22 July 2014   

ROYAL MAIL plc

INTERIM MANAGEMENT STATEMENT

Royal Mail plc (RMG.L) today issued its Interim Management Statement covering the financial position and trading performance of the Group for the three months ended 29 June 2014 and including the period from 31 March 2014 to date.

Moya Greene, Chief Executive Officer, Royal Mail plc, said:

"In the first three months of our financial year we have delivered low single digit revenue growth in line with our strategy. Trading has been characterised by a good performance in letters, with the decline in addressed letter volumes better than our expected range, but a weaker than expected performance in UK parcels, largely driven by the intensifying competitive environment in the account, consumer/SME and export channels. GLS continues to perform well in Europe. On costs, performance is better than expected.

"Given the increasing challenges we are facing in the UK parcels market, our parcels revenue for the year is likely to be lower than we had anticipated. However, through cost control measures and with continued good letters performance we expect to be able to offset the impact on profit such that our overall performance would remain in line with our expectations for the full year. Our parcels revenue will be dependent on our performance in the second half, which includes the Christmas trading period, and on no further weakening in our addressable UK parcels market."

Trading performance for the three months ended 29 June 2014

·   Cost management remains a key focus. The management reorganisation programme announced in March 2014 is on track to realise cost savings of around £25m which will benefit the second half of the year. In particular, we are maintaining a tight control on non-people costs. In addition, the increase in cost of sales is slowing due to lower export mail volume growth  

·     As expected, period-on-period comparison of volume and revenue growth is impacted by the phasing of customers' reaction to the introduction of size-based pricing in April 2013. In the prior period revenue saw an immediate uplift as a result of this pricing change, but consumer/SME volumes saw a phased decline as customers took time to react

·     Export parcel volumes were lower than expected due to the impact of stronger Sterling and increasing competition in the export market. This had the effect of reducing UK parcels revenue growth in the period by around 150 basis points which is not expected to reverse in the full year

·     Changes to Amazon's minimum order level for free delivery and expansion of its own delivery network have reduced addressable market volumes. Competition in account and consumer/SME parcels has intensified more than expected as other carriers seek to fill capacity in their networks by aggressively reducing prices

·     Overall performance in June was weaker due to a slowdown in the retail sector

·     We have a number of initiatives focused on addressing the impact of these issues: we are opening our network longer on Saturdays and on Sundays to receive goods from e-retailers; Parcelforce Worldwide has started a Sunday delivery service for online shoppers; and we have introduced new shipping tools for large online retailers. The benefits of these initiatives are expected in the second half of the year

·   Addressed letter volumes decreased by 3% (excluding the impact of the European and local elections in May 2014), better than our expected range of a 4-6% decline per annum, mainly due to the improvement in UK economic conditions

·   Letter revenue was up 3%, benefitting from the impact of price increases and the uplift from the elections traffic

·   Walk sequencing rates have increased to 82% as a result of increasing the number of letters we handle through our automated pipeline. Overall Quality of Service is exceeding our targets. The successful launch of Mailmark^TM has added additional value to our bulk letters and meter mail products

·   On 20 June 2014 we made a formal evidence submission to Ofcom, for whom the primary duty is to secure the provision of a financially sustainable universal service, setting out the threat to the universal postal service posed by unfettered cherry-picking of high density urban areas for direct delivery competition

·   Trading in the period has been encouraging with improved revenue in the majority of countries

·   The situation in Germany remains challenging with competitors pursuing aggressive volume strategies but delivery costs have stabilised. The turnaround in GLS France continues to progress well but the resulting profit improvement is expected to be offset by increased IT investment across the network. GLS Italy continues to perform well, benefitting from new franchisee acquisitions

Outlook

We continue to expect UK addressed letter market volumes, excluding elections, to decline by 4-6% per annum. For 2014-15 we continue to expect to be at the better end of this range.

We anticipate that the UK parcels market will continue to be highly competitive which will have a downward impact on average unit revenues. In addition, we expect that the continued strength of Sterling and increasing competition in the export market will impact export parcels revenue for the rest of the year. However, we have implemented a number of initiatives that aim to enable us to gain share of the addressable UK parcels market. The benefits of these initiatives will be skewed towards the second half, in particular the critical Christmas trading period.

GLS continues to perform well but its reported results will be impacted by the strength of Sterling.

Given the increasing challenges we are facing in the UK parcels market, our parcels revenue for the year is likely to be lower than we had anticipated. However, through cost control measures and with continued good letters performance we expect to be able to offset the impact on profit such that our overall performance would remain in line with our expectations for the full year. Our parcels revenue will be dependent on our performance in the second half, which includes the Christmas trading period, and on no further weakening in our addressable UK parcels market.

As previously highlighted, period-on-period comparison of reported Group operating profit after transformation costs will be impacted by certain one-off and other items⁶, particularly in the first half such that margin expansion will be skewed to the second half of the year.

No material events or transactions impacting the Group's financial position have taken place during the period from 31 March 2014 to date. Royal Mail made a statement on 16 July 2014 on the French competition authority investigation into alleged antitrust law breaches by GLS France. Given the early stage of this matter, we cannot yet determine the amount or range of potential loss, however, it is possible that it could be material.

No material changes have occurred to the Group's financial position since the Annual Report and Financial Statements 2013-14 issued on 6 June 2014.

The results for the half year ending 28 September 2014 are expected to be announced on Wednesday 19 November 2014.

Notes:

1)  Throughout this document, growth/decline changes are stated on a like-for-like basis, unless otherwise indicated. Like-for-like changes in revenue are calculated after adjusting for movements in foreign exchange in GLS and working days in UKPIL revenue. For volumes, like-for-like changes are adjusted for working days in UKPIL

2)  Working days - There was approximately one less working day in the first three months ended 29 June 2014 compared with the first three months of the prior financial year

3)  UKPIL addressed letter volumes exclude elections, but no adjustment is made to UKPIL letter revenue for elections as there are direct costs associated with handling election traffic. In the first three months the impact of elections on letter revenue growth was c.300 basis points, but this impact will diminish over the course of the financial year

4)  The cumulative average translation rate for the three months ended 29 June 2014 was £1 = €1.225, compared with £1 = €1.177 for first three months of the prior financial year.

5)  To date means up to 21 July 2014, being the latest practicable date prior to the publication of this Interim Management Statement

6)   Certain one-off and other items are:

a. One-off VAT credit of £35m in the first half of 2013-14 that will not be repeated in the first half of 2014-15

b. Half year impact of the expected £70-80m increase in the IAS 19 pension service charge

c. Half year impact of the expected c.£20m increase in depreciation and amortisation

d. Impact of approximately one less working day in the first half 2014-15

Enquiries:

Media Relations 

Mish Tullar

Phone: 07423 524 154

Email: mish.tullar@royalmail.com 

Beth Longcroft

Phone: 020 7449 8241

Email: beth.longcroft@royalmail.com

Royal Mail press office out of hours: 020 3338 1007

Investor Relations

Catherine Nash

Phone: 020 7449 8297

Email: investorrelations@royalmail.com 

Disclaimer:

Figures presented in this Interim Management Statement are not audited. This Interim Management Statement contains certain statements that constitute "forward-looking statements". Such forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievements of the Group or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Persons receiving this document should not place undue reliance on any forward-looking statements.

The Group disclaims any obligation or undertaking to update or revise any forward-looking statements contained in this document to reflect any change in its expectations or any change in events, conditions or circumstances on which such statements are based unless required to do so by applicable law, the Prospectus Rules, the Listing Rules or the Disclosure and Transparency Rules of the Financial Conduct Authority. 

About Royal Mail plc:

Royal Mail plc is the parent company of Royal Mail Group Limited, the leading provider of postal and delivery services in the UK and the UK's designated universal postal service provider. UK Parcels, International & Letters (UKPIL) comprises the company's UK and international parcels and letters delivery businesses operating under the "Royal Mail" and "Parcelforce Worldwide" brands. Through the Royal Mail Core Network, the company delivers a one-price-goes-anywhere service on a range of parcels and letters products. Royal Mail has the capability to deliver to more than 29 million addresses in the UK, six days a week (excluding UK public holidays). Parcelforce Worldwide operates a separate UK network which collects and delivers express parcels. Royal Mail also owns General Logistics Systems (GLS) which operates one of the largest ground-based, deferred parcel delivery networks in Europe.