Half Yearly Report

20th November 2013

UK MAIL GROUP plc

INTERIM RESULTS

For the 6 months ended 30 September 2013

Highlights

· Group revenues up 7.9%; group operating profit up 63.2%

o Parcels: revenues up 21.4%; operating profit up 91.3%

o Mail: revenues down 0.3%; operating profit up 10.9%

· Group profit before tax up 63.0% to £11.9m (2012: £7.3m)

· Strong balance sheet, net cash at period end of £19.5m (2012: £15.7m)

· Interim dividend increased by 10.93% to 7.1p per share (2012: 6.4p)

· Strong levels of customer retention and new client wins

· Further growth in market share as competitive and market landscape evolves

· New products and service offerings, including imail and ipostparcels, continue to make good progress

· Plans progressing for relocation of Birmingham hub and increased automation

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

"This has been a period of very strong growth, driven particularly by strong increases in our parcels volumes. Trading to date in the second half has been in line with our expectations and we remain confident of a positive outcome for the full year.

"This strong performance reflects the excellent progress made over the past three years. We have created a robust operational platform, strong competitive market positions, and we are a much more consumer-focused business.

"We are now entering the next phase of strategic investment. With significant steps forward planned over the next two years in our capacity, customer-facing technology, I.T. infrastructure and automation, these investments will create the platform for the next chapter of growth for the Group over the coming years."

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Introduction

This has been a period of very strong growth for UK Mail. Good levels of trading continued throughout the first half of the year, driven particularly by strong increases in Parcels volumes.

Reported Group revenues for the first half increased by 7.9% compared to the same period in the previous year. Adjusting for there being three extra working days compared to the same period in the previous year, underlying Group revenues increased by 5.3%. Group profit before tax increased by 63.0% on the previous year to £11.9m. 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 42.5%.

Our Parcels business (43% of group revenues) grew revenues by 21.4% compared to the same period in the previous year. Adjusting for the extra working days the revenue increase was 18.6%. This revenue growth was supported by average daily volume growth of 25%, driven largely by an increase in home deliveries related to on-line shopping. Despite the pricing environment in Parcels remaining challenging, and the mix effect, the operating margin improved to 10.6% (2012: 6.7%), leading to strong growth of 91.3% in operating profit to £11.1m (2012: £5.8m). On an adjusted basis, taking account of the additional working days, operating profit grew by some 67%. We continue to focus on innovation and on operational efficiency to help drive further margin improvements.

Revenues in our Mail business (48% of group revenues) reduced by 0.3%. The reduction in revenue was caused by a mix change, with mail volumes actually increasing slightly in the half year, compared to a market that saw an overall volume decline of some 5%. This volume growth was driven by strong customer retention and new customer wins. Operating profit increased by 10.9% to £6.3m (2012: £5.7m) and the operating margin increased to 5.5% (2012: 4.9%). On an adjusted basis, taking account of the impact of the additional working days, operating profit grew by some 8.2%. 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.

In our Courier business (3% of group revenues) revenues declined slightly by 4.4%. Strong operational management reduced operating costs, helping to increase the operating margin to 17.8% for the period (2012: 13.5%), and leading to 25.9% growth in operating profit to £1.4m (2012: £1.1m).

In our Pallets business (6% of group revenues) revenues declined by 1.6% and operating profit declined by 26.1% to £0.6m (2012: £0.8m).

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 achieved for the first half.

We are now entering the next phase of strategic investment, with significant steps forward planned 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.

We continue to make progress with our previously announced plans to relocate our Birmingham hub and to introduce further automation into our parcels operations.

Our financial position remains strong, with net funds at the period end of £19.5m (2012: £15.7m).

The Board has declared an Interim Dividend of 7.1p; an increase of 10.9% (2012: 6.4p).

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 21.4% for the period to £105.8m (2012: £87.2m). On an adjusted basis, taking account of the three extra working days compared to the same period last year, Parcels revenues increased by some 18.6%.

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 25% compared to the same period last year. This performance is driven by good customer retention and a number of good 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 10.6% for the period (2012: 6.7%). On a comparable basis (allowing for the three additional working days) the operating margin would have been some 9.5%.

The good growth in revenue combined with the operating margin increase has led to a strong growth in the Parcels operating profit of 91.3% to £11.1m (2012: £5.8m). On an adjusted basis, taking account of the additional working days, Parcels operating profit grew by some 67%.

We are making further progress with developing our specialised Retail Logistics product, which provides services tailored to the specific needs of retailers, with a special capability to handle hanging garments. We opened our specialist distribution centre in July 2013, and automated sortation capabilities for hanging garments will be introduced in the second half. We have also introduced improved software which allows us to seamlessly combine our Parcels and Courier networks to provide a flexible product to customers.

Our ipostparcels product allows any customer, whether an individual or a small business, to arrange parcel collection and delivery directly with UK Mail through an easy-to-use website. This product has been successfully established in the market and is achieving rapid growth, now handling some 12,000 items per week. In the period we introduced an international service to this product, and we will continue to develop and market this product which we see as a good source of future profitable growth.

The overall UK parcels market is growing rapidly but remains highly competitive. We continue to be successful in winning new customers as a result of our high service levels, low-cost network, our strong brand in the market, 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 a further eight earmarked for expansion in the next 12 months.

Our strategy in Parcels is to position ourselves as a high quality operator, differentiated by our provision of the value-added services that customers increasingly demand. We have already made important progress with our driver scanners, and new software and systems will be implemented in the coming months to provide customers with industry leading service and functionality. This will include the capability to provide a next day delivery service that offers clear one-hour delivery and collection windows which can easily be re-arranged, and the use of I.T. to provide added functionality and information including text alerts and a web presence through which recipients can readily manage their delivery. We also expect to launch a service within the next six months which will allow customers to deliver and collect parcels from locker boxes and parcel shops. As a result, we will be even more clearly differentiated as a "best in class" parcels operator.

Automation/New Hub

We are continuing to progress our plans to introduce further automated sortation into our Parcels operations. The expectation remains that this will cost some £20m which we will incur over the course of this and the next financial year. We have spent £0.5m in the first half of this year with a further £4.5m planned for the second half with the balance to be spent in the next financial year.

We are targeting a double digit net return on the investment we make. We expect the automated sortation to go live in early 2015 with the full run rate of benefits being achieved from September 2015.

The timing of our plans for automation is linked to the relocation of our Birmingham hub which is required due to the HS2 rail link. Following Parliamentary approval of the Paving Bill for HS2, we expect to complete our contract with HS2 and for it to become unconditional in December 2013. Subject to receipt of planning consent, we would expect construction to start in early 2014 and to be completed by the autumn of 2014.

We expect that our capital contribution to the building of the new hub will be some £10m which covers the enhancement of the site and building beyond the scale of the current facility. Of this amount some £5m will be incurred in the second half of this financial year with the balance in the next financial year.

The expenditure on the new hub together with the automation expenditure, will be covered from existing cash resources and new bank facilities.

Mail

Mail revenues declined by 0.3% to £115.6m (2012: £115.9m). On an adjusted basis, taking account of the three extra days compared to the same period last year, Mail revenues declined by some 2.6%. 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 actually increased slightly compared to the prior year, which compares to the expected overall UK mail market decline in 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 10.9% to £6.3m (2012: £5.7m), and the operating margin increased to 5.5% (2012: 4.9%). On a comparable basis (allowing for the three additional working days) the operating margin would have been some 5.1%.

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 £0.8m which reflects our confidence in the future prospects of our mail business.

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.

An important factor in this volume growth is product innovation. imail, our web-to-print postal service, continues to grow strongly. We have invested to increase our capacity and to provide additional services, such as high speed insertion, and we are now developing this product further to support its market leadership, including the addition of data services. imail monthly volumes are now some two million items, average daily volumes are more than 60% higher than a year ago, and we are identifying new areas where the product can be applied.

In the coming months we will also be developing our plans for the rapidly growing Packets market, where we see a good opportunity to further increase our market share.

Courier

Revenues in our Courier business, which provides same-day delivery services, decreased slightly by 4.4% to £7.9m (2012: £8.3m). We are continuing to focus on national contracts that can leverage our network and blue chip customer base. Operating margins increased to 17.8% (2012: 13.5%) helping to increase operating profit by 25.9% to £1.4m (2012: £1.1m). The increase in operating margin reflects the actions management 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.

Pallets

Revenues in our Pallets business, which provides a nationwide palletised goods delivery service, decreased by 1.6% to £14.1m (2012: £14.3m). Operating profit for the period declined by 26.1% to £0.6m (2012: £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 will take time for the new members to achieve the sales volumes that would be expected from established members. This means that operating profits in the current financial year will be held back from previous achieved levels.

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 23.8% to £7.6m (2012: £6.2m). This increase is largely due to increased I.T. costs, reflecting our increased investment in this key area.

Finance costs

We have benefitted from the good cash balances maintained in the period. As a result we generated interest income of £0.1m (2012: £0.1m).

Cash Flow and Balance Sheet

The Group has a strong balance sheet with net funds at the end of the period of £19.5m (2012: £15.7m).

Net cash inflow from operating activities totalled £4.7m (2012: £8.3m). Net cash outflow for the period was £8.2m (2012: £3.4m) which included £9.3m of cash consumed in working capital (2012: £1.0m). The normal first half trend for our business is of a working capital outflow, this outflow is larger than normal reflecting increased trade levels and some increases in the trading terms our customers require.

Capital expenditure for the period, including assets acquired under finance leases, was £6.7m (2012: £4.7m). The capital expenditure for the period includes £2.6m on network and automation equipment and £3.3m on IT, as we continue to develop our systems infrastructure.

The Group paid £6.8m (2012: £6.4m) of dividends during the period being the 12.4p final dividend approved at the AGM on 10 July 2013 (2012: 11.8p).

Earnings per share

Basic earnings per share increased 69% to 17.0p (2012: 10.1p).

Dividend

The Board has declared an increased Interim Dividend of 7.1p; an increase of 10.9% (2012: 6.4p), to be paid on 17 January 2014 to shareholders registered on 6 December 2013.

CURRENT TRADING & OUTLOOK

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

We continue to expect that the rate of year-on-year Parcels volume growth moderates in the second half compared to that achieved in the first, as we annualise the higher growth achieved in the second half of last year. As we move into the peak period running up to Christmas, we will be highly disciplined in balancing our volumes with our capacity and our infrastructure, such that our very high service levels are maintained. In Mail, we expect our market share to continue to grow. We therefore remain confident of good progress for the remainder of 2013 and a positive outcome for the full year.

UK Mail is already a well invested business with very strong competitive positions in our chosen markets, and those markets continue to provide us with attractive further opportunities. Having seen the clear benefits of the strategic progress of recent years, we are now entering a new phase of investment for future growth, to ensure that we are able to capitalise fully on those opportunities in the years ahead.

We therefore remain confident of our ability to generate sustainable profitable growth, and increased shareholder value, over the medium term and beyond.

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 HS2, 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 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

As stated in note 2 to the condensed consolidated interim financial statements, 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.

Related-party transactions

As stated in note 17 to the condensed consolidated interim financial statements, there were no transactions with related parties during the six months ended 30 September 2013 which have had a material effect on the results or the financial position of the Group. The nature of the related party transactions has not changed from those described in the Group's 2013 Annual Report and Accounts.