Royal Mail results “strong” as profit jumps 26%

Royal Mail Group has announced a rise in operating profit by £83m to £404m, up by 26% on the previous year. The increased profit, which is in spite of the continuing decline in traditional mail markets in the UK and around the world, shows the positive impact of continued modernisation and increased efficiency across the Group.

Three quarters of the £2bn investment plan to transform Royal Mail’s operations has now been spent, including a further £500m invested in the last 12 months in new technology and new equipment for our postmen and women, bringing the total to £1.6bn invested in modernisation since 2006.

Competition intensified during the year with over 13m fewer letters a day being handled than just five years ago as people turn increasingly to other forms of communication including the internet and text.

Group revenues dipped – for the first time in a decade – to £9.35bn, but all four businesses within the Group remained in profit.

The continued investment in modernisation and the high level of payments into the pension fund contributed to negative Group cash flow in the year of £517m.

Key performance highlights in 2010:

Business unit performance	External revenue		Operating profit*
	2009-10 £m	2008-09 £m	2009-10 £m	2008-09 £m
Royal Mail Letters	6,564	6,707	121	58
General Logistics Systems	1,487	1,495	112	124
Parcelforce Worldwide	399	399	17	12
Post Office Limited	838	908	72	41
Other businesses	61	51	82	86
Group	9,349	9,560	404	321

*Operating profit is defined as before exceptional items

Donald Brydon, chairman of Royal Mail Group, said: “These are good results achieved against a backdrop of harsh economic conditions and the relentless reduction in the number of letters sent by customers, not just in the UK but around the world. However huge challenges remain, including the need to find a resolution to our historic pension deficit, and the need to reach agreement with Postcomm on a regulatory regime more suited to today’s changing marketplace.”

He added: “The strikes called by the CWU in 2009 clearly had an adverse effect on Royal Mail Letters and I am delighted that the recent ballot of union members endorsed the agreement struck between the Group and the CWU which will allow for still further progress towards our modernisation goals and help us to protect the Universal Service while providing a fair reward for our people and recognising the important role they play in achieving the transformation we so urgently need.”

Brydon thanked Adam Crozier, who stepped down as chief executive in April, for leading the transformation of the Group over the last seven years: “Adam’s clarity of purpose and strong leadership marked a period when the Group recovered from significant losses to be again profitable. Adam leaves behind a Group with a sense of purpose, a modernising agenda and good people. Together with colleagues I have been conducting a search for his successor and I will be making an announcement shortly,” he said.

All four Group businesses remain profitable

Group operating profit increased to £404m – a 26% improvement on the previous year and for the second year running, all four of the Group’s businesses are profitable. Royal Mail Letters, the Post Office and Parcelforce Worldwide all increased their operating profit last financial year.

Recessionary trading conditions saw many customers posting fewer letters, downtrading from premium services such as First Class to Second, while at the same time the switch away from traditional mail to email and web communications accelerated. These factors, and falls in traditional Government business in the Post Office network, all resulted in revenue reductions – but the impact was more than offset by modernisation and lower costs.

Despite strike action by the CWU at local and national level in Royal Mail Letters during 2009, the business made good progress in its transformation plan. Over 80% of the mail is now sorted to the level of the individual postman or woman’s walk and the national rollout of “walk sequencing machines”, which sort the mail to the exact pattern of addresses followed by the delivery postman or woman, continues at pace. Five years ago, just half the mail was being sorted automatically.

Royal Mail Letters’ operating profit has more than doubled to £121m despite an overall revenue fall of £143m. The profit margin remains low – less than 2% – but the financial performance shows convincingly that Royal Mail’s modernisation plan is delivering real benefits.

Post Office Limited’s revenue fell by £70m in 2009-10 mainly because of lower income from the Post Office Card Account. The Post Office’s net cash outflow reflects the investment being made to refurbish Crown branches and improve the network’s IT capabilities.

The Group’s headcount reduced by almost 8,000 in 2009-10 and as in previous years, the reduction was managed without any compulsory redundancy.

Record target-beating performance was delivered by Royal Mail’s postmen and women in the spring and early summer of 2009. However, we very much regret that CWU strike action later in the year inevitably resulted in Royal Mail falling short of some of its annual quality of service targets.

Parcelforce Worldwide continued to perform well in the hugely competitive time-guaranteed parcel sector. Despite the recession, it maintained its revenues at £399m for the year and its operating profit rose to £17m – a 42% increase. Parcelforce 24 Quality of Service improved to 97.7%.

Revenues at GLS fell by 0.5% year on year reflecting the difficult economic conditions, particularly in Germany. Cost savings in its delivery operations limited the resulting fall in operating profit – down by 10% to £112m. The business is well positioned for recovery in Europe.

Major issues and challenges remain

The withdrawal of the Postal Service Bill means that the three major issues it highlighted – the need for regulation that reflects the changing market Royal Mail operates in, the need for a resolution to the historic pension deficit, and the need for more flexible access to capital – have yet to be resolved.

Mail markets in the UK and around the world continue to decline. UK mail volumes declined by 7.3% in 2009-10 – the steepest fall since average daily volumes peaked at 84m in 2005 – with the average daily mail bag now containing around 71m letters, packets and parcels.

All major postal operators around the world expect volumes to decline further as people switch increasingly to electronic communications. TNT Post Group in The Netherlands, for example, is planning for a volume reduction of up to 9% this year and around 30% over the next five years, while the United States Postal Services is currently seeing its mail volumes decline by 13% a year.

Within the UK the volume of mail handled by rivals grew by over 20% in the last 12 months. More than one in three letters – a total of 6,400m items – were posted last year with a competitor, but delivered by a Royal Mail postman or woman under rules which allow rivals access to Royal Mail’s network. Access mail now accounts for more than half of all business mail.

The Group has a net trading cash outflow of £517m, reflecting the continued investment being made in sorting technology, new equipment for postmen and women, improvements to Crown Post Office branches – as well as continuing heavy cash payments to the Pension Fund.

The pension fund deficit

The Group and the Trustees have worked hard to find a solution to the problem of the actuarial deficit – which is expected to be significantly higher than the previous figure of £3.4bn when the current valuation is completed – and they continue to do so.  In 2010 the Group paid £867m into the pension schemes, of which £291m was to help fund the historic deficit.

The future

Brydon said: “Despite the very significant pressures in all parts of the Company, Royal Mail Group has continued to demonstrate its ability to withstand the combined pressures of recession and competition and has shown real momentum in driving forward our modernisation and making the changes which are so important if the Company is to survive and thrive.

“To echo the words of Adam Crozier at this time last year, we know that despite the challenges of difficult and uncertain markets, we have the resilience and determination to continue our transformation and to become the world’s best postal company. The strong and robust performance we have shown over the last 12 months shows we are making good progress.”