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Royal Mail has reported its first annual profit in three years as growth in parcel volumes, automation and continued investment in out-of-home locations offset a continued decline in letters.
Following the £3.6 billion takeover of its owner International Distribution Services (IDS) by the Czech billionaire Daniel Kretinsky’s EP Group in May, Royal Mail has posted an adjusted operating profit of £12 million, excluding voluntary redundancy costs, for the year to the end of March. Including those costs, losses shrank to £8 million from £348 million a year earlier.
The improvement meant that across the group — including GLS, the historically more prosperous European parcels business — adjusted operating profit rose to £278 million, compared with a loss of £28 million a year earlier.
Group revenue rose 4.8 per cent to £13.1 billion, with revenue up 7 per cent to £8.2 billion at Royal Mail and 1.3 per cent to £4.9 billion at GLS.
Parcel volumes rose 6 per cent, offsetting a 4 per cent drop in addressed letters, excluding election mail.
Martin Seidenberg, the group chief executive, said Royal Mail’s return to profit marked “an important milestone in the company’s turnaround”.
He added: “With IDS’s acquisition by EP Group complete and universal service reform decided, now is the time for us to drive the business forward and capitalise on our momentum.”
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As part of the 370p-a-share takeover of London-listed IDS, EP Group agreed a series of undertakings with ministers, including issuing a so-called golden share for the government, as well as reaching an agreement with the Communication Workers Union, which represents frontline Royal Mail workers.
Under its previous management, Royal Mail was hobbled by bitter industrial relations including 18 days of strikes over pay and conditions. The breakdown left the company, which has been expanding its parcels business amid the long-term decline in letters, losing more than £1 million a day.
Following years of lobbying, the regulator Ofcom agreed in July to an overhaul of the so-called universal service obligation. The changes include Royal Mail ending Saturday deliveries of second-class letters, with the cuts estimated to save between £250 million and £425 million a year.
The new owners and management are seeking to modernise the business at Royal Mail.
Royal Mail increased its “out-of-home” locations — where mail and parcels can be picked up or dropped off — by almost 70 per cent to about 24,000, including 11,500 Post Office branches, and has also launched its own branded lockers as well as new partnerships with Sainsbury’s and the Co-operative Group.
Parcel automation increased to 90 per cent, up from 50 per cent in 2022, the company said, with hubs at Daventry and Warrington able to process up to 1.5 million parcels a day.
GLS, meanwhile, continued to expand its network to over 110,000 out-of-home access points and more than doubled the size of the GLS locker network to over 20,000.
IDS said GLS had delivered a “resilient performance and solid revenue growth”. Adjusted operating profit of £286 million was down £34 million, which it said was “due to a challenging macroeconomic and regulatory environment in Germany and Italy and foreign exchange movements”.
Commenting on the results, Gerald Khoo, an analyst at Panmure Liberum, said that based on the limited information released by IDS, “the return to profitability at Royal Mail is very marginal, 0.1 per cent operating margin, although clearly a big improvement on last year”. He added that “GLS has gone backwards in quite a big way, although that is not entirely unexpected”.
Publicly listed companies have significantly higher disclosure requirements than privately owned businesses.
‘Still a lot to do’
Despite trumpeting Royal Mail’s return to the black on Monday, Martin Seidenberg acknowledged it was a “tiny profit” and that it was clear there is a “still a lot to do” to ensure the business was sustainable.
The short term challenge for Royal Mail is the large costs of the government’s increase in employer national insurance contributions from October’s budget, the chief executive of International Distribution Services, Royal Mail’s parent company, said.
The tax hit, as Royal Mail first flagged in November when it was still a publicly-listed company, is expected to be in the region of £120 million.
Whilst Royal Mail believes it can “absorb that within the business”, Michael Snape, the group finance chief, said “it’s going to set us back a little bit in terms of the shape of the recovery over the next few years, but it doesn’t make us less sustainable. It maybe just slows the progress a little bit.”
The national insurance increase has also cost Royal Mail “disproportionately” compared with the rest of the industry because of its “full employment” model, including pensions, and the size of its workforce.
But “on the plus side” for Royal Mail’s future, Seidenberg pointed out, was reform of Royal Mail’s costly universal service obligation amid the long-term decline of letters, which means it is permitted by Ofcom, the regulator, to end Saturday deliveries of second-class letters.
“And then we’re taking the people [employees] along, who believe in what we’re doing and see the results”, Seidenberg said of a workforce that was demoralised by months of industrial strife before an agreement with unions, including on pay in July.
“So, we have all the ingredients to achieve a [sustainable profit]. Plus, we have an owner now who buys into our strategy, who sees that this can work in the right direction and who supports us also investing in the business.”
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