Royal Mail revenues inch up as it braces for Christmas

For the six months ended 25 September, revenue nudged up by 1% to £4.58bn, compared to last year, driven by a good performance from GLS, its continental European parcel business.

However, operating profit before transformation costs fell 5% to £320m.

Adjusted operating profit margin after transformation costs increased by 40 basis points to 5.7%.

The company increased its "cost avoidance" target from to £600m from £500m of annualised costs cumulative over the three financial years ending 2017-18, as it aims to reduce underlying operating costs at UKPIL, its UK operation, before transformation by up to 1% in 2016-17, depending on the absorbable rate of change within the company.

Net cash investment is expected to be no more than £500m per year, compared with an average of £615m over the past three years.

UKPIL revenue declined 1% on an underlying basis and parcel volumes were up 2% driven by growth in Royal Mail account and import parcels, while parcel revenue rose by 3%.

Addressed letter volumes were down 4% on an underlying basis, within the forecast range of a 4-6% decline per year. Total letter revenue decreased by 3%.

GLS performed well over the period, taking into account the impact of public holidays across Europe, as volumes were up 10% on an underlying basis, benefiting from strong growth in export volumes.

Parcel revenue increased by 9% and operating profit soared 25% on an underlying basis.

The company recently bought ASM in Spain and Golden State Overnight in California, which supports GLS' strategy of targeted and focused geographic expansion.

Chief executive Moya Greene said the company’s performance was broadly in line with its expectations.

“We delivered UK parcel volume and revenue growth including new contract wins. Addressed letter volume decline was within our forecast range.

"As always, our performance for the full year will be dependent on the important Christmas period. Extensive planning, which began in the spring, will help us to manage our busiest time. This includes the recruitment of over 19,000 temporary staff and opening nine temporary parcel sort centres."

The company declared a dividend of 7.4p per share for the half year.

Nicholas Hyett, equity analyst at Hargreaves Lansdown, said the 5% fall in underlying profits at Royal Mail was largely the result of continuing weakness in the letters business.

“True, the decline is in line with company expectations but it’s still painful. Fortunately the European business is delivering a strong performance, boosted by currency movements, and continues to pick up the slack.

“However, operating costs at UKPIL also took their toll this half, with a £30m increase equivalent to around 70% of the divisional profit fall. That’s a worry when cost reduction is a large part of the rationale for investing in the business. Still, it’s good to see the group increasing its targeted cost cuts over the next three years.”

Shares in Royal Mail were down 4.03% to 0854 GMT.