Royal Mail Group PLC (LON:RMG) posted a slump in first-half profits as the post office company missed its cost savings target and as letter volumes continued to decline.
Profit before tax fell to £33mln in the 26 weeks to September 23 from £77mln a year ago. Revenue rose 1% to £4.93bn from £4.83bn last year as 9% growth in European business Global Logistics Systems (GLS) offset a 1% drop in the UK parcels, international and letters division (UKPIL).
READ: Royal Mail says UK letters volumes and productivity down, shares plunge
UKPIL revenues were hit by a 7% drop in addressed letter volumes, reflecting tough market conditions and lower marketing mail following the introduction of General Data Protection Regulation (GDPR) rules.
GLS revenues were boosted by a 6% rise in volumes, excluding recent acquisitions, but the adjusted operating profit margin fell 160 basis points to 5.7% due to labour and other cost pressures across Europe and the US.
Last month the company warned that full-year adjusted operating profit before transformation costs would be in the range of £500mln and £550mln, well below the £694mln posted last year, as it lowered its cost avoidance target to £100mln from £230mln due to poor UK productivity.
In the first half, Royal Mail took a £52mln hit related to “transformation costs” for UKPIL, which included redundancies, investments to upgrade IT systems and the implementation of its new pension schemes.
Productivity fails to improve as expected
The company reached an agreement with the Communication Workers Union over pensions, pay and working conditions in January, ending a long-running dispute.
At the time, Royal Mail had said that it expected the agreement to improve productivity.
However, in the first half UK productivity fell 0.2%, well below the group’s target. The group now expects its full-year productivity performance to be ”significantly below” its original expectation, which was towards the upper end of 2% to 3%.
New CEO to lay out new strategy but not until March
New chief executive Rico Back said it was “ very disappointing” to have to announce poor UK productivity and cost performance.
“We are setting out, in some detail, the actions we are taking to address our performance issues,” he said.
“They include: the known and understood actions underpinning our £100mln cost avoidance target; pricing movements in UK business mail and in many GLS markets; undertaking an assessment of the productivity and efficiency opportunities under our agreement with CWU; conducting a UK network review, which aims to clarify how we can create a modern, optimised and efficient network to deliver letters, parcels and other products; and at the capital markets day we will provide an update on a Royal Mail for the future and our direction for the next five years.”
The capital markets day -- Royal Mail's first since its initial public offering in 2013 -- will be held in March 2019. Investors had hoped the strategy update would be released alongside the first half results.
Royal Mail raised its interim dividend by 4% to 8p each despite debt rising to £470mln from £382mln last year and £308mln in cash outflows, including £100mln related to pay awards.
Shares fell 3.4% to 335.9p in morning trading, reversing an initial gain.
Organisational restructure expensive and risky, says analyst
Nicholas Hyett, Equity Analyst at Hargreaves Lansdown, said: "The new agreement with employees, reached earlier this year, avoided industrial action, but it’s proving difficult to deliver the improved working conditions and cost savings at the same time. That’s no great surprise, and it’s only likely to become more difficult from here.
"An organisational restructure looks like it’s on the cards as the group tries to get back on track and, while we’ll have to wait for next year’s strategy day to get the details, that kind of thing is expensive and risky.”
Liberum maintained a 'sell' rating and target price of 250p.
"Royal Mail faces significant structural challenges with little visibility on how the business might be turned around," it said.