TIDMRMG
RNS Number : 4063H
Royal Mail PLC
15 November 2018
FINANCIAL RESULTS
15 November 2018
ROYAL MAIL PLC
RESULTS FOR THE HALF YEARED 23 SEPTEMBER 2018
Royal Mail plc (RMG.L) today announces its results for the half
year ended 23 September 2018.
Rico Back, Group Chief Executive Officer, commenting on the
results, said: "We have put in place a range of actions to improve
our performance. We are reconfirming our commitment to our revised
GBP100 million cost avoidance target and adjusted Group operating
profit before transformation costs of GBP500 million - GBP550
million for the financial year.
"We will update the market next year on our strategy. There will
be a greater emphasis on how we connect customers, companies and
countries through our domestic and international businesses. There
will be a clearer focus on financial performance and management
accountability. In March, we will host our first Capital Markets
day since IPO in 2013. We will share more detail then about our
direction for the next five years."
Group financial summary(1)
26 weeks 26 weeks
ended 23 ended 24
September September Underlying
Reported results (GBPm) 2018 2017 change(2)
------------------------ ----------- ----------- -----------
Revenue 4,932 4,829 1%
Operating profit before transformation
costs 208 89
Operating profit after transformation
costs 156 26
Profit before tax 33 77
Profit after tax 5 168
Basic earnings per share (pence) 0.5p 17.1p
In-year trading cash flow (100) 125
Net debt (470) (382)
Interim dividend per share (pence) 8.0p 7.7p 4%
---------------------------------------- ------ ------ ---------
Adjusted results (GBPm)
-------------------------------------------------------------------
Revenue 4,932 4,829 1%
Operating profit before transformation
costs 242 323 (25%)
Operating profit after transformation
costs 190 260
Margin 3.9% 5.4% (150bps)
Profit before tax 183 250 (27%)
Profit after tax 136 198
Basic earnings per share (pence) 13.6p 20.1p
---------------------------------------- ------ ------ ---------
Business units
Adjusted operating
profit before transformation
Revenue costs
-------- ------------------------------------- --------------------------------
26 weeks 26 weeks 26 weeks 26 weeks
ended 23 ended 24 ended 23 ended 24
September September Underlying September September
(GBPm) 2018 2017 change 2018 2017
-------- ----------- ----------- ----------- --------------- ---------------
UKPIL 3,585 3,624 (1%) 165 233
GLS 1,347 1,205 9% 77 90
-------- ----------- ----------- ----------- --------------- ---------------
GROUP 4,932 4,829 1% 242 323
-------- ----------- ----------- ----------- --------------- ---------------
Group performance(1,2)
-- Revenue up one per cent on an underlying basis. GLS revenue
increased nine per cent, more than offsetting one per cent decline
in UKPIL revenue.
-- Adjusted operating profit before transformation costs of
GBP242 million was down 25 per cent on an underlying basis,
primarily reflecting lower revenue in the UK, poor productivity
performance and, consequently, lower cost avoidance in the UK, as
well as higher than expected cost pressures in GLS.
-- In-year trading cash outflow of GBP100 million arising
primarily from, as previously indicated, a GBP101 million payment
in relation to the 2017-18 pay award3.
-- Adjusted operating profit margin after transformation costs
of 3.9 per cent, down 150 basis points.
-- Adjusted profit before tax of GBP183 million was down 27 per
cent on an underlying basis, largely reflecting the operational
performance.
-- Adjusted basic earnings per share (EPS) of 13.6 pence was
down 6.5 pence.
Business performance(1,2)
UKPIL
-- UKPIL revenue down one per cent on an underlying basis.
-- UK parcels business performing well. UK parcel revenue and
volumes up six per cent. Royal Mail domestic account parcel
volumes, excluding Amazon, up eight per cent.
-- Addressed letter volumes (excluding the impact of political
parties' election mailings) down seven per cent. Total letter
revenue (including marketing mail) down by seven per cent.
Excluding the benefit of political parties' mailings in relation to
the general election in H1 2017-18, total letter revenue down five
per cent.
-- Disappointing UK productivity performance, significantly
below plan at -0.2 per cent4. UKPIL total costs up one per cent.
Transformation costs of GBP52 million.
-- Costs avoided of GBP41 million.
-- Implementing short-term cost actions, including a review of
our organisational structure and management roles, discretionary
spend and central costs.
GLS
-- GLS revenue up nine per cent on an underlying basis. Volumes
up six per cent, excluding recent acquisitions. Including
acquisitions, revenue up 11 per cent on a constant currency
basis.
-- Adjusted GLS operating profit margin declined to 5.7 per
cent, due to previously highlighted labour market and other cost
pressures across Europe and the US.
-- Good revenue growth at Golden State Overnight (GSO). GSO and
Postal Express being integrated to create an interstate overnight
parcel delivery service with full US west coast coverage. Expected
synergies and benefits will now take longer to be realised. This is
because of local cost pressures, refocusing the customer base,
transitioning to the new business model and ongoing integration
costs. Recognising a GBP68 million impairment against the goodwill
and other assets related to the acquisition of these businesses:
non-cash operating specific item.
Outlook summary for 2018-19
-- Outlook and other guidance for 2018-19 unchanged.
-- Adjusted Group operating profit before transformation costs
of GBP500 million to GBP550 million on a 52 week basis.
-- UKPIL parcel volumes and revenue growth rates to be better
than in 2017-18.
-- Addressed letter volume decline (excluding political parties'
election mailings) similar to decline in first half.
-- Committed to GBP100 million cost avoidance target; UKPIL
productivity improvement significantly below our original
expectation (towards the upper end of the two to three per cent
range).
-- Transformation costs of around GBP150 million due to
short-term cost actions.
-- Continued good revenue growth in GLS. Targeting adjusted
operating profit margins of over six per cent.
-- Total net cash investment of around GBP500 million.
-- The Group has a progressive dividend policy. In line with our
dividend policy, the interim dividend of 8.0 pence has been set as
one third of the prior year's total dividend.
For further information, please contact:
Investor Relations:
Catherine Nash
Phone: 020 7449 8183
Email: investorrelations@royalmail.com
Media Relations:
Beth Longcroft
Phone: 07435 768 549
Email: beth.longcroft@royalmail.com
Company Secretary:
Kulbinder Dosanjh
Phone: 020 7449 8133
Email: cosec@royalmail.com
Results presentation:
A results presentation for analysts and institutional investors
will be held in London at 9:30am on Thursday 15 November 2018. A
simultaneous webcast will be available at
www.royalmailgroup.com/results.
A trading update covering the nine months ending 23 December
2018 is expected to be issued on 29 January 2019. A conference call
for analysts and institutional investors will be held on that
date.
Registered Office:
Royal Mail plc
100 Victoria Embankment
London EC4Y 0HQ
Registered in England and Wales
Company number 08680755
LEI 213800TCZZU84G8Z2M70
(1) Reported results are in accordance with International
Financial Reporting Standards (IFRS). Adjusted results exclude the
pension charge to cash difference adjustment and specific items,
consistent with the way financial performance is measured by
Management and reported to the Board.
(2) Movements are presented on an underlying basis.
For further details of reported results, adjusted and underlying
Alternative Performance Measures (APMs) used in the Financial
Report for the half year ended 23 September 2018, including
reconciliations to the closest IFRS measures where appropriate, see
section entitled 'Presentation of results and Alternative
Performance Measures.'
(3) The Agreement applies to employees in CWU represented grades
in Core Operations, Logistics (excluding RM Fleet), Engineers, RMSS
and Royal Mail International. It is subject to contract. A separate
agreement has been finalised between Parcelforce Worldwide and the
CWU. Details of arrangements for RM Fleet and Parcelforce Worldwide
employees are appended to the Agreement. Separate negotiations will
take place for other CWU grade employees within Royal Mail as per
current arrangements. It does not apply to Unite-represented
grades.
(4) We have refined the calculation of workload since the
October trading update, resulting in a change to the productivity
performance for the first half.
CHIEF EXECUTIVE OFFICER'S REVIEW(1)
Introduction
Four months into my new role as CEO, it was very disappointing
to have to announce in early October our poor UK productivity and
cost performance. In our trading update, we lowered our 2018-19
cost avoidance target to GBP100 million. We are committed to this
target. We are also maintaining our revised outlook for adjusted
Group operating profit before transformation costs of GBP500
million to GBP550 million for this financial year.
We are setting out, in some detail, the actions we are taking to
address our performance issues. They include: the known and
understood actions underpinning our GBP100 million cost avoidance
target; pricing movements in UK business mail and in many GLS
markets; undertaking an assessment of the productivity and
efficiency opportunities under our Agreement with CWU; conducting a
UK Network Review, which aims to clarify how we can create a
modern, optimised and efficient network to deliver letters, parcels
and other products; and at the Capital Markets day we will provide
an update on a Royal Mail for the future and our direction for the
next five years.
In short, we as a management team are focused on pulling all the
short and medium-term levers at our disposal to improve our
performance.
Setting out our plans for the future
Against the backdrop of difficult trading conditions, it is
important to highlight the major advantages underpinning our
business model. This is a great Company with great brands. We have,
by far, the best delivery network in the UK: our ability to deliver
most of our letters and parcels together is a major asset. In GLS,
we have one of the largest deferred, ground-based networks in
Europe. Product and geographical diversification is a key and
ever-increasing part of our business model. We have a strong
balance sheet and strong cash generation characteristics.
Our results presentation today will be followed by a Christmas
update in January and a Capital Markets day in March 2019. As we
will just have come to the end of our annual business planning
process, the Capital Markets Day will be our first opportunity to
share our plans on a number of key topics. They include our
assessment of the productivity and efficiency opportunities under
the Pensions, Pay and Pipeline Agreement ('the Agreement') with the
CWU and a UK Network Review. We will also provide an update on our
productivity plans.
We will be updating the market next year on our strategy. All
the work we will share with you is about a Royal Mail for the
future, and our direction for the next five years. There will be
many elements of our strategy that we will retain. You will also
see a greater emphasis on how we connect customers, companies and
countries through our domestic and international businesses. There
will be a clearer focus on financial performance and management
accountability. We are conducting a review of our overall
investment spending for this financial year. That process is
underway. We will continue to invest in the UK.
Our UK productivity and cost avoidance programme
In the first three months of the financial year, we were
experiencing the after-effects of the industrial dispute. We
therefore did not expect a great deal in the way of productivity
improvements. This proved to be the case in the first quarter.
We did expect, however, a move upwards in productivity during
the second quarter. The slower ramp up in productivity in the
second quarter was due to a combination of factors. This included
the continued after effects of the industrial dispute, delayed
implementation of cost avoidance projects and the complexity
involved in implementing elements of the Agreement. The lack of
progress in this respect crystallised our management judgement that
we would not be able to deliver our productivity improvement target
for the full year (i.e. towards the upper end of the two to three
per cent range). Accordingly, we revised our 2018-19 cost avoidance
target downward from GBP230 million to GBP100 million.
(1) Movements are presented on an underlying basis. For further
details of reported results, adjusted and underlying Alternative
Performance Measures (APMs) used in the Financial Report for the
half year ended 23 September 2018, including reconciliations to the
closest IFRS measures where appropriate, see section entitled
'Presentation of results and Alternative Performance Measures'.
The GBP100 million of sustainable savings is underpinned by a
series of initiatives across all areas of the business. The
initiatives behind these savings are on track. We are confident we
will deliver the GBP100 million. We are also deploying a range of
short-term cost actions, including a review of our organisational
structure and management roles, discretionary spend and central
costs.
New ways of working
The operational elements of the Agreement, coupled with
business-as-usual initiatives and continuous improvement, are the
means by which we aim to deliver productivity improvements.
Specific efficiency incentives were detailed in the Agreement.
The Delivery Methods trial is about testing multiple new modes of
letter delivery. The conclusions will be important in negotiations
for a new delivery agreement in 2019. Postal Digital Assistant
(PDA) Outdoor Actuals, alongside the ongoing trials of Automated
Hours Data Capture (AHDC) and Resource Scheduler, are about
aligning hours worked with workload and fairness in processing,
logistics and delivery. The annual Processing and Logistics Review
optimises network planning and logistics management - a sizeable
operation for us in its own right - across the UK.
The Agreement is wide ranging and has secured a fair and
sustainable pensions solution for the Company and colleagues.
Funding the overall deal, however, requires the successful
deployment of the specific measures too. We are conducting an
assessment of (a) our existing business-as-usual initiatives and
continuous improvement programme and (b) current trials, including
scalability and ability to deliver services required to pay for the
Agreement.
Our UK Network Review
We get very considerable benefits from the combined delivery of
letters and parcels in the UK. This is our economic sweet spot. It
will remain the case for a considerable period that letters will be
central to the economics of our business. This is the environment
within which we have begun a UK Network Review ('the Review') to
develop the blueprint for a modern, optimised, efficient network to
deliver letters, parcels and new products, combining new methods of
processing and delivery with automation, where appropriate. For
clarity, we have got the best network in the UK. This is about
getting the best from it. It is not about building a new
network.
Since privatisation, we have invested around GBP2 billion in
modernisation - particularly in IT and parcels development. This
has delivered great benefits. But, recent investment in our UK
network itself has been more modest. If further investment is
required, we will ensure this is targeted and focused on delivering
efficiencies and greater effectiveness. We will take an
evolutionary and phased approach within an agreed expenditure
envelope.
Our international business
Our Company is becoming more diversified on two counts. Firstly,
parcels account for 62 per cent of our Group revenue in the first
half, compared to 50 per cent five years ago. Secondly, we are
becoming more international. The UK and continental Europe are our
two linchpins. We have a growing presence in North America too. In
the first half of the year, our non-UK revenue(2) was around 38 per
cent of the Group total. This is probably more than many people
might think.
In the future, there will be a determined focus to leverage the
synergies between Royal Mail and GLS more effectively. Royal Mail
International is well placed to benefit from the UK's leading
presence in cross-border e-commerce. Royal Mail International is
already accessing the GLS European network, and in the first half
shipped around two million parcels from the UK into the network.
The next stage will be to connect into GLS North America. Royal
Mail's global network is a postal option for all our GLS and UK
clients. Our ambition is to offer parcel solutions to anywhere in
the world, for any customer.
(2) Non-UK revenue consists of GLS, Royal Mail International and
Parcelforce Worldwide international revenue.
GLS
GLS performance in the first half of the year reflects the ups
and downs of good economic growth across Europe. On one hand,
revenue was up nine per cent based on good volume growth and
necessary price increases. On the other hand, the adjusted
operating profit margin has declined to 5.7 per cent. This is
primarily because of the labour and other cost pressures associated
with that economic growth, and due to losses in France and the
US.
Our current view is that we can recover some of that margin in
the second half through prudent pricing actions and tight cost
management. We are targeting adjusted operating profit margins of
over six per cent for the full year.
Our combined Spanish business is performing well. GLS Spain
revenue was up 17 per cent in the first half on an underlying
basis. We are now a major player in the Spanish market. Dicom
Canada has just become part of our Group, giving us a significant
presence in one of the world's largest economies and a primarily
B2B focus.
Our US business
We acquired two separate businesses on the west coast of the
United States in the last two years - GSO and Postal Express. We
are in the process of integrating these operations to create an
interstate overnight parcel delivery service with full US west
coast coverage, with the aim of realising operational synergies and
commercial benefits.
We are pleased with the revenue development in GSO, which is
showing good growth. We are investing organically to expand the
network further in Idaho and into Utah. In Postal Express,
profitability continues to be impacted by its integration with GSO
and the decision to refocus our customer base to SMEs and mid-sized
corporate customers.
As well as integrating the operations, we have accelerated the
transition of the businesses to a fully independent contractor
model. This is in line with the tried and tested GLS approach
elsewhere. It is a necessary and important step. But, it does
generate transitional costs. While we are making progress with our
plans, the combined impact of cost pressures and our actions means
that the expected synergies and benefits will now take longer to be
realised. Accordingly, we are recognising a GBP68 million
impairment against the goodwill and other assets related to the
acquisition of these businesses. This is a non-cash operating
specific item.
Conclusion
The last few months have been challenging. We are disappointed
with our performance, and are taking a range of actions to address
this.
We are comfortable with our guidance for the financial year. Our
cost avoidance target is underpinned by a range of known and
understood actions. Christmas, as always, is a key factor in the
equation. Our preparations for the festive season are going very
well. We will share our seasonal performance with you in
January.
We have got some great strengths. They include our people, our
brands, our product and geographical diversification, and our
strong balance sheet. Over the next few months, we are focused on
leveraging those strengths to deliver for our shareholders, while
taking the next steps to plan for our future. We will provide
shareholders with a further update at our Capital Markets day in
March 2019.
Royal Mail has been in existence in one form or another for over
500 years. We have transformed ourselves many times before. We will
succeed by working, first and foremost, with our people and our
customers.
BUSINESS REVIEW(1)
UKPIL Parcels
Parcels growth in the UK is largely driven by e-commerce. The UK
alone makes up around 30 per cent of the European e-commerce
market. UK retailers, and their customers, have many options.
Access to an extensive network is vital. Royal Mail has the most
developed UK network: over 90 per cent of the UK population are
within one mile of a Royal Mail parcel access point. Through our
Local Collect service, customers can collect their parcels from
over 11,000 sites.
We continue to look for new areas of growth. Our recent
Subscription Economy Report(2) found that the subscription box
market is forecast to grow by 72 per cent to GBP1 billion by 2022.
Subscription e-commerce has moved on from a previous focus on
magazines and newspapers, to everything from recipe kits to shaving
gear.
Our progress
UK parcels performed well. Volumes and revenue were up six per
cent on an underlying basis, driven by new business wins and more
traffic with existing customers in domestic parcels. Royal Mail
domestic account volumes (excluding Amazon) were up eight per cent.
At 25 per cent, Royal Mail Tracked 24(R) /48(R) and Tracked
Returns(R) volume growth is strong. Amazon parcel volumes grew
strongly due to higher volumes of letterboxable items. The
extension of our customer Latest Acceptance Times for our Tracked
24(R) product in July 2018 will help support the growth in
e-commerce in the UK. It enables late night online shopping for
next day delivery at scale, covering 95 per cent of the United
Kingdom. This service has already won new business.
We are making a significant investment in Christmas, our most
important time of the year. We are opening six temporary parcel
sort centres and recruiting around 23,000 temporary workers. Over
1,100 Enquiry Offices will be open on Sunday 23 December 2018. All
will open on Christmas Eve. These measures are about delivering the
best possible service to our customers throughout the Christmas
period.
We are embedding sustainability into the heart of our delivery
strategy. With the UK's biggest by far "feet on the street"
network, we play a key role in lowering carbon emissions associated
with delivery. The many letterboxable items in our network are
ideally suited for foot delivery. In addition, 100 electric vans
are now in active use at 17 sites across the country.
UKPIL Letters
Challenging market conditions
UK letter volumes are impacted by a number of factors. They
include ongoing structural decline due to e-substitution, business
uncertainty and the impact of GDPR, which particularly impacts
marketing material. Some businesses are replacing physical letters
with other media. They are also consolidating mailings to reduce
costs.
Addressed letter volumes were down seven per cent (excluding
political parties' election mailings). We expect a similar decline
for the full year. Total letter revenue (including marketing mail)
was down by seven per cent. Excluding the benefit of political
parties' mailings in relation to the general election in the first
half of 2017-18, total letter revenue was down five per cent.
Marketing mail revenue, which includes redirections and our Address
Management Unit, decreased by five per cent.
Over the years, there has been major investment in our letters
operations to increase efficiency. In 2010, only eight per cent of
Royal Mail letters were automatically sequenced into walk order.
Now, around 85 per cent of letters are walk-sequenced. We have
expanded Mailmark(TM) to more letters, providing senders with more
detailed mailing information and ensuring we bill accurately for
our services.
(1) Movements are presented on an underlying basis. For further
details of reported results, adjusted and underlying Alternative
Performance Measures (APMs) used in the Financial Report for the
half year ended 23 September 2018, including reconciliations to the
closest IFRS measures where appropriate, see section entitled
'Presentation of results and Alternative Performance Measures'.
(2) The UK Subscription Box Boom Report, compiled by GlobalData
for Royal Mail, draws findings from a bespoke consumer survey using
a nationally representative sample of 2,000 shoppers and a bespoke
B2B survey of 53 directors and senior managers. It was commissioned
in May 2018.
Our Keep Me Posted campaign is supported by 126 organisations
that recognise the importance of giving consumers the choice of
paper bills and statements. As part of the Joint Industry Committee
for Mail, we are continuing our efforts to offer standardised data
on the reach and readership of mail. This engagement will
demonstrate more clearly to the market how consumers interact with
direct mail.
As previously announced, we exceeded our regulatory Quality of
Service target for Second Class mail in the first half of the year.
Disappointingly, we could not, however, meet our regulatory target
for First Class mail. We are working closely with Ofcom in relation
to the regulatory investigation into our regulated Quality of
Service performance for 2017-18. In the non-regulated area,
business customer satisfaction for Royal Mail Tracked 24(R) /48(R)
services is high. 94 per cent of customers are satisfied with the
service.
In August, we announced that we would appeal Ofcom's competition
law infringement decision. The decision, and fine of GBP50 million,
relates to a price change announced in 2014 - never implemented or
paid - under our Access Letters Contract. The announced price
change had been robustly stress tested by Royal Mail under
competition law and the relevant regulatory framework. Royal Mail
has now lodged an appeal with the Competition Appeal Tribunal to
have both Ofcom's decision and fine overturned. No fine is payable
until the appeals process is exhausted.
In October, we informed Access mail operators and large business
mail senders that we were increasing wholesale pricing for business
mail by an average of nine per cent from January 2019. This affects
businesses like banks and insurance companies sending large volumes
of business mail. We thought long and hard about these changes.
But, we reported an operating loss for our wholesale business on a
regulated business basis in 2017-18(3) . This move will help us
maintain, sustain and invest in the Universal Service.
Customer-focused and digitally-enabled
Since privatisation in 2013, we have invested around GBP2
billion in the ongoing modernisation of our UK operation. For
example, our rollout of more than 80,000 PDAs - completed in 2018 -
established one of the largest IT estates of its kind in
Europe.
Customer-focused innovation has continued at pace. New
initiatives have been announced in recent months. They include
trialling the UK's first parcel postboxes in Northampton and
Leicester, the first potential major change for the postbox in 160
years.
Another important development was the introduction of new
measures to improve the online shopping experience. They include
Delivery to Neighbour enhancements; retailers can give customers
more information about the delivery progress of their items.
Notifications now identify the neighbour's address. This makes it
even easier for recipients to know who has their parcel if they are
not at home for delivery.
Our international parcels business
Continued geographical diversification
A key focus for us is the development of our international
parcels business, which now operates in 44 countries. Improved
integration between Royal Mail International and GLS means more
customers benefit from Royal Mail's global experience, and GLS'
expertise and reach across continental Europe. Outbound parcels are
delivered by a range of delivery partners elsewhere: the Universal
Service Obligation (USO) provider, or other players where
appropriate. Another example of our increased international focus
is the success of Royal Mail International's initiative to attract
more cross-border traffic from Asia. This service is being
expanded, with opportunities in the US being explored.
As part of our focused geographical expansion, we announced in
September that we had acquired Dicom Canada. It is primarily a B2B
parcel services provider. Dicom Canada operates across Canada with
a major focus on the Eastern Provinces of Ontario and Quebec.
Canada is the world's tenth largest economy(4) , with Ontario and
Quebec representing 57 per cent of the country's GDP(5) . Dicom
Canada is well-placed to leverage growth trends in these markets
and give us an established market position in this key economy.
(3) An operating loss after transformation costs was reported
for Network Access products in the 2017-18 Regulatory Financial
Statements, prepared in accordance with the USP Accounting
Condition and Regulatory Accounting Guidelines as defined by
Ofcom.
(4) Based on current GDP in November 2018 from International
Monetary Fund DataMapper.
(5) Gross domestic product (GDP) at basic prices, by industry,
provinces and territories. Statistics Canada.
The company's performance was in line with our expectations in
the first month following acquisition. The transaction is expected
to be earnings and cash flow accretive to the Group in the current
financial year.
GLS
Across Europe, GLS is benefiting from good economic conditions.
At the same time, however, those stronger economic conditions are
leading to a significant increase in labour and non-labour costs,
e.g. contractor costs. This is having an impact on the GLS margin.
We expect to implement price increases in a number of countries in
the second half of the year. We are also actively reviewing
discretionary spend across all our markets.
Volumes were up six per cent, while revenue increased by nine
per cent. The strong revenue performance was driven by price
increases in several markets. Revenue growth was achieved in most
markets. Our three largest markets, Germany, Italy and France,
accounted for 58 per cent of total revenue, down slightly from the
first half of 2017-18. This reflects our growth in other European
markets and recent acquisitions in North America.
In Germany, GLS' largest market, revenue was up seven per cent.
In Italy, it increased by eight per cent. Revenue in France was up
five per cent. France continues to be a challenging market. Actions
are underway to improve quality and profitability. GLS Spain is
performing strongly, with strong B2B and B2C volume growth.
In the western United States, we are integrating GSO and Postal
Express to create an interstate overnight parcel delivery service.
While we are making progress with our plans, the combined impact of
local cost pressures, refocussing the customer base, transitioning
to the new business model and ongoing integration costs means that
the expected synergies and benefits will now take longer to be
realised. Accordingly, we are recognising a GBP68 million
impairment against the goodwill and other assets related to the
acquisition of these businesses. This is a non-cash operating
specific item. Please see the paragraph entitled 'USA' in the
section entitled 'General Logistics Systems (GLS)' and the
paragraph entitled 'Specific items and pension charge to cash
difference adjustment' in the section entitled 'Group Results' in
the Financial Review for more information.
Pensions, productivity, new ways of working and network
review
Pensions
We are making good progress with the pension elements of our
Agreement with the CWU. The closure of the Royal Mail Pension Plan
to future accrual in its previous form ensured we avoided an
expected increase in cash contributions to around GBP1.25 billion
per annum. Our total contributions in respect of all pension
schemes remain at around GBP400 million per annum. This is one of
the largest ongoing annual cash costs for any UK company. We are
working closely with the CWU to secure the introduction of the UK's
first Collective Defined Contribution (CDC) scheme. We were pleased
to see the Government's recent publication of the public
consultation on the introduction of CDC schemes. This is an
important step forward in our campaign to allow us to offer a CDC
scheme for over 140,000 UK employees as soon as possible.
Productivity and cost avoidance
Delivering significant productivity gains is vital to sustaining
the Universal Service. It was very disappointing that we announced
a productivity decline of 0.2 per cent(6) , significantly below
plan. We now expect our full year performance to be significantly
below our original expectation (which was towards the upper end of
the two to three per cent range for 2018-19). We accordingly
lowered our 2018-19 cost avoidance target from GBP230 million to
GBP100 million.
Our revised GBP100 million cost avoidance target is underpinned
by a comprehensive programme of activity. In addition, a series of
short-term cost actions are being taken, including a review of our
organisational structure and management roles, discretionary spend
and central costs.
The operational elements of the new Agreement are about new
working conditions, new technology and digitisation, and new growth
initiatives. This is a challenging agenda. In addition, in the
first three months of the financial year, we had not expected a
great deal in the way of productivity improvement. Indeed, the
first quarter was as we expected it to be.
We had, however, expected a move upwards in productivity in our
second quarter. The slower ramp up in productivity in the second
quarter was due to a combination of factors. This included the
continued after effects of the industrial dispute, delayed
implementation of cost avoidance projects and the complexity
involved in implementing elements of the Agreement. We are working
on an assessment of the efficiency and productivity opportunities
available under the Agreement (see the 'New ways of working'
section).
Our UK Network Review
Royal Mail derives very considerable benefits from the combined
delivery of letters and parcels. Whilst we are transforming into a
UK parcels operation that also handles letters, it will remain the
case for some time that letters are central to the economics of our
business.
Against this strategic backdrop, Royal Mail is undertaking a UK
Network Review ('the Review'). This is a holistic exercise. It is
about finding the best way to collect, process, and deliver letters
and parcels. It will take into account changing market conditions
in letters and parcels. One of its starting points, however, is
that based on previous analysis, the current USO specification is
the best way to maintain the revenue available to sustain the
Universal Service.
Fundamentally, the Review will focus on how we can create a
modern, optimised, efficient network to process and deliver
letters, parcels and innovative new products as well. More
automation is only part of the answer. Most of our items,
especially those that are letterboxable, will continue to be
delivered on foot through our network.
We will take an evolutionary and phased approach to any
investment within an agreed expenditure envelope. The main findings
from the Review will be shared with stakeholders at the Capital
Markets day.
Brexit
While the shape of the future relationship between the UK and
the EU remains unclear, it is not possible to predict with any
degree of accuracy the impact Brexit could have on us. The main
issues for our Group relate to any potential economic downturn, and
changes associated with customs and VAT processing. We believe the
immediate risk to our domestic operations is low. We are working
with key suppliers to ensure our supply chain remains secure.
Internal procedures are in place to monitor and manage ongoing
risks.
Historically, there has been a correlation between economic
conditions and the level of letter and parcel volumes. Flat or
adverse economic conditions have a bearing on our ability to
maintain and grow revenue, particularly as business customers look
to reduce costs. A decline in the value of Sterling also impacts
our international business.
The impact of Brexit on cross-border parcel volumes will depend
on the nature of the UK's future trading relationships, and what
future EU/UK customs and VAT arrangements look like. In a 'no deal'
situation, we expect the rules which apply to non-EU imports to be
extended to EU items. Similarly, we would expect the EU to treat UK
imports as it does non-EU imports today. We are well placed to
manage the impact of changes to customs processing. Royal Mail was
the only company to get a specific mention in the UK Government's
Customs White Paper. We are working closely with Government on
alternative models for customs and tax collection after the UK
leaves the EU.
Current trading and Outlook for 2018-19
Current trading is in line with our revised expectations. Our
outlook and other guidance is unchanged. We continue to expect
adjusted Group operating profit before transformation costs in the
range of GBP500 million to GBP550 million for the full year on a 52
week basis.
Given our performance to date, we expect UKPIL parcel volumes
and revenue growth rates for the full year to be better than in
2017-18. We maintain our medium-term outlook for addressed letter
volume declines of between four to six per cent per annum
(excluding political parties' election mailings). For this year, we
maintain our outlook for a similar decline to that which we have
seen in the first half.
We are committed to our GBP100 million cost avoidance target. We
expect UKPIL productivity improvement in 2018-19 to be
significantly below our original expectation (towards the upper end
of the two to three per cent range). While productivity
improvements are lower than anticipated, we continue to expect
transformation costs of around GBP150 million due to the short-term
cost actions we are taking.
We expect continued good revenue growth in GLS for the full
year. As a result of pricing initiatives and cost mitigation
actions, we are targeting adjusted operating profit margins of over
six per cent for the full year.
We are well prepared for the Christmas season. The outcome for
the full year will be dependent on our performance over this
period.
We continue to target total net cash investment of around GBP500
million in 2018-19. The Group has a progressive dividend policy. In
line with our dividend policy, the interim dividend of 8.0 pence
has been set as one third of the prior year's total dividend.
Board changes
There have been a number of changes to the Board in the first
half of the year. In July 2018, Paul Murray retired from the Board
and as Chairman of the Audit and Risk Committee. We have benefited
significantly from Paul's wisdom and experience. We thank Paul for
his dedication and commitment during a key time for us. Keith
Williams took over from Paul as Chair of the Audit and Risk
Committee.
In September 2018, Peter Long informed the Company of his
decision to step down from the Board. The Board would like to offer
our thanks to Peter for his contribution to our Company. He has led
the Board through a time of major change, including ongoing
transformation, industrial relations agreements and changes to the
Board itself, including the transition of CFO, Stuart Simpson, and
Group CEO, Rico Back. At the same time, we were pleased to confirm
the immediate appointment of Les Owen, a highly experienced Board
member, as Chairman. Les has a deep understanding of our business
and the challenges we face. September 2018 also saw the retirement
of Dame Moya Greene, who had been our Chief Executive Officer for
eight years. Moya stepped down from the Board in July 2018. The
Board also offers Moya thanks for her considerable service to the
Company and its shareholders. We wish her well in her future
endeavours.
Outside the reporting period, in November 2018, we announced
that Sue Whalley, CEO, Post and Parcels UK, and the Board agreed
that she will leave Royal Mail. She stepped down from the Board
with immediate effect and will transition her responsibilities by
the end of March 2019. We would like to thank Sue for the
significant contribution she has made to Royal Mail across a whole
range of issues over the last 12 years. We wish her well in the
future. At the same time, we announced that Keith Williams has been
appointed Deputy Chairman with immediate effect, in addition to his
responsibilities as Chair of the Audit and Risk Committee. Keith
has a very strong track record in operational transformation,
digital strategy and industrial relations, including pensions.
Finally, we would like to thank our people across our Group for
their considerable effort during a challenging time.
PRINCIPAL RISKS
The Board considers that the principal risks faced by the Group
for the remaining six months of the year are substantially
unchanged from those described at pages 40-45 of the Royal Mail plc
Annual Report and Financial Statements 2017-18, except that the
status of the industrial action and efficiency risks have
increased, as described under 'New Pensions, Pay and Pipeline
Agreement and risk of industrial action'. The 'Employment
legislation and regulation risk' has also been removed and replaced
with a risk relating to workforce planning as described below under
'Regulatory and legislative environment'. Our updated principal
risks are:
New Pensions, Pay and Pipeline Agreement and risk of industrial
action
-- As Royal Mail Group continues to pursue the necessary
efficiency programmes in order to remain competitive in the letters
and parcels markets and implements the new Pensions, Pay and
Pipeline Agreement, there remains a risk of material disagreements
or disputes between the Group and its trade unions resulting in
widespread localised or national industrial action.
-- We may not achieve the effective control of costs and
efficiency benefits required to deliver our strategy.
As announced in the trading update on 1 October 2018, we have
lowered our targets for cost avoidance and productivity
improvements for 2018-19. It is also taking longer than anticipated
to deliver some of the benefits of the Agreement with the CWU. As a
result, the above two specific risks have increased. We are
mitigating these through a comprehensive review of management
structures, organisational design and restrictions on discretionary
non-pay spend. We have also begun a review of the UK network, with
a view to creating an optimised and efficient network.
-- We may be unable to obtain the necessary legislative changes
to implement the UK's first Collective Defined Contribution (CDC)
pension scheme as agreed with the CWU. If alternative arrangements
cannot be agreed, this may lead to industrial action.
Changes in market conditions and customer behaviour
-- Our product offerings and customer experience may not
adequately meet evolving customer expectations.
-- Flat or adverse economic conditions, the impact of the
outcome of the negotiations of UK's exit from the EU, and customer
uncertainty over detailed data regulation requirements could impact
our ability to maintain and grow UK revenue.
-- We may be unable to identify new profitable and sustainable
areas of business, implement appropriate investments, and have in
place suitable structures to support continued transformation of
the business.
Regulatory and legislative environment
-- The absence of a sustainability framework may impact on Royal
Mail's ability to support the USO.
-- Depending on the outcome of the appeal against the Ofcom
Competition Act decision, Royal Mail may be fined.
-- A health and safety incident or failure could result in the
serious injury, ill health or death of employees, contractors,
agency workers or members of the public.
-- A major breach of information security, data protection
regulation and/or a cyber-attack could have a negative financial
and reputational impact on the business or trigger material service
and/or operational disruption.
-- We may fail to attract and retain senior management and key
personnel with appropriate expertise.
-- Workforce planning could be adversely impacted as the
demographic of our workforce changes alongside the availability of
people with the right skills to join our organisation. We have
added this risk to our principal risks to reflect its strategic
importance.
We monitor the demographic of our workforce and in parts of our
organisation we have an aging workforce as a result of the
abolishment of the default retirement age. As this workforce ages,
they may be incapable of fulfilling more physical roles.
Advancement in technology is leading to increasing automation,
which requires a different more specialist skill from a workforce.
We therefore need to ensure our current workforce is capable of
fulfilling the roles we require, whilst attracting the right skills
and knowledge for the future.
-- The risk 'Employment legislation and regulation' has now been
removed from our principal risks.
The majority of changes to employment legislation and regulation
that could, directly or indirectly, increase the Group's labour
costs have already come into effect. There are no proposed changes
in the short to medium term that are considered to have a material
gross or net impact on costs.
FINANCIAL REVIEW
Reported results and Alternative Performance Measures (APMs)
Reported results are prepared in accordance with International
Financial Reporting Standards (IFRS). Reported results are set out
in the section entitled 'Presentation of results and Alternative
Performance Measures' and 'Condensed consolidated financial
statements'.
In addition to reported results, the Group's performance in this
Financial Review is also explained through the use of APMs that are
not defined under IFRS. Management considers that these measures
provide a more meaningful basis on which to analyse business
performance. They are consistent with the way that financial
performance is measured by Management and reported to the
Board.
The APMs used are explained in the paragraphs entitled
'Alternative Performance Measures' and reconciliations to the
closest measure prescribed under IFRS are provided where
appropriate. The analysis of underlying movements in adjusted
results is set out in the paragraph entitled 'Underlying change
adjustments'. Commentary is provided on both reported and adjusted
results.
UK PARCELS, INTERNATIONAL & LETTERS (UKPIL)
Reported results
Reported
26 weeks Reported
ended 26 weeks ended
23 September 24 September
Summary results (GBPm) 2018 2017
==================================================== ============= ===============
Revenue 3,585 3,624
Operating costs (3,454) (3,625)
============= ===============
Operating profit/(loss) before transformation costs 131 (1)
Transformation costs (52) (63)
============= ===============
Operating profit/(loss) after transformation costs 79 (64)
Operating specific items (82) (22)
------------- ---------------
Operating loss (3) (86)
------------- ---------------
Operating profit/(loss) margin after transformation
costs 2.2% (1.8%)
==================================================== ============= ===============
The full UKPIL reported results are set out in the paragraph
entitled 'Segmental reported results'. UKPIL reported revenue was
GBP39 million lower compared with the first half of 2017-18. This
was due to lower letter revenue not being offset by growth in
parcels revenue. Operating profit before transformation costs
increased to GBP131 million. This was largely due to the reduction
of the IAS 19 pension charge to GBP311 million (H1 2017-18: GBP510
million) following the closure of the Royal Mail Pension Plan
(RMPP) to future accrual in its previous form from 31 March
2018.
Operating profit after transformation costs was GBP79 million
compared with a loss of GBP64 million in the prior period.
Operating specific items increased by GBP60 million, largely due to
the purchase of a further buy-in insurance policy for the Royal
Mail Senior Executives Pension Plan (RMSEPP). Further details are
set out in the paragraph entitled 'Pensions'. Operating loss for
the period decreased by GBP83 million to GBP3 million compared with
the first half of 2017-18.
Adjusted results
The Group makes adjustments to reported results under IFRS to
exclude specific items and the IAS 19 pension charge to cash
difference adjustment as set out in the paragraph entitled
'Specific items and pension charge to cash difference
adjustment'.
Adjusted Adjusted
26 weeks ended 26 weeks ended
23 September 24 September Underlying
Summary trading results (GBPm) 2018 2017 change(1)
======================================= =============== =============== ==========
Letters and other revenue(2) 1,399 1,504 (7%)
Marketing mail(2) 496 524 (5%)
=============== ===============
Total letters(2) 1,895 2,028 (7%)
Parcels 1,690 1,596 6%
=============== ===============
Revenue(2) 3,585 3,624 (1%)
Operating costs before transformation
costs (3,420) (3,391) 1%
=============== ===============
Operating profit before transformation
costs 165 233 (29%)
Transformation costs (52) (63) (18%)
=============== ===============
Operating profit after transformation
costs 113 170 (34%)
Margin after transformation costs 3.2% 4.7% (150bps)
Letters (millions)
Addressed letters 5,094 5,610 (7%)
Unaddressed letters 1,381 1,510 (9%)
Parcels (millions)
Core network 550 516 6%
Parcelforce Worldwide 48 47 2%
===== =====
Total 598 563 6%
---------------------- ----- ----- ----
Revenue declined by one per cent on an underlying basis. Total
parcel revenue was up six per cent, while letter revenue was down
seven per cent.
Our UK parcels business is performing well. Total parcel volumes
and revenue increased by six per cent on an underlying basis. Royal
Mail domestic account parcels volumes, excluding Amazon, were up
eight per cent as we won new customers and gained more traffic from
existing customers. Royal Mail Tracked 24(R) /48(R) and Tracked
Returns(R) volumes, our key e-commerce products, grew by 25 per
cent. Amazon parcel traffic grew strongly due to higher volumes of
letterboxable parcels. We expect the second half to benefit from
new volumes due to the extension of our customer Latest Acceptance
Times for our Tracked 24(R) product.
Our international parcels business continued to benefit from our
initiative to attract cross-border traffic, mainly from Asia into
mainland Europe and the UK. This accounted for around two
percentage points of the underlying parcel volume growth and around
one percentage point of the parcel revenue growth. This service is
being expanded and we are exploring cross-border opportunities with
the US. We saw lower import parcel volume growth outside of our
cross-border initiative. However, this was largely offset by higher
revenue due to increased import rates. Contract export volumes
declined due to the competitive market. We have initiatives in
place to improve our export competitiveness through enhanced
quality of service, tracking and customer reporting. Parcelforce
Worldwide volumes increased by two per cent compared with four per
cent in the first quarter, largely due to a customer withdrawing
from the online retail market.
Addressed letter volumes (excluding political parties' election
mailings) declined by seven per cent on an underlying basis. Our
letter volumes, including marketing mail, are being impacted by
ongoing structural decline, business uncertainty and General Data
Protection Regulation (GDPR). We anticipate a similar decline for
the full year. Our medium-term guidance of addressed letter volume
(excluding political parties' election mailings) decline of four to
six per cent per annum remains unchanged.
Low average unit revenue unaddressed letter volumes were down
nine per cent as we lapped a period of strong growth in the prior
period, due to initiatives which encouraged incremental volume
growth.
Total letter revenue (including marketing mail) decreased by
seven per cent. However, it was down five per cent excluding the
benefit of political parties' mailings related to the general
election in the first half of 2017-18. Marketing mail revenue
decreased by five per cent as the decline in addressed advertising
letters revenue was partially offset by growth in redirections
revenue.
(1) Movements in revenue, costs, profits and margins are shown
on an underlying basis, taking into account non-recurring or
distorting items such as the first year impact of acquisitions and
foreign exchange translation in GLS. See paragraph entitled
'Underlying change' for further information.
(2) Stamped, metered and other prepaid revenue channels are
subject to statistical sampling surveys to derive the revenue
relating to parcels, marketing mail and letters. These surveys are
subject to continuous refinement, which may over time reallocate
revenue between the products above, and which may occasionally lead
to a consequent change to this estimate.
Adjusted operating costs before transformation costs
Adjusted Adjusted
26 weeks ended 26 weeks ended
23 September 24 September Underlying
(GBPm) 2018 2017 change(1)
==================================== =============== =============== ==========
People costs (2,387) (2,362) 1%
Non-people costs (1,033) (1,029) Flat
==================================== =============== =============== ==========
Distribution and conveyance costs (369) (361) 2%
Infrastructure costs (361) (365) (1%)
Other operating costs (303) (303) Flat
==================================== =============== =============== ==========
Total (3,420) (3,391) 1%
------------------------------------ --------------- --------------- ----------
Total adjusted operating costs before transformation costs
increased by one per cent. This was largely driven by poor
performance in people costs as we did not achieve the expected
benefits from our business-as-usual initiatives and transformation
projects. As a result, we saw a decline in productivity of 0.2 per
cent(3) in the first half. Due to an increase in variable hours as
a result of high levels of sick absence and resourcing to recover
Quality of Service, we only achieved a 0.1 per cent reduction in
core network hours. As a result of poor productivity in the first
half, we are expecting our productivity improvement in the full
year to be significantly below our original expectation (towards
the upper end of the two to three per cent range for 2018-19).
The UKPIL cost avoidance programme delivered GBP41 million costs
avoided in the first half, largely due to last year's operational
management headcount reduction, modernisation of our Heathrow
distribution centre and savings on property, technology and central
functions. Given the poor productivity performance, our 2018-19
cost avoidance target was lowered from GBP230 million to GBP100
million. We have plans in place to deliver the revised target for
the full year. These include the absorption of the shorter working
week. In addition, we have a range of short-term cost actions,
including a review of our organisational structure and management
roles, discretionary spend and central costs.
Adjusted people costs were one per cent higher on an underlying
basis. This reflects the timing and amount of the frontline and
manager pay awards. People costs in the period included the impact
of high-levels of sickness-related absences, adverse weather
conditions earlier in the year and additional investment to improve
Quality of Service.
Non-people costs were flat. Distribution and conveyance costs
increased by two per cent. This was largely driven by higher
vehicle repair costs due to adverse weather and delays to the
delivery of new vehicles. Total diesel and jet fuel costs were
broadly flat (H1 2017-18: GBP67 million) and we expect them to be
broadly flat for the full year. Terminal dues were GBP5 million
lower, due to lower export volumes and favourable foreign exchange
movements.
Infrastructure costs decreased by one per cent. Depreciation and
amortisation was flat but we expect it to be GBP10 million higher
for the full year. The cost avoidance programme delivered benefits
through supplier contract renegotiations and lower discretionary
spend across the property estate.
Other operating costs were flat mainly due to the impact of the
cost avoidance programme.
Adjusted operating profit before transformation costs
Adjusted operating profit before transformation costs declined
29 per cent on an underlying basis. This was due to the prior
period benefiting from political parties' mailings related to the
general election in the first half of 2017-18, the impact of GDPR
on marketing mail revenues and poor performance in people costs as
we did not achieve the expected benefits from our business-as-usual
initiatives and transformation projects.
The slower ramp up in productivity in the second quarter was due
to a combination of factors. This included the continued after
effects of the industrial dispute, delayed implementation of cost
avoidance projects and the complexity involved in implementing
elements of the Agreement. In addition, sick absence, which had
increased during the dispute, was expected to reduce. However, sick
absence has remained at elevated levels.
Transformation costs
26 weeks
26 weeks ended ended
23 September 24 September
(GBPm) 2018 2017
===================== =============== ==============
Voluntary redundancy (10) (31)
Project costs (42) (32)
===================== =============== ==============
Total (52) (63)
--------------------- --------------- --------------
(3) We have refined the calculation of workload since the
October trading update, resulting in a change to the productivity
performance for the first half.
Transformation costs decreased by GBP11 million. Voluntary
redundancy costs were lower than expected in the first half, as we
have not achieved the expected levels of efficiency. There was a
net increase of around 390 employees in the first half as we
invested in resource to improve Quality of Service. There was a
reduction of around 1,530 full-time equivalent employees (FTE)(4)
to around 146,455 compared with March 2018, as we have decreased
variable hours compared with the high levels at that time.
Project costs of GBP42 million were GBP10 million higher
compared with the prior period and largely comprised initiatives
supporting investments and the cost avoidance programme. The
increase was largely due to investment to upgrade our IT systems
and projects related to the implementation of the Defined Benefit
Cash Balance Scheme (DBCBS) and development of the Collective
Defined Contribution (CDC) pension scheme.
We continue to forecast transformation costs of between GBP130
million to GBP150 million per annum. We expect transformation costs
of around GBP150 million for 2018-19 due to the short-term cost
actions we are taking.
Adjusted operating profit after transformation costs
Adjusted operating profit after transformation costs of GBP113
million was 34 per cent lower on an underlying basis due to lower
revenue in the UK and higher costs. Operating profit margin after
transformation costs was 3.2 per cent, down 150 basis points
compared with the first half of 2017-18.
4 FTE numbers relate to the total number of paid hours
(including part-time, full-time and agency hours) divided by the
standard full-time working hours in the same period.
GENERAL LOGISTICS SYSTEMS (GLS)
Reported results
Reported
Reported 26 weeks
26 weeks ended ended
30 September 30 September
Summary trading results (GBPm) 2018 2017
=============================== =============== =============
Revenue 1,347 1,205
Operating costs (1,348) (1,122)
=============== =============
Operating (loss)/profit (1) 83
Operating (loss)/profit margin - 6.9%
------------------------------- --------------- -------------
The full GLS reported results are set out in the paragraph
entitled 'Segmental reported results'. GLS reported revenue grew by
GBP142 million compared with the first half of 2017-18. GLS
incurred an operating loss of GBP1 million, mainly due to the
impairment of the GSO and Postal Express businesses in the US, as
explained in the paragraph entitled 'USA' in this section, and
increased operational cost pressures.
Adjusted results
The table below sets out a summary of the adjusted GLS Sterling
and Euro results, excluding the impact of the impairment of the US
businesses and amortisation of intangible assets related to
acquisitions. The adjustments made to reported results are set out
in the paragraph entitled 'Specific items and pension charge to
cash difference adjustment'.
Adjusted Adjusted
26 weeks ended 26 weeks ended
Summary trading results 30 September 30 September Underlying
(GBPm) 2018 2017 change(1)
======================== =============== =============== ==========
Revenue 1,347 1,205 9%
Operating costs (1,270) (1,115) 11%
=============== ===============
Operating profit 77 90 (15%)
Operating profit margin 5.7% 7.5% (160bps)
(EURm)
======================== =============== =============== ==========
Revenue 1,524 1,371 9%
Operating costs (1,437) (1,269) 11%
=============== ===============
Operating profit 87 102 (15%)
Volumes (m) 301 276 6%
------------------------ --------------- --------------- ----------
Overall, GLS continued to perform well in terms of revenue.
Performance in the half year was impacted by one additional working
day due to the timing of public holidays. Excluding this impact,
underlying revenue and volume movements would each have been one
percentage point lower. Volumes were up six per cent on an
underlying basis, with growth in both domestic and international
volumes in most markets. Revenue increased by nine per cent, three
percentage points higher than volume growth due largely to price
increases in several markets.
Revenue in Sterling terms benefited by GBP7 million from
exchange rate movements and GBP28 million from acquisitions, which
have been excluded from underlying movements. Including the impact
of acquisitions, revenue was up 11 per cent on a constant currency
basis. Revenue growth was achieved in most markets and from a broad
customer base. The largest customer accounted for around two per
cent of total GLS revenue as we continue to diversify our customer
base through acquisitions. The three major markets (Germany, Italy
and France) accounted for 58 per cent of total GLS revenue. This is
down from 60 per cent in 2017-18, reflecting the impact of recent
acquisitions and growth in other GLS markets.
Adjusted
Adjusted 26 weeks
26 weeks ended ended
30 September 30 September Underlying
Adjusted operating costs (GBPm) 2018 2017 change(1)
==================================== =============== ============= ==========
People costs (318) (293) 6%
Non-people costs (952) (822) 12%
==================================== =============== ============= ==========
Distribution and conveyance costs (841) (725) 12%
Infrastructure costs (78) (71) 7%
Other operating costs (33) (26) 23%
==================================== =============== ============= ==========
Total (1,270) (1,115) 11%
------------------------------------ --------------- ------------- ----------
Total adjusted operating costs were up 11 per cent. People costs
increased by six per cent. This was as a result of higher
semi-variable costs linked to volumes and higher rates of pay due
to high wage inflation, especially across Central and Eastern
European and US markets.
Adjusted non-people costs increased by 12 per cent. Distribution
and conveyance costs were up 12 per cent. This was driven by higher
volumes and increased network costs, due to higher contractor costs
across the majority of GLS markets. We also incurred increased
costs in the US as we are transitioning the GSO and Postal Express
businesses to a fully independent contractor model.
Infrastructure costs increased by seven per cent, largely due to
higher rent and rates, and repairs and maintenance costs. We are
also seeing higher depreciation costs as we continue to invest to
increase the capacity of our network.
Other operating costs increased by 23 per cent, principally due
to a one-off provision release in the first half of 2017-18 and
costs in relation to the acquisition of Dicom Canada.
Adjusted operating profit
Adjusted operating profit was GBP77 million, 15 per cent lower
than the prior period on an underlying basis. Operating profit in
Sterling benefited from a GBP1 million impact of foreign exchange
movements, which is excluded from underlying movements.
Operating margins reduced by 160 basis points on an underlying
basis to 5.7 per cent due to the ongoing cost pressures in the
majority of GLS' markets and increasing losses in France and the
US. We do not expect labour market cost pressures to ease in the
short term. We are taking action in terms of pricing strategies to
help mitigate these pressures. We are also actively reviewing
discretionary spend across all our markets. As a result of these
actions, and coupled with anticipated good revenue performance, we
are targeting adjusted operating profit margins of over six per
cent for the full year.
Germany
Germany remains the largest GLS market by revenue. Revenue grew
by seven per cent, driven by international volumes and improved
pricing.
Italy
GLS Italy revenue grew by eight per cent, moderating in line
with our expectations. We experienced lower revenue growth compared
with the prior period as we are being impacted by the evolving
competitive environment, including the launch of Amazon's own
logistics network in Italy.
France
GLS France revenue grew by five per cent, driven largely by
export volumes and improved pricing, including surcharges for
over-sized parcels. However, operating losses increased by EUR5
million to EUR11 million. France remains a challenging market.
Actions are underway to improve quality and profitability
through the reduction of the proportion of manually sorted parcels,
more streamlined processes at our hubs and the introduction of
route planning software for final mile deliveries. The goal is to
win new customers, improve top line growth and reduce operating
losses. Despite the challenges in its domestic market, GLS France
continues to be integral to the GLS network by supporting exports
from other markets into France, allowing GLS to provide a
comprehensive service across Europe.
Spain
GLS Spain continues to grow strongly, increasing revenue by 17
per cent on an underlying basis, reflecting strong domestic and
export volume growth. ASM has been fully integrated with GLS Spain
and we are expecting to complete the integration of Redyser in the
second half.
USA
Our US businesses, Golden State Overnight (GSO) and Postal
Express, are in the process of being integrated to create an
interstate overnight parcel delivery service with full US west
coast coverage, with the aim of realising operational synergies and
commercial benefits.
We are pleased with the revenue development in GSO, which is
showing good growth. We are investing organically to expand the
network further in Idaho and into Utah. Profitability continues to
be impacted by local cost pressures.
In Postal Express, profitability continues to be impacted by its
integration with GSO and the decision to refocus the customer base
to ensure we are targeting the most profitable traffic.
(1) Movements in revenue, costs, profits and margins are shown
on an underlying basis, taking into account non-recurring or
distorting items such as the first year impact of acquisitions and
foreign exchange translation in GLS. Revenue from GLS acquisitions
in the period was GBP28 million (H1 2017-18: GBP89 million), which
has been excluded from underlying movements. See paragraph entitled
'Underlying change adjustments' for further information.
As well as integrating the operations, we have accelerated the
transition of the businesses to a fully independent contractor
model, similar to GLS' business model in Europe. While we are
making progress with our plans, the combined impact of local cost
pressures, refocusing the customer base, transitioning to the new
business model and ongoing integration costs means that the
expected synergies and benefits will now take longer to be
realised. The combined businesses were loss-making in the first
half, with operating losses of around $8 million (approximately
GBP6 million). Accordingly, we are recognising a GBP68 million
impairment against the goodwill and other assets related to the
acquisition of these businesses. This is a non-cash operating
specific item.
Canada
On 3 September 2018, we announced the acquisition of Dicom
Canada, a Canadian parcel delivery company, for a total
consideration of C$360 million (approximately GBP212 million).
Dicom Canada primarily provides B2B, ground-based parcel, freight
and logistics services across Canada, with a major focus on the
Eastern Canadian provinces of Ontario and Quebec. It operates a
network of 28 depots and works with partner carriers across Canada
to provide pan-Canadian logistics services.
Performance was within our expectations in the first month since
acquisition. The transaction is expected to be earnings and cash
flow accretive to the Royal Mail Group in the financial year ending
31 March 2019.
Other developed European markets (including Austria, Belgium,
Denmark, Ireland, Netherlands and Portugal)
Revenue growth was achieved in the majority of GLS' other
developed European markets. There was continued strong volume and
revenue growth in Denmark as we continue to drive higher B2C
volumes by increasing the number of parcel shops to support
growth.
Other developing/emerging European markets (including Croatia,
Czech Republic, Hungary, Poland, Romania, Slovakia and
Slovenia)
We saw strong, double digit revenue growth in all
developing/emerging European markets. We continue to invest in our
network in these countries to take advantage of their growing
parcel markets.
GROUP RESULTS
Reported results
Reported Reported
26 weeks 26 weeks
ended ended
23 September 24 September
Summary trading results (GBPm) 2018 2017
============================================== ============== ==============
Revenue 4,932 4,829
Operating costs (4,724) (4,740)
============== ==============
Operating profit before transformation
costs 208 89
Transformation costs (52) (63)
============== ==============
Operating profit after transformation
costs 156 26
Operating specific items (160) (29)
============== ==============
Operating loss (4) (3)
Non-operating specific items 5 44
Net finance costs (7) (10)
Net pension interest (non-operating specific
item) 39 46
============== ==============
Profit before tax 33 77
============== ==============
Earnings per share (basic) 0.5p 17.1p
=============================================== ============== ==============
Group revenue increased by GBP103 million. This was due to
higher parcels revenue in GLS and UKPIL, which more than offset the
decline in UKPIL letters revenue. Operating profit before
transformation costs increased by GBP119 million, mainly due to the
reduction in the IAS 19 pension charge in UKPIL as the RMPP was
closed to future accrual in its previous form from 31 March 2018.
Operating specific items increased by GBP131 million largely due to
the impairment of the GSO and Postal Express businesses in GLS and
the purchase of a further buy-in insurance policy for the
RMSEPP.
As a result, Group operating loss increased by GBP1 million to
GBP4 million. Profit before tax decreased to GBP33 million, of
which UKPIL accounted for GBP37 million (H1 2017-18: loss before
tax of GBP4 million) while GLS accounted for a loss before tax of
GBP4 million (H1 2017-18: profit before tax of GBP81 million).
Basic earnings per share decreased to 0.5 pence. A full
reconciliation of reported to adjusted results is set out in the
section entitled 'Presentation of results and Alternative
Performance Measures'.
Adjusted results
Group revenue
Adjusted Adjusted
26 weeks ended 26 weeks ended
23 September 24 September Underlying
(GBPm) 2018 2017 change(1)
======= =============== =============== ==========
UKPIL 3,585 3,624 (1%)
GLS 1,347 1,205 9%
Total 4,932 4,829 1%
------- --------------- --------------- ----------
Group revenue was up one per cent, driven by parcel growth in
GLS and UKPIL more than offsetting the decline in UKPIL letters
revenue. Total parcel revenue continued to grow as a percentage of
Group revenue, accounting for 62 per cent (H1 2017-18: 58 per
cent). The main factors impacting revenue in the half year are
described in the sections entitled 'UK Parcels, International &
Letters (UKPIL)' and 'General Logistics Systems (GLS)'.
Group operating costs
Adjusted Adjusted
26 weeks ended 26 weeks ended
23 September 24 September Underlying
(GBPm) 2018 2017 change(1)
==================================== =============== =============== ==========
People costs (2,705) (2,655) 2%
Non-people costs (1,985) (1,851) 6%
==================================== =============== =============== ==========
Distribution and conveyance costs (1,210) (1,086) 9%
Infrastructure costs (439) (436) Flat
Other operating costs (336) (329) 2%
==================================== =============== =============== ==========
Total (4,690) (4,506) 3%
------------------------------------ --------------- --------------- ----------
(1) Movements in revenue, costs, profits and margins are shown
on an underlying basis, taking into account non-recurring or
distorting items such as the first year impact of acquisitions and
foreign exchange translation in GLS and working days in UKPIL. See
paragraph entitled 'Underlying change adjustments' for further
information.
Group operating costs increased by three per cent on an
underlying basis. This was mainly a result of higher people and
distribution and conveyance costs in UKPIL and GLS. The main
factors impacting operating costs in the year are described in the
sections entitled 'UK Parcels, International & Letters (UKPIL)'
and 'General Logistics Systems (GLS)'.
Group operating profit before transformation costs
Adjusted
26 weeks Adjusted
ended 26 weeks ended
23 September 24 September
(GBPm) 2018 2017
=========================================== =============== ===============
UKPIL 165 233
GLS 77 90
--------------- ---------------
Total 242 323
Margin 4.9% 6.7%
----------------------------------------------- ----------- ---------------
Group operating profit after transformation costs
Adjusted
26 weeks Adjusted
ended 26 weeks ended
23 September 24 September
(GBPm) 2018 2017
======= ============= ===============
UKPIL 113 170
GLS 77 90
------------- ---------------
Total 190 260
Margin 3.9% 5.4%
------- ------------- ---------------
Group operating profit margin after transformation costs was
down 150 basis points on an underlying basis, driven by the lower
level of profitability in both UKPIL and GLS.
Specific items and pension charge to cash difference
adjustment
26 weeks ended 26 weeks ended
23 September 24 September
(GBPm) 2018 2017
============================================================ ============== ==============
Pension charge to cash difference adjustment
(within People costs) (34) (234)
Operating specific items
Impairment relating to GSO and Postal
Express businesses (68) -
Accounting impact of RMSEPP buy-in settlement (64) -
Employee Free Shares charge (17) (18)
Amortisation of acquired intangible assets (10) (8)
Legacy/other costs (1) (3)
============================================================= ============== ==============
Potential industrial diseases claim (costs)/credit (1) 1
Other - (4)
============================================================= ============== ==============
Total operating specific items (160) (29)
============================================================= ============== ==============
Non-operating specific items
Profit on disposal of property, plant
and equipment 5 44
Net pension interest 39 46
Total non-operating specific items 44 90
============================================================= ============== ==============
Total specific items and pensions adjustment
before tax (150) (173)
============================================================= ============== ==============
Total tax credit on specific items and
pensions adjustment 19 143
------------------------------------------------------------- -------------- --------------
The pension charge to cash difference adjustment was GBP34
million, GBP200 million lower than the first half of 2017-18. This
was due to the closure of the RMPP to future accrual in its
previous form from 31 March 2018. The difference between the
pension charge and cash cost largely comprises the difference
between the IAS 19 income statement pension charge rate of 18.9 per
cent for the DBCBS from 1 April 2018 and the actual cash payments
agreed with the Trustee of 15.6 per cent. There is also a small
difference between the pension charge of 41.0 per cent and cash
cost of 17.1 per cent for the RMPP for the week of 26 to 31 March
2018. The pension charge to cash difference adjustment is expected
to be around GBP70 million for the full year, GBP20 million lower
than previously expected due to fewer eligible Royal Mail Defined
Contribution Plan (RMDCP) members choosing to join the DBCBS.
Operating specific items in the period included a GBP68 million
impairment of the goodwill and assets previously related to the
acquisition of the GSO and Postal Express businesses by GLS. More
details on the impairment are provided in the section entitled
'General Logistics Systems (GLS)'.
Operating specific items also included a GBP64 million charge in
relation to the purchase of a further buy-in insurance policy for
the RMSEPP. A buy-in involves purchasing an insurance policy that
provides cash flows that exactly match the value and timing of the
benefits payable to the members it covers. This is an accounting
adjustment in relation to the write off of the closing surplus as a
result of the purchase of the policy. It has no cash impact to the
Group. Further details are set out in the paragraph entitled
'Pensions'.
The Employee Free Shares charge for the period in relation to
our Share Incentive Plans (SIP) was GBP17 million (H1 2017-18:
GBP18 million). The full year charge for Employee Free Shares is
expected to be around GBP25 million. Amortisation of acquired
intangible assets of GBP10 million relates to acquisitions in GLS.
Legacy costs in the period were driven by the reduction in the
discount rate used to calculate the industrial diseases provision.
Other specific items in the prior period relate to the integration
of Romec into the Group.
Non-operating specific items mainly comprise the net pension
interest credit of GBP39 million (H1 2017-18: GBP46 million), which
was lower than the prior period due to the lower pension surplus
position at 25 March 2018 compared with 26 March 2017. The pension
interest credit for the full year is expected to be around GBP80
million.
The profit on disposal of property, plant and equipment of GBP5
million (H1 2017-18: GBP44 million) largely relates to the sale of
the Hendon Delivery Office. The prior period included a GBP24
million overage payment in relation to the sale of Rathbone Place
in 2011 and a gain of GBP22 million from the completion of the sale
of the Phoenix Place plot at Mount Pleasant.
The tax credit on specific items related largely to deferred tax
movements in relation to certain specific items. The GBP124 million
reduction compared with the prior period mainly related to the
one-off deferred tax credit following the decision to close the
RMPP to future accrual in its previous form from 31 March 2018.
Net finance costs
Reported net finance costs of GBP7 million (H1 2017-18: GBP10
million) largely comprised interest on the EUR500 million bond of
GBP6 million (H1 2017-18: GBP6 million).
Facility Drawn Facility
Facility Rate (GBPm) (GBPm) end date
========================== =========== ======== ======= =========
EUR500 million bond 2.5% 447 447 2024
Revolving credit facility LIBOR+0.55% 1,050 115 2020-22
======== =======
Total 1,497 562
-------------------------- ----------- -------- ------- ---------
The blended interest rate on gross debt, including finance
leases for 2018-19, is expected to be approximately three per cent.
The retranslation impact of the EUR500 million bond is accounted
for in equity. GBP115 million has been drawn from the revolving
credit facility in the period to fund business expenditure in the
first half. Further details on the use of net debt are provided in
the paragraph entitled 'Net debt'.
Taxation
26 weeks ended 26 weeks ended
23 September 24 September
2018 2017
=================== =====================
(GBPm) UK GLS Group UK GLS Group
================================== ====== ==== ===== ====== ====== =======
Reported
Profit/(loss) before tax 37 (4) 33 (4) 81 77
Tax (charge)/credit (10) (18) (28) 113 (22) 91
Adjusted
Profit before tax 109 74 183 162 88 250
Tax charge (21) (26) (47) (28) (24) (52)
Effective tax rate 19% 35% 26% 17% 27% 21%
---------------------------------- ------ ---- ----- ------ ------ -------
The Group effective tax rate on adjusted profit before tax was
26 per cent (H1 2017-18: 21 per cent). The effective tax rate was
higher than the first half of 2017-18 largely due to the
derecognition of deferred tax assets in GLS US, increased losses in
GLS France, for which no deferred tax asset is recognised, and the
increase in the proportion of the Group's profits made by GLS for
which the standard tax rates are generally higher than the UK.
The UK adjusted effective tax rate was 19 per cent (H1 2017-18:
17 per cent), which is the same as the UK statutory corporation tax
rate. This is higher than the prior period due to higher non-tax
deductible expenditure relative to half year adjusted profits, the
closure of the RMPP to future accrual in its previous form from 31
March 2018, offset by increased tax reliefs.
The GLS adjusted effective tax rate of 35 per cent (H1 2017-18:
27 per cent) was higher than the prior period mainly due to losses
in GLS US and France for which no deferred tax assets are
recognised.
The Group reported tax charge is GBP28 million on a reported
profit of GBP33 million. This resulted in a high effective tax rate
largely due to the factors which impacted GLS US and France and the
impairment of goodwill in respect of GLS US for which there is no
tax credit. In addition, there is no tax credit for the RMSEPP
buy-in cost. The impact of these items on the effective tax rate is
partially offset by the net pension interest income, on which there
is no tax charge.
We currently estimate an adjusted effective tax rate of 24 per
cent on Group adjusted profits for the full year. This is higher
than previously expected due to the change in mix of profits
between UKPIL and GLS and not recognising the tax benefit of
current year losses in GLS US and France.
Earnings per share (EPS)
Adjusted basic EPS from continuing operations was 13.6 pence (H1
2017-18: 20.1 pence), largely reflecting the trading performance of
the Group.
In-year trading cash flow
26 weeks ended 26 weeks ended
23 September 24 September
(GBPm) 2018 2017
============================================= ============== ==============
Reported EBITDA before transformation
costs 375 255
Pension charge to cash difference adjustment 34 234
============== ==============
Adjusted EBITDA before transformation
costs 409 489
Trading working capital movements (272) (130)
Share-based awards (SAYE, LTIP and DSBP)
charge adjustment 4 1
Total investment (184) (198)
Income tax paid (49) (27)
Research and development expenditure credit 2 3
Net finance costs paid (10) (13)
============================================= ============== ==============
Total (100) 125
--------------------------------------------- -------------- --------------
In-year trading cash outflow was GBP100 million. Adjusted EBITDA
before transformation costs was GBP80 million lower largely due to
the operational performance.
Trading working capital movements in the first half always
reflect the payment of the annual bonus and the timing of terminal
dues settlements. In addition, the first half of 2018-19 includes
the GBP101 million payment in relation to the 2017-18 frontline pay
award. Income tax paid increased by GBP22 million due to there
being no tax relief on payments made to the pension escrow in the
prior year. Net finance costs paid largely comprised interest on
the EUR500 million bond and the decrease is mainly due to the
increase in interest received, which includes interest from the
RMPP escrow investments.
We will report on a 53-week basis for 2018-19, therefore trading
working capital will include an extra VAT payment of around GBP20
million. There will also be 13 monthly payroll payments made in
2018-19, therefore trading working capital will also be impacted by
an extra monthly payroll payment of between GBP40 million to GBP50
million.
Net cash investment
26 weeks ended 26 weeks ended
23 September 24 September
(GBPm) 2018 2017
==================================================== ============== ==============
Growth capital expenditure (88) (86)
Replacement capital expenditure (49) (53)
Transformation operating expenditure (47) (59)
---------------------------------------------------- -------------- --------------
Voluntary redundancy (5) (27)
Project costs (42) (32)
---------------------------------------------------- -------------- --------------
Total investment (184) (198)
Proceeds from disposal of property (excluding
London Development Portfolio), plant and equipment 9 29
==================================================== ============== ==============
Net cash investment (175) (169)
---------------------------------------------------- -------------- --------------
Growth capital expenditure increased by GBP2 million as we
continue to invest in strategic projects in UKPIL and GLS. This
included expanding the GLS network, IT systems and projects
supporting parcels innovation. Replacement capital expenditure
decreased by GBP4 million due to lower IT replacement and property
refurbishments, partially offset by higher investment in
vehicles.
Transformation operating expenditure decreased by GBP12 million
largely due to lower than expected voluntary redundancy costs in
the first half, as we have not achieved the expected levels of
efficiency. This was partially offset by project costs that were
GBP10 million higher largely due to expenditure on projects related
to upgrades of our IT systems and projects related to the
implementation of the DBCBS and CDC pension schemes.
Proceeds from disposal of property (excluding London Development
Portfolio) of GBP9 million largely relate to the sale of the Hendon
Delivery Office. The first half of 2017-18 included a GBP24 million
overage payment in relation to the sale of Rathbone Place in
2011.
Net debt
A reconciliation of net debt is set out below.
26 weeks ended 26 weeks ended
23 September 24 September
(GBPm) 2018 2017
--------------------------------------------- -------------- --------------
Net cash/(debt) brought forward at
25 March 2018 and 26 March 2017 14 (338)
Free cash flow (308) 115
---------------------------------------------- -------------- --------------
In-year trading cash flow (100) 125
Other working capital movements (6) (19)
Cash cost of operating specific items (3) (8)
Proceeds from disposal of property
(excluding London Development Portfolio),
plant and equipment 9 29
Acquisition of business interests (214) (8)
Cash flows relating to London property
portfolio 6 (4)
---------------------------------------------- -------------- --------------
Purchase of own shares (10) -
Employee exercise of SAYE options 5 -
Foreign currency exchange impact (9) (5)
Dividends paid to equity holders of
the parent Company (162) (154)
Net debt carried forward (470) (382)
---------------------------------------------- -------------- --------------
Other working capital movements outflow of GBP6 million
consisted of stamps used but purchased in previous periods, GLS
client cash and other deferred revenue. This cash outflow is GBP13
million lower than the prior period largely due to increases in the
amount of GLS client cash held.
Cash cost of operating specific items was an outflow of GBP3
million due to National Insurance contributions on the SIP employee
share sales, industrial disease settlements and Romec business
integration costs.
Proceeds from property disposals (excluding London property
portfolio) of GBP9 million is explained in the paragraph entitled
'Net cash investment'. Acquisition of business interests in the
period largely relates to the acquisition of Dicom Canada by GLS.
The acquisition spend in the prior year largely related to the
purchase of Postal Express in the US by GLS.
Cash inflow relating to the London property portfolio was GBP6
million. The GBP20 million overage received under the agreement for
the sale of Paddington Mail Centre was offset by GBP14 million of
costs for separation and infrastructure works on the Mount Pleasant
and Nine Elms plots, respectively. The impact of foreign currency
exchange rates movements largely relates to the EUR500 million bond
offset by GLS cash.
Pensions
The RMPP closed to future accrual in its previous form from 31
March 2018. The Company put in place transitional arrangements from
1 April 2018 and implemented a new DBCBS within the RMPP, and an
improved RMDCP.
Defined Benefit Cash Balance Scheme (DBCBS)
RMPP members automatically started building up DBCBS benefits
from 1 April 2018 (unless they opted to join the improved RMDCP
instead) together with eligible RMDCP members who opted to
join.
The DBCBS guarantees members a minimum lump sum at age 65. It is
therefore being accounted for as a defined benefit scheme in a
similar way to the RMPP. The DBCBS will aim to provide increases to
the lump sum each year, depending on investment performance. An
IAS19 deficit of GBP32 million is shown on the balance sheet. The
scheme is not in funding deficit and it is not anticipated that
deficit payments will be required. The DBCBS will be subject to
triennial valuations.
An IAS 19 pension service charge at 18.9 per cent (GBP181
million) has been charged to the income statement. The pension
charge is greater than the cash contribution rate as the assumed
rate of future increases in benefits (4.2 per cent) is greater than
the assumed discount rate (2.6 per cent).
The Company has made contributions at 15.6 per cent (GBP147
million) of DBCBS pensionable pay in respect of the scheme. Members
will contribute six per cent (including Pension Salary
Exchange).
The IAS 19 pension service charge to cash difference adjustment
for 2018-19 was expected to be around GBP90 million. This charge is
now expected to be GBP70 million due to a lower than anticipated
number of eligible RMDCP members choosing to join the DBCBS.
Pension interest will be calculated on the assets and liabilities
at the end of 2018-19 for inclusion in the income statement from
2019-20 onwards.
Royal Mail Defined Contribution Plan (RMDCP)
Under the RMDCP, Company contributions have increased by one
percentage point in each tier, up to a maximum of ten per cent.
Current and future RMDCP members in the standard section will
contribute at the highest contribution tier (employee: six per
cent; employer: ten per cent) unless they opt to contribute at a
lower level.
Royal Mail Pension Plan (RMPP)
The pre IFRIC 14 accounting surplus of the RMPP at 23 September
2018 was GBP3,152 million, comprising assets of GBP9,542 million
and liabilities of GBP6,390 million. The pre IFRIC 14 accounting
surplus has reduced by GBP98 million in the period, as the increase
in discount rate has had a greater impact on assets than on
liabilities. This is because the scheme's hedging arrangements are
designed to maintain its funding position, which is currently 149
per cent on an accounting basis. After the IFRIC 14 adjustment, the
accounting surplus of the RMPP was GBP2,049 million at 23 September
2018. This is an accounting adjustment with no cash benefit to the
Company. The RMPP closed to future accrual in its previous form
from 31 March 2018.
Royal Mail Senior Executives Pension Plan (RMSEPP)
The RMSEPP triennial valuation at 31 March 2018 has been
completed. Based on the rolled forward assumptions used for that
valuation, the RMSEPP actuarial surplus at 30 September 2018 was
estimated to be GBP10 million (31 March 2018: GBP36 million). The
RMSEPP closed in December 2012 to future accrual and the Company
makes no regular service contributions.
In accordance with the new Schedule of Contributions agreed as
part of the 2018 triennial valuation, a final deficit payment of
GBP1 million must be paid in 2018-19, together with GBP1 million
per annum for the period 1 April 2018 to 31 March 2025 in respect
of death-in-service lump sum benefits and administration
expenses.
In September 2018, the RMSEPP Trustees purchased a further
buy-in policy of insurance in respect of its remaining pensioners
and deferred pensioners. A buy-in involves purchasing an insurance
policy that provides cash flows that exactly match the value and
timing of the benefits payable to the members it covers. This
transaction required no additional funding from the Company. It
significantly reduces the potential risk to the Company in respect
of this scheme.
Prior to the buy-in, the scheme had an IAS 19 surplus of GBP74
million and a funding surplus of GBP36 million. Although the scheme
was in surplus, this position was sensitive to changes in the
assumptions used. The buy-in reduces both the funding and
accounting surpluses to GBP10 million, but significantly reduces
the risk that further contributions could be required from the
Company. The reduction in IAS 19 surplus from GBP74 million to
GBP10 million results in an accounting charge of GBP64 million. As
the buy-in eliminates substantially all of the remaining risk it is
treated as a settlement and charged to the income statement as a
non-cash operating specific item.
This insurance policy is considered an asset of the RMSEPP and
does not confer any rights to individual members. All benefits
payable from the RMSEPP remain unchanged. Further details can be
found in the paragraph entitled 'Royal Mail Senior Executive
Pension Plan (RMSEPP)' in note 7 in the condensed consolidated
financial statements
The Company expects to contribute around GBP310 million in the
2018-19 financial year in respect of DBCBS, RMPP, and RMSEPP with
employees expected to contribute around GBP125 million. The Company
also expects to contribute around GBP90 million into the defined
contribution plans in the Group. Total employer contributions in
respect of all pension schemes will therefore be around GBP400
million.
The High Court has recently ruled that pension schemes have to
address the issue of unequal Guaranteed Minimum Pensions (GMPs).
From Royal Mail's perspective, the transfer of RMPP's historic
pension liabilities to Government in 2012 included all of the
Plan's GMP liabilities. The requirement to remove the inequality in
former RMPP benefits deriving from GMPs therefore rests with
Government.
RMSEPP, however, does still have its GMP liabilities and will be
required to take action to equalise benefits. The Trustees'
actuaries estimate that the cost of GMP equalisation will not be
material. This is still subject to any further clarification from
the Court on exact equalisation requirements, and also to the
actual equalisation approach adopted by the Trustees.
Collective Defined Contribution (CDC) scheme and Defined Benefit
Lump Sum Scheme (DBLSS)
Based on current expectations, the CDC will be accounted for as
a defined contribution scheme. The DBLSS will be accounted for as a
defined benefit scheme with the accounting treatment expected to be
similar to the transitional DBCBS. The new arrangements will have
fixed employer contributions of 13.6 per cent and employee
contributions of six per cent.
Property
We invested around GBP15 million in the first half on works to
separate the retained operational sites from the development plots
at Mount Pleasant and infrastructure works at Nine Elms.
Mount Pleasant
Further cash proceeds are to be paid in contractually agreed
staged payments over the 2018-19 to 2020-21 financial years, with
the final balance of consideration to be paid in 2024. All proceeds
received up to 2020-21, in aggregate, are expected to cover Royal
Mail's outgoings on the separation and enabling works over this
period.
Nine Elms
The London Borough of Wandsworth made a resolution on 19
September 2018 to grant planning consent to Greystar for the two
plots they purchased at our Nine Elms site. Subject to Greystar
negotiating and agreeing the Section 106 Town Planning Agreement,
we are expecting to receive further cash proceeds of GBP98 million
on formal completion of the sale in the second half of 2018-19. We
have committed to reinvesting around GBP30 million for
infrastructure works associated with these plots.
Although we continue to market the remaining plots for sale and
ensure that the existing planning permission for these plots
remains protected, we do not anticipate that three of the remaining
plots will be sold in the next 12 months. As a result, the GBP18
million book value of these plots on the balance sheet was moved
from Assets held for sale to Property, plant & equipment.
Dividends
The final dividend of 16.3 pence per share in respect of the
2017-18 financial year was paid on 31 August 2018, following
shareholder approval.
As previously stated, given the seasonality of the Group's
business, the Board would expect to pay an interim dividend each
year equal to approximately one-third of the prior year's total
dividend and to set the final dividend for each year in light of
the full year performance of the Group.
The Board has declared an interim dividend of 8.0 pence per
ordinary share, payable on 16 January 2019 to shareholders on the
register at the close of business on 7 December 2018.
Underlying change
Movements in revenue, costs, profits and margins are shown on an
underlying basis. We also made adjustments for movements in foreign
exchange in GLS (H1 2018-19: GBP1:EUR1.13; H1 2017-18 GBP1:EUR1.14)
and the first year impact of acquisitions. No adjustments were made
for working days in UKPIL (H1 2018-19: 152.0 working days; H1
2017-18: 152.0 working days).
UKPIL will report a 53-week period (310.0 working days) in
2018-19. We will present adjusted results and underlying movements
on a 52-week basis to operating profit after transformation costs.
Our working week consists of 5.5 days, therefore the adjusted UKPIL
working days for 2018-19 on a 52-week basis will be 304.5 days with
an estimated revenue and profit decrease of around GBP15
million.
Adjusted Adjusted Underlying
26 weeks 26 weeks 26 weeks
ended ended ended
23 September 24 September Foreign 24 September Underlying
(GBPm) 2018 2017 exchange Acquisitions 2017 change
============================== ============= ============= ========= ============ ============= ==========
Revenue
============================== ============= ============= ========= ============ ============= ==========
UKPIL 3,585 3,624 - - 3,624 (1%)
GLS 1,347 1,205 7 28 1,240 9%
------------- ------------- --------- ------------ ------------- ----------
Group 4,932 4,829 7 28 4,864 1%
Costs
============================== ============= ============= ========= ============ ============= ==========
UKPIL
People (2,387) (2,362) - - (2,362) 1%
Non-people costs (1,033) (1,029) - - (1,029) Flat
------------------------------ ------------- ------------- --------- ------------ ------------- ----------
Distribution and conveyance
costs (369) (361) (361) 2%
Infrastructure costs (361) (365) - - (365) (1%)
Other operating costs (303) (303) - - (303) Flat
------------------------------ ------------- ------------- --------- ------------ ------------- ----------
Operating costs before
transformation costs (3,420) (3,391) - - (3,391) 1%
GLS
People (318) (293) (2) (5) (300) 6%
Non-people costs (952) (822) (4) (23) (849) 12%
------------------------------ ------------- ------------- --------- ------------ ------------- ----------
Distribution and conveyance
costs (841) (725) (4) (20) (749) 12%
Infrastructure costs (78) (71) - (2) (73) 7%
Other operating costs (33) (26) - (1) (27) 23%
------------------------------ ------------- ------------- --------- ------------ ------------- ----------
Operating costs (1,270) (1,115) (6) (28) (1,149) 11%
Group
People (2,705) (2,655) (2) (5) (2,662) 2%
Non-people costs (1,985) (1,851) (4) (23) (1,878) 6%
------------------------------ ------------- ------------- --------- ------------ ------------- ----------
Distribution and conveyance
costs (1,210) (1,086) (4) (20) (1,110) 9%
Infrastructure costs (439) (436) - (2) (438) Flat
Other operating costs (336) (329) - (1) (330) 2%
------------------------------ ------------- ------------- --------- ------------ ------------- ----------
Operating costs before
transformation costs (4,690) (4,506) (6) (28) (4,540) 3%
Profit, margin and EPS
------------------------------ ------------- ------------- --------- ------------ ------------- ----------
UKPIL
Operating profit before
transformation costs 165 233 - - 233 (29%)
Transformation costs (52) (63) - - (63) (18%)
------------- ------------- --------- ------------ ------------- ----------
Operating profit after
transformation costs 113 170 - - 170 (34%)
Margin 3.2% 4.7% 4.7% (150bps)
GLS
Operating profit 77 90 1 - 91 (15%)
Margin 5.7% 7.5% 7.3% (160bps)
Group
Operating profit before
transformation costs 242 323 1 - 324 (25%)
Transformation costs (52) (63) - - (63) (18%)
------------- ------------- --------- ------------ ------------- ----------
Operating profit after
transformation costs 190 260 1 - 261 (27%)
Margin 3.9% 5.4% 5.4% (150bps)
Profit before tax 183 250 1 - 251 (27%)
------------- ------------- --------- ------------ ------------- ----------
Tax (47) (52)
Profit for the period 136 198
Profit attributable to
equity holders of the
parent Company 136 199
Basic earnings per share
(pence) 13.6p 20.1p
------------------------------ ------------- ------------- --------- ------------ ------------- ----------
PRESENTATION OF RESULTS AND ALTERNATIVE PERFORMANCE MEASURES
The Group uses certain Alternative Performance Measures (APMs)
in its financial reporting that are not defined under International
Financial Reporting Standards (IFRS), the Generally Accepted
Accounting Principles (GAAP) under which the Group produces its
statutory financial information. These APMs are not a substitute,
or superior to, any IFRS measures of performance. They are used by
Management, who considers them to be an important means of
comparing performance year-on-year and are key measures used within
the business for assessing performance.
APMs should not be considered in isolation from, or as a
substitute to, financial information presented in compliance with
GAAP. Where appropriate, reconciliations to the nearest GAAP
measure have been provided. The APMs used may not be directly
comparable with similarly titled APMs used by other companies.
Reported to adjusted results
The Group makes adjustments to results reported under IFRS to
exclude specific items and the IAS 19 pension charge to cash
difference adjustment (see definitions in the paragraph entitled
'Alternative performance measures'). Management believes this is a
more meaningful basis upon which to analyse the business
performance (in particular given the volatile nature of the IAS 19
charge) and is consistent with the way financial performance is
reported to the Board.
IFRS can have the impact of causing high levels of volatility in
reported earnings which do not relate to changes in the operational
performance of the Company. Management has reviewed the long-term
differences between reported and adjusted profit after tax.
Cumulative reported profit after taxation for the five years ended
25 March 2018 was GBP2,361 million compared with cumulative
adjusted profit after tax of GBP2,054 million. Annual reported
profit after tax showed a range of GBP222 million to GBP1,280
million. The principal cause of the difference and volatility is
due to pension-related accounting.
Further details on specific items excluded are included in the
paragraph entitled 'Specific items and pension charge to cash
difference adjustment'. A reconciliation showing the adjustments
made between reported and adjusted group results can be found in
the paragraph entitled 'Consolidated reported and adjusted results
reconciliation'.
Underlying change
Movements compared with prior year in volumes, revenue, costs,
profits and margins are shown on an underlying basis. Underlying
movements improve comparability between periods by making
adjustments to the prior year to take into account differences in
working days in UKPIL and movements in foreign exchange in GLS. We
only adjust for items with a full year impact greater than GBP10
million.
In addition, adjustments are made for non-recurring or
distorting items, which by their nature may be unpredictable, such
as the first year impact of acquisitions. For volumes, underlying
movements are adjusted for working days in UKPIL and the first year
impact of acquisitions. It also excludes political parties'
election mailings in addressed letter volume movements.
The paragraph entitled 'Underlying change adjustments' provides
further details on the adjustments we have made to the prior year
to calculate the underlying change.
Presentation of results
Consolidated reported and adjusted results
The following table reconciles the consolidated reported
results, prepared in accordance with IFRS, to the consolidated
adjusted results.
26 weeks ended 26 weeks ended
23 September 2018 24 September 2017
================================ ================================
Specific Specific
items items
and pension and pension
(GBPm) Reported adjustment Adjusted Reported adjustment Adjusted
==================================== ======== ============ ======== ======== ============ ========
Revenue 4,932 - 4,932 4,829 - 4,829
Operating costs (4,724) (34) (4,690) (4,740) (234) (4,506)
People costs (2,739) (34) (2,705) (2,889) (234) (2,655)
Non-people costs (1,985) - (1,985) (1,851) - (1,851)
==================================== ======== ============ ======== ======== ============ ========
Distribution and conveyance
costs (1,210) - (1,210) (1,086) - (1,086)
Infrastructure costs (439) - (439) (436) - (436)
Other operating costs (336) - (336) (329) - (329)
==================================== ======== ============ ======== ======== ============ ========
Operating profit before
transformation costs 208 (34) 242 89 (234) 323
Transformation costs (52) - (52) (63) - (63)
==================================== ======== ============ ======== ======== ============ ========
Operating profit after
transformation costs 156 (34) 190 26 (234) 260
Operating specific items:
Impairment of assets relating
to GSO and Postal Express
businesses (68) (68) - - - -
Accounting impact of RMSEPP
buy-in settlement (64) (64) - - - -
Employee Free Shares charge (17) (17) - (18) (18) -
Legacy/other costs (1) (1) - (3) (3) -
Amortisation of intangible
assets in acquisitions (10) (10) - (8) (8) -
==================================== ======== ============ ======== ======== ============ ========
Operating (loss)/profit (4) (194) 190 (3) (263) 260
Non-operating specific
items:
Profit on disposal of property,
plant and equipment 5 5 - 44 44 -
Earnings before interest
and tax 1 (189) 190 41 (219) 260
Finance costs (10) - (10) (11) - (11)
Finance income 3 - 3 1 - 1
Net pension interest (non-operating
specific item) 39 39 - 46 46 -
==================================== ======== ============ ======== ======== ============ ========
Profit before tax 33 (150) 183 77 (173) 250
Tax (charge)/credit (28) 19 (47) 91 143 (52)
==================================== ======== ============ ======== ======== ============ ========
Profit for the period 5 (131) 136 168 (30) 198
==================================== ======== ============ ======== ======== ============ ========
Profit for the period attributable
to:
Equity holders of the parent
Company 5 (131) 136 169 (30) 199
Non-controlling interests - - - (1) - (1)
==================================== ======== ============ ======== ======== ============ ========
Earnings per share
Basic 0.5p (13.1p) 13.6p 17.1p (3.0p) 20.1p
Diluted 0.5p (13.1p) 13.6p 17.0p (3.0p) 20.0p
------------------------------------ -------- ------------ -------- -------- ------------ --------
Segmental reported results
The following table presents the segmental reported results,
prepared in accordance with IFRS.
26 weeks ended 26 weeks ended
23 September 2018 24 September 2017
-------------------------------------- ----------------------------------------
GLS GLS
UKPIL (Non-UK UKPIL (Non-UK
(GBPm) (UK operations) operations) Group (UK operations) operations) Group
---------------------------------- ---------------- ------------ ------- ---------------- ------------ -------
Revenue 3,585 1,347 4.932 3,624 1,205 4,829
People costs (2,421) (318) (2,739) (2,596) (293) (2,889)
Non-people costs (1,033) (952) (1,985) (1,029) (822) (1,851)
---------------- ------------ ------- ---------------- ------------ -------
Operating profit/(loss) before
transformation
costs 131 77 208 (1) 90 89
Transformation costs (52) - (52) (63) - (63)
---------------------------------- ---------------- ------------ ------- ---------------- ------------ -------
Operating profit/(loss) after
transformation
costs 79 77 156 (64) 90 26
Operating specific items (82) (78) (160) (22) (7) (29)
Operating (loss)/profit (3) (1) (4) (86) 83 (3)
Non-operating specific items 5 - 5 44 - 44
Earnings before interest and tax 2 (1) 1 (42) 83 41
Net finance costs (4) (3) (7) (8) (2) (10)
Net pension interest
(non-operating
specific item) 39 - 39 46 - 46
---------------------------------- ---------------- ------------ ------- ---------------- ------------ -------
Profit/(loss) before tax 37 (4) 33 (4) 81 77
---------------------------------- ---------------- ------------ ------- ---------------- ------------ -------
Tax (charge)/credit (10) (18) (28) 113 (22) 91
---------------------------------- ---------------- ------------ ------- ---------------- ------------ -------
Profit/(loss) for the period 27 (22) 5 109 59 168
---------------------------------- ---------------- ------------ ------- ---------------- ------------ -------
Alternative Performance Measures
Reported operating profit before and after transformation
costs
These measures are in accordance with IFRS and are a means by
which Management can understand the financial performance of the
Group, taking into account business-as-usual (BAU) costs e.g.
people, distribution and conveyance, infrastructure and other
operating costs excluding operating specific items. They are
presented before and after transformation costs, to provide
Management with a view of the ongoing impact of the costs of
transforming the business.
Reported operating profit
This measure is in accordance with IFRS and is a means by which
Management can understand the financial performance of the Group.
It is based on reported profit after transformation costs (see
above) including operating specific items.
Adjusted operating profit before and after transformation
costs
These measures are based on reported operating profit before and
after transformation costs (see above) further adjusted to exclude
the volatility of the pension charge to cash difference adjustment,
which Management considers to be a key adjustment in understanding
the underlying profit of the Group at this level.
Adjusted operating profit
This measure is based on reported operating profit (see above)
excluding the pension charge to cash difference adjustment and
operating specific items, which Management considers to be key
adjustments in understanding the underlying profit of the Group at
this level.
These adjusted measures are reconciled to the reported results
in the table in the paragraph entitled 'Consolidated reported and
adjusted results reconciliation'. Definitions of operating costs,
the pension charge to cash difference adjustment, transformation
costs and operating specific items are provided below.
Adjusted operating profit margin after transformation costs
This is a fundamental measure of performance that Management
uses to understand the efficiency of the business in generating
profit. It calculates 'adjusted operating profit after
transformation costs' as a proportion of revenue in percentage
terms.
Earnings before interest, tax, depreciation and amortisation
(EBITDA) before transformation costs
Reported EBITDA before transformation costs is reported
operating profit before transformation costs with depreciation and
amortisation and share of associate company profits added back.
Adjusted EBITDA before transformation costs is reported EBITDA
before transformation costs with the pension charge to cash
difference adjustment added back.
EBITDA is considered to be a useful measure of operating
performance because it approximates the underlying operating cash
flow by eliminating depreciation, amortisation and the performance
of associate companies.
The following table reconciles adjusted EBITDA before
transformation costs to reported operating profit before
transformation costs.
26 weeks ended 26 weeks ended
23 September 24 September
(GBPm) 2018 2017
================================================ ============== ==============
Reported operating profit before transformation
costs 208 89
Depreciation and amortisation 167 166
Reported EBITDA before transformation
costs 375 255
Pension charge to cash difference adjustment 34 234
Adjusted EBITDA before transformation
costs 409 489
================================================ ============== ==============
Adjusted earnings per share
Adjusted earnings per share is reported basic earnings per
share, excluding operating and non-operating specific items and the
pension charge to cash difference adjustment. A reconciliation of
this number to reported basic earnings per share is included in the
adjusted results table in the section entitled 'Presentation of
results'.
People costs
These are costs incurred in respect of the Group's employees and
comprise wages and salaries, pensions and social security
costs.
Distribution and conveyance costs
These costs relate to non-people costs incurred in transporting
and delivering mail by rail, road, sea and air, together with costs
incurred by international mail carriers, Parcelforce Worldwide
delivery operators and GLS.
Infrastructure costs
These are costs primarily relating to the day-to-day operation
of the delivery network and include depreciation and amortisation,
IT and property facilities management costs.
Other operating costs
These are any operating costs which do not fall into the
categories of people costs, distribution and conveyance costs or
infrastructure costs including for example, Post Office Limited
agency costs, consumables and training.
Transformation costs
These costs relate to the ongoing transformation of the
business, including management time and costs associated with the
cost avoidance programme, and other projects with the aim of making
our operations more efficient or improving our customer offering.
They also include voluntary redundancy and other termination
costs.
Pension charge to cash difference adjustment
This adjustment represents the difference between the IAS 19
income statement pension charge rate of 41 per cent for the RMPP to
31 March 2018 and 18.9 per cent for the DBCBS from 1 April 2018 and
the actual cash payments agreed with the RMPP Trustee of 17.1 per
cent of pensionable pay for RMPP to 31 March 2018 and 15.6 per cent
for the DBCBS. Management believes this adjustment is appropriate
in order to eliminate the volatility of the IAS 19 accounting
charge and to include only the true cash cost of the pension plans
in the adjusted operating profit of the Group.
Operating specific items
These are recurring or non-recurring items of income or expense
of a particular size and/or nature relating to the operations of
the business that, in Management's opinion, require separate
identification. Management does not consider them to be reflective
of year-on-year operating performance. These include items that
have resulted from events that are non-recurring in nature, even
though related income/expense can be recognised in subsequent
periods.
Employee Free Shares charge
These relate to accounting charges arising from the granting of
free shares to employees upon the Government's sales of its stake
in the business (SIP 2013, 2014, 2015 and 2016) with no direct cash
impact on the Group.
Amortisation of intangible assets in acquisitions
These notional charges, which arise as a direct consequence of
IFRS business combination accounting requirements, are separately
identified as Management does not consider these costs to be
directly related to the trading performance of the Group.
Legacy/other costs
These costs relate either to unavoidable ongoing costs arising
from historic events (industrial diseases provision) or
restructuring costs.
Non-operating specific items
These are recurring or non-recurring items of income or expense
of a particular size and/or nature which do not form part of the
Group's trading activity and in Management's opinion require
separate identification.
Profit/loss on disposal of property, plant and equipment
(PP&E)
Management separately identifies recurring profit/loss on
disposal of PP&E as these disposals are not part of the Group's
trading activity and are driven primarily by business strategy.
Profit/loss on disposal of business
These non-recurring events are excluded on the basis that by
their nature they are individually unique and therefore distort
comparison of year-on-year business performance.
Free cash flow
Free cash flow (FCF) is calculated as statutory (reported) net
cash flow before financing activities, adjusted to include finance
costs paid and exclude net cash from the purchase/sale of financial
asset investments. FCF represents the cash that the Group generates
after spending the money required to maintain or expand its asset
base.
In-year trading cash flow
In-year trading cash flow reflects the cash generated from the
trading activities of the Group. It is based on reported net cash
inflow from operating activities, adjusted to exclude other working
capital movements and the cash cost of operating specific items and
to include the cash cost of property, plant and equipment and
intangible asset acquisitions and net finance payments. Other
working capital movements include movements in GLS client cash held
and in deferred revenue from stamps purchased in prior periods.
In-year trading cash flow is used primarily by Management to show
cash being generated by operations less cash investment.
The following table reconciles in-year trading cash flow to the
nearest IFRS measure 'net cash inflow from operating
activities'.
Reported Reported
26 weeks ended 26 weeks ended
23 September 24 September
(GBPm) 2018 2017
========================================== =============== ===============
Net cash inflow from operating activities 38 250
Adjustment for:
Other working capital movements 6 19
Cash cost of operating specific items 3 8
Purchase of property, plant and equipment (79) (69)
Purchase of intangible assets (software) (58) (70)
Net finance costs paid (10) (13)
========================================== =============== ===============
In-year trading cash inflow (100) 125
------------------------------------------ --------------- ---------------
Net cash investment
Net cash investment is a measure of the cash utilised by the
Group in the period on investment activities netted off against
cash received on the disposal of property, plant and equipment. It
is a measure used by Management to monitor investment within the
Group. The items making up this balance in the statutory cash flow
are indicated in the section 'Condensed consolidated statement of
cash flows'.
Net debt
Net debt is calculated by netting the value of financial
liabilities (excluding derivatives) against cash and other liquid
assets. It is a measure of the Group's net indebtedness that
provides an indicator of the overall balance sheet strength. It is
also a single measure that can be used to assess the combined
impact of the Group's indebtedness and its cash position. The use
of the term net debt does not necessarily mean that the cash
included in the net debt calculation is available to settle the
liabilities included in this measure. Details of the borrowing
facilities in place and the amounts drawn can be found in the
section titled 'Net finance costs'
A reconciliation of net debt to reported balance sheet line
items is shown below.
At 23 September At 24 September
(GBPm) 2018 2017
========================== ================ ===============
Loans/bonds (562) (440)
Finance leases (146) (191)
Cash and cash equivalents 218 229
Pension escrow (RMSEPP) 20 20
========================== ================ ===============
Net debt (470) (382)
-------------------------- ---------------- ---------------
Net debt excludes GBP186 million (2017-18: GBP23 million)
related to the RMPP pension scheme of the total GBP206 million
(2017-18: GBP43 million) pension escrow investments on the balance
sheet which is not considered to fall within the definition of net
debt.
Adjusted effective tax rate
The adjusted effective tax rate is the adjusted tax charge or
credit for the period expressed as a proportion of adjusted profit
before tax. Adjusted effective tax rate is considered to be a
useful measure of tax impact for the period. It approximates the
tax rate on the underlying trading business through the exclusion
of specific items and the pension charge to cash difference
adjustment.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed consolidated income statement
Reported Reported
26 weeks 26 weeks
ended ended
23 September 24 September
2018 2017
Notes GBPm GBPm
Continuing operations
Revenue 2,3 4,932 4,829
Operating costs(1) (4,724) (4,740)
------------------------------------------------------ ----- ------------- -------------
People costs (2,739) (2,889)
Distribution and conveyance costs (1,210) (1,086)
Infrastructure costs (439) (436)
Other operating costs (336) (329)
------------------------------------------------------ ----- ------------- -------------
Operating profit before transformation costs(2) 208 89
Transformation costs (52) (63)
------------------------------------------------------ ----- ------------- -------------
Operating profit after transformation costs(2) 156 26
Operating specific items
RMSEPP buy-in settlement 7 (64) -
Employee Free Shares charge (17) (18)
Impairment/legacy/other costs (69) (3)
Amortisation of intangible assets in acquisitions (10) (8)
Operating loss (4) (3)
Profit on disposal of property, plant and equipment
(non-operating specific item) 5 44
Earnings before interest and tax 1 41
Finance costs (10) (11)
Finance income 3 1
Net pension interest (non-operating specific
item) 7 39 46
------------------------------------------------------ ----- ------------- -------------
Profit before tax 33 77
Tax (charge)/credit 4 (28) 91
Profit for the period 5 168
------------------------------------------------------ ----- ------------- -------------
Profit for the period attributable to:
Equity holders of the parent Company 5 169
Non-controlling interests - (1)
------------------------------------------------------ ----- ------------- -------------
Earnings per share 5
Basic 0.5p 17.1p
Diluted 0.5p 17.0p
------------------------------------------------------ ----- ------------- -------------
(1) Operating costs are stated before transformation costs,
RMSEPP buy-in settlement, Employee Free Shares charge,
impairment/legacy/other costs and amortisation of intangible assets
in acquisitions. Details of specific items are provided in the APMs
section of the Financial Review.
(2) These measures of performance are both before operating
specific items.
Condensed consolidated statement of comprehensive income
Reported Reported
26 weeks 26 weeks
ended ended
23 September 24 September
2018 2017
Notes GBPm GBPm
------------------------------------------------------------ ----- ------------- ---------------
Profit for the period 5 168
Other comprehensive (expense)/income for the
period from continuing operations:
Items that will not be subsequently reclassified
to profit or loss:
Amounts relating to pensions accounting (73) (822)
------------------------------------------------------------ ----- ------------- -------------
IFRIC 14 adjustment relating to defined benefit
surplus 7 53 (1,119)
Remeasurement losses of the defined benefit
plans 7 (126) (178)
Deferred tax 4 - 475
------------------------------------------------------------ ----- ------------- -------------
Items that may be subsequently reclassified
to profit or loss:
Foreign exchange translation differences 6 (1)
------------------------------------------------------------ ----- ------------- -------------
Exchange differences on translation of foreign
operations (GLS) 19 9
Net loss on hedge of a net investment (EUR500
million bond) (12) (9)
Net loss on hedge of a net investment (Euro-denominated
finance lease payables) (2) (1)
Tax on above items 1 -
------------------------------------------------------------ ----- ------------- -------------
Designated cash flow hedges 17 (2)
------------------------------------------------------------ ----- ------------- -------------
Gains/(losses) on cash flow hedges deferred
into equity 30 (2)
Gains on cash flow hedges released from equity
to income (9) -
Tax on above items (4) -
------------------------------------------------------------ ----- ------------- -------------
Total other comprehensive expense for the
period (50) (825)
------------------------------------------------------------ ----- ------------- -------------
Total comprehensive expense for the period (45) (657)
------------------------------------------------------------ ----- ------------- -------------
Total comprehensive expense for the period
attributable to:
Equity holders of the parent Company (45) (656)
Non-controlling interests - (1)
------------------------------------------------------------ ----- ------------- -------------
Condensed consolidated balance sheet
Reported Reported
At 23 September At 25 March
2018 2018
Notes GBPm GBPm
------------------------------------------ ----- ---------------- ------------
Non-current assets
Property, plant and equipment 2,032 2,016
Goodwill 8 407 324
Intangible assets 699 608
Investments in associates 5 5
Financial assets
Pension escrow investments 206 198
Derivatives 13 5
RMPP/RMSEPP retirement benefit surplus -
net of IFRIC 14 adjustment 7 2,055 2,163
Other receivables 14 13
Deferred tax assets 62 72
------------------------------------------ ----- ---------------- ------------
5,493 5,404
Assets held for sale 34 50
------------------------------------------ ----- ---------------- ------------
Current assets
Inventories 28 25
Trade and other receivables 1,250 1,160
Income tax receivable 7 3
Financial assets
Derivatives 21 15
Cash and cash equivalents 218 600
------------------------------------------ ----- ---------------- ------------
1,524 1,803
------------------------------------------ ----- ---------------- ------------
Total assets 7,051 7,257
------------------------------------------ ----- ---------------- ------------
Current liabilities
Trade and other payables (1,774) (1,927)
Financial liabilities
Interest-bearing loans and borrowings (115) (1)
Obligations under finance leases (45) (59)
Derivatives (3) (3)
Income tax payable (18) (33)
Provisions (51) (59)
------------------------------------------ ----- ---------------- ------------
(2,006) (2,082)
Non-current liabilities
Financial liabilities
Interest-bearing loans and borrowings (447) (436)
Obligations under finance leases (101) (110)
Derivatives - (4)
DBCBS retirement benefit deficit 7 (32) -
Provisions (111) (103)
Other payables (44) (41)
Deferred tax liabilities 4 (69) (45)
------------------------------------------ ----- ---------------- ------------
(804) (739)
Total liabilities (2,810) (2,821)
------------------------------------------ ----- ---------------- ------------
Net assets 4,241 4,436
------------------------------------------ ----- ---------------- ------------
Equity
Share capital 10 10
Retained earnings 4,163 4,381
Other reserves 68 45
------------------------------------------ ----- ---------------- ------------
Equity attributable to parent Company 4,241 4,436
Non-controlling interests - -
------------------------------------------ ----- ---------------- ------------
Total equity 4,241 4,436
------------------------------------------ ----- ---------------- ------------
Condensed consolidated statement of changes in equity
Foreign Equity
currency holders Non-
Share Retained translation Hedging of the controlling Total
capital earnings reserve reserve parent interests equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------------------------------------- -------- --------- ------------ -------- -------
Reported at 26 March 2017 10 4,940 40 7 4,997 1 4,998
--------------------------------------- -------- --------- ------------ --------- -------- ------------ -------
Profit for the period - 169 - - 169 (1) 168
Other comprehensive expense
for the period - (822) (1) (2) (825) - (825)
--------------------------------------- -------- --------- ------------ --------- -------- ------------ -------
Total comprehensive expense
for the period - (653) (1) (2) (656) (1) (657)
Transactions with owners of
the Company, recognised directly
in equity
Dividend paid to equity holders
of the parent Company - (154) - - (154) - (154)
Share-based payments
Employee Free Shares issue(1) - 17 - - 17 - 17
Save As You Earn (SAYE) scheme - 1 - - 1 - 1
Long-Term Incentive Plan (LTIP)(2) - (2) - - (2) - (2)
Deferred Share Bonus Plan (DSBP) - 2 - - 2 - 2
Settlement of LTIP 2014 - (3) - - (3) - (3)
Reported at 24 September 2017 10 4,148 39 5 4,202 - 4,202
--------------------------------------- -------- --------- ------------ -------- -------
Profit for the period - 90 - - 90 - 90
Other comprehensive income/(expense)
for the period - 164 (3) 4 165 - 165
--------------------------------------- -------- --------- ------------ --------- -------- ------------ -------
Total comprehensive income/(expense)
for the period - 254 (3) 4 255 - 255
Transactions with owners of
the Company, recognised directly
in equity
Dividend paid to equity holders
of the parent Company - (77) - - (77) - (77)
Share-based payments
Employee Free Shares issue(1) - 18 - - 18 - 18
Long-Term Incentive Plan (LTIP)(2) - 5 - - 5 - 5
Employee exercise of SAYE options - 28 - - 28 - 28
Deferred tax on share-based
payments - 5 - - 5 - 5
Reported at 25 March 2018 10 4,381 36 9 4,436 - 4,436
--------------------------------------- -------- --------- ------------ -------- -------
Profit for the period - 5 - - 5 - 5
Other comprehensive (expense)/income
for the period - (73) 6 17 (50) - (50)
--------------------------------------- -------- --------- ------------ --------- -------- ------------ -------
Total comprehensive (expense)/income
for the period - (68) 6 17 (45) - (45)
Transactions with owners of
the Company, recognised directly
in equity
Dividend paid to equity holders
of the parent Company - (162) - - (162) - (162)
Share-based payments
Employee Free Shares issue(1) - 16 - - 16 - 16
Long-Term Incentive Plan (LTIP)(2) - 2 - - 2 - 2
Deferred Share Bonus Plan (DSBP) - 2 - - 2 - 2
Employee exercise of SAYE options - 5 - - 5 - 5
Purchase of own shares(3) - (10) - - (10) - (10)
Settlement of LTIP 2015 - (3) - - (3) - (3)
--------------------------------------- -------- --------- ------------ --------- -------- ------------ -------
Reported at 23 September 2018 10 4,163 42 26 4,241 - 4,241
--------------------------------------- -------- --------- ------------ --------- -------- ------------ -------
(1) Excludes GBP1 million charge (at 24 September 2017: GBP1
million charge; at 25 March 2018: GBP3 million credit) National
Insurance, recognised in the income statement, included in
provisions on the balance sheet.
(2) Excludes GBP1 million (at 24 September 2017: GBPnil million;
at 25 March 2018: GBP1 million) National Insurance, charged to the
income statement, included in provisions on the balance sheet.
(3) Purchases in respect of employee share schemes.
Condensed consolidated statement of cash flows
Reported Reported
26 weeks 26 weeks
ended ended
23 September 24 September
2018 2017
Notes GBPm GBPm
-------------------------------------------------------- ----- ------------- -------------
Cash flow from operating activities
Profit before tax 33 77
Adjustment for:
Net pension interest 7 (39) (46)
Net finance costs 7 10
Profit on disposal of property, plant and equipment (5) (44)
RMSEPP buy-in settlement 7 64 -
Impairment/legacy/other costs 69 3
Amortisation of intangible assets in acquisitions 10 8
Employee Free Shares charge 17 18
Transformation costs 52 63
-------------------------------------------------------- ----- ------------- -------------
Operating profit before transformation costs(1) 208 89
Adjustment for:
Depreciation and amortisation 167 166
EBITDA before transformation costs(1) 375 255
Working capital movements (278) (149)
-------------------------------------------------------- ----- ------------- -------------
Increase in inventories (3) (4)
Increase in receivables (63) (25)
Decrease in payables (210) (103)
Net decrease/(increase) in derivative assets 3 (6)
Decrease in provisions (non-specific items) (5) (11)
-------------------------------------------------------- ----- ------------- -------------
Pension charge to cash difference adjustment 7 34 234
Share-based awards (SAYE, LTIP and DSBP) charge
adjustment 4 1
Cash cost of transformation operating expenditure(2) (47) (59)
Cash cost of operating specific items (3) (8)
-------------------------------------------------------- ----- ------------- -------------
Cash inflow from operations 85 274
Income tax paid (49) (27)
Research and development expenditure credit 2 3
-------------------------------------------------------- ----- ------------- -------------
Net cash inflow from operating activities 38 250
-------------------------------------------------------- ----- ------------- -------------
Cash flow from investing activities
Finance income received 3 1
Proceeds from disposal of property (excluding
London Development Portfolio), plant and equipment
(non-operating specific item) 9 29
London Development Portfolio net proceeds/(costs)
(non-operating specific item) 6 (4)
Purchase of property, plant and equipment(2) (79) (69)
Acquisition of business interests, net of cash
acquired (210) (7)
Purchase of intangible assets (software)(2) (58) (70)
Payment of deferred consideration in respect
of prior years' acquisitions (4) (1)
Net cash outflow from investing activities (333) (121)
-------------------------------------------------------- ----- ------------- -------------
Net cash (outflow)/inflow before financing
activities (295) 129
-------------------------------------------------------- ----- ------------- -------------
Cash flow from financing activities
Finance costs paid (13) (14)
Purchase of own shares (10) -
Employee exercise of SAYE options 5 -
Payment of capital element of obligations under
finance lease contracts (33) (21)
Cash received on sale and leasebacks 8 17
Drawdown of loan facility 115 -
Repayment of loans and borrowings (2) (31)
Dividends paid to equity holders of the parent
Company 6 (162) (154)
Net cash outflow from financing activities (92) (203)
-------------------------------------------------------- ----- ------------- -------------
Net decrease in cash and cash equivalents (387) (74)
Effect of foreign currency exchange rates on
cash and cash equivalents 5 4
Cash and cash equivalents at the beginning
of the period 600 299
-------------------------------------------------------- ----- ------------- -------------
Cash and cash equivalents at the end of the
period 218 229
-------------------------------------------------------- ----- ------------- -------------
(1) See APMs section within the Financial Review for a
definition of these measures.
(2) Items comprise total gross investment within 'In-year
trading cash flow' measure (see Financial Review).
Notes to the condensed consolidated financial statements
1. Basis of preparation
The comparative figures for the year ended 25 March 2018 are not
the Company's statutory accounts for that financial year. Those
accounts have been reported on by the Company's auditor and
delivered to the registrar of companies. The report of the auditor
was (i) unqualified; (ii) did not include a reference to any
matters to which the auditor drew attention by way of emphasis
without qualifying their report; and (iii) did not contain a
statement under section 498 (2) or (3) of the Companies Act
2006.
This condensed set of unaudited financial statements has been
prepared in accordance with IAS 34 'Interim Financial Reporting' as
adopted by the European Union (EU).
The annual financial statements of the Group are prepared in
accordance with International Financial Reporting Standards (IFRS)
as adopted by the EU. As required by the Disclosure Guidance and
Transparency Rules of the Financial Conduct Authority, this
condensed set of financial statements has been prepared applying
the accounting policies and presentation that were applied in the
preparation of the Group's published consolidated financial
statements for the year ended 25 March 2018, except for any changes
detailed below.
Presentation of results and accounting policies
The condensed consolidated financial statements have been
prepared in accordance with IFRS as adopted by the EU and as issued
by the International Accounting Standards Board (IASB) (i.e. on a
'reported' basis).
In some instances, Alternative Performance Measures (APMs) are
used by the Group. This is because Management is of the view that
these APMs provide a more meaningful basis on which to analyse
business performance, and are consistent with the way that
financial performance is measured by Management and reported to the
Board. Details of the Group's APMs are explained in the Financial
Review.
Accounting standards adopted in 2018-19
IFRS 15 'Revenue from Contracts with Customers'
IFRIC 22 'Foreign Currency Transactions and Advance
Consideration'
IFRS 2 (Amended) 'Classification and Measurement of Share-based
Payment Transactions'
IFRS 4 (Amended) 'Applying IFRS 9 Financial Instruments with
IFRS 4 Insurance Contracts'
IAS 40 (Amended) 'Transfers of Investment Property'
Annual Improvements 2014-2016
The modified retrospective transition method has been adopted
for IFRS 15, although the introduction of this standard does not
have a material impact on the financial performance or position of
the Group. It has, however, resulted in additional revenue
disclosure requirements for interim financial reporting which have
been met through the introduction of a new Revenue Note. The
adoption of the other standards above does not have a material
impact on the financial performance or position of the Group.
Other accounting standards
The Directors do not expect that the adoption of any other new
or amended standards issued during the reporting period that are
not yet effective will have a material impact on the financial
performance or position of the Group in future periods.
IFRS 16 'Leases'
The project to implement this accounting standard in Royal Mail
with effect from 1 April 2019 continues to progress, including the
recent acquisition of specialist accounting software which will
provide the calculations and disclosures required by IFRS 16.
Key sources of estimation uncertainty and critical accounting
judgements
The preparation of the condensed consolidated financial
statements requires Management to make certain estimates and
judgements that can have a significant impact on the financial
statements. These estimates and judgements are continually
evaluated and are based on historical experience and other factors,
including expectations of future events that are believed to be
reasonable under the circumstances. The significant judgements and
estimates applied by the Group in these condensed consolidated
financial statements are consistent with those applied in the
Annual Report and Financial Statements 2017-18 except as explained
below.
Accounting estimates
The following estimates are those at the end of the current
reporting period that have a significant risk of resulting in a
material adjustment to the carrying amounts of assets and
liabilities within the next financial year.
Business Acquisition - Dicom Canada
Identifiable assets acquired and liabilities and contingent
liabilities assumed in business acquisitions are measured initially
at their fair values at the acquisition date. The fair value of an
asset or liability represents the price that would be received to
sell an asset or paid to transfer a liability in an orderly
transaction between market participants. An independent valuer was
used to assist in the valuation of the Dicom Canada
acquisition.
In determining the fair value of the intangible assets acquired,
risk-adjusted future cash flows discounted using discount rates
specific to the asset are generally used. In determining cash
flows, a combination of historical data and estimates regarding
revenue growth, profit margins and operating cash flows have been
used.
-- customer relationships were measured using estimates of
future cash flows and expected customer retention rates.
-- brands were measured by estimating the savings realised by
owning or holding the right to use the brand name (as opposed to
paying a royalty fee to a third party). This includes an estimate
of the projected revenues attributable to the brand, potential
royalty rates and the estimated life of the brand to a third
party.
-- internally developed software acquired was measured using a
lost profit approach, taking into account additional software
licencing costs, the replacement cost of recreating the existing
technology platforms and foregone profits during a hypothetical
rebuild phase.
-- other tangible assets and liabilities were measured by
estimating the current cost to purchase or replace the assets,
taking into account available market data for the sale or transfer
of such assets.
The excess of the consideration transferred over the fair value
of the net identifiable assets acquired is recorded as goodwill.
The Group has one year from the acquisition date to re-measure the
fair values of the acquired assets and liabilities and the
resulting goodwill if new information is obtained relating to
conditions that existed at the acquisition date.
Acquisition related costs are expensed as incurred. Details of
the Dicom Canada acquisition during the period are disclosed in
Note 9.
Goodwill impairment - GLS US businesses cash generating unit
(CGU)
In assessing whether there has been any impairment of goodwill,
Management determines whether the goodwill carrying value is higher
than the recoverable amount of the underlying CGU. The recoverable
amount is the higher of a CGU's fair value less costs to sell
(realisable value) and value-in-use. In the case of goodwill
allocated to the GLS US businesses CGU, the realisable value is
estimated using five year forecast cash flows. Details of the
impairment review of the CGU and the relevant estimates and
assumptions are included in Note 8.
Constructive obligation - Defined Benefit Cash Balance Scheme
(DBCBS)
In accounting for the DBCBS pension scheme Management must apply
judgement in determining whether a constructive obligation exists
in relation to annual pension benefit increases in the absence of a
legal obligation. Any such constructive obligation must be included
in the calculation of the fair value of the DBCBS defined benefit
liability. From an assessment of announcements and internal
communications made to members of the scheme to date, Management is
of the view that scheme members would have a reasonable expectation
of returns of CPI plus two per cent. Further details are available
in Note 7, including sensitivities around measures involving
CPI.
Accounting judgements
The following are the critical judgements, apart from those
involving estimations (which are dealt with separately above), that
Management have made in applying the Group's significant accounting
policies and that have the most significant effect on the amounts
recognised in the financial statements.
Contingent liabilities - Ofcom fine
Management have considered Ofcom's decision following its
investigation into whether Royal Mail had breached competition law,
and the subsequent imposition of a fine, and they are confident
that no liability should be recognised in these financial
statements. Further details are provided in Note 10.
Pension settlement - Royal Mail Senior Executives Pension Plan
(RMSEPP) buy-in
During the period the RMSEPP Trustees purchased a further buy-in
insurance policy in respect of all remaining pensioners and
deferred members of the RMSEPP. Alongside previous insurance
policies purchased, this means that substantially all the
liabilities of the scheme are now covered by insurance policies.
The new policy also includes provisions for the possible issue of
individual policies in respect of individual members at the future
discretion of the RMSEPP Trustees. From an assessment of the nature
of the policies in place, Management have applied judgement to
conclude that the purchase of this additional insurance policy
should be treated as a settlement under IAS 19.
Going concern
The Directors have a reasonable expectation that the Group has
adequate resources to continue in operational existence for at
least the next 12 months. Accordingly, they continue to adopt the
going concern basis in preparing the financial statements for the
26 weeks ended 23 September 2018.
2. Segment information
The Group's operating segments are based on geographic business
units whose primary services and products relate to the delivery of
parcels and letters. These segments are evaluated regularly by the
Executive Board and the Royal Mail plc Board - the Chief Operating
Decision Maker (CODM) as defined by IFRS 8 'Operating Segments' -
in deciding how to allocate resources and assess performance.
The key measure of segment performance is operating profit
before transformation costs (used internally for the Corporate
Balanced Scorecard). This measure of performance is disclosed on an
'adjusted' basis i.e. excluding specific items and the pension
charge to cash difference adjustment (see 'Alternative Performance
Measures' paragraphs of the Financial Review), which is consistent
with how financial performance is measured internally and reported
to the CODM.
Segment revenues have been attributed to the respective
countries based on the primary location of the service performed.
Trading between UKPIL and GLS is not considered material.
Seasonality
Mail volumes are subject to seasonal variation. The Group's
busiest period is from September to December, when there is
typically an increase in marketing mail volumes as businesses seek
to maximise sales in the period leading up to Christmas, an
increase in parcel volumes as a result of online Christmas shopping
and an increase in addressed letter volumes as a result of the
delivery of Christmas cards. During this period, the Group would
expect to record higher revenue as greater volumes of letters and
parcels are delivered through its networks. It also incurs higher
costs as the Group, particularly in UKPIL, hires large numbers of
temporary workers to assist in handling the increased workload.
Other seasonal factors that can affect the Group's results of
operations include the Easter period, the number of bank holidays
in a reporting period and weather conditions. Within the year, mail
volumes typically decline in the summer months due to the holiday
period, and then increase during autumn through to the peak period
at Christmas.
Specific
items
and pension
26 weeks ended 23 September 2018 Adjusted adjustment(1) Reported
----------------------------------------- --------------------------------------- -------------- --------
GLS
UKPIL (Non-UK
(UK operations) operations) Group Group
Continuing operations GBPm GBPm GBPm GBPm GBPm
----------------------------------------- ---------------- ------------ ------- -------------- --------
Revenue 3,585 1,347 4,932 - 4,932
People costs (2,387) (318) (2,705) (34) (2,739)
Non-people costs (1,033) (952) (1,985) - (1,985)
---------------- ------------ ------- -------------- --------
Operating profit before transformation
costs 165 77 242 (34) 208
Transformation costs (52) - (52) - (52)
----------------------------------------- ---------------- ------------ ------- -------------- --------
Operating profit after transformation
costs 113 77 190 (34) 156
Operating specific items
RMSEPP buy-in settlement - - - (64) (64)
Employee Free Shares charge - - - (17) (17)
Impairment/legacy costs - - - (69) (69)
Amortisation of intangible assets in
acquisitions - - - (10) (10)
----------------------------------------- ---------------- ------------ ------- -------------- --------
Operating profit/(loss) 113 77 190 (194) (4)
Profit on disposal of property, plant
and equipment (non-operating specific
item) - - - 5 5
Earnings before interest and tax 113 77 190 (189) 1
Finance costs (10) - (10) - (10)
Finance income 2 1 3 - 3
Inter-segment interest 4 (4) - - -
Net pension interest (non-operating
specific item) - - - 39 39
----------------------------------------- ---------------- ------------ ------- -------------- --------
Profit before tax 109 74 183 (150) 33
----------------------------------------- ---------------- ------------ ------- -------------- --------
(1) A GBP38 million charge for specific items and a GBP34
million charge for the pension charge to cash difference adjustment
relate to UKPIL. A GBP78 million charge for specific items relates
to GLS, of which GBP68 million relates to the impairment of the GLS
US businesses.
Specific
items
and
26 weeks ended 24 September pension
2017 Adjusted adjustment(2) Reported
----------------------------- --------------------------------------- -------------- ----------
GLS
UKPIL (Non-UK
(UK operations) operations) Group Group
Continuing operations GBPm GBPm GBPm GBPm GBPm
----------------------------- ---------------- ------------ ------- -------------- ----------
Revenue 3,624 1,205 4,829 - 4,829
People costs (2,362) (293) (2,655) (234) (2,889)
Non-people costs (1,029) (822) (1,851) - (1,851)
---------------- ------------ ------- -------------- ----------
Operating profit before
transformation
costs 233 90 323 (234) 89
Transformation costs (63) - (63) - (63)
----------------------------- ---------------- ------------ ------- -------------- ----------
Operating profit after
transformation
costs 170 90 260 (234) 26
Operating specific items
Employee Free Shares
charge - - - (18) (18)
Legacy/other costs - - - (3) (3)
Amortisation of
intangible assets
in acquisitions - - - (8) (8)
----------------------------- ---------------- ------------ ------- -------------- ----------
Operating profit/(loss) 170 90 260 (263) (3)
Profit on disposal of
property,
plant and equipment
(non-operating
specific item) - - - 44 44
Earnings before interest and
tax 170 90 260 (219) 41
Finance costs (10) (1) (11) - (11)
Finance income - 1 1 - 1
Inter-segment interest 2 (2) - - -
Net pension interest
(non-operating
specific item) - - - 46 46
----------------------------- ---------------- ------------ ------- -------------- ----------
Profit before tax 162 88 250 (173) 77
----------------------------- ---------------- ------------ ------- -------------- ----------
(2) A GBP68 million credit for specific items and a GBP234
million charge for the pension charge to cash difference adjustment
relate to UKPIL. A GBP7 million charge for specific items relates
to GLS.
3. Revenue
This disclosure provides a disaggregation of Group revenue by
type. Revenue recognised is net of Value Added Tax and principally
relates to the rendering of services derived from contracts with
customers.
UKPIL GLS Group
26 weeks 2018 GBPm GBPm GBPm
-------------------------- ----- ----- -----
Letters and other revenue 1,399 - 1,399
Marketing mail 496 - 496
Parcels 1,690 1,347 3,037
-------------------------- ----- ----- -----
Total 3,585 1,347 4,932
-------------------------- ----- ----- -----
4. Taxation
The Group reported tax charge is GBP28 million on a reported
profit of GBP33 million. This gives a high effective tax rate which
arises mainly due to the impairment of goodwill in respect of the
GLS US businesses (for which there is no tax credit) and the
associated derecognition of deferred tax assets in respect of tax
losses in the GLS US businesses. Other contributing factors include
the RMSEPP buy-in cost (for which there is no tax credit) and
losses in GLS France and the GLS US businesses (for which no
deferred tax asset is recognised). The impact of these items on the
effective tax rate is partially mitigated by the net pension
interest income on which there is no tax charge.
Details of the adjusted tax charge and effective tax rate are
provided in the Financial Review.
5. Earnings per share
26 weeks ended 23 September 26 weeks ended 24
2018 September 2017
----------------------------------
Specific Specific
items items
and pension and pension
Reported adjustment(1) Adjusted Reported adjustment(1) Adjusted
----------------------------------- -------- -------------- -------- -------- -------------- --------
Attributable to equity holders
of the parent Company
Profit from continuing operations
(GBP million) 5 (131) 136 169 (30) 199
Weighted average number
of shares issued (million) 1,000 n/a 1,000 991 n/a 991
Basic earnings per share
(pence) 0.5 n/a 13.6 17.1 n/a 20.1
Diluted earnings per share
(pence) 0.5 n/a 13.6 17.0 n/a 20.0
----------------------------------- -------- -------------- -------- -------- -------------- --------
(1) Further details of the specific items can be found in the
Financial Review.
The diluted earnings per share for the 26 weeks ended 23
September 2018 is based on a weighted average number of shares of
1,003,327,899 (H1 2017-18: 993,020,938) to take account of the
potential issue of 2,957,905 ordinary shares resulting from the
Long-Term Incentive Plans (LTIP) for certain senior management,
438,557 ordinary shares resulting from the Deferred Share Bonus
Plan (DSBP) for certain senior management and 1,768 ordinary shares
resulting from the Save As You Earn (SAYE) scheme. Management have
historically elected to settle these schemes using shares purchased
from the market.
The 70,331 mainly LTIP shares held in an Employee Benefit Trust
for the settlement of options and awards to current and former
employees are treated as treasury shares for accounting purposes.
The Company, however, does not hold any shares in treasury.
6. Dividends
26 weeks 26 weeks 26 weeks 26 weeks
ended ended ended ended
23 September 24 September 23 September 24 September
2018 2017 2018 2017
Pence per Pence per
Dividends on ordinary shares share share GBPm GBPm
----------------------------- ------------- ------------- ------------- -------------
Final dividends paid 16.3 15.6 162 154
----------------------------- ------------- ------------- ------------- -------------
Total dividends paid 16.3 15.6 162 154
----------------------------- ------------- ------------- ------------- -------------
The final dividend of 16.3p per share was paid on 31 August 2018
to shareholders whose names appeared on the register of members on
26 July 2018.
7. Retirement benefit plans
Summary pension information
26 weeks 26 weeks
ended ended
23 September 24 September
2018 2017
GBPm GBPm
====================================================== ============= =============
Ongoing UK pension service costs
UK defined benefit plans (including administration
costs)(1) (187) (405)
UK defined contribution plan (39) (28)
UK defined benefit and defined contribution plans'
Pension Salary Exchange (PSE) employer contributions (85) (77)
====================================================== ============= =============
Total UK ongoing pension service costs (311) (510)
GLS defined contribution type plan costs (4) (3)
====================================================== ============= =============
Total Group ongoing pension service costs (315) (513)
====================================================== ============= =============
Cash flows relating to ongoing pension service
costs
UK defined benefit plans' employer contributions(2) (154) (164)
Defined contribution plans' employer contributions (43) (31)
UK defined benefit and defined contribution plans'
PSE employer contributions (85) (77)
====================================================== ============= =============
Total Group cash flows relating to ongoing pension
service costs (282) (272)
====================================================== ============= =============
RMSEPP deficit correction payments (1) (5)
Pension related accruals (timing difference) 2 (2)
====================================================== ============= =============
Pension charge to cash difference adjustment (34) (234)
------------------------------------------------------ ------------- -------------
(1) These pension service costs are charged to the income
statement. They represent the cost (as a percentage of pensionable
payroll - 41.0 per cent (2017-18: 41.1 per cent) for the RMPP until
31 March 2018 and 18.9 per cent for the DBCBS from 1 April 2018) of
the increase in the defined benefit obligation due to members
earning one more half year's worth of pension benefits. They are
calculated in accordance with IAS 19 and are based on market yields
(high quality corporate bonds and inflation) at the beginning of
the reporting year. Pensions administration costs for the RMPP of
GBP2 million (H1 2017-18: GBP3 million) and the DBCBS of GBP2
million (H1 2017-18: GBPnil) continue to be included within the
Group's ongoing UK pension service costs.
(2) The employer contribution cash flow rate forms part of the
payroll expense and is paid in respect of the RMPP (17.1 per cent
to 31 March 2018, and the prior period) and the DBCBS (15.6 per
cent from 1 April 2018). This includes payments into RMPP pension
escrow investments. The contribution rate for RMPP is set following
each actuarial funding valuation, usually every three years. These
actuarial valuations are required to be carried out on assumptions
determined by the Trustee and agreed by Royal Mail, and will be
required in respect of the DBCBS.
Defined Benefit Cash Balance (DBCBS)
DBCBS service costs and contributions from 1 April 2018 are
shown in the table above. The DBCBS is a transitional arrangement
until the proposed Collective Defined Contribution (CDC) scheme can
be established. One week of Royal Mail Pension Plan (RMPP)(3)
service costs and contributions up to when the scheme closed on 31
March 2018 are also included in the above. Improvements to the
Royal Mail Defined Contribution Plan (RMDCP) were made in the first
half. Further details can be found in the Financial Review.
Royal Mail Senior Executives Pension Plan (RMSEPP)
On 21 September 2018, the RMSEPP Trustees purchased a further
buy-in insurance policy in respect of all remaining pensioners and
deferred members. This insurance policy, alongside the previous
insurance policy purchased in April 2016, means that substantially
all the liabilities of the scheme are now covered by insurance
policies. After consideration of the facts outlined above,
Management have concluded that the purchase of this further
insurance policy should be treated as a settlement. The difference
between the IAS 19 surplus before and after the transaction has
resulted in GBP64 million being charged to the income statement as
an operating specific item. This insurance policy includes
provisions for the possible issue of individual policies in respect
of individual members at the future discretion of the RMSEPP
Trustees.
As with the previous insurance policy purchased in April 2016,
this policy is considered an asset of the RMSEPP and does not
confer any rights to individual members. All benefit payments due
from the RMSEPP remain unchanged. The insurance policy exactly
matches the value and timing of the benefits payable under the
RMSEPP (for the remaining pensioners and deferred members) and the
fair value is deemed to be the present value of the related
obligation. The total value(4) of the buy-in annuity policies in
place is GBP332 million (March 2018: GBP148 million) and is
included as a pension asset and a pension liability at 23 September
2018.
(3) Any references to RMPP relate to the scheme's defined
benefit pension liabilities built up to 31 March 2018. Members
built up DBCBS benefits from 1 April 2018.
(4) In accordance with IAS 19.
Accounting and actuarial surplus/(deficit) position (RMPP,
RMSEPP and DBCBS)
The plans' assets and liabilities are shown below.
DBCBS DBCBS RMPP and RMSEPP RMPP and RMSEPP
Accounting Actuarial Accounting Actuarial funding
(IAS funding (IAS 19)
19)
=============================== =========== ============== =================== =====================
At 23 At 30 At 23 At At 30 At
September September September 25 March September 31 March
2018 2018 2018 2018 2018 2018
GBPm GBPm GBPm GBPm GBPm GBPm
=============================== =========== ========== ============ ========= ========== =========
Fair value of plans' assets(5) 197 197 9,884 10,361 9,927 10,461
Present value of plans'
liabilities (229) (197) (6,722) (7,038) (9,905) (10,318)
=============================== =========== ========== ============ ========= ========== =========
(Deficit)/surplus in plans
(pre IFRIC 14 adjustment) (32) - 3,162 3,323 22 143
IFRIC 14 adjustment n/a n/a (1,107) (1,160) n/a n/a
=============================== =========== ========== ============ ========= ========== =========
(Deficit)/surplus in plans (32) - 2,055 2,163 22 143
------------------------------- ----------- ---------- ------------ --------- ---------- ---------
(5) The difference between accounting and actuarial funding
asset fair values arises from the different period end dates used
for the valuation of the assets under each method.
The Directors do not believe that the surplus in RMPP on an
accounting basis will result in a surplus on an actuarial funding
basis. However, the Directors are required to account for the plans
based on the Company's legal right to benefit from a surplus, using
long-term actuarial funding assumptions current at the reporting
date, as required by IFRS. As the Group has a legal right to
benefit from a surplus in the RMPP and RMSEPP, under IAS 19 and
IFRIC 14, it must recognise the economic benefit assumed to arise
from either a reduction to its future contributions or a refund of
the surplus. This is a technical adjustment made on an accounting
basis. There is no cash benefit from the surplus.
The legal right to benefit from a surplus has not changed as a
result of the Company's decision to close the RMPP from 31 March
2018. However, since this date, any surplus is no longer assumed to
be recoverable as a reduction to future employer contributions.
Therefore, at 23 September 2018 the surplus is assumed to be
available as a refund. This surplus is presented net of an IFRIC 14
adjustment of GBP1,103 million (at 25 March 2018: GBP1,134 million)
on the balance sheet, which represents the taxation that would be
withheld on the surplus amount.
Included in the IAS 19 figures in the table above is an RMSEPP
surplus at 23 September 2018 of GBP10 million (pre IFRIC 14) (at 25
March 2018: GBP73 million surplus).
As RMSEPP is closed to future accrual, the surplus is assumed to
be available as a refund as per IFRIC 14 and, as such, is shown net
of an IFRIC 14 adjustment of GBP4 million (at 25 March 2018: GBP26
million) on the balance sheet which represents the taxation that
would be withheld on the surplus amount.
The High Court has recently ruled that pension schemes have to
address the issue of unequal Guaranteed Minimum Pensions (GMPs).
From Royal Mail's perspective, the transfer of RMPP's historic
pension liabilities to Government in 2012 included all of the
Plan's GMP liabilities. The requirement to remove the inequality in
former RMPP benefits deriving from GMPs therefore rests with
Government.
RMSEPP, however, does still have its GMP liabilities and will be
required to take action to equalise benefits. The Trustees'
actuaries estimate that the cost of GMP equalisation will not be
material. This is still subject to further legal clarification on
exact equalisation requirements, and also to the actual
equalisation approach adopted.
The following disclosures relate to the major assumptions,
sensitivities, assets and liabilities in the RMPP, RMSEPP and
DBCBS.
Major long-term assumptions used for accounting (IAS 19)
purposes - RMPP, RMSEPP and DBCBS
The major assumptions used to calculate the accounting position
of the pension plans are as follows:
DBCBS RMPP and At 25 March
At 23 September RMSEPP At 2018
2018 23 September
2018
====================================== ================ ============= ===========
Retail Price Index (RPI) 3.2% 3.2% 3.1%
Consumer Price Index (CPI) 2.2% 2.2% 2.1%
Discount rate
- nominal 2.6% 2.7% 2.4%
- real (nominal less RPI)(6) (0.6)% (0.5)% (0.7)%
Constructive obligation for increases 4.2% - -
-------------------------------------- ---------------- ------------- -----------
(6) The real discount rate used reflects the average duration of
the RMPP of around 30 years and the DBCBS of 11 1/2 years.
Sensitivity analysis for RMPP and DBCBS liabilities
The RMPP and DBCBS liabilities are sensitive to changes in key
assumptions. The potential impact of the largest sensitivities on
these liabilities is as follows:
Potential Potential
increase in increase in
DBCBS liabilities RMPP liabilities
Key assumption change GBPm GBPm
=================================== ================== =================
Additional one year of life
expectancy - 240
Increase in inflation rate
(both RPI and CPI simultaneously)
of 0.1% p.a. 3 170
Decrease in discount rate
of 0.1% p.a. 3 170
Increase in CPI assumption
(assuming RPI remains constant)
of 0.1% p.a. 3 35
------------------------------------ ------------------ -----------------
This sensitivity analysis has been determined based on a method
that assesses the impact on the defined benefit obligation,
resulting from reasonable changes in key assumptions occurring at
the end of the reporting period. Changes inverse to those in the
table (e.g. an increase in discount rate) would have the opposite
effect on liabilities.
Movement in RMPP and RMSEPP assets, liabilities and net
position
Changes in the value of the defined benefit pension liabilities,
fair value of the plans' assets and the net defined benefit surplus
are analysed as follows:
Defined benefit Defined benefit Net defined
asset liability benefit surplus
========================================= ===================== ===================== =====================
At 23 At At 23 At At 23 At
September 25 March September 25 March September 25 March
2018 2018 2018 2018 2018 2018
GBPm GBPm GBPm GBPm GBPm GBPm
========================================= ========== ========= ========== ========= ========== =========
Retirement benefit surplus (pre
IFRIC 14 adjustment) at 26 March
2018 and 27 March 2017 10,361 9,847 (7,038) (5,992) 3,323 3,855
========================================= ========== ========= ========== ========= ========== =========
Amounts included in the income statement
Ongoing UK defined benefit pension
plan and administration costs (included
in People costs) (2) (7) (6) (899) (8) (906)
RMSEPP buy-in settlement - operating
specific item (64) - - - (64) -
Pension interest income/(cost)(7) 123 251 (84) (160) 39 91
========================================= ========== ========= ========== ========= ========== =========
Total included in profit before
tax 57 244 (90) (1,059) (33) (815)
========================================= ========== ========= ========== ========= ========== =========
Amounts included in other comprehensive
income - remeasurement gains/(losses)
Actuarial gain/(loss) arising from:
Financial assumptions - - 370 (53) 370 (53)
Experience assumptions - - - 1 - 1
Return on plans' assets (excluding
interest income) (497) 62 - - (497) 62
========================================= ========== ========= ========== ========= ========== =========
Total remeasurement gains/(losses)
of the defined benefit surplus (497) 62 370 (52) (127) 10
========================================= ========== ========= ========== ========= ========== =========
Other
Employer contributions(8) 3 272 - - 3 272
Employee contributions - 5 - (5) - -
Benefits paid (38) (70) 38 70 - -
Curtailment costs - - - (3) - (3)
Movement in pension-related accruals (2) 1 (2) 3 (4) 4
========================================= ========== ========= ========== ========= ========== =========
Total other movements (37) 208 36 65 (1) 273
========================================= ========== ========= ========== ========= ========== =========
Retirement benefit surplus (pre
IFRIC 14 adjustment) at 23 September
2018 and 25 March 2018 9,884 10,361 (6,722) (7,038) 3,162 3,323
========================================= ========== ========= ========== ========= ========== =========
IFRIC 14 adjustment - - - - (1,107) (1,160)
========================================= ========== ========= ========== ========= ========== =========
Retirement benefit surplus (net
of IFRIC 14 adjustment) at 23 September
2018 and 25 March 2018 9,884 10,361 (6,722) (7,038) 2,055 2,163
----------------------------------------- ---------- --------- ---------- --------- ---------- ---------
(7) Pension interest income results from applying the plans'
discount rate at 25 March 2018 to the plans' assets at that date.
Similarly, the pension interest cost results from applying the
plans' discount rate as at 25 March 2018 to the plans' liabilities
at that date.
(8) Excludes payments into pension escrow investments of GBP7
million (2017-18: GBP178 million).
Movement in DBCBS assets, liabilities and net position
Changes in the value of the defined benefit pension liabilities,
fair value of the plans' assets and the net defined benefit deficit
since the start of the scheme on 1 April 2018 are analysed as
follows:
Defined benefit Defined benefit Net defined
asset liability benefit deficit
========================================= ================ =============== ================
At 23 At 23 At 23
September September September
2018 2018 2018
GBPm GBPm GBPm
========================================= =============== =============== ================
Retirement benefit at 26 March 2018 - - -
========================================= =============== =============== ================
Amounts included in the income statement
Ongoing UK defined benefit pension
plan and administration costs (included
in People costs) (2) (230) (232)
Total included in profit before
tax (2) (230) (232)
========================================== =============== =============== ================
Amounts included in other comprehensive
income - remeasurement gains/(losses)
Actuarial gain/(loss) arising from:
Financial assumptions - 2 2
Experience assumptions - (1) (1)
Total remeasurement gains of the
defined benefit deficit - 1 1
========================================== =============== =============== ================
Other
Employer contributions 199 - 199
Employee contributions 2 (2) -
Benefits paid (2) 2 -
Total other movements 199 - 199
========================================== =============== =============== ================
Retirement benefit deficit at 23
September 2018 197 (229) (32)
------------------------------------------ --------------- --------------- ----------------
8. Goodwill
2018-19 2017-18
GBPm GBPm
=================================== ======= =======
Cost
At 26 March 2018 and 27 March 2017 715 703
Exchange rate movements 21 1
Acquisition of businesses 123 11
At 23 September 2018 and 25 March
2018 859 715
===================================
Impairment
At 26 March 2018 and 27 March 2017 391 387
Exchange rate movements 12 4
Impairment 49 -
At 23 September 2018 and 25 March
2018 452 391
Net book value:
At 23 September 2018 and 25 March
2018 407 324
At 25 March 2018 and 26 March 2017 324 316
GLS' US businesses (cash generating unit - CGU) comprise Golden
State Overnight Delivery Services Inc. (GSO) and Postal Express
Inc. These businesses are in the process of being integrated to
create an interstate overnight parcel delivery service with full US
west coast coverage, with the aim of realising operational
synergies and commercial benefits. While progress is being made
against plans, the combined impact of local cost pressures,
refocussing the customer base, transitioning to the new business
model and ongoing integration costs means that the expected
synergies and benefits will now take longer to be realised. The
combined businesses were loss-making in the period, with operating
losses of around $8 million (approximately GBP6 million) in the
first half.
Management have performed an impairment review of the assets
comprising the CGU and, as a result, the goodwill in these
businesses, amounting to GBP49 million, has been fully impaired,
along with other assets with a carrying value of GBP19 million.
Further details are provided in the Financial Review.
9. Acquisition of business
On 3 September 2018, the Group announced it had acquired Dicom
Canada for total consideration of GBP212 million. This acquisition
was funded through a mix of cash and the temporary drawdown of the
Group's revolving credit facility. In view of the close proximity
of the acquisition date to the half year end reporting date, the
fair valuation exercise is still continuing and accordingly, the
fair values of the identifiable assets and liabilities recognised
as at the date of acquisition, as detailed below, are still
provisional.
26 weeks ended
23 September
2018
GBPm
Tangible assets acquired 17
Intangible assets recognised on acquisition 102
Trade and other receivables 19
Cash and cash equivalents 2
Goodwill recognised on acquisition 123
Total assets acquired 263
Trade and other payables (20)
Tax liabilities (31)
Net assets acquired 212
Cash paid during the period 212
Deferred consideration -
Total consideration 212
The fair value of trade debtors is equal to the gross
contractual amounts receivable. An initial review of trade debtors
has not indicated any recoverability issues.
The intangible assets recognised relate to customer lists,
software and brands. The goodwill of GBP123 million arising on this
acquisition (GLS Candada CGU) is indicative of the acquired
business knowledge of products and markets, and future efficiencies
that are expected through changes in the operations.
Revenue generated from this entity since the date of acquisition
is GBP12 million and the profit is GBP1 million. If this
acquisition had taken place at the beginning of the financial year,
revenue generated would have been GBP68 million and the profit
would have been GBP6 million.
10. Contingent liabilities
On 14 August 2018, Ofcom published its decision following its
investigation into whether Royal Mail had breached competition law.
The investigation was launched in February 2014, following a
complaint brought by TNT Post UK (now Whistl). Ofcom found that
Royal Mail had abused its dominant position in the market for bulk
mail delivery services in the United Kingdom by issuing Contract
Change Notices on 10 January 2014 which introduced discriminatory
prices. It fined Royal Mail GBP50 million.
The Group robustly defended its conduct in written and oral
representations made to Ofcom during the investigation and
continues to maintain that it has not infringed competition law. It
lodged an appeal with the Competition Appeal Tribunal on 12 October
2018 to have both Ofcom's decision and fine overturned. No fine is
payable until after the completion of the appeal process.
11. Events after the reporting period
Interim dividend
The Board has declared an interim dividend of 8.0 pence per
ordinary share (H1 2017-18: 7.7 pence per share). The dividend
amounts to GBP80 million (H1 2017-18: GBP77 million) and will be
paid on 16 January 2019 to shareholders on the register at the
close of business on 7 December 2018. The ex-dividend date is 6
December 2018.
RESPONSIBILITY STATEMENT OF THE DIRECTORS IN RESPECT OF THE HALF
YEAR FINANCIAL REPORT
The Directors confirm that to the best of their knowledge:
-- the condensed set of financial statements has been prepared
in accordance with IAS 34 Interim Financial Reporting as issued by
the International Accounting Standards Board and as adopted by the
EU and gives a true and fair view of the assets, liabilities,
financial position and profit or loss of Royal Mail plc as required
by DTR 4.2.4R; and
-- the interim Financial Report includes a fair review of the information required by:
(a) DTR 4.2.7R of the Disclosure Guidance and Transparency
Rules, being an indication of important events that have occurred
during the first 26 weeks of the financial year and their impact on
the condensed set of financial statements; and a description of the
principal risks and uncertainties for the remaining 26 weeks of the
year; and
(b) DTR 4.2.8R of the Disclosure Guidance and Transparency
Rules, being related party transactions that have taken place in
the first 26 weeks of the current financial year and that have
materially affected the financial position or performance of the
Company during that period; and any changes in the related party
transactions described in the last annual report that could do
so.
The Directors of Royal Mail plc are as listed in the Royal Mail
plc Annual Report and Financial Statements 2017-18 with the
exception of Paul Murray and Moya Greene who both stepped down from
the Board on 19 July 2018. Peter Long stepped down from the Board
on 19 September 2018. As announced on 7 November 2018, Sue Whalley
has stepped down from the Board with immediate effect. A list of
current Directors is maintained on our corporate website
www.royalmailgroup.com.
By order of the Board
Rico Back Stuart Simpson
Group Chief Executive Chief Finance Officer
Officer
14 November 2018 14 November 2018
INDEPENT REVIEW REPORT TO ROYAL MAIL PLC
Conclusion
We have been engaged by the Company to review the condensed set
of financial statements in the half-yearly financial report for the
26 weeks ended 23 September 2018 which comprises the Condensed
consolidated income statement, the Condensed consolidated statement
of comprehensive income, the Condensed consolidated balance sheet,
the Condensed consolidated statement of changes in equity, the
Condensed consolidated statement of cash flows and the related
explanatory notes.
Based on our review, nothing has come to our attention that
causes us to believe that the condensed set of financial statements
in the half-yearly financial report for the 26 weeks ended 23
September 2018 is not prepared, in all material respects, in
accordance with IAS 34 Interim Financial Reporting as adopted by
the EU and the Disclosure Guidance and Transparency Rules ("the
DTR") of the UK's Financial Conduct Authority ("the UK FCA").
Scope of review
We conducted our review in accordance with International
Standard on Review Engagements (UK and Ireland) 2410 Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity issued by the Auditing Practices Board for use in the
UK. A review of interim financial information consists of making
enquiries, primarily of persons responsible for financial and
accounting matters, and applying analytical and other review
procedures. We read the other information contained in the
half-yearly financial report and consider whether it contains any
apparent misstatements or material inconsistencies with the
information in the condensed set of financial statements.
A review is substantially less in scope than an audit conducted
in accordance with International Standards on Auditing (UK) and
consequently does not enable us to obtain assurance that we would
become aware of all significant matters that might be identified in
an audit. Accordingly, we do not express an audit opinion.
Directors' responsibilities
The half-yearly financial report is the responsibility of, and
has been approved by, the Directors. The Directors are responsible
for preparing the half-yearly financial report in accordance with
the DTR of the UK FCA. As disclosed in Note 1, the annual financial
statements of the Group are prepared in accordance with
International Financial Reporting Standards as adopted by the EU.
The Directors are responsible for preparing the condensed set of
financial statements included in the half-yearly financial report
in accordance with IAS 34 as adopted by the EU.
Our responsibility
Our responsibility is to express to the Company a conclusion on
the condensed set of financial statements in the half-yearly
financial report based on our review.
The purpose of our review work and to whom we owe our
responsibilities
This report is made solely to the Company in accordance with the
terms of our engagement to assist the Company in meeting the
requirements of the DTR of the UK FCA. Our review has been
undertaken so that we might state to the Company those matters we
are required to state to it in this report and for no other
purpose. To the fullest extent permitted by law, we do not accept
or assume responsibility to anyone other than the Company for our
review work, for this report, or for the conclusions we have
reached.
Richard Pinckard
for and on behalf of KPMG LLP
Chartered Accountants
15 Canada Square
London
E14 5GL
14 November 2018
FORWARD-LOOKING STATEMENTS
This document contains certain forward-looking statements
concerning the Group's business, financial condition, results of
operations and certain of the Group's plans, objectives,
assumptions, projections, expectations or beliefs with respect to
these items. Forward-looking statements are sometimes, but not
always, identified by their use of a date in the future or such
words as 'anticipates', 'aims', 'due', 'could', 'may', 'will',
'would', 'should', 'expects', 'believes', 'intends', 'plans',
'potential', 'targets', 'goal', 'forecasts' or 'estimates' or
similar expressions or negatives thereof.
Forward-looking statements involve known and unknown risks,
uncertainties and other factors, which may cause the Group's actual
financial condition, performance and results to differ materially
from the plans, goals, objectives and expectations set out in the
forward-looking statements included in this document.
All written or verbal forward-looking statements, made in this
document or made subsequently, which are attributable to the Group
or any persons acting on its behalf are expressly qualified in
their entirety by the factors referred to above. Accordingly,
readers are cautioned not to place undue reliance on
forward-looking statements. No assurance can be given that the
forward-looking statements in this document will be realised;
actual events or results may differ materially as a result of risks
and uncertainties facing the Group. Subject to compliance with
applicable law and regulation, the Group does not intend to update
the forward-looking statements in this document to reflect events
or circumstances after the date of this document, and does not
undertake any obligation to do so.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
IR BIBLTMBABBRP
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