8th Sep 2020 10:34
(Alliance News) - Royal Mail PLC on Tuesday said revenue rose in the five months to August, thanks to a sharp increase in parcel volumes and prompting upgraded guidance for the current financial year.
Shares in Royal Mail were up 19% at 207.50 pence in London in morning trading.
The London-based letter and package carrier said revenue in the UK business was GBP139 million higher for the five months ended August 30 compared to the year before.
UK parcel volumes were up 34%, representing an additional 177 million parcels, and parcel revenue increased by 33% year-on-year compared to the same five month period a year before.
Addressed letter volumes in the UK, excluding for elections, were 28% lower, a drop of 1.1 billion. Letter revenue declined 22%.
For GLS, Royal Mail's international parcel business, revenue and volume both were up 19% on a year before in the five-month period, with an adjusted operating margin of 8.1%.
The company updated its annual guidance for its financial year ending March 2021. It has two scenarios, 1 and 2, with scenario 2 assuming a deeper recession with a UK gross domestic product decline of 15%. Scenario 1 is more optimistic and assumes a 10% UK GDP decline amid easing Covid-19 restrictions.
In Scenario 2, Royal Mail UK revenue is seen GBP500 million to GBP600 million lower year-on-year, with GP155 million of additional Covid-19 related costs and GBP100 million of costs associated with higher parcel volumes. This has been maintained as a base case. GLS revenue growth of 0% to 2% with an operating margin of around 5% also was maintained for scenario 2.
Scenario 1 has been updated and now assumes that Royal Mail's UK revenue will rise by between GBP75 million and GBP150 million year-on-year, rather than falling by GBP200 million to GBP250 million as previously predicted.
It also now assumes that letter revenue will fall by 17% rather than 16% as originally expected and that total UK parcel revenue will increase by 22% instead of 12%.
The scenario 1 forecast cost of Covid-19 for Royal Mail, including increased employee absence, social distancing, protective equipment, has been reduced to GBP120 million from GBP140 million, although the net cost of the mix change from letter to parcels is expected at between GBP140 million and GBP160 million, higher than the GBP110 million previously predicted.
GLS revenue growth in scenario 1 is predicted at 10% to 14% rather than previous 5% to 7% and the adjusted operating profit margin is expected at around 7%, having been forecast at 6% before.
Royal Mail said it is in talks with unions Unite CMA and the CWU on needed changes.
"There is an opportunity to benefit from the rapidly growing demand by customers for parcels and if Royal Mail can adapt its business quickly enough, we will be well positioned to meet customers' demands for more and more items, to and from more people, delivered more frequently. But we need to move quickly. Currently, too many parcels are sorted by hand and we are failing to adapt our business to fundamentally lower letter volumes and are holding on to outdated working practices and a delivery structure that no longer meets customer needs," the company explained.
It is working with unions on various changes, including to its network strategy to support new parcel hubs and trial separate daily parcel deliveries. It also is looking to end "outdated ways of working", including handwritten sign-in sheets. The company also wants agreement to remove old letter-sorting machines, given that letter volumes have halved since 2004, and to review processing and distribution regularly to bring them in line with the rapid drop in letter volumes.
"It is disappointing that we have not yet been able to reach agreement. Without these changes, we cannot achieve essential improvements in operational efficiency and better focus our efforts on the ever increasing demands of our customers. We have increased the intensity of our discussions in recent weeks in recognition of the need to make progress more quickly," Royal mail explained.
Royal Mail also has been in talks about its universal service obligation, and how it "may need to change for the future".
The company said: "We are currently exploring what a rebalanced universal service might look like. We remain committed to the universal, affordable 'one price goes anywhere' nature of the USO, but we would like to deliver the items that customers want more often, not less. To do that we need a regulatory system fit for the future rather than the past."
It will be speaking about this with regulator Ofcom and with the UK government this autumn.
"The upcoming Ofcom review of both [universal service obligation] user needs and its wider regulatory framework for the postal market will be vital in securing a platform which permits both the investment required to deliver the USO demanded by the public and for that service to be delivered sustainably. Any decision is a matter for the regulator, government and ultimately parliament - but we need to make sure this review process is considered swiftly given the rapidly changing customer needs and the financial sustainability of the universal service," said Royal Mail.
By Anna Farley; [email protected]
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