Edited Transcript of RMG.L earnings conference call or presentation 25-Jun-20 8:00am GMT

William Gibson, the science future writer, said that the future is already here today, it’s just not evenly distributed. In essence, that’s the story of our 2 businesses. We have 2 very different businesses in very different positions. Whilst you will see from this morning’s presentation is that GLS, we have a business that is already positioned to achieve further success in its market. It’s coping well with volume increases from B2C as well as continue to perform well in B2B. But in Royal Mail in the U.K., which has struggled to move forward as quickly as it should have to deal with fewer letters and more parcels, it now seen its future arrive more quickly. And therefore, the business needs to adapt faster. With both a solid balance sheet and operational leverage to make that happen, but the window of opportunity is running out.

I’ll give you an overview of how we will progress the 2 businesses, and then I’m going to pass on to Mick, Stuart and Martin to talk a little bit more. But before we get there, I want to pay tribute to everyone at Royal Mail and GLS.

If you look to the left view, this is a sign which has been on the post box nearest my home for the past 15 weeks. It started to look a little bit faded from when I took this picture on April 14 at the start of the lockdown. But the message is still there, and it’s still the same. It says, “Thank you for being there. You are brilliant.”

Royal Mail and GLS colleagues have been a source of strength to communities in this country and internationally throughout the current COVID crisis. They played a crucial role in keeping both countries and communities going, whether that’s through the delivery of vital equipment such as testing kits, as you can see in the picture on the right-hand box, or the demand for more and more parcels, whilst delivering letters to 31 million households in this country. Both brands continued to stand high, particularly Royal Mail in the eyes of the British public, and it’s a source of enormous pride for everyone at Royal Mail. Now we’ve been truly the fourth emergency service through the current crisis.

I said that we’ve seen — we’ve got 2 very different businesses, and one has a legacy going back 500 years, the other is about 20 years old. Historical legacy, however, is both a blessing as a curse. As someone once said, the risk of any great brand that has its history in the past is that it can get a little bit dusty. In the U.K. Royal Mail, we’ve allowed our legacy in letters to hold back operational changes we should have made to serve our customers greater online presence on the move to e-commerce.

Our bureaucratic decision-making structure has slowed us down. And even though we spent more than GBP 850 million on business transformation over the last 5 years, we’ve not kept pace efficiently with our customers’ demand for more and more parcels and manage the decline in letters. And you can see that in the top chart on this slide.

Our existing plan to improve inefficiency in letters and to take advantage of the opportunity to transform our business in parcels is obviously still the right one, however. What we need to do in the U.K. is we need a step change in what we do.

Internationally, within GLS, we’ve avoided many of the constraints, which we have seen in Royal Mail. We’ve developed an entrepreneurial culture and consequently, GLS has a strong presence in B2B markets across Europe and increasingly also B2C. And you can see that in the bottom left chart there. And this gives us a great opportunity for profitable growth going forward. So with GLS, the opportunity is to accelerate the change.

If we look at COVID, and COVID-19 has accelerated change trends that were already happening in our marketplace. And though we should assume some mean reversion, the habits of our customers have changed for good. In April and May, we’ve seen a 39% decline in letters with addressed letters down 33%, and 37% volume growth in parcels.

It’s obviously difficult to predict what might happen for the rest of the year. And what Mick will show in a few moments is a possible scenario we prepared on what might happen in the course of the year based on an assumed GDP decline in the fiscal year to March 2021 of 10%. As you know, there’s a wide variation of official forecasts and the treasury recently published on June 17, it’s own paper on independent forecast, which averaged out, I think, at around 9.2% GDP decline for this year. So our own forecast is really much in line with that.

Mick’s also going to show you a scenario based on a deeper recession of GDP down to 15%, and possibility of further lockdown restrictions later in the year. That obviously has a more negative impact. We use this as a board to stress test our own plans.

In the first couple of months since the COVID-19 crisis hit Europe and North America, GLS has seen a significant shift from B2B to B2C, adjusting the mix of its business, and resulting in significant volume increases across its markets, at little or no cost. So both so far, it’s been so good for GLS, but we’ll see more visibility later in the year. Again, Mick will show you later what the impact might be on GLS over the course of the year to March 2021 in a few moments.

So if COVID-19 has accelerated trends that were already happening, there needs to be a reasonable response both to the immediate impact of that change and also its lasting effects. So immediately, we’re going to take steps to reduce our people and discretionary costs. These will take full effect over the course of the next 18 months, and we’ll save GBP 330 million on an annual basis in 2021, ’22. We’ll also improve our cash flow by reducing capital expenditure over the next 2 years by a figure of some GBP 350 million — GBP 300 million to GBP 350 million, and Mick will talk to that later. We’ve also canceled senior level bonuses and dividends. We have, however, throughout the crisis, awarded a bonus to our frontline colleagues who’ve been working through the crisis since it started back in May — in March rather.

Now we need to continue to execute on these programs that are already underway to improve our efficiency so that any pay rise for this year and the next can be funded by productivity improvements. There’ll also be no pay award for senior managers this year. If we can make sufficient progress on these changes, they’re designed to bring the group and both businesses within the group back to free cash flow positive in 2021-’22. Obviously, GLS is free cash flow positive throughout, but Royal Mail, as it goes through its restructuring, will be negative this year.

But we also need further change to be sustainable for the long term. While some of the efficiencies we can achieve in the short and medium-term will improve our performance in letters, we do not believe they’re a dramatic shift that we’ve seen in letter volumes so far will recover to anywhere near where they’d be.

The decline in letter volumes in the last 5 years has been accelerating away anyway. Over that time, the profitability of the regulated business has declined by 95%. We will be materially loss-making in Royal Mail this year. Therefore, we’re engaging with our unions and our people to work together on delivering the change we need to respond to the challenges we face. We’re ready, willing and able to have talks with our union, and Stuart will update that in a few moments.

Whilst our customers want many more parcels, they want fewer letters. We’re delivering, on average, around one letter per household a day in the U.K., around half of what we were doing at privatization. Total letter volumes today are about half of what they were when the USO was signed in 2012. Accordingly, we will be looking to engage with our unions, the regulator and government to deliver a modern and sustainable USO. But even with what we can do in letters, in terms of further efficiency, the scale of our customers’ usage of letters, the decline has been considerable over the 5-year period.

Finally, given the uncertainty of the position this year, the Board is not proposing a final dividend for 2019-’20, and is not at this point intending to pay a dividend for this year, any dividend to investors in the short-term is likely to come from GLS.

Now I spoke earlier about — when we met earlier in May, about management restructure. I spoke about the different positions of our 2 companies. As I announced last month, we’ve simplified the group structure and removed complexity. Structurally, we’ve seen 2 businesses with very different missions and with limited certain synergies. In our domestic market in the U.K., as I said earlier, we need a step change in performance. We need to grow our parcels business ahead of the market whilst maintaining its position in terms of quality. At the same time, we need a change — in the pace of change so we can compete and generate sufficient returns, and we need to fix or exit businesses that are underperforming.

In our international business, we need to take advantage of the acceleration in growth from B2C and the opportunity that, that gives across our markets. We’ll review whether we’re in the right markets, and we need to ensure that we need a positive return and positive contribution everywhere. As group CEO — CFO rather, Mick will monitor delivery of our plans, challenge both Stuart and Martin and ensure the pace in our delivery.

So just to summarize, COVID-19 has accelerated market trends. As I said earlier, our plan in the U.K. is to improve efficiency in letters and transform our activities in parcels, and Stuart will talk to that in a moment. It’s obviously the right one, but we need to move as quickly forward as we can.

We’ve taken immediate steps to stabilize business performance and set the group back on a path to profitability as soon as we can. In the U.K., we’re reducing spend to achieve GBP 330 million cost savings by 2021-’22. And to preserve cash flow, we’ve reduced capital expenditure across the group, with no bonus for senior executives and a dividend suspended until 2021-’22. In GLS, however, we have a clear opportunity for profitable growth, and that will be our focus with GLS.

I’m now going to pass over to Mick, to talk you through the financials for the year and the scenarios, which I outlined earlier.

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Mick Jeavons, Royal Mail plc – Interim CFO [4]

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Thanks, Keith, and good morning, everyone. I’m going to start today by stepping through the results for last year. And then I’m going to talk a little bit about what we might expect in the remainder of this year, including, of course, some of the impact we’ve seen on our business in the U.K. and overseas since COVID-19 hit.

So the headlines from last year, I’ve shown the key metrics for the year pre and post the impact of IFRS 16. So you can see the material impact it has on some of the figures. It’s worth noting that the prior year numbers have not been restated for IFRS 16.

Group revenues were up 3.8% or around 3%, excluding acquisitions. Adjusted operating profit down 13.6% to GBP 325 million. Pre-IFRS 16, this was GBP 312 million, so within the projected range of $300 million to $340 million that we gave.

Margin was compressed, as expected, down 60 basis points. EPS down to 19.6p. The year-on-year improvement in our trading cash flow was flatted by some timing differences and the impact of IFRS 16. I’ll say a little bit more on that later. Net debt increased to GBP 1.1 billion, again, impacted by IFRS 16 as the operating leases were brought on to the balance sheet. Excluding that impact, net debt actually reduced over the course of the year.

Keith already said the Board’s not recommending a full year dividend due to the current uncertainty in the outlook, and nor are they proposing to pay a dividend through the remainder of FY ’21. Our ambition is, though, to restart dividends in FY ’22, supported by cash from GLS.

Moving on to the U.K. business. We’ll be referring to the U.K. business as Royal Mail rather than UKPIL in the future, reflecting the new organizational structure we’ve put in place. So this slide relates to the U.K. We can see the margin compression we saw in the group last year was entirely a U.K. concern. Profits down over 40% to GBP 117 million and margin now at 1.5%. Revenues were up 1.6% in the year. Parcel revenues of 4.6% on 2% volume growth. The volume growth rate was negatively impacted in the second half. Lower import parcel volumes as China closed down in the early stages of the pandemic, hence our growth rates. We did see continued really strong growth in our premium truck services, where volumes, including returns were up 18%.

On letters, whilst the addressed letter volumes were down 8%. So in the middle of the revised guidance range of 7% to 9% we gave, revenues were only down around 1%, supported by the 2 elections we had during the year and also by similar targeted price increases we put into the market in January last year.

Excluding the election impact, the underlying revenue trend was weaker, impacted negatively by ongoing business uncertainty in GDP, something we saw particularly in advertising mail.

On to U.K. costs. Expenditure was about 2.8%. Once again, people caused pressure from both frontline and managerial pay inflation wasn’t offset by productivity gains. The change program has been too slow to deploy, productivity ending the year at only 1%. The full year number was also impacted negatively in March as absence rates increased as COVID-19 took hold in the U.K. and also by the additional investment we made in — ahead of Christmas to maintain quality through the general election.

Year-on-year, hours reduction was 1.4%. Non-people costs increased, impacted by the cost of growth and higher fuel costs in the country and logistics unit, along with significant inflation in the cost of overseas delivery for exports. Further cost areas performed well, noticeable reductions in IT and other operating costs. The latter were more than offset by the onset of COVID-19, which resulted in unplanned cost for PPE in March and also caused us to increase our provision for bad debt at the year-end.

Moving on to GLS where we had another strong year. Operating profit was up GBP 208 million, and the overall margin improved to 6.6%, well into the 6% to 7% guidance range we gave. Revenue was up 9.5%, including acquisitions, 6.3% excluding. In spite of the cost pressures during the year, we managed to successfully introduce targeted price increases that protected and even improved margins.

Germany had a great year. Revenues up around 10% and also strong volume performance in Eastern Europe, Poland and Denmark. Costs have continued to increase in GLS, driven by growth and the ongoing inflationary pressures, something we’ve spoken about before. We’ve accommodated a further shift towards B2C during the year. We were right to position at the year-end where B2C now represents almost half of our volume. Yet, we still managed to improve our margin performance in the year. Now our ability to successfully navigate margin progression whilst this inevitable mix shift occurs towards B2C, the real challenge for the future. So we’ll hear more from Martin on that in a while.

A few words on spec items. Most of these were trailed at the half year, just to point to a few of them. The regulatory fine, we continue to appeal the fine issued to us in respect of the alleged competition law breach. We’ve provided the full now in that respect.

On impairment, I should highlight, we’ve taken the decision to impair the balance sheet of our Parcelforce business in the U.K. at this year-end. Performance of Parcelforce has deteriorated during the last year or 2. Without fundamental change, we now expect it to be cash flow negative for the foreseeable future. Stuart will say a few words on the initial steps we’ve taken to start to fix this business in a while. Further down, you can see the profit on disposal of property, this mainly represents the deal we did on the sale of 3/4 of our development site at Nine Elms in London.

Moving on to trading cash flow. The composition of volumes in some of the categories have changed quite materially with the introduction of IFRS 16. These impacts are given in the appendices, have shown the net impact of IFRS 16 as an adjustment on this slide. Excluding the new standard, trading cash flow improved during the year, really as a result of beneficial movements in working capital. This principally related to the unwind of timing differences on payments made in the prior year, which depressed cash flow in that year. Excluding these one-offs, working capital was broadly comparable year-on-year.

CapEx was slightly lower in the year. There were tighter budgetary controls in the U.K. but also some delay in starting up some of the transformation initiatives that we highlighted in our plan last year.

As mentioned earlier, the principal changes in net debt resulted from the introduction of IFRS 16. If you exclude these changes, the position actually improved during the year to GBP 46 million. The cash inflow from London development portfolio is the net of the GBP 144 million of proceeds received on Nine Elms and Mount Pleasant, offset by the ongoing investments we continue to make off of bot those sites. We’re pleased with the liquidity position and the conservative state of the balance sheet that we have as we face into the headwinds in the coming months.

In many ways, last year’s performance was in line with what we set out to deliver. Adjusted operating profit, GBP 325 million, GLS margin, 6.6%. GLS really does continue to go from strength to strength. But the truth in the U.K. is the underlying position was weaker than the results. Performance was flatted, in particular, by the 2 elections we benefited from.

We were already trending towards losses before COVID-19 hit. And now the pandemic has arrived, it’s introduced additional uncertainties into our outlook. So this unprecedented level of uncertainty means that providing outlook guidance for this year is really difficult.

We do know some things, though. We expect bad debt levels to increase. We know we’ll have some additional costs relating to COVID-19. We’ll have restructuring charges of around GBP 150 million from the program Keith outlined, and Stuart will give more detail on in a while. And we know we’ll need to find a way to fund any wage inflation through productivity gains. But ultimately, our actual bottom line performance this year will depend on other variables, which are much more difficult to predict. So what happened next with the COVID-19 pandemic, what really are the economic growth prospects in the U.K. and overseas. And how will customer behaviors change following the pandemic? What will our new normal be for the prior industry.

Now we really don’t know the answer to these questions. So instead of guidance we’ve laid out 2 scenarios that highlight the different dimensions, people should consider when thinking about the impact COVID-19 might have on our businesses. I should note that these scenarios don’t represent guidance or management’s views on the outlook.

First, a few words on how COVID-19 has impacted us to date. In the U.K., we’ve seen a large shift in the mix of business. Parcel volumes up 37%. Our domestic account parcels, excluding Amazon, so the service principally used by e-retailers, up 65%, as people shopped at home and the high-speed closedown. Letters have gone quite dramatically the other way though, with addressed letters, excluding elections, down 33%, driven by the collapse in advertising.

There are 2 variables at play here. Firstly, what will be the rate of change from these peak impacts in the coming months? So how will it unwind? And then what level will the new normal position will be based off for both letters and parcels? And it’s this that drives the uncertainty.

Costs in the U.K. have increased during the crisis, driven by the cost of dealing with COVID-19, so covering sick absence, social distancing, providing PPE. But also alongside the higher cost of handling parcels. It really would have been good to have our parcel hubs up and running in the last couple of months because without them, we’ve needed to invest really quite heavily in people to manually sort the extra volumes of parcels.

In GLS, performance has been a bit more volatile, but for the last couple of months, we’ve now seen growth fueled by B2C. This growth more than offset declines in B2B as the business has closed down across many markets. To date, GLS has been able to deliver improved margins on this growth. So there’s clearly a risk to the sustainability of that position as we move forward.

So how do we try and communicate what all this means for the financial prospects for our businesses? We’ve laid out 2 scenarios for the year. As I said, neither represent our forecast, but rather they highlight the moving parts at play and hopefully show why the outlook is south of the call.

The first scenario assumes that lockdown continues to ease from now, with a recession in the U.K. of around minus 10% for the financial year. So that maybe is our kind of more mainline view of the current expectations in the broader market.

The second scenario is more gloomy, a further downside case, if you like, contemplating the prospects of a deeper recession, minus 15%, and also the prospect of a further lockdown later in the year. And we use this to stress test our plan, as Keith mentioned.

Looking at scenario one, there’s clearly a major impact on letters. Revenue is down by around 16% for the year, with a slow recovery from the 33% volume declines we’ve already seen. There’s an assumption of a recovery in advertising and business mail volume, decline rates start to improve as businesses reopen. But we don’t see a bounce back to the pre-COVID run rate this year.

Parcels revenue grows by 12%. They’re continuing to be fueled by the high-growth rate in domestic account parcels. Both during lockdown, but also remaining at higher than normal growth rates in the medium term. This growth is mitigated slightly in the second half, where we expect potentially a decline in international parcels as the impact of price inflation in international settlement, driven particularly by price hikes in the U.S. and the possible impact of Brexit impacts on cross border volumes.

So this scenario will result in year-on-year revenue decline of around GBP 200 million to GBP 250 million. But no, this includes the GBP 82 million impact. There’s been no election this year, or so we assume. The mix shift of parcels drives extra cost into the business since the growth rate has accelerated before we’ve completed our planned automation. The extra cost of a manual sortation, as I mentioned, but also the extra cost of trunking parcels around the country.

There are also one-off costs, but hopefully, one-off costs associated with COVID 19. This includes the cost of absence, PPE, but also the cost of social distancing, for example where we can no longer share delivery plans.

The second scenario has lesser volume declines, which are higher, parcel growth, not as strong due to the weaker economy, resulting in an overall revenue decline of GBP 500 million to GBP 600 million. Again, this includes the GBP 82 million impact of no election this year.

There’s still incremental cost of the mix change towards parcels due to the manual nature of most of our sortation, and the COVID-19 direct costs are slightly higher.

In GLS, as I mentioned, performance so far in the crisis has been good. But again, the average is too uncertain to call. The scenarios again look at 2 outcomes. In the first, we have a less severe recession, whilst we see the strong growth in the first half mitigate as the recession bites in some of the B2C volume we picked up in lockdown starts to fall away. We’re still able though to maintain margins in this scenario at around 6% on good overall top line growth. The second scenario, again, a bit more gloomy, higher volume declines in the second half, an additional pressure on pricing and costs assumed to reduce margins to nearer 5%.

I did expect, given the uncertainty, we’ve done a lot of analysis, stress testing the funding position. We’ve always sought to maintain a conservative balance sheet. As a result, we entered the crisis with strong liquidity and we definitely believe it’s adequate to see us through the crisis and some of the restructuring activities we must now deploy at the same time.

We’ve already actioned initiatives that Keith highlighted to conserve cash, just in case COVID-19 takes a turn for worse, but this also allowed us to refocus where we spent some of the available capital. We now need to accelerate progress on our transformation of the U.K. business. We’ll continue to invest in key programs for the parcel hubs and the technology capability in the operation. And some of the capital we save will be invested in some of the restructuring activities that we are now having to get on to.

We certainly see headwinds for the year. Will likely be materially loss-making in the U.K. this year, but we believe we have a structured plan to cope with the crisis and then to restore profits and dividends in the future.

I’m now going to hand off to Stuart so he can take you through a bit more detail on those plans in the U.K.

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Stuart Simpson, Royal Mail plc – CEO, Director & Interim CEO of Royal Mail (UKPIL) [5]

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Good morning, everybody. Thanks, Mick. Thanks, Keith. First thing I want to say is I feel very, very honored and very humbled to be asked to lead the organization, even in the interim of this extraordinary time. And most importantly, the first thing for me to do is to really thank people. I’ve been out and about, over the last couple of weeks, going to various offices, night shifts and mail centers just to thank the people. It really has been remarkable what everyone has done, how people have come together, the frontline, the managers, the unions, to keep the country moving and connect it in this extraordinary time. Really, really tremendous job.

Now as Mick said, I will take you through a couple of things. The first will be the current situation where we are as a business; second, the immediate actions that we’re taking; and then the third sort of longer term initiatives.

And just before I go to that, a couple of initial observations. Just to reiterate, we are a people business, both in terms of the numbers that we have employed, but also the service we provide. The COVID-19 challenge that the country has faced, I think, has shown the value of this business to the country, to the communities, to the businesses, how we’ve kept people connected, moving — the economy moving at this time has been fantastic. And the enthusiasm and energy from everyone in the business to do that, whether it’s frontline, back office to make changes in how we work there has been tremendous. And harnessing that enthusiasm and energy for the people is something we must continue to do.

I think second thing is we’ve talked about is strategic direction, and Keith has pointed that out. The direction of travel we laid out before is broadly correct. We need to automate bringing parcels upstream, as Mick said, sorting over 1 billion parcels manually is just not a way to be efficient or make money. And it’s been a real challenge for us during these last few weeks. And then we also need to revise delivery. Again, we’ve talked about this before. We need to change that to meet the evolving customer and consumer needs.

And the next point just to highlight is increasing the pace of change. I’ll talk a bit more about this, but we can, and we already have made decisions to move faster. And I’ll give more details on those.

The next thing is increasing focus. We have a history of here of probably trying to do too many things all at once. By leaning out management, by trimming back to CapEx, getting a real focus, we will get better delivery. But importantly, it will also improve the cash generation, which fundamentally will underpin the security of this business in the long term.

In terms of my priorities, this could be a very long list of challenges. This, as many of you know, this business has a lot of challenges. But what I’d like to stress again is if we work with our people and harness that enthusiasm and huge focus on customer care and customer service, we can make a huge difference to the future.

The next 3 points, increasing market share, we need to capitalize on the opportunity presented by COVID-19. We’ve had tremendous growth in that area. Customers have been sensitized to new ways of working with us and consumers have been sensitized to new markets. So making sure we continue that, harvest that opportunity over the coming years.

Hand-in-hand with that, fixing the cost base. Again, we’ve already taken some decisions on that, and I’ll expand on that in a bit more detail. But there are short-term immediate actions we are making that will address this.

And then the fourth thing is fix or exit underperforming businesses. I’ll talk about Parcelforce in more detail, but we’ve already faced against that challenge. It’s a great brand with a great network, but it was losing a significant amount of money, and we are going to phase into that and fix it. If we do all of those things, that will lead to improved cash generation. And as Keith and Mick have already mentioned, we will be cash positive in the U.K. in ’21, ’22.

Now moving on to the first of the 3 key things to talk about the current status. I don’t intend to go through this page. You can read it at your leisure. But overarching, I think I’d pull out the pace with which this business responded. It was something people wouldn’t believe we were set talking in February. The changes that we manage in place in an incredibly short period of time because we all came together and worked. It was tremendous. We had offices running with 40-plus-percent set, yet we still kept serving those communities. And that speaks a huge amount to the commitment and motivation of our managers and our frontline and unions to engage positively when there is a challenge.

I think one highlight to take away has been the growth in account parcels, up 65%. This is what I was saying before, how we harvest that and make sure we keep satisfying those customers, providing brilliant service to make sure they stick with us post this CV period. I think a lowlight, as Mick and Keith have already mentioned, is the letters. There is no question there’s been a huge acceleration in the decline in letters, 33% down on addressed letters, 39%, close to 40% on all letters. Advertising mail, particularly hit, 63% down.

Now we’re already out stimulating the market. We’ve got incentive packages in place. We will do everything we can to get that back into our business. However, we do have to phase into the fact this is going to be a different business going forward. We’ve effectively got 4 or 5 years worth of change that we talked about landing now, and we need to phase into that, revise the business to address those challenges.

And moving to transformation in terms of that statement. It was a very tough year last year, the industrial relations environment was not great. Coupled with that, we had 2 elections. Great from a provision of service to the country and a revenue perspective, but it actually stops you driving change because you can’t risk that demographic process. So a really challenging environment, particularly in second election that had a coincidence with Christmas for the first time in over 100 years. But we’re already at peak capacity, yet we still took in all the additional volume for the elections.

The quality we set out to deliver the quality for effectively the first time for 4 or 5 years. Through 50 weeks, we were absolutely on track to do that. But the lock down in the last week just nudged us below that. Second class still go over the line. But it was a tremendous first-class performance given the challenges we have, and it was the best performance in our premium products in over a decade. Our track products, which is the ones that underpin the account growth.

Productivity was challenging, but hidden within that is the 2 elements, workload was down. Actually baked within that, there were around about 2,000 people left in the business. That compares to the prior period when we have more people coming into the business. So again, we’ve managed to change the direction of that.

In terms of trials, some good progress. We’ve got the PDA actuals. This is where the PDA monitors and measures where everyone is, so we can provide the best service to the customers. That’s out being used. We can always leverage it more. I think in terms of the network design, we landed the 20th parcel machine about a month ago. I went and saw it on the night shift a couple of days ago. It’s working fantastically the people absolutely loving the machine. And again, small things like that, landing that machine, enhances the quality, the service and the efficiency, what we provide to our customers.

So some highlights. Sort of very difficult things. We’ve lost a year on the hub automation in major hubs. There was a review of the supplier that we were ready to sign with this time last year. We have now signed with a new supplier, and we are now going to be moving quickly into that first half, but a challenging position on some of the transformation.

Now just wrapping up on the current status. The COVID-19 problem has not created our financial challenges. It’s not created business challenges that we are facing into. It has accelerated them, but these are not new things to us. We knew we had to automate parcels. We knew we had to revise delivery. The fact is it’s come at us much quicker, roughly 3 or 4-year acceleration. As Keith said, we will have more parcels revenue in the U.K. this year and letters revenue. That was something we weren’t anticipating just yet.

We must change faster. And to that end, we are starting to take immediate actions, which I’ll now expand on. First will be in Parcelforce. It’s a great brand. The challenge is, that business was losing a significant amount of money. So what we’re doing is we’re merging the management of that. We will have one view of the market with an absolute customer focus, making sure we can do exactly what those customers need and serve them, whether it’s through Parcelforce brand or the Royal Mail brand, we will have one integrated view of that.

On the back end of that, we are going to look at what is the most efficient way to handle every parcel. We know there are some parcels going through each network that are probably better handled by the other. By pulling the management together, we can make sure each parcel takes the most efficient route through our networks, meeting the customer promises that we’ve made. And just to reemphasize, the Parcelforce brand is a great brand. We will maintain it, and we will maintain that network. But that is a change we’ve already made, and those — that integration is already underway.

Second example of immediate change, and this is a really tough decision. I’ve been with the business 11 years. I know many, many of the managers within this business. We announced this morning that we’d be reducing that population by around 2,000 people. So over 20% reduction in management. I started that last night by talking to the top 250 people. That population we’re taking down by 50%.

A very, very significant change in that senior management population. This is to drive a cultural change to improve accountability, improve responsibility no hiding places in functional fox holes or large committee. This will be a leaner, more commercially focused organization that can move faster, which is what it has to be given the challenges we’re facing into.

Those senior people will be leaving the business over the next few weeks. We then move to the bulk of the people that will be — all will be gone by March next year. There will be different phases of that. The operational managers, that will be hit less than other places. The prior — the main areas where the management reduction is are in senior management and back office. However, there will be reductions in the operational management of around 10%, as likely to be the last people that leave as to protect service over that key peak period at Christmas.

The next example of a major change is a real push on our non-people staff. We know, as Mick has already said, we will have significant headwinds on our non-people staff. The step change we’re sitting in parcels means we will have more vehicle runs on the road. We’ll have more fuel. We have to stand up more buildings to accommodate the parcels. But within that space, we will be looking at efficiencies. A good example is better fill rates on lorries. What I mean by that is making sure every lorry is full before we move it. Trying to improve the revenue density for a vehicle, which for parcel sports well behind that for letters.

In addition, we’ll be looking at all of the structural costs of fixed cost in the business. To that end, we’re committing to across these 2 buckets, saving of around GBP 200 million that will keep us flat on non-people cost over the next 2 years.

There will be some symbolic changes. For example, we will be leaving our head office here. We’ll be moving up the road to be, in effect, above our main office in London. So we are looking at every single thing we can do on the non-people, and we’re starting now.

Fourth here on the major change is looking at CapEx. I’ve already identified GBP 250 million that can be saved over the next 2 years. A combination of things that canceled. There was a back-office investment and upgrade that we are canceling. We’re looking at delaying things. So there’s a big opportunity in moving the parcels, the letters around on our internal logistics and cages. We’ve looked at that for about a year. There is no technological solution at the minute that can cope with the speed and the weight with which we need to move those. So we will be looking at that again, but it’s delayed for now. And then there’ll be efficiencies across all projects by leaning out the management having fewer things to focus on, we can get more efficient in how we deploy capital.

And just to give you some examples, in the first few weeks, I’ve signed the new sortation supplier to say we’re a year behind on that, but I’ve signed that. That will be coming on stream, that new hub in about 21 months. I’ve signed for the second location for the hub. We’ve signed for the second supplier for the next wave of smaller sorting machines. Those will start coming on in the next 18 months. All of those activities mean we’re moving at pace on the things we know we need to focus on, such as the automation. And we are saving money by canceling and deferring things that aren’t going to pay back in the very near term.

Now turning to the third bucket I wanted to talk about, this is looking at more sustainable change in the long term. There’s 3 areas just to touch briefly on the union at people and the USO. Starting with the union, I recognize the union are a very significant stakeholder in this business. They have been for many years. I’ve worked with them for many years and want to work with them again to phase into these challenges. And there’s no point shying away from it. It is a challenging situation. But we want to work with them to find a solution through this over the coming weeks and months. We have a history of working together and finding innovative solutions. The pension solution that we came into together, CDC pension that is progressing through parliament as we speak, that was a great example of what we can achieve. But we need that mindset and ethos as we face into these new challenges.

The next thing is our people, as I said, right at the start, our people on the backbone of this business, as about every customer, every consumer in the U.K. 6 days a week. And that customer service ethos is remarkable. Now we want to engage with our people in a really positive way. I think what we have done, and they understand, this is certainly my experience from being out and about talking to the front line, they recognize the need for change. They recognize that the changing dynamic in the parcels and the letters, every place they all recognize that mail back has changed dramatically since 2012 when the IPO took place. Around 50% less letters and a significant number more of parcels. So that, I think, is well understood. But what we need to do is make our communications more relevant, more personal, more local to them. So they really understand as this business changes, what does it mean for them?

And that’s what we intend to do. One thing we’ve started, we had a program of 300 senior managers going out talking to officers, talking face-to-face with groups of people, bringing those messages to a local level rather than having some distant discussion about what we’re investing in, in the future. The people want and deserve to know what it means for them. That’s what we intend to do. So I personally talk to every manager every couple of weeks on a conference call that we hold open for Q&A, to try and make sure we have clarity of purpose and focus. And there’s no misunderstanding of the things we need to face into and address. And they are then well equipped to talk to their people down through the organization. So we can and will work with our employees on employee engagement.

I think the final thing is the universal service. The universal service has defined this business for many, many years. It is part of what makes us the fabric of society. And in fact, it’s been underpinning what we’ve done through this COVID crisis. However, the USO was put in place many, many years ago, the universality of one price everywhere, things were very different. Now that universality is fantastic, and we absolutely want to preserve it. But back then the word parcels, it really was a letters business. What we see now is a completely different consumer requirement, different consumer situation. And what we want to do is work with all of the stakeholders with unions with the government, with regulator, and most importantly, with the consumers and the customers to define a relevant and importantly, financially sustainable USO for the 21st century. So that’s what we want to do, and that’s what we need to do over the coming months.

So just wrapping up. Again, I’d like to thank all the people within the business and the remarkable job they have been doing over the past few weeks. It’s absolutely tremendous and I am incredibly proud and humble when I was out in the offices recently seeing what these people have been doing and the enthusiasm that they have brought, the way they’ve served their customers over these past few weeks is remarkable. So a huge thank you, again, for that.

Our strategy is broadly correct, the automation of upstream and looking at how we satisfy consumer needs and demands in delivery. But we do need to move faster. And we are already doing that. I think as I’ve said, we’ve made changes to management. We’ve got to focus on non-people. We’ve leaned out the CapEx so we can and will move faster. And those things will underpin improved cash generation through ’21-’22.

We then need to make sure that the operational change keeps pace with what we’re doing and the things we control by working with our union. And then, finally, we need to work with all of our stakeholders to define a new and different financially-sustainable USO for the future. Thank you.

Okay. I think it’s now on to Martin.

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Martin Seidenberg, [6]

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Yes. Thank you, Stuart. So over to GLS. You’ve heard from Mick already that we at GLS had a good last year’s performance with some challenges still ahead of us. So what we want is, we want to take this positive trajectory into this year, and we want to even increase our speed of delivery. Hence, we set ourselves clear priorities.

Priority one, we want to grow parcels. And we want to grow them in the fields we are playing in. We are playing in B2B, B2C and cross border. And even in the current economic environment, we aim to maintain or even grow our margins as our second priority. And amongst other actions to achieve this, we will deal with our underperforming businesses, which is our third priority.

But how does the COVID-19 influence those 3 business priorities? And to what extent does it support the achieving of our business priorities? I’d like to talk a little bit about the benefits we’re seeing currently in the current environment and also the challenges we’re facing. So the most obvious benefit we have incurred is obviously the volume growth. And because of the growing e-commerce, the growing requirement for home delivery, nationally as well as internationally, we have seen in B2C, a volume growth that has been immense, above 50% as well as internationally more than 25% growth. And so you can say that this growth is really accelerating and helps us to deliver our — towards our growth priority.

It is fair to say, though, that the B2B volumes have declined. And only as lockdowns start to ease, they are slowly recovering. It’s important to note that with the growth, also our networks have adapted quickly in response to the volume change. And that is also due benefit — we are benefiting from our variable cost-based model, and that is respect, both in line haul and last-mile delivery.

We have been able to compensate the increase in delivery costs, which is naturally there because we have more costs, more tools, more parcels and more to see parcels, with a very efficient and productive live haul setup. So in sum, this led us to a stable unit cost development.

So GLS, so far, has been benefiting from the current volume development. And with the volume increases comes another situation, which is that the markets GLS operates in ultimately now is capacity — are capacity constrained. So this has enabled us to increase prices where appropriate and service fees in quite some key countries, like France and Germany.

It is, however, important to note that price increases introduction of service fees is necessary to offset the costs associated with volume volatility, last-mile productivity and also the investments we are making into health and safety in those current times.

Because we have demonstrated in GLS, a continued high-performance throughout the lockdown, we were able and still are able to attract new customers. And on the back of that, we are improving our customer mix and our yield. And what is also impacted by COVID-19 is the customer requirements. We’ve seen them changing over time. And GLS has responded, has responded locally and very quickly. And in a certain sense, it made us always accelerate the technological progress and our developments.

So the customers do want to have their parcel that’s obvious, but they don’t necessarily currently want to get them really handed over personally, and we had to deal with that. So we implemented certain measures. Just one example, we implemented and massively improved our online drop-off commission. For example, in Germany, where for every parcel that’s being shipped, the customer can find online where he wants the parcel or to be dropped, if he’s not at home or if he doesn’t want to basically open the door, it can be dropped at the doorstep or wherever. And we’ve seen an increase of 50% of people using that service.

And on top of that, obviously, we’ve introduced in every country, different various modes of contactless delivery, which is a win-win situation at the end of the day, both for the customer because it’s more convenient for him to get the parcel, but also for us as a GLS company because, of course, it facilitates the last-mile delivery process and reduces the average stock time.

Last but not least, of course, we’ve dealt with the high volumes by introducing additional delivery tools dedicated to see delivery to us mainly in the big capitals of Europe and also evening delivery tours to cater for the changed customer requirements.

So to summarize, GLS does make managers to make use of the changing environment, and this supports the delivery towards our priorities as said before, growth and margin development. However, now the question is, how does GLS capture profitable growth in its individual markets across Europe and the U.S.? Is it a one size fits all approach? No, it isn’t. Actions to capture the market opportunities are very much tailored to our local markets, and that’s what makes GLS successful.

You see here above the chart, where you see where we are — how we were positioned last year and how we were moving in terms of B2C share and international share this year, I think it’s fair to say that GLS has always been seen as a strong B2B player. But in recent years, GLS has already strengthened its B2C position massively. So if you look, for example, on Spain, on the top, they’ve always been playing in the 2C field very strongly. And now they’ve made a massive leap forward to even further focus on 2C.

Whereas if you look at Germany, predominantly still a B2B focused market for GLS, Germany has moved forward as well, both in terms of 2C growth and international growth. So in GLS, GLS is a set of very different countries with different starting positions. However, the B2C share has increased in all of its countries. But as I said, coming from very different starting position. And the management has reacted locally. They have adopted a local B2C approaches, considering what is happening in the market what the competitive landscape is in the market and how the economies develop. The positive effect of this localized approach shows the fact that the majority of our countries has been able to improve their margin. And as you’ve seen before, a mix slide, the overall GLS margin in the last 2 months went up, in April, May, by 1.4%. So a strong local approach helps us to deliver towards our priorities, and that’s what makes GLS strong and is strongly embedded in the DNA of our local businesses.

Coming to the challenges. One of the main challenges was and still is, of course, the volatility in volumes. So I’ve depicted here, on the right-hand graph, 2 examples of 2 countries, Spain and France. And you see how the volumes fluctuated before the lockdown during the lockdown and when the lockdown started to ease. So these massive volatilities are putting pressure on our network, on the quality and on the running costs. We have seen that in many of our countries.

And on top of that, because we are having quite a massive international business because the lockdowns were not in sync timing-wise, our international volume flows were not really synchronized, and they were imbalanced. Taking various operational measures, even within a couple of days, so we had to react very swiftly because the lockdowns came swiftly, and the customers changed their ordering behavior very rapidly. So we introduced, for example, day sortation where required to cope with the volumes. So basically, what we’re doing, we are just sweating our assets more and we’re moving into day and night sortation. We have introduced weekend delivery where required in order to fulfill our service obligations to our customers. We are now serving some cities with second wave delivery. So we’re doing a morning shift and an afternoon shift. And of course, we’ve also amended our line haul setup as required and our transit times. And as a result of all those measures, the GLS network has continued to operate with a reliable service, which is obviously very important for us and our customers. So volatility is a challenge, but so far, GLS has coped on a local level quite well.

Another challenge is to shift from B2B to B2C. And the country organization, which is set up for B2B deliveries, which we have in our portfolio, faces quite some challenges to profitably deliver 2C shipments. And that is more so than a company that is already quite a high 2C share. So you see on the right-hand boxes a comparison of the main parameter describing a B2B and a 2C delivery. And a 2C delivery does drive more stops for the same number of parcels than a B2B delivery because the 2B delivery typically has more than one parcel per stop. Thus, we need more time and/or more tours and vans on the road to deliver the same amount of parcels. And especially if the distance between the 2C stops is high, then it poses a challenge. So we — a do-nothing option was and is not an option. The good news is the GLS countries are used to reacting swiftly and to the local needs. So the countries have taken action to deal with that challenge and mainly around the areas of productivity improvement and technological advancement and digitization. I firmly believe that this is important for us going forward in terms of continuing to deliver positive margins.

Just as an example, GLS has increased massively the usage of digitized route optimization tools and has deployed modern handhelds and increased the focus on the day-to-day productivity management. So those — this mixture of day-to-day management of productivity on the shop floor together with new digitized tools helped us to increase our productivity on the ground. For example, in Germany and Italy, we saw especially during the lockdown situation, an increase of productivity of stops per tour of 20%.

So digitalization is very important for GLS. We are pushing that forward. And in a sense, I think the COVID situation has helped us to accelerate this. And since we expect the favorable parameters like less traffic and customers being at home, which is currently the case, to cede soon, we need to continue our developments in that direction. So we are focusing on maintaining our higher productivity levels even for the time after COVID-19. And again, this will help us to deliver towards our priority as we set it out on margin delivery. This is especially important because we in GLS, we expected to see share to remain continuously well above the 50% mark across the GLS countries.

Finally, we are, of course, also challenged by the protective measures which we had to implement in order to protect our staff, drivers and our customers. I want to make this very clear here: for GLS, protecting our people is the top priority.

Since we operate in a variety of different countries, we have established, of course, different ways of working in line with local legislation. Naturally, it doesn’t come as a surprise: productivity levels tend to decrease as a result of distancing measures in the hubs and depos. And the absence rate went up during the lockdown situations, but they are now back on track again. We have task forces implemented in every country, and it helped us very much to react very swiftly day by — on a day-to-day basis and to implement required changes as needed. We have secured key worker status in all countries where required to ensure that our business continued. So all our businesses throughout all lockdowns continue to operate because we are also an important part to serving the local communities across Europe.

We will continue to invest in personal protective equipment. We expect to spend over the year around EUR 7 million on this. And as one — as I said, this is a top priority for us.

Now coming to our third priority, talking about focus countries. I’ve depicted here Spain, France and the U.S. So in Spain, last fiscal year, we saw good improvements. The integration of Redyser, which we bought, have been finalized, and we managed to achieve an improved cost position. We have removed deliberately low-margin customers, and we followed through a yield management activity, which yielded very positive results and also had a positive impact on our pricing.

So Spain has been delivering black figures last fiscal year. What is the situation currently? We experienced, as you’ve seen also on the bubble chart, a strong volume growth in Spain. The local management is showing a terrific reaction to the market requirements and needs. So in sum, for Spain, Spain is further improving, and I expect the trend to continue.

On France, last fiscal year, France has been facing strong competition. Unfortunately, the volume growth was lower than expected. And the unit operational costs were higher than we expected them to be, which, as a result, led to increased losses in the past fiscal year. We have taken action in terms of organizational change. We have a new management team in place, which is working already and active on the ground. But this year, during the lockdown, GLS France managed to provide consistent service delivery. And therefore, GLS France has acquired new customers and is acquiring new customers and volumes. They’ve also worked on the pricing, which subsequently is improving. So to date, with regards to France, revenue and profit are above last year’s level. However, I want to point out that continued management focus is required to stabilize these initial positive signs, in particular as recessionary conditions may impact the market in the future.

Now last but not least, coming to the U.S. In ’19, ’20, the turnaround progressed, the losses halved, and another bolt-on acquisition of the company called Mountain Valley Express, a small LTL business, was successfully completed and integrated. However, we have to acknowledge that the U.S. business will be impacted by the COVID-19 situation, first and foremost, also because the U.S. business has a high B2B customer share. So to be very clear, it will require further management focus, and it’s a key priority for me to get on top of this ASAP.

To summarize, I think it’s fair to say that GLS is well positioned to emerge stronger from the current coronavirus crisis and to deliver towards the 3 priorities which are named at the beginning of the presentation. We have been able to support revenue growth and margin improvement from the opportunities and the benefits of current market developments. We are able to capture growth with local approaches where we define them locally. Digitization and technological change is important and will remain important for us going forward. The volatile volumes and the required investment and protective measures have impacted our costs. Opportunities to further improve focus countries are being reviewed and will get our full management focus and attention now.

At the end of my presentation, a word of caution, though. We are well moving ahead at GLS, but we don’t know what will still come re COVID-19, how it will impact economies across Europe. And we are a European business, and we have a U.S. business, where you have different economic developments. We don’t know yet how deep a recession will be. This will have an impact, as you’ve seen in the scenarios also that Mick presented, not just on GLS.

With that, I would like to close and hand over back to Keith. Thank you.

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Keith Williams, Royal Mail plc – Executive Chair [7]

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Thank you, Martin, and thank you, Stuart. I’m going to summarize very quickly. And what you’ve seen here is, in the presentation, there’s 2 businesses which both have challenges but have opportunities as well and enormous opportunities. And obviously, the task is to focus on those.

It is obviously a bit more difficult in the U.K., and what we’ve put in place is, I’d say, a 3-stage plan, really. The first is to focus on what we can do now to improve the U.K. position and partly from COVID and partly from what was happening in the world anyway; secondly, to work with our trade unions and move forward together on a program of transformation of the business from a primarily letters business to a business that’s going to be parcels as well as letters; and finally, to look at, within that, what the role of the USO is to bring stable financial position for Royal Mail for the future.

And with that, I’m going to turn it over for questions, if that’s okay. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first question is from Andy Chu of Deutsche Bank.

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Chi Onn Chu, Deutsche Bank AG, Research Division – Research Analyst [2]

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I’ve got 3 questions, please. My first question is on capital allocation. And in UKPIL, your stated aim is to accelerate change and to increase parcels market share. So why are you cutting CapEx at a time when you probably need to invest in more automation and technology to try and close the gap versus your competitors and when, in fact, you probably should be increasing Capex?

And given the operational leverage in the business, why do you feel this need to restart the dividend as soon as you get back into positive free cash flow in ’21, ’22? It doesn’t sound to me like a very prudent thing to announce.

Secondly, in GLS, why are you persevering with the consistently loss-making French business? I mean there’s been several attempts to turn that around. Why should we believe that it will be different this time around? And why are you again persevering with subscale operations in North America?

And my last question is on the USO, which you briefly touched on. I mean, what specific areas in the USO do you actually hope to renegotiate? And do you think that these can actually lead to a significant improvement for your bottom line?

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Keith Williams, Royal Mail plc – Executive Chair [3]

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Thanks, Andy. If I — I’ll take the 3 questions, and then I’ll ask Stuart to work on some specifics in the U.K. and Martin to talk to the French business in GLS, if that’s okay.

In terms of capital allocation and your question on CapEx, I think this really reflects — and Stuart will talk to it in a second. It really reflects actually where we get most value for the spend that we make. So this isn’t intended to hit those programs that we need to make to make transformation happen, okay? So just to make that clear. I mean, clearly, the transformation is fundamental to the U.K. business.

In terms of the dividend. What we’re saying today is that there won’t — there was — obviously, we haven’t taken the dividend forward for ’19, ’20, the final dividend. We are not intending — the Board isn’t intending to pay a dividend for ’20, ’21 because that reflects, with the transformation in the U.K., a one-off expenditure that the U.K. will not be free cash flow positive in ’20, ’21. However — and GLS, obviously, will be cash flow positive in ’20, ’21. However, when you get to ’21, ’22 is that both businesses, with the transformation where we will have gotten to, will be free cash flow positive in 2021, ’22. The U.K. will not be through transformation. GLS will be cash flow positive. And if the Board decides to pay a dividend in ’21, ’22 — it’s obviously very early on that one — is that, that would — what we’re saying today is primarily that would come out of GLS because the U.K. wouldn’t be through its transformation program.

In terms of the USO, the USO has been there for a long period, as you know. And if you look at it what happened since we were privatized in 2012, 2013 is that the volume of letters has fallen from about GBP 18.2 billion to about — last year about GBP 12.6 billion, yes? And if you look at what’s happened in the last couple of months, the run rate might well fall this year to about 9 million, yes — GBP 9 billion. So that is about half of what it was 10 years ago. And obviously, what we’re saying today is that to be financially stable to underpin the long-term financial performance for Royal Mail is that, that ought to be looked at. And it ought to be looked out sooner rather than later. What that should be determined by, as Stuart said, it should really be determined by what consumers primarily want, yes? And what we’re saying today is, let’s take a look at what consumers want for the USO in today’s world, which has seen a move to e-commerce. Let’s take a look at what that USO ought to provide. And what we would like to ensure, obviously, that it is financially sustainable for Royal Mail for the long term.

If I ask — Stuart, if you want to say anything more on CapEx, and then I’ll ask Martin to talk about this specific question on GLS France.

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Stuart Simpson, Royal Mail plc – CEO, Director & Interim CEO of Royal Mail (UKPIL) [4]

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Thanks, Keith. Thanks, Andy. The capital allocation within the U.K. I think when we sat back and looked at the portfolio, there are simply things we shouldn’t be spending on now because the technology is not mature enough. So for example, the lock — the York movement, we need to push that out, delay it. The back office transformation, again, we can save money on that. We don’t need to do it now. There’s an extension to the version of SAP. We’ve got another 5, 6 years. So there’s no pressure to do it.

And just to reassure you, we are investing in the parcels automation. So I saw the 20th machine a couple of days ago. It just landed. I’ve signed for the supplier for the next wave of small machines. I’ve signed for the major supplier for the technology for the first half and identified and signed the lease for that. So we are absolutely investing in that, which is central to the future of the business and underpinning the transformation to a parcels business. So that’s on the Capex.

And on the USO, I would just echo exactly what Keith said. The business has changed so much since this USO was put in place and now — and is due for a review. And we’re just calling for that and saying we will work hand-in-hand with all the stakeholders, as we said, most importantly, with the consumer, what do they need from a USO now.

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Keith Williams, Royal Mail plc – Executive Chair [5]

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Thanks, Stuart. Martin, do you want to just cover GLS France?

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Martin Seidenberg, [6]

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Yes, of course. Thank you. So the question on the French business, why we stick — why do we stick with it. So from an overall GLS perspective, it is important to point out that also France is important from a network perspective, and we are a network business. As I presented earlier, our international, our cross-border growth is quite substantial, and it’s an important service offering which we provide to our customers and giving them the freedom that we can say, look, if you ship a shipment from one country to the other, it remains in the GLS network is worth quite a lot. And hence, that’s why it is important for us that we are present ourselves in the major European countries, of which France is one. So it is from an import/export perspective important as well as we have seen now currently a revenue improvement, double-digit above prior — the prior year, and also a positive impact on the margin. And the turnaround itself is a question of volume and revenue growth. And because with the increased volumes, of course, the unit costs will go down.

And the real question currently is if the change we’re seeing now in that country sticks going forward. And we have taken supportive measures. We’ve changed and strengthened the management team on the ground with experienced senior managers that have also turnaround experience. So we are facing right now a situation where I would say it is worth getting under the skin of it. As I said, I will be focusing on it as one of my top priorities and then assessing what should be done going forward.

With regards to the U.S., you also asked that question. Why keep it as it is, subscale? I reserve the right to say that I’m, sorry to say, the new kid on the block. I’ve said, what is happening currently there, it is a top priority as well. I have to dive into it together with my team and with the U.S. team and then come back basically with an educated opinion and view.

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Keith Williams, Royal Mail plc – Executive Chair [7]

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Thanks, Martin. Yes. So sorry, we need to give Martin the time. One of the beauties of having Martin take another look at it is actually to have a fresh pair of eyes.

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Operator [8]

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The next question is from Mark McVicar, Barclays.

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Mark John McVicar, Barclays Bank PLC, Research Division – Head of European Transportation Research [9]

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Really, 3 questions from me. First of all, could you give us some flavor of what kind of roles the 2,000 managers that you’re letting go were fulfilling? It just seems a very large number of people to be able to lose without any sort of knock-on somewhere in the business, is the first question.

Second one is your scenario 2 is clearly — it’s a stress test. If you saw the business moving in that direction, what other management responses could you take or would you take? And then my third question is, where are you on Hub 3? That’s the one in the Southeast where the pressure on logistics properties is pretty extreme. Do you have sites identified? Or are you still looking?

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Keith Williams, Royal Mail plc – Executive Chair [10]

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Thanks, Mark. I’ll ask Stuart to talk specifically to the 2,000 roles in a minute. But my observation as a relative newcomer to Royal Mail is, in all honesty, our decision-making has not been as quick as it could have been. And that is because we have had a diffused accountability. And in all honestly, the time that it’s taken to do the hubs, to your other question, is a case in point. It’s been just too long. So I think there’s opportunity to streamline the management. And I’ll talk — ask Stuart to talk to it in a minute. But it’s not aimed primarily at the front line, which is where the operation hits transformation.

In terms of the stress test and other levers. And the first thing to recognize is actually the strength of the balance sheet at the moment, so — that if you look at the balance sheet on a pre-IFRS basis is the net debt, from memory, is only about GBP 46 million. And even on an IFRS basis, it’s GBP 1.3 billion. So the net debt is very, very small, and the liquidity is very, very high. We’ve just renegotiated the facilities that we have. So we actually have GBP 1.9 billion of liquidity at this point in time. And on top of that, should we wish it, we’d have the CCFF as well. So the liquidity is strong, and that was to, if you like, cover what was stress tested by the Board as a downside scenario. Whether that comes to pass or not, we’ll see in due course. And obviously, if we needed to react to that, we’d react to it. But that was a sort of downside stress test, if you like.

If I ask Stuart talk to the 2,000 roles and the hubs.

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Stuart Simpson, Royal Mail plc – CEO, Director & Interim CEO of Royal Mail (UKPIL) [11]

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Yes, sure. In terms of the managers, Mark, listen, it’s really tough, really tough since I know many of these people. But when you’ve got 9,700 managers, it’s just too many. Last night, I did first step with the top 300, where we’d taken out 50% of the people. I think that really plays to the discussions Keith and I have had about how you — how we needed to drive more responsibility, accountability, clear lines of authority so we can move apace. We can’t have a market accelerating away from us and we’re not responding. And to do that, we need to change the culture and change the way the business is run.

So we started at the top with about 50% now, and that’s across the board because that top 5 — top 300 really is across the board. So you then come down to the next level, primarily back office focused, where, again, I think we need to lean out, move quicker, drive responsibility further down; then you get to the operational team, where it’s about a 10% reduction in the operational team. As you know, we strengthened the operational management to recover from an 18-month period when we had more people coming in and quality was falling away. So we strengthened that. We’re going to lean that out a little bit but try and protect that to the extent we can. In particular, we’ll make sure we understand exactly how it’s going to work before those frontline managers leave, that 10% leave, which will be post-Christmas because we want to make sure we protect the customer service through that important peak time. So that’s a bit of a flavor on the managers, as I say, very, very challenging, but we’ll do it the right way. We’ve got a great history of doing this on a voluntary basis.

In terms of the hub, the third hub, you’re absolutely right. The ability to get land in the right place down there is really, really tough. I think the thing I’d take real heart from is, the first hub, we’ve signed, sealed on everything. And the second hub, we’ve signed on the land. Both of those from a technology perspective and a footprint perspective can cope with an extension of up to 50% of the original capacity we’re putting in. Northwest hub is 40-odd thousand. It can be extended up to 60,000. The one in the Midlands is 60,000 and could be extended up to 90,000. So we’ve actually got enough opportunities where we could flex within that footprint should something not become available down there. And as it stands, that third hub would not fall within the window we’re talking about — we were originally talking about. There just isn’t the land and timing to do it. So should it come along, and we are still actively looking, it would be outside that original 5-year window. I hope that gives you better clarity on it, Mark.

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Mark John McVicar, Barclays Bank PLC, Research Division – Head of European Transportation Research [12]

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Yes. Just a tiny follow-up. Not having a geographic hub in the Southeast, let’s say, it just took forever to get one as Amazon keeps on hoovering up anything that’s got 4 walls and a roof. How much would that affect the delivery of the overall plan and affect the efficiency of the Northwestern and the Midlands hubs?

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Stuart Simpson, Royal Mail plc – CEO, Director & Interim CEO of Royal Mail (UKPIL) [13]

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The Midlands hubs is not much further north than where we were looking because, actually, the Southeast hub was north of the M25. So actually, the distance between them is very small, Mark. So it has minimal impact.

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Operator [14]

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The next question is from Muneeba Kayani of Bank of America.

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Stuart Simpson, Royal Mail plc – CEO, Director & Interim CEO of Royal Mail (UKPIL) [15]

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You’re on mute Muneeba.

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Keith Williams, Royal Mail plc – Executive Chair [16]

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If you want to ask the next one, we’ll come back to Muneeba.

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Stuart Simpson, Royal Mail plc – CEO, Director & Interim CEO of Royal Mail (UKPIL) [17]

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Yes. I think Sathish is next.

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Operator [18]

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The next question is Sathish Sivakumar of Citi Group.

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Sathish Babu Sivakumar, Citigroup Inc. Exchange Research – Research Analyst [19]

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I have 3 questions. So firstly, if you could comment on volume trends for the month of June, most specifically, directionally, are you seeing the bottom of letters volumes? And what about parcel volume both in UKPIL and GLS?

And secondly, could you please add details on VAT cut impact in Germany at GLS? And also, what will be the implication for U.K. if a VAT cut has been implemented?

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Keith Williams, Royal Mail plc – Executive Chair [20]

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Sathish, repeat that one just so we hear it. Sorry, we may have missed the question.

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Stuart Simpson, Royal Mail plc – CEO, Director & Interim CEO of Royal Mail (UKPIL) [21]

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VAT cut in Germany.

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Keith Williams, Royal Mail plc – Executive Chair [22]

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Oh, VAT cut in Germany. Okay.

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Stuart Simpson, Royal Mail plc – CEO, Director & Interim CEO of Royal Mail (UKPIL) [23]

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If you had a VAT cut in the U.K. as well.

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Keith Williams, Royal Mail plc – Executive Chair [24]

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Okay. Yes. I guess Martin can answer that.

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Sathish Babu Sivakumar, Citigroup Inc. Exchange Research – Research Analyst [25]

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And then thirdly, you mentioned about 2,000 roles, which is across the board, that just — you had just mentioned. Is that split between letters, parcel and maybe Parcelforce?

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Keith Williams, Royal Mail plc – Executive Chair [26]

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Okay. Yes. Okay. Thanks. I’m going to turn the first question to Mick. And the second one, Martin, because he is the German VAT expert, hopefully. And then I’d ask Stuart to just go ahead on Parcelforce and the 2,000, yes? So, Mick?

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Mick Jeavons, Royal Mail plc – Interim CFO [27]

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Yes. So volume trends in June. But we’ve clearly not got the 4-month data. But it’s been more of the same in the U.K. Maybe Martin can comment on what he’s seen in GLS. I haven’t seen GLS data at all, but it’s been more of the same. I think the question clearly is, as businesses start to reopen and with the high street reopening in the middle of the month, when will that start to see an unwind of the peak kind of distortions we saw through April and May. And that’s part of the uncertainty. The answer, certainly in the U.K., is nothing material yet, I think. So more of the same.

Just before I kind of maybe pass to Martin, just to cover the VAT point in the U.K. Clearly, we don’t know what the proposal is in the U.K. or even if it will impact on orders. So I don’t want to get involved in either conjecture. But the last time there was a VAT change, quite some years ago now, it certainly caused a deal of disruption. There was a very short window given to businesses to respond. So we ourselves suffered with our systems environment to respond quickly, and many of our customers and suppliers did it, too. So it was certainly a bit messy. Financially, as a business in the U.K. that partially recovers VAT, a cut in VAT usually means we get a bit of an upside on the expenditure side because we don’t recover all that VAT on cost. But it’s really, really quite minimal when we recover that — our VAT in the U.K. And on the sales side, it absolutely depends what happens, and we’ll make a call on whether there’s any implications for prices when we see what, if any, changes.

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Keith Williams, Royal Mail plc – Executive Chair [28]

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Yes. And just to add a word to that. If you look at the trend lines between months, as Mick said, is that addressed letters has been relatively flat month-on-month, whereas parcels has actually been growing month-on-month. So you’re seeing a continuation of the growth in parcels from April through to now. And if your question is, would a VAT cut stimulate more in the economy? I guess that’s what the chancellor is aiming at and whether we benefit in that in due course in terms of the number of parcels that we might deliver.

Yes. Martin, do you want to cover what happened in Germany?

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Martin Seidenberg, [29]

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Yes. So — sure. First of all, volume in June, I would say, generally speaking, they continue to be good and continue to be stronger than last year at the same time. We do see the summer season to start. So there’s a general reduction, but that is every year. But compared to last year, volumes continue to be good and above prior year. With regard to VAT in Germany, so there is a 3% cut in VAT for the next 6 months decided by the government in order to foster spend. We don’t know yet what impact it will really have. If it has a positive impact on consumer spending, the good news for GLS Germany is basically, because we are having B2B and 2C, it literally doesn’t matter whether it’s spent on e-commerce or, though, whether it’s spend on the high street. We will participate because we serve both markets with our parcels. But it is not clear. It depends on how the people will react, whether they make use of it or whether they still not spend because they’re afraid of what’s happening in the economy.

So I think GLS is as much looking — well, waiting to what will happen at any other company in our sector. And the bottom line, probably, we will not at least be worse off. Maybe that’s fair to say. And there is an opportunity there. But how it will look like, we don’t know.

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Keith Williams, Royal Mail plc – Executive Chair [30]

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Stuart, do you want to just cover the 2,000?

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Stuart Simpson, Royal Mail plc – CEO, Director & Interim CEO of Royal Mail (UKPIL) [31]

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Yes. So the 2,000 managers covers everyone in the U.K., including Parcelforce. So it is the whole of the U.K. Is that clear?

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Sathish Babu Sivakumar, Citigroup Inc. Exchange Research – Research Analyst [32]

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Sorry. And just a follow-up on the last one. Is there a rough split between — is it the letter division that’s taking impact more from these manager roles being laid off? Or — just to get a…

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Stuart Simpson, Royal Mail plc – CEO, Director & Interim CEO of Royal Mail (UKPIL) [33]

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It’s primarily back office focused. So there isn’t a letters division. This is a joint network that delivers letters and parcels. But the roles are primarily back office.

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Operator [34]

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The next question is from Sam Bland of JPMorgan.

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Samuel James Bland, JP Morgan Chase & Co, Research Division – Research Analyst [35]

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I have a few questions if I can, please. The first one is on GLS. There’s been a fair bit of talk recently that something could happen there, particularly relating to a potential disposal. I don’t think there’s any mention of that today. Is it permanently off the table or could be revisited at some point?

Second one is on the CWU and where you are with them. Sort of how much of all this change that needs to happen in the U.K. to get that in a better place has kind of been agreed and you’ve got a green light to go ahead and do it? And how much of all things you need to do still have to be negotiated and worked through?

And the third question is on this USO review. What’s the sort of time line there? When is the earliest that some change could come through [on the part of those issues] that the union are quite sensitive about as well?

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Keith Williams, Royal Mail plc – Executive Chair [36]

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So thanks, Sam. If I take the first and the third, the GLS question, and I’ll ask Martin if he wants to comment on that one. And then I’ll take the USO. And I’ll say a little bit about the CWU, but I’ll pass it over to Stuart as well.

So on GLS is — what we’ve clearly said, and we said it in May, is that we have 2 businesses in different positions, and we wanted to structure the management around those different positions and the different challenges, which they face, which both Stuart and Martin have spoken to earlier on. So if you like, that was the change in the management structure. We also said at the same time that there are few synergies at the moment between GLS and Royal Mail UKPIL. That’s a statement of fact. So the management structure is there to focus on the individual challenges of the 2 businesses. And I felt that — or the Board felt that if we have that focus, then it would accelerate the pace of change in GLS and make the step-change happen in the U.K. So that was the purpose of the restructure.

Clearly, we recognize that there is an interest in GLS. GLS, as Martin has demonstrated, for raw mail, it still has great opportunities to grow. And with Martin at the helm, I think it not only has an opportunity to grow, it has an opportunity to revisit some of the things that have been there in the past and hopefully improve its performance even further. And in addition to that, it’s performing well through COVID. So GLS is there today. Clearly, as a Board, we will always act in the interest of all our shareholders, and that will be a continuing debate as to what happens to GLS over time. But for the moment, we see great opportunity in GLS. As we said today, it’s cash generative. If we’re going to pay a dividend in ’21, ’22, it’s likely to come from GLS.

On the U.S. — on the USO, the regulator is already conducting a user needer — user needs review. And I think that’s scheduled to deliver in the autumn. So if you like, there already was a review of the USO by the regulator. I think what we’re saying today is let’s take that a stage further and look at what the consumer wants and involve all interested parties to that review to make sure that, as I said earlier, that we get something that is financially sustainable and the public get what they want out of the USO going forward. And that’s the intent there. If a change were to happen, it would need to go through parliament, but the way I understand it, it would go through parliament by way of statutory instrument. So that’s GLS — that’s GLS and USO.

Martin, do you want to add anything on GLS or you’re okay?

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Martin Seidenberg, [37]

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I think you answered that perfectly fine. All I can add is that, indeed, GLS is a fantastic company.

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Keith Williams, Royal Mail plc – Executive Chair [38]

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Yes. I agree. With a fantastic leader. Stuart, do you want to say anything on the CWU?

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Stuart Simpson, Royal Mail plc – CEO, Director & Interim CEO of Royal Mail (UKPIL) [39]

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Sure. We’re coming from a tough place with the union. Sort of the background in the last 18 months haven’t been good. But I appreciate — in a very positive fashion, as does Keith, we recognize they’re a significant stakeholder in the business. We want to work with them. We are starting to reengage with them. We talked to them several times. We want to move forward hand-in-hand in a positive way to find a way through these challenges. And I always come back to the union and the business have a great history of working together. We’ve done some tremendous things. And we need to get back to doing that, focusing on the challenges outside, not focusing on fighting each other inside. And that’s the approach we’re going to take.

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Operator [40]

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The next question is from David Kerstens of Jefferies.

We’ll go to the next question. The next question is from Gerald Khoo of Liberum.

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Gerald Nicholas Khoo, Liberum Capital Limited, Research Division – Transport Analyst [41]

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Three questions from me. I’m just looking at the 2 scenarios that you’ve set out. Obviously, you’ve given some good indications in terms of revenue and cost. I was just wondering whether you could give us some indications of what those scenarios mean for liquidity. My sense is that, obviously, the scenario 2 gives you — is a stress test scenario and that — and presumably you’re okay in that. But if you could just give us an indication of where you end up and maybe in the context of — on the covenants, what the new liquidity thresholds are.

Secondly, in respect to the U.K., I think you’ve mentioned increases in parcel market share as being a part of your strategy going forward. How do you reconcile market share increases from a starting point where you’re already the market leader by a country mile and with the potential risk of abusing a dominant position?

And finally, you’ve talked a bit about dividends from FY ’22. What are your thoughts if dividends come back in that year? What are your thoughts in terms of dividend policy? What are the parameters you’re looking at, please?

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Keith Williams, Royal Mail plc – Executive Chair [42]

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Okay. Thanks, Gerald. On the 3, if I say a word about the 2 scenarios; and liquidity, and then pass that one to Mick. I’ll ask Stuart — I’ll make a comment on market share, and then I’ll pass it to Stuart — and dividend policy.

On the 2 scenarios, I mean, clearly, what the Board was trying to do was to look at the base case and then to stress test it, which we needed to do in terms of going concern and viability, yes? And you’ll see today in the announcement that when we stress tested it, there’s sufficient liquidity there for — which surpassed the going concern and viability test.

In market share terms, of course, if you look at the market over time — and the market is not one single market. I’ll ask Stuart to comment in a minute. It’s actually, in market share terms, we — partly because of Amazon coming into the market and partly otherwise is that our market share is not what it was, yes? I’ll let Stuart to comment to that.

And on dividend, to be honest, we’re signaling today is that, look, if we are to pay a dividend in ’21, ’22, that would come out of GLS, which has a positive cash flow, a significant positive cash flow, at least EUR 100 million a year. And if a dividend is paid, it would come out of that. I wouldn’t comment today on what the dividend policy. It’s for the Board to decide in due course based on where we are at the time.

Mick, do you want to say anything else on liquidity?

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Mick Jeavons, Royal Mail plc – Interim CFO [43]

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Well, a couple things maybe. Just to say that in scenario 1, there really is kind of ample liquidity. When we did the stress test around scenario 2, the potential issue for us when we rolled forward was with respect to EBITDA, and that impacted the covenants — both the covenants actually we had on our RCFs, which were an interest cover covenant [and a late-stage with] net debt. So what we wanted to do was to get early relaxation in that so that we can [waive] any kind of fees as we might have had. And we’ve successfully done that, that the banks have replaced those covenants with a new one, which is a liquidity covenant, where we’re required to maintain (inaudible) of GBP 250 million [every quarter]. We’re very comfortable with that level. In fact, if I think back — rolling back a decade or so when we really were in financial trouble as a business and hemorrhaging cash for a period, that GBP 250 million figure was a kind of benchmark that we always sought to keep above so that we know that we can deal with any seasonality in our working capital as we go through the year.

So we’re comfortable with the level of covenant. And so we have now — and it really has kind of eased any issues around liquidity that we might have had.

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Keith Williams, Royal Mail plc – Executive Chair [44]

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Thanks, Mick. Stuart, do you want to say anything on market?

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Stuart Simpson, Royal Mail plc – CEO, Director & Interim CEO of Royal Mail (UKPIL) [45]

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Sure. In terms of the market share, I think what we’ve seen over the last few years is it’s been really, really challenging. As Keith said, we have not quite [been as we’ve sort of been]. And what we’ve seen, and I think what myself and Nick Landon, who were put in as the Chief Customer Officer, is we recognize there’s really an opportunity to capitalize on what’s happened over the last 12, 13 weeks in COVID, where we’ve just provided outstanding performance. We’ve had customers coming to us, and we basically want to keep those people with us by continuing to provide a tremendous service. We don’t anticipate there’ll be any challenges on that because if you then look at the wider market of what Amazon are doing, they continue to grow apace. So when you look at all of that, we could all participate in growth. So we don’t expect any challenges there. But we do want to make that commitment that we want to accelerate the growth in parcels. We think it’s the right thing for the business to grab every bit of revenue we can and provide a tremendous service.

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Operator [46]

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The next question is from Arthur Truslove of Crédit Suisse.

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Arthur David Truslove, Crédit Suisse AG, Research Division – Research Analyst [47]

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So 3 from me, if I may. First question, it’d just be helpful if you could just provide an update on the competitive environment that you’re seeing in parcels and, indeed, how that’s changed over recent months and over the last sort of 6 to 12 months, really.

Second question, obviously, across April, May, you mentioned that your GLS EBIT — operating margin was up by 1.4%. But you also mentioned that your number of stops per tour was up 20% in that period, which I guess coincided with lockdown. Is that partly to do with lockdowns resulting in less traffic? And if you could just sort of give an idea of how that stops-per-tour figure has evolved since lockdown started to ease, that would be very helpful.

And I guess, finally, in terms of the cost takeout, you obviously talked about taking a couple of hundred million of nonpeople cost out of the business in FY ’22. And the thing that slightly confuses me, though, was a few years ago, we were sort of told that take — a lot of the low-hanging fruit had already been taken out from a nonpeople cost perspective. So I just sort of wondered what had changed there, really.

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Keith Williams, Royal Mail plc – Executive Chair [48]

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Thanks for the questions. I’ll ask Stuart if you mind to talk on competitors and Martin to talk to GLS.

I think just to signal on GLS, as Martin sort of pointed out earlier on, there’s a lot more than one market in GLS, just that you’re looking at a number of different markets where we’ve got different shares on B2B to B2C. So just to put that into context.

And Mick, maybe if you want to talk on the cost takeout given that you’ve been around probably through the first cost takeout and now the second. Do you want to do that one first?

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Mick Jeavons, Royal Mail plc – Interim CFO [49]

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Yes, sure. So the cost takeout on the nonpeople costs is going to be across all areas of the business. So we have some areas where our costs naturally will go up in the period to come. As parcel volumes grow, we’re going to need more trucks to translate — transfer those around the country. The costs around settlement on overseas delivery, that’s going to inflate as that market changes. But we’re going to look at every single line of costs in the P&L account here. What we have is now — and we did say we’ve gone for quite a lot of the low-hanging fruit and that we did go for the lowest-hanging fruit for sure, and this is increasingly tough. So this now is about looking at every line item, looking at the specification of what we’re buying, buying at the minimum specification. We do have a bit of a culture of gold plating what we buy here at Royal Mail. Stuart announced earlier on, for example, that we’re moving out Victorian Embankment, Blackfriars. And it is an unusual head office for a logistics business that’s heading into losses to live in.

And so we’re going to be looking at all of those areas and maybe behaviors and ways of working that — or a legacy of our time as a government organization and then as a FTSE 100 business and now with the same margin, if any margin, logistics business and start to behave like one. So that goes to, do we need to buy things in the first place? Are we buying at the lowest cost? Have we turned the screw on the demand for those items? Have we specified it correctly? So it’s across everything. It’s a lot more difficult than the last time we did it, for sure, but the level of ambition is there. We’ve done some initial analyses. It looks tough, but it also looks achievable. And that’s — and therefore, that’s the challenge we’ve set to the business.

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Keith Williams, Royal Mail plc – Executive Chair [50]

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Thanks, Mick. Martin, can you sort of cover of number of stops?

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Martin Seidenberg, [51]

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Yes. So — indeed. So as Keith already said, it’s not a one-size-fits-all answer here, but — because we’re definitely positioned in each country. However, as a general rule of thumb, you’re right. So as the lockdowns ease, we do see the number of — the stop increase figure going down. But it is still reasonably above where it was to — prior to the start of the crisis. And that’s what I tried to refer to earlier on as — and that is, by the way, impacted by the increasing traffic again and because the people are starting to go back to work and are not at home that our delivery success rate in the first attempt is decreasing again. But we are aware of that and, hence, why we have taken measures and are continuing to take those measures against that because our objective is — in order to keep the margin at a good level. We are trying to keep some of the productivity gains also after the lockdowns, which is — main part is the digitization. We are heavily trying now to use our tools — to equip our tools with digitized routing tools.

We are also working on the product side. For example, we have a letter box product which you can deliver. It’s a certain type of product which you ship, and the courier can just drop it in the letter box. So that [has to increase]. We can be quicker when delivering it. We have the new handhelds that make it easier and make the stops faster.

So in a nutshell, on the last mile, we are focusing on improving our productivity to achieve exactly what you said: to try to benefit further from the productivity improvements. But it is fair to say that we do expect a cost increase in the last mile because of this reason, because we can’t keep up the productivity levels [at the verge of a] lockdown.

But on the other hand, there’s also, of course, the other cost parameters that make up the unit cost, which are the line haul. And given that the volumes are still high, we do have a high line haul utilization and the scale effect there. We continue to see the same scale effect. And on labor, we also — because we have a high volume, we also see there a positive scale effect. So that in a nutshell, we are trying, despite those challenges on the last mile, that we continue to work with a stable unit cost as a target.

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Keith Williams, Royal Mail plc – Executive Chair [52]

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Yes. Thanks, Martin. And just to give you another challenge, of course, is that labor rates had been increasing quite a lot in Europe from shortage of labor. That should actually ameliorate at this point in time. I wouldn’t want to give Martin — [nothing in the world too freely] on that challenge.

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Stuart Simpson, Royal Mail plc – CEO, Director & Interim CEO of Royal Mail (UKPIL) [53]

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In terms of the market, it still remains incredibly competitive in the U.K. The whole market has had a boost from COVID-19 as people have been in lockdown and have been shopping from home that parcels market is seeing the opportunity that’s out there. People are still continuing to invest. As you know, one of our competitors announced a couple of hundred million last week that they’re investing in a center. And I think that’s a signal that people still remain positive. We’re still going to have pricing pressures in this market, and I think you’ll see an increase in demand for consumers for the high quality because that’s — they want things faster and they want a better service. So that’s where we need to focus. So it is — remains a very tough market. And I actually think it will get more demanding rather than less.

Nevertheless, during this, because volumes were close to peak levels, we know we are getting a disproportionate amount of that. We want to make sure we continue to provide a great service and get those customers to stick with us.

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Operator [54]

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The next question is from Sumit Mehrotra of Societe Generale.

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Sumit Mehrotra, Societe Generale Cross Asset Research – Equity Analyst [55]

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So some questions for — to answer for you, Keith. First of all, regarding USO, what do you think are the major aspects that need to absolutely change in your view now in the USO? And you’re making a loss this year. Profitability is half over 5 years. Are you eligible for some kind of financial compensation from the government now? That’s for you, Keith.

Secondly, Stuart, a difficult one. Keeping the COVID-related aspects for FY ’21 apart, what gives you the confidence that there will be a significant improvement as of the year following in UKPIL?

And lastly, for Martin, GLS, well, I noticed that you’re banking on volume growth to help you after this COVID-19-related effect to keep the margins stable even with the accelerated shift to B2C. What gives you the confidence that you’ll still be doing 6% to 7% even when things normalize after COVID-19 at GLS?

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Keith Williams, Royal Mail plc – Executive Chair [56]

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Thanks very much, Sumit. If I take the first one, and then I’ll pass it to Stuart and then Martin.

On the USO, I said earlier is that — basically, the universal service has been there. As Stuart said, it’s been there for a long period, and it was reestablished under the Postal Services Act, I think, in 2011 — is that I think we need to look at what customers want and how we can provide it in a financially stable manner. So I don’t have a specific view because, actually — and I always work on the basis that, ultimately, it’s the consumer that gets what they want, yes? So what we need to work out is what the consumer wants and how we can provide it financially — on a financially sustainable basis. And as Stuart said is that we ought to work on that with all interested parties, whether that’s trade unions because, obviously, they’re impacted, whether it is the regulator and whether it be government.

In terms of government, and just to point it out, is that, actually, we haven’t actually asked the government for any support over the crisis. It’s that we haven’t furloughed people during the crisis. So there’s been no support from government there. We’ve continued to pay people fully throughout the crisis. And although the CCFF is there, in reality, as Mick mentioned, is that we renegotiated the covenants with our lenders. And that gives us sufficient liquidity, almost $2 billion of liquidity going forward. So no reliance on the government so far.

GLS, do you?

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Martin Seidenberg, [57]

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Yes. On GLS, on the question on volume growth afterwards. Well, we see certain behaviors have changed with our customers. And we have seen also new customers entering, let’s say, the e-commerce space. So they are ordering — all of the elderly people are — have experienced that it’s easy to order online. They don’t necessarily have to go to shops. So we expect in the market, from a market perspective, the volumes to stick and higher volumes to just flow through the logistics networks, and we will be participating through that. It will vary by various degrees per country, and also, as I said, we are differently positioned in the countries. But overall, I expect because of that, that there is just a higher growth rate in the market, and we will be able to capture it.

It is important to note on top of that, that we, as GLS, have always focused also throughout the lockdowns that we continue to operate and in all countries which we are present in. And we have continued to deliver, and we have also continued to pick up our customers. And that has been a unique proposition for us in some countries where we stood out from the competition. And so that’s also the fact — that’s also reason why we are right now winning customers for us in certain countries, because we have shown a consistent service delivery. And that’s part of our DNA. That’s what we’ve been — always set out when the lockdowns came. That’s where we took every effort to continue to operate and to serve our customers. And we expect that this will also — on top of the general volume growth, will pay back for us going forward. While I have to agree it is an assumption, but I think it is fair to assume for GLS.

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Keith Williams, Royal Mail plc – Executive Chair [58]

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Thanks, Martin.

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Stuart Simpson, Royal Mail plc – CEO, Director & Interim CEO of Royal Mail (UKPIL) [59]

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Yes, you wanted something about bounce-back from this year and into the following year, why we feel we can do that. I think we divide it into a couple of buckets. The first is what we can control. So we know, and I’ve committed to the managerial reductions, the nonpeople reductions. In addition to that, we will be seeing some costs that are incurred this year that won’t be incurred next year. So we anticipate there being at least the relaxation of some of the social distancing measures that will give us an opportunity to operate closer to how we were before, not exactly how we were before but an easing of them that gives us [better support in that]. So that’s important that we do that.

And then on the revenue side, we’ve got price that we anticipate putting into the market. We’re not going to be shy on that on both letters and parcels. And then also revenue, we want to make sure we maintain as much as we can of these parcels that come into the market.

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Keith Williams, Royal Mail plc – Executive Chair [60]

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Thank you. Thanks very much for all the questions and stay safe, and we will talk to you, hopefully, in person next time around. Thanks.

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Stuart Simpson, Royal Mail plc – CEO, Director & Interim CEO of Royal Mail (UKPIL) [61]

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Yes. Thanks, Keith. Before we leave it there, just, as ever, myself, [Sabrina] and the IR team are here to pick up any other questions.

But thank you for dialing in. We’ve run a little bit over time, so apologies for that. But hopefully that was helpful. And as Keith said, hopefully see you face-to-face next time. Good morning. Thanks.

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Keith Williams, Royal Mail plc – Executive Chair [62]

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Thank you.

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Mick Jeavons, Royal Mail plc – Interim CFO [63]

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Thank you. Buh-bye.