Final Results

22 May 2012

UK MAIL GROUP plc

FINAL RESULTS

For the year ended 31 March 2012

Highlights

·; Group revenues up 8.4% to £429.0m (2011: £395.8m)

o Mail revenues up 14.5% to £208.1m (2011: £181.8m)

o Parcels revenues up 3.2% to £172.1m (2011: £166.7m)

·; Group profit before tax (before exceptional items) £15.1m (2011: £16.1m) reflecting a reduction in margins and the impact of one less working day

·; Exceptional items of £2.2m (2011: £nil) relating to restructuring costs

·; Group profit before tax of £12.9m (2011: £16.1m)

·; Strong balance sheet, net cash at year end of £18.4m (2011: £17.4m)

·; Final dividend maintained at 11.8p per share (2011: 11.8p), giving a total dividend of 18.2p (2011: 18.2p)

·; Continued focus on innovation and efficiency to build our share in an evolving market

·; New products and service offerings, including imail and ipostparcels, making good progress

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

"These results show UK Mail's resilience during a year of tough trading conditions, in markets that are undergoing fundamental change.

"We have made progress in developing our business, investing in our highly efficient network, and driving down cost. We have achieved very high service levels even during peak times when we have handled record volumes, and the new products we have brought to market - such as ipostparcels.com and imail - are going well.

"Trading in the initial weeks of the new financial year has been in line with our expectations. We fully expect the economic backdrop to remain tough in 2012 and the pricing environment to stay highly competitive. We are planning accordingly, with tight control of our costs continuing to be a key focus.

"We have leading and differentiated positions in our markets, a highly competitive business model, and a strong balance sheet which gives us strategic flexibility. We are therefore confident that we will come through this period of significant change in our industry not just as a survivor, but as one of the strongest players in the markets in which we operate."

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Introduction

UK Mail has delivered a resilient performance, and has made important strategic progress, in a year that has seen a continuation of tough and highly competitive trading conditions, and some fundamental change taking place in our industry. The result is that, despite lower profitability in the year, we have maintained our stability and our market-leading positions, improved our strong operating model, and are competitively well positioned for the future.

Reported Group revenues for the year at £429.0m were up 8.4% compared to the previous year. Adjusting for the increase in Royal Mail prices implemented on 6 May 2011, underlying Group revenues increased by 3.2%. Group profit before tax before exceptional items at £15.1m was down £1.0m on the previous year, although £0.5m of this decrease is a result of there being one less working day in the period.

Our Mail business grew its revenues on a reported basis by 14.5%; on an underlying basis, revenues were up by 3.2% compared with the previous year. Mail operating profit reduced compared to the prior year as the continued competitive pricing environment, combined with actions taken by Royal Mail which reduced operational tolerances for all mail operators, led to a reduction in our Mail operating margin. Our Mail business remains well positioned in its market with a healthy pipeline of new business opportunities. We saw good progress from our new product area of imail and this should have a beneficial impact on operating margins in the future.

Our Parcels business grew its revenues by 3.2% compared to the previous year reflecting the benefit of recent customer wins, albeit in a pricing environment that remains challenging and with a continuation of the shift in mix towards B2C. This mix effect has impacted the parcels operating margin and the underlying parcels operating profit. We continue to focus on innovation and improving our operational efficiency to help offset the effects of a challenging market.

In our Courier business, contract wins from the prior year helped deliver good revenue and profit growth.

Our Pallets business has performed well in a market that remains challenging, with revenues up on last year and a good increase in operating profit as a result of strong operational management.

We have taken further action to reduce the fixed costs of our business. We have closed four depots, reducing our total number of mail and parcels sites to 50. Along with some restructuring in a number of other areas of our business, this has resulted in one off exceptional costs of £2.2m.

Our financial position remains strong, with net cash balances at the year end of £18.4m (2011: £17.4m).

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 (2011: 18.2p) is covered 1.1 times by earnings per share (pre-exceptional items), 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 the cost base of our business and reshaping our depot network to maximise its efficiency. We have continued to invest in our IT infrastructure so as to increase efficiency and introduce new information and data services to the end customer and will continue to consider future investment opportunities assuming suitable financial returns can be achieved.

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 have introduced new and innovative products and services in both our Parcels and our Mail businesses, a strategy which is gaining valuable traction.

Our whole industry is being affected by some real challenges and fundamental forces of change, from the rise of e-commerce through shrinking volumes in traditional mail, large scale consolidation to the forthcoming Royal Mail privatisation.

We have been working hard in recent years through driving efficiencies and introducing major product and service innovations, to position ourselves as competitively as possible to outperform our competitors and to increase our market share.

One key element that would increase our capability and drive down costs is the further automation of our network. Following the successful partial automation of our Birmingham hub in 2010 we are developing further plans in this area and will provide details in the months ahead.

Results

The results can be summarised as follows:

Revenue and operating profit are analysed as follows:

Mail

Mail showed further growth in revenues of 14.5% to £208.1m (2011: £181.8m). The Mail revenue growth includes the impact of the Royal Mail price increase on 6 May 2011, which increased prices by some 15% on an annualised basis. On an underlying basis, revenues increased by 3.2%.

Our mail volumes decreased by 2% compared to the prior year. 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.

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 driving our new product innovations.

imail, our web-to-print postal service, continues to grow successfully. We are continuing to develop this product to support its market leadership. Average daily volumes in March 2012 were more than double those of a year ago. We have a healthy pipeline of new opportunities for this product as we identify new areas where it can be applied successfully.

Mail operating profits were down 15.3% to £10.0m (2011: £11.8m). The operating margin reduced to 4.8% (2011: 6.5%), of which some 0.9% is the mathematical result of the 15% price increase imposed by Royal Mail. The balance of the margin reduction is caused by the pricing environment in the transactional mail market remaining very competitive, a mix change towards business class which has a lower margin percentage, and actions taken by Royal Mail to reduce operational tolerance and increase specification surcharges for all mail operators, driving up our operating costs in the year. Working closely with our customers we have now adapted our operating approach to substantially reduce this additional cost factor going forwards.

In April 2012 Ofcom officially replaced Postcomm as the mail industry regulator. In March 2012 Ofcom published their decision document on the regulatory regime that will apply from April 2012 and the regulatory conditions which will apply to postal operators in general and Royal Mail in particular. This regime will apply until April 2019. The key factors for UK Mail are that Ofcom has continued to mandate independent/third party access to the Royal Mail delivery network, with the headroom between retail and access prices protected by Ofcom but at reduced levels. Royal Mail have published their prices for April 2012 which fall within this control regime but which involve a further increase in prices for business mail users of some 11%. Given the competitive nature of our mail pricing, we do not expect any impact on our mail margins, however we remain concerned about the overall impact on mail market volumes of such continued price increases.

Ofcom is currently allowing the introduction of some limited end-to-end competition with Royal Mail, but having explored this area fully we do not currently see it as an attractive option to pursue. Regulatory conditions can be applied by Ofcom, and there are VAT implications, "over-labelling" requirements, and significant investment in infrastructure involved, without generating any clear return.

Parcels

Revenues in Parcels, which comprises the Group's business-to-business, business-to-consumer and international parcel delivery service, were up 3.2% for the year to £172.1m (2011: £166.7m). Operating profit decreased by 4.2% to £11.6m (2011: £12.1m) with the operating margin at 6.8% (2011: 7.3%).

Due to the fixed cost nature of our parcels business, the impact of one less working day reduced operating profit by some £0.4m with an impact on the operating margin of some 0.2%.

Performance was also impacted by the effect of business-to-business revenue growth remaining subdued. This effect has been largely offset by the further improvements in the efficiency and effectiveness of our Parcels operation.

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 have accelerated the plans to reduce our fixed cost base. This has resulted in the closure of four depots, reducing our total number of sites to 50, along with restructuring in a number of support areas.

We have recently introduced a number of major improvements to our I.T. infrastructure. These include the provision of industry-leading functionality 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 have also introduced a completely new internet platform which will help support business growth and drive down costs.

A key factor in driving down the operating costs of our Parcels business is the use of automated sortation. We introduced a major sortation facility into our Birmingham hub in October 2010, which has proved successful. We are continuing to review the potential opportunities to extend the benefits of automation across our network and will provide an update when appropriate.

Our Retail Logistics product, which provides services tailored to the specific needs of retailers, continues to make good progress. This service is targeted at the extensive list of retail customers we have access to through our mail, parcels and courier businesses, and we now have a number of major retailers trading with us. We estimate the Retail Logistics market to be worth £1.2bn overall, supporting our view that this represents a significant growth opportunity for the business. We have recently enhanced our service offering to include the ability to handle hanging garments, as well as providing customers with returns and inter-store transfer facilities.

The overall parcels market in the UK is challenging with growth linked to economic performance in a highly competitive environment. Our target position in this market is to be a high quality operator which provides the value added services that customers want. The key here is a reliable next day service, providing customers with estimated delivery windows, which can easily be re-arranged, with the use of I.T. to provide added information. 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. Our service levels remain at very high levels; even during the peak seasons of the year, when we achieved our highest ever service levels whilst handling record parcel volumes.

There is an increasing trend for parcel collection and delivery services to be purchased on-line, rather than through the traditional contract based approach. This trend is partly caused by the growth of on-line transaction sites, such as ebay and Amazon Marketplace, which allow small businesses to reach their customers directly. In response to this trend we launched in November 2011 our on-line parcel collection and delivery service, www.ipostparcels.com, which allows any customer, be they an individual or a small business, to arrange parcel collection and delivery directly with UK Mail through an easy to use website. This highly innovative service makes UK Mail's parcels offering more accessible to a much wider audience of small businesses and consumers, and has shown rapid growth since its launch. We continue to develop the service to be industry leading.

Courier

Revenues in our Courier business, which provides same-day delivery services, increased 6.8% to £20.5m (2011: £19.2m). Operating margins increased to 13.4% (2011: 11.3%) leading to an increase in operating profit to £2.7m (2011: £2.2m). The increase in operating margin reflects the actions we have taken to improve effectiveness and reduce overheads in the business.

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. We are implementing plans to utilise our parcels network to handle some of the deliveries that are currently handled by our courier network as this can provide a more cost effective solution.

Pallets

Revenues in our Pallets business, which provides a nationwide palletised goods delivery service, increased by 0.5% for the year to £28.3m (2011: £28.1m). We have again improved the efficiency of our operations and reduced costs, leading to an improvement in the operating margin to 7.4% (2011: 6.4%). The improvement in revenue and margin led to an increase in operating profit for the year of 16.1% to £2.1m (2011: £1.8m).

This business has performed well in a market that remains challenging, and we will continue to focus on sectors of the distribution market which are best placed to benefit as the economy recovers.

Exceptional Items

As previously indicated the Group has taken action to reduce its fixed cost base. As a result we have incurred exceptional costs of £2.2m (2011: £nil). The actions involved a number of initiatives including a reduction in headcount and the closure of four sites, resulting in redundancy costs of £1.2m, property related costs of £0.8m, and other costs of £0.2m.  £0.8m of this cost is a cash cost in the year.

Finance costs

Net interest payable was £nil (2011: £0.1m). Our finance costs remain low as we continue to maintain good cash balances and repay debt.

Cash Flow and Balance Sheet

The Group has a strong balance sheet with net cash at the end of the period of £18.4m (2011: £17.4m).

Net cash inflow from operating activities totalled £17.3m (2011: £19.3m). Net cash outflow for the period was £0.8m (2011: £0.1m) which included £0.2m cash generated from working capital (2011: £0.6m consumed).

Capital expenditure for the period was £6.5m (2011: £7.8m). The capital expenditure for the period includes £3.3m on IT, as we continue to develop our systems infrastructure, and £2.5m on our network.

Earnings per share

Basic earnings per share decreased 18.6% to 17.3p (2011: 21.2p). The underlying basic earnings per share, excluding the impact of exceptional items, decreased 5.3% to 20.1p (2011: 21.2p).

Dividend

The Board has proposed an unchanged Final Dividend of 11.8p (2011: 11.8p), resulting in a total dividend for the year of 18.2p (2011: 18.2p). The Final Dividend is payable on 27 July 2012, to shareholders registered on 29 June 2012.

The total dividend is covered 1.1 times by earnings pre-exceptional items, or 0.95 times post-exceptionals (2011: 1.2 times). Taking into account the cash generative nature of the business and its investment needs, the Board considers this level of cover to be appropriate in current circumstances.

CURRENT TRADING & OUTLOOK

Trading in the initial weeks of the year has been in line with our expectations.

We continue to assume that UK economic conditions will remain tough throughout 2012 and tight control of our costs will remain a key focus to offset the impact of the competitive pricing environment.

We expect a continued decline in underlying mail volumes in the UK market, exacerbated by the price increases imposed by Royal Mail. We will maintain our focus on winning additional mail volumes from new and existing customers and driving the growth opportunities presented by our new product developments.

The parcels market will also remain challenging and highly competitive, but we believe our focus on key customer segments such as Retail Logistics and new product innovations such as ipostparcels.com will allow us to make further progress. There are major changes taking place in the parcels market place, and our parcels business remains in a 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.

Our strategy remains to continue to build competitive advantage, through further investment in our low cost integrated network, driving down cost 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, and to take advantage of any opportunities that arise as those markets evolve.

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 2011 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 15 of the Group's 2011 Annual Report and Accounts. These included risks relating to IT systems, business continuity, 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 2011 Annual Report and Accounts. Two further risks have been identified since that date relating to the potential impact of the 2012 London Olympics on our parcel delivery operation, and the potential impact of the High Speed 2 rail link on our Birmingham hub. Actions are being taken to minimise the impact of both risks.

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 2012

The profit for the financial year arises from the Group's continuing activities, and is wholly attributable to equity holders of the Company.