Half-year Report

International Distribution Services plc

(Incorporated in England and Wales)

Company Number: 8680755

LSE Share Code: IDS

ISIN: GB00BDVZYZ77

LEI: 213800TCZZU84G8Z2M70

21 November 2024

                      INTERNATIONAL DISTRIBUTION SERVICES plc (IDS or IDS plc) RESULTS FOR THE 26 WEEKS ENDED 29 SEPTEMBER 2024

Despite difficult market environment, Group delivered revenue growth of 8.2% in the first half and returned to adjusted operating profit.

Royal Mail transformation delivering an improved financial and operational performance - on track to deliver full year guidance³; GLS margin lower compared to H1 2023-24 against a challenging economic and regulatory backdrop; taking action through cost and efficiency measures.

1.    Reported results are prepared in accordance with UK adopted International Financial Reporting Standards (IFRS). In addition, the Group's performance is explained through the use of alternative performance measures (APMs) that are not defined under IFRS. A full list of the Group's APMs are set out in the section titled 'Presentation of results and alternative performance measures' and reconciliations to the closest measure prescribed under IFRS are provided where appropriate.

2.      Includes intragroup revenue, which represents trading between Royal Mail and GLS, principally a result of Parcelforce Worldwide operating as GLS'      partner in the UK. This was £10 million in H1 2024-25 and £9 million in the prior period.

3.     The Royal Mail Profit Forecast is a profit forecast for the purposes of Rule 28 of the Takeover Code and the required confirmation of the IDS Directors, together with the basis of preparation and assumptions, is set out in Appendix 1 to this announcement.

4.     The takeover offer for 100% of the shares in IDS plc has been made by EP UK Bidco Limited ("Bidco"). Bidco is ultimately controlled by EP Corporate Group, a.s. ("EP Group").

Group overview:

·    Revenue £6,343 million, up £481 million year-on-year.

·   Adjusted operating profit¹ of £61 million (H1 2023-24: loss of £169 million), mainly due to significantly reduced loss in Royal Mail.

·    Reported operating loss of £26 million (H1 2023-24: loss of £243 million), including an impairment of the carrying value of Royal Mail of £134 million (H1 2023-24: £nil):

o  Impairment charge largely due to expected additional tax burden reflected in a c. £120 million annual increase in employers National Insurance from FY 2025-26 - a result of Royal Mail's role as a major UK employer with c. 130,000 people - which is expected to only be partially mitigated in the short term through pricing and costs actions; additional initiatives being developed to fully offset the impact over the long term.

·    Net debt increased to £1,894 million (£1,532 million September 2023); strong balance sheet maintained, ample liquidity.

Royal Mail overview:

·    Revenue growth of 10.7%:

o  Good parcel revenue growth of 8.9%, despite weaker market than anticipated in H1;

o  Addressed letter volumes (ex. elections) down 5% year-on-year. Letter revenue growth of 12.7%, with volume decline more than offset by price, and positive impact from General Election.

·    Further progress on modernisation and transformation in H1, leading to an improving trajectory for quality of service over the last 12 months:

o  Deployed the biggest operational change for over 20 years, changing frontline start times to enable the removal of half of domestic flights, improve reliability, increase network capacity and reduce emissions;

o  Permanent employees on new contracts grew to over 19,000 at the end of September (from c. 5,500 a year ago);

o  Increased parcel automation: 84% end of September, continuing to invest, c. 90% expected by March 2025;

o  Innovation: digitally tagging parcel containers in the network to improve visibility and efficiency;

o  Expansion of out of home: planned increase in drop off locations to over 21,000 by end of March 2025, including c. 7,500 parcel shops (with Collect+) and c. 1,500 lockers through partnerships and Royal Mail's own network.

·    Considerable change and investment still required to transform Royal Mail and be financially sustainable   for the future, including real and urgent need to reform Universal Service, which currently is hindering   our competitiveness.

GLS overview:

·    Revenue growth of 4.4% year-on-year, driven by B2C and cross-border.

·    Adjusted operating profit lower year-on-year due to macroeconomic and regulatory pressures, particularly in Germany and Italy. In response, implementing further pricing and efficiency measures.

·    Other developed European markets and Canada performing well.

·    Continuing to invest to support strategic delivery:

o  Expanding out of home network, with growth of 11% vs. March 2024, to c. 61,000 points;

o  Improving digital propositions - new consignee app in Eastern Europe;

o  Upgrading the network to drive productivity and growth, with two new hubs open for peak;

o  Growing our international business.

Outlook:

·    Royal Mail on track to return to adjusted operating profit, before voluntary redundancy costs, for FY   2024-25³. However, fiscal and regulatory backdrop is adding cost and inflexibility to the business,  making USO reform even more urgent.

·   In GLS, the macro environment across Europe remains challenging, with regulatory pressures in certain markets; continued investment is required to deliver strategic ambitions and support growth.

·   Offer by EP UK Bidco Limited⁴: as set out in the Offer document published 26 June 2024, expected that Recommended Offer will become or be declared unconditional in Q1 of calendar year 2025, subject to required conditions being satisfied or waived.

Martin Seidenberg, Group Chief Executive Officer of IDS commented:

"The modernisation of the Royal Mail network continues at pace, with innovation to improve our services to customers, including the rapid expansion of our out of home footprint. As we enter our busiest period, we are well prepared to deliver Christmas, with around 4,000 new vehicles being delivered before peak, 16,000 extra people, extended delivery hours until 8pm and our growing network of parcel lockers and parcel shops.

"We are delivering on the changes we can control, but the cost environment is worsening just at the time when we need to invest. As a major employer with around 130,000 permanent employees, the changes to National Insurance will disproportionately impact our business relative to competitors. This makes Universal Service reform even more urgent.

"GLS' flexible business model, diverse geographic footprint and commitment to high quality has enabled it to navigate a challenging environment. We are taking action to drive efficiencies and control costs while continuing with our strategy to invest to expand our out of home network, develop new digital solutions for customers and upgrade the network to drive productivity and growth. We are also expanding our global service offering across the US and Asia-Pacific.

"I would like to thank all our colleagues across the Group for their continued hard work, dedication to serving our customers every day and the role they have played in the progress we have made."

Results presentation

A results webcast for analysts and institutional investors will be held at 9am today, Thursday 21 November 2024 at https://www.internationaldistributionservices.com/en/investors/financial-results-presentations.

Enquiries:

Investor Relations

John Crosse

Email: [email protected]

Media Relations

Jenny Hall

Phone: 07776 993 036

Email: [email protected]

Greg Sage

Phone: 07483 421 374

Email: [email protected]

Royal Mail press office: [email protected]

Company Secretary

Matthew Newman

Email: [email protected]

The person responsible for arranging the release of this announcement on behalf of IDS plc is Matthew Newman, Company Secretary.

GROUP OPERATING AND STRATEGIC REVIEW: Martin Seidenberg, Group Chief Executive Officer

The market environment was difficult during the first six months of the year, with macroeconomic, regulatory and competitive headwinds. In the UK, we continue to see cost of living pressures and falling consumer confidence, which was reflected in a weaker than anticipated parcels market. Across Europe, GDP growth is sluggish, with Germany on the cusp of recession.

Despite this, the Group delivered a good performance. Group revenue grew by £481 million year-on-year to £6,343 million, driven by growth in both businesses. Group reported operating loss was £26 million (H1 2023-24: £243 million loss), including the reduction in the carrying value of Royal Mail.

Adjusted operating profit was £61 million (H1 2023-24: £169 million loss) due to revenue growth and a significant reduction in the loss at Royal Mail. We continue to focus on what we can control: the transformation and modernisation of Royal Mail and strategic delivery and mitigation of inflationary pressures at GLS.

Royal Mail made good progress on its modernisation agenda in H1, delivering operational change, innovation and further expansion of our out of home footprint. But considerable change and investment is still required, including the real and urgent need to reform the Universal Service to make it financially sustainable for the future.

GLS is implementing further pricing and efficiency measures and yield management to mitigate inflationary pressures and continuing to invest to support strategic delivery. GLS also expanded its out of home network during H1, launched new digital propositions, continued to upgrade its network to drive productivity and growth and expanded its international business.

Despite the difficult market environment, Royal Mail remains on track to return to adjusted operating profit, before voluntary redundancy costs, for FY 2024-253. However, there is an unfavourable fiscal and regulatory backdrop into the future, adding cost and inflexibility to the business. Changes to employers National Insurance will have a material negative impact in FY 2025-26, and there is still no certainty about the shape of reform of the Universal Service. In GLS, the macroeconomic environment across Europe remains challenging.

Royal Mail

We continue to implement the Business Recovery, Transformation and Growth Agreement, building on the progress already made. In the first half of the year we:

·    Deployed the biggest operational change to the business in over 20 years, with later frontline start times. This allows us to remove half of our domestic flights, with 14 out of the planned 18 flights now stopped. This is good for both the environment and for quality of service, improving reliability for customers and helping to meet growing demand for next day deliveries, whilst reducing emissions.

·    Started moving a limited number of larger sized parcels from Royal Mail to Parcelforce Worldwide, important as the Parcelforce Worldwide network is more efficient at handling larger parcels. Since 2017, the average size of a parcel sent through the Royal Mail Network has grown by over 29%, and larger sized parcels now account for c. 37% of all parcel traffic, up from c. 30% in 2017. This highlights the need for further change and investment in our network.

·    Reduced frontline hours by an average of two hours a week during the summer with the roll-out of seasonal hours, to balance the additional two hours a week our people worked during peak in 2023. Seasonal hours is a key enabler to deliver efficiencies and make our resource more flexible. We will again flex up resource from our fixed employee base, through seasonal variation and overtime, during peak for 2024.

·     Further reduced sick absence rates. The average over the first six months was 5.6%, down from 7.0% in the first half of 2023-24.  This has been achieved through successful deployment of new attendance standards, a new sick pay policy in the Autumn of 2023 and an improved wellbeing offer for all colleagues.

·     Increased the number of permanent colleagues on new, more flexible contracts to over 19,000 at the end of September, from around 5,500 a year ago and 13,000 in March 2024. This has helped reduce our reliance on agency staff, which in turn helps to improve quality.

Quality of service has continued to improve over the past 12 months, for both commercial tracked and Universal Service products, although there is clearly more to do. We invested to support the delivery of the General Election in July, with deliveries of postal votes 50% higher compared to the 2019 General Election, and 30% more candidate mail delivered compared to 2019. Royal Mail is a very important part of the democratic, electoral process and I'd like to thank all our colleagues for helping to deliver it.

We're well placed for peak and will be delivering later to 8pm for our customers, with 16,000 additional people joining for the festive period. A total 141,000 sqm of extra temporary space - equivalent to 20 football pitches - has been created across the five seasonal parcel sort centres. We're adding c. 5,000 new vehicles this financial year, with over 1,000 delivered in the first half and c. 3,000 more due before peak, which will help support quality and reduce rental costs and emissions.

Parcel automation has continued to increase and was at 84% at the end of the period. Three more parcel sorting machines have been installed in Plymouth, Exeter and Leeds, and six large parcel conveyors have been installed across the network, with five more to come into the network after peak. This continued investment is expected to push automation to around 90% by the end of the current financial year. We continue to optimise our Parcel Hubs, with the throughput at our Midlands Parcel Hub now at one million parcels per day, which around peak will increase to 1.1 million. We're also optimising our network by digitally tracking parcels through the network which helps to improve visibility and plan more efficiently. We will introduce AGVs (automated guided vehicles) in our Parcel Hubs in the fourth quarter. We need to maintain investment in the network to support the multi-year transformation of Royal Mail, enable the business to have the flexibility to adapt to a changing market and be able to deliver future profitable growth.

We continue to make good progress on our channel strategy and new growth initiatives. We are expanding our out of home network, which will be important for future long-term growth, to make sending and receiving parcels as convenient as possible and give customers more choice to drop off and collect parcels - from Collect+ Parcelshops, parcel lockers, doorstep collection or Post Offices. Overall, Royal Mail's out of home network is planned to increase to over 21,000 locations by the end of FY 2024-25, including around 7,500 parcel shops with Collect+, and around 1,500 lockers through strategic partnerships and Royal Mail's own locker network, which will launch in the fourth quarter of FY 2024-25.

In October, Royal Mail launched the UK's first Collective Defined Contribution Pension Plan. The innovative scheme will offer over 100,000 Royal Mail employees a cash lump sum and an income in retirement. It was designed and implemented together with the Communications Workers Union and Unite CMA to provide the right pension arrangement for our people and the business.

Turning to financial performance, Royal Mail revenue increased 10.7%, reflecting growth in both parcel and letter revenue.

Domestic parcel volumes (ex. international) increased by 5%, with domestic parcel revenue up 8.9% year-on-year, reflecting price increases offset by mix, with performance in the Consumer and Small Business segment below expectations. The overall parcel market was weaker than anticipated, with ongoing cost of living pressures and falling consumer confidence.

International parcel volumes, including import and export parcels for Royal Mail and Parcelforce Worldwide, showed strong growth of 37%, driven by strong import volumes. International parcel revenue only grew by 9.1% year-on-year, reflecting higher import volumes at a lower average unit revenue and weaker performance from exports, which have a higher than average unit revenue.

Total letter revenue grew by 12.7% year-on-year, benefitting from price rises, necessary given the costs of delivering the Universal Service, partially offset by volume decline and negative mix. Letter revenue growth was also helped by the earlier than expected General Election in July, which added 5.5 percentage points to growth.

Reported operating loss was £138 million (H1 2023-24: £383 million loss) and adjusted operating loss reduced to £67 million (H1 2023-24: £319 million loss). In-year trading cash outflow was £151 million (H1 2023-24: £166 million outflow). Gross capital expenditure increased by £31 million to £109 million, due to investment in our transformation and network.

Further detail on financial performance is included in the Financial Review.

GLS

At GLS, the macroeconomic and competitive backdrop has been difficult, with regulatory headwinds in certain markets.

However, against that backdrop, GLS delivered robust revenue growth of 4.4% in Sterling terms (6.3% in Euro terms), driven by parcel volume growth and pricing. The first half benefitted from working day effects, which if adjusted for, resulted in revenue growth of 2.6% in Sterling terms (up 4.5% in Euro terms).

Parcel volumes increased by 4%, driven by B2C and cross-border, with B2C accounting for 59% of total parcel volumes, compared to 57% in the prior period.

Reported operating profit was £112 million (H1 2023-24: £140 million) and adjusted operating profit was £128 million (H1 2023-24: £150 million) or €150 million (H1 2023-24: €173 million), reflecting macroeconomic and regulatory pressures, including wage inflation, particularly in Germany and Italy, and our ongoing strategic investments, primarily in the expansion of our out of home network. Foreign exchange movements also resulted in a net decrease of £2 million in operating profit. Adjusted operating profit margin declined by 110 basis points to 5.3%.

Whilst most GLS countries delivered an improved performance year-on-year, in Germany and Italy, two of GLS' larger markets, the market backdrop is particularly challenging. In Germany, the economy is on the cusp of recession, with ongoing wage inflation and regulatory pressures. Revenue growth was 7.8% in Euro terms, benefitting from additional working days and favourable price/mix effect, with underlying volumes flat. However, operating profit fell due to the cost pressures, including a minimum wage increase and higher costs in linehaul and last mile delivery. Initiatives to reduce costs, improve efficiency and increase yield are underway.

In Italy, revenue grew by 3.4% in Euro terms, including working days effects. Operating profit declined compared with the prior year due to wage inflation and regulatory changes impacting the subcontractor base. We continue to take action, implementing yield management and cost reduction measures, alongside price increases.

Other markets are performing well, with GLS Spain delivering strong organic revenue growth of 11.1% in Euro terms, driven by double-digit volume growth, benefitting from additional capacity with the new Madrid hub. Operating profit also increased compared with the prior year. GLS France revenue grew by 7.6% in Euro terms, driven by pricing, with strong growth in cross-border. The new Paris hub is now open and will provide additional capacity in advance of peak season, as well as improve efficiency and quality.

The US business is performing in line with expectations. Underlying revenue declined by 7.5% in USD terms, and operating losses reduced compared with the prior year, due to operational efficiencies and yield management. The freight business was divested on 1 September, a key milestone in the turnaround of the US business, to focus on the core parcel operations, including leveraging cross-border traffic between US, Europe and Canada.

GLS Canada organic revenues increased by 4.4% in CAD terms due to growth in freight revenue and parcel volumes. Operating profit also increased.

In-year trading cash flow pre-IFRS 16 remained robust, at £72 million, which compared with £63 million in the prior year. In-year trading cash flow was £113 million (H1 2023-24: £103 million).

Further detail on financial performance is included in the Financial Review.

GLS also made further progress on its strategic initiatives during the first half. Alongside the opening of the new Paris hub, which has the capacity to handle around 200,000 parcels per day, the new Berlin hub opened in May 2024. This is one of Germany's biggest regional hubs with a capacity of 10,000 parcels per hour and will play a key role in serving the greater Berlin area and as an international gateway to Eastern Europe. There is also a new Copenhagen depot in the pipeline due to open in FY 2025-26, which will increase inbound handling capacity and deliver significant operational cost savings.

We are continuing to invest to transform the last mile and expand our out of home network, with growth from March to September 2024 of 11% to c. 61,000 access points. Our locker network increased by c. 2,800, or 38%, to c. 10,000. GLS owned lockers grew by 19%, while third party lockers grew by 69%. In addition, in Poland we have agreed a new partnership with ORLEN, giving customers access to c. 6,000 parcel lockers from October.

GLS Hungary successfully launched a new consignee app, the first version of our loyalty program-based application with a focus on core functionalities like track and trace, out of home point locator, delivery management and redirection features. As part of a wider roll-out in Eastern Europe, GLS Hungary is the first country to launch the app, with Romania being the next, followed by Czechia.

We successfully launched a new cross-border service, allowing our North American and EU countries to seamlessly send transatlantic volumes. The growing cross-border market between North America and Europe remains a significant potential opportunity for GLS, with higher than average margins per parcel.

GLS also announced a bilateral network partnership with SF Express, China's largest integrated logistics service provider, to enhance global distribution capabilities and open up the Asia-pacific region for GLS shipment services, including China, India, Japan, Korea, Thailand and Vietnam.

As previously announced, in October 2024 GLS acquired 20% of ACS in Greece, the largest parcel carrier in the domestic Greek parcels market which serves over 30,000 customers, with an option to acquire the remaining 80% of the share capital of ACS within two years^*. Its network provides 100% coverage across mainland Greece and the Greek islands and is comprised of over 271 ACS outlets operated by exclusive independent agents offering competitive and flexible collection and delivery services and 269 parcel shops. ACS operates eight hubs, including a new, highly automated central hub in Athens which opened in 2022. ACS has been operating as the GLS network partner in Greece since 2004. The investment in ACS is consistent with GLS' strategy to strengthen its parcel operations, including within the cross-border deferred segment.

*        More details are included in Note 13 to the financial statements.

Sustainability

Royal Mail continued to grow its electric vehicle fleet in the first half. The deployment of an additional 2,100 electric vans began in August, adding to the existing 5,000, the largest electric delivery fleet in the UK. When all 2,100 new electric vans are in use, they are expected to reduce Royal Mail's total emissions by around 6,000 tCO₂ equivalent per year. Royal Mail will also purchase c. 27 million litres of Hydrotreated Vegetable Oil (HVO) to fuel its heavy goods vehicle fleets this year.

Royal Mail is also investing in more than 300 green upgrades to heating, lighting and water systems across its estate of more than 1,200 operational sites and offices around the UK, as part of the company's strategy to be Net-Zero by 2040. The improvements will save 3,500 tCO₂ equivalent a year, on top of the reduction in emissions already being realised across the fleet and supply chain. Beyond the environmental benefits, we expect to see significant returns on investment by reducing utilities bills.

The removal of 18 domestic flight routes as part of the network window changes will, when fully realised, equate to a saving of c. 30,000 tCO₂ equivalent per year or over 50% of Royal Mail's base year domestic air freight emissions.

During the first half, GLS continued to work closely with its transport partners to grow the number of electric and biofueled vehicles within the delivery and linehaul network. The zero and low emission share of the transport fleet increased from 11% to 15% over the first half. In total 6,125 zero and low emissions vehicles operate in the GLS network. In addition, 26% of the GLS company car fleet is now electric.

Capital allocation and dividend

The Group's net debt position (pre-IFRS 16) was at £542 million as at 29 September 2024 (£142 million at 24 September 2023, £328 million at 31 March 2024).

As previously indicated, the Board is proposing a special dividend of 8 pence per share, conditional upon completion of the transaction with EP Group.

The Group had available liquidity of around £1.6 billion at the end of September 2024, including £645 million of cash and cash equivalents (excluding £39 million GLS client cash), along with an undrawn bank syndicate loan facility of £925 million.

Recommended Cash Offer by EP UK Bidco Limited (Bidco) ⁴

The IDS Board is unanimously recommending Shareholders accept the Offer. The Board continues to believe that the Offer by Bidco reflects the value of GLS' current growth plans and the progress being made on change at Royal Mail. It provides Shareholders with the opportunity to realise the value inherent in the IDS business in cash, against the execution risks in delivering IDS' current strategy, uncertainty over the nature and timing of Universal Service reform and the need for significant strategic investments. To deliver sustainable profitable growth in the future, Royal Mail requires further significant investment in automation, network changes and rapid expansion of out of home solutions, especially parcel lockers. GLS also requires investment into its strategic priorities. Despite the announcement by Ofcom on 5 September 2024, we still do not know what form Universal Service change may take and what the benefits to Royal Mail may be, and over what timeframe.

In arriving at its recommendation, the IDS Board considered the valuation of the business and took into account a range of scenarios on the upside, including the possibility and timing of change in the Universal Service among other factors, as well as downside risks, such as execution of the transformation in Royal Mail and a deterioration in the macroeconomic outlook, among others. Since May 2024, Ofcom has announced it will consult on reform of the Universal Service in early 2025, although there is still uncertainty over the timing for any final change, the nature of any change, and execution risk remains. The Offer price of 370 pence per IDS share represented a significant premium of approximately 72.7% to the IDS share price of 214 pence on 16 April 2024 (being the last business day before the Offer became public), and thus supported the recommendation. Our independent advisors as to the financial terms of the Acquisition unanimously considered them "fair and reasonable" as at the date of the Offer document.

Please read the background to and reasons for the IDS Board's recommendation set out in Part 2 (Paragraph 4) on page 46 of the Offer document.

EP Group is a long-term investor in infrastructure with significant knowledge of the postal, logistics and distribution sectors, that has the expertise and access to capital to accelerate and de-risk the delivery of IDS' strategic plans over the long-term, with the goal of developing IDS into one of the leading postal logistics players in Europe. The Board has negotiated a comprehensive package of legally binding undertakings and contractual commitments from EP Group and Bidco for specific periods, which provide customers, employees, unions, regulators and broader stakeholders with important safeguards, including:

·   The provision of the Universal Service Obligation and ensuring Royal Mail's compliance with regulatory conditions imposed by Ofcom (including the one-price-goes-anywhere service in the UK and First Class letters still delivered six days a week);

·     Restrictions on distributions or other forms of return of value from Royal Mail unless certain conditions are satisfied;

·      Restrictions on change of control of both Royal Mail and GLS;

·     Use of the "Royal Mail" trading name and commitment to IDS and Royal Mail being UK headquartered and tax resident;

·      Recognition of IDS group's existing unions; and

·      Maintenance of certain employee compensation and benefits (including pension benefits).

The undertakings and commitments are subject to varying timeframes and durations as detailed in Part 1 (Paragraphs 4 - 5) starting on page 18 of the offer document.

As set out in the Offer document published on 26 June 2024, it is currently expected that the recommended offer by Bidco will become or be declared unconditional in the first quarter of calendar 2025, subject to the required conditions being satisfied or waived.

Summary and Outlook

Against the backdrop of a challenging market environment, the Group has delivered a good performance over the first six months of the year and made good progress on its strategic agenda.

Royal Mail has built on the momentum from the second half of last year and continues to make good progress implementing the CWU agreement and delivering on its growth, network and channel strategy. We have improved our digital capabilities and are deploying innovative digital solutions quicker than before. We remain on track for Royal Mail to return to adjusted operating profit, before voluntary redundancy costs, for FY 2024-25³.

However, there is still hard work ahead and more investment and change required across our operations and network. The current UK fiscal and regulatory backdrop is unfavourable, with the changes to employer National Insurance announced in the budget coming into effect next year, and no change to the Universal Service as yet agreed, adding significant cost to the Royal Mail business at a time when we need to invest. This makes Universal Service reform even more urgent. Despite that, we will continue to focus on what we can control and deliver our multi-year transformation to enable the business to have the flexibility it needs to compete in a changing market.

Against a backdrop of a weaker macroeconomic environment, alongside regulation changes, GLS has implemented cost reduction and efficiency measures, and pricing actions in a number of countries. We continue to deliver on our strategy, to transform the last mile and expand our out of home network, upgrade the network to drive productivity and growth, and launch new innovative digital propositions. We're also building a global service offering, with new transatlantic routes, and enhanced distribution capabilities in Asia-Pacific.

GLS' flexible business model, broad customer base and geographic diversity, alongside a commitment to high quality, will enable it to navigate through the difficult market backdrop. We will also maintain sustained investment to support GLS' organic and inorganic growth opportunities.

3.         The Royal Mail Profit Forecast is a profit forecast for the purposes of Rule 28 of the Takeover Code and the required confirmation of the IDS Directors, together with the basis of preparation and assumptions, is set out in Appendix 1 to this announcement.

OUR PRINCIPAL RISKS AND UNCERTAINTIES

The Board has considered the principal risks faced by the Group for the remaining six months of the year as described at pages 52 to 58 of International Distribution Services plc's Annual Report and Financial Statements 2023-24:

https://www.internationaldistributionservices.com/media/12344/ids_annual-report-2023-24.pdf

No new principal risks have been identified. The risks remain materially unchanged in their nature and severity, with the exception of the following risk descriptions which have been changed to reflect their change in nature and immediate focus:

·      Risk 3: Industrial Relations - changed to "Employee Relations" to reflect that since agreement was reached between Royal Mail and the CWU the focus of activity is on delivery of the Agreement and broader transformational change which can only be achieved through the strengthened engagement of employees at all levels of our workforce. Successful transformation relies upon operational change, increased automation and developing new ways of working in addition to the need for new and different skills in our workforce.

·      Risk 5: Customer expectations and our ability to grow revenue - changed to "Failure to grow revenue in an increasingly competitive environment". In Royal Mail there has been a recovery in revenue through the win-back programme post the industrial dispute and improving quality of service. To grow market share in the UK and internationally, in the highly competitive environment, requires continued focus on quality of service, improvement to our products and services including the development of our out of home offering, and next day delivery.

The following principal risks remain materially unchanged:

•      Risk 1: Economic and political environment

•      Risk 2: Failure to reduce our operational cost base

•      Risk 4: Major breach of information security, data protection regulation and/or cyber attack

•      Risk 6: Financial sustainability of the Universal Service

•      Risk 7: Talent - workforce for the future

•      Risk 8: Climate change and environmental management

•      Risk 9: Actual or suspected breaches of material law and/or regulation

•      Risk 10: Business continuity and operational resilience

•      Risk 11: Health, safety and wellbeing

•      Risk 12: Failure to manage liquidity and capital structure

FINANCIAL REVIEW

Summary results (£m)

1.      Reported results are prepared in accordance with UK adopted International Financial Reporting Standards (IFRS). In addition, the Group's performance is explained through the use of Alternative Performance Measures (APMs) that are not defined under IFRS. The APMs used are explained in the section entitled 'Presentation of results and Alternative Performance Measures' and reconciliations to the closest measure prescribed under IFRS are provided where appropriate.

2.      Intragroup revenue and costs represent trading between Royal Mail and GLS, principally a result of Parcelforce Worldwide operating as GLS' partner in the UK.

3.      Net Debt includes an amount of £nil (H1 2023-24: £130 million) released from the RMPP pension escrow which was subsequently used to pay Royal Mail employees a one-off payment following ratification of the Business, Transformation and Growth agreement.

Group results

Group and Royal Mail results are for the 26 week period to 29 September 2024. GLS financial performance is presented for the 6 months to 30 September 2024.

Reported Group revenue increased by £481 million to £6,343 million (H1 2023-24: £5,862 million), with growth achieved in both Royal Mail and GLS. Reported Group operating costs were £6,215 million (H1 2023-24: £6,103 million).

Reported operating profit before specific items improved by £354 million to £128 million (H1 2023-24: £226 million loss) driven by a reduction in losses in Royal Mail, partially offset by lower profit in GLS. Operating specific items were a cost of £154 million (H1 2023-24: £17 million) with the increase driven by an impairment charge of £134 million (H1 2023-24: £nil) of the Royal Mail excluding Parcelforce Worldwide CGU. Further details of the impairment assessment is provided in Note 1 of the Condensed Consolidated Financial Statements.

Reported Group operating loss was £26 million (H1 2023-24: £243 million loss) which comprised a £138 million loss in Royal Mail (H1 2023-24: £383 million loss) and a profit of £112 million in GLS (H1 2023-24: £140 million profit). The Group reported operating loss margin was 0.4% (H1 2023-24: 4.1% operating loss margin).

Non-operating specific items were a credit of £60 million (H1 2023-24: credit of £66 million) and relate to net pension interest.

Reported profit before tax was £4 million (H1 2023-24: loss of £194 million).

1.       Reported results are prepared in accordance with UK adopted International Financial Reporting Standards (IFRS). In addition, the Group's performance is explained through the use of Alternative Performance Measures (APMs) that are not defined under IFRS. The APMs used are explained in the section entitled 'Presentation of results and Alternative Performance Measures' and reconciliations to the closest measure prescribed under IFRS are provided where appropriate.

4.       All percentage changes reflect the movement between figures as presented, unless otherwise stated.

Group revenue increased by 8.2% in the period, with parcel revenue growing by 6.4%. Parcel revenue now accounts for 70.1% of total revenue (H1 2023-24: 71.3%). In Royal Mail letter revenue also grew, increasing by 12.7% in the period, aided by the General Election related postings which added 5.5 percentage points to growth.

Adjusted Group operating costs increased by 4.2%, with people costs growing by 2.6% from the prior year and non-people costs by 6.0%. The increase in people costs was driven by wage inflation across both businesses, with Royal Mail people costs increasing by 2.2% largely as a result of the 2% pay award for frontline staff and the additional costs associated with the delivery of elections, partly offset by efficiency savings. Group non-people costs were impacted by inflationary pressures across the Group, in particular in GLS due to increased subcontractor rates and higher IT costs. More detail can be found in the "People costs" and "Non-people costs" sections within the Segment Analysis of this Financial Review.

Segment Analysis

Royal Mail

Royal Mail reported operating loss was £138 million (H1 2023-24 £383 million). The adjusted operating loss was £67 million (H1 2023-24: £319 million) with an adjusted operating loss margin of 1.7% (H1 2023-24: 9.0% operating loss margin). Revenue grew by £380 million or 10.7% versus the prior period of which £94 million was as a result of the General Election. Revenue from the General Election was higher than previous years as we saw more postal votes and candidate mail delivered. Adjusted Operating costs were higher by £128m, or 3.3%, than the same period last year.

4.       All percentage changes reflect the movement between figures as presented, unless otherwise stated.

5.       Domestic Parcels excludes import and export for both Royal Mail and Parcelforce Worldwide.

6.       International Parcels includes import and export for Royal Mail and Parcelforce Worldwide.

Parcels Revenue

Total parcel revenue saw an increase of 8.9% on the prior period, driven by volume growth which was 9%. Parcel revenue represented 51.4% of total Royal Mail revenue or 52.7% excluding General Election revenue, compared to 52.3% in H1 2023-24.

Domestic parcels (excluding International) volume grew by 5% and revenue grew by 8.9% versus the prior period. The first half of the year has seen volume growth driven by customer win back in account parcels which grew by 8%. As well as higher volumes, revenue also benefitted from contract price rises since the previous half year.

International revenue grew 9.1% on the prior period due to volumes which were 37% higher. Prior period performance was impacted by lower consumer spending and a cyber incident. The cyber incident mainly impacted international import volumes where, following a short closure to the international operation, volumes took some time to recover. Growth this year has been driven by commercial import parcel volumes which were 63% higher than the prior period, however these imports have a lower price and so impact less on revenue. The higher imports have more than compensated for a decline in export volumes.

Letters Revenue

Total letter revenue saw an increase of 12.7% versus the prior period, or 7.2% excluding revenue generated as a result of the General Election. Volumes for addressed letters excluding elections fell by 5%, reflecting the ongoing structural decline in the letters market. However, this volume decline was more than offset by price increases.

Advertising mail volumes were down 3% year-on-year, however revenue grew 5.1% on the prior period. As the general economic outlook for the UK has improved, we have seen some customers returning to using advertising mail compared to the same period last year.

Business mail volumes, which include mandatory communications from the Financial Services sector e.g. interest rate change mailings, have declined 5% year-on-year excluding the impact of the General Election. Unexpected one-off mailings softened the decline in volume year-on-year, whilst revenue grew 17.6% in total.

Consumer and small business letter volumes fell by 13% versus the previous year, however revenue grew by 4.5%.

Adjusted operating costs¹

1.       Reported results are prepared in accordance with UK adopted International Financial Reporting Standards (IFRS). In addition, the Group's performance is explained through the use of Alternative Performance Measures (APMs) that are not defined under IFRS. The APMs used are explained in the section entitled 'Presentation of results and Alternative Performance Measures' and reconciliations to the closest measure prescribed under IFRS are provided where appropriate.

4.       All percentage changes reflect the movement between figures as presented, unless otherwise stated.

Total adjusted operating costs increased by £128 million or 3.3% year-on-year. People costs have increased by £60 million or 2.2% on the prior period. Non-people costs have increased £68 million or 5.8% on the prior period. This has been driven by distribution and conveyancing costs and infrastructure costs with other operating costs remaining broadly flat.

People costs

People costs have increased by £60 million or 2.2% on the prior period. Excluding the cost of voluntary redundancy of £15 million (H1 2023-24: £nil) people costs increased by 1.7%.

Within people costs, Royal Mail's operational staff costs increased by £60 million, however, a significant portion of this increase is attributed to non-recurring election related expenses. In addition, the increase includes the impact of the 2% pay award and increased resourcing to handle higher parcel volumes, which were partially offset by lower sick absence compared to the prior period, and benefits from the full impact of seasonal variation of frontline hours.

Non-operational people costs were flat and included the benefit of continued cost saving and transformation programmes.

Non-people costs

Non-people costs increased by £68 million or 5.8% versus the prior period.

Distribution and conveyance costs increased by 9.1%. The increasing average age of vehicles within the Royal Mail Fleet has led to higher maintenance costs and use of hire vehicles. The increasing age of the fleet has driven Royal Mail to invest in new vehicles to refresh the age of the fleet. This investment will continue throughout the year. These additional costs, as well as fuel inflation, have been partially offset by lower international overseas conveyance costs due to lower export volumes. Royal Mail has removed 14 domestic flights at the end of H1 2024-25, and although the impact of this is minimal in the period, the savings will continue to grow throughout the year.

Infrastructure costs increased year-on-year by 6.9%. This category includes the inflationary impacts of rents and business rates which have increased by £13 million against the prior period. Technology costs have increased by £12 million driven by inflationary pressures and higher costs associated with Heathrow Worldwide Distribution Centre following the rebuilding of the network, ensuring increased resilience.

Other operating costs have remained broadly in line with the prior period.

GLS

GLS reported operating profit was £112 million (H1 2023-24: £140 million). Adjusted operating profit was £128 million (H1 2023-24: £150 million). Adjusted operating margin declined by 110 basis points to 5.3% due to operational cost pressures including the impact from regulatory effects in some markets and an investment in strategic initiatives with initial start-up losses. Foreign exchange movements adversely impacted revenue by £44 million and favourably impacted costs by £42 million resulting in a net decrease in operating profit of £2 million.

Adjusted operating profit in Euro terms decreased by 13.3%.

1.      Reported results are prepared in accordance with UK adopted International Financial Reporting Standards (IFRS). In addition, the Group's performance is explained through the use of Alternative Performance Measures (APMs) that are not defined under IFRS. The APMs used are explained in the section entitled 'Presentation of results and Alternative Performance Measures' and reconciliations to the closest measure prescribed under IFRS are provided where appropriate.

4.       All percentage changes reflect the movement between figures as presented, unless otherwise stated.

7.       The results for H1 2024-25 include £0.4 million (H1 2023-24: £1 million) operating profit before specific items from acquisitions.

Revenue

Revenue increased by 4.4% in Sterling terms (6.3% in Euro terms) driven by a combination of parcel volume growth, and slightly improved pricing. Overall price development was negatively impacted by mix effects due to a higher proportion of B2C shipments with a lower average price. Revenue growth was achieved in most markets. GLS' European markets represented 89.1% of total revenue (H1 2023-24: 88.2%), with the North American market contributing 10.9% (H1 2023-24: 11.8%).

Overall volumes increased by 4% despite challenging economic conditions. Growth was driven by higher cross-border volumes and increasing domestic volumes. B2C volume share at 59% was two percentage points above the prior period.

Operating costs

4.       All percentage changes reflect the movement between figures as presented, unless otherwise stated.

Total reported operating costs in Sterling terms increased by 5.7%.

Inflationary effects across GLS markets, including higher minimum wages in some countries, impacted rates for sub-contracted services such as collection, delivery and linehaul as well as own labour costs.

The reported cost increases in Euro terms are presented below.

4.       All percentage changes reflect the movement between figures as presented, unless otherwise stated.

People costs

In Euro terms people costs increased by 6.2% due to a combination of factors including higher unit labour costs for hub and depot operations driven by wage inflation across GLS' markets and higher minimum wages in some jurisdictions.

Non-people costs

Non-people costs increased by 8.1% in Euro terms. Distribution and conveyance costs were up 8.4%, driven by higher sub-contractor rates due to wage inflation and the impact from regulatory changes in markets such as Italy, Germany and Belgium. Infrastructure costs increased by 9.7%, whilst other operating costs were down by 4.7%. The increase in infrastructure costs was principally due to higher depreciation, IT costs and repairs and maintenance.

Country overview

The following individual market summaries detail growth in Euro terms.

In Germany, the largest GLS market by revenue, revenues were up 7.8%, benefitting from additional working days, with underlying volumes flat. Price increases were implemented in response to inflationary effects on the cost base. Wage inflation resulted in higher subcontractor rates for pick-up and delivery, as well as higher labour costs in hubs and depots; in addition, linehaul tolls doubled. Germany is seeing record-high business bankruptcies and is on the cusp of recession, a challenging environment that has driven operating profit and margin decline compared with the prior period.

Italy revenue grew by 3.4%, including the impact of more working days. Operating profit declined compared with the prior period due to increasing operational costs resulting from wage inflation and regulatory effects on the subcontractor base, which have placed downward pressure on margin.

Organic revenues in Spain grew by 11.1% driven by double-digit volume growth with prices relatively flat. Volume growth was supported by additional capacity in the Madrid hub which became fully operational by August 2023. A full period impact from the extra capacity and linked operational efficiencies contributed to an improvement in operating profit. The acquisition of fulfilment business e-Log Logistica Insular was completed on 13 June 2024 for consideration of €2 million expanding GLS Spain's service portfolio.   

France revenue grew by 7.6%, due to a combination of volume growth and improved pricing. Volumes benefitted from significant growth in cross-border, with domestic volumes marginally higher. Losses were slightly higher than the corresponding period of the prior year. In September 2024 the new hub in Le Coudray (Paris) was opened providing additional capacity ahead of the peak season. The new facility is expected to generate efficiency savings once fully scaled-up and further improve quality across the French network.

In the US, underlying revenues declined by 7.3% in Euro terms (7.5% decline in USD terms), due to lower parcel volumes resulting from lower B2C volumes including the impact from yield management initiatives. Despite the volume and revenue decline, improved operational productivity resulted in a marginal improvement in total operating losses. On 1 September the US Freight business was divested for consideration of USD 21 million resulting in a gain on disposal of USD 0.4 million. GLS US management will now focus on the core parcel operations, including leveraging cross-border traffic to/from Europe and Canada. Shipments from US to Europe commenced in February 2024 and are on a good trajectory.   

Canada organic revenues increased by 2.8% in Euro terms (4.4% in CAD terms) principally due to a combination of higher parcel volumes and growth in freight revenues. Operating profit was slightly up on the prior period despite fragile economic conditions. The integration of Rosenau and Altimax to create a unified national operation in Canada continues to progress well.

Revenue growth in GLS' other developed European markets was 3.7%, driven by a combination of higher volumes and better pricing. Operating profit was above the prior year, with good progression in most markets including positive developments in Belgium, Denmark and Austria.

In other developing markets, where GLS has a high exposure to B2C, organic revenue increased 13.1% in the period, with growth in all markets. Overall operating profit was slightly below the prior period, with performance in Poland broadly offsetting profit declines in some other eastern European markets. Investment in strategic initiatives, such as the roll-out of parcel lockers with initial start-up costs, are impacting profit development. In Hungary the acquisition of fulfilment business iLogistic was completed on 28 June 2024 for initial consideration of €3 million with a further €2 million deferred contingent consideration subject to future performance. iLogistic will complement GLS Hungary's parcel operations and represents a further step in expanding GLS' European fulfilment footprint.

Other Group financial performance measures

Adjustments and specific items¹

1.         Reported results are prepared in accordance with UK adopted International Financial Reporting Standards (IFRS). In addition, the Group's performance is explained through the use of Alternative Performance Measures (APMs) that are not defined under IFRS. The APMs used are explained in the section entitled 'Presentation of results and Alternative Performance Measures' and reconciliations to the closest measure prescribed under IFRS are provided where appropriate.

The pension charge adjustment is £11 million debit (H1 2023-24: £132 million credit). In the current year this solely (H1 2023-24: £2 million credit) relates to the difference between the IAS 19 income statement pension charge rate of 13.2% (H1 2023-24: 14.8%) for the Defined Benefit Cash Balance Section (DBCBS) and the cash funding contribution rate agreed with the Trustee of 15.6% (H1 2023-24: 15.6%). The prior period also includes £130 million in relation to a refund of cash held in escrow by the Trustee of the Royal Mail Pension Plan (RMPP). The RMPP escrow cash was subsequently used to provide a one-off payment to UK employees.

In previous years an impairment charge was recognised to write down the value of the Royal Mail (excluding Parcelforce Worldwide) CGU. This has resulted in a lower depreciation/amortisation charge in infrastructure costs, and an adjustment of £56 million (H1 2023-24: £60 million) has been made to the adjusted results to reflect the depreciation/amortisation on a pre-impairment basis in line with how Management reviews the underlying performance of the business.

Amortisation of intangible assets from acquisitions of £8 million (H1 2023-24: £11 million) mainly relates to amortisation in GLS.

In the period the Royal Mail excluding Parcelforce Worldwide CGU was impaired by £134 million (H1 2023-24: £nil). In assessing whether the CGU was impaired, the carrying value of the CGU of £2,053 million was compared to its recoverable amount, using the higher of a value in use (VIU), or fair value less cost of disposal (FVLCD) methodology. The VIU methodology would have resulted in a significant further impairment, while the FVLCD methodology resulted in an impairment charge of £134 million. Further details of the calculations involved are provided in Note 1 of the Condensed Consolidated Financial Statements.

The regulatory and legal charges credit of £7 million represents changes in the best estimates to settle present obligations for Royal Mail and GLS. The prior year debit of £6 million was in respect of the penalty issued by Ofcom in respect of the 2022-23 USO Quality of Service performance.

Incremental bid costs of £22 million (H1 2023-24: £nil) represent the one-off costs incurred by the Group in relation to the takeover bid by EP Group. These costs mainly relate to the provision of financial and legal advice.

Legacy/other items mainly relate to a £3 million release (H1 2023-24: £nil) of the industrial diseases provision.

Net finance costs

Reported net finance costs of £30 million (H1 2023-24: £17 million) comprise interest on bonds (including the cross-currency swaps and the two new bonds issued in September 2023) of £29 million (H1 2023-24: £12 million), interest on leases of £24 million (H1 2023-24: £19 million), interest/fees on the bank syndicate loan and the €500 million backstop facility of £1 million (H1 2023-24: £4 million), and other net interest payable of £4 million (H1 2023-24: £1 million). This was partially offset by interest income of £28 million (H1 2023-24: £19 million), which increased as a result of interest earned on the net proceeds of the two bond issues in September 2023.

The blended interest rate on gross debt, including leases for the remainder of 2024-25, is approximately 4%.

Taxation

The Group recognised a reported tax charge of £29 million (H1 2023-24: £29 million) which consists of a tax charge of £30 million (H1 2023-24: £33 million) in GLS and a tax credit of £1 million (H1 2023-24: £4 million credit) in Royal Mail.

The GLS reported effective tax rate of 29.4% (H1 2023-24: 25.8%) is higher than the GLS weighted average tax rate of 20.7% (H1 2023-34: 21.9%) mainly due to the effect of losses in certain territories for which no deferred tax credit is recognised and the non-tax-deductible legal and regulatory provisions.

The GLS adjusted effective tax rate of 27.1% (H1 2023-24: 25.4%) is lower than the reported effective tax rate as it does not include the effect of the non-tax-deductible provisions in GLS Italy, which are treated as a specific item.

In Royal Mail there is a reported tax credit of £1 million (H1 2023-24: £4 million).  

Due to the uncertainty of generating future taxable profits, Royal Mail continues to not recognise a tax credit for its losses and other temporary differences.

Earnings per share (EPS)

Reported basic EPS was 2.6 pence loss per share (H1 2023-24: 23.3 pence loss per share) and adjusted basic EPS was nil pence per share (H1 2023-24: 22.7 pence loss per share).

In-year trading cash flow¹

1.      Reported results are prepared in accordance with UK adopted International Financial Reporting Standards (IFRS). In addition, the Group's performance is explained through the use of Alternative Performance Measures (APMs) that are not defined under IFRS. The APMs used are explained in the section entitled 'Presentation of results and Alternative Performance Measures' and reconciliations to the closest measure prescribed under IFRS are provided where appropriate.

8.      Other non-cash adjustments include £2 million (H1 2023-24: £2 million) relating to the share-based awards (LTIP and DSBP) charge and £5 million (H1 2023-24: £nil) relating to foreign exchange movements. 

9.      The capital element of lease payments of £115 million (H1 2023-24: £101 million) shown in the statutory cash flow is made up of the capital element of operating lease payments of £111 million (H1 2023-24: £96 million) and the capital element of finance lease payments of £4 million (H1 2023-24: £5 million).  

Group in-year trading cash outflow was £38 million (H1 2023-24: £63 million outflow). This improvement was predominantly driven by the trading improvement in Royal Mail, partially offset by higher trading working capital movements, increased capital expenditure and higher finance costs.

Royal Mail trading working capital outflow in the period was £157 million compared to a working capital inflow of £20 million in the prior period. This was driven by a number of factors including higher international settlements in the current period, seasonality of payroll costs and a number of working capital actions taken in the prior half year that did not repeat.

GLS in-year trading cash flow remains robust, a slight improvement on prior year principally as lower operating profit was more than offset by a reduction in capital expenditure and lower trading working capital movements and income tax payments.

Net debt¹

A reconciliation of the movement in net debt is set out below.

1.      Reported results are prepared in accordance with UK adopted International Financial Reporting Standards (IFRS). In addition, the Group's performance is explained through the use of Alternative Performance Measures (APMs) that are not defined under IFRS. The APMs used are explained in the section entitled 'Presentation of results and Alternative Performance Measures' and reconciliations to the closest measure prescribed under IFRS are provided where appropriate.

10.    GLS client cash movements are presented as part of the working capital movements line in the statutory cashflow. The movement in the period excluding foreign currency exchange impacts is £7 million outflow (H1 2023-24: £8 million inflow). The foreign currency movement on GLS client cash in the period was a loss of £1 million (H1 2023-24: £1m loss) which is included in the £27 million inflow (H1 2023-24: £3 million inflow) foreign currency exchange impact line in the table.

11.                            This amount represents leases that would not have been recognised on the Balance Sheet prior to the adoption of IFRS 16.

12.                            This measure is considered as the Group's banking covenants are calculated on a pre-IFRS 16 basis.

An analysis of the net debt as at 29 September 2024 is set out below.

12.      This measure is considered as the Group's banking covenants are calculated on a pre-IFRS 16 basis.

13.      Cash and cash equivalents includes bank overdrafts of £58 million at 29 September 2024 that are part of a cash pool for the UK companies which generally has a net £nil balance across the Group and forms an integral part of the Group's cash management.

London Development Portfolio

In total we have invested £2 million (H1 2023-24: £2 million) in the period on works to separate the retained operational sites from the development plots at Mount Pleasant and infrastructure works at Nine Elms.

The development site at Mount Pleasant was previously sold to Taylor Wimpey UK Ltd. Proceeds in relation to the sale of the site have been received in stage payments in prior years and the remainder of the proceeds is due to be received through a final payment of £9.5 million later this year.

Pensions

Royal Mail makes contributions to two main schemes in the UK; the Royal Mail Defined Contribution Plan (RMDCP) and the Defined Benefit Cash Balance Section (DBCBS) of the Royal Mail Pension Plan (RMPP).

The Group also operates the legacy section of the RMPP which is closed to accrual.

The buy-out of the Royal Mail Senior Executives Pension Plan (RMSEPP) was completed in June 2022, when the bulk annuity policies held were exchanged for individual policies between the insurers and all remaining members. The Group's obligations under the RMSEPP have now been fully extinguished and the scheme was wound up in April 2024. The residual assets were returned to the Group after the remaining closure expenses and the deduction of withholding tax.

Since the half year, on 7 October 2024, Royal Mail introduced a new pension scheme, the Royal Mail Collective Pension Plan (RMCPP) which replaced the existing DBCBS and the RMDCP for future accrual and comprises a Defined Benefit Lump Sum Section (DBLS), similar to the existing DBCBS, and a Collective Defined Contribution (CDC) Section.

The CDC Section will be accounted for as a defined contribution scheme and the DBLS as a defined benefit scheme with the accounting treatment expected to be similar to the DBCBS. The new arrangements will have fixed employer contributions of 13.6%, plus an additional 1.0% for employees who choose to save for an additional lump sum payment. Standard employee contributions will be 6.0%.

Cash pension costs

The Group's cash pension costs in respect of all UK pension schemes were £71 million (H1 2023-24: £193 million) in the period, excluding Pension Salary Exchange (PSE). In addition, £120 million (H1 2023-24: £nil) of employer contributions were paid into an escrow in respect of accrual in DBCBS for the first half year. 

Defined benefit schemes - balance sheet position

An IAS 19 deficit of £19 million (31 March 2024: £60 million) is shown on the balance sheet in respect of the DBCBS; however, the scheme is not in funding deficit and it is not anticipated that deficit payments will be required. The decrease in the deficit in the period is largely due to an increase in the assets of £129 million, which was offset by a smaller increase in the IAS 19 liabilities in the period of £88 million.

The RMPP scheme closed to future accrual in its previous form from 31 March 2018. The pre-withholding tax accounting surplus of the legacy section of the RMPP at 29 September 2024 was £2,338 million (31 March 2024: £2,462 million). The pre-withholding tax accounting surplus has decreased by £124 million in the period. The decrease in the surplus is due to a decrease in the assets of £229 million partially offset by a decrease in liabilities of £105 million.

Dividends

No FY 2024-25 interim dividend to be paid.

Presentation of results and alternative performance measures (APMs)

The Group uses certain APMs in its financial reporting that are not defined under IFRS, the Generally Accepted Accounting Principles (GAAP) under which the Group produces its statutory financial information.

These APMs are not a substitute for, or superior to, any IFRS measures of performance. They are used by Management, who considers them to be an important means of comparing performance period-on-period and are key measures used within the business for assessing performance.

APMs should not be considered in isolation from, or as a substitute for, financial information presented in compliance with GAAP. Where appropriate, reconciliations to the nearest GAAP measure have been provided. The APMs used may not be directly comparable with similarly titled APMs used by other companies.

A full list of APMs used are set out in the section entitled 'Alternative Performance Measures'.

Reported to adjusted results

The Group makes adjustments to results reported under IFRS to exclude specific items, depreciation/amortisation adjustment for impaired assets, profit/(loss) on disposal of property, plant and equipment, and the pension charge adjustment. Management believes this is a useful basis upon which to analyse the business' underlying performance (in particular given the volatile nature of the IAS 19 charge) and is consistent with the way financial performance is reported to the Board.

Further details on specific items excluded from adjusted operating profit are included in the paragraph 'Adjustments and specific items' in the Financial Review. A reconciliation showing the adjustments made between reported and adjusted Group results can be found in the section headed 'Consolidated reported and adjusted results' below.

Presentation of results

Consolidated reported and adjusted results

The following table reconciles the consolidated reported results, prepared in accordance with IFRS, to the consolidated 26 week adjusted results:

14.    Details of adjustments and specific items can be found under 'Adjustments and specific items' in the Financial Review.

Segmental reported results

The following table presents the segmental reported results, prepared in accordance with IFRS:

14.    Details of adjustments and specific items can be found under 'Adjustments and specific items' in the Financial Review.

Alternative Performance Measures

This section lists the definitions of the various APMs disclosed throughout this report. They are used by management, who considers them to be an important means of comparing performance year-on-year and are key measures used within the business for assessing performance.

Adjusted operating profit/(loss)

This measure is based on reported operating profit excluding the pension charge adjustment, the depreciation/amortisation adjustment for impaired assets, profit/(loss) on disposal of property, plant and equipment, and operating specific items, which Management considers to be key adjustments in understanding the underlying result of the Group at this level. These adjusted measures are reconciled to the reported results in the table in the 'Presentation of results' section within 'Consolidated reported and adjusted results'. Definitions of the pension charge adjustment, the depreciation/amortisation adjustment for impaired assets, profit/(loss) on disposal of property, plant and equipment, and operating specific items are provided below.

Adjusted operating profit/(loss) margin

This is a measure of performance that management uses to understand the efficiency of the business in generating profit. It calculates 'adjusted operating profit' as a proportion of revenue in percentage terms.

Earnings before interest, tax, depreciation and amortisation (EBITDA) before specific items and adjusted EBITDA

EBITDA is reported operating profit before specific items with depreciation and amortisation added back. Adjusted EBITDA is EBITDA before specific items with the pension charge adjustment added back.

Adjusted earnings per share

Adjusted earnings per share is reported basic earnings per share, excluding operating and non-operating specific items, the pension charge adjustment, the depreciation/amortisation adjustment for impaired assets and profit/(loss) on disposal of property, plant and equipment.

Adjusted people costs

People costs incurred in respect of the Group's employees and comprise wages and salaries, temporary resource, pensions, bonus and social security costs. People costs relating to projects and voluntary redundancy costs are also included. The pension charge adjustment is excluded from reported people costs in establishing adjusted people costs.

Adjusted non-people costs

These are costs incurred in respect of the operations of the Company and comprise distribution and conveyance costs, infrastructure costs (e.g. depreciation/amortisation, property and IT) and other operating costs (e.g. Post Office Ltd charges, transformation costs, consumables). The depreciation/amortisation adjustment for impaired assets is excluded from reported non-people costs, specifically infrastructure costs, in establishing adjusted non-people costs.

Pension charge adjustment

This adjustment represents the difference between the IAS 19 income statement pension charge and the funding cost of accrual as specified in the DBCBS Schedule of Contributions, plus any payments into, or out of, RMPP pension escrow investments and any scheme deficit payments. Management reviews the performance of the business based on the cash cost of the pension plans in the adjusted operating profit/(loss) of the Group.

Depreciation/amortisation adjustment for impaired assets

This adjustment represents the reinstatement of the amounts for depreciation and amortisation that would have been charged to the income statement, had the partial impairment of the Royal Mail excluding Parcelforce Worldwide CGU impairment in prior years not taken place. The reported depreciation and amortisation is in accordance with UK-adopted IFRS, however when reviewing these balances management exclude the impact of impairments and the related impact on depreciation and amortisation. Due to the unpredictability of impairments and the resulting impact on depreciation, this measure is used to provide a consistent basis for operating profit.

Profit/(loss) on disposal of property, plant and equipment

Management separately identifies the profit/(loss) on disposal of property, plant and equipment as these disposals are not part of the Group's trading activity and are driven primarily by business strategy.

Operating specific items

These are items that management consider significant by nature or value and that, in management's opinion, require separate identification. Management does not consider them to be reflective of year-on-year operating performance.

Amortisation of intangible assets in acquisitions

These charges, which arise as a direct consequence of IFRS business combination accounting requirements, are separately identified as management does not consider these costs to be directly related to the trading performance of the Group.

Impairment of Royal Mail excluding Parcelforce Worldwide CGU

These costs represent the impairment charge arising from the impairment assessment of the Royal Mail excluding Parcelforce Worldwide CGU. The reported impairment charge is in accordance with UK-adopted IFRS, however, when reviewing performance, management exclude the impact of impairments. Due to the unpredictability of impairments, this measure is used to provide a consistent basis for operating profit.

Regulatory and legal charges

These costs relate to incremental one-off costs arising from various ongoing legal and regulatory matters across the Group. These costs have been separately identified as management do not consider these costs to be directly related to the trading performance of the Group.

Incremental bid costs

These costs relate to the incremental one-off costs arising from the bid from EP Group. These costs have been separately identified as management do not consider these costs to be directly related to the trading performance of the Group. These costs have been allocated against the Royal Mail segment on the basis that this is where Corporate Centre costs are included.

Legacy/other items

These costs/credits relate to unavoidable ongoing costs arising from historic events (such as the industrial diseases provision).

Non-operating specific items

These are recurring or non-recurring items of income or expense of a particular size and/or nature which do not form part of the Group's trading activity and in management's opinion require separate identification.

Net pension interest

The net pension interest credit/charge is a non-cash item recognised under the requirements of IAS 19. It is calculated based on the pension surplus/deficit multiplied by the discount rate at the beginning of the reporting period. It is not considered to form part of the Group's trading activity and in management's opinion requires separate identification.

Adjusted tax (charge)/credit

The adjusted tax (charge)/credit is the total reported tax (charge)/credit excluding the tax (charge)/credit in relation to specific items, the depreciation/amortisation adjustment for impaired assets, profit/(loss) on disposal of property, plant and equipment and the pension charge adjustment.

Weighted average tax rate

This rate is calculated by taking the weighted average sum of the expected tax charge of each territory. The expected tax charge in a territory is calculated by taking the profits multiplied by the standard rate of tax in that territory. The weighted average tax rate is sometimes considered as a useful alternative to the parent company standard rate of tax when reconciling the effective tax rate.

Adjusted effective tax rate

The adjusted effective tax rate is the adjusted tax charge or credit for the year expressed as a proportion of adjusted profit before tax. The adjusted effective tax rate is considered by Management to be a useful measure of the tax impact for the period. It approximates to the tax rate on the underlying trading business through the exclusion of specific items, the pension charge adjustment, the depreciation/amortisation adjustment for impaired assets and profit/(loss) on disposal of property, plant and equipment.

Free cash flow

Free cash flow (FCF) is calculated as statutory (reported) net cash flow before financing activities, adjusted to include finance costs paid and exclude net cash from the purchase/sale of financial asset investments and GLS client cash movements. FCF represents the cash that the Group generates after spending the money required to maintain or expand its asset base, thus is useful for Management in assessing liquidity. FCF is also shown on a pre-IFRS 16 basis as it is used to support dividend cover analysis, taking into account all cash flows related to the operating businesses.

The following table reconciles free cash flow to the nearest IFRS measure 'net cash inflow before financing activities'.

9.      The capital element of lease payments of £115 million (2023-24: £101 million) shown in the statutory cash flow is made up of the capital element of operating lease payments of £111 million (2023-24: £96 million) and the capital element of finance lease payments of £4 million (2023-24: £5 million).

15.    The movement in GLS client cash is shown excluding foreign currency exchange loss of £1 million (H1 2023-24: £1 million loss).

In-year trading cash flow

In-year trading cash flow reflects the cash generated from the trading activities of the Group. It is based on reported net cash inflow from operating activities, adjusted to exclude movements in GLS client cash and the cash cost of operating specific items and to include the cash cost of property, plant and equipment and intangible asset acquisitions, net finance payments and dividends received from associates. In-year trading cash flow is also shown on a pre-IFRS 16 basis as it is used to support dividend cover analysis, taking into account all cash flows related to the operating businesses.

The following table reconciles in-year trading cash flow to the nearest IFRS measure 'net cash inflow from operating activities'.

9.      The capital element of lease payments of £115 million (2023-24: £101 million) shown in the statutory cash flow is made up of the capital element of operating lease payments of £111 million (2023-24: £96 million) and the capital element of finance lease payments of £4 million (2023-24: £5 million).

15.    The movement in GLS client cash is shown excluding foreign currency exchange loss of £1 million (H1 2023-24: £1 million loss).

Net debt

Net debt is calculated by netting the value of financial liabilities (excluding derivatives) against cash and other liquid assets. Management consider this APM to be useful as it is a measure of the Group's net indebtedness that provides an indicator of the overall balance sheet strength. It is also a single measure that can be used to assess the combined impact of the Group's indebtedness and its cash position. The use of the term net debt does not necessarily mean that the cash included in the net debt calculation is available to settle the liabilities included in this measure. Net debt is also shown on a pre-IFRS 16 basis as the banking covenants are calculated on a pre-IFRS 16 basis.

Net debt excludes £230 million (FY 2023-24: £102 million) related to the RMPP and RMCPP pension escrow investments on the balance sheet which are not considered to fall within the definition of net debt.

11.      This amount represents leases that would not have been recognised on the Balance Sheet prior to the adoption of IFRS 16.

13.      Cash and cash equivalents includes bank overdrafts of £58 million at 29 September 2024 that are part of a cash pool for the UK companies which generally has a net £nil balance across the Group and forms an integral part of the Group's cash management.

GLS performance presented in Euro

IDS plc financial statements are presented in Sterling, being the Group functional currency. However, given GLS strategic targets are set using Euros, GLS financial performance is presented in Euro as well as Sterling in order to aid transparency.

The reconciliation between the Group functional currency of Sterling and Euro are set out below:

GLS performance has been translated using an average exchange rate between Sterling and Euro of £1:€1.18 (H1 2023-24: £1:€1.16). This has resulted in a net negative £2 million (H1 2023-24: positive £2 million) impact in GLS reported operating profit before tax.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Condensed consolidated income statement

1.      Operating costs are stated before operating specific items.

2.      Details of Alternative Performance Measures (APMs) are provided in the section entitled 'Presentation of results and alternative performance measures'.

Condensed consolidated statement of comprehensive income

Condensed consolidated balance sheet

Condensed consolidated statement of changes in equity