Royal Mail PLC (LON:RMG) has warned annual addressed letter volumes could drop more than expected due to the potential impact of the General Data Protection Regulation (GDPR) and business uncertainty.
In a trading update for the first quarter, the postal operator said it continues to expect letter volume declines in fiscal year 2018/19 to be at the higher end of its guidance range of 4-6% but it “may fall outside the range”.
The company believes GDPR rules, which were implemented in May and aimed at protecting the data of individuals within the European Union, could lead to less marketing mail volumes.
“We are monitoring any potential impact closely,” Royal Mail said. “We continue to work with customers to find solutions for their marketing mail needs.”
In the international parcels business, General Logistics Systems (GLS), Royal Mail said it still anticipates a “good performance” for the year but margins may be hurt by ongoing labour market pressures in many of its markets.
Parcels growth offsets letter decline in first quarter
For the first quarter ended June 24, the group posted a 2% increase in total underlying revenue as an 11% increase GLS revenue offset a 1% fall in its UK parcels and letters (UKPIL) business.
READ: Royal Mail's profits drop on pension charge, revenues rise on growth in parcels
In UKPIL, addressed letter volumes and revenue dropped 6% and 7%, respectively, while parcel volumes and revenue edged up 7% and 6%. Excluding the benefit of elections the same period a year ago, UKPIL revenue was flat and total letter revenue was down 5%.
GLS delivered a 10% increase in volumes, boosted by a strong performance in Italy, Denmark and Spain as well as expansion in Poland where the company opened three new depots to meet demand.
Overall trading for the three-month period was in line with the company’s expectations.
Shares rose 3.18% to 496p in morning trading.
Nicholas Hyett, equity analyst at Hargreaves Lansdown, said: "All-in-all these are reasonable numbers, but with cost-cutting a major focus at Royal Mail it’s difficult to get too excited without some indication of what’s happening to margins. For that, we’ll have to wait for the half year.”
Threat of competition in parcels
Russ Mould, investment director at AJ Bell, said the figures are hardly surprising as Royal Mail has been telling a similar story for some time with falling letter volumes and rising parcel volumes.
But he said the biggest hurdle for the company is tackling growing competition in parcel deliveries from the likes of Deutsche Post and Amazon.com Inc. (NASDAQ:AMZN).
“The future of Royal Mail is all about dealing with fierce competition on the parcel deliveries side and achieving productivity improvements across the business, such as through increased automation,” he said.
"The latter could help to make the sorting and sequencing parcels more efficient and thus free up workers to spend more time delivering items."
Impact of pensions and pay deal with union
Royal Mail said it expects extra cash outflows for the year after forking out a frontline pay award of £101mln in the first quarter as part of a deal with the Communication Workers Union (CMU) in February to end a long-running dispute over plans to replace the company’s defined benefit pension scheme.
The group 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.
Rico Back, who took over the reins from Moya Green as chief executive in June, said: “In the UK, we are making progress with the trials and initiatives under our new Pensions, Pay and Pipeline agreement. We, together with the CWU, are working with Government to enable the introduction of a Collective Defined Contribution scheme.”
Liberum maintained a 'sell' rating and target price of 415p, saying it remains concerned about cost headwinds that it does not think can be mitigated by productivity improvements.
Ofcom investigates quality of service
Meanwhile, regulator Ofcom is currently investigating Royal Mail’s quality of service performance last year.
“We welcome the opportunity to continue discussions with Ofcom about a number of factors that impacted our quality of service performance, as well as the actions we have taken to address those challenges,” the firm said.