Royal Mail PLC (LON:RMG) posted a 1% increase in quarterly revenue, supported by growth in parcel deliveries and a better-than-expected decline in letters.
Shares rose 2.87% to 410.20p in afternoon trading.
Total letter revenue in the UK fell 4% and volumes dropped 6% in the first quarter to 25 June, but the postal operator said this could have been worse without the boost from general election mailings.
The continued struggles in letters, however, saw the UK Parcels, International and Letters (UKPIL) division deliver a 1% dip in underlying revenue. Growth in parcel revenue and volumes of 3% and 5%, respectively, failed to offset the fall in letters.
Royal Mail cautious on outlook for letter volumes
As more consumers switch to online correspondence and do away with letters, Royal Mail has come to rely on its parcels business. Given the uncertainty surrounding Brexit, the company remained cautious on the outlook for letters.
“We continue to monitor the impact of overall business uncertainty in the UK on letter volumes,” it said.
Neil Wilson, senior market analyst at ETX Capital, said the company's stock remains one third off its 2014 peak and one fifth below where it was a year ago as Brexit uncertainty has weighed on the domestic market.
"The company is at the mercy of the shifting trends in letters and parcels: people are sending fewer letters to each other but online shopping means far more parcels are being sent – the Amazon effect, which is proving so destructive for high street retailers, is at least supporting Royal Mail," he said.
"Economic uncertainty continues to weigh on letter volumes and could also hit parcels if consumers start to rein in their spending. With relatively high fixed costs Royal Mail’s parcel business may not be best placed to weather a pullback in volumes."
Royal Mail revenue boosted by European parcel deliveries
In General Logistics Systems (GLS), the group’s European parcel delivery unit, revenue rose 6% on an underlying basis with volumes up 5%.
The later timing of Easter and other public holidays had an impact of 4 percentage points on GLS volumes.
Royal Mail’s international parcels business was boosted by a new initiative to attract cross-border traffic from Asia into Europe, accounting for nearly 2 percentage points of volume growth and 1 percentage point of the revenue gain.
Under this initiative, Royal Mail handles mail that arrives into its Heathrow processing plant from Asia for customs clearance and onward transit into mainland Europe.
The postal operator added that a weaker pound against other currencies improved contract export volumes but slowed imports.
Royal Mail repeats plans for new pension schemes
Royal Mail also revisited its pension plan, saying that the current scheme will close on 31 March 2018 after finding that annual contributions could triple to £1.3bn if no changes were made.
Last Friday, the company said it has proposed a defined benefit cash balance scheme and a defined contribution scheme. While the Unite union said it believed the offer was the “best available deal”, the Communication Workers Union (CWU) has opposed the group’s decision to close the current pension plan.
In today's trading, Royal Mail said it was continuing talks with the CWU, which said employees stand to lose up to a third of their future pensions.
Royal Mail to deliver cost savings target
Looking ahead, Royal Mail chief executive Moya Green said: "We remain on track to deliver our cost avoidance and net cash investment targets for the full year."
The firm expects to save £190mln in operating costs in UKPIL fiscal year 2017-18, and sees total net cash investment of about £450mln this year.
The company has taken steps to cut costs as its letters divison continues to struggle and the parcels business contends with rising competition from big players such as Amazon, Yodel and Hermes.
Liberum reiterated a 'sell' rating and target price of 385p, saying: "We remain concerned that parcels growth is not fast enough to offset the decline in letters, with productivity facing headwinds from wage inflation and parcels workload."
The broker added: "We see Royal Mail continuing to face long-term challenges in parcels, with competition from lower cost and more agile smaller operators and market dynamics that do not favour its strengths."