Royal Mail – complexity lies behind the numbers

The annual results from Royal Mail published last week were received with disappointment. Yet the position of the company is more complex than it first appears.

The top-line reported numbers for Financial Year 2016 were a revenue of £9,251m, down from £9,328m in financial year 2015 and a profit before tax of £267m, down from £400m in financial year 2015.

However, using Royal Mail’s ‘adjusted’ figures, revenue rose by 1% year-on-year whilst pre-tax profits were £538m. The variation is driven by a number of different causes, from the effects of currency on the GLS business in continental Europe, to the sale of businesses in Germany and fewer working days at Royal Mail in the UK. But the largest issue is the impact of continued investment in operational efficiency.  

Looking at the different parts of the company, UK Parcels International and Letters (UKPIL), which is the core business of Royal Mail, saw revenue fall by 1% even on an underlying basis but operating profit rose by 3%. Unsurprisingly addressed and unaddressed mail volumes drifted down by 3% and 5% respectively, but parcel volumes climbed by 3%, driven by international traffic. As usual GLS was the star performer with revenues and profits up by 9%, with currency fluctuations just depressing the numbers slightly. Volumes were up 10%.

The big hit to the company’s profits were what it calls ‘transformation costs’. Part of this is investment in new IT and depots but the largest element is the cost of voluntary redundancy as Royal Mail looks to improve its productivity per head. The overall bill for ‘transformation’ rose from £81m last financial year to £117m this, compressing profits.  

The other underlying issue Royal Mail faces is that e-commerce driven demand is not growing either its own sales or profits as fast as it might. The company may be winning contracts from large retailers and seeing double digit growth in a number of market segments, such as international traffic or internet-retailing ‘returns’, but the big picture is that volume growth is weak and competition is putting a ceiling on margins. That said, even for UKPIL margins are 5.4% after investment costs, which is not terrible despite representing a fall from 6.1% last year.

The situation at Royal Mail is a complex one, with some markets that are growing and others that are shrinking. In addition, productivity is rising but at a cost of considerable investment. The question is, will the future see Royal Mail with a much lower cost base enabling it to grab market share and reap the rewards in the potentially huge internet commerce market? Or will it just stutter to a halt in a market torn to pieces by competition from the likes of Amazon and others?

Source: Transport Intelligence, May 25th 2016