City Link per-parcel driver payments helping recovery plans

Struggling parcel delivery company City Link is “on track” to achieve break even point by the end of the year, according to its parent firm Rentokil Initial plc. The firm revealed first half results today suggesting its recovery plan for its loss-making delivery subsidiary was now turning the situation around, helping with overall group profits that were up 52% in the second quarter, compared to the same three months in 2011.

City Link itself saw revenues up 5.3% in the three months to the end of June 2012, to GBP 76m, in a better quarter compared to the “dreadful” start to 2012.

During the first half of the year, revenues were up 3.5% to GBP 149.5m, although with more B2C lightweight parcels in the mix, the revenue growth was not so high as City Link’s volume growth for the half, up 14% compared to the first half of 2011. Revenue per shipment was down 9%, the company said.

City Link made a GBP 5.8m operating loss in the second quarter, an 18.3% improvement compared to the second quarter of 2011. So far in 2012, the company has lost GBP 18.5m, a 3.9% decline on the same period in 2011.

Commenting on the results, Rentokil Initial plc chief executive Alan Brown said: “City Link’s recovery plan is progressing in line with expectations. We would expect to see losses to reduce further year-on-year in Q3 and for the business to be profitable in Q4, and we’re pretty confident of getting into profit for the year as a whole in 2013.”

Recovery plan

Turning around the performance of City Link has been the top priority for 2012 at Rentokil. The company hired two executives from Parcelforce – David Smith and Robert Peto – last year as MD and finance director as part of a new management team to turn around its performance.

Along with price increases at the start of the second quarter, which have brought in an extra GBP 4.9m, the company’s recovery plan has targeted operational productivity improvements, particularly for drivers.

Along with route optimisation improvements, and closure of three depots in the first half of 2012, there has been a shift to a new payment system for owner-driver subcontractors based on volumes being carried.

Brown said today that this change to paying drivers on the basis of parcels delivered, rather than days worked, was the major improvement in productivity during this quarter.

Volume-based payments have now been introduced into 61 of the company’s 66 depots.

“That has now largely been implemented. We had a few bumps in the road in Q2 as we were doing it, but it is now going pretty well and we are now very close to the target cost rates we set ourselves for the final mile of delivery, the biggest portion of our cost base,” said the Rentokil CEO.

The City Link recovery plan also includes measures to reduce costs in the company’s trunking operations, warehouses and administration, although measures to

A full route redesign is set to be completed in the current quarter (Q3), with hub and line haul efficiencies already improving. Investment in improved scanning technology was driving further quality improvements, the company said.

Assumptions for new business for the rest of the year looked “fairly robust”, although Brown said the general economic outlook for 2012 appeared “uncertain”, with volumes down

Olympics slow-down

Looking at the current, third quarter of the year, Rentokil CFO Jeremy Townsend said his company had been well prepared for operations during the current London Olympics, and that there has been “minimal impact” so far in the event from traffic congestion, but initial indications suggest that parcel volumes have reduced during the Games.

“Assuming this is a temporary slowdown, we expected further improvement in financial performance in Q3, and a small profit in Q4,” he said of the City Link business.

Brown said his company had seen volumes down by 5-10% over the last 10 days, and while did describe the economic situation in the UK as “uncertain”, he suggested that the downturn in volumes was related to the diversion that the Olympics has caused to the British economy.

“We do anticipate that is a very-specific issue related to the general attention of the British population on the Olympics, and we very much hope that things will pick up again once we are through the next 10 days or so,” said the Rentokil CEO.

Going forward, with its cost base “pretty well sorted”, City Link will be turning its attention to its customer mix, which has recently swung towards larger B2C customers, affecting the profitability of parcel delivery.

Brown said once profitability is assured in Q4, his team would focus more on smaller businesses in the medium-term.