Nov 27, 2013 | edocr |
Royal Mail plc Interim Financial Report for the half year ended 29 September 2013 1 Royal Mail plc Interim Financial Report for the half year ended 29 September 2013 Royal Mail plc Royal Mail plc Interim Financial Report for the half year ended 29 September 2013 2 ROYAL MAIL plc INTERIM FINANCIAL REPORT FOR THE HALF YEAR ENDED 29 SEPTEMBER 2013 Royal Mail plc (RMG.L) today announced its results for the half year ended 29 September 2013. Moya Greene, Chief Executive Officer, Royal Mail plc, said: “Our first half financial performance was in line with our expectations of delivering low single digit revenue growth and margin expansion. The combination of increasing EBITDA and moderating investment spend underpins value creation for our shareholders.” Financial highlights Half year ended 29 Sept 2013 Half year ended 23 Sept 2012 Like-for-like change1 Revenue (£m) 4,520 4,355 2% Operating costs before transformation costs (£m)* (4,167) (4,091) flat Transformation costs (£m) (70) (120) Operating profit after transformation costs (£m)* 283 144 Operating profit margin after transformation costs (%)* - Like-for-like 5.2 3.3 + 190bps - Reported2 6.3 3.3 Profit before taxation (£m) - Excluding specific items** - Reported2 Notional earnings per share3 (pence) - Excluding specific items** - Reported2 233 94 1,580 113 16.8 122.0 6.1 37.7 EBITDA before transformation costs (£m)* 483 405 Free cash flow (£m) 183 218 * Before specific items. ** Reported results excluding a number of items which management believes better represent the trading and external financing of the Group. Note 2 provides the full definition of specific items. Key points • Revenue growth of two per cent was driven by strong growth in parcel revenue in UKPIL and GLS, which offset letter revenue decline. Parcel revenue now accounts for 51 per cent of Group revenue. • Operating costs after transformation costs were flat, due to tight cost control and lower transformation costs. Transformation costs were lower than expected, in part due to delays in transformation expenditure related to the industrial relations situation. Transformation costs are now expected to be approximately £160 million for the full year. • Operating profit after transformation costs of £283 million benefitted from a one-off VAT credit of £35 million, lower depreciation and amortisation of £10 million, as well as £50 million lower transformation costs. • While the improved Group operating profit margin after transformation costs reflects continued tight cost control, the VAT credit and lower depreciation and amortisation benefitted margins by approximately one percentage point. } Royal Mail plc Royal Mail plc Interim Financial Report for the half year ended 29 September 2013 3 • Profit before taxation of £233 million and notional earnings per share of 16.8 pence (both excluding specific items) reflect the operating performance of the Group. Pension accounting standards require us to include a one-time, non-cash benefit of £1,350 million4 as a result of the Pensions Reform in reported profit before taxation and reported notional earnings per share. • EBITDA before transformation costs increased to £483 million. • Net debt of £723 million was £183 million lower than at 31 March 2013. On 15 October 2013, Royal Mail refinanced and replaced all loans previously provided by HM Government. These loans5 and existing finance leases are currently forecast to have a blended interest rate of approximately 3.5 per cent per annum over the life of the facilities. Outlook We remain focused on delivering our value drivers to achieve revenue growth, margin expansion and underlying free cash flow growth for the full year. It should be noted that the first half costs benefitted from certain one-off and other items of £45 million, which will not be repeated in the second half. We are about to enter our busiest period of the year. Since September, as expected, there has been some customer reaction to the industrial relations situation. To date this has been limited to a slowdown in the rate of business customer acquisition in parcels and switching of some volume to competitors in anticipation of strike action. Depending on the strength of the seasonal parcels volume growth in late November and December, this may result in Royal Mail reporting broadly unchanged parcel volumes but significant revenue growth for the nine months to December 2013. Our letters business had a good start to the second half and has particularly benefitted from energy company mailings. GLS continues to perform well. In the absence of unforeseen circumstances, the Board intends to propose a final dividend of £133 million for the full year. Notes 1. Throughout this document, margins and growth/decline rates are stated on a like-for-like basis, unless otherwise indicated. Like-for-like revenue and cost growth/decline percentages are calculated after adjusting for movements relating to foreign exchange effects in GLS’ revenue and costs, and working days in UKPIL revenue. For volumes, like- for-like movements are adjusted for working days in UKPIL. (£m) Increase compared to prior year relating to: Foreign exchange Working days Total Revenue 43 48 91 Costs 40 n/a 40 The cumulative average translation rates for the half year ended 29 September 2013 are £1 = €1.1729, compared with £1 = €1.2445 for the half year ended 23 September 2012. 2. Reported: fully compliant with accounting standards (IFRS), including specific items. 3. Notional basic earnings per share assumes that one billion shares, as at 29 September 2013, existed for the whole of the half year ending on that date and for the comparative half year ending 23 September 2012. 4. The agreed changes due to Pensions Reform are considered to be a ‘plan amendment’, which meets the IAS 19 definition of a past service cost. The Pensions Reform resulted in a reduction in assessed liabilities of £1,350 million. In line with the accounting standard, this has been recorded in the income statement for H1 2013-14 as a one-time, non-cash benefit. 5. Includes arrangement and commitment fees. Royal Mail plc Royal Mail plc Interim Financial Report for the half year ended 29 September 2013 4 BUSINESS PERFORMANCE Revenue (£m) Operating profit after transformation costs (£m) Operating profit margin after transformation costs (%) Half year ended 29 Sept 2013 Half year ended 23 Sept 20121 Like-for- like change Half year ended 29 Sept 2013 Half year ended 23 Sept 2012 Like-for- like change Half year ended 29 Sept 2013 Half year ended 23 Sept 2012 Like-for- like change UKPIL 3,711 3,636 1% 224 97 4.8 2.7 210bps GLS 801 712 6% 53 45 11% 6.6 6.3 30bps Other 8 7 14% 6 2 4,520 4,355 2% 283 144 5.2 3.3 190bps UK Parcels, International & Letters (UKPIL) • Revenue increased by one per cent. Operating costs after transformation costs decreased by one per cent: o Parcel revenue grew nine per cent, driven by the impact of size-based pricing. o As expected, parcel volumes were broadly unchanged compared with the same period last year. Strong growth in account parcels and Parcelforce Worldwide was offset by lower volumes in consumer channels, driven by the impact of size-based pricing and a temporary slowdown in growth in e-retailing due to the good summer weather in the UK. o Letter revenue (including marketing mail) was four per cent lower. Excluding the impact of London 2012 philatelic sales in the prior period, revenue declined three per cent. o Addressed letter volumes decline of six per cent was within our expected range of four to six per cent, compared with a decline of nine per cent in the same period last year. • Operating profit after transformation costs was £224 million, with operating profit margin after transformation costs increasing from 2.7 per cent to 4.8 per cent. General Logistics Systems (GLS) • GLS performed well, with revenue growth of six per cent, well ahead of Eurozone GDP growth for the period: o Revenue increased to £801 million, driven by growth in all the major countries. o Volumes increased six per cent to 193 million items. • Operating profit was up 11 per cent. The operating profit margin improved to 6.6 per cent. 1 There have been a number of minor restatements to H1 2012-13 comparatives to reflect: • Refined methodology to define a small element of international mail formats impacting letter and parcel volumes and revenue • Inclusion of non-revenue generating volumes increasing both UKPIL parcel and letter volumes • Reclassification between Other and UKPIL impacting revenue, costs and profit (all less than or equal to £1 million). Royal Mail plc Royal Mail plc Interim Financial Report for the half year ended 29 September 2013 5 GROUP CHIEF EXECUTIVE OFFICER’S REVIEW In our first financial results as a listed company, I would like to welcome our new shareholders, including the many thousands of retail shareholders – some 150,000 of whom are Royal Mail employees - who took part in the recent Offer. I am pleased to announce that we are building on the improved financial performance we have achieved across the Group in recent years. In the first half, our financial performance was in line with our expectations. Low single digit revenue growth has been achieved and operating costs after transformation costs were flat, thus improving margins. Free cash flow was positive again during the period. The performance in our core UK business has improved, with UKPIL’s operating profit after transformation costs increasing from £97 million to £224 million. UKPIL’s operating margin after transformation costs increased from 2.7 per cent to 4.8 per cent. GLS, our ground-based, European deferred parcels delivery network, delivered an improved performance after a challenging 2012-13. Revenue was up six per cent. The operating margin improved to 6.6 per cent from 6.3 per cent in the prior period. As previously announced, in the absence of unforeseen circumstances, the Directors intend to propose only a final dividend in respect of this financial year, to be paid in July 2014, of £133 million. This amount is approximately two-thirds of the notional full year dividend of £200 million that the Directors believe they would have proposed if the Company had been listed throughout this financial year. Delivering our strategy Our vision is to be recognised as the best delivery company in the UK and across Europe. We have made good progress in our parcels businesses; the decline in addressed letter volumes has moderated to within our expected range; and we are continuing to leverage our reputational and operational strengths to deliver improvements in our customer service. Being a successful parcels business The Group has three main parcels networks. UKPIL operates in the UK through the Royal Mail core network and Parcelforce Worldwide. GLS operates in continental Europe and the Republic of Ireland through one of the largest ground-based, deferred parcel delivery networks in Europe. We have a clear strategy to grow parcel revenue by leveraging structural trends in e-retailing and optimising our traffic mix. Volume growth in the UK parcels market is being driven primarily by growth in e-retailing, which is driving B2C activity. Whilst the market saw a temporary slowdown in the growth of e-retailing during the summer, the IMRG Capgemini e-Retail Sales Index for October 2013 quotes average year-on-year total e-retail sales growth of 16 per cent from October 2012 to September 2013. We continue to expect the B2C and C2X segments combined to deliver volume growth of between 4.5 per cent and 5.5 per cent per annum, and the B2B segment to grow slightly above the UK GDP growth rate. We introduced size-based pricing in April 2013 to ensure that parcels are delivered through the most appropriate UK network according to their size, value and urgency. Our core network is best at delivering smaller consumer goods, rather than bulkier parcels. Our core network’s scale and configuration allows Royal Mail plc Royal Mail plc Interim Financial Report for the half year ended 29 September 2013 6 lower-cost delivery of these smaller parcels, which are delivered on foot. We changed prices as part of our size-based pricing approach and anticipated that some volume would transfer to Parcelforce Worldwide from the core network, with some larger, uneconomical items exiting our networks completely. As expected, UK parcel volumes were broadly unchanged in the first half due to the impact of the size- based pricing approach and a temporary slowdown the growth of e-retailing due to the good summer weather in the UK. We saw a slightly higher rate of volume reduction than expected in the consumer, micro-SME and SME segments. Changes announced in October 2013 in response to feedback from customers will enable them to post a greater range of items through our Small Parcels format in time for Christmas. This will ensure Royal Mail offers the most competitive price in the market for shoe box sized parcels of up to 1kg. Parcelforce Worldwide’s volumes increased by nine per cent and we are expanding capacity through our previously announced investment programme. In September 2013, we opened the new Parcelforce Worldwide parcel processing centre in Chorley, complementing our existing centre in Coventry. We have also opened 10 new, replacement or extended Parcelforce Worldwide depots around the country. GLS performed well in the first half, with revenue growth of six per cent. Approximately 70 per cent of GLS’ revenue is generated in Germany, France and Italy. While revenue has grown in Germany, conditions continue to be challenging due to the highly competitive marketplace, and low levels of unemployment leading to increased subcontractor costs. In France, where we are in the early stages of a turnaround plan, revenue has increased marginally which, together with cost reductions has reduced losses. In GLS Italy revenue grew strongly, in part benefitting from competitor disruption. GLS continues to focus on increasing the scale of its operations in Europe on a targeted basis, including monitoring emerging markets for new opportunities. Managing the decline in letters While addressed letter volumes are in structural decline, our UKPIL letter business remains a key part of our future success. The decline in addressed letter volumes moderated to six per cent (H1 2012-13 nine per cent), in line with our forecast range of approximately four to six per cent per year. Letter revenue (including marketing mail) declined by four per cent. When the impact of London 2012 philatelic sales in the prior period is excluded, this decline was three per cent. In March 2013, we announced that First Class and Second Class stamp prices for 2013-14 would be frozen at 2012-13 levels. We have been encouraged to see increasing levels of support from business mail customers with regard to giving their customers the choice to keep paper statements if they wish. However, we continued to see declines in business mail volumes as business customers – particularly in the financial services industry – sought to move some customer communications online. Our marketing mail business delivered revenue of £545 million, down three per cent on the prior year. The same period in the prior year benefitted from additional marketing activity in the build-up to London 2012 and the Diamond Jubilee. In July 2013, we announced an investment of £70 million to introduce our ‘Mailmark’ barcode reading technology for large, bulk mail customers. This will significantly increase our ability to track addressed letters through our network for these customers. Royal Mail plc Royal Mail plc Interim Financial Report for the half year ended 29 September 2013 7 We are seeing increased competition in the direct delivery of business mail, with TNT Post UK extending its alternative delivery operations to Greater Manchester. Unchecked, this could lead to cherry-picking of more profitable, higher-density delivery areas and could undermine the sustainability of the Universal Service. We are reassured that the regulator will act to protect the Universal Service given its primary duty, but we are not complacent. Our focus is on continuing to improve Royal Mail's service and efficiency as part of our transformation programme. We are also using the greater commercial freedom granted to Royal Mail by Ofcom to compete for business. Being customer focused The regulatory Quality of Service standard specifications Royal Mail is subject to are amongst the highest of any postal operator in any major European country. It is pleasing to note therefore that, on a cumulative basis in the first half, we exceeded our targets for First Class and Second Class mail. We delivered 93.2 per cent of First Class mail the next working day, against a target of 93 per cent. Our Second Class delivery performance was 98.8 per cent in three working days, against a target of 98.5 per cent. We continue to focus on delivering a better parcels experience. We believe that our strong brands and high quality of service will help to drive growth. A recent survey in the UK conducted on behalf of Which? found that regular post was the consumer’s favourite way to receive their online shopping, achieving a customer score of 80 per cent1. A separate survey found 76 per cent of consumers would be more likely to re-use a particular online retailer if they use Royal Mail for delivery (58 per cent said the same for Parcelforce Worldwide)2. The parcels sector is highly competitive, with a number of distinct market segments and multiple players. Our competitors have introduced many initiatives in the online parcels delivery market, aimed at taking share from Royal Mail. We aim to react quickly in response to competitor initiatives to ensure we continue to deliver what customers want. It is vital that we continue to invest in the customer experience. IT investment to enhance customer convenience, including tracking, is an important sectoral theme. In April 2013, we introduced our tracked returns service, which provides greater convenience for both consumers and online retailers. We have also introduced enhanced delivery information for our Special Delivery offering – a key product for us. As previously announced, we are ready to capitalise on the increasing popularity of ‘click and collect’ networks and have introduced our own ‘click and collect’ service in Post Offices, providing more convenient parcel delivery options for online retailers and their customers. Post Office has one of the largest retail networks in the UK - its branches are in ideal locations to provide convenient, secure parcel collection facilities. We have also launched our first major TV advertising campaign for some time. It focuses on our unique position as the UK’s leading parcel delivery company. The campaign highlights the role our people play - they feature in the advert along with the voices of the Royal Mail choir – all across the country, six-days- a-week and in all weathers, to deliver the parcel that the consumer has ordered online for themselves, a family member or a friend. We make commerce happen by connecting customers, companies and communities. 1 Which?, November 2013. 2 Hall & Partners, April 2013. Royal Mail plc Royal Mail plc Interim Financial Report for the half year ended 29 September 2013 8 Our brand is a great strength. Our mean business customer satisfaction score, which tracks the satisfaction of business customers with the service they receive and products they have used from Royal Mail, remains constant at 74. The strength of our brand and reputation is one of the key ways we are maintaining our strong market position. We know there are no grounds for complacency, especially as we are now entering our busiest period of the year – Christmas. We plan all year round for this key time of year. So, we have opened 10 temporary parcel sort centres, and employed 21,000 extra temporary staff. They will work alongside approximately 124,0003 postmen and women as we seek to deliver a great Christmas for our customers. Transformation Royal Mail is delivering what we believe is one of the largest industrial transformation programmes undertaken in the UK in recent history. This wide-ranging programme requires difficult change for our people. In the first half, we closed three Mail Centres in Derby, Darlington and Bradford. Leicester Mail Centre has closed since the end of the period and four more closures are expected in the second half of the year. We have begun modernising our 1,000th Delivery Office out of a total of approximately 1,400. However, in the first half we have seen a slowdown in transformation activity. Some of this was expected. However, the industrial relations environment has meant some activity has been deferred into next year. Our ongoing transformation programme is also optimising our operations for continued growth in our parcels businesses. More than 38,500 new trolleys and over 13,000 shared vans are now in operation across our network. We have completed the roll out of around 74,000 handheld electronic scanners. This means that every postman and woman will have access to a scanner in time for this Christmas. The scanners enable us to track items in real time at key points throughout the network, through to the customer’s doorstep. This is a key part of our strategy, as outlined in the previous section. A reduction in gross hours of 3.3 per cent has helped to deliver a core network processing and delivery productivity improvement of 1.7 per cent in the first half. Productivity is the primary measure of our ability to efficiently process and deliver mail. In November 2013, after the period end, Royal Mail received an APM Project Management Award for the transformation of mail collection, processing and delivery in London. Our investment programme, which included the transformation of our Mount Pleasant site, was designed to deliver an improved customer service for seven million people in Greater London. Our people Our people are the key to our transformation and the delivery of our strategic priorities. It is testament to the commitment of our UK workforce that the transformation has been delivered without compromising on the quality of our service. That is why I am pleased to report that, through the Free Shares Offer, approximately 10 per cent of shares in Royal Mail are now owned by, or on behalf of, eligible Royal Mail Group Limited employees – the overwhelming majority of our employees in the UK. Second only to the Government, our employees have the largest stake in their Company. We are making substantial efforts to communicate with both frontline colleagues and managers during this very important time in our history. The senior management team and I have conducted more than 37 Town Hall meetings in the first half. More than 140 senior managers have visited sites as part of our 3 As reported at 31 March 2013. Royal Mail plc Royal Mail plc Interim Financial Report for the half year ended 29 September 2013 9 engagement programme. As part of the Free Shares education programme, specialists from our share scheme administrator visited approximately 100 Royal Mail sites. Our face-to-face communications programme will continue in the coming months. Discussions with the Communication Workers Union (CWU) on a new multi-year agreement are ongoing. Significant progress is being made on proposals for a legal framework to deliver a stable industrial relations environment, protections for employees and a competitive pay increase. A new agreement will create an agenda for change in Royal Mail and a new model for how we work together with the CWU. Building on pre-existing agreements, it will help us to complete our modernisation and build a strong platform for the future success of the Company. Royal Mail plc Royal Mail plc Interim Financial Report for the half year ended 29 September 2013 10 BUSINESS AND FINANCIAL REVIEW UKPIL UK Parcels, International & Letters (UKPIL) comprises the Group’s core UK and international parcel and letter delivery businesses under the Royal Mail and Parcelforce Worldwide brands and through the Royal Mail core network and the Parcelforce Worldwide network. In addition, UKPIL provides specialist delivery services and carries out a number of other letter-related activities, including marketing mail consulting services. It is also responsible for the processing of international mail under reciprocal arrangements with other overseas postal administrations. Trading results (£m) Half year ended 29 Sept 2013 Half year ended 23 Sept 2012 Like-for-like change1 Revenue 3,711 3,636 1% People costs (2,320) (2,261) 3% Distribution & conveyance costs (387) (382) 1% Infrastructure costs (452) (459) (2%) Other operating costs (258) (317) (19%) Operating costs (3,417) (3,419) 0% Transformation costs (70) (120) (42%) Operating costs after transformation costs (3,487) (3,539) (1)% Operating profit after transformation costs 224 97 Operating profit margin after transformation costs - Like-for-like 4.8% 2.7% +210 bps - Reported2 6.0% 2.7% Revenue (£m) Letters 1,685 1,741 (5%) Marketing mail 545 552 (3%) Total letters (including marketing mail) 2,230 2,293 (4%) Parcels 1,481 1,343 9% Total 3,711 3,636 1% Volumes (m) Letters Addressed letters 6,477 6,793 (6)% Unaddressed letters 1,513 1,599 (7)% Parcels Core network 454 452 (1%) Parcelforce Worldwide 36 32 9% Total 490 484 0% Trading performance Revenue growth of one per cent contrasted with a decline of one per cent in operating costs after transformation costs. The revenue performance was driven primarily by changes to pricing and products in our parcels portfolio offsetting the decline in letters revenue. Operating profit margin after transformation costs improved to 4.8 per cent. Royal Mail plc Royal Mail plc Interim Financial Report for the half year ended 29 September 2013 11 Parcels Parcel revenue was £1,481 million, up nine per cent. Parcel revenue now accounts for 40 per cent of UKPIL revenue. Parcel volumes were broadly unchanged when compared with the same period in the prior year, as expected. Letters, including marketing mail Overall letter revenue (including marketing mail) of £2,230 million declined by four per cent. Excluding the impact of London 2012 philatelic sales in the prior year, letter revenue declined three per cent. The rate of decline in addressed letter volumes reduced to six per cent, in line with our forecast range. Revenue for our marketing mail business of £545 million declined by three per cent, as the prior period benefitted from the additional marketing activity in the build-up to London 2012 and the Diamond Jubilee. Operating costs were flat. Whilst the business continued to exercise tight cost control, the first half benefitted from a one-off VAT credit of £35 million and lower year on year depreciation and amortisation. The VAT credit arose as a result of the change in regulations in April 2012 which increased the scope of products attracting VAT, leading to an increased recovery rate. The credit has been allocated to the relevant cost lines and equates to one per cent of UKPIL operating costs. People costs increased by three per cent, reflecting increased pay costs, due to an accrual for a frontline pay increase. Pensions costs increased by £26 million, largely due to the IAS 19 pension service cost rate increasing from 18.2 per cent to 20.3 per cent of pensionable pay. This was partially offset by an average reduction in UKPIL FTEs of two per cent, in part enabled by a 1.7 per cent improvement in processing and delivery productivity in the core network, slightly below the target of 2-3 per cent per year. Distribution and conveyance costs increased by one per cent, primarily due to an increase in vehicle related costs and terminal dues. Infrastructure costs decreased by two per cent reflecting a portion of the VAT credit and lower depreciation and amortisation, as a result of a different mix in depreciable assets. In the second half, the depreciation and amortisation charge is expected to be flat year-on-year. Other operating costs decreased by 19 per cent, mainly due to tight cost control measures. Transformation costs in the period of £70 million were £50 million lower than the same period in the prior year. This was largely due to lower voluntary redundancy costs in relation to the Mail Centre closure programme, which have been fully provided for. We now expect transformation costs will be approximately £160 million for 2013-14, reflecting a higher level of transformation activity in the second half. GLS General Logistics Systems (GLS) is the Group’s European parcel business. The GLS Network is one of the largest ground-based deferred parcel delivery networks in Europe, covering 37 European countries and nation states with services provided through a combination of wholly-owned members of the GLS Group, network and service partners of the GLS Group, franchisees and agents. Royal Mail plc Royal Mail plc Interim Financial Report for the half year ended 29 September 2013 12 GLS offers services in all areas of the couriers-express-parcels market, but is mainly active in the parcels segment, delivering parcels on a deferred basis. The majority of the parcels handled by GLS are in the B2B segment. GLS brings a number of strategic benefits to the wider Group, including an important level of geographical earnings diversification, its ability to generate cash which can be used to fund investment in other parts of the Group’s business, a means to capture growth in European cross-border parcel traffic and opportunities for sharing operational excellence within the Group. Trading results (€m) Half year ended 29 Sept 2013 Half year ended 23 Sept 2012 Like-for-like change1 Revenue 940 886 6% People costs (209) (203) 3% Distribution & conveyance costs (580) (544) 7% Infrastructure costs (62) (60) 4% Other operating costs (27) (23) 19% Operating costs (878) (830) 6% Operating profit 62 56 11% Trading results (£m) Revenue 801 712 6% Operating costs (748) (667) 6% Operating profit 53 45 11% Operating profit margin (%) 6.6 6.3 30 bps Volumes (m) 193 182 6% Trading performance GLS delivered a robust revenue performance, well ahead of Eurozone GDP growth in the period. Revenue growth was achieved in all of the major countries in which we operate. Revenue was up six per cent to £801 million, driven by the increase in parcel volumes. Costs were up six per cent, in line with volume growth. In particular, distribution and conveyance costs were up seven per cent, reflecting higher volumes and increased sub-contractor costs in Germany. Other operating costs were up 19 per cent due to increased IT consultancy costs and turnaround-related costs in France. Operating profit increased from £45 million to £53 million, up 11 per cent. Operating profit margin improved to 6.6 per cent. Approximately 70 per cent of GLS’ revenue is generated in its three main markets: Germany, France and Italy. GLS Germany continues to operate in an extremely competitive market, with the business subject to significant cost pressures due to the impact of continued low unemployment levels. Improved delivery options to increase the rate of first time delivery are being put in place with the aim of reducing costs and increasing convenience. In France, we are at an early stage of the turnaround programme. In the first half, revenue increased marginally and costs reduced, resulting in lower operating losses. Royal Mail plc Royal Mail plc Interim Financial Report for the half year ended 29 September 2013 13 GLS Italy delivered a strong financial performance, growing organically and through acquisitions. GLS Italy continued to extend its ownership of the network, through the purchase of one franchisee in H1 2013- 14. It has also benefitted from competitor disruption. GLS continues to monitor emerging European markets for new opportunities. GLS Croatia, a new company, has made an encouraging start after it began operations in August 2013, following the admission of Croatia to the European Union in July 2013. GROUP FINANCIAL PERFORMANCE Revenue Group revenue was £4,520 million (H1 2012-13 £4,355 million), up two per cent. Parcel revenue accounted for 51 per cent of Group revenue (H1 2012-13 47 per cent). Operating profit after transformation costs Operating profit after transformation costs was £283 million compared with £144 million in the prior period. Group operating profit margin after transformation costs improved to 5.2 per cent from 3.3 per cent, due to revenue growing at a faster rate than costs. One percentage point of this margin improvement was due to the VAT credit and lower depreciation and amortisation. Specific items There were a number of one-off specific items in the period. The accounting impact of the Pensions Reform (see note 10) was to increase the accounting pension surplus significantly, resulting in a one-time non-cash credit of £1,350 million. Specific items also arose in relation to transaction-related costs of £26 million and the charge associated with the Employee Free Shares Offer of £6 million. The Employee Free Shares Offer charge represents the initial charge to the income statement relating to the issuing of Free Shares, which is calculated from the start of the period when employees could expect to receive Free Shares and based on the mid-market closing price on the day of Admission. In H2 2013-14 the charge will be approximately £80 million, as the cost will accrue for the whole of H2 2013-14. Total specific items before taxation were a credit of £1,347 million. Net finance costs Net finance costs were £50 million compared with £28 million in H1 2012-13, which benefitted from a one-off £22 million gain from the sale of gilts, which had been held in escrow to provide security to the Trustee of the Royal Mail Pension Plan (RMPP) to support pension-related payments. The finance costs are based on the borrowing facilities in place at the half year end. On 15 October 2013 the existing facilities were replaced with new borrowing facilities. Finance costs in H2 2013-14 will reflect these new facilities, which are currently forecast to attract a lower effective blended interest rate of approximately 3.5 per cent per annum over the life of the facilities, after accounting for the charges associated with commitment and arrangement fees and finance leases. Net pension interest Net pension interest credit, treated as a specific item, was £19 million. The net pension interest credit is calculated using the net pension surplus at the start of the financial year multiplied by the Plan’s discount Royal Mail plc Royal Mail plc Interim Financial Report for the half year ended 29 September 2013 14 rate. Due to the substantial change in the RMPP surplus as a result of the Pensions Reform, the net pension interest for H2 2013-14 will be recalculated and is expected to be approximately £50 million. Taxation The effective tax rate on the profit before taxation was 23 per cent, comprising the current tax charge of £17 million and a deferred tax charge of £342 million. The Group current income tax charge of £17 million represented an effective rate on profit before taxation of one per cent (H1 2012-13 23 per cent). Whilst GLS’ current effective tax rate is over 30 per cent, as expected, there is no UK current tax charge, as a result of the standard treatment of the HMRC-approved Employee Free Shares Offer as well as utilisation of some brought forward tax reliefs, including capital allowances. The deferred tax charge was £342 million (H1 2012-13 £292 million credit). The movement in the deferred tax charge is principally due to the effect of the Pensions Reform. The deferred tax credit in H1 2012-13 related to UK tax and mainly recognised the benefits associated with carried forward tax reliefs, including capital allowances. Notional earnings per share (EPS) Notional EPS excluding specific items was 16.8 pence (Reported 122.0 pence). The notional EPS is calculated using the profit from continuing operations attributable to equity holders of the parent, both reported and excluding specific items, and assuming the one billion ordinary shares had been in existence throughout the first half of the year, as required by IAS 33 Earnings per Share. Going forward, EPS will be calculated using the weighted average number of shares in issue over the relevant period. Cash flow EBITDA before transformation costs of £483 million increased by £78 million due to the improved trading performance. Trading working capital movements generated an outflow of £170 million compared with £94 million in the prior period. Both periods benefitted from one-off items. H1 2013-14 benefitted from the impact of the delay in finalising the frontline pay award of approximately £65 million, which will be paid when the new wage settlement is agreed. H1 2012-13 benefitted from the one-off impact of the buy forward of stamps in April 2012 of £100 million, an increase in the VAT creditor of £75 million due to an increase in the number of products that have become liable to VAT since April 2012 and the unwinding of the pension prepayment of £40 million made in March 2012. Total investment reduced from £270 million to £212 million mainly as a result of a decrease in transformation capital expenditure and businesses transformation payments, partially offset by an increase in non-transformation capital expenditure. The principal investments were in GLS, the Parcelforce Worldwide expansion and ‘Mailmark’. Full year investment is expected to be slightly lower than in 2012-13 due to the impact of delayed transformation expenditure. Excluding the one-off working capital movements and specific items, underlying free cash flow was £103 million in H1 2013-14 compared with £14 million in H1 2012-13. H2 2013-14 will benefit from the unwinding of the remaining £150 million pension prepayment, partially offset by any payment of the delayed frontline pay award. Royal Mail plc Royal Mail plc Interim Financial Report for the half year ended 29 September 2013 15 Net debt Net debt was £723 million at 29 September 2013, £183 million lower than at 31 March 2013. The movement in the period reflects the free cash inflow. Pensions The IAS 19 pension position at 29 September 2013 was a surplus of £1,862 million compared with a surplus of £825 million as at 31 March 2013. The increased surplus reflects the impact of the Pensions Reform (see note 10). The IAS 19 accounting position and key assumptions for the liability valuation are provided in note 10. Notes 1. Throughout this document, margins and growth/decline rates are stated on a like-for-like basis, unless otherwise indicated. Like-for-like revenue and cost growth/decline percentages are calculated after adjusting for movements relating to foreign exchange effects in GLS’ revenue and costs and working days in UKPIL revenue. For volumes, like-for- like movements are adjusted for working days in UKPIL. (£m) Increase compared to prior year relating to: Foreign exchange Working days Total Revenue 43 48 91 Costs 40 n/a 40 The cumulative average translation rates for the half year ended 29 September 2013 are £1 = €1.1729, compared with £1 = €1.2445 for the half year ended 23 September 2012. 2. Reported: fully compliant with accounting standards (IFRS), including specific items. Royal Mail plc Royal Mail plc Interim Financial Report for the half year ended 29 September 2013 16 PRINCIPAL RISKS AND UNCERTAINTIES The Group’s principal risks and uncertainties remain the same as those disclosed on pages 8 to 43 of the Registration Document part of the Prospectus in relation to the initial public offer of shares in Royal Mail plc published on 27 September 2013. Those risks are summarised on pages 11 to 15 of the Summary part of that Prospectus and have been summarised further below. All of them have the potential to impact the Group’s business, results of operations, financial condition and prospects adversely. Our overall risk management processes are designed to identify, evaluate and mitigate our business risks. • Letters decline and parcels growth: The use of letters as a medium of communication has declined in recent years as a result of greater use of electronic forms of communication, including email and text messaging, which have become increasingly important, especially for businesses. This is known as e- substitution. Letter volumes in the UK may decline at a faster rate than forecast. While the Group aims to increase revenue in its parcel businesses to mitigate the continued decline in letter volumes and the slow or declining growth in letter revenue, such increase is contingent on continued growth in both the UK and the European parcel markets. It is possible that parcel volumes in the UK and Europe may fail to grow as forecast by the Group, grow at rates different from the Group’s forecasts or decline. • Changes in customer preferences and competitor activity: Customer behaviours are constantly evolving and competition is increasing. Consequently there is a risk that our product offerings and the customer experience we provide may not meet changing customer needs. In addition, customer or competitor actions could trigger significant volumes of physical mail bypassing Royal Mail, down- trading to lower revenue products and acceleration in e-substitution. In particular, increased “end to end” competition may lead to a significant decline in the volume of letters handled through the Royal Mail Core Network, which facilitates the delivery of the UK’s universal postal service. Although Royal Mail would be handling fewer letters, it would still be required to operate a national network capable of delivering a next-day service six days per week to every address in the UK at uniform and affordable prices. The risks to maintaining the profitability of the Royal Mail Core Network are likely to increase with increased competition. • Economic environment: Historically there has been a correlation between the state of the UK economy and the level of mail volumes. There is a risk that the continuation of flat or adverse economic conditions could impact our ability to stay profitable, either by reducing volumes or by encouraging down-trading to lower revenue products. Additionally, we have significant European operations, and current uncertainty and economic weaknesses in the Eurozone could impact these businesses. • Business modernisation: In order to increase productivity and manage the Group’s costs, we are undergoing a significant, extensive modernisation programme to improve our equipment and technical and IT infrastructure, and operating models. The success of the business strategy relies on successful extraction of cost, productivity and other benefits from the programme, whilst maintaining key business outcomes such as Quality of Service. • Risks inherent in the postal industry: The postal industry has specific characteristics that bring particular operational and commercial risks. Operations are at risk of disruption by, for example, industrial action, adverse weather, health & safety incidents, operational change, terrorism or failure of critical suppliers. In addition to the new regulatory regime in the postal sector, there is a risk of non-compliance with a wide range of legal and regulatory requirements. The legal and regulatory environment (including at EU level) in which the Group operates, is subject to change. Royal Mail plc Royal Mail plc Interim Financial Report for the half year ended 29 September 2013 17 • VAT exemption applying to certain network access products: Mandated network access services provided by Royal Mail are currently exempt from value added tax (VAT). This VAT exemption is the subject of judicial review proceedings. The imposition of VAT on mandated network access services provided by the Group could result in a loss of revenue and increased competition. As a result of the imposition of VAT on mandated network access services, end-users that use such network access services for distribution of their letters may accelerate their adoption of e-substitution or alternative means of communicating with their customers or switch to competing third party “end to end” delivery services if they become economically more attractive on a VAT-inclusive basis. • Value drivers; The Group has established certain financial objectives or value drivers. These objectives are forward-looking statements and the Group’s achievement of these objectives is subject to a range of sensitivities and external factors. There can be no assurance that the Group will achieve these objectives. In particular, the Group’s earnings in the future could be highly volatile. As many of the Group’s costs are fixed, any material reduction in volumes and revenue may have a material adverse effect. • Industrial relations: There is extensive trade union recognition in respect of the Group’s workforce in the UK and there is a risk that one or more material disagreements or disputes between the Group and its trade unions could result in widespread localised or national industrial action. Royal Mail plc Condensed consolidated income statement Royal Mail plc Interim Financial Report for the half year ended 29 September 2013 18 1 Reported - the reported results prepared on an IFRS compliant basis. 2 Specific items - defined in note 2. 3 Excluding specific items - reported results excluding specific items. Details of cumulative average translation rates can be found in note 4. Half year ended 29 September 2013 Half year ended 23 September 2012 Notes Reported1 £m Specific items2 £m Excluding specific items3 £m Reported1 £m Specific items2 £m Excluding specific items3 £m Revenue 4 4,520 - 4,520 4,355 - 4,355 People costs (2,546) - (2,546) (2,471) - (2,471) Distribution and conveyance operating costs (880) - (880) (816) - (816) Infrastructure costs (property, IT, depreciation/amortisation) (504) - (504) (505) - (505) Other operating costs (237) - (237) (299) - (299) Operating profit before transformation costs 353 - 353 264 - 264 Transformation costs 5 (70) - (70) (120) - (120) Operating profit after transformation costs 283 - 283 144 - 144 Operating specific items: Royal Mail Pension Plan (RMPP) amendment 6 1,350 1,350 - - - - Transaction related costs 6 (26) (26) - (4) (4) - Employee Free Shares costs 6 (6) (6) - - - - Other 6 (9) (9) - (17) (17) - Operating profit/(loss) 1,592 1,309 283 123 (21) 144 Profit on disposal of property, plant and equipment 6 17 17 - 3 3 - Profit on disposal of associate undertaking 6 2 2 - - - - Earnings before interest and taxation (EBIT) 1,611 1,328 283 126 (18) 144 Finance costs 7 (52) - (52) (52) - (52) Finance income 7 2 - 2 24 22 2 Net pension interest 6 19 19 - 15 15 - Profit from continuing operations before taxation 1,580 1,347 233 113 19 94 Current taxation (charge)/credit 8 (17) 8 (25) (26) - (26) Deferred taxation (charge)/credit 8 (342) (303) (39) 292 297 (5) Profit for the period from continuing operations 1,221 1,052 169 379 316 63 Discontinued operations Profit after taxation for the period from Post Office Limited - - - 2 2 - Profit for the period 1,221 1,052 169 381 318 63 Profit for the period attributable to: Equity holder of the parent company 1,220 1,052 168 379 318 61 Non-controlling interest 1 - 1 2 - 2 Notional earnings per share – from continuing operations 11 Basic 122.0p 105.2p 16.8p 37.7p 31.6p 6.1p Diluted 122.0p 105.2p 16.8p 37.7p 31.6p 6.1p Royal Mail plc Condensed consolidated statement of comprehensive income Royal Mail plc Interim Financial Report for the half year ended 29 September 2013 19 Half year ended 29 September 2013 Reported £m Half year ended 23 September 2012 Reported £m Profit for the period 1,221 381 Other comprehensive (expense)/income for the period: Items that
Half Year Results Announcement 2013-14.pdf
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