Final Results

18 May 2011

UK MAIL GROUP plc

FINAL RESULTS

For the year ended 31 March 2011

Highlights

·; Group revenues up 2.8% to £395.8m (2010: £385.2m)

o Mail revenues up 4.8% to £181.8m (2010: £173.5m)

o Parcels revenues up 1.2% to £166.7m (2010: £164.7m)

·; As previously announced, second half affected by subdued levels of business to business volume growth combined with disruption from adverse December weather during our peak trading period

·; Group profit before tax down 9.9% to £16.1m (2010: £17.8m)

·; Strong balance sheet, with net cash at year end of £17.4m (2010: £15.7m)

·; Final dividend maintained at 11.8p per share (2010: 11.8p) giving a total dividend of 18.2p (2010: 18.2p)

·; Continued focus on innovation and cost reduction to build our share of a challenging market

·; New products and service offerings including imail, Packets and Retail Logistics making good progress

Guy Buswell, Chief Executive Officer of UK Mail, said:-

"After a satisfactory start to the year, the second half was undoubtedly more challenging for the markets in which we operate. Whilst we continued to grow revenues in our core businesses, our margins and therefore profits came under pressure.

"Our strategy remains to continue to expand our available markets and to increase our share of those markets by introducing new and innovative products and services, whilst enhancing the low-cost, integrated network that lies at the heart of our business.

"The difficult conditions impact all operators in our markets. Our focus on efficiency and innovation, combined with our strong balance sheet, put us in a strong position to continue to outperform our competitors and to defend and increase our market share."

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Introduction

As previously reported, after a satisfactory first half which saw good growth in revenues and profits, the second half of the financial year proved challenging for our business. Underlying levels of volume growth were more subdued than originally expected, particularly in recent months, reflecting the challenging underlying economic conditions. This was compounded by the snow in December which caused disruption, and an increased cost of working, at a time of peak trading.

Whilst revenues for our Parcels business were up 1.2% for the full year, operating profits were down some 19% reflecting the impact on operating margin of a change in volume mix, the additional costs incurred and the competitive market environment.

Our Mail business increased its revenues by 4.8% as we continued to win new customers and progress our new product innovations. The impact of the continued competitive price environment throughout the year and the costs of disruption due to the snow reduced Mail operating profits for the year by some 3%.

Our Courier and Pallets businesses have performed satisfactorily with overall operating profits broadly in line with last year.

Overall Group revenues at £395.8m were up 2.8% compared to the prior year. Group profit before tax at £16.1m was down 9.9%.

Our financial position remains strong with net cash balances at the year end of £17.4m (2010: £15.7m).

The Board has proposed that the final dividend be maintained at 11.8p per share, the same level as last year. The total dividend for the year of 18.2p per share (2010: 18.2p) is covered 1.2 times by reported earnings per share, which the Board considers an appropriate level of cover in current circumstances.

STRATEGY

Our aim is to continue to strengthen our position as the UK's leading independent integrated postal group. There are two central planks to this strategy:

First, we continue to enhance the market-leading, low-cost, integrated network that underpins the competitiveness of our businesses. We are doing this by continuing to drive down cost and by investing in our IT infrastructure so as to increase efficiency and introduce new information and data services to the end customer.

Second, we are focused on continuing to expand the size of the markets available to us and on increasing our share of those markets. To do so, we are introducing new and innovative products and services in both our Parcels and our Mail businesses, a number of which are already available to customers and gaining valuable traction.

The current challenging market conditions impact all operators in our markets. We believe our focus on efficiency and innovation, combined with our strong balance sheet, mean we are in a strong position to continue to outperform our competitors and to defend and increase our market share.

Results

The results can be summarised as follows:

Revenue and operating profit are analysed as follows:

Mail

The Mail business enjoyed continued success in attracting good levels of new business as well as generating further mail growth from existing customers. As a result, revenues rose 4.8% to £181.8m (2010: £173.5m).

Within the overall UK mail market, there has been a decline in transactional volumes of some 4% per annum in recent years. An important factor in the continued progress of our Mail business is therefore product innovation, to open up new segments of the mail market and extend our reach.

imail, our web-to-print postal service, now includes appointment cards, 'economy' black and white printing and mailing list production, and is continually being developed to support its market leadership. We have now created a very strong platform for this new concept in the UK mail market, with average daily volumes in March 2011 more than double those of a year ago, and a good pipeline of new opportunities.

Our Packets product, launched in early 2010, enables us to offer customers a price competitive service in a sector that was previously difficult to access. The packets market is the fastest growing segment of the postal market, mainly due to the growth in internet-based shopping. We currently handle up to 20,000 packets per night and continue to add customers to this service, confirming our views on the growth potential for this product and establishing us as a serious player in the c£1.5bn p.a. UK packets market. The next phase for us is to widen the service offering to attract the SME market.

Mail operating profits were down 3.3% to £11.8m (2010: £12.2m) and the operating margin reduced to 6.5% (2010: 7.0%). Pricing in the transactional mail market is very competitive. In the past, we have been able to offset pricing pressures through the increased economies of scale that came from material volume growth; as the market matures, this is more difficult to achieve. The Mail operating margin also suffered a slight impact from the increased operational costs incurred due to the disruption caused by the snow in December 2010.

The Bill for the privatisation of Royal Mail has now largely completed its passage through Parliament and we expect it to become an Act by the time of the Summer recess. One of the key outcomes of the Bill is that Ofcom will effectively replace Postcomm as the mail industry regulator, a move which we support. We continue to believe that the UK postal market needs a successful, commercially focused and efficient Royal Mail operating within a regulated framework where competition benefits the customer and allows the overall mail industry to flourish.

The new Royal Mail pricing regime approved by Postcomm was implemented in May 2011. This has resulted in wholesale prices increasing by some 20% with retail prices increasing by some 15%. There has been a reduction in the pricing headroom between the price we pay Royal Mail for access to their network and the lowest prices that Royal Mail can charge their customers directly. This will have a minor impact on our Mail operating margin given the competitive prices we already charge our customers. We are highly conscious of the impact the price increases will have on our customers, who will see their mailing costs increasing to an unprecedented extent, at a time when most businesses are trying to control their costs tightly, all of which may have an impact on the overall volumes of mail in the UK. We are working closely with our customers both to understand their position and to help them identify the most cost effective mailing route for their business.

From May 2011, in addition to any underlying increase, mail revenues will increase by some 15% purely as a result of the Royal Mail price rise, with the operating margin reducing to a corresponding extent. This overall increase in reported mail revenues is less than the headline wholesale price increase because a significant proportion of our customers operate as Customer Direct Access (CDA) where they pay the access price directly to Royal Mail and we charge them separately for services we provide.

The market backdrop for our Mail business is challenging. Our objective is to strengthen our market leading position by continuing to grow our overall volumes through gaining additional volumes from new and existing customers, together with the benefits from our new product innovations.

Parcels

Revenues in Parcels, which comprises the Group's business-to-business, business-to-consumer and international parcel delivery service, were up 1.2% for the period to £166.7m (2010: £164.7m). Operating profit decreased by 18.9% to £12.1m (2010: £14.8m) with the operating margin at 7.3% (2010: 9.1%).

Parcels performance has been impacted by the effect of business-to-business volume growth remaining subdued in the second half, combined with the disruption caused by the snow in December. This was however largely offset by stronger business-to-consumer volumes, resulting in an overall volume increase of 4.3%.

The impact of the mix effect and the snow, when combined with the continued competitive pricing environment, placed pressure on margins, although this has been largely offset by the continued improvements in the efficiency and effectiveness of our Parcels operation. We continue to be successful in winning new Parcels customers as a result of our high service levels, low-cost network and strong brand in the market.

We continue to drive down costs to improve the profitability of our parcels operations. A key area of focus is our network cost where we are accelerating plans to reduce our fixed cost base in the coming year. We also intend to reduce our vehicle costs through improved route planning and vehicle utilisation, and have taken action to reduce our administrative support costs.

We have recently introduced a number of major improvements to our I.T. infrastructure. These will provide industry-leading facilities to our customers, and to the recipients of the parcels they despatch via our services. All customers can now be notified in advance of expected delivery times and given easy to use facilities if they need to re-arrange deliveries.

As part of these improvements we are introducing a completely new internet platform which will help support business growth and drive down costs.

In May 2010 we launched a new range of logistics services tailored to the specific needs of retailers and targeted at the extensive list of retail customers we have access to through our parcels, mail and courier businesses. This Retail Logistics product is making good progress and we now have a number of major retailers trading with us. We estimate this market to be worth £1.2bn, supporting our view that this represents a significant growth opportunity for the business.

Courier

Revenues in our Courier business, which provides same-day delivery services, increased 7.3% to £19.2m (2010: £17.9m). Operating margins however reduced to 11.3% (2010: 13.3%) leading to a reduction in operating profit to £2.2m (2010: £2.4m). The decline in operating margin reflects, in part, the strong performance last year and, in part, the costs of establishing an extended capability within the wider Group.

We have now developed a highly efficient nationwide courier network with a proven ability to support national contracts, which adds to our ability to offer a fully integrated proposition and supports product development across the Group.

Pallets

Revenues in our Pallets business, which provides a nationwide palletised goods delivery service were down 3.2% for the period to £28.1m (2010: £29.1m). We consider this business to be the most exposed of all our operations to economic conditions. We have however improved the efficiency of our operations and reduced costs, leading to an improvement in the operating margin to 6.4% (2010: 5.9%). This improved margin has more than offset the revenue decline, enabling us to increase operating profit for the period by 6.3% to £1.8m (2010: £1.7m).

We see growth opportunities for this business and will continue to focus on sectors of the distribution market which are best placed to benefit as the economy recovers.

Finance costs

Net interest payable remained at £0.1m (2010: £0.1m).

Cash Flow and Balance Sheet

The Group has a very strong balance sheet with net cash at the end of the period of £17.4m (2010: £15.7m).

The improvement in the net cash is comprised of a slight reduction of £0.1m in cash balances to £22.4m (2010: £22.5m), combined with a reduction in debt of £1.8m to £5.0m (2010: £6.8m). The reduction in debt is due to the repayment of loans and finance lease balances in the year.

Net cash inflow from operating activities totalled £19.3m (2010: £23.3m). Net cash outflow for the period was £0.1m (2010 inflow: £4.5m) which included £0.6m of cash consumed in working capital (2010: £2.7m generated from working capital).

Capital expenditure for the period was £7.8m (2010: £7.0m). The capital expenditure for the period includes £3.8m on IT, as we continue to develop our systems infrastructure, and £3.1m on our network.

Earnings per share

Basic earnings per share decreased 9.4% to 21.2p (2010: 23.4p).

Dividend

The Board has proposed an unchanged Final Dividend of 11.8p (2010: 11.8p), resulting in a total dividend for the year of 18.2p (2010: 18.2p). The Final Dividend is payable on 22 July 2011, to shareholders registered on 24 June 2011.

The total dividend is covered 1.2 times by earnings (2010: 1.3 times). Taking into account the cash generative nature of the business and its current investment needs, the Board considers this level of cover to be appropriate in current circumstances.

CURRENT TRADING & OUTLOOK

Our plans and management actions continue to be based on the assumption that economic conditions will remain tough throughout the current financial year. Trading in the early weeks has been in line with these expectations.

We expect a continued decline in underlying mail volumes in the UK market as a result of the recent price increases imposed by Royal Mail. Whilst this will represent a challenge, we maintain our aim to more than offset this factor through additional mail volumes from new and existing customers, combined with the growth opportunities presented by our new product developments.

Our parcels business is in an increasingly strong position compared to its key competitors thanks to the benefits of our low-cost network and the industry-leading services we are continuing to introduce. This market will remain challenging, but we believe our focus on key customer segments, such as Retail Logistics, should allow us to make progress in the coming year.

Our strategy remains to continue to build competitive advantage, developing and investing in our low cost integrated network, driving down cost, investing in IT infrastructure and bringing to market new products and services to drive profitable revenue growth. By capitalising on our leadership and differentiated positioning, we aim to increase both the size of the markets available to us and our share of those markets.

Guy Buswell

Chief Executive Officer

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 21 of the 2010 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 pages 69 and 70 of the Group's Annual Report and Accounts for the 2010 financial year. These included market, credit, regulatory, price, liquidity, capital and foreign exchange risk. A number of additional principal risks and uncertainties have been identified by the Risk Management Committee; namely IT, business continuity, legislation and regulation, competitive, and fuel risks. Further details will be available within the 2011 Annual Report.

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.

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 condensed consolidated interim financial statements.