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Royal Mail's profits drop on pension charge, revenues rise on growth in parcels

Royal Mail warned that it expects letter volumes the next fiscal year to reach the top end of its guidance range for a decline of between 4-6%
Royal Mail
Royal Mail says it will continue to focus on cost avoidance and parcel revenue growth

Royal Mail PLC (LON:RMG) posted a 36% decline in full year profits after taking a hit from a pension charge in the UK.

The postal operator said profit before tax fell to £212mln in the year to 25 March 2018, from £335mln a year ago.

The results included the impact of an International Accounting Standards 19 pension charge.

In morning trading, shares fell 4.8% to 568p. 

In February Royal Mail and the Communication Workers Union (CMU) reached an agreement in principle to end a long-running dispute over plans to replace the company’s defined benefit pension scheme.

READ: Royal Mail's execution of pensions and pay deal with CWU crucial, says UBS

Royal Mail agreed on pensions, pay, a shorter working week, culture and operational changes. It closed its current pension scheme in March to avoid an expected increase in cash contributions to about £1.2bn per annum and plans to introduce a collective defined contribution scheme.

Revenue up as growth in parcels offsets decline in letters

Revenues rose 2% to £10.1bn in the year, up from £9.7bn in 2017.

The European parcels delivery business Global Logistics Systems (GLS) was the star performer with revenue up 10% to £2.6bn from £2.2bn as volumes grew 9%.

The UK business delivered broadly flat revenue of £7.6bn as a 4% increase in parcels offset a 4% decline in letters.

Total parcel volumes rose 5% while addressed letter volumes fell 5%, as expected.

Royal Mail said delivery productivity in the UK rose by 1%, missing its target range of 2-3%. 

GDPR to impact letter volumes

The group warned that it expects letter volumes in the 2018/19 fiscal year to reach the top end of its expected range for a decline of between 4-6% due to the potential impact of the introduction of General Data Protection Regulation (GDPR) in May.

Royal Mail said GDPR, new EU rules that put tighter controls on the gathering and storage of personal information, could lead to a drop in marketing mail volumes. 

Overall UK parcel and letter volumes and revenues in the next financial year are forecast to be "at least the same as 2017/18".

Royal Mail is targeting £230mln in cost savings in the UK business but restructuring costs are predicted to be at upper end of the forecast range of £130-150mln.

Productivity improvements are expected to be towards the upper end of the group's targeted 2-3% range.

Fierce competition in UK parcels 

Royal Mail also acknowledged the tough competition it faces in UK parcels with 15 rivals.

However, the company said consumers are spending more online per head in the UK than any other major market, including the US and China, driven by online retail orders.

The dividend for the year was raised 4% to 24p each as the company swung to net cash of £14mln from net debt of £338mln.

"It has been another successful year, despite the challenging environment,” said outgoing chief executive Moya Greene.

She added: “We continue to focus on cost avoidance and parcel revenue growth in the UK and through GLS.

"The good cash generation characteristics of our business will support our progressive dividend policy."

Greene is set to stand down later this year after eight years at the helm. She will be replaced by Rico Bank, who currently runs GLS, in June but will stay on until September to ensure a smooth transition. 

READ: Royal Mail confirms chief executive officer Moya Greene will retire in September 2018

'Mixed outlook'

Liberum left its rating on the stock at 'sell' with a target price of 450p, saying "a mixed outlook has uncertain implications for consensus estimates".

"Management expects parcels volume and revenue growth to at least match the previous year, but there is clear caution on letters, where the volume decline is seen at the worse end of the long-term range on GDPR concerns, with downside risk if business uncertainty persists," the broker said.

"Management is aiming at the upper end of its productivity improvement range, having missed last year, but we believe more is needed."

-- Adds share price reaction and broker comment --

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