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Royal Mail plc (OTCPK:ROYMF) Nine Month 2019-2020 Trading Update Conference Call February 6, 2020 4:30 AM ET
Company Participants
Stuart Simpson – Chief Financial Officer and Chief Operating Officer
Conference Call Participants
Daniel Roeska – Bernstein Research
David Kerstens – Jefferies
Andy Chu – DB
Arthur Truslove – Credit Suisse
Sam Bland – JPMorgan
Sumit Mehrotra – Societe Generale
Stuart Simpson
Good morning, everyone. Thank you for joining the nine-month trading update. As you know, I’m Stuart, the CFO and COO of Royal Mail. As the host said, I’ll do a brief update, and then we’ll take some questions. There’ll be plenty of time for those at the end. So we had a busy Christmas period. First time for a long time, we had a general election coinciding with our peak period. So a huge challenge from an operational perspective.
We knew, and we said this back in November, we’d be investing into this to make sure that we could protect the democratic process in the U.K., but also to provide fantastic service for our customers. And we did both of those things. We have the best election service we’d ever provided, and we also had the best Christmas quality we’d ever provided.
So huge thank you for our operational teams for delivering that. Everyone out there every day, going to every door in the U.K. with all of those mail pieces and parcels. Now turning to trading performance. This was broadly in line with our expectations. I’m pleased to confirm the adjusted operating profit for this year, pre-IFRS 16, will be in the range of £300 million to £340 million, as we said earlier.
One thing, I’m going to talk to the numbers that are adjusted for working days. For the whole year, there’s no working day adjustment. However, this period, it just landed slightly differently with a quite material difference, 2.5 working day adjustment. So I think it’s more important to talk to those working day adjusted numbers. So starting with UKPIL. Revenue increased by 2.1%. This is in line with what Rico and I have said, we are going to make this a growing business. So we are continuing to grow in the U.K. after several challenging years where it’s been declining. So we’re pleased with that.
Even within that, due to the risk of industrial action, we did have some customers that switched volumes away. The larger customers typically have a couple of carriers. So there was a little bit of a shift where they would just rebalance volume where carriers could absorb it even over the busy Christmas period. Now that’s something that probably wouldn’t have happened a few years ago, where the market was totally maxed out from a capacity perspective.
Now as you know, there’s been investments in capacity by a lot of the competitors over the last several years. So that gave customers the opportunity to just shift away a little bit. However, if I stand back and look at the overall parcels performance, we’re really pleased. We’ve had a tremendous start to Q4. Great returns, performance, very significant part of the business now. We lead the market in that great performance operationally, and we’re pleased with the start for the whole of Q4.
Back to Q3, the Tracked 24 and 48 products continue to grow really strongly. There are key e-commerce products, as you know. So really pleased, strong double-digit growth.
Looking at letters volumes. If we strip out the election mailings, they declined by 8%, which was in line with what we guided to in November. Overall, Letter revenue decreased by 0.4%, which is actually benefiting from some of the targeted prices – price increases we put in last year and the two elections. And just to note, we’ve also put prices in, in this January.
And again, we put prices into the letters market targeted primarily of business mail and higher than RPI, a change in what we’ve seen in the past, where it had always been RPI minus. We’re now pretty much RPI plus-plus. So despite all the challenges, actually pretty pleased with that revenue performance. GLS continued to perform really well. Revenue up 11% and volume up 5%. That’s in line with what we said. We’re doing some yield management activities. Putting some price into the market with GLS.
Dicom, really pleased with that continuing to perform in line with our expectations. And the U.S. business very challenging as it was 18 months or so ago, that is moving forward as we anticipated, so pleased. And strong performances across Europe, Germany, Belgium, Eastern European markets in particular, really strong performance.
Just turning to industrial relations. As you know, the CWU have issued a time line for a ballot. This is something we were anticipating, having won the first contest for the first ballot where we got an injunction. Managed to move this action to after Christmas. We always knew they would come back. However, we absolutely are and remain open and willing to talk to our union, and we want them to get around the table with us to try and find a way forward on this.
Now one thing I would like to emphasize, we are making progress despite the fact productivity is not where it is. Despite all the industrial relations challenges, we are continuing to move forward. So we’ve got on board the parcel supplier for our automation capacity now. We’re really pleased with that. We conducted a very thorough review of the market. We feel we’ve got an industry-leading player in to work with us.
First, on the Warrington hub and then on the Midlands hub. The Midlands hub, we’ll – we’re very close to signing the lease. We’ve identified the property and the location. So that’s two of our three hubs. In fact, the two key ones where we’re in really good shape if we look out over a three- or four-year period.
Putting in significant capacity, sourcing capacity, into those, both built in a flexible way where we can continue to increase capacity in the future. So again, we’re protecting the business for this growth in Parcels that we are seeing. In addition, despite the challenges we have, we’re continuing to roll out our small parcel-sorting machines that some of you may have seen in action. And over Christmas this year, we automatically sorted. So we’ve eliminated the manual saw, almost double what we had last year, so pleased with that.
Through Q3, we continued to decommission letter machines. So again, we are putting change into the business despite the challenges that we face. And as of January, we – the trial activities that have been held up for many months, because of our legally binding dispute resolution process, because we’ve come out of that with the union and we agreed as part of the injunction and reaching the end of our mediation that the dispute resolution process had concluded, we are now pressing on and putting in place the trials. So a challenging period, but we are making progress.
Now moving to outlook. Just to reiterate, this year, we’re pleased to say we’re still in the range £300 million to £340 million pre-IFRS 16. However, a couple of things to draw out on that. First of all, from a letters perspective, we were expecting to see the trajectory follow what we’ve seen in the first half of the year, an improving trajectory. What we’ve seen is broadly a flattening effect. Also, we’ve seen GDP. Pretty much everyone we see, all the new announcements are weaker for next year.
So rather than wait and call something later, we’re adjusting the outlook for letters volume decline to the 7% to 9% for next year. So that’s the first thing. The second thing is despite the fact we’re putting in change into the business, we are behind on productivity for the year. Now part of that was the investment in Christmas to protect the election and deliver a great quality through a pretty challenging period. But our exit rate for the year is going to be a bit behind where we anticipated. Of course, that then takes a bit of time to play through.
So we anticipate productivity next year not being quite where we expected it. So those two things. And then the final one is we do still have the ongoing industrial relations environment. So while we are putting in change, it’s not at the pace we’d like to. We’re not making the progress we would like to when we get a deal with the union, and we can really push on at pace. So all of those things together increase the likelihood that the UKPIL will be loss-making in 2021. We are absolutely open for talks with the union. We want to get those up and underway. The door is open with them. And we want to make progress fast and get back on the track working with the union, working with our people to deliver what we think is the right plan for this business.
What we outlined in Journey 2024 is the pivot from a letters-dominated business to a parcels-dominated business. And I actually think this set of results, for me, it reinforces that we know absolutely the direction of travel for this business. We know what we need to do. We need to work with the people and the union and get on with it.
And finally, as you can imagine, given some of the challenges that we see, Rico and I are spending a lot of time between now and when we talk to you again looking at mitigating actions. As always, when you put a plan together, there are some things that aren’t in it. We will be crystallizing those and taking action on them. So we’ll provide you an update on that in May. I’m not going to outline what they are because our cost base is primarily people that I don’t want to be negotiating in public or indeed putting things out before we’ve talked to our people and firmed up on our plans.
But that being said, we are working very hard on mitigating actions to make sure that we can continue to deliver and do what is right for this business and move it from a letters-focused business to a parcels-focused business. So thank you very much. I think at that point, that leaves us plenty of time for Q&A, having done a brief update. So I’ll now open it up to Q&A.
Question-and-Answer Session
Operator
[Operator Instructions] Your first telephone question is from Daniel Roeska from Bernstein Research. Please go ahead.
Daniel Roeska
Thank you so much, Stuart, good morning. Three if I may. You already commented on the union a little bit, but could I maybe ask more technically what the different milestones are in the next – or are there any big milestones in the next couple of months we should be aware of? Any part of the contract expiring, kind of just a time line if you will?
Secondly, you also touched on competitors a little bit. Kind of what’s your view on the current capacity and competitor landscape in the U.K. specifically, where you see improvements, who’s struggling a bit? Is there – are there any opportunities for Royal Mail from the competitive development in the U.K.?
And then lastly, you already hinted at kind of a more challenging environment, financial year 2021 with a higher letter decline. If this eliminates the headroom for the dividend in the end, also given the CapEx you want to undertake, would you consider taking on more debt to kind of keep the CapEx program and your dividend commitment going?
Stuart Simpson
Okay, great. Thanks. Thanks, Daniel. In terms of time lines, the first thing is there’s nothing – we haven’t served notice on agenda for growth. So one of the things in that contract is if we deem that to be industrial instability, we can serve notice on the contract and there’s a six-month runout effect. I think we’ve talked about that before. We haven’t done that because we want to work with the union and find a way through on that. So there’s no ticking time bomb there.
In terms of the time line, I would expect the union to be targeting a strike around Easter. That’s probably a good timing from them from a political perspective in terms of our internal elections but also because of the bank holidays, et cetera, that are in that period. I’d just reiterate, though, that we actually – we very much want to get round the table with them and find a solution to this. I think the set of results shows very clearly that letters is challenging. The future is parcels. Our plan is all about pivoting to that parcels-focused organization, and we need to get on with it.
So I think that’s a bit about the union. In terms of the competitor landscape, it has changed, no question. Compared to five years ago, the competitors are better than they’ve ever been. They’ve put in capacity. They’ve all had their problems, I think, as they launched their capacity, their hubs taking time to get up to speed, et cetera. But they’re doing a pretty good job now, and the pressure is really on us to continue to do that.
That being said, we have had a tremendous Christmas, the best Christmas quality we ever had. We’ve had the best start to January and the new calendar year from a quality perspective on record, we think. We’re just looking to firm up the numbers on that. So we are doing tremendous things there. We’ve got just under 1 million downloads of the Royal Mail app. So a great bit of technology we’ve rolled out into the market. So yes, the competitive landscape is better than it has been in the past, but we are making big strides to keep up with it. And our key e-commerce products continue to grow in strong double-digit numbers.
And then more challenging for 2021, our dividend policy remains the same. We’re really committed to that. And as you can imagine, I think just to reiterate what I said before, when you put a plan together, there are always other levers you can pull. And that’s what Rico and I are working with now so that we can update you in May to make sure that we can remain on this plan.
Hopefully, that gives you a bit of a flavor, Daniel.
Daniel Roeska
Yes. You circumvented the question on the debt, but I’ll take it, and we’ll speak again in May.
Stuart Simpson
I can tell you we’ve got a very strong balance sheet. We are in great shape from a liquidity perspective and a credit rating perspective.
Daniel Roeska
Thanks.
Stuart Simpson
Okay. Next question?
Operator
Next question is from David Kerstens from Jefferies. Please go ahead.
David Kerstens
Hi, good morning, Stuart.
Stuart Simpson
Good morning, David.
David Kerstens
Three questions, please, from my side as well. First, maybe to a little bit better understand why you’re changing your letter volume guidance now already at this stage for next year whereas your performance is in line with the first six months. And we’ve seen business confidence improved somewhat, I think, after the U.K. elections. And also, if you look at the expected development beyond next year, do you still anticipate a return to the medium-term objective range of 4% to 6% as it would imply quite a big improvement compared to what you’re now expecting for next year?
And then secondly, just to understand the £300 million to £340 million EBIT guidance a little bit better. What is the kind of wage inflation that you have now baked into this guidance range? Is that the 2% nominal increase plus one day shorter working week for only half a year? Or is there some more cost already that you are assuming that will be impacting the profit for this year?
And finally, on the productivity improvement. Given that you are somewhat behind schedule with the targeted productivity improvement, does that mean that transformation costs could also be potentially lower than the £150 million you originally guided for? Thanks very much.
Stuart Simpson
Thanks. Thanks, David. So the reason we moved on letters volumes is the trajectory that we’ve seen earlier in the year plateaued but – so we have not seen what we anticipated seeing. And we did not want to be in a position where we’re rolling into next year and having to issue guidance short term. We felt it was better to get ahead of it and be clear, we’re not seeing the trajectory we thought. And I do accept business confidence seems to be getting higher. There was – I think there was one out today that showed people more confident.
Interestingly, when we look at and talk to other CFOs, other CEOs, our very experienced Board, the general feeling is that GDP will continue to be very weak. And as you know, that does translate through to our business. So we felt it’s better to get ahead of that and guide now rather than leave it to later.
In terms of the 4% to 6%, the 4% to 6% we had another look at, as we do every month, last month. The structural decline driven by e-commerce, e-substitution still remains 8.5% as it has done for many, many years. The real difference here is GDP and business uncertainty. And those two combined mean businesses are not investing into advertising, trying to drive their top lines, et cetera. So again, we feel the 4% to 6% is right if you look into the medium term, but I think the next year is going to be challenging. But as the economy bounces back, we anticipate our letters rate of decline will come back. And that’s always been the case. We’ve been very clear on that. This is related to the business confidence and GDP.
Moving to the EBIT, the £300 million to £340 million, you’re absolutely right. What we have in there is the second half or the first hour of the shorter working week. We had 2% pay went in last year. The other thing is we had 2.7% from managers that went in at the midyear as well. In that £300 million to £340 million, I don’t anticipate another pay rise for the front line because the £300 million to £340 million is this year, and the pay deal we have runs out at the end of March, start of April. So the cost of any future pay deal would flow into next year.
Probably somewhat behind, yes, it is somewhat behind. Challenging. It’s not where we’d like it to be. But we genuinely feel that we are changing the dynamic we’ve seen in the past, where we are now putting in change because we feel we’ve fulfilled the obligations under our dispute resolution process. So we are making change. We’ve started the trials, albeit they’re small, but we have started them. We’ve got several offices that are making change. We’ve completed the dispute resolution process, and we’re getting on with things.
So it’s not where we want it to be, and it will take some time to catch up. And absolutely, it isn’t how we want to do this. We want to do it hand-in-hand with our people because we know then we can run faster. And that’s what we aim to be able to do.
David Kerstens
Right. So transformation costs still within that £150 million?
Stuart Simpson
I would say broadly where they are because actually, what we’re doing is working behind the scenes to make sure that when the brakes come off and we get a deal, we can move fast.
David Kerstens
All right. That’s great. Thank you very much Stuart.
Stuart Simpson
Yes, thanks David.
Operator
Next question is from the line of Andy Chu from DB. Please go ahead.
Andy Chu
Good morning Stuart and three from me please.
Stuart Simpson
Hi, Andy.
Andy Chu
Hi Stuart, good morning. Just in terms of the £300 million to £340 million, given the sort of moving parts on the downside in terms of slightly less productivity, maybe a little bit of impact of 0.5% in your parcel revenue growth because customers switched during the Christmas period. Why are you sort of keeping that sort of guidance sort of – or at least not narrowing or cutting that guidance? What are the sort of offsetting factors that make you confident within the £300 million to £340 million?
Secondly, in terms of housekeeping, maybe you can help us get to the underlying numbers for this year ex the two elections or maybe just the revenues and EBIT for both the European and UK elections for this year.
And then my last point is on access mail pricing. Is there any possibility of that changing? And any sort of positive benefit that you might be able to get from the regulator in terms of adjusting the current access pricing regime, please? Thanks very much.
Stuart Simpson
Yes thanks Andy. The reason that I’m comfortable to hold the £300 million to the £340 million is despite the productivity being less, we are still making – 1.5% will come out of the year so only a little bit less. And what we have is an offset from elections. So despite the parcels, we’ve got a bit of shifting out on the parcels from some customers, we have had the election in the second half of the year that we didn’t budget for when we started the year. So those kind of net off together, which is why I’m comfortable holding the £300 million to £340 million.
In terms of housekeeping, we don’t comment on how much the elections are. Each one is generally low single digits – sorry, low tens of millions of revenue. We do have some costs behind them. I’m sure you know we actually pay a piece price to the posties to deliver election mail. So it isn’t absorbed into the mail bank. We actually pay them some money to deliver every piece of mail, and we did put a 5%, I think, price increase into what we paid the posties in advance of this election.
So that’s how that has dropped through. In terms of Access mail and the regulator, there is nothing the regulator will do to help us on the Access mail. It’s not an area we focus on. As you know, the regulator has pulled forward their review of the business. They’ve started that already. We engage very positively with them. We’re working really closely with them on the future.
Andy Chu
Just to be clear on the guidance because the UK election was confirmed on the 12 of October and you had your first half results where you issued the guidance of £300 million to £340 million on the 21 of November. So are you basically saying that on the 21 of November, on the first half results, even though the UK election date of the 12th of December had been announced, you actually put nothing into the budget there, the guidance? Is that correct?
Stuart Simpson
I’d say that’s just how where – we’ve got a range of £300 million to £340 million. We’re going to come in within that, and there’s a lot of ons and offs within it. We’ve got a huge cost base, and there’s always a bit of wiggle room on a business that’s so highly operationally leveraged.
Andy Chu
Okay. Thanks very much. Thanks.
Stuart Simpson
Yes.
Operator
[Operator Instructions] Next question is from the line of Arthur Truslove from Credit Suisse. Please go ahead.
Arthur Truslove
Hi, Stuart. A few from me. Firstly, is there any – have you seen any impact on parcel trading as a result of the prospect of the potential upcoming strike around Easter? So that’s question one. Question two is you mentioned that you haven’t served notice on the agenda for growth. In what circumstances could we reasonably expect that you might think more about that? And is it correct to assume that if you did serve notice of that and that notice expired that you would then be able to do more in the way of compulsory redundancy?
And then finally for me, your Journey 2024 involves around £1 billion of cost avoidance over five years, around – an average of £200 million a year. Is it reasonable to assume that in FY ’21, do you expect to hit the number broadly consistent with that? Thank you.
Stuart Simpson
Thanks Arthur. So far we are not seeing any impact. And just to be clear, we don’t know there’ll be a strike. What we’ve got is the timetable for a second ballot. And I think it’s clear when that leads up to when they would take strike action. Let’s say we hope to avoid it. And the initial indications for the start of Q4 are actually really strong. We’re really pleased. And that’s in large part, we did deliver a tremendous Christmas for our customers, absolutely tremendous Christmas.
In terms of the agenda for growth, it’s not something we’re out there trying to get rid of. It serves both us, our people and the union. And we want to work with the union to find a solution. And we genuinely think that we’ve got the right plan. We’ve got very balanced proposals, and we want to work with them to find a way through it. We don’t want to go down a route of terminating protections that we think are good for us. And if you think about what we had before Christmas that agenda for growth helped us and made sure we delivered a tremendous Christmas despite the fact we’ve had a ballot and some noise.
And then in terms of the costs avoided over the five years, I’d anticipate next year we will be within the broad range similar to this year. We’ll firm that up in May, but I anticipate our productivity continuing to move forward. As I say, we’re looking at mitigating actions to offset the fact at mitigating actions to offset the fact that we’re not as far ahead as we’d like to have been on the transformation journey. But there are other things that we can do that will help us make sure we keep the costs avoided on track for the whole period. Did that answer Arthur?
Arthur Truslove
Yes, perfect thank you.
Stuart Simpson
Thanks.
Operator
Next question is from the line of Sam Bland from JPMorgan. Please go ahead.
Sam Bland
Good morning. I have two questions please. The first one is, I guess, on all the sort of transformation projects and efficiency savings that are involved in the Journey 2024 program. How far through those can you get using, I guess what the union term executive action or unagreed change? Or do you need at some point an agreement to get into the real sort of the bigger items of change within that strategy? And I guess the second part which is linked to that is at what point do you think you may look to change strategy in terms of how you’re approaching the union go for a bit more of a collaborative approach rather than you taking the executive action? Where might you – at what point might you look to compromise to resolve the impasse? Thanks.
Stuart Simpson
Yes, a good question. It’s a really interesting one. We are absolutely in compliance with our agreements with the union because what they do is they formulize a dispute resolution process. And actually, the union wrote to us and said, “Do you agree?” We have concluded on all of these 21 issues that they were raising, and we said, “Yes, we agree.” We’ve been through all of our agreed dispute resolution process with you. So actually, we are completely compliant with all our agreements with the union. And we’re moving on hand-in-hand, side by side, with the changes we want to make. And actually, you can extend that logic out. We can keep going and doing this because we’ve been through the dispute resolution process.
What we really want to do is get the union around the table to talk about, “Okay, let’s do it together,” because frankly, that’s far better if you and – you, the union, us, the management and the people are all pulling together. But actually, we can just keep pressing on and that is what we’re doing. And of course, the union can then raise local disputes. They haven’t done so at the minute. We’ve got many offices going through change. And we haven’t had a local ballot on it yet. So we’re pressing on.
And in terms of changing strategy to collaboration, we haven’t changed, right? We want to do this collaboratively. We made an unconditional offer, no strings, come and talk to us. We want to get on with this. And that offer still remains where Rico and I are available at any time, sit down and start working through this. It is challenging, no question about that. It is slowing us down. We’d like to go faster. We know we can go faster as we work with the union. Hence, the offer is there for them to come and work with us.
Sam Bland
Okay. All right thanks.
Stuart Simpson
Thanks Sam.
Operator
Next question is from the line of Sumit Mehrotra from Societe Generale. Please go ahead.
Sumit Mehrotra
Hi Stuart, just one from me. I would like to have an update on what’s the progress on the discussions with the CWU? How many meetings have you had them with them this January or over Christmas? And how is the progress there? Thanks.
Stuart Simpson
Sure. So the progress, I think, is very public. They have called for another national ballot that we’re frustrated that they’re doing that, but we did anticipate that they would do that. Rico and I met with the union back, I think, second week of January, second or third week of January. We again reiterated let’s get our teams together. We’ve met. Let’s get our teams together to really work through this. The union haven’t taken us up on that offer, which we’d like them to because the offer remains there. We constantly have people in our teams and the union teams talking together at local level, at regional level and at national level.
So they make no mistake, we are always talking to each other. What we want to do is formalize that and get it into a structured set of talks so we can find a resolution to this and move forward faster. So I hope that gives you a bit of a flavor of that. We are always talking to the union.
Sumit Mehrotra
Yes thanks.
Operator
We have a follow-up question from the line of Arthur Truslove from Credit Suisse. Please go ahead.
Arthur Truslove
Stuart just a couple of follow-ups from me. I mean first and foremost, I just wondered how you think about the union’s logic at this point in time. I mean, I guess, looking at it from the outside, the UKPIL business is obviously facing significant difficulties, and the union clearly not helping with those. Historically, of course, they have been arguably more cooperative at times of trouble. So just sort of interested in your thoughts on why they are being especially challenging now?
And secondly, just following up on the point I made on parcels and the point you’ve reported this morning. When did you actually start seeing the shift of volumes away from yourselves and towards your customers in anticipation of strike of strike action? Roughly, when did that start coming through? Thank you.
Stuart Simpson
Sure. First thing, I can’t comment on what the union’s logic is. They have different agenda. I do think in the past, though, and I’d just reiterate this and I’ve said this many times to Terry, the union colleagues. I think we agree on 95% of the things. We provide great jobs for the people. We want to keep doing that. We provide great terms and conditions. We don’t want to undermine that. What we do need to do, though, is change. And this set of results really emphasizes that need for fast change to best protect actually our people and the union going forward. So I can’t comment on their logic, and we are here and ready to talk.
In terms of the parcels, the ballot was announced. I think the customers wait as late as they possibly can because we have a track record, a very strong track record actually of avoiding industrial action. So it’s not something that as soon as the ballot’s announced, you see happening. This plays out at a much, much slower rate as you get closer towards a potential strike. So it’s not something where I’m concerned about as I stand here today with the fact that ballot was announced earlier in the week. There’s a timetable for that, and we will stay incredibly close to our customers. We’ll make sure they understand the contingency plans we have, the additional support we put in to make sure we can keep things moving…
Arthur Truslove
So is it reasonable to assume that it would be kind of less than a month before the likely strike that people would – that customers might start shifting businesses?
Stuart Simpson
I think it’s different for each individual customer. And I can’t really comment, but it’s certainly not going to happen immediately.
Arthur Truslove
Got it, thank you.
Stuart Simpson
Thanks Arthur.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Stuart for any closing remarks. Please go ahead.
Stuart Simpson
So I’d just like to say thank you. Thank you very much for taking the time to join. As you know, the IR team is around all day. If you’ve got any other questions at all, please don’t hesitate to get in touch with John and Spring. And thank you very much, indeed, for joining the call today. Thank you.
Operator
Ladies and gentlemen, this concludes today’s conference. Thank you for joining. You may now disconnect. Goodbye.
