24^th May 2016

UK MAIL GROUP plc

FINAL RESULTS

For the year ended 31 March 2016

New automated hub operating well with high service levels,

following period of major transition

Highlights

·   Group revenues of £481.0m down 0.8% on the previous year (2015: £485.1m)

·   Group profit before tax (pre-exceptional) £10.7m (2015: £21.0m), in line with previous guidance

·   Net exceptional income of £3.7m (2015: net exceptional costs of £0.9m), reflecting compensation received from HS2 for hub relocation, offset by relocation and other exceptional costs

·   Profit for the financial year £11.9m (2015:  £5.1m)

·   Final HS2 compensation payment of £10.3m received in November 2015

·   Net cash at year end of £2.2m (2015: net debt of £5.2m)

·   Final dividend of 10.9p per share (2015: 14.5p), giving a total dividend for the year of 16.4p (2015:  21.8p)

Peter Kane, Chairman of UK Mail, said:-

"Last year was a challenging one but we have made good progress in implementing a detailed plan to address the issues we faced in transitioning to our new automated hub.  The hub is now operating very well and achieving good throughput levels, having recently processed its 30 millionth parcel, with consistently high service levels in both Parcels and Mail in recent months.  The strategic rationale for the investments we have made remains compelling, and sets us up well for the next stage of profitable growth. 

"The benefits are expected to start showing through in the second half of the current year, as a result of which we continue to expect performance to be more second half weighted than usual."

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Introduction

UK Mail remains in the midst of a period of major transition, having completed the move of its Birmingham hub to a new, automated facility in Ryton in July 2015, and the year under review has been a challenging one for the Group.

The transition, as the single most significant strategic development in the Group's history, will deliver long term opportunities and will place us amongst the most efficient and competitive operators in our market.  However, it was always expected to be challenging in the short-term and, as previously reported, it became apparent last summer that those near-term challenges and their impact on the current year's performance would be greater than had originally been anticipated.

A detailed plan to address the issues is well underway, and it remains our expectation that we will fully resolve them over the course of the current financial year.  Service levels in both our Parcels and Mail businesses have consistently achieved high levels over recent months, and the new automated hub is now operating very well and achieving good throughput levels  having recently processed its 30 millionth parcel.

The impact of the issues that arose during the transition means that the financial performance of the Group for the year has been very disappointing, albeit in line with previous guidance.

Reported Group revenues for the year decreased by 0.8% compared to the previous year.  Group profit before tax and exceptional items decreased by 49.2% to £10.7m (2015: £21.0m).

In our Parcels business (52% of group revenues) revenues grew by 1.4%.  This revenue growth was supported by average daily volume growth of 4.5%, reflecting some important new customer wins and weighted towards B2C customers, related to the growth in online shopping.  The impact of the sales mix effect combined with the increased operating costs we have incurred as a result of the relocation of our operations, has meant that the parcels operating margin reduced to 6.4% (2015: 9.7%), and the operating profit before exceptional items decreased to £15.9m (2015: £23.6m). As announced at our interim results in November, our Courier operation is now integrated into our Parcels business. 

In our Mail business (48% of group revenues) revenues reduced by 3.1%.  Our daily mail volumes increased by 5.2% in the year, compared to a market that saw an overall volume decline of some 3.0%.  This volume growth was driven by strong customer retention and new customer wins.  The mail market is highly competitive and this, combined with some impact in our Mail business of the wider operational issues relating to the move to Ryton, has meant that the operating profit decreased by 18.3% to £10.1m (2015:  £12.5m) with the operating margin reducing to 4.4% (2015: 5.2%).  Our Mail business remains well positioned in its market with a healthy pipeline of new business opportunities.  We continue to see good progress from imail and related new product innovations.

The Group remains in a sound financial position.  Net cash at the year end was £2.2m (2015: net debt of £5.2m).  The final compensation payment from HS2 of £10.3m was received in November 2015, and the period of substantial investment in the hub and automation is now complete.

Given the impact of the operational issues on the financial results, in the year just ended and in the current year, the Board resolved in November 2015 that it would be prudent to rebase the dividend.   The Board has therefore proposed a Final Dividend of 10.9p per share (2015: 14.5p).  This gives a total dividend for the year of 16.4p (2015: 21.8p). 

This dividend is covered 0.94 times by underlying basic earnings per share (1.32 times by basic earnings per share). We would expect to return to prior levels of dividend cover in due course as our earnings grow.

The process of identifying a successor to Guy Buswell, who stepped down as Chief Executive in November, is ongoing.  Peter Kane continues to serve as Executive Chairman until an appointment is made.   

strategy

Our strategy is to grow revenue and profitability by establishing a market leading position in our key markets of parcels and mail, with a clear focus on high service levels and network efficiency together with product and service innovation.  To do so, and to facilitate the future growth of the business, we have created additional capacity, both in our operations and in support areas including significant investment in I.T.

High Service Levels

High service levels are a vital element for success in our industry.  Customers and recipients expect their consignments to be delivered to the agreed timescale without loss or damage.  Service levels in this respect, in both our Parcels and Mail businesses have achieved consistently high levels over recent months.

We also continue to introduce improvements and innovations to our business to further enhance the service we provide.

A key part of our customer offering is our one-hour delivery window, which helps make UK Mail one of the industry leaders in the Parcels delivery market.  This service provides customers with advance notification of the timing of a delivery, with the facilities to amend the delivery location and day.  We have recently enhanced this service to provide additional features for customers, including 'in flight' delivery option changes and GPS delivery location 'stamping'.  We continue to progress alternative and innovative delivery options.

Network Efficiency

A low cost, efficient network is key to our market position.  This allows us to win and retain contracts at good profit levels in markets that continue to be very competitive.

The key factors in achieving this objective are:

An Integrated Network for our Parcels and Mail Businesses

This integration allows us to spread the fixed costs of our operation and to drive operational benefits.  The integrated nature of our network, which is unique in the UK, also allows us to offer services our competitors cannot match.  We have continued to progress with the integration of our Courier operation into our Parcels network, providing further efficiencies and enhanced delivery options for customers.

Extensive and innovative use of I.T.

In our industry I.T. is a key differentiator.  We handle some 230,000 parcels each night together with some 12m mail items.  The ability to track the progress of these items through our network and to provide customers with information on this progress is vital, as is the provision of sophisticated solutions centred on the end-consumer experience.

In the year we have continued to invest in our I.T. infrastructure, increasing capacity and resilience.  We successfully completed a major upgrade to our core Track and Trace and Integration Hub systems in February.  We have introduced new data services and information to our recipients and are also enhancing our ability to support and drive innovation in our business through a multi-year I.T. change programme, centred on a service orientated architecture framework.

Automation

Effective use of automated sortation is vital in our industry, to further reduce sortation costs and to increase capacity. 

Following the move to the new Ryton hub with its new automated sortation equipment, we intend to continue to increase the level of automated sortation.  We have taken action to amend the profile of the consignments we handle to make the best use of the automated parcel sorter.  There will however remain a significant element of the consignments that we handle that will not be compatible with automated sortation, normally due to their size.  The ability to handle such consignments is a key differentiator for us compared to those competitors who are 100% automated.  To allow us to efficiently handle these 'non-machineable' consignments we have added a second central hub which will be utilised principally for this purpose.

Product and Service Innovation

The third key factor in our strategy is product and service innovation.  We are focussed on continuing to expand the size of the markets available to us and on increasing our share of these markets.  To do so we have introduced new and innovative products and services in both our Parcels and our Mail businesses.  This strategy continues to gain valuable traction in helping us to win new customers.

The key areas we are progressing are:

ipostparcels - a leading parcels collection and delivery service targeting the internet end- customer/small businesses

Retail Logistics - a parcel delivery service targeting the needs of retail businesses

imail - a market leading hybrid (web-to-print) postal service

imailprint - an internet based printing service, linked to imail, which can meet localised printing requirements

Packets - a packet collection and delivery service providing cost effective solutions in conjunction with Royal Mail's final mile delivery service

In addition, in Mail we launched our innovative and market leading, turn-key solution for the Royal Mail Mailmark service, whereby we manage and process individual item data on behalf of our customers with the Royal Mail.  Integrating the item data with our track and trace data, we provide a clearer chain of custody for the mail, more accurate data input into Royal Mail reporting systems, and as a result minimise current and future Royal Mail surcharges.

Making Profitable Use of Increased Capacity

UK retail e-commerce sales are predicted to increase by some 10% p.a. driven by the continued strong growth in online shopping.  We have the opportunity to benefit from the market growth this will create, together with the potential to grow our market share.

To manage this growth we have increased the capacity in our operations, and our objectives now are to make the best use of this and therefore increase the profitability of the volumes processed.

Hub/Network Capacity

Increasing the capacity of our overall network is vital as our core markets continue to show strong growth.  We will achieve this through fully utilising the new central hub and through localised expansion where needed. The new automated hub is operating well and achieving good throughput levels, and our objective now is to further increase the volumes that it processes, through improved network planning and hub operating methods, and through further enhancements to the automated sorter throughput.  We are also about to introduce a new computerised model to optimise the efficiency of our linehaul operations and, therefore, our overall network.

We have also added a second central hub which is focussed on the 'non-machineable' freight that is not efficient for our automated hub to process.  This facility increases our overall capacity and allows us to handle freight that, whilst bulky and not suitable for automated sortation, can provide a profitable income stream.

Innovation in Delivery Methods

To make the most efficient use of our delivery sites and vehicles, as well as to provide a range of delivery options to recipients, we are progressing a range of innovations in our delivery methods. These include deliveries throughout the day and evening, which make best use of our delivery sites and vehicles as well as providing flexibility for customers. We are also progressing alternative delivery and collection options such as retail stores and locker boxes.

Creating Support Capacity

The number of transactions processed in our business on a daily basis, including parcels and mail, has increased significantly in the last three years.  We have enhanced our support capacity to manage this growth, with a key emphasis on our I.T. infrastructure.  We are now progressing plans to create significant further such capability to support the future growth potential of the business.

Strategy Summary

We have a clear strategy which will allow us to grow revenue and profitability in markets which, whilst they are competitive, continue to offer good growth opportunities.

The transition of our business to the new hub and new method of operation did not go as we planned but we understand the causes of the problems and are well advanced in taking actions to address them to get the business fully back on track.

We believe that the completion of the recovery plan, combined with the other improvements we are making in product and service innovation, and the capacity we have created, will provide a robust platform for further growth over the coming years.

Results

The results can be summarised as follows:

* - excludes exceptional items

Revenue and operating profit for continuing operations (before exceptional items) are analysed as follows:

Parcels

Revenues in Parcels, which comprises the Group's business-to-business (B2B), business-to-consumer (B2C) international parcel delivery service and courier operations, were up 1.4% to £247.9m (2015: £244.6m).

Parcels average daily volumes increased by 4.5% compared to last year.  We continue to see an on-going volume mix change towards the lower margin B2C segment. 

The Parcels operating margin for the period reduced to 6.4% (2015: 9.7%), resulting in operating profit before exceptional items for the period reducing to £15.9m (2015: £23.6m). 

Both the rate of volume growth and the operating margin have been impacted by the operational issues related to our move to the new hub.  The profit reduction is partly due to the temporary increase in operating costs associated with this and also due to a magnified mix effect as a result of the increased customer churn we experienced in the first half of the year.

A detailed plan has been underway to address these issues including a number of near-term initiatives that have already eased the pressures on the hub.  A key decision we have taken is to introduce a second central hub which will specialise in handling the 'non-machineable' freight.  This is a highly efficient cross-dock facility designed specifically for such use and, whilst it increases our overall central hub costs, it allows the automated hub to focus on 'machineable' freight whilst enabling us to retain significant volumes of 'non-machineable' freight which we see as a good profit stream.

The efficiency of the main hub will also improve as new customers come on board thereby increasing volume throughput, with some of that new volume arriving at the new hub throughout the day rather than just in the peak hours.

More widely, our plan involves re-engineering our line haul template to fully align it with the efficiency of the new hub. We are shortly to introduce a new computerised model to optimise the planning of our linehaul routing, with the new routing being rolled out during the second quarter.  This is expected to deliver improvements in trunk vehicle utilisation levels and therefore a reduction in overall linehaul costs. 

Peter Fuller joined as Operations Director in April 2016.  With substantial experience in parcels distribution and specifically in managing automated facilities, most recently at Parcelforce where he was Operations Director, Peter will be instrumental in the execution of our plans, and encouraging progress has already been made.  The sortation equipment is operating effectively, service levels are now back to where they should be, and the machine has recently processed its 30 millionth item. We have a number of significant potential customers keen to use the services available through our new hub. 

We continue to make good progress with product innovations in our Parcels business.  These include Retail Today, our same-day delivery service combining our parcels and courier operations, and ipostparcels, which represents one of the lowest-cost and most user-friendly online collection and delivery services available in the UK.  To support the growing demand for same-day deliveries in the retail sector, we are expanding our same-day service capability, particularly in the Greater London area.  Revenues and profits grew well for these operations and we continue to invest in further enhancing our services in these areas.

Key to our parcels market position is the provision of value added services that customers increasingly demand.  Our enhanced next day delivery service, which offers advance-notice one-hour delivery and collection windows, is consistently achieving strong service levels of over 95%.  We have now enhanced this service to include further customer features, including the ability to redirect a delivery after the delivery driver has left the depot as well as GPS 'stamping', which is a key function to allow us to confirm that a delivery has been made based on the GPS coordinates of the delivery confirmation.   We are also progressing our plans to offer parcel drop-off and collection points, including a trial with a national multi-site retailer.

Mail

Mail revenues reduced by 3.1% to £233.1m (2015: £240.5m). 

Our daily Mail volumes increased by 5.2% on the previous year, compared to a decline in transactional volumes of some 3% per annum in the overall UK mail market, showing that we have achieved further market share gains.

The operational issues we faced across our business in the year had some impact on our Mail business, principally in the form of additional operating costs.  These were incurred to maintain service levels to customers which we are pleased to report continue to be at a very high level.  In addition, the pricing environment within the mail market remains highly competitive. 

As a result, Mail operating profits decreased by 18.3% to £10.1m (2015: £12.5m).  The operating margin decreased to 4.4% (2015: 5.2%). 

We have been successful in growing our volumes and our market share despite the underlying structural decline in the physical mail market overall.  In the past year there have been a number of substantial mail accounts out for tender, and we have achieved a strong record of retaining existing customers, and of winning competitor accounts, albeit with some pricing pressures.

Our continued product innovation has helped us to offset this mail market decline and the associated pricing pressures, and will continue to do so.  imail, our web-to-print postal service, continues to show good revenue and profit growth.  We continue to invest to increase our capacity and provide additional services.  'imailprint' has now been successfully launched, providing a specialist printing service which, rather than being purely mail-related as with our current service, can produce printed documents for general usage.  We see this as a medium-term low risk growth opportunity using our existing infrastructure.

In addition, we have launched an innovative turn-key solution for the Royal Mail Mailmark service, where we manage and process individual item data on behalf of our customers with the Royal Mail.  By providing a clearer chain of custody for the mail and more accurate data input into Royal Mail reporting systems, we can minimise current and future Royal Mail surcharges for our customers.

A key growth element of the Mail market is the rising popularity of packets; a market we estimate to be worth some £1.2bn.  Whilst we have made some progress in this area in recent years, our share of the market remains very low. We now have a clear plan in place to grow our market share, with specialist packets sortation equipment in place which allows us to offer a service that fully meets our customers' requirements.  We have increased the size of our sales team to capitalise on this and are gaining good traction with customers.  We expect to see a positive impact in the current financial year, and continue to believe that this area will be key to growing our Mail revenues and profitability in the future.

In June 2015 Ofcom announced it was undertaking a Fundamental Regulatory Review of Royal Mail.  Its stated aims were to ensure regulation remains appropriate and sufficient to secure the efficient and financially sustainable provision of the universal postal service, assess Royal Mail's efficiency, consider its position within the parcels sector, and assess Royal Mail's potential ability to set wholesale prices in a way that might harm competition.

We have responded to the Ofcom discussion paper on this subject.

We understand that Ofcom are soon to publish a more detailed Consultation Document setting out their views and proposals.  We will actively participate in the consultation process that follows the issue of this paper.

UK Mail remains a market leader with an operational template ideally suited to the evolving demands of the mail market.  We remain focussed on growing our business by handling additional mail for existing customers and winning volumes from other Downstream Access operators.  We continue to invest for the future, and see substantial growth opportunities for the medium and longer term.

Central costs

Central costs reduced by 1.6% to £14.8m (2015: £15.1m), with our increased investment in I.T. having been offset by savings in other areas.

Finance Cost

Finance cost for the period was £0.5m (2015: £nil).  This partly reflects the investment in the new hub and our initial funding of the relocation costs, which were subsequently reclaimed from HS2.   The investment in our new hub and automation was largely completed in the year and the final HS2 compensation was received in November 2015.

HS2

During the year we agreed specific compensation payments with the Department for Transport and HS2 Ltd in relation to the relocation of our Birmingham hub and head office to Ryton near Coventry, as a result of the proposed High Speed Two (HS2) railway.  Of these amounts, £22.0m was received in the year (2015: £4.3m) including the final compensation payment of £10.3m which was paid in November 2015.

The costs of the move to the new site, including the I.T. data centre move and related staff costs have now been incurred.  The costs of reinstating our existing capability have been fully compensated by the DfT and HS2.

Exceptional Items

Our results include net exceptional income as follows:                                                       

The profit on sale of the national hub results from the compulsory acquisition of the National hub and offices at Birmingham by the DfT and HS2 Ltd as a result of the proposed HS2 railway.

The amounts received from HS2 relate to agreed compensation for the impact of HS2 on our business. 

The cost of automation implementation represents the cost incurred as we implement and roll out the new automation equipment.  The costs primarily relate to asset write-offs of equipment no longer required.

National hub relocation costs represent disturbance costs associated with the relocation of our National hub and offices to Ryton.

The impairment of intangible assets charge results from a comprehensive strategic review of the Group's I.T. systems which identified a number of software assets that did not fit within the medium and long term strategic goals of the Group, and which therefore offered no future economic value. 

The impairment of tangible assets charge relates to the cost of sortation equipment and related facilities that are no longer required.

The management reorganisation costs principally relate to the reorganisation of the Board which occurred during the year.  These costs include the contractually required payments to departing directors, following mitigation, and the appointment costs of new Board directors.  The search for a new CEO is ongoing at the date of this report.

Financial Position

The Group's financial position remains sound.  Despite the significant investment in our new hub and in automation, details of which are set out below, we had net cash at the end of the year of £2.2m (2015: net debt of £5.2m).

The group invested a further £4.1m (net of HS2 compensation) in the new hub and automation in the year, taking the total investment to £52.2m.  The investment in the year has been offset by monies received from HS2 relating to the hub move of £15.7m.

Net cash inflow from operations totalled £31.3m (2015: £28.6m), including £31.0m (2015: £28.2m) from continuing operations. 

The total consolidated net cash inflow for the year was £2.2m (2015: outflow £22.8m) which included £2.3m cash generated from working capital (2015: nil), and a net £11.2m (after allowing for the deferred compensation received from HS2) expended on capital additions (2015: £43.9m).

The Group paid £11.0m (2015: £11.8m) in dividends during the year.

To provide funding for the investment in the new hub and automation the Group agreed a £25m five year revolving credit facility with Lloyds Bank plc in May 2014.  This facility which supports the cash requirements of the investment programme, was undrawn at 31 March 2016.

The Group has in place further funding facilities to support our investment programme and to provide adequate working capital facilities.  These comprise asset lease funding and overdraft facilities.

Capital Additions

Capital additions for the year included our underlying business capital expenditure combined with the further investment in our new hub and in automation.

This is be summarised as follows:

The underlying capital additions includes £6.4m on I.T. as we continue to develop our system infrastructure, and £3.6m on our network.

The investment in the new hub and head office in the year comprises the payments for their construction.  The new hub and head office were completed in February 2015. Final payments were made in April 2016 of £0.5m.  The cumulative total spent on the land and buildings is £35.8m, which is in line with our original budget of £35.0m. Our cash contribution to the building of the new hub and head office, after receipts from the DfT and HS2, is £12.4m which covers the enhancement of the site and building beyond the scale of the previous facility. 

The automation equipment was placed live in May 2015.  The investment in automation reflects the payments for the development, installation and commissioning of the hub and network automation equipment.  The total capital spent on the introduction of automation was £18.3m, compared to the original budget of £20.0m.

Earnings per share

Underlying basic earnings per share decreased to 15.4p (2015: 30.3p). Basic earnings per share decreased to 21.6p (2015: 9.2p).

Dividend

Given the impact of the operational issues on the financial results, the Board has therefore proposed a Final Dividend of 10.9p per share (2015: 14.5p), payable on 26 August 2016 to shareholders on the register on 29 July 2016.  This gives a total dividend for the year of 16.4p (2015:  21.8p).  This dividend is covered 0.94 times by underlying basic earnings per share (1.32 times by basic earnings per share). We would expect to return to prior levels of dividend cover in due course as our earnings grow.

OUTLOOK

Parcels is a growth market that is polarising between high quality, innovative and sophisticated operators and those at the opposite end of the value scale.  We are in the midst of a phase of business transition to place us at a significant competitive advantage in the value-added segment of this market for the medium and longer term.

We also continue to see significant opportunities for our Mail business, from the ongoing structural changes in the marketplace and the new initiatives we are pursuing such as imail and imailprint. We are also excited by the substantial opportunities that exist to expand our packets business over the medium term.

The immediate focus is to resolve the issues that arose on the transition to the new hub combined with the effective introduction and roll-out of the new automated sortation methodology, and we are making encouraging progress in this regard.  We believe that the investment we have made in our new hub and automation will set us up very well for the next stage of profitable growth. 

The first half of the new financial year will reflect the fact that we continue to reposition our parcels business and manage the full transition to the new ways of working. The benefits of this are expected to be seen from the second half, and we therefore continue to expect performance for the year as a whole to be more weighted to the second half than usual.

The strategic rationale for the transformation we are undertaking remains compelling and we are confident both of our ability to restore our parcels business to previous levels of profitability and to build from there.  The medium term operational and financial benefits will place us amongst the most efficient and competitive operators in our market.  The medium and long term outlook for the Group therefore remain very positive.

ADDITIONAL DISCLOSURES

Principal risks and uncertainties facing the business

UK Mail's business and share price may be affected by a number of risks, not all of which are within our control. The process UK Mail has in place for identifying, assessing and managing risks is set out in the Corporate Governance Report on page 34 of the 2015 Annual Report and Accounts. The specific principal risks and uncertainties that may affect the Group's performance, together with relevant mitigating factors as identified by the Group's risk management process were discussed on page 22 of the Group's 2015 Annual Report and Accounts. These included risks relating to national hub, IT systems, competition, business continuity, legislation and regulation and fuel factors, in addition to financial risks (details of which can be found in note 25 of the 2015 Annual Report and Accounts) including credit risk. As required by the 2014 Corporate Governance Code, the Board regularly monitors risk and since the publication of the 2015 Annual Report has removed fuel and the relocation of the national hub as principal risks and identified three new principal risks relating to operational plan failure, loss of key management and physical theft and security as follows;

Cautionary statement

This announcement contains certain forward-looking statements, which have been made by the directors in good faith based on the information available to them up to the time of the approval of this report and such information should be treated with caution due to the inherent uncertainties, including both economic and business risk factors, underlying any such forward-looking information. Nothing in this report should be construed as a profit forecast.

Going concern

The Directors are satisfied that the Group has sufficient resources to continue in operation for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the financial statements. 

Related-party transactions

There were no transactions with related parties during the year ended 31 March 2016 which have had a material effect on the results or the financial position of the Group. The nature of the related party transactions has not changed from those described in the Group's 2015 Annual Report and Accounts. 

Consolidated Statement of Comprehensive Income

for the year ended 31 March 2016

Consolidated Balance Sheet

as at 31 March 2016

Consolidated Cash Flow Statement

for the year ended 31 March 2016

Consolidated Statement of Changes in Equity

for the year ended 31 March 2016

 1.        Segmental information

Management has determined the operating segments based on reports that are reviewed by the Board for making strategic decisions. These reports reflect the Group's defined management structure, whereby distinct managers are accountable to the Board for the results and activities of their identified segments and the different markets in which they operate. The Board, which is the Group's chief operating decision maker, considers that the Group has two reportable operating segments following the integration of the Courier operations into Parcels and the cessation of trading of UK Pallets Ltd in March 2015.

The Group's operating segments consist of Parcels and Mail (which are shown as continuing operations). In recent years the Courier business has undergone a period of transition away from a traditional same-day courier operation towards an operation which provides specialist service support to our Parcels business. Consequently results for the comparative period have been restated to reflect the integration of the Courier operations into Parcels.

The Board assesses the performance of the operating segments based on a measure of operating profit before net finance costs and taxation.

Central costs comprises of network costs and central support costs. Central assets comprise mainly of corporate assets, cash, current and deferred tax balances.

The Group manages its business segments on a national basis, with all its operations in the UK, as are nearly all of the customers.

Inter-company transactions, (which are conducted on an arm's length basis), balances and unrealised gains on transactions between segments are eliminated. Unrealised profits and losses are also eliminated.

No individual customer accounted for more than 7% of revenue in the periods included in these consolidated financial statements.

2.        Earnings per share 

Basic earnings per share have been calculated by dividing the profit for the year by the weighted average number of ordinary shares in issue for the year ended 31 March 2016 of 54,888,887 (2015: 54,729,788). Diluted earnings per share have been calculated by adjusting the weighted average number of ordinary shares for the effect of the exercise of share options, increasing the number of shares to 54,901,735 (2015: 54,912,124).

3.        Exceptional items

Net exceptional income - continuing operations

The profit on sale of the national hub represents the gain on sale following the compulsory acquisition of our National hub and offices at Birmingham by the DfT and HS2 Ltd, as a result of the proposed High Speed Two ('HS2') railway. The HS2 compensation relates to agreed compensation for the impact of HS2 on our business.

Net exceptional costs - continuing operations

The cost of automation implementation represents the cost incurred as we implement and roll out the new automaton equipment. These costs largely represent asset write offs and contract termination costs.

National hub relocation costs represent disturbance costs associated with the relocation of our National hub and offices to Ryton following an agreement reached with the Department of Transport ('DfT') to acquire the National hub and offices in Birmingham. These costs largely comprise £4.0m of disturbance payments including recruitment and redundancy costs and legal & professional fees. £2.5m of property costs associated with running two sites for an approximate period of six months, hub expansions costs of £0.3m and £0.3m loss of profit due to the delay in hub capacity expansion. No further amounts are expected to be taken as exceptional costs in the 2016/17 financial year.

The impairment of intangible assets represents the impairment cost recognised following a comprehensive strategic review of the Group's I.T. systems during the year which identified a number of software assets that did not fit within the medium and long term strategic goals of the Group, and which therefore offered no future economic value.

The impairment of tangible assets represents the cost of sortation equipment and related facilities that are no longer required given the revised automation strategy of the business.

The management reorganisation costs principally relate to the reorganisation of the Board which occurred during the year. These costs include the contractually agreed payments to departing directors, following mitigation, and the appointment costs of new Board directors.

Exceptional costs - discontinued operations

The exceptional costs of £10.4m in respect of discontinued operations in the year ended 31 March 2015 represent an impairment of intangible assets cost of £9.0m (comprising of £7.9m in respect of goodwill relating to the UK Pallets business and £1.1m relating to the write off of software developments costs), together with other closure costs of £1.4m following a decision to close the business of UK Pallets Ltd.

Other closure costs principally comprised of £0.7m of redundancy costs and £0.7m for contract termination and additional dilapidation costs.

4.        Analysis of net cash

5.        General information

(i) Statutory Accounts

The financial information set out above does not constitute the Group's statutory accounts for the year ended 31 March 2016 within the meaning of section 435 of the Companies Act 2006. Financial Statements for the year ended 31 March 2016 will be delivered to the registrar of companies in due course. PricewaterhouseCoopers LLP has reported on these financial statements and their report was (i) unqualified, (ii) did not include a reference to any other matters to which the auditors drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 498(2) or (3) of the Companies Act 2006.

(ii) Accounting policies

The accounting policies applied by the Group in its consolidated financial statements for the year ended 31 March 2016 are in accordance with International Financial Reporting Standards and IFRIC interpretations as adopted by the European Union (Adopted IFRSs) and the Companies Act 2006 applicable to companies reporting under IFRS. The accounting policies, which have been applied consistently to all the years presented, are set out in those financial statements.