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International Distribution Services’ (IDS) leadership is working hard to drive profitability into both reporting segments (Royal Mail and GLS) ahead of the Board’s recommended sale to Daniel Křetínský owned EP UK. In the first half of the financial year the Group turned its previous years’ losses into a £61m operating profit on revenues that grew 8.2% yo-y to £6,343m.
Likely takeover by EP UK
Despite the controversial issue of the UK’s primary postal operator being acquired by Czech billionaire Daniel Křetínský, the IDS Board remains convinced of the benefits of such a takeover. In its H1 earnings release it stated, “The IDS Board is unanimously recommending Shareholders accept the Offer. The Board continues to believe that the Offer by Bidco reflects the value of GLS’ current growth plans and the progress being made on change at Royal Mail. It provides Shareholders with the opportunity to realise the value inherent in the IDS business in cash, against the execution risks in delivering IDS’ current strategy, uncertainty over the nature and timing of Universal Service reform and the need for significant strategic investments.”
Royal Mail losses lessen
The domestic postal and parcel carrier segment Royal Mail reported a 79% y-o-y drop in losses to -£67 million in the half year, on revenues that grew 10.7% to £3,921m. According to IDS Chief Executive Martin Seidenberg, it “Made good progress on its modernisation agenda in H1, delivering operational change, innovation and further expansion of our out of home footprint.”
The universal service obligation over letter mail is one of the chief obstacles to profitability in the eyes of the company’s leadership. In a recent proposal to postal regulator OfCom, IDS suggested ceasing all non-First Class mail deliveries on Saturdays, including business mail. This would allow for 1,000 voluntary redundancies to be made by the postal operator, that won’t charm the workers’ unions with whom Royal Mail has only just emerged from protracted industrial action.
One global trend affecting many parcel carriers around the world is the emergence of low priced Asian online marketplaces like Temu and Shein. Royal Mail’s international parcel volumes grew 37% y-o-y yet its international parcel revenues grew just 9.1% in the same period. Revenue per parcel has fallen 13.0% in the last six months as a result to £3.61 and is now just 15.1% per unit more than domestic parcels. Seidenberg made no specific mention of this issue but instead focused on the historic problems facing the postal operator that includes:
- Reducing the number of weekly domestic mail cargo flights
- Passing heavier parcels out of the Royal Mail network and into the ParcelForce Worldwide network
- Rolling out seasonal working hours for postal workers
- Tackling sickness absence rates among postal workers
- Putting new postal workers on less favourable employment contracts than their predecessors
- Improved parcel handling automation, that the carrier claims is now 84% and should raise to 90% by the end of the financial year
Leadership say that Royal Mail is ready for the coming peak season, and with the improved financial picture in the preceding months there is every reason to believe that this is the case. Given the added volumes from Asia, this could be an interesting time for the company as parcel volumes have already surged without adding greatly to operating income.
GLS profits fall significantly
Usually the cash engine for the Group, GLS made a £128m operating profit this half financial year but this was still down 14.7% y-o-y on revenues that grew 4.4% to £2,432m. GLS’ operations in Italy, Germany and the US helped the fall in earnings.
As with Royal Mail, Seidenberg seems to blame courier and staff costs for the fall in earnings. Regarding Italy, one of GLS’s largest markets, he said “Revenue grew by 3.4% in Euro terms” but “Operating profit declined compared to the prior year due to wage inflation and regulatory changes impacting the subcontractor base.”
Germany is another large market for GLS and this too had problems with staff costs for the carrier. Seidenberg said that revenue increased 7.8% in Euro terms but, “Operating profit fell due to cost pressures including a minimum wage increase and higher costs in linehaul and last mile delivery.”
GLS USA has been loss-making for quite a while and to help tackle this the carrier divested its road freight operation in September. Even so, underlying revenue still fell by 7.5% y-o-y in USD terms though Seidenberg said, “Operating losses reduced compared with the prior year.”
Looking forward, GLS has gone into competition with the biggest logistics players in the world like FedEx and DHL by offering direct parcel forwarding between North America and Europe. Where international revenues per parcel are falling at Royal Mail, Seidenberg said of this new opportunity, this “Remains a significant potential opportunity for GLS with higher than average revenues per parcel.” Overall, another mixed picture for the UK’s mail and parcel universal service obligation carrier, that isn’t out of the woods yet as far as the medium term drive to profitability is concerned.
Author: Richard Shrubb
Source: Ti Insights
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