Royal Mail plc

(Incorporated in England and Wales)

Company Number: 8680755

LSE Share Code: RMG

ISIN:  GB00BDVZYZ77

LEI: 213800TCZZU84G8Z2M70

Royal Mail plc
25 January 2022

FURTHER PROGRESS ON TRANSFORMATION AND TRADING UPDATE FOR THE THIRD QUARTER OCTOBER TO DECEMBER 2021

Royal Mail Group (RMG.L) is today providing further information on its transformation programme in the UK and updating on Group trading for the third quarter, October to December 2021, and the nine months ended December 2021.

Highlights

·    Performance in Q3 in line with expectations;

·    Royal Mail:

o  Confident there has been a structural shift in parcel volumes since the start of the COVID-19 pandemic;

§ 439 million parcels handled during the quarter;

§ Q3 domestic parcel³ revenue grew by 43.9% vs. Q3 2019-20, and declined by 4.9% year on year;

§ Q3 domestic parcel³ volumes grew by 33% vs. Q3 2019-20, and declined by 7% year on year; at least maintaining our market share;

§ Proud to continue to support the Government's COVID-19 testing effort with increased volumes during the quarter; test kits accounted for around a mid-single digit % of total parcel volume in the first 9 months;

o  Absence peaked at c.15,000 in early January due to Omicron;

§ Service levels in some areas of the country and delivery of Pathway to Change efficiencies impacted;

§ Quality of service: providing targeted support in those areas most impacted: number of local delivery offices listed on our service update page reduced from 77 to 10 as of yesterday;

§ Pathway to Change: delivered £35 million of benefits to the end of December; expect to achieve targeted exit run rate to deliver at least £90 million in FY 2022-23; FY 2021-22 expected benefits of £55 to 80 million, dependent on speed of recovery from Omicron;

o  As part of our transformation programme, today entering into formal consultation on a reorganisation to streamline operational management to improve focus on performance at a local level;

§ Expected to deliver around £40 million annualised benefit, with around £70 million charge to be taken in Q4 2021-22, subject to consultation;

o  Trading in line with previous guidance of around £500 million adjusted operating profit for FY 2021-22. Including restructuring charge as outlined above, guidance is now around £430 million adjusted operating profit.

·    GLS:

o  Performing well: Q3 revenue growth of 37.7% in Euros¹, 35.2% in Sterling, vs. Q3 2019-20, and 10.7% growth in Euros¹, 4.5% in Sterling, year on year;

o  Despite upward pressure on costs, full year revenue guidance now around 9% growth in Euro terms, c. 4% in Sterling (previously low single digit %), and operating profit margin of c.8%.

Keith Williams, Chair, commented: "We delivered a solid performance over the Christmas period in particularly challenging circumstances operationally. I'd like to thank all of our people for their dedication over the period."

"We expected some decline in parcel volumes given most retail stores were open during the period, unlike last year. However, the trend towards customers wanting more parcels remains, and responding to that change efficiently is key. Our domestic parcels business in the UK has seen demand increase by around a third over two years, as has our GLS business across its markets."

"The past few months have demonstrated that the challenge for Royal Mail is to improve both quality and efficiency. Looking forwards, the delivery of our transformation and modernisation plans remain incredibly important in light of the fast-paced change we are seeing and ongoing inflationary pressures. Whilst GLS will also face inflationary pressures, our focus will be on continuing to leverage its distinctive and proven business model to exploit growth opportunities in a profitable way, whilst building on the progress made this year in previously underperforming markets."

Simon Thompson, CEO Royal Mail, commented: "With the rise of Omicron, absence has been around twice pre-COVID levels, with around 15,000 staff off sick or isolating in early January. Thankfully, this is now improving. We are resolutely focussed on addressing these issues which have affected our service in some parts of the country. Year to date we have spent more than £340 million on overtime, additional temporary staffing and sick pay, as well as providing targeted support for the offices most impacted. We have taken steps to maintain as comprehensive a service as possible, whilst keeping our people and customers safe. I'd like to thank all our people who have worked incredibly hard, as they have done throughout the pandemic. I would also thank customers for their patience in those areas where we have faced operational challenges and increased absence as we focus on restoring our usual levels of service everywhere."

"Higher absence has also been a headwind to delivering our productivity targets, but our Q3 performance gives us confidence in the delivery of adjusted operating profit for Royal Mail, before the cost of the reorganisation announced today, in line with previous guidance at around £500 million."

"We have today entered into formal consultation on a management reorganisation to further streamline our operations and, at the same time, improve focus on local performance. We are committed to conducting the process sensitively, working closely with our people and their representatives. We have a track record of delivering change through natural turnover, redeployment and voluntary redundancy, wherever possible. Our full year outlook has been revised to take account of the costs of this reorganisation."

Martin Seidenberg, CEO GLS, commented: "GLS continues to deliver good volume and revenue growth, both year on year and against 2019. Revenue growth was achieved in almost all markets, with in particular continued strong performance in our Eastern European businesses. We continue to manage our operations successfully despite the impact of the Omicron wave which is spreading across Europe. We are seeing upward pressure on costs driven by increasing inflation rates in the countries where we operate, and have recently implemented price increases in response."

"As previously announced, the acquisition of Rosenau Transport in Canada was completed on 1 December 2021 and Q3 includes the first revenue contribution from this business. We have commenced the programme to realise synergies with our pre-existing GLS Canada business and are confident that our plan will be delivered."

"Given our good Q3 performance, whilst we expect the rate of growth to soften in Q4, we now expect full year revenue growth of around 9% in Euro terms (around 4% in Sterling) and an operating profit margin of c.8%. This equates to an operating profit of c. €400 million."

PERFORMANCE FOR THE THIRD QUARTER (OCTOBER TO DECEMBER)

Royal Mail

With the rising incidence of positive COVID-19 tests from the Omicron wave, absence rates remained elevated during Q3 vs. the prior year and increased over Christmas and into early January 2022 to peak at around 12% (c. 15,000), double pre-COVID levels. This has resulted in increased costs and impacted quality of service in some areas of the country. We are providing targeted support to the local offices most affected by elevated absence. More recently absence has begun to reduce to below 10%. Our postmen and women are continuing to work incredibly hard, as they have done throughout the pandemic, and we thank them for all of their efforts and determination.

Overall revenue performance was broadly in line with our expectations. The COVID-19 pandemic has resulted in a structural shift, with a permanent step up in the level of domestic parcel volumes compared to pre-pandemic levels.

Domestic parcel volumes increased by 33% vs. Q3 2019-20, but fell by 7% year on year, given lockdown restrictions were successively reimposed during the prior period. We saw a slower than expected increase in volumes around Black Friday, although December saw stronger growth, driven by a pick-up in B2C volume in the run up to Christmas. We believe we are at least maintaining our share of the market. In addition, Royal Mail was pleased to be able to respond quickly to Government requests to increase capacity for the delivery of COVID-19 testing kits due to increased demand. Test kits accounted for around a mid-single digit % of total parcel volume in the first 9 months.

Total parcel volumes increased by 15% vs. Q3 2019-20, but fell by 11% year on year, impacted by weakness in International as a result of a number of factors previously outlined including increased customs processing and conveyance costs.

Domestic parcel revenues grew by 43.9% vs. Q3 2019-20 due to volume growth and positive price/mix.

Total parcel revenues grew by 29.7% vs. Q3 2019-20. Year on year revenues decreased by 9.4%, primarily due to lower volumes, partially offset by positive product/channel mix.

Addressed letter volumes (excluding elections) in Q3 were down 17% compared to Q3 2019-20, broadly in line with the trend seen in the first half and reflecting the ongoing structural decline in letters. Year on year volumes decreased by 3%, a slower decline compared to the sharp volume declines seen in the prior period. Total letter revenue was broadly flat, driven largely by pricing initiatives.

Overall Royal Mail revenue decreased by 5.8% year on year, but grew by 9.8% over two years.

We continue to transform our business and seek new ways to ensure we can adapt quickly to the changing market and ensure more customer-centric ways of working. Our successful 'Day in the Life of' initiative has already reduced administration for frontline managers and allowed us to repurpose over one million annualised hours so that managers can spend more time focusing on their teams and customers.

As a next step, subject to consultation, we intend to further simplify and streamline our operational structures to ensure an improved focus on local performance, and devolve more accountability and flexibility to frontline operational managers. We are engaging with our unions on the proposals, which we expect will lead to a reduction of around 700 managers and deliver an annualised benefit of around £40 million, with around £30 million in FY 2022-23. To deliver this programme, we expect to incur a restructuring charge of around £70 million in Q4 2021-22, subject to consultation. The proposed changes in management structure are subject to statutory consultation with Unite/ CMA, and additionally we will work with the CWU to ensure that the impact of any proposals remains in line with our existing agreements.

GLS

Volume growth in Q3 was 5% year on year, a slowdown as expected from the first half of the year. Growth was 34% compared to Q3 2019-20, a slight improvement compared to the trend seen in the first half of the year.

Revenue growth was 10.7% in Euros¹, 4.5% in Sterling, year on year and 37.7% growth in Euros¹, 35.2% in Sterling compared to Q3 2019-20. Underlying revenue growth in Euro terms was driven by higher volumes and better pricing. Reported revenue growth was impacted by the strengthening of Sterling.

Trading in the weeks leading up to Christmas was good in most markets, underpinning the robust Q3 performance that GLS was able to deliver.  

The Omicron wave is spreading across Europe and placing pressure on the availability of drivers and in-house labour in our operations. To date we have been able to manage these challenges successfully, with good quality maintained across the GLS network during the peak season.

Cost headwinds are being experienced in both our European and North American businesses driven by higher inflation rates and a limited pool of available line-haul and delivery drivers. Measures to protect margin through pricing initiatives and improved efficiency are being implemented.

The acquisition of Rosenau Transport in Canada was completed on 1 December 2021 after having received regulatory approval. The GLS Q3 results include the first contribution from this business. The acquisition has been well received both internally and externally, and we are confident that the planned synergies with our existing GLS Canada business can be secured.

YEAR TO DATE PERFORMANCE - NINE MONTHS TO DECEMBER

Outlook

As previously stated, there is still some uncertainty over the evolution of the COVID-19 pandemic and current Omicron wave, consumer behaviour, and economic factors such as GDP growth and inflation.

In Royal Mail, we continue to expect month-on-month fluctuations in parcel volumes, including test kits given periodic changes to Government guidance on testing. As expected, the operational gearing benefit seen in the first half is starting to unwind as we move through the balance of the year and comparators become tougher.

Given the absence related operating challenges through December and early January, achieving target productivity performance in our delivery offices has been made more challenging. It is not possible to predict how long the operational impacts of Omicron will persist as the operation recovers. As a consequence, the in-year benefit from our Pathway to Change agreement is expected to be in the range of £55 million to £80 million, depending on how fast the operation recovers from Omicron.  We are focused on delivering productivity exit rates which will enable at least £90 million flow through in FY 2022-23, which remains our commitment.

Notwithstanding the above, overall performance has been in line with previous guidance of around £500 million adjusted operating profit for FY 2021-22. Including the restructuring charge of £70 million, as outlined above, guidance is now around £430 million adjusted operating profit.

For FY 2022-23, we continue to build our commercial plan to target growth opportunities and share in a market that we anticipate will still be in transition from COVID-19. As a result, we are focused on progressing our transformation and efficiency plans to mitigate expected cost pressures and sustain profitability, with around £220 million of savings now identified. We will continue to build on this over the coming months.

GLS, like Royal Mail, is facing cost headwinds in all of its markets. We believe the combination of specific pricing actions, service quality and targeted efficiency measures that are being undertaken will allow us to deliver full year revenue growth of around 9% in Euro terms, around 4% in Sterling, and an operating margin of c.8%. This equates to an operating profit of c. €400 million.

Royal Mail Group FY 2021-22 results will be published on 19 May 2022.

1.     The impact of acquisitions increased reported growth rates by: Q3 vs 2019 1.3ppts, 9 Months vs 2019 1.4ppts, Q3 vs 2020 1.1ppts, 9 Months vs 2020 0.3ppts.

2.     Royal Mail and GLS revenue does not equal Group revenue due to the elimination of intragroup trading.

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

4.     % changes based on reported numbers.

5.     International includes import and export for Royal Mail and Parcelforce Worldwide.

Enquiries:

Investor Relations

John Crosse

Email: investorrelations@royalmail.com 

Royal Mail investor relations line: 020 7449 8183

Media Relations 

Jenny Hall

Phone: 07776 993 036

Email: jenny.hall@royalmail.com

Royal Mail press office: press.office@royalmail.com

Helen Reynoldson

Phone: 07483 302 245

Email: helen.reynoldson@royalmail.com

Company Secretary

Mark Amsden

Email: cosec@royalmail.com  

FORWARD-LOOKING STATEMENTS

This document contains certain forward-looking statements concerning the Group's business, financial condition, results of operations and certain Group's plans, objectives, assumptions, projections, expectations or beliefs with respect to these items. Forward-looking statements are sometimes, but not always, identified by their use of a date in the future or such words as 'anticipates', 'aims', 'due', 'could', 'may', 'will', 'would', 'should', 'expects', 'believes', 'intends', 'plans', 'potential', 'targets', 'goal', 'forecasts' or 'estimates' or similar expressions or negatives thereof.

Forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause the Group's actual financial condition, performance and results to differ materially from the plans, goals, objectives and expectations set out in the forward-looking statements included in this document.

All written or verbal forward-looking statements, made in this document or made subsequently, which are attributable to the Group or any persons acting on its behalf are expressly qualified in their entirety by the factors referred to above. Accordingly, readers are cautioned not to place undue reliance on forward-looking statements. No assurance can be given that the forward-looking statements in this document will be realised; actual events or results may differ materially as a result of risks and uncertainties facing the Group. Subject to compliance with applicable law and regulation, the Group does not intend to update the forward-looking statements in this document to reflect events or circumstances after the date of this document, and does not undertake any obligation to do so.