Final Results

21 May 2014

UK MAIL GROUP plc

FINAL RESULTS

For the year ended 31 March 2014

Another year of very strong performance;

Significant investment now underway, in preparation for next phase of growth

Highlights

· Group revenues up 7.0% to £508.5m (2013: £475.4m)

o Mail revenues up 1.5% to £245.3m (2013: £241.6m)

o Parcels revenues up 16.2% to £219.9m (2013: £189.3m)

· Group profit before tax up 28.2% to £22.8m (2013: £17.8m)

· Strong balance sheet, net cash at year end of £27.0m (2013: £27.0m)

· Final dividend increased 14.5% to 14.2p per share (2013: 12.4p), giving a total dividend increase for the year of 13.3% to 21.3p (2013: 18.8p)

· Strong levels of customer retention and new client wins

· New Hub and automation projects progressing well

· Good progress with new product and service offering, including imail and ipostparcels

· New scanning software being rolled out to all sites providing one hour delivery windows

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

"These results reflect an excellent year for UK Mail, with increased revenues and strong margin progression. We have also achieved profitable growth across all areas of the business. Such a robust performance shows that we have accomplished almost all that we set out to achieve through the programme of investment and change over recent years.

"As previously announced, we have now entered a new phase of significant investment, in a new automated hub, in additional capacity, and in further developing our range of innovative consumer-facing services. This strategic approach will position us well for the next stage of profitable growth, with the benefits expected to be seen from 2015 onwards."

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Introduction

"These results reflect an excellent year for UK Mail, with increased revenues and strong margin progression. We have also achieved profitable growth across all areas of the business. Such a robust performance shows that we have accomplished almost all that we set out to achieve through the programme of investment and change over recent years.

We continue to benefit from our strong market positions across our business thanks to our efficient integrated network and high service levels. During March 2014 we experienced the highest ever daily volumes across our combined parcels and mail businesses; given the Group's continued focus on network management we maintained our strong customer service levels.

Reported Group revenues for the year at £508.5m were up 7.0% compared to the previous year. Adjusting for there being four extra working days than in the previous year, underlying Group revenues increased by 5.3%. Group profit before tax increased by 28.2% on the previous year to £22.8m. We estimate that each extra working day equates to some £0.5m of contribution. Adjusting for this factor the underlying increase in profit before tax was some 17.0%.

Our Parcels business (43% of group revenues) continued to deliver a good performance, with high volumes throughout the year, leading to an increase in market share and a double-digit operating margin of 10.2% (2013: 8.6%). This volume growth was partly driven by an increase in home deliveries related to online shopping, with a continuation of the mix change towards B2C that we have previously seen. Revenues grew by 16.2% to £219.9m (2013: £189.3m) and operating profit grew strongly by 37.2% to £22.4m (2013: £16.3m) as we continued to focus on innovation and operational efficiency to help drive margin improvement.

Our Mail business (48% of group revenues) showed a 1.5% increase in revenues for the year alongside a positive uplift in volumes, driven by strong customer retention and new business wins. Our mail volumes increased by some 2.0% compared to the prior year, while the overall UK mail market has seen a decline in transactional volumes of some 5% per annum in recent years. Operating profit increased by 18.0% to £12.7m (2013: £10.7m) and the operating margin increased to 5.2% (2013: 4.4%). Our Mail business remains well positioned in its market with a healthy pipeline of new business opportunities. We again saw good progress from imail and related new product innovations.

Our Courier business (3% of group revenues) saw an improving trend of revenue throughout the year, however for the full year revenues declined by 1.9%. Strong operational management reduced operating costs, helping to increase the operating margin to 17.0% for the period (2013: 15.5%), leading to 7.2% growth in operating profit to £2.7m (2013: £2.6m).

In our Pallets business (6% of group revenues) revenues declined by 3.2%, however operating profit increased by 18.8% to £0.9m (2013: £0.8m).

The move of our head office and national hub to a newly constructed site in 2015 will be a major change for our business. The new automated hub will be a significant step forward in how we operate, creating extra capacity and reducing operating costs. The move however will create challenges as we relocate with a key objective being to retain the knowledge and experience of our teams. We have instigated a programme to manage this change which will involve substantial engagement with our staff.

The Board has proposed that the final dividend be increased by 1.8p or 14.5% to 14.2p (2013: 12.4p). The total dividend for the year will increase 13.3% to 21.3p (2013: 18.8p) which is covered 1.50 times by earnings per share.

Our cash generation and financial position remains strong with net cash balances at the period end of £27.0m (2013: £27.0m).

strategy

Our strategy is to grow our revenue and margins by establishing a market leading position in our key markets of parcels, mail and courier services, with a clear focus on network efficiency together with product and service innovation.

Network Efficiency

A low cost, efficient network with high service levels is key to our market position. This allows us to win and retain contracts at good profit levels in a market which continues to be very competitive.

The key factors in achieving this objective are:

An Integrated Network for our Parcels, Mail and Courier Businesses

This integration allows us to spread the fixed costs or our operation and drive operational benefits. The integrated nature of our network, which is unique in the UK, also allows us to offer services our competitors cannot match. We have continued to progress this objective in the current year with further integration of our Courier network providing enhanced delivery facilities for customers.

Extensive and innovative use of I.T.

In our industry I.T. is a key differentiator. We handle some 200,000 parcels each night together with some 11.5m mail items. The ability to track the progress of these items through our network and to provide customers with information on this progress is vital, as is the provision of sophisticated solutions centred on the end-consumer experience.

In the year we have continued to invest in our I.T. infrastructure, increasing capacity and resilience. We have also introduced new data services and information to the end-customer. The key change here has been the introduction of one-hour delivery windows, which puts us alongside the industry leaders in our market.

Strong Operational Management

The organisation and management of our network is vital to achieving the consistently high operational levels we achieve. This comes down to operating disciplines and cost control.

We believe we excel in this area and continue to introduce improvements to help drive down our operating costs whilst improving service levels.

As a reflection of the central importance of strong operational management to the Group's success, Carl Moore, our Group Operations Director, was promoted to the Board with effect from 8th April 2014. With his strong operational focus, wide-reaching experience of parcel distribution networks and of the implementation of automated parcel sortation operations, he is a valuable addition to the Board.

Automation

Effective use of automated sortation is vital in our industry, to further reduce sortation costs and to increase capacity. Having partially automated our operations in 2010, we now handle some 20% of our Parcels volumes through these automated facilities.

We intend to increase the level of automated sortation to some 80% of our Parcels volumes, the maximum we believe our business can achieve at this stage, due to the consignments we handle not all being compatible with automated sortation. As previously announced, this will involve the installation of further automated sortation equipment, at a capital cost of approximately £20m of which some £3.3m has been incurred in the financial year just finished with the balance to be incurred in the new financial year. We are targeting a double digit net return on the automation investment we make and the full run rate of benefits from September 2015.

We estimate that this increased automation of our parcels operations will increase our central sortation capacity by some 45%.

Network Capacity/New Hub

Growing network capacity is vital in a market that continues to show strong growth, largely due to the rapid growth of internet shopping. We aim to achieve this capacity growth through localised expansion of capacity where needed, together with the expansion of our central hub. The expansion of our central hub is overdue and was delayed due to the uncertainty caused by the relocation of our Birmingham hub as a result of the HS2 rail link.

This position was resolved in December 2013, and our new hub is under construction at a site near Coventry. This new hub, together with increased automation, is key to our future growth plans. We expect construction to be completed in late 2014, with the hub being fully operational from mid-2015.

Product and Service Innovation

The second key factor in our strategy is product and service innovation. We are focussed on continuing to expand the size of the markets available to us and on increasing our share of these markets. To do so we have introduced new and innovative products and services in both our Parcels and our Mail businesses. This strategy is gaining valuable traction helping us to win new customers.

The key areas we are progressing are:

imail - a market leading hybrid mail service

imailprint - an internet based printing service, linked to imail, that can meet localised printing requirements

ipostparcels - a leading parcels collection and delivery service targeting the internet end customer/small businesses

Retail Logistics - a parcel delivery service targeting the needs of retail businesses

Packets - a packet collection and delivery service providing cost effective solutions in conjunction with Royal Mail's delivery service

istore - a localised storage and delivery service targeting local repair engineer services that need fast access locally to parts and components

More details are provided on the progress of these initiatives in the following review.

Strategy Summary

Over the past three years, excellent progress has been made in developing the business to its current position, with a clear focus on network efficiency and product innovation. The result is a robust operational platform and strong competitive positions in our chosen markets. The new products that we have introduced have gained valuable traction, and we have become a significantly more consumer-focused business. The benefits can be seen in the strong results we have achieved.

As previously announced, we are now entering the next phase of strategic investment, targeting significant improvements in our capacity, customer-facing technology, IT infrastructure and automation. Combined, these will create the platform for the next chapter of growth over the coming years.

Results

The results can be summarised as follows:

Revenue and operating profit are analysed as follows:

Parcels

Revenues in Parcels, which comprises the Group's business-to-business (B2B), business-to-consumer (B2C) and international parcel delivery service, were up 16.2% to £219.9m (2013: £189.3m). On an adjusted basis, taking account of the four extra days compared to last year, they increased by some 14.2%.

We have achieved strong volume growth in both the B2B and B2C market segments throughout the period, with Parcels average daily volumes increasing by some 19% compared to last year. This performance is driven by good customer retention and a number of high quality customer wins. We continue to see an on-going volume mix change towards the lower margin B2C segment.

The strong volume growth allows us to spread our fixed costs across the increased volumes and so improve our operating margins. As a result, despite the continued competitive pricing environment, we have improved our Parcels operating margin to 10.2% for the year (2013: 8.6%).

The good growth in revenues combined with the operating margin increase has led to a strong growth in the Parcels operating profit of 37.2% to £22.4m (2013: £16.3m). On an adjusted basis, taking account of the additional working days, operating profit grew by some 27.5%.

We continue to make progress with our specialised Retail Logistics product, which provides services tailored to the specific needs of retailers, with a special capability to handle hanging garments. Following the opening of our specialist distribution centre in July 2013, we have now introduced automated sortation capabilities for hanging garments as well as improved software which allows us seamlessly to combine our Parcels and Courier networks, providing a more flexible, integrated product for our customers.

ipostparcels represents one of the lowest-cost and most user-friendly online collection and delivery services available in the UK. While growth slowed slightly year on year as the business becomes more established among our target customer base, 2013 Christmas volumes were double those achieved in the previous year.

The overall UK parcels market is growing rapidly but remains highly competitive. While we experienced the usual mix of contract changes over the period, we continue to be successful in winning new customers as a result of our high service levels, low-cost network, our strong brand, and dislocation elsewhere in the market. To allow us to handle these increasing volumes we continue to expand our capacity, with three sites in our fifty-strong network having been expanded during the period and up to eight additional sites earmarked for expansion in the next 12 months.

Key to our parcels market position is the provision of value added services that customers increasingly demand. In March we introduced our enhanced next day delivery service that will offer advance-notice one-hour delivery and collection windows which can easily be re-arranged. This includes our new "You're Next" texting service to inform customers when their delivery is some ten minutes away; an industry first which will further improve the first time delivery experience for our customers. This added functionality gives Parcels tremendous opportunity for customer acquisition and puts us firmly in the top tier of an increasingly polarised market.

Looking forward, we expect Parcels growth to slow during the 2014/15 financial year as our capacity is partially constrained ahead of the increases in which we are investing coming on stream.

Mail

Mail revenues increased by 1.5% to £245.3m (2013: £241.6m). On an adjusted basis, taking account of the four extra days compared to last year, they declined by some 0.4%. This decline however was largely caused by a mix change towards Customer Direct Access (CDA) mail, which carries a lower revenue per item.

Our mail volumes increased by some 2.0% compared to the prior year, while the overall UK mail market has seen a decline in transactional volumes of some 5% per annum. This growth in market share has been achieved through generating additional mail volumes from existing customers, and a number of new customer wins.

Mail operating profits increased by 18.0% to £12.7m (2013: £10.7m). On an adjusted basis, taking account of the additional working days, the increase was some 14.0%. The operating margin increased to 5.2% (2013: 4.4%).

UK Mail remains a market leader with an operational template that is ideally suited to adapt to the demands of an evolving mail market, and we have continued to focus on growing our business by gaining additional volumes from new and existing customers, and on investing for the future. To increase the efficiency of our operations and to provide additional facilities to our customers we have invested in two new, state-of-the-art, mail sortation machines, at a capital cost of some £0.9m, which reflects our confidence in the future prospects of our mail business.

In February 2014 Ofcom announced that it was to investigate a complaint from TNT concerning certain access prices introduced in April 2014. In April 2014 Ofcom confirmed that this would be dealt with under its Competition Act powers. We believe this Ofcom investigation has no direct effect on UK Mail. It does however create uncertainty in the wider market and we would trust that Ofcom resolves the matter as swiftly as practical. In April 2014 Ofcom also announced a review of access mail arrangements. We will fully assist with this review but, again, see no direct implications for our business.

imail, our web-to-print postal service, continues to show healthy growth and monthly items are now in excess of 2m. We continue to invest to increase our capacity and provide additional services, such as high speed insertion, and this year we launched a brand new website for the service, providing customers with enhanced personalisation options, innovative data services, and a new suite of products. This includes the introduction of advanced software and functionality for SME clients to promote integrated customer communications strategies.

The success of imail has meant that we have become the fastest growing digital printer of our type in the UK. Our area of speciality remains small run printing. We have now decided to build on this business to create 'imailprint'. This will provide a specialist printing service which, rather than being purely mailed as with our current service, can produce printed documents for general usage. We see this as a natural, low risk, medium-term growth opportunity.

Packets represents an exciting new growth area for the Group. We have recently launched a new packets service, based on a new agreement with Royal Mail which will allow us to offer customers a two/three day, low cost delivery service. The new agreement enables us to collect packets, using our nationwide efficient network, and sort them for final delivery by Royal Mail. This combination allows us to provide a profitable product to customers which can compete with the 'lifestyle couriers' who provide a basic service at low cost. We estimate the packets market to be worth some £1.2bn, of which we estimate some £200m is handled by 'lifestyle couriers'.

We would expect the new packets product to make a positive contribution in the new financial year with good medium-term growth prospects once it is fully established in the market.

Courier

Revenues in our Courier business, which provides same-day delivery services, decreased slightly by 1.9% to £16.2m (2013: £16.5m). We are continuing to focus on national contracts that can leverage our network and blue chip customer base. Operating margins increased to 17.0% (2013: 15.5%) helping to increase operating profit by 7.2% to £2.7m (2013: £2.6m). The increase in operating margin reflects the actions management have taken to improve operational effectiveness and reduce overheads in the business.

Our Courier network also provides the 'istore' service. This involves the local storage of parts and components for which service engineers need easy access to complete timely service jobs. We provide the storage facilities, largely in our parcels depots, and the courier delivery service to the engineers. This is a growing market in which we have developed a market leading position.

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, decreased by 3.2% to £27.1m (2013: £28.0m). Operating profit for the period however increased by 18.8% to £0.9m (2013: £0.8m).

The Pallets business is based on a national network of members. In the last financial year we experienced temporary gaps in the network which reduced input volumes and gave rise to additional delivery costs. Those gaps are resolved although it is taking time for the new members to achieve the sales volumes that would be expected from established members. Operating profits have now started to recover as these plans have taken effect.

Changes we have made to our Pallets business have resulted in a more sustainable business model for the future and we remain convinced that it can be successful in a market with good long term growth prospects.

Central costs

Central costs increased by 26.2% to £16.0m (2013: £12.7m). This increase is largely due to increased I.T. costs, reflecting our increased investment in this key area.

Net Finance Income

We have benefited from the good cash balances maintained in the period. As a result we generated net interest income of £0.1m (2013: £0.1m).

Financial Position

The Group has maintained its financial position during the year. Despite the initial investment in our new hub and in automation - details of which are set out below - we had net cash at the end of the period of £27.0m (2013: £27.0m).

Net cash inflow from operations totalled £33.2m (2013: £31.1m). Net cash outflow for the period was £0.8m (2013: inflow £6.6m) which included £1.6m of cash generated from working capital (2013: £5.6m).

The Group paid £10.7m (2013: £9.9m) of dividends during the period.

To provide funding for the investment in the new hub and automation the Group put in place a £25m five year revolving credit facility with Lloyds Bank plc on 14 May 2014. This facility will support the cash requirements of the investment programme.

Capital Expenditure

Capital expenditure for the period included our underlying business capital expenditure combined with the initial investment in our new hub and in automation.

This can be summarised as follows:

The underlying capital expenditure includes £6.6m on I.T. as we continue to develop our system infrastructure, and £3.3m on our network.

The investment in the new hub is the cost of the land together with the initial payments for the construction contract. The total expected to be spent on the land and building over the period to March 2015 is some £35m. We expect our contribution to the building of the new hub will be some £15m which covers the enhancement of the site and building beyond the scale of the current facility. The investment in automation reflects the initial payments for the design and development of the hub and network automation equipment. As previously guided, the total expected to be spent on this equipment, over the period to September 2015, is some £20m.

HS2

In December 2013 we reached agreement with the Secretary of State for Transport concerning compensation for the relocation of our Birmingham hub as a result of the proposed High Speed Two (HS2) railway.

This will involve the sale of our Heartlands site to the Department for Transport (DfT) and the relocation of our central hub and Head Office to a newly constructed facility near Coventry.

The value we have agreed with the DfT and HS2 Ltd for our Heartlands site is £9.5m. £8.6m of this value was received in December 2013, with the balance payable from the DfT when we fully vacate the Heartlands site and complete the deal, expected to be in late 2015. We have also agreed further specific compensation payments with the DfT and HS2 Ltd. Of these amounts, £2.9m was received in the period with the balance to be received over the next two financial years.

The costs of the move to the new site, including the I.T. data centre move and related staff costs will be incurred over the next two financial years. We anticipate that these costs will be compensated by the DfT and HS2 Ltd (subject to the requirements of the Compensation Code).

Earnings per share

Basic earnings per share increased 29.6% to 32.0p (2013: 24.7p).

Dividend

The Board has proposed a 14.5% increase in the Final Dividend to 14.2p (2013: 12.4p), resulting in a total dividend for the year of 21.3p (2013: 18.8p), an increase of 13.3%. The Final Dividend is payable on 25 July 2014, to shareholders registered on 27 June 2014.

The total dividend is covered 1.50 times by earnings (2013: 1.31 times). The Board believes this level of Dividend cover is appropriate for our business.

CURRENT TRADING AND OUTLOOK

Trading in the initial weeks of the current financial year has been as anticipated. We continue to see good growth in parcels volumes, albeit inevitably at a lower rate than in the second half of last year, reflecting the higher base and our current partial capacity constraints.

As previously announced, we have now entered a new phase of significant strategic investment which will set us up well for the next stage of profitable growth, with the benefits expected to be seen from 2015 onwards.

Our expectations for the current year therefore remain unchanged.

With the strength of our market positions, a well-invested integrated and automated network, and a growing suite of innovative and industry-leading products and services, we are excited by the medium term growth prospects for UK Mail.

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 26 of the 2013 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 page 16 of the Group's 2013 Annual Report and Accounts. These included risks relating to IT systems, business continuity, the building of and relocation to our new hub, legislation and regulation, competition and fuel factors, in addition to financial risks including credit risk. It is considered that these still remain the most likely areas of potential risk and uncertainty, with the position unchanged from that set out in the 2013 Annual Report and Accounts.

Cautionary statement

This interim 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. Nothing in this report should be construed as a profit forecast.

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.

Consolidated Statement of Comprehensive Income

for the year ended 31 March 2014

Consolidated Balance Sheet

as at 31 March 2014

Cash Flow Statements

for the year ended 31 March 2014

Consolidated Statement of Changes in Equity

for the year ended 31 March 2014

1. Segmental information

2. Earnings per share 

Basic earnings per share have been calculated by dividing the profit for the year by the weighted average number of ordinary shares in issue for the year ended 31 March 2014 of 54,705,627 (2013: 54,632,719). Diluted earnings per share have been calculated by adjusting the weighted average number of ordinary shares for the effect of the exercise of share options, increasing the number of shares to 54,972,297 (2013: 54,707,761).

3. Analysis of net cash

4. General information

(i) Statutory Accounts

The financial information set out above does not constitute the Group's statutory accounts for the year ended 31 March 2014 within the meaning of section 435 of the Companies Act 2006. Financial Statements for the year ended 31 March 2014 will be delivered to the registrar of companies in due course. PricewaterhouseCoopers LLP has reported on these financial statements and their report was (i) unqualified, (ii) did not include a reference to any other matters to which the auditors drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 498(2) or (3) of the Companies Act 2006.

(ii) Accounting policies

The accounting policies applied by the Group in its consolidated financial statements for the year ended 31 March 2014 are in accordance with International Financial Reporting Standards and IFRIC interpretations as adopted by the European Union (Adopted IFRSs) and the Companies Act 2006 applicable to companies reporting under IFRS. The accounting policies, which have been applied consistently to all the years presented, are set out in those financial statements.