with reductions in IT and other costs in the Post Office network and efficiency gains in the Royal Mail Letters business. Royal Mail Group’s operating profit more than doubled from GBP 86 million to GBP 177 million in the first half of the 2008-09 financial year compared to the same period the previous year despite a further fall in mail volumes, the company announced today.

The strong financial performance came alongside a rise in customer quality of service with the most recent figures showing the vast bulk of mail hitting or exceeding its targets.

Operating profit grew by GBP 91 million in the first half of the year compared to the same period last year. The company’s continued focus on reducing overheads as competitive and economic pressures mount played a significant role in the financial uplift with reductions in IT and other costs in the Post Office network and efficiency gains in the Royal Mail Letters business.

The challenges facing the company are:
• The one-price-goes-anywhere Universal Service – used by social customers and by businesses big and small to communicate with their customers and each other, and which underpins the economic and social fabric of the country – continues to be loss-making and its future is under threat.
• Increasing competition in the overall communications market in which we operate has seen an acceleration in the switch by businesses and individuals away from mail to electronic media, including internet and email. At the same time, rival mail operators in the open letters market are increasing their share of volumes with competitors currently handling almost one letter in every three posted.
• The rate of structural volume decline in UK postal market – as in the rest of the postal world – has accelerated, leading to a 4% fall in Royal Mail’s volumes in the first half of 2008-09. Royal Mail is now handling an average daily postbag of around 79 million letters – some five million fewer on average each day compared to just two years ago when mail volumes peaked.
• On top of the structural decline in the mail market, Royal Mail faces additional risk from the squeeze in the UK economy, as mail volumes and revenues track GDP, and from the drive by both businesses and individuals to cut their costs as the economy tightens. Royal Mail is particularly vulnerable to a downturn in the advertising market, which is a key element in overall mailings.
• Royal Mail Group remains heavily cash-constrained and, in contrast to its rivals, currently has no ability to raise money in the financial markets while Government funding, even at commercial interest rates, is subject to scrutiny by the European Commission.
• Earlier this year the company reformed the pension scheme to reduce the risk going forward. Despite this, however, the pension deficit in accounting terms has increased by more than GBP 1 billion to GBP 4 billion – up from the GBP 2.9 billion deficit at March earlier this year – as a result of the heavy falls in the stock markets. Of particular concern is the actuarial deficit, which is due to be revalued as at 31 March 2009 and it is likely to have increased substantially from the previous level of GBP 3.4 billion in March 2006. The urgent need to tackle this major challenge is underlined by the continuing burden of the heavy cash contributions the company is required to pay towards the deficit and servicing the pension plan.
• Following the wide-ranging national agreement last autumn with the Communication Workers Union on flexible working practices, the essential drive to modernise the Royal Mail Letters business – to ensure it can compete effectively in a market that is both declining and gets ever more competitive – is now underway. Although many offices are working hard to introduce new working arrangements and get efficiency gains from the new technology being installed there has also been resistance on the ground at local level that’s damaging the pace of change.
• Swifter transformation means we must continue to bring in people, across the business, with the skills and experience in operational change which Royal Mail needs for the next stage of our transformation, which in turn will enable us to compete effectively in the competitive market.
• The regulatory regime constrains Royal Mail’s ability to compete fairly and respond with price flexibility, new products and services in the business mail market – the only sector of the market where competition is well developed. As the independent review of the postal services sector said in its initial report in May this year, the way in which the sector is regulated will "need to change."

POST OFFICE BACK IN PROFIT
A strong push to cut overheads, especially the cost of running the IT systems crucial to the operation of every branch, along with growth in new products and services, particularly the Post Office’s HomePhone and broadband services, helped reverse a lengthy period of losses in Post Office Limited.

The business made an operating profit of GBP 28 million in the first half of the year compared to a GBP 7 million loss 12 months earlier, after taking account of the Government’s annual GBP 150 million Social Network Payment which is helping keep open thousands of loss-making Post Office branches.

The business’s turnover was up 2.7 pct on the 2007 half year performance with income from new products and services exceeding falls in traditional Government business. This is another positive sign for the future of the business as the Network Change programme to reduce the size of the branch network, in line with the available Government funding, nears completion.

However, despite all the efforts of the Post Office team to turn the business around, of critical importance going forward is the decision on the Card Account contract to replace the current Post Office Card Accounts in April 2010. This crucial decision is clearly central to the future of the branch network and Post Office Limited has submitted a very competitive bid.

PARCELFORCE WORLDWIDE PROFITS UP
Parcelforce Worldwide’s operating profit doubled to GBP 4 million over the period of the two half years and its revenues grew by an impressive 5.7 pct in an exceptionally tough market. The business’s quality of service remains among the strongest in the field.

GLS – STRONG PERFORMANCE
GLS, the Group’s European parcels business which operates in 36 European states, again improved its performance with a half year operating profit of GBP 59 million. On a like-for-like basis, including when the impact of a favourable exchange rate in favour of the Euro against Sterling is taken out, the company has recorded underlying sales growth of 4.5 pct and profit growth of 6 pct.