TIDMRMG
RNS Number : 1369U
Royal Mail PLC
21 November 2019
Royal Mail plc
(Incorporated in England and Wales)
Company Number: 8680755
LSE Share Code: RMG
ISIN: GB00BDVZYZ77
LEI: 213800TCZZU84G8Z2M70
This announcement contains inside information for the purpose of
Article 7 of the Market Abuse Regulation (EU) No 596/2014.
FINANCIAL RESULTS
21 November 2019
ROYAL MAIL PLC
RESULTS FOR THE HALF YEARED 29 SEPTEMBER 2019
Royal Mail plc (RMG.L) today announces its results for the half
year ended 29 September 2019.
Rico Back, Group Chief Executive Officer, commented: "Our
profitability performance is in line with our expectations for the
half year, despite considerable UK economic and political
uncertainty. Group revenue was up 5.1 per cent, including our best
UK revenue performance in 5 years. UK parcel revenue growth more
than offset letter revenue declines. GLS revenue, up 14.1 per cent
including acquisitions, underlines the strength of our
international operations. We continue to expect to deliver adjusted
Group operating profit of between GBP300-340 million (before IFRS
16) in 2019-20, in line with guidance. The business has delivered
good in-year trading cash flow, supporting our new dividend policy.
As a result, the Board has declared an interim dividend of 7.5
pence per share.
"The UK letter revenue performance in the first half is our best
for 5 years. It will also benefit from the General Election in the
second half. But, the outlook, excluding elections, for the letters
business in the UK is challenging. Lower than anticipated GDP and
lower GDP forecasts for 2020-21, together with business
uncertainty, are expected to have an impact on addressed letter
volumes. For 2019-20, we now expect addressed letter volume decline
(excluding elections) to be in the 7-9 per cent range. In 2020-21,
we expect letter volume decline (excluding elections) may be in the
6-8 per cent range.
"Our transformation is behind schedule. We are investing more
because of the industrial relations environment, the General
Election and Christmas, to underpin our Quality of Service at this
key time. This is likely to impact our productivity for the
remainder of the year. When combined, revenue and cost headwinds
could possibly result in a break-even or loss-making position for
the UK business in 2020-21. We maintain the ambitions associated
with our Journey 2024 plan as set out in our full year results in
May.
"People are posting fewer letters and receiving more parcels. We
have to adapt to that change. The challenging financial outlook in
the UK means now, more than ever before, we need to make the
changes required - and accelerate them - to ensure a successful UK
business. We remain committed to investing GBP1.8 billion in our
transformation. We want to change, working with our unions, but we
can only do so through an affordable resolution. We have changed
many times before. We will do it again."
Group financial summary(1,2)
26 weeks ended 26 weeks ended
29 September 23 September
Reported measures (GBPm) 2019 2018 Change(3)
---------------------------------------- ------------------ ============== =========
Revenue(4) 5,166 4,914 5.1%
Operating profit/(loss) 61 (4)
Profit before tax 173 33
Profit after tax 153 5
-Basic earnings per share - continuing
operations (pence) 15.3p 0.5p
Net debt (1,372) (470)
Interim dividend per share (pence) 7.5p 8.0p
---------------------------------------- ------------------ -------------- ---------
26 weeks ended
26 weeks ended 23 September
Adjusted measures (GBPm) 29 September 2019 2018 Change(3)
---------------------------------------- ------------------ -------------- ---------
Operating profit 165 190 (13.2.%)
Margin 3.2% 3.9% (70bps)
Profit before tax 146 183
Profit after tax 111 136
Basic earnings per
share (pence) 11.1p 13.6p
In-year trading cash
flow 152 (100)
---------------------------------------- ------------------ -------------- ---------
Business unit financial summary(1,2)
Revenue Adjusted operating profit
--------------- =========================================== -------------------------------------------
26 weeks 26 weeks 26 weeks 26 weeks
ended ended ended ended
29 September 23 September 29 September 23 September
(GBPm) 2019 2018 Change(3) 2019 2018 Change(3)
=============== ============== ============== =========== ============== ============== ===========
UKPIL 3,649 3,585 1.8% 75 113 (33.6%)
GLS 1,537 1,347 14.1% 90 77 16.9%
Intragroup(4) (20) (18) 11.1% - - -
=============== ============== ============== =========== ============== ============== ===========
Group 5,166 4,914 5.1% 165 190 (13.2%)
--------------- -------------- -------------- ----------- -------------- -------------- -----------
Group(1,2,3)
-- Group revenue up 5.1 per cent. UKPIL revenue up 1.8 per cent,
our best performance for 5 years. GLS revenue up 14.1 per cent,
including acquisitions.
-- Reported operating profit of GBP61 million, up GBP65 million
due to lower costs relating to specific items.
-- Adjusted Group operating profit of GBP165 million, down 13.2
per cent, primarily due to a decline in UKPIL profitability.
-- Adjusted Group operating profit margin down 70 basis points
to 3.2 per cent, driven by UKPIL profitability, as expected.
-- In-year trading cash inflow of GBP152 million.
-- Net debt increased to GBP1,372 million, mainly due to adoption of IFRS 16.
-- The Board has declared an interim dividend of 7.5 pence per
share, in line with new dividend policy.(5)
UKPIL(1,2,3,6)
-- Parcel revenue up 5.6 per cent, more than offsetting letter
revenue decline of 1.4 per cent.
-- UK parcels business performing well. Volumes up 5 per cent.
Domestic account (excluding Amazon) (up 7 per cent) and Tracked
24(R) /48(R) and Tracked Returns(R) (up 20 per cent) delivering
good growth.
-- Total letter revenue down 1.4 per cent, following appropriate
pricing actions and benefit of European parliamentary election.
-- Addressed letter volumes down 5 per cent. Excluding European
parliamentary election mailings, addressed letter volumes declined
by 8 per cent. This is outside our forecast range of 5-7 per cent
decline for 2019-20, due to weaker GDP, GDPR and business
uncertainty.
-- Exceeded our regulatory Quality of Service targets for the
first half. Delivered 93.3 per cent of First Class mail on the next
working day; 98.8 per cent of Second Class mail within three
working days.
-- A 2.2 per cent improvement in productivity (full year target:
over 2 per cent); hours in operation reduced by 1.7 per cent. GBP86
million of costs avoided.
-- Total adjusted operating costs increased by 2.9 per cent; the
largest contributing factor being people cost pressures (including
frontline staff and managers' overall compensation) which were not
fully offset by productivity gains.
-- Adjusted operating profit of GBP75 million. Adjusted
operating profit margin down 110 basis points to 2.1 per cent.
GLS(1,2,3)
-- Eastern European markets delivered strong, double digit
revenue growth. Three major markets (Germany, France and Italy)
accounted for 54.9 per cent of revenue. North America contributed
9.8 per cent.
-- Volumes up 5 per cent, or 7 per cent, including the impact of acquisitions.
-- Adjusted operating profit, including acquisitions, of GBP90
million, up 16.9 per cent. Up 8.4 per cent, excluding the impact of
acquisitions.
-- Adjusted operating profit margin of 5.9 per cent, up 20 basis
points compared with prior period. Broadly aligned to 6-7 per cent
annual target range.
-- Dicom, our Canadian business, performing in line with our
expectations. Plan for GLS US progressing well. Operational
synergies between Mountain Valley Express (acquired 30 September
2019) and GLS US business to provide an additional valuable strand
to the plan.
Transformation
-- Parcel automation machines installed in 16 Mail Centres. Around 26 per cent of parcels now automatically sorted (12 per cent during 2018-19).
-- Design of technical fit out of first parcel hub in Warrington
underway. Targeting go-live in 2022-23. We have identified a site
for our second parcel hub in the Midlands. We are exploring options
for our third (and final) hub.
-- Completed "proof of concept" trials of Automated Hours Data
Capture (AHDC) at four trial sites. Roll out on hold, because of
the "point of principle" dispute with CWU.
-- New technology (digital routing tool and PDA Outdoor Actuals)
is being deployed in Delivery. Completed around 50 revisions,
against a target of around 100 for the year.
-- Rolled-out 1,400 parcel postboxes across UK. First major
innovation to postboxes in 160 years.
Industrial relations
-- Unite junior and middle managers voted in favour of a two
year pay deal and bonus arrangements.
-- High Court granted interim injunction against CWU's postal
ballot of Royal Mail employees for industrial action.
-- We want to enter into discussions with CWU without preconditions.
-- Investing more, because of the industrial relations
environment, the General Election and Christmas, to underpin our
Quality of Service at this key time.
Outlook
2019-20
-- We continue to expect to deliver adjusted Group operating
profit of between GBP300-340 million (before IFRS 16) in
2019-20.
-- Continuing weak GDP and ongoing business uncertainty expected
to have negative impact in second half such that addressed letter
volume decline (excluding elections) now expected to be in the
range 7-9 per cent for the full year.
-- Letter revenue will benefit from European parliamentary and
General elections as well as the letter price increases effective
from January 2019.
2020-21
-- Rate of addressed letter volume decline in 2020-21 dependent
on level of GDP growth. The current outlook for GDP is below the
level needed to support medium-term outlook of 4-6 per cent
addressed letter volume decline. In addition, there is expected to
be continued business uncertainty.
-- As such, we expect addressed letter volume decline (excluding
elections) may be in the range 6-8 per cent in 2020-21.
-- In addition, current industrial relations environment is
slowing rate of change in the UK operation. This is likely to
impact our rate of productivity improvement. As a result, we
continue to expect further margin pressure in UKPIL in 2020-21.
-- These revenue and cost headwinds, when combined, could
possibly result in a break-even or loss-making situation in
UKPIL.
-- Nevertheless, we are expecting a continued good performance
from our UK parcels with volume growth above our addressable
market.
-- GLS is again expected to perform well, delivering adjusted
operating profit margin of 6-7 per cent.
Journey 2024
-- We maintain the ambitions associated with our Journey 2024
plan as set out in our full year results in May 2019.
Results presentation
A results presentation for analysts and institutional investors
will be held in London at 9:30am on Thursday 21 November 2019. A
simultaneous webcast will be available at
www.royalmailgroup.com/results.
A trading update covering the nine months ending 23 December
2019 is expected to be issued on 6 February 2020. A conference call
for analysts and institutional investors will be held on that
date.
For further information, please contact:
Investor Relations Registered Office
Catherine Nash Royal Mail plc
Phone: 020 7449 8183 100 Victoria Embankment
Email: investorrelations@royalmail.com London EC4Y 0HQ
Registered in England and Wales
Media Company number 08680755
Beth Longcroft LEI 213800TCZZU84G8Z2M70
Phone: 07435 768 549
Email: beth.longcroft@royalmail.com
Royal Mail press office out of hours:
020 7449 8246
Company Secretariat
Mark Amsden
Phone: 020 7449 8289
Email: cosec@royalmail.com
CHIEF EXECUTIVE OFFICER'S REVIEW
Introduction
Earlier this year, we announced our five-year strategy - Journey
2024. We aim to deliver sustainable shareholder value in the
medium-term and underpin the UK's Universal Service. We want to
become a more parcels-led, more balanced and more diversified
international business. By 2023-24, we aim to generate annual
revenues of GBP12 billion, and deliver Group adjusted profit
margins of over 5 per cent. Our objective is that 70 per cent of
our revenue will come from parcels; with a growing proportion from
our international propositions.
Our profitability performance is in line with our expectations
for the half year, despite considerable UK economic and political
uncertainty. Group revenue was up 5.1 per cent, including our best
UK revenue performance in 5 years. UK parcel revenue growth more
than offset letter revenue declines. GLS revenue, up 14.1 per cent
including acquisitions, underlines the strength of our
international operations. We continue to expect to deliver adjusted
Group operating profit of between GBP300-340 million (before IFRS
16) in 2019-20, in line with guidance. The business has delivered
good in-year trading cash flow, supporting our new dividend policy.
As a result, the Board has declared an interim dividend of 7.5
pence per share.
The UK letter revenue performance in the first half is our best
for 5 years. It will also benefit from the General Election in the
second half. But, the outlook, excluding elections, for the letters
business in the UK is challenging. Lower than anticipated GDP and
lower GDP forecasts for 2020-21, together with business
uncertainty, are expected to have an impact on addressed letter
volumes. For 2019-20, we now expect addressed letter volume decline
(excluding elections) to be in the 7-9 per cent range. In 2020-21,
we expect letter volume decline (excluding elections) may be in the
6-8 per cent range.
Our transformation is behind schedule. We are investing more
because of the industrial relations environment, the General
Election and Christmas, to underpin our Quality of Service at this
key time. This is likely to impact our productivity for the
remainder of the year. When combined, revenue and cost headwinds
could possibly result in a break-even or loss-making position for
the UK business in 2020-21. We maintain the ambitions associated
with our Journey 2024 plan as set out in our full year results in
May.
People are posting fewer letters and receiving more parcels. We
have to adapt to that change. The challenging financial outlook in
the UK means now, more than ever before, we need to make the
changes required - and accelerate them - to ensure a successful UK
business. We remain committed to investing GBP1.8 billion in our
transformation. We want to change, working with our unions, but we
can only do so through an affordable resolution. We have changed
many times before. We will do it again.
The pressing need for change
Breaking the cycle of decline and returning the UK operations to
growth is at the heart of our strategy. Our "Turnaround and Grow"
plan is rooted in two key realities of the UK markets we operate in
and, consequently, our business model. Firstly, around a 50 per
cent decline in addressed letter volumes since their 2004 peak,
with further falls expected over the next five years. Secondly,
continued growth in parcels, driven by online shopping. Our UK
network, however, is primarily configured to quickly and
efficiently deliver letters. We want to invest GBP1.8 billion to
ensure we can more efficiently and effectively process and deliver
the changing traffic mix. In short, we want to change from a UK
letters company that delivers parcels, into a parcels-led,
international company that also delivers letters.
We want to change, working closely and at pace with our people
and our unions, in line with our existing Agreements. We have
honoured our side of the 2018 Agreement. Whilst we are in the early
stages of the transformation we want to make, we are not making the
progress we would like in some key areas of the Agreement, like the
introduction of new technology, because of a number of factors,
including a lack of co-operation by CWU. New digital tools, like
our electronic "clocking in, clocking out" system, are amongst the
key ways that we can become even more efficient and effective. They
are also the means by which we can work with the CWU to seek to
fund other elements of the 2018 Agreement, e.g. the Shorter Working
Week. Conversely, in other areas, like route planning technology
deployment and PDA Outdoor Actuals, we are making good
progress.
We want to enter into discussions with CWU, without
preconditions. We want to reach resolution. Industrial action, or
the threat of it, can only hurt our company, and our colleagues.
That is because, in today's postal market, our customers have
choices. Consumers can send a text or email when they would once
have written a letter; and shippers can choose from a wide range of
delivery companies, not just Royal Mail.
We know we are asking a lot of our hardworking colleagues. But
we cannot stand still. Change is essential if we want to remain one
of the UK's largest employers, with the best terms and conditions
in our industry. Unlike many of our peers, who operate in the "gig
economy", over 99 per cent of Royal Mail employees are on permanent
contracts. The pay of a postman or woman (base salary only) is
around 30 per cent higher than the Voluntary Living Wage. In
contrast to the UK average of around 23 per cent, employee turnover
for 2018-19 was 7.2 per cent.
We know we cannot deliver a high quality service unless we offer
good jobs with a sense of purpose. We have made a commitment to our
colleagues that - if we can successfully deliver our plan, at pace
- there will be a job for everyone who can and wants to work for
us. We will roll out digital tools to make Royal Mail a fairer
place to work. And, we will continue to deliver the UK's Universal
Service.
Our overall performance
Against the backdrop of a challenging and uncertain
macroeconomic environment, our performance is in line with our
expectations. Group revenue was up 5.1 per cent. Adjusted Group
operating profit was GBP165 million(2) , down 13.2 per cent,
reflecting margin compression as expected. In-year trading cash
inflow was GBP152 million(2) . This is mainly due to lower trading
working capital outflow and the impact of adopting IFRS 16. The net
impact of IFRS 16 on in-year trading cash flow is an increase of
GBP67 million. The Board has declared an interim dividend of 7.5
pence per share, in line with our new dividend policy, announced in
May 2019.
In the UK, growth in parcel revenue underpinned overall UKPIL
revenue growth of 1.8 per cent, our best performance in 5 years. UK
parcel volumes growth exceeded the expected annual rate of growth
in our addressable market. Addressed letter volumes, declined by 5
per cent, or 8 per cent excluding the impact of European
parliamentary elections. Productivity improved by 2.2 per cent, and
we avoided GBP86 million of costs. Total adjusted operating costs
increased by 2.9 per cent; the largest contributing factor being
people cost pressures (including frontline staff and managers'
overall compensation) which was not fully offset by productivity
gains. GLS performed in line with our expectations, despite
increasing labour costs across Europe and headwinds in certain
markets. We continue to expect a GLS operating profit margin of 6-7
per cent per annum over the plan period.
"Turnaround and grow" the UK
Our five-year transformation is about returning the UK to
growth, after a period of margin compression in the early years of
the plan. In this, the foundation year, our focus is on
productivity and operational excellence. In the second stage, we
want to build our extended network and embed digital tools and
harvest key benefits. In the final phase, we want to roll out and
operate our extended UK network. The staging of our plan means
significant investment is needed early on; while many benefits will
come through later.
i. Renewed focus on productivity: operational excellence and key work tools
While letters are in structural decline for the reasons I have
set out, we expect parcel volumes in our addressable market to grow
by 4-5 per cent per annum. The majority of our parcels are
currently processed by hand: just as they were in the Victorian
era. Automation is therefore a key focus. It ensures day-to-day
productivity gains and makes parcels easier and quicker to handle.
We have now installed 16 automated parcel sortation machines. We
have increased the number of parcels we sort automatically from 12
per cent during 2018-19, to around 26 per cent at the half year. We
want to increase that to over 80 per cent through the installation
of automated machines in all our Mail Centres by 2023-24, and
through building 3 dedicated parcel hubs.
We want to introduce digital tools that help us to better align
resource to workload. This will make us more efficient, and make
the workplace a fairer place too. PDA Outdoor Actuals, alongside
our digital routing tool, will materially help our managers to
allocate duties more evenly and support effective revisions to
reflect the changes in letter and parcel volumes. It will also help
us provide even more accurate estimated delivery windows for our
customers.
The data from PDA Outdoor Actuals complements other work tools,
like Resource Scheduler. Aimed at helping managers resource more
effectively, Resource Scheduler allocates duties based on historic
and projected workload, and other workplace information. This tool
is in the early stages of development. Further work is required
before we can confirm "proof of concept" and move towards roll out.
Automated Hours Data Capture (AHDC), on the other hand, automates
what is currently a paper-based system to record the hours our
people work. It provides more accurate information about who is on
and off-site. This will improve colleague safety - our first
priority. It will also test if we have the right resourcing on site
for each shift. We have completed "proof of concept" trials of AHDC
at four trial sites. Further roll out is on hold, as this is part
of the "point of principle" dispute with CWU.
In Processing, we are trialling automated guided vehicles
(AGVs), to replace inefficient manual movement of yorks (large
trolleys used to move mail items) between work areas. Following
successful deployment of an AGV system in Heathrow Worldwide
Distribution Centre, we are identifying potential suppliers to
deliver national deployment. In Delivery, we are looking at new
methods to reduce the amount of time postmen and women spend
prepping the mail indoors. This includes putting proper enablers in
place, including strategic workforce planning and better workflow
forecasting. We want to introduce these tools together with CWU.
See the Industrial relations update.
ii. Extending our UK network
Due to the major changes in our markets - more parcels and fewer
letters - and greater demand for the delivery of larger parcels and
Next Day items, we want to enhance our UK network. According to
data from John Lewis, night-time online shopping rose by almost a
quarter in the past year.(7) Our plan is to complement our existing
processing and delivery of letters and small parcels with a new
element of the overall network that is better equipped to handle
large parcels and Next Day items. We believe this strategy has many
benefits. Firstly, it enhances the good economics underpinning the
current combined delivery. In fact, we expect to deliver more small
parcels in this way in the years to come. Secondly, we will be more
competitive in the large parcels and Next Day items categories.
This is strategically important to us at a time when the growth
rate for Next Day parcels, for example, is expected to outpace the
rate of increase in other delivery time categories. In short, the
separate processing and delivery of larger parcels and Next Day
items is expected to deliver significant benefits for Royal Mail
and the Universal Service.
Over the next few years, the successful delivery of our plan is
expected to change the dynamics around the respective contributions
of letters and parcels. Currently, we estimate for every 1 per cent
of letter volume decline, we have to grow parcel volumes by over 2
per cent to make the same contribution. By making these changes,
that ratio improves significantly over the plan period. The UK
parcels market is highly competitive. We need to change quickly in
order to ensure that we maintain our leading position and grow in
new areas.
We want to build three new, fully-automated parcel hubs to
handle the Next Day and larger parcels more effectively. The design
of the technical fit out for our North West parcel hub in
Warrington is well-progressed. When operational, the Warrington hub
will be able to process more than 600,000 parcels per day.
Employees from our North West Distribution Centre have moved to the
site to work on high volume parcel streams, coming from shippers in
the North West. We have identified a site for our second parcel hub
in the Midlands, set to be operational in 2022-23. We are exploring
options for our third (and final) hub. There is no impact on our
existing Mail Centre estate as a result of these changes.
iii. A major geographical presence and enhanced customer service
Alongside our parcel hubs, the network extension plan includes
7,000 separate van delivery routes for larger and Next Day parcels,
routed through potentially 200-300 of our existing, larger Delivery
Offices. A planned trial of van deliveries out of Swindon Delivery
Office is on hold, as it has become part of the "point of
principle" dispute with CWU. As we said at the time of our 2018-19
Results, we want to work closely with our unions on our strategy,
detailed design and deployment, including a trial for the separate
van delivery.
If we can successfully put the new parcel hubs and separate van
deliveries in place by 2023-24, this will result in a major
increase in delivery frequency for consumers and small and
medium-sized enterprises (SMEs). Accordingly, we will introduce two
deliveries a day in most parts of the country. Firstly, consumers
will receive the usual letters and small parcels delivery.
Secondly, there will be a delivery later that day of larger or Next
Day parcels they have ordered, in many instances, less than 24
hours before.
iv. Becoming a parcels-led business; letters remain important
UKPIL parcels
UK parcel volumes increased by 5 per cent. Revenue was up 5.6
per cent, with Tracked 24/48(R) and Tracked Returns(R) performing
particularly well (with volumes up 20 per cent)(6) . We are winning
and retaining customers based on our high quality service. During
the period, we won new business with Game and Monsoon Accessorize.
Parcelforce Worldwide volumes increased by 2 per cent. Despite
challenges in export, new business wins have driven good
performance in its account parcels.
In October 2019, we completed the roll out of 1,400 parcel
postboxes, enabling 24-hour access for customers sending or
returning parcels. This is the first UK-wide network of parcel
posting boxes, and the biggest change to the postbox in its 160
year history. We have enhanced the Royal Mail App to include a UK
"industry first" Augmented Reality (AR) Parcel Sizer. It enables
customers to work out the right postage and then pay directly via
the App. Users can also track a delivery using Alexa by saying a
code name they have assigned to a mail item. Over 500,000 people
are already using the App.
UKPIL letters
In the first six months of the year, addressed letter volumes
were down 5 per cent. Excluding political parties' election
mailings connected with the European parliamentary elections, they
were down 8 per cent, due to the negative impact of GDPR in the
first few months of the year and the impact of weakening GDP and
ongoing business uncertainty. Total letter revenue was down 1.4 per
cent, benefiting from targeted pricing actions and the European
parliamentary elections(6) . This was the best performance in 5
years.
UK addressed letter volumes are in structural decline. They have
fallen around 50 per cent since their 2004 peak. The rate of the
decline is impacted by a number of factors. They include
e-substitution, the impact of GDPR and UK GDP and business
uncertainty. See Outlook for our view on 2019-20 and 2020-21 letter
volume decline.
Despite the continuing structural decline in letter volumes, the
UK still has a high number of letters per capita compared with many
other countries. We continue to promote the value of letters. We
have refreshed our product portfolio and optimised our pricing
strategy, using automation in the network to capture insight and
drive efficiency. Business mail makes up the majority of our
addressed mail volumes (excluding International and elections) at
around 60 per cent. Advertising mail is around 30 per cent. Our
range of products, incentives and offers are designed to
demonstrate how mail can help their businesses. One example is our
new Partially Addressed product. Aimed at advertisers targeting new
customers, it allows them to reach recipients without using
personal data. Customers can access strictly non-personalised
geo-demographic data, from fully consented individuals. Another
product, Late Bookings, for unaddressed mail, enables customers to
access additional postcode sectors at a significant discount.
Scaling up and growing GLS
GLS is one of the largest, ground-based deferred parcel networks
in Europe. The company has a growing presence in the Western US and
Canada. It is a key part of our strategic ambition to become a
parcels-led, more balanced and more diversified international
business, with a strong presence in the UK. Our ongoing focus on
profitable revenue growth, primarily in B2B services, resulted in
strong revenue growth of 14.1 per cent including acquisitions (8.9
per cent excluding acquisitions). Volumes were up 7 per cent
including acquisitions, or 5 per cent excluding acquisitions, with
growth in domestic and international volumes in most markets.
Including acquisitions, GLS achieved adjusted operating profit
of GBP90 million, an increase of 16.9 per cent. Operating
conditions in the majority of its markets were impacted by wage
inflation and tight labour markets. To offset these cost pressures,
we have increased prices, where appropriate, and focused on yield
management activities. These factors contributed to an adjusted
operating profit margin of 5.9 per cent - broadly in line with our
forecast annual range of 6-7 per cent per annum over the life of
the plan.
GLS' performance in eastern Europe has been particularly strong.
Countries including Croatia, Hungary and Romania delivered double
digit revenue growth. GLS Germany is the largest GLS market by
revenue. Its revenue grew by 10.8 per cent, driven by higher
international volumes and improved pricing.
There is a specific focus on improving performance in some of
our key markets. We are experiencing ongoing challenging conditions
in GLS France's domestic markets. It continues to be integral to
the GLS network, by supporting exports into France, and allowing
GLS to provide a comprehensive service across Europe. We are
focused on improving quality to secure new customers in more
profitable segments. GLS Spain revenue decreased by 6.3 per cent
due to lower domestic volumes. However, losses have reduced
compared with the second half of 2018-19, due to yield management
activities to exit low margin customers. We are making progress
integrating Redyser, which is expected to be completed by the end
of the financial year.
Selective bolt-on acquisitions in key geographies form a
fundamental part of GLS' 'scale up and grow' strategy. In GLS US,
we are continuing with our previously announced plans to integrate
GSO and Postal Express. Losses have been reduced through a
combination of yield management activities and cost optimisation.
We acquired Mountain Valley Express (MVE) on 30 September 2019,
which offers less-than-truckload services to a broad range of
customers in the Western US. This acquisition expands our presence
in North America. The geographical overlap of MVE's network with
our existing operations has the potential to provide cost synergies
and revenue growth opportunities. In Canada, Dicom is performing in
line with expectations. Revenue in the period was GBP82 million and
operating profit was GBP8 million.
We are investing in GLS to provide a platform for future growth;
with a number of network infrastructure improvements in plan. These
include hub extensions in Denmark, Romania and Hungary, as well as
a new euro hub in Germany and a new depot in Poland. New
technology, including hand scanners, depot IT infrastructure
upgrades and software development aim to improve our B2C offering
and secure delivery cost efficiencies.
Enhancing our cross-border proposition
Cross-border trade is a key growth area for us. Group
cross-border revenue was up 4.2 per cent, as the cross-border
letter revenue decline of 8.3 per cent was more than offset by
cross-border parcel revenue growth of 6.9 per cent. Combining the
best of Royal Mail and GLS will enhance our product portfolio and
enable us to benefit from cross-selling opportunities. Our
cross-border initiatives to connect the Royal Mail and GLS networks
are progressing well. We expect this to fuel further growth by
providing added value to our customers through an enhanced product
portfolio with global reach and a stronger focus on Europe, Asia
and North America.
In September 2019, it was confirmed that the United States will
stay within the Universal Postal Union (UPU), having previously
given notice to withdraw from it by October 2019. Under the agreed
solution, the US will be able to self-declare its terminal rates
for post received from abroad from July 2020.
The UK's position on the reform was ultimately a decision for
the UK Government. We welcome the fact that the reform maintains
the global postal network. We are committed to working with the UPU
and its members on a range of options to minimise any impact on our
customers. It is regrettable that the reform could lead to price
rises for UK consumers and small businesses sending postal items
abroad. We would expect any necessary price increases to take
effect as part of our regular pricing review.
Industrial relations and contingency planning
We are proud to be the best employer in the UK delivery
industry. Earlier on in this section, I set out some of the ways in
which we differentiate Royal Mail from its peers through the
provision of high quality jobs. This is especially important when
you take into account that Royal Mail employs one in every 192
working people in the UK.
i. Our managers
Royal Mail employs approximately 9,500 managers across the UK,
of which approximately 6,300 are in operational functions. The
contribution of all our managers is crucial to the performance of
our business. We were pleased to confirm in October 2019, managers
who are members of Unite/CMA, voted in favour of a pay agreement
recommended to them by their union, following extended discussions
with the Company. Under the agreement, managers will receive a pay
increase of 2.6 per cent this year, backdated to 1 September 2019,
and a pay increase of 2.7 per cent from 1 September 2020. Managers
will also receive a GBP1,000 Annual Bonus advance in December 2019.
This amount will be deducted from any final bonus individuals may
receive.
ii. Honouring our Agreements with CWU
In May 2019, shortly after the announcement of our five-year
plan, CWU informed the Company that it considered that we were not
honouring and deploying our 2018 Agreement. While the Agreement
brought us significant financial benefits - in particular, through
the agreement to close the Royal Mail Pension Plan to future
accrual in its previous form - an analysis of the productivity and
efficiency opportunities in it found the cost of the Agreement is
significant. To fund it, there needed to be a step change in the
pace and focus of the initiatives it contains, and a greater focus
on day-to-day operational excellence. These points are central to
the delivery of the "Turnaround and Grow" plan.
We have honoured the 2018 Agreement. We awarded two pay
increases (five per cent and two per cent respectively). We
implemented the first hour's reduction of the Shorter Working Week,
although we did not obtain all the cost saving measures to pay for
it. Taking all these together, our frontline colleagues have seen
base pay increase by 10 per cent in two years. We have worked
closely with CWU, and continue to do so, to lobby Government to
enable Collective Defined Contribution (CDC) pension schemes under
UK law, for the first time in the UK.
iii. Industrial relations
On 13 November 2019, the High Court granted an interim
injunction against CWU's postal ballot of Royal Mail employees for
industrial action. The interim injunction means no industrial
action can be taken before the completion of a lawful ballot, with
a result in favour of action, and formal notification of
action.
We are pleased with the High Court's decision. Trade union
legislation is designed to safeguard democratic integrity by
ensuring union members can vote in the privacy of their own homes,
rather than in any public process. As is the case with any
electoral process, it is vital our colleagues can vote without any
constraint imposed on them by any other party.
We never wanted to resort to legal action. We wrote to CWU on a
number of occasions, setting out the information on which our case
was based. We asked CWU to confirm it would refrain from taking
industrial action, due to clear evidence we provided that CWU had
interfered with the ballot process. CWU declined to do so, leaving
us with no alternative option.
We stand ready to engage with the CWU. We want to enter into
discussions without preconditions. We will continue to pursue every
avenue possible to avoid or curtail industrial action. We remain
committed to reaching a resolution which is within the spirit of
the 2018 Agreement, is affordable and helps secures a sustainable
future for our Company and the Universal Service.
The CWU lodged an appeal against the ruling with the High Court
on 20 November 2019. As you would expect, we will continue to
monitor the situation carefully. We are investing more because of
the industrial relations environment, the General Election, and
Christmas, to underpin our Quality of Service at this key time.
iv. Parcelforce Worldwide
Royal Mail's application to the High Court did not apply to
employees within Parcelforce Worldwide. They are the subject of
separate ballot notices, which have resulted in two separate
ballots in favour of industrial action. The first relates to
honouring our Agreements with CWU. I have set out above the ways in
which we are meeting our obligations.
The second relates to our proposal to transfer Parcelforce
Worldwide into a new legal entity and TUPE Parcelforce Worldwide's
5,000 colleagues into the new company. The transfer aims to
increase management accountability and help Parcelforce become a
more agile, responsive business, while remaining part of, and
retaining the backing of, the wider Group. We have made a series of
commitments to CWU, Unite/CMA and colleagues about the legal
separation. As a result of the transfer: i) job responsibilities
would not change; ii) continuity of service would not be affected;
iii) terms and conditions of employment would not change; and iv)
existing agreements with our unions would not change. Employees
will continue to participate in employee share plans, Company
pension schemes, and other employee benefits schemes.
We do not believe there are any grounds for industrial action.
We are committed to further talks on many of the issues the CWU has
raised. We continue to urge Parcelforce Worldwide's people not to
participate in industrial action.
Key external issues
i. Brexit
Following the agreed extension of Article 50 of the Treaty on
the Functioning of the European Union until 31 January 2020, the
shape of the future relationship between the UK and the EU still
remains unclear. It is therefore not possible to predict with any
degree of accuracy the impact the UK's departure from the EU could
have on the Group. Internal procedures are in place to monitor and
manage ongoing risks associated with the UK leaving the EU.
Material risks are reported to and handled through a Brexit
steering group. This is comprised of senior executives.
As previously disclosed, the main issues for the 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.
The impact on cross-border parcel volumes will depend on the
nature of the UK's future trading relationships, and what the
future EU/UK customs and VAT arrangements will be. 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. Changes in the
UK's customs arrangements in the event of a no-deal Brexit are a
decision for Government. We are therefore working closely with
Government and other stakeholders to put in place systems to ensure
the movement of cross-border parcels continues to operate
effectively.
ii. Regulatory environment
We have exceeded both our First Class and Second Class mail
annual regulatory Quality of Service targets for the first six
months of the financial year. We delivered 93.3 per cent of First
Class mail on the next working day, against a target of 93.0 per
cent. 98.8 per cent of Second Class mail was delivered within three
working days, exceeding the 98.5 per cent regulatory target.
Separately, we are cooperating fully with Ofcom's investigation
into our 2018-19 Quality of Service. Quality of Service is a key
priority for us. We are focused on delivering high levels of
customer satisfaction while introducing more innovation into our
services.
We confirmed in February 2019 that, due to an error on our part,
our new Second Class stamp price of 61 pence was one penny above
the existing regulatory safeguard cap for seven days. We apologised
for this mistake as soon as we realised. We sought to put it right
by donating the revenue that we expected to collect from the error
- around GBP60,000 - to our chosen charity Action for Children,
which helps young people at risk of developing mental health
problems. We are cooperating fully with Ofcom's investigation into
this matter.
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. Royal Mail lodged an
appeal with the Competition Appeal Tribunal (CAT) on 12 October
2018 to have both Ofcom's decision and fine overturned. On 12
November 2019, the CAT issued its judgment, which upheld Ofcom's
decision and fine. Royal Mail is considering all legal options,
including whether to seek permission to appeal and to request that
payment of the penalty, which would otherwise become payable, be
stayed pending any appeal. In October 2018, Whistl filed a damages
claim against Royal Mail at the High Court relating to Ofcom's
decision. Whistl's High Court claim is on hold until after the
completion of the appeal process. Royal Mail believes Whistl's
claim is without merit and will defend it robustly if Whistl
decides to pursue it.
Royal Mail's current regulatory framework is scheduled to remain
in place until March 2022. To check that the framework remains
fit-for-purpose, Ofcom has started a review of the needs of postal
users as an initial step in its wider review. This involves market
research and analysis looking at the extent to which the postal
market is meeting the reasonable needs of users. It plans to
publish preliminary findings in Q4 2019-20. We will be engaging
fully with Ofcom during its review.
Outlook
2019-20
We continue to expect to deliver adjusted Group operating profit
of between GBP300-340 million (before IFRS 16) in 2019-20.
Addressed letter volumes (excluding elections) in the first half
declined by 8 per cent due to the negative impact of GDPR in the
first two months of the year, the impact of weakening GDP and
ongoing business uncertainty. In the second half, continuing weak
GDP and ongoing business uncertainty are expected to have a
negative impact such that we now expect addressed letter volume
decline (excluding elections) to be in the range 7-9 per cent for
the full year. Letter revenue will benefit from the European
parliamentary and General elections as well as the letter price
increases effective from January 2019.
2020-21
The rate of addressed letter volume decline in 2020-21 will be
dependent on the level of GDP growth. The current outlook for GDP
is below the level needed to support the medium-term outlook of 4-6
per cent addressed letter volume decline. In addition, there is
expected to be continued business uncertainty. As such, we expect
that addressed letter volume decline (excluding elections) may be
in the range 6-8 per cent in 2020-21.
Changes to terminal dues rates, including the rates we pay to
the US postal service to deliver mail which come into effect from
July 2020, are expected to add costs to our international letters
and parcels business which may not be fully mitigated by pricing
actions.
In addition, the current industrial relations environment is
slowing our rate of change in the UK operation. This is likely to
impact our rate of productivity improvement. As a result, we
continue to expect further margin pressure in UKPIL in 2020-21.
These revenue and cost headwinds, when combined, could possibly
result in a break-even or loss-making situation in UKPIL.
Nevertheless, we are expecting a continued good performance from
our UK parcels with volume growth above our addressable market and
GLS is again expected to perform well, delivering adjusted
operating profit margin of 6-7 per cent.
It is essential that we find an affordable resolution to the
currently ongoing industrial relations dispute. We are doing
everything we can to secure the success of our plan for the UK
business. We will again seek to leverage value from price increases
where we believe the service offering justifies a change.
We will continue to honour our Agreements and will act in the
interests of all our stakeholders to make sure we secure a
successful and sustainable future for the UK business. Alongside
our plans for growth in parcels, improved efficiency and cost
reduction will be key to our success.
Journey 2024
We maintain the ambitions associated with our Journey 2024 plan
as set out in our full year results in May 2019.
Rico Back
Group Chief Executive Officer
21 November 2019
FINANCIAL REVIEW
Reported results and Alternative Performance Measures (APMs)
Reported results are prepared in accordance with International
Financial Reporting Standards (IFRS) and are set out in the
sections entitled 'Presentation of results and Alternative
Performance Measures' (APMs) 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 is of the view 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 we use are explained in the section entitled
'Alternative Performance Measures' and reconciliations to the
closest measure prescribed under IFRS are provided where
appropriate.
Group, UKPIL and GLS reporting periods
The Group and UKPIL results are for the 26 week period to 29
September 2019. The GLS financial period is the six months to 30
September 2019.
Changes in disclosures and metrics used in external
reporting
We have made changes to our financial and non-financial
disclosures and metrics used in external reporting. This is to
improve transparency, accuracy, and understanding, and to eliminate
'underlying' movements. All numbers presented in this Financial
Review are on the new basis. A summary of the changes is set out
below:
1. UK letters and parcels revenue and volumes have been
allocated using a new methodology which reduces our reliance on
sampling by using Post Office traffic data which has been tested
for accuracy. This change only impacts the allocation of revenue
between stamped letters and parcels, and some international export
products. Total UKPIL revenue remains unchanged;
2. Transformation costs are now incorporated within their
relevant operating cost categories within UKPIL operating
costs;
3. Intragroup revenue and cost reflecting trading between UKPIL
and GLS, principally due to Parcelforce Worldwide operating as
GLS's partner in the UK, are now eliminated from the Group results
upon consolidation, and
4. Comparisons with prior periods are no longer presented on an
'underlying basis'. From the 2019-20 financial year onwards, no
underlying adjustments in respect of working days, foreign exchange
movements, acquisitions or any one-off items will be made to the
prior period. Any factors having a material impact on period on
period comparisons are highlighted in the narrative to the
results.
The tables on the following page reconcile the 2018-19 adjusted
results presented in this Financial Review to the half year 2018-19
adjusted results published previously.
Re-presented UKPIL results half year 2018-19
Adjusted
26 weeks Re-presented(8)
ended adjusted
23 September 26 weeks
2018 UK letters ended
as previously Transformation and parcels 23 September
UKPIL (GBPm) published costs revenue 2018
================================= ============== ============== ============ ===============
Revenue
================================= ============== ============== ============ ===============
Letters 1,895 - 56 1,951
Parcels 1,690 - (56) 1,634
--------------------------------- -------------- -------------- ------------ ---------------
Total revenue 3,585 - - 3,585
--------------------------------- -------------- -------------- ------------ ---------------
Operating costs
--------------------------------- -------------- -------------- ------------ ---------------
People costs (2,387) (29) - (2,416)
--------------------------------- -------------- -------------- ------------ ---------------
People costs (2,387) (19) - (2,406)
Voluntary redundancy costs (10) - (10)
--------------------------------- -------------- -------------- ------------ ---------------
Non-people costs (1,033) (23) - (1,056)
--------------------------------- -------------- -------------- ------------ ---------------
Distribution and conveyance
costs (369) - - (369)
Infrastructure costs (361) - - (361)
Other operating costs (303) (23) - (326)
--------------------------------- -------------- -------------- ------------ ---------------
Total operating costs (3,420) (52) - (3,472)
--------------------------------- -------------- -------------- ------------ ---------------
Adjusted operating profit before
transformation costs 165 - -
Transformation costs (52) 52 -
--------------------------------- -------------- -------------- ------------ ---------------
Adjusted operating profit 113 - - 113
--------------------------------- -------------- -------------- ------------ ---------------
Re-presented Group results half year 2018-19
------------------------------------------------------------------------------------------------
Adjusted
26 weeks Re-presented(8)
ended adjusted
23 September 26 weeks
2018 ended
as previously Transformation Intragroup 23 September
Group (GBPm) published costs adjustment 2018
================================= ============== ============== ============ ===============
Revenue 4,932 - (18) 4,914
Operating costs
================================= ============== ============== ============ ===============
People costs (2,705) (29) - (2,734)
--------------------------------- -------------- -------------- ------------ ---------------
People costs (2,705) (19) - (2,724)
Voluntary redundancy costs (10) - (10)
--------------------------------- -------------- -------------- ------------ ---------------
Non-people costs (1,985) (23) 18 (1,990)
--------------------------------- -------------- -------------- ------------ ---------------
Distribution and conveyance
costs (1,210) - 18 (1,192)
Infrastructure costs (439) - - (439)
Other operating costs (336) (23) - (359)
--------------------------------- -------------- -------------- ------------ ---------------
Total operating costs (4,690) (52) 18 (4,724)
--------------------------------- -------------- -------------- ------------ ---------------
Adjusted operating profit before
transformation costs 242 - -
Transformation costs (52) 52 -
--------------------------------- -------------- -------------- ------------ ---------------
Adjusted operating profit 190 - - 190
--------------------------------- -------------- -------------- ------------ ---------------
Re-presented in-year trading cash flow half year 2018-19
------------------------------------------------------------------------------------------------------------
26 weeks
ended Re-presented(8)
26 weeks
23 September ended
Voluntary
2018 Transformation redundancy 23 September
as previously charge to
In-year trading cashflow (GBPm) published costs cash difference(9) 2018
===================================== ============== ============== ==================== ===============
Adjusted EBITDA 409 (52) - 357
Trading working capital movements (272) - 5 (267)
Share-based awards (LTIP and
DSBP) charge adjustment 4 - - 4
Total investment (184) 52 (5) (137)
Income tax paid (49) - - (49)
Research and development expenditure
credit 2 - - 2
Net finance costs paid (10) - - (10)
------------------------------------- -------------- -------------- -------------------- ---------------
In-year trading cashflow (100) - - (100)
===================================== ============== ============== ==================== ===============
Impact of IFRS 16
The Group adopted IFRS 16, which replaced IAS 17, with effect
from 1 April 2019. The results for the first half of 2018-19 have
not been restated for the impact of IFRS 16.
IFRS 16 has a material impact on the Group as it requires the
recognition of assets and liabilities for the majority of leases.
Operating lease costs previously recognised in operating costs are
replaced by a depreciation charge on the assets and finance costs
on the liabilities. The total cash outflow for lease payments does
not change. However, the payments related to the principal
liabilities are now presented as cash outflows from financing
activities, as opposed to the previous treatment as cash outflows
from operating activities. The impact of IFRS 16 on the 2019-20
half year results is set out below:
Impact on operating costs (GBPm) UKPIL GLS Group
--------------------------------------------------------- ---------- ---------- -----
Decrease in distribution and conveyance costs (operating
lease costs) (7) (5) (12)
Increase in infrastructure costs 2 3 5
--------------------------------------------------------- ---------- ---------- -----
Property (operating lease costs) (44) (23) (67)
Depreciation charge 46 26 72
--------------------------------------------------------- ---------- ---------- -----
Net decrease in operating costs (5) (2) (7)
--------------------------------------------------------- ---------- ---------- -----
Net increase in operating profit 5 2 7
--------------------------------------------------------- ---------- ---------- -----
Impact on in-year trading cash flow (GBPm) Group
------------------------------------------- -----
Net increase in operating profit 7
Depreciation and amortisation 72
--------------------------------------------- -----
Net increase in EBITDA 79
Net finance costs paid (12)
Net increase in in-year trading cash flow 67
--------------------------------------------- -----
We stated in the full year 2018-19 Financial Review that we
would continue to implement and refine procedures and processes to
apply the requirements of IFRS 16, and that there could be some
changes to the adoption impact that we outlined.
Our experience in deploying IFRS 16 during the first half of
2019-20 has caused us to revise our approach. We now expect the
benefit to operating profit to be GBP10-20 million in 2019-20,
lower than our estimate earlier in the year. This guidance could be
impacted by any material new lease agreements that are entered into
in the second half.
UK PARCELS, INTERNATIONAL & LETTERS (UKPIL)
Reported results
Re-presented(8)
Reported reported
26 weeks 26 weeks
ended ended
29 September 23 September
Summary results (GBPm) 2019 2018
======================================= ============= ===============
Revenue 3,649 3,585
Operating costs (3,617) (3,506)
======================================= ============= ===============
Operating profit before specific items 32 79
Operating specific items (57) (82)
======================================= ============= ===============
Operating loss (25) (3)
======================================= ============= ===============
Operating loss margin (0.7%) (0.1%)
======================================= ============= ===============
The detailed reported results for UKPIL are set out in the
paragraph entitled 'Segmental reported results'. Reported revenue
was GBP64 million higher than the prior period. Operating profit
before specific items decreased to GBP32 million. Operating
specific items were GBP57 million, which largely comprised a
provision for a regulatory fine of GBP50 million and associated
interest from Ofcom and the Employee Free Shares Charge. The prior
period included the accounting consequences of the purchase of a
further buy-in insurance policy for the Royal Mail Senior
Executives Pension Plan (RMSEPP), which resulted in a charge of
GBP64 million, and the Employee Free Shares charge of GBP17
million. UKPIL generated an operating loss of GBP25 million for the
period, compared with a GBP3 million loss in the prior period.
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'.
Re-presented(8)
Adjusted adjusted
26 weeks 26 weeks
ended ended
29 September 23 September
Summary trading results (GBPm) 2019 2018 Change(10)
--------------------------------------- ------------- --------------- -----------
Letters 1,923 1,951 (1.4%)
Parcels 1,726 1,634 5.6%
------------- ---------------
Revenue 3,649 3,585 1.8%
Operating costs (3,574) (3,472) 2.9%
------------- ---------------
Operating profit 75 113 (33.6%)
Operating profit margin 2.1% 3.2% (110bps)
Letters volumes (m)
Addressed letters 4,912 5,171 (5%)
Addressed letters (excluding political
parties' election mailings) (8%)
Unaddressed letters 1,244 1,381 (10%)
------------- ---------------
Total letters 6,156 6,552 (6%)
Parcels volumes (m)
Royal Mail 564 535 5%
Parcelforce Worldwide 49 48 2%
------------- ---------------
Total 613 583 5%
---------------------------------------- ------------- --------------- -----------
Total revenue was up 1.8 per cent with parcel revenue up 5.6 per
cent, more than offsetting letter revenue decline of 1.4 per
cent.
Total parcel volumes increased by 5 per cent. Royal Mail
domestic account parcels volumes, excluding Amazon, were up 7 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 20 per cent. Our
Latest Acceptance Times (LATs) offering for our Tracked 24(R)
product, as well as a focus on faster growing sectors and
customers, is supporting this growth. We also saw continued strong
volume growth in letterboxable parcels from Amazon.
Our international cross-border offering accounted for just under
one percentage point of the parcel volume and revenue growth in the
period, moderating as expected. Our performance has been negatively
impacted by Brexit uncertainty, but we have put in place mitigating
actions by creating other channels into Europe. We saw lower import
volumes outside our cross-border offering due to adverse foreign
exchange movements. Contract export volumes have improved,
benefitting from a significant new customer win. Parcelforce
Worldwide volumes increased by 2 per cent, in line with prior
period.
Total parcel revenue increased by 5.6 per cent reflecting volume
growth and targeted pricing actions.
Total letter volume decline was 6 per cent. Excluding political
parties' election mailings, addressed letter volumes were down 8
per cent. Letter volumes were impacted by ongoing structural
decline, GDP weakness and lapping the impact of General Data
Protection Regulation (GDPR) in May last year. Excluding the impact
of GDPR, addressed letter volume decline (excluding political
parties' election mailings) would have been around 1 percentage
point lower than reported.
Low average unit revenue (AUR) unaddressed letter volumes were
down 10 per cent due to high levels of uncertainty in the current
advertising market, driven by continued business uncertainty.
Total letter revenue decreased by 1.4 per cent, benefitting from
European parliamentary election mailings and the introduction of
targeted price rises. Advertising letters revenue of GBP306 million
(now comprising only addressed and unaddressed advertising letters
products) was down 8.8 per cent reflecting the impact of GDPR and
business uncertainty.
Adjusted operating costs
Re-presented(8)
Adjusted adjusted
26 weeks ended 26 weeks ended
29 September 23 September
(GBPm) 2019 2018 Change(10)
============================= =============== =============== ===========
People costs (2,495) (2,416) 3.3%
============================== =============== =============== ===========
People costs (2,489) (2,406) 3.4%
Voluntary redundancy
costs (6) (10) (40.0%)
------------------------------ --------------- --------------- -----------
Non-people costs (1,079) (1,056) 2.2%
------------------------------ --------------- --------------- -----------
Distribution and conveyance
costs (390) (369) 5.7%
Infrastructure costs (381) (361) 5.5%
Other operating costs (308) (326) (5.5%)
------------------------------ --------------- --------------- -----------
Total (3,574) (3,472) 2.9%
============================== =============== =============== ===========
Total adjusted operating costs increased by 2.9 per cent. As a
result of adopting IFRS 16, there was a reduction in operating
lease costs of GBP51 million and an increase in the depreciation
charge of GBP46 million. Overall, there was a net reduction of GBP5
million in operating costs. Excluding this impact, adjusted
operating costs increased by 3.1 per cent. The largest contributing
factor was people costs pressures (including frontline staff and
managers' overall compensation) which were not fully offset by
productivity gains.
Adjusted people costs were 3.3 per cent higher, primarily due to
the frontline staff and managers' overall compensation and the cost
of only partially absorbing the one hour reduction of the working
week introduced in October 2018. Transformation costs of GBP29
million are included in people costs, comprising GBP23 million of
project costs and GBP6 million of voluntary redundancy costs.
We saw a 2.2 per cent improvement in productivity in the first
half. We achieved a 1.7 per cent reduction in core network hours.
There was a net reduction of around 515 full-time equivalent
employees (FTE)(11) to around 146,633 compared with March 2019 as
we decreased variable hours. Workload was 0.5 per cent higher
driven by an increase in parcel volumes and political parties'
election mailings.
Non-people costs increased by 2.2 per cent, reflecting the
impact of CPI and costs associated with parcels growth. Excluding
the positive impact from adopting IFRS 16, non-people costs were
2.7 per cent higher.
Distribution and conveyance costs increased by 5.7 per cent.
This was largely driven by higher terminal dues and fuel costs
partially offset by lower vehicle maintenance costs. Terminal dues
were GBP18 million higher driven by higher export volumes,
contracted rate rises and adverse foreign exchange rate movements.
Total diesel and jet costs were GBP77 million (H1 2018-19: GBP69
million), and we continue to expect around GBP170 million for the
full year.
Infrastructure costs increased by 5.5 per cent. Depreciation and
amortisation costs were GBP55 million higher, driven by an
additional charge of GBP46 million as a result of adopting IFRS 16
and a GBP9 million expected increase because of accelerated
depreciation relating to letter sorting machinery. IT costs were
also GBP6 million higher in the period.
Other operating costs decreased by 5.5 per cent. This was
largely due to the impact of the UKPIL cost programme which
includes savings on supplier contract renegotiations and lower
discretionary spend. Transformation project costs of GBP20 million
are also included in other operating costs.
Total transformation costs were GBP49 million in the period (H1
2018-19: GBP52 million), mainly relating to operations data
projects to support future productivity improvements and investment
to upgrade our IT and parcel systems.
The UKPIL cost programme delivered GBP86 million costs avoided
in the first half, comprising people costs of GBP57 million and
non-people costs of GBP29 million. This was largely driven by a
reduction in core network hours including the partial absorption of
the one hour reduction of the working week, management headcount
reduction arising from the organisational structure review at the
end of 2018-19, and a linehaul review and supplier contract
renegotiations.
Adjusted operating profit
Adjusted operating profit of GBP75 million includes a GBP5
million positive impact from the adoption of IFRS 16. Adjusted
operating profit margin was 2.1 per cent, down 110 basis points
compared with the first half of 2018-19.
GENERAL LOGISTICS SYSTEMS (GLS)
Reported results
Reported Reported
6 months 6 months
30 September 30 September
Summary trading results (GBPm) 2019 2018
Revenue 1,537 1,347
Operating costs (1,447) (1,270)
------------------------------------------------- ------------- -------------
Operating profit before specific items 90 77
Operating specific items (4) (78)
------------------------------------------------- ------------- -------------
Operating profit/(loss) 86 (1)
Operating profit margin including specific items 5.6% -
------------------------------------------------- ------------- -------------
The detailed reported results are set out in the paragraph
entitled 'Segmental reported results'. GLS reported revenue grew by
GBP190 million. Operating profit before specific items increased by
GBP13 million. Operating specific items represented a net charge of
GBP4 million, largely due to the amortisation of intangible assets
related to acquisitions, offset by a GBP5 million provision release
that is no longer required. The prior period included a charge of
GBP68 million for the impairment of the Golden State Overnight
(GSO) and Postal Express businesses in the US. GLS operating profit
was GBP86 million compared with a GBP1 million loss in the prior
period.
Both the reported and the adjusted results in the first half of
2019-20 include six months' of contribution from the acquisition of
Dicom. The prior period only includes one month's contribution.
Adjusted results
The Group makes adjustments to reported results under IFRS to
exclude specific items as set out in the paragraph entitled
'Specific items and pension charge to cash difference
adjustment'.
Adjusted Adjusted
6 months 6 months
Summary trading results 30 September 30 September
(GBPm) 2019 2018 Change(10)
------------------------ ============= ============= -----------
Revenue 1,537 1,347 14.1%
Operating costs (1,447) (1,270) 13.9%
------------- -------------
Operating profit 90 77 16.9%
Operating profit margin 5.9% 5.7% 20bps
(EURm)
------------------------ ------------- ------------- -----------
Revenue 1,730 1,524 13.5%
Operating costs (1,629) (1,437) 13.4%
------------- -------------
Operating profit 101 87 16.1%
Volumes (m) 321 301 7%
======================== ============= ============= ===========
Volumes were up 7 per cent. Excluding acquisitions, volumes were
up 5 per cent. Volume growth moderated compared with the prior
period reflecting the competitive environment and yield management
activities. We saw growth in both domestic and international
volumes in most markets.
In the period, the impact of foreign exchange movements
increased both revenue and operating costs by GBP7 million.
Consequently, there was no material foreign exchange impact on
adjusted operating profit in Sterling terms.
Revenue increased by 14.1 per cent. Excluding acquisitions,
revenue was up 8.9 per cent driven by a combination of higher
volumes, targeted price increases and customer mix effects. Revenue
growth was achieved in the majority of markets. The three major
markets (Germany, Italy and France) accounted for 54.9 per cent of
total GLS revenue (FY 2018-19: 57.0 percent), with the North
America markets contributing 9.8 per cent.
Adjusted Adjusted
6 months 6 months
30 September 30 September
Adjusted operating costs (GBPm) 2019 2018 Change(10)
----------------------------------- ============= ============= ----------
People costs (353) (318) 11.0%
Non-people costs (1,094) (952) 14.9%
----------------------------------- ------------- ------------- ----------
Distribution and conveyance costs (959) (841) 14.0%
Infrastructure costs (96) (78) 23.1%
Other operating costs (39) (33) 18.2%
----------------------------------- ------------- ------------- ----------
Total (1,447) (1,270) 13.9%
----------------------------------- ------------- ------------- ----------
Total adjusted operating costs increased by 13.9 per cent, or
9.0 per cent excluding acquisitions.
As a result of adopting IFRS 16, there was a reduction in
operating lease costs of GBP28 million and an increase in the
depreciation charge of GBP26 million, resulting in a net reduction
of GBP2 million in operating costs.
People costs increased by 11.0 per cent, or 5.6 per cent
excluding acquisitions. This was due to wage inflation in most
markets and higher semi-variable costs linked to volume growth.
Non-people costs increased by 14.9 per cent, or 10.1 per cent
excluding acquisitions. Distribution and conveyance costs increased
by 14.0 per cent, driven by volume growth and higher subcontractor
rates resulting from tight labour markets. Infrastructure costs
increased by 23.1 per cent. Higher property-related costs such as
rent and rates, repairs and maintenance and utilities, together
with increased IT costs were the principal drivers of the increase.
Other operating costs increased by 18.2 per cent, primarily driven
by compensation and other costs.
Adjusted operating profit
Adjusted operating profit of GBP90 million includes a GBP2
million positive impact from the adoption of IFRS 16.
Adjusted operating profit margin of 5.9 per cent was 20 basis
points higher than the prior period, largely due to the acquisition
of Dicom which has a higher margin than the Group average.
Germany
GLS Germany remains the largest GLS market by revenue. Revenue
grew by 10.8 per cent, driven by higher international volumes and
improved pricing. The German logistics market remains highly
competitive, with other operators adding capacity to their
networks, including Amazon rolling out its own delivery service.
Operating profit margin was broadly similar to the prior period due
to ongoing cost pressures.
Italy
GLS Italy revenue grew by 6.6 per cent. Weak Italian GDP growth,
Amazon expanding its own delivery network, and the competitive
environment have impacted growth.
France
In GLS France revenue growth slowed to 2.1 per cent due to weak
domestic volumes. Operating losses in the period were EUR11
million, the same as in the prior period.
Improvement plans in France are focused on improving quality to
secure new customers in more profitable segments. Despite the
challenges in the domestic market, GLS France continues to be
integral to the GLS network by supporting exports from other
markets into France, and allowing GLS to provide a comprehensive
service across Europe.
Spain
GLS Spain revenue declined by 6.3 per cent. Yield management
activities to exit low margin customers have impacted growth.
Losses in the first half of 2019-20 have reduced compared with the
second half of 2018-19. The integration of Redyser is expected to
be completed by the end of the financial year.
North America
Our US West Coast operations have been renamed GLS US. The GLS
US business plan, initiated last year, is progressing well with
losses reduced to $4 million compared with $8 million in the prior
period. This is being driven by a combination of yield management
activities and cost optimisation measures.
Through our recent acquisition of Mountain Valley Express (MVE)
on 30 September 2019, we have secured capability to offer
less-than-truckload (LTL) services in the states of California,
Arizona and Nevada. LTL services are provided successfully by our
Dicom business in Canada. We plan to augment our product offering
in the US with a similar LTL capability. Operational synergies
between MVE and the existing GLS US businesses are expected to
provide an additional strand to the GLS US business plan.
Dicom's performance has been in line with our expectations.
Revenue in the period was GBP82 million and operating profit was
GBP8 million. We are investing in the business to provide a
platform for future growth. Canada represents an attractive market
and also provides geographic diversification for the Group.
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. In particular, there was good volume
and revenue growth in Denmark and Belgium. In Denmark, higher B2C
volumes supported by investment in Parcel Shops is facilitating the
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 FOR THE HALF YEAR TO 29 SEPTEMBER 2019
Reported results
Reported Re-presented(8)
26 weeks reported
ended 26 weeks ended
29 September 23 September
Summary trading results (GBPm) 2019 2018
============= ================
Revenue 5,166 4,914
Operating costs (5,044) (4,758)
============= ================
Operating profit before specific items 122 156
Operating specific items (61) (160)
============= ================
Operating profit / (loss) 61 (4)
Non-operating specific items 88 5
Net finance costs (19) (7)
Net pension interest (non-operating specific
item) 43 39
============= ================
Profit before tax 173 33
============= ================
Earnings per share (basic) 15.3p 0.5p
============================================= ============= ================
Group revenue increased by GBP252 million. This was largely due
to higher parcel revenue in GLS and UKPIL which more than offset
the decline in UKPIL letters revenue. Group operating profit before
specific items decreased by GBP34 million. This was primarily due
to higher operating costs. Operating specific items of GBP61
million largely comprised a provision for a regulatory fine of
GBP50 million and associated interest from Ofcom and the Employee
Free Shares Charge. The prior period included a GBP68 million
impairment relating to the GSO and Postal Express businesses in GLS
and a GBP64 million charge relating to the purchase of a further
buy-in insurance policy for the RMSEPP. The Employee Free Shares
charge was also GBP13 million lower than the prior period.
Non-operating specific items of GBP88 million largely relate to the
sale of Plots B and D and Plot C of Nine Elms in the period.
Profit before tax increased to GBP173 million, of which UKPIL
accounted for GBP95 million (H1 2018-19: GBP37 million) with GLS
accounting for GBP78 million (H1 2018-19: loss before tax of GBP4
million). Basic earnings per share increased to 15.3 pence. A full
reconciliation of reported to adjusted results is set out in the
section entitled 'Presentation of results'.
Adjusted results
Group revenue
Re-presented(8)
Adjusted adjusted
26 weeks 26 weeks
ended ended
29 September 23 September
(GBPm) 2019 2018 Change(10)
============= ===============
UKPIL 3,649 3,585 1.8%
GLS 1,537 1,347 14.1%
Intragroup revenue (20) (18) 11.1%
------------- ---------------
Total 5,166 4,914 5.1%
==================== ============= =============== ===========
Intragroup revenue represents revenue from trading between UKPIL
and GLS principally due to Parcelforce Worldwide operating as GLS's
partner in the UK. The prior period has been re-presented to show
intragroup revenue of GBP18 million separately.
Parcel growth in GLS and UKPIL, which more than offset the
decline in UKPIL letters revenue, resulted in Group revenue growth
of 5.1 per cent. Total parcel revenue continued to grow as a
percentage of Group revenue, accounting for 62.8 per cent (H1
2018-19: 60.3 per cent). The main factors impacting revenue are
described in the sections entitled 'UK Parcels, International &
Letters (UKPIL)' and 'General Logistics Systems (GLS)'.
Group operating costs
Re-presented(8)
Adjusted adjusted
26 weeks 26 weeks
ended ended
29 September 23 September
(GBPm) 2019 2018 Change(10)
----------------------------- ============== =============== -----------
People costs (2,848) (2,734) 4.2%
------------------------------ -------------- --------------- -----------
People costs (2,842) (2,724) 4.3%
Voluntary redundancy costs (6) (10) (40.0%)
------------------------------ -------------- --------------- -----------
Non-people costs (2,153) (1,990) 8.2%
------------------------------ -------------- --------------- -----------
Distribution and conveyance
costs (1,329) (1,192) 11.5%
Infrastructure costs (477) (439) 8.7%
Other operating costs (347) (359) (3.3%)
------------------------------ -------------- --------------- -----------
Total (5,001) (4,724) 5.9%
============================== ============== =============== ===========
Group operating costs increased by 5.9 per cent. As a result of
adopting IFRS 16, there was a reduction in operating lease costs of
GBP79 million and an increase in the depreciation charge of GBP72
million. Overall, there was a net reduction of GBP7 million in
operating costs. Excluding this impact, adjusted operating costs
increased by 6.0 per cent. The increase in Group operating costs
was largely due to an increase in people costs as people cost
pressures (including frontline staff and managers' overall
compensation) in the UK were not fully offset by productivity
gains. Distribution and conveyance costs were also higher due to
the impact of CPI, higher parcel volumes and the acquisition of
Dicom. 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)'.
Distribution and conveyance costs include GBP20 million (H1
2018-19: GBP18 million) of intragroup costs from the trading
between UKPIL and GLS principally due to Parcelforce Worldwide
operating as GLS's partner in the UK.
Group operating profit
Adjusted Adjusted
26 weeks 26 weeks
ended ended
29 September 23 September
(GBPm) 2019 2018
------------------------ ============= =============
UKPIL 75 113
GLS 90 77
------------- -------------
Total 165 190
Operating profit margin 3.2% 3.9%
========================= ============= =============
Group operating profit margin was down 70 basis points, driven
by the lower level of profitability in UKPIL.
Specific items and pension charge to cash difference
adjustment
Adjusted Adjusted
26 weeks 26 weeks
ended ended
29 September 23 September
(GBPm) 2019 2018
===================================================== ============= =============
Pension charge to cash difference adjustment
(within people costs) (43) (34)
Operating specific items
Regulatory fine (51) -
Impairment relating to GSO and Postal Express
businesses - (68)
Accounting impact of RMSEPP buy-in settlement - (64)
Employee Free Shares charge (4) (17)
Amortisation of acquired intangible assets (10) (10)
Legacy/other income/(costs) 4 (1)
===================================================== ============= =============
Potential industrial diseases claim cost (1) (1)
Other 5 -
===================================================== ============= =============
Total operating specific items (61) (160)
===================================================== ============= =============
Non-operating specific items
Profit on disposal of property, plant and equipment 88 5
Net pension interest 43 39
Total non-operating specific items 131 44
===================================================== ============= =============
Total specific items and pensions adjustment
before tax 27 (150)
===================================================== ============= =============
Total tax credit on specific items and pensions
adjustment 15 19
===================================================== ============= =============
The difference between the pension charge and cash cost (pension
charge to cash difference adjustment) largely comprises the
difference between the IAS 19 income statement pension charge rate
of 19.6 per cent for the Defined Benefit Cash Balance Scheme
(DBCBS) from 1 April 2019 and the actual cash payments agreed with
the Trustee of 15.6 per cent.
The pension charge to cash difference adjustment was GBP43
million in the period, GBP9 million higher than in the first half
of 2018-19. This was largely due to an increase in the pension
charge rate for the DBCBS from 18.9 per cent in 2018-19, to 19.6
per cent in 2019-20. The pension charge to cash difference
adjustment is expected to be around GBP85 million for the full
year.
In light of the Competition Appeal Tribunal judgment of 12
November 2019, a provision has been made in the interim accounts
for a fine of GBP50 million and associated interest. Please see the
"Principal Risks and Uncertainties" section for further
details.
Operating specific items also include the Employee Free Shares
charge of GBP4 million (H1 2018-19: GBP17 million). This was lower
than in the prior period because of the vesting of the SIP 2015
scheme in the prior year. The full year charge for Employee Free
Shares is expected to be around GBP5 million and not material
thereafter. Amortisation of acquired intangible assets of GBP10
million (H1 2018-19 GBP10 million) largely relates to acquisitions
in GLS.
Legacy credits of GBP4 million in the period were due to the
release of a GBP5 million historic provision that is no longer
required, partially offset by a GBP1 million charge in relation to
the industrial diseases provision (H1 2018-19 GBP1 million
charge).
Operating specific items in the prior period included a GBP68
million impairment of the goodwill and assets related to the
acquisition of the GSO and Postal Express businesses by GLS and a
GBP64 million charge in relation to the purchase of a further
buy-in insurance policy for the RMSEPP.
Non-operating specific items include the net pension interest
credit of GBP43 million (H1 2018-19: GBP39 million), which was
higher than the prior period due to the higher pension surplus
position at 31 March 2019 compared with 25 March 2018. The pension
interest credit for the full year is expected to be GBP86
million.
The profit on disposal of property, plant and equipment of GBP88
million (H1 2018-19: GBP5 million) largely relates to the
completion of the sale of Plots B and D and Plot C of Nine Elms.
The proceeds from the sale of Plots B and D were received in June
2019 and Plot C in July 2019.
The tax credit on specific items related largely to deferred tax
movements in relation to certain specific items.
Net finance costs
Reported net finance costs of GBP19 million (H1 2018-19: GBP7
million) largely comprised interest on the EUR500 million bond of
GBP6 million (H1 2018-19: GBP6 million) and interest on leases
capitalised under IFRS 16 of GBP12 million (H1 2018-19: GBPnil).
The revolving credit facility was amended in September 2019 and its
maturity date extended to September 2024 with options to extend for
a further two years.
Facility Drawn Facility
Facility Rate (GBPm) (GBPm) end date
-------------------------- ------------ -------- ------- ---------
EUR500 million bond 2.5% 443 443 2024
Revolving credit facility LIBOR+0.475% 925 - 2024
-------- -------
Total 1,368 443
========================== ============ ======== ======= =========
The blended interest rate on gross debt, including leases for
2019-20, is expected to be approximately three per cent. The
retranslation impact of the EUR500 million bond is accounted for in
equity.
On 8 October 2019, Royal Mail plc issued a EUR550 million bond
with coupon of 1.25 per cent and maturity date of 8 October 2026.
To hedge the foreign exchange risk, Royal Mail chose to take out a
cross currency swap. The combined interest rate of the coupon and
the cross currency swap is 2.7 per cent.
Taxation
26 weeks ended 26 weeks ended
29 September 2019 23 September 2018
------------------------- ---------------------- ----------------------
(GBPm) UKPIL GLS Group UKPIL GLS Group
========================= ====== ====== ====== ====== ====== ======
Reported
Profit/(loss) before tax 95 78 173 37 (4) 33
Tax credit / (charge) 2 (22) (20) (10) (18) (28)
Adjusted
Profit before tax 64 82 146 109 74 183
Tax charge (12) (23) (35) (21) (26) (47)
Effective tax rate 18.8% 28.0% 24.0% 19.3% 35.1% 25.7%
========================= ====== ====== ====== ====== ====== ======
The UK adjusted effective tax rate of 18.8 per cent (H1 2018-19:
19.3 per cent) is broadly in line with the prior period and the UK
statutory rate of 19.0 per cent. The effect of a lower credit for
technology claims is offset by a one-off deferred tax credit in
respect of non-trading tax losses.
The GLS adjusted effective tax rate of 28.0 per cent (H1
2018-19: 35.1 per cent) was lower than the prior period. The higher
prior period effective rate was due to the impact of derecognising
brought forward deferred tax assets in the US. The rate continues
to be increased by ongoing losses in the US and France for which
deferred tax assets are not recognised.
The Group reported tax charge is GBP20 million on a reported
profit of GBP173 million. This gives a low effective tax rate
compared with the adjusted effective tax rate and arises mainly due
to there being no tax charge on profits on property disposals due
to reinvestment relief and non-taxable net pension interest income.
The impact of these items on the effective tax rate is partially
offset by the Regulatory fine which is not tax deductible.
We currently estimate an adjusted effective tax rate of 24.0 to
25.0 per cent on Group adjusted profits for the full year.
Adjusted earnings per share (EPS)
Adjusted basic EPS was 11.1 pence compared with 13.6 pence in
the prior period reflecting the trading performance of the
Group.
In-year trading cash flow
Re-presented(8)
26 weeks 26 weeks
ended ended
29 September 23 September
(GBPm) 2019 2018
----------------------------------------------------- ============= ===============
Adjusted operating profit 165 190
Depreciation and amortisation 252 167
------------- ---------------
Adjusted EBITDA 417 357
Trading working capital movements (105) (267)
Share-based awards (LTIP and DSBP) charge adjustment 3 4
Gross capital expenditure (113) (137)
Net finance costs paid (24) (10)
Research and development expenditure credit 3 2
Income tax paid (29) (49)
In-year trading cash flow 152 (100)
===================================================== ============= ===============
In-year trading cash inflow was GBP152 million, compared with an
outflow of GBP100 million in the prior period. This was mainly due
to lower trading working capital outflow and the impact of adopting
IFRS 16.
Under IFRS 16, operating lease costs previously recognised in
operating costs are replaced by a depreciation charge on the assets
and finance charge on the liabilities. As a result of adopting IFRS
16, adjusted operating profit increased by GBP7 million. The
depreciation charge also increased by GBP72 million, resulting in a
GBP79 million increase in adjusted EBITDA. Net finance costs
increased by GBP12 million, reflecting the finance charge on
liabilities. The net impact of IFRS 16 on in-year trading cash flow
is an increase of GBP67 million. The GBP67 million outflow appears
in 'Payment of capital element of obligations under lease
contracts' in the consolidated statement of cash flows. As such,
there is no impact on overall cash flow from IFRS 16.
Trading working capital movements in the first half normally
include the payment of the annual bonus and the impact of the
timing of terminal dues settlements. Trading working capital
outflow of GBP105 million was GBP162 million lower than the prior
period. There was no bonus payment for managers in the first half
of 2019-20 as we missed our threshold profitability level for
2018-19. The first half of 2018-19 also included the GBP101 million
payment in relation to the 2017-18 frontline pay award.
Income tax paid decreased by GBP20 million largely because there
was no tax relief in 2018-19 on payments made to the pension
escrow. Net finance costs largely comprised interest on the EUR500
million bond and interest on leases capitalised under IFRS 16.
Gross capital expenditure
Adjusted Adjusted
26 weeks 26 weeks
ended ended
29 September 23 September
(GBPm) 2019 2018
-------------------------------- ============== =============
Growth capital expenditure (83) (88)
Replacement capital expenditure (30) (49)
--------------------------------- ------------- -------------
Total (113) (137)
--------------------------------- ------------- -------------
Total gross capital expenditure of GBP113 million, of which GLS
spend was GBP40 million, was GBP24 million lower. This was largely
due to the timing of vehicle purchases. We continue to invest in
strategic projects in UKPIL and GLS, including expanding the GLS
network, IT systems and activities supporting data projects.
Net debt
A reconciliation of net debt is set out below.
Adjusted Adjusted
26 weeks 26 weeks
ended ended
29 September 23 September
(GBPm) 2019 2018
---------------------------------------------------- ============= =============
Net (debt)/cash brought forward at 31 March 2019
and 25 March 2018 (300) 14
Capitalisation of leases under IFRS 16 (1,062) -
Free cash flow 245 (308)
---------------------------------------------------- ------------- -------------
In-year trading cash flow 152 (100)
Other working capital movements (9) (6)
Cash cost of operating specific items (1) (3)
Proceeds from disposal of property (excluding
London Development Portfolio), plant and equipment 5 9
Acquisition of business interests (1) (214)
Cash flows relating to London Development Portfolio 99 6
---------------------------------------------------- ------------- -------------
Purchase of own shares (3) (10)
Employee exercise of SAYE options - 5
New lease obligation under IFRS 16 (non-cash) (62) -
Foreign currency exchange impact (21) (9)
Dividends paid to equity holders of the parent
Company (169) (162)
---------------------------------------------------- ------------- -------------
Net (debt) carried forward (1,372) (470)
==================================================== ============= =============
Movements in GLS client cash are included within other working
capital. The amount held at the half year was GBP29 million (H1
2018-19: GBP28 million). The cash cost of operating specific items
was an outflow of GBP1 million mainly due to National Insurance
contributions on the SIP 2014 and 2015 Employee Free Share sales
and industrial disease settlements.
Proceeds from disposal of property (excluding the London
Development Portfolio), plant and equipment of GBP5 million relate
to the sale of part of Basildon Delivery Office, vehicle disposals
and other small property disposals.
Cash inflow relating to the London Development Portfolio was
GBP99 million. Infrastructure and enabling works costs of GBP24
million on the Nine Elms and Mount Pleasant sites were offset by
GBP123 million of receipts in relation to the Nine Elms plots.
Acquisition of business interests in the year related to
deferred consideration on prior year acquisitions. The acquisition
of business interests in the prior period related to the
acquisition of Dicom by GLS.
Purchase of own shares relates to the Company purchasing its own
shares to meet Long Term Incentive Plan (LTIP) requirements.
Pensions
Details of each of the plans operated by Royal Mail are set out
below.
Defined Benefit Cash Balance Scheme (DBCBS)
An IAS 19 deficit of GBP151 million is shown on the balance
sheet in respect of the DBCBS. 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 19.6 per cent (GBP184
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 (4.4 per cent) is greater than
the assumed discount rate (1.6 per cent).
The Company has made contributions at 15.6 per cent (GBP146
million) of DBCBS pensionable pay in respect of the scheme. Members
contribute 6 per cent (including Pension Salary Exchange).
The IAS 19 pension service charge to cash difference adjustment
for 2019-20 is expected to be around GBP85 million, an increase
from the prior year. This is largely as a result of the increased
pension charge rate of 19.6 per cent, versus the prior year rate of
18.9 per cent.
Royal Mail Defined Contribution Plan (RMDCP)
Under the RMDCP, current and future RMDCP members in the
standard section contribute at the highest contribution tier
(employee: 6.0 per cent; employer: 10.0 per cent) unless they opt
to contribute at a lower level. The contribution rate for members
not in the standard section is employee: 5.0 per cent; employer:
3.0 per cent.
Royal Mail Pension Plan (RMPP)
The pre withholding tax accounting surplus of the RMPP at 29
September 2019 was GBP4,286 million, comprising assets of GBP11,911
million and liabilities of GBP7,625 million. The pre withholding
tax accounting surplus has increased by GBP590 million in the
period, as the decrease in the real 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 156 per cent on an accounting basis. After the
withholding tax adjustment, the accounting surplus of the RMPP was
GBP2,786 million at 29 September 2019. 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.
The triennial valuation of RMPP at 31 March 2018 was agreed on
19 July 2019. Based on this set of assumptions rolled forwards, the
RMPP actuarial surplus on a Technical Provisions basis at 30
September 2019 was estimated to be around GBP189 million.
The RMPP closed in March 2018 to future accrual in its previous
form and the Company makes no regular service contributions in
respect of those liabilities.
Royal Mail Senior Executives Pension Plan (RMSEPP)
Following the purchase of an additional buy-in policy of
insurance in the prior year, substantially all the liabilities of
this scheme are now covered by insurance policies. These
significantly reduce the potential risk to the Company in respect
of this scheme.
These insurance policies are considered assets of the RMSEPP and
do not confer any rights to individual members.
Based on the rolled forward assumptions used for the 31 March
2018 triennial valuation, the RMSEPP actuarial surplus at 30
September 2019 was estimated to be GBP10 million (31 March 2019:
GBP10 million). The RMSEPP closed in December 2012 to future
accrual. The Company makes no regular service contributions.
In accordance with the new Schedule of Contributions agreed as
part of the 2018 triennial valuation, around GBP500,000 a year is
to be paid for the period 1 April 2018 to 31 March 2025 in respect
of death-in-service lump sum benefits and administration
expenses.
The Trustees are considering the approach to be taken to address
the issue of unequal Guaranteed Minimum Pensions (GMPs) in respect
of the RMSEPP scheme but estimate that the cost of this will not be
material.
Cash pension costs for 2019-20
The Company expects to contribute around GBP290 million in the
2019-20 financial year in respect of DBCBS, RMPP, and RMSEPP with
employees expected to contribute around GBP110 million. The Company
also expects to contribute around GBP105 million into the defined
contribution plans in the Group. Total employer contributions in
respect of all pension schemes will therefore be around GBP400
million for the year.
Collective Defined Contribution (CDC) scheme and Defined Benefit
Lump Sum Scheme (DBLSS)
On 15 October 2019, the Government laid the Pension Schemes Bill
in Parliament. The Bill would have enabled Collective Defined
Contribution (CDC) pension schemes for the first time under UK law.
However, following the announcement of a General Election on 12
December 2019, the Bill will make no further progress under the
current Parliament.
We welcome the cross-party support CDC pension schemes have
received to date. We look to the new Government to legislate to
bring them into UK law at the earliest opportunity. We will
continue to work with CWU and other stakeholders to make CDC a
reality for Royal Mail and its people.
Based on current expectations, the CDC scheme 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 6 per cent. The total annual
cost of the proposed scheme to Royal Mail is expected to be broadly
similar to the current costs.
Property
We invested a total of GBP24 million in the first half of the
year 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 2019-20 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
We received GBP101 million cash proceeds on formal completion of
the sale of Plots B and D on Nine Elms in the first half of the
2019-20 financial year. We have committed to reinvesting around
GBP30 million for infrastructure works associated with these plots.
Further investment will be required for the remaining plots when
sold.
We have also received GBP22 million cash proceeds on formal
completion of the sale of Plot C at the Nine Elms site to Galliard
Homes.
Dividends
The final dividend of 17.0 pence per share in respect of the
2018-19 financial year was paid on 4 September 2019, following
shareholder approval.
As previously stated, our new dividend policy reflects the
additional investment required to turnaround and grow our UK
business. The Board has declared an interim dividend of 7.5 pence
per ordinary share payable on 15 January 2020 to shareholders on
the register at the close of business on 6 December 2019. The
ex-dividend date is 5 December 2019. The Board expects to recommend
a full year dividend of 15.0 pence per share for 2019-20, in line
with new dividend policy.
PRESENTATION OF RESULTS AND ALTERNATIVE PERFORMANCE MEASURES
(APMs)
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.
A full list of APMs used are set out in the section entitled
'Alternative Performance Measures (APMs)'.
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
31 March 2019 was GBP1,256 million compared with cumulative 53 week
adjusted profit after tax of GBP2,048 million. Annual reported
profit after tax showed a range of GBP175 million to GBP328
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'.
Presentation of results
Consolidated reported and adjusted results
The following table reconciles the consolidated reported
results, prepared in accordance with IFRS, to the consolidated 26
week adjusted results.
Re-presented(8)
26 weeks ended 26 weeks ended
29 September 2019 23 September 2018
=================================== ===================================
Reported Specific Adjusted Reported Specific Adjusted
items items
and pension and pension
(GBPm) adjustment(12) adjustment(12)
==================================== ======== =============== ======== ======== =============== ========
Revenue 5,166 - 5,166 4,914 - 4,914
Operating costs (5,044) (43) (5,001) (4,758) (34) (4,724)
People costs (2,891) (43) (2,848) (2,768) (34) (2,734)
------------------------------------ -------- --------------- -------- -------- --------------- --------
People costs (2,885) (43) (2,842) (2,758) (34) (2,724)
Voluntary redundancy (6) - (6) (10) - (10)
------------------------------------ -------- --------------- -------- -------- --------------- --------
Non-people costs (2,153) - (2,153) (1,990) - (1,990)
------------------------------------ -------- --------------- -------- -------- --------------- --------
Distribution and conveyance
costs (1,329) - (1,329) (1,192) - (1,192)
Infrastructure costs (477) - (477) (439) - (439)
Other operating costs (347) - (347) (359) - (359)
------------------------------------ -------- --------------- -------- -------- --------------- --------
Operating profit before
specific items 122 (43) 165 156 (34) 190
Operating specific items:
Impairment of assets relating
to GSO and Postal Express
businesses - - - (68) (68) -
Accounting impact of RMSEPP
buy-in settlement - - - (64) (64) -
Regulatory fine (51) (51) - - - -
Employee Free Shares charge (4) (4) - (17) (17) -
Legacy/other income/(costs) 4 4 - (1) (1) -
Amortisation of intangible
assets in acquisitions (10) (10) - (10) (10) -
==================================== ======== =============== ======== ======== =============== ========
Operating profit / (loss) 61 (104) 165 (4) (194) 190
Non-operating specific items:
Profit on disposal of property,
plant and equipment 88 88 - 5 5 -
Earnings before interest
and tax 149 (16) 165 1 (189) 190
Finance costs (23) - (23) (10) - (10)
Finance income 4 - 4 3 - 3
Net pension interest (non-operating
specific item) 43 43 - 39 39 -
==================================== ======== =============== ======== ======== =============== ========
Profit before tax 173 27 146 33 (150) 183
Tax (charge)/credit (20) 15 (35) (28) 19 (47)
==================================== ======== =============== ======== ======== =============== ========
Profit for the period 153 42 111 5 (131) 136
==================================== ======== =============== ======== ======== =============== ========
Earnings per share
Basic 15.3p 4.2p 11.1p 0.5p (13.1p) 13.6p
Diluted 15.3p 4.2p 11.1p 0.5p (13.1p) 13.6p
==================================== ======== =============== ======== ======== =============== ========
Segmental reported results
The following table presents the segmental reported results,
prepared in accordance with IFRS.
Re-presented(8)
26 weeks ended 26 weeks ended
29 September 2019 23 September 2018
----------------------------------------------- ----------- --------------------------------------
UKPIL GLS UKPIL GLS
(UK (Non-UK Intragroup (UK (Non-UK Intragroup
(GBPm) operations) operations) Eliminations Group operations) operations) Eliminations Group
---------------- ----------- ----------- ------------ ------- ----------- ------------ ------------ --------
Revenue 3,649 1,537 (20) 5,166 3,585 1,347 (18) 4,914
People costs (2,538) (353) - (2,891) (2,450) (318) - (2,768)
Non-people costs (1,079) (1,094) 20 (2,153) (1,056) (952) 18 (1,990)
----------- ----------- ------------ ------- ----------- ------------ ------------ --------
Operating profit
before
specific items 32 90 - 122 79 77 - 156
Operating
specific
items(12) (57) (4) - (61) (82) (78) - (160)
Operating
(loss)/profit (25) 86 - 61 (3) (1) - (4)
Non-operating
specific
items(12) 88 - - 88 5 - - 5
Earnings before
interest
and tax 63 86 - 149 2 (1) - 1
Net finance
costs (11) (8) - (19) (4) (3) - (7)
Net pension
interest
(non-operating
specific) item) 43 - - 43 39 - - 39
---------------- ----------- ----------- ------------ ------- ----------- ------------ ------------ --------
Profit/(loss)
before tax 95 78 - 173 37 (4) - 33
---------------- ----------- ----------- ------------ ------- ----------- ------------ ------------ --------
Tax
credit/(charge) 2 (22) - (20) (10) (18) - (28)
---------------- ----------- ----------- ------------ ------- ----------- ------------ ------------ --------
Profit/(loss)
for the
period 97 56 - 153 27 (22) - 5
================ =========== =========== ============ ======= =========== ============ ============ ========
ALTERNATIVE PERFORMANCE MEASURES (APMs)
This section lists the definitions of the various APMs disclosed
throughout the Annual Report and Accounts and Financial Review.
They are used by Management, who consider them to be an important
means of comparing performance year-on-year and are key measures
used within the business for assessing Business performance.
Adjusted operating profit
This measure is based on reported operating profit 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, and operating
specific items are provided below.
Adjusted operating profit margin
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' as a proportion
of revenue in percentage terms.
Earnings before interest, tax, depreciation and amortisation
(EBITDA)
Reported EBITDA is reported operating profit before specific
items with depreciation and amortisation and share of associate
company profits added back.
Adjusted EBITDA is reported EBITDA before specific items 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 to reported
operating profit before specific items.
26 weeks 26 weeks
ended ended
29 September 23 September
(GBPm) 2019 2018
================================================ ============= =============
Reported operating profit before specific items 122 156
Depreciation and amortisation 252 167
Reported EBITDA 374 323
Pension charge to cash difference adjustment 43 34
================================================ ============= =============
Adjusted EBITDA 417 357
================================================ ============= =============
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, temporary resource, pensions and
social security costs. People costs relating to projects and
voluntary redundancy costs are also included.
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. Non-people costs relating
to projects are included. Other operating costs exclude operating
specific items.
Pension charge to cash difference adjustment
This adjustment represents the difference between the IAS 19
income statement pension charge rate of 19.6 per cent for the DBCBS
from the 1 April 2019 and the actual cash payments agreed with the
Trustee of 15.6 per cent. 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.
Regulatory fine
In light of the Competition Appeal Tribunal judgment of 12
November 2019, a provision has been made in the interim accounts
for a fine of GBP50 million and associated interest. Please see the
"Principal Risks and Uncertainties" section for further
details.
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 2014, 2015, 2016 and Matching Shares Scheme)
with no direct cash impact on the Group.
Accounting impact of RMSEPP buy-in settlement
These costs relate to the purchase of buy-in insurance policies
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. These are accounting
adjustments in relation to the write off of the closing surplus as
a result of the purchase of the policy and have no cash impact to
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/income
These costs/income relate either to unavoidable ongoing costs
arising from historic events (industrial diseases provision),
restructuring costs, or historic provisions not utilised.
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 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.
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 26 weeks
ended ended
29 September 23 September
(GBPm) 2019 2018
========================================== ============= =============
Net cash inflow from operating activities 279 38
Adjustment for:
Other working capital movements 9 6
Cash cost of operating specific items 1 3
Purchase of property, plant and equipment (78) (79)
Purchase of intangible assets (software) (35) (58)
Net finance costs paid (24) (10)
========================================== ============= =============
In-year trading cash flow 152 (100)
========================================== ============= =============
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.
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 29 September At 23 September
(GBPm) 2019 2018
========================== =============== ===============
Loans/bonds (443) (562)
Leases (1,171) (146)
Cash and cash equivalents 222 218
Pension escrow (RMSEPP) 20 20
========================== =============== ===============
Net debt (1,372) (470)
========================== =============== ===============
Net debt excludes GBP189 million (2018-19: GBP186 million)
related to the RMPP pension scheme of the total GBP209 million
(2018-19: GBP206 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.
PRINCIPAL RISKS AND UNCERTAINTIES
Except for the following 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
64 to 72 of the Royal Mail plc Annual Report and Financial
Statements 2018-19
(www.royalmailgroup.com/media/10924/royal_mail_ar19_190918.pdf):
-- Industrial action
-- Efficiency
-- Economic and political environment
-- Competition Act Investigation
Industrial Action
The absence of major industrial action is a key assumption
underpinning the 'Turnaround and Grow' plan in the UK. Widespread
industrial action would cause material disruption to our business
in the UK and would be likely to result in an immediate and
potentially ongoing loss of customers and revenue for the Group. It
may also cause Royal Mail to fail to meet Quality of Service
targets prescribed by Ofcom, which may lead to enforcement
action.
On 15 October 2019, the Communication Workers Union (CWU),
announced that, of the CWU members in Royal Mail who voted, 97.1
per cent were in favour of taking industrial action. It has also
announced that, in two separate ballots for CWU members in
Parcelforce Worldwide, outcomes of 95 per cent and 94.7 per cent in
favour of industrial action were returned. As a result, there is a
significant increase in the risk of industrial action taking
place.
Following the conclusion of the external mediation process,
Royal Mail made an application to the High Court for an interim
order to injunct CWU with respect to potential irregularities in
the Royal Mail ballot for industrial action. The application was
upheld, concluding that the ballot was unlawful and the results are
therefore null and void. The CWU lodged an appeal against the
ruling with the High Court on 20 November 2019.
Whilst the risk of industrial action affecting the Christmas
peak period and UK General Election remains low, we continue with
our planning to mitigate the impact of industrial action through
ongoing operational contingency planning.
Efficiency
There is an increased risk we will not be able to deliver our
transformation programme and meet our required cost avoidance and
productivity improvement targets during the life of the plan due to
the threat of industrial action.
Economic and political environment
Historically, there has been a correlation between economic
conditions and the level of letter and B2B parcel volumes. Low
rates of economic growth could impact our ability to maintain and
grow revenue, either by reducing volumes or encouraging customers
to adopt cheaper products for sending letters and parcels. The UK
voted to leave the European Union (EU) in 2016. The shape of the
future relationship between the UK and the EU remains unclear. The
Labour Party's 2017 manifesto included a pledge to bring a number
of private companies, including Royal Mail, back into public
ownership.
The EU has announced that it will permit an extension to the
Brexit deadline until 31 January 2020, but will also allow the UK
to leave before this date if the Withdrawal Agreement is passed
through parliament sooner. The business remains on track to
mitigate the operational impacts of a no deal Brexit through
extensive planning. We continue to be well placed to manage the
impact of changes to customs processing.
It has been announced that a UK General Election will take place
on 12 December 2019. We continue to monitor the
development of Labour Party policy on nationalisation
closely.
Competition Act Investigation
On 12 November 2019, the Competition Appeal Tribunal (CAT)
upheld Ofcom's decision to fine Royal Mail GBP50 million for
breaching competition law following a complaint brought about by
TNT Post UK (now Whistl). Whistl had also filed a damages claim
against Royal Mail at the High Court relating to Ofcom's decision
on 12 October 2018. Whistl's claim is on hold until after the
completion of the appeals process. Royal Mail believe Whistl's
claim is without merit and will defend it robustly if Whistl
decides to pursue it.
In light of the CAT's judgment, a provision has been made in the
results for the half year 2019-20 for the fine and associated
interest. Royal Mail is considering all legal options, including
whether to seek permission to appeal and to request that payment of
the penalty, which would otherwise become payable, be stayed
pending any appeal.
The following risks remain unchanged from those disclosed in the
2018-19 Annual Report and Financial Statements:
-- Pensions arrangements
-- Customer expectations and Royal Mail's responsiveness to market changes
-- Growing in new areas
-- Absence of a sustainability framework to sustain the USO
-- Strategic workforce planning
-- Health, Safety and Wellbeing
-- Major breach of information security, data protection regulation and / or cyber
-- Talent and capability
-- Environment and sustainability
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IFRS 16 'Leases' (IFRS 16) was adopted by the Group on 1 April
2019. The comparative period figures in these condensed
consolidated financial statements have not been restated and
accordingly, the results for the 26 weeks ended 29 September 2019
are on an IFRS 16 basis, and the results for the 26 weeks ended 23
September 2018 are on an IAS 17 basis. Note 8 provides more details
on the impact of IFRS 16.
Condensed consolidated income statement
Reported Re-presented(1)
26 weeks reported
ended 26 weeks ended
29 September 23 September
2019 2018
Notes GBPm GBPm
Continuing operations
Revenue 2,3 5,166 4,914
Operating costs(1,2) (5,044) (4,758)
----------------------------------------------------- ----- ------------- ---------------
People costs (2,891) (2,768)
Distribution and conveyance costs (1,329) (1,192)
Infrastructure costs (477) (439)
Other operating costs (347) (359)
----------------------------------------------------- ----- ------------- ---------------
Operating profit before specific items(2) 122 156
Operating specific items(2)
Regulatory fine 9 (51) -
RMSEPP buy-in settlement 7 - (64)
Employee Free Shares charge (4) (17)
Impairment/legacy/other income/(costs) 4 (69)
Amortisation of intangible assets in acquisitions (10) (10)
----------------------------------------------------- ----- ------------- ---------------
Operating profit /(loss) 61 (4)
Non-operating specific item(2) - profit on
disposal of property, plant and equipment 88 5
------------- ---------------
Profit before interest and tax 149 1
Finance costs (23) (10)
Finance income 4 3
Net pension interest (non-operating specific
item(2) ) 7 43 39
----------------------------------------------------- ----- ------------- ---------------
Profit before tax 173 33
Tax charge 4 (20) (28)
----------------------------------------------------- ----- ------------- ---------------
Profit for the period 153 5
----------------------------------------------------- ----- ------------- ---------------
Earnings per share 5
Basic 15.3p 0.5p
Diluted 15.3p 0.5p
----------------------------------------------------- ----- ------------- ---------------
(1) Operating costs include GBP49 million (2018-19: GBP52
million) costs reported previously as 'Transformation costs'.
Transformation costs are now incorporated within their relevant
operating cost categories, which better reflects the ongoing costs
of the business. The comparative period costs have therefore been
re-presented, along with revenue which has been adjusted for the
intragroup trading between UKPIL and GLS. Operating costs are also
stated before the Regulatory fine, RMSEPP buy-in settlement,
Employee Free Shares charge, impairment/legacy/other income/(costs)
and amortisation of intangible assets in acquisitions.
(2) For further details on Alternative Performance Measures
(APMs) used, see the section of the Financial Review entitled
'Presentation of Results and Alternative Performance Measures'.
Condensed consolidated statement of comprehensive income
Reported Reported
26 weeks 26 weeks
ended ended
29 September 23 September
2019 2018
Notes GBPm GBPm
------------------------------------------------------------ ----- ------------- -------------
Profit for the period 153 5
Other comprehensive income/(expense) for
the period from continuing operations:
Items that will not be subsequently reclassified
to profit or loss:
Amounts relating to pensions accounting 312 (73)
------------------------------------------------------------ ----- ------------- -------------
Withholding tax adjustment relating to defined
benefit surplus 7 (206) 53
Remeasurement gains/(losses) of the defined
benefit surplus in RMPP and RMSEPP 7 550 (127)
Remeasurement (losses)/gains of the defined
benefit deficit in DBCBS 7 (39) 1
Deferred tax 7 -
------------------------------------------------------------ ----- ------------- -------------
Items that may be subsequently reclassified
to profit or loss:
Foreign exchange translation differences 18 6
------------------------------------------------------------ ----- ------------- -------------
Exchange differences on translation of foreign
operations (GLS) 33 19
Net loss on hedge of a net investment (EUR500
million bond) (13) (12)
Net loss on hedge of a net investment (Euro-denominated
lease payables) (2) (2)
Tax on above items - 1
------------------------------------------------------------ ----- ------------- -------------
Designated cash flow hedges (4) 17
------------------------------------------------------------ ----- ------------- -------------
(Losses)/gains on cash flow hedges deferred
into equity (2) 30
Gains on cash flow hedges released from
equity to income (3) (9)
Tax on above items 1 (4)
------------------------------------------------------------ ----- ------------- -------------
Total other comprehensive income/(expense)
for the period 326 (50)
------------------------------------------------------------ ----- ------------- -------------
Total comprehensive income/(expense) for
the period 479 (45)
------------------------------------------------------------ ----- ------------- -------------
Condensed consolidated balance sheet
Reported Reported
At 29 September At 31 March
2019 2019
Notes GBPm GBPm
-------------------------------------------- ----- ---------------- ------------
Non-current assets
Property, plant and equipment 8 3,088 2,066
Goodwill 394 380
Intangible assets 609 631
Investments in associates and joint venture 5 5
Financial assets
Pension escrow investments 209 207
Derivatives 2 4
RMPP/RMSEPP retirement benefit surplus -
net of withholding tax payable 7 2,792 2,408
Other receivables 13 12
Deferred tax assets 4 82 64
-------------------------------------------- ----- ---------------- ------------
7,194 5,777
Assets held for sale 5 36
-------------------------------------------- ----- ---------------- ------------
Current assets
Inventories 28 27
Trade and other receivables 8 1,283 1,310
Income tax receivable 5 7
Financial assets
Derivatives 8 8
Cash and cash equivalents 222 236
-------------------------------------------- ----- ---------------- ------------
1,546 1,588
-------------------------------------------- ----- ---------------- ------------
Total assets 8,745 7,401
-------------------------------------------- ----- ---------------- ------------
Current liabilities
Trade and other payables 8 (1,743) (1,883)
Financial liabilities
Lease liabilities 8 (167) (37)
Derivatives (3) (3)
Income tax payable (13) (8)
Provisions 8,9 (103) (58)
-------------------------------------------- ----- ---------------- ------------
(2,029) (1,989)
Non-current liabilities
Financial liabilities
Interest-bearing loans and borrowings (443) (431)
Lease liabilities 8 (1,004) (88)
Derivatives (5) (2)
DBCBS retirement benefit deficit 7 (151) (72)
Provisions 8,9 (111) (104)
Other payables 8 (10) (41)
Deferred tax liabilities (55) (55)
-------------------------------------------- ----- ---------------- ------------
(1,779) (793)
Total liabilities (3,808) (2,782)
-------------------------------------------- ----- ---------------- ------------
Net assets 4,937 4,619
-------------------------------------------- ----- ---------------- ------------
Equity
Share capital 10 10
Retained earnings 8 4,880 4,576
Other reserves 47 33
-------------------------------------------- ----- ---------------- ------------
Total equity 4,937 4,619
-------------------------------------------- ----- ---------------- ------------
Condensed consolidated statement of changes in equity
Foreign
currency
Share Retained translation Hedging Total
capital earnings reserve reserve equity
GBPm GBPm GBPm GBPm GBPm
---------------------------------------------- -------- --------- ------------ -------
Reported at 25 March 2018 10 4,381 36 9 4,436
---------------------------------------------- -------- --------- ------------ --------- -------
Profit for the period - 5 - - 5
Other comprehensive (expense)/income
for the period - (73) 6 17 (50)
---------------------------------------------- -------- --------- ------------ --------- -------
Total comprehensive (expense)/income
for the period - (68) 6 17 (45)
Transactions with owners of the Company,
recognised directly in equity
Dividend paid to equity holders of
the parent Company - (162) - - (162)
Share-based payments
Employee Free Shares issue - 16 - - 16
Long-Term Incentive Plan (LTIP) - 2 - - 2
Deferred Share Bonus Plan (DSBP) - 2 - - 2
Employee exercise of SAYE options - 5 - - 5
Purchase of own shares(1) - (10) - - (10)
Settlement of LTIP 2015 - (3) - - (3)
---------------------------------------------- -------- --------- ------------ --------- -------
Reported at 23 September 2018 10 4,163 42 26 4,241
---------------------------------------------- -------- --------- ------------ --------- -------
Profit for the period - 170 - - 170
Other comprehensive income/(expense)
for the period - 312 (15) (20) 277
---------------------------------------------- -------- --------- ------------ --------- -------
Total comprehensive income/(expense)
for the period - 482 (15) (20) 447
Transactions with owners of the Company,
recognised directly in equity
Dividend paid to equity holders of
the parent Company - (80) - - (80)
Reversal of put options for non-controlling
interests - 2 - - 2
Share-based payments
Employee Free Shares issue - 7 - - 7
Long-Term Incentive Plan (LTIP) - 2 - - 2
Deferred Share Bonus Plan (DSBP) - 1 - - 1
Deferred tax on share-based payments - (1) - - (1)
---------------------------------------------- -------- --------- ------------ --------- -------
Reported at 31 March 2019 10 4,576 27 6 4,619
IFRS 16 transition adjustment - 1 - - 1
---------------------------------------------- -------- --------- ------------ --------- -------
Reported at 1 April 2019 on transition
to IFRS 16 10 4,577 27 6 4,620
---------------------------------------------- -------- --------- ------------ --------- -------
Profit for the period - 153 - - 153
Other comprehensive income/(expense)
for the period - 312 18 (4) 326
---------------------------------------------- -------- --------- ------------ --------- -------
Total comprehensive income/(expense)
for the period - 465 18 (4) 479
Transactions with owners of the Company,
recognised directly in equity
Dividend paid to equity holders of
the parent Company - (169) - - (169)
Share-based payments
Employee Free Shares issue - 7 - - 7
Long-Term Incentive Plan (LTIP) - 1 - - 1
Deferred Share Bonus Plan (DSBP) - 2 - - 2
Purchase of own shares(1) - (3) - - (3)
---------------------------------------------- -------- --------- ------------ --------- -------
Reported at 29 September 2019 10 4,880 45 2 4,937
---------------------------------------------- -------- --------- ------------ --------- -------
(1) Purchases in respect of employee share schemes.
Condensed consolidated statement of cash flows
Re-presented(1)
Reported reported
26 weeks 26 weeks
ended ended
29 September 23 September
2019 2018
Notes GBPm GBPm
------------------------------------------------------ ----- ------------- ---------------
Cash flow from operating activities
Profit before tax 173 33
Adjustment for:
Net pension interest 7 (43) (39)
Net finance costs 19 7
Profit on disposal of property, plant and
equipment (88) (5)
Regulatory fine 51 -
RMSEPP buy-in settlement 7 - 64
Impairment/legacy/other (income)/costs (4) 69
Amortisation of intangible assets in acquisitions 10 10
Employee Free Shares charge 4 17
Operating profit before specific items(2) 122 156
Adjustment for:
Depreciation and amortisation 252 167
EBITDA(2) 374 323
Working capital movements (114) (273)
------------------------------------------------------ ----- ------------- ---------------
Increase in inventories (1) (3)
Decrease/(increase) in receivables 19 (63)
Decrease in payables (123) (210)
Net decrease in derivative assets - 3
Decrease in provisions (non-specific items) (9) -
------------------------------------------------------ ----- ------------- ---------------
Pension charge to cash difference adjustment 7 43 34
Share-based awards (LTIP and DSBP) charge 3 4
Cash cost of operating specific items (1) (3)
------------------------------------------------------ ----- ------------- ---------------
Cash inflow from operations 305 85
Income tax paid (29) (49)
Research and development expenditure credit 3 2
------------------------------------------------------ ----- ------------- ---------------
Net cash inflow from operating activities 279 38
------------------------------------------------------ ----- ------------- ---------------
Cash flow from investing activities
Finance income received 4 3
Proceeds from disposal of property (excluding
London Development Portfolio), plant and equipment
(non-operating specific item) 5 9
London Development Portfolio net proceeds
(non-operating specific item) 99 6
Purchase of property, plant and equipment (78) (79)
Acquisition of business interests, net of
cash acquired - (210)
Purchase of intangible assets (software) (35) (58)
Payment of deferred consideration in respect
of prior years' acquisitions (1) (4)
Net cash outflow from investing activities (6) (333)
------------------------------------------------------ ----- ------------- ---------------
Net cash inflow/(outflow) before financing
activities 273 (295)
------------------------------------------------------ ----- ------------- ---------------
Cash flow from financing activities
Finance costs paid (28) (13)
Purchase of own shares (3) (10)
Employee exercise of SAYE options - 5
Payment of capital element of obligations
under lease contracts (92) (33)
Cash received on sale and leasebacks 2 8
Drawdown of loan facility - 115
Repayment of loans and borrowings (1) (2)
Dividends paid to equity holders of the parent
Company 6 (169) (162)
Net cash outflow from financing activities (291) (92)
------------------------------------------------------ ----- ------------- ---------------
Net decrease in cash and cash equivalents (18) (387)
Effect of foreign currency exchange rates
on cash and cash equivalents 4 5
Cash and cash equivalents at the beginning
of the period 236 600
------------------------------------------------------ ----- ------------- ---------------
Cash and cash equivalents at the end of the
period 222 218
------------------------------------------------------ ----- ------------- ---------------
(1) Transformation costs are no longer presented as a separate
line item and are included in 'operating profit before specific
items'. The transformation costs to cash difference is now
presented in working capital. The comparative period cash flows
have therefore been re-presented on this basis.
(2) For further details on Alternative Performance Measures
(APMs) used, see the section of the Financial Review entitled
'Presentation of Results and Alternative Performance Measures'.
Notes to the condensed consolidated financial statements
1. Basis of preparation
The comparative figures for the 53 weeks ended 31 March 2019 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 53 weeks ended 31 March 2019, 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.
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.
The condensed consolidated income statement and condensed
consolidated statement of cash flows have been re-presented for the
comparative period. This is to reflect the Group's decision to no
longer report transformation costs as a separate line item,
including them within their relevant operating costs categories.
Revenue has also been re-presented in line with the 2018-19 Annual
Report, to reflect the intragroup trading eliminations between
UKPIL and GLS, as a result of Parcelforce Worldwide operating as
GLS's partner in the UK.
Accounting standards and interpretations adopted in 2019-20
IFRS 16 'Leases'
The Group has adopted IFRS 16 with effect from 1 April 2019.
Under IFRS 16, all lease contracts, with limited exceptions, are
recognised on the balance sheet as right-of-use assets,
representing the right to use the underlying assets, and lease
liabilities, representing an obligation to make lease payments. The
principal asset classes impacted by this change are property and
motor vehicles previously held under operating leases.
The Group has applied IFRS 16 using the modified retrospective
approach for all leases previously classed as operating leases
under IAS 17. The modified retrospective approach allows a
combination of the following two approaches when measuring the
carrying value of right of use assets on a lease by lease
basis:
(i) as if the standard had been applied since the lease
commencement date; and/or
(ii) at an amount equal to the lease liability at the date of
adoption.
At the time of the Group's annual results announcement in May
2019, Management intended to adopt a mixture of approaches (i) and
(ii) on a lease by lease basis. Subsequent experiences in deploying
IFRS 16 during the first half of 2019-20 have resulted in a
revision to this approach and the approach outlined in (ii) above
has been adopted for these leases.
Under this revised approach, it is now anticipated that adopting
IFRS 16 will result in an increase in 'operating profit before
specific items' of between GBP10 million and GBP20 million for
2019-20, rather than the range of GBP35 million to GBP45 million
that was previously expected.
The GBP1 million adjustment to equity relates to the
irrecoverable VAT element of lease prepayments and lease incentives
at the transition date.
In view of the above, the comparative period information has not
been restated and has been presented, as previously reported, under
IAS 17. Details of the impact of transition on the financial
statements is given below.
Previously the Group determined at contract inception whether a
contract contained a lease under IFRIC 4. Under IFRS 16 a contract
is, or contains, a lease if the contract conveys the right to
control the use of an identified asset for a period of time in
exchange for consideration.
Under IAS 17, leases were classed as either operating or finance
leases based on whether the lease transferred substantially all the
risks and rewards of ownership, with only those leases identified
as finance leases being brought onto the balance sheet. Under IFRS
16, the Group recognises a right of use asset and a lease liability
at the lease commencement date for the majority of leases.
The right of use asset is measured initially at cost and is
subsequently adjusted for any accumulated depreciation, impairment
losses or certain remeasurements of the lease liability.
The lease liability is measured initially at the commencement
date at the present value of future lease payments discounted at
the rate inherent in the lease (for leases previously classed as
finance leases) or, where this is not readily determinable, an
appropriate 'incremental borrowing rate' (IBR). In practice, the
majority of the lease calculations are performed using an IBR. The
lease liability is subsequently increased by the interest cost and
decreased by payments made. The lease liability may also be
remeasured where there are changes in future lease payments or
changes in the assessment of future extension or termination
options.
Whilst the majority of leased assets will be brought onto the
balance sheet, the Group has elected to apply the exemption from
recognising leases for low value assets in line with existing Group
policy, or short-term leases (with a lease term of under 12 months)
on the balance sheet. The Group continues to recognise lease
expenses for these assets on a straight-line basis in the income
statement over the lease term.
Where possible, the Group allocates the consideration in each
contract between any lease and non-lease components, however, where
this is not possible the Group has elected to apply the practical
expedient of including all of the contract costs in the calculation
of the lease asset and liability recognised as a single lease
component.
For assets previously classed as finance leases, the carrying
values of the right of use assets and lease liabilities held as at
31 March 2019 under IAS 17 have been determined to be equal to the
carrying value brought forward at 1 April 2019 under IFRS 16. The
Group has also adopted the practical expedient to grandfather the
accounting treatment of the assets and liabilities relating to
these leases, to still include the irrecoverable VAT element (which
is excluded for all new leases).
Application of IFRS 16 by the Group has no impact on lessor
accounting for leases previously classed as finance leases.
At transition, for leases classed as operating leases under IAS
17, lease liabilities were measured at the present value of the
remaining lease payments, discounted using a calculated IBR as at 1
April 2019.
Right-of-use assets at transition are measured at an amount
equal to the lease liability, adjusted by the amount of any prepaid
or accrued lease payments or rent incentives.
In adopting IFRS 16 the following practical expedients have been
applied at transition to leases previously classed as operating
leases under IAS 17:
-- only apply IFRS 16 to those contracts that were previously
identified as leases under IAS 17 and IFRIC 4;
-- apply a single discount rate to portfolios of leases with similar characteristics;
-- not apply IFRS 16 to operating leases with a remaining lease
term of less than 12 months and to continue to recognise these
lease costs through the income statement as they are incurred;
-- rely on an assessment of whether the lease contract is
onerous under IAS 37 at 31 March 2019 as an alternative to
performing an impairment review of the right of use assets created.
Where this is the case the carrying amount of the assets is
adjusted by the onerous lease provision; and
-- exclude initial direct costs from the measurement of the right of use asset.
The Group has lease break options in place for a majority of its
property lease agreements. These options provide the Group with
greater flexibility in managing the UK estate. These break options
have historically not been exercised due to ongoing operational
requirements. Management have therefore made the decision that the
reasonably certain length of the lease is the full lease term,
assuming the break option will not be exercised.
Further details of the impact of IFRS 16 on the financial
statements are disclosed in note 8.
IFRIC 23 'Uncertain Tax Positions' (IFRIC 23)
The Group has adopted IFRC 23 with effect from 1 April 2019.
IFRIC 23 clarifies how to apply the recognition and measurement
requirements in IAS 12 'Income Taxes' where there is uncertainty
over income tax treatments. Controls and procedures are in place in
the Group to monitor the tax treatments assuming a 100 per cent
detection risk by the relevant tax authorities, although the impact
of this new guidance 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.
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
2018-19, except for the exclusion of the Dicom Canada business
acquisition; the GLS US goodwill impairment; and the RMSEPP pension
settlement. An update to the previously disclosed contingent
liabilities accounting judgement and the new disclosure in respect
of lease accounting under IFRS 16 are detailed below.
Critical accounting judgements
The following are the critical judgements, apart from those
involving estimations, 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.
Provisions - Ofcom fine (disclosed as a contingent liability in
the 2018-19 Annual Report)
Management considered Ofcom's decision following its
investigation into whether Royal Mail had breached competition law,
the subsequent imposition of a fine and the Competition Appeal
Tribunal judgment to reject Royal Mail's appeal of Ofcom's decision
and fine. Following this assessment, which included legal review,
both internal and external to the Group, Management's view is that
it is probable that Royal Mail will be required to pay the fine
and, accordingly, a liability has been recognised in these
financial statements.
IFRS 16 - Incremental borrowing rates (IBR)
Under IFRS 16, lease liabilities are initially recognised at the
commencement date at the present value of future lease payments
discounted at the rate inherent in the lease or, where this is not
readily determinable, an appropriate IBR. In practice, the rate
inherent in the lease is not readily determinable for the majority
of leases previously classed as operating leases under IAS 17 and
so an IBR is used. These leases primarily relate to property and
motor vehicles. In addition, an IBR has also been applied when
calculating the opening transition lease liability balances.
The IBR is the rate of interest that a lessee would have to pay
to borrow, over a similar term, and with a similar security, the
funds necessary to obtain an asset of a similar value to the
right-of-use asset in a similar economic environment. The
methodology used to obtain these rates and how they are applied to
assets with different lease terms, is an area of significant
judgement.
In considering the appropriate IBR to apply the Group has
applied a three-step approach. This approach begins with an
appropriate risk-free base rate; adjusts this rate to reflect the
cost of company specific unsecured borrowing; and, finally,
considers the need to adjust the rate determined to reflect the
underlying leased asset acting as collateral.
From the evidence obtained, Management have concluded that for
the UKPIL business, lenders do not make adjustments to the
borrowing rates offered on lending based upon the underlying asset
to be obtained. The key factors in the borrowing rates available to
UKPIL are judged to be the current credit rating of the Group (BBB)
and the length of the borrowing term required.
On the basis of the work performed, UKPIL has treated assets
being held for a similar length of time as having a similarly
calculated IBR, with assets being grouped according to lease
length, both at transition and in the future. By grouping assets in
this way, a rate card has been produced, to be updated
periodically, which can be applied to all future leases requiring
an IBR. UKPIL have based IBR rates on UK BBB corporate bond yields,
adjusted to reflect the different payment profile between a bond
and a lease.
The GLS business has followed a similar methodology and grouping
by lease length to that used in UKPIL. However, instead of basing
the yields on corporate bond yield curves, which are not readily
obtainable for all GLS currencies, a sovereign bond yield curve for
the relevant country has been used as the starting point and an
appropriate margin applied to this based upon consideration of
consolidated GLS quantitative and qualitative information.
The weighted average lessee's incremental borrowing rate applied
to lease liabilities recognised in the statement of financial
position at the date of initial application is three per cent in
UKPIL and two per cent in GLS. Sensitivity analysis performed as
part of the IFRS 16 implementation work, identified that a movement
of 100 bps in the incremental borrowing rate would lead to a
movement in lease liabilities recognised of around four per
cent.
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 29 September 2019.
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
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 specific items (used internally for the Corporate Balanced
Scorecard). This measure of performance is disclosed on an
'adjusted' basis e.g. 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.
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
26 weeks ended 29 September and pension
2019 Adjusted adjustment(1) Reported
---------------------------- ------------------------------------------------------- ------------------- --------
UKPIL GLS
(UK operations) (Non-UK operations) Eliminations(2) Group Group
Continuing operations GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------- ---------------- -------------------- --------------- ---------- ------- --------
Revenue 3,649 1,537 (20) 5,166 - 5,166
People costs (2,495) (353) - (2,848) (43) (2,891)
Non-people costs (1,079) (1,094) 20 (2,153) - (2,153)
---------------------------- ---------------- -------------------- --------------- ---------- ------- --------
Operating profit before
specific items 75 90 - 165 (43) 122
Operating specific items
Regulatory fine - - - - (51) (51)
Employee Free Shares
charge - - - - (4) (4)
Legacy/other income - - - - 4 4
Amortisation of intangible
assets in acquisitions - - - - (10) (10)
---------------------------- ---------------- -------------------- --------------- ---------- ------- --------
Operating profit 75 90 - 165 (104) 61
Non-operating specific
item - profit on disposal
of property, plant and
equipment - - - - 88 88
---------------------------- ---------------- -------------------- --------------- ---------- ------- --------
Profit before interest
and tax 75 90 - 165 (16) 149
Finance costs (20) (3) - (23) - (23)
Finance income 3 1 - 4 - 4
Inter-segment interest 6 (6) - - - -
Net pension interest
(non-operating
specific item) - - - - 43 43
---------------------------- ---------------- -------------------- --------------- ---------- ------- --------
Profit before tax 64 82 - 146 27 173
---------------------------- ---------------- -------------------- --------------- ---------- ------- --------
(1) A GBP74 million credit for specific items and a GBP43
million charge for the pension charge to cash difference adjustment
relate to UKPIL. A GBP4 million charge for specific items relates
to GLS.
(2) Eliminations relate to intragroup revenue from trading
between UKPIL and GLS. This is due to Parcelforce Worldwide
operating as GLS's partner in the UK.
Specific
items
Re-presented(3) and pension
26 weeks ended 23 September
2018 Adjusted adjustment(4) Reported
----------------------------- ----------------------------------------------------- ------------------- ---------
UKPIL GLS
(UK operations) (Non-UK operations) Eliminations(2) Group Group
Continuing operations GBPm GBPm GBPm GBPm GBPm GBPm
----------------------------- --------------- ------------------- --------------- ---------- ------- ---------
Revenue 3,585 1,347 (18) 4,914 - 4,914
People costs (2,416) (318) - (2,734) (34) (2,768)
Non-people costs (1,056) (952) 18 (1,990) - (1,990)
----------------------------- --------------- ------------------- --------------- ---------- ------- ---------
Operating profit before
specific items 113 77 - 190 (34) 156
Operating specific items
RMSEPP buy-in settlement - - - - (64) (64)
Employee Free Shares charge - - - - (17) (17)
Impairment/legacy/
other costs - - - - (69) (69)
Amortisation of intangible
assets in acquisitions - - - - (10) (10)
----------------------------- --------------- ------------------- --------------- ---------- ------- ---------
Operating profit 113 77 - 190 (194) (4)
Non-operating specific
item - profit on disposal
of property, plant and
equipment - - - - 5 5
----------------------------- --------------- ------------------- --------------- ---------- ------- ---------
Profit 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
----------------------------- --------------- ------------------- --------------- ---------- ------- ---------
(3) The comparative period has been re-presented to incorporate
changes to the presentation of costs (see the income statement for
more details) and the elimination of intragroup revenue (see
footnote 2 above).
(4) 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.
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.
Intragroup
26 weeks ended 29 September UKPIL GLS revenue(1) Group
2019 GBPm GBPm GBPm GBPm
----------------------------- ----- ----- ----------- -----
Letters and other revenue 1,617 - - 1,617
Advertising Letters 306 - - 306
Parcels 1,726 1,537 (20) 3,243
----------------------------- ----- ----- ----------- -----
Total 3,649 1,537 (20) 5,166
----------------------------- ----- ----- ----------- -----
Intragroup
Re-presented(2) UKPIL GLS revenue(1) Group
26 weeks ended 23 September
2018 GBPm GBPm GBPm GBPm
----------------------------- ----- ----- ----------- -----
Letters and other revenue 1,615 - - 1,615
Advertising Letters 336 - - 336
Parcels 1,634 1,347 (18) 2,963
----------------------------- ----- ----- ----------- -----
Total 3,585 1,347 (18) 4,914
----------------------------- ----- ----- ----------- -----
(1) Eliminations relate to intragroup revenue from trading
between UKPIL and GLS. This is due to Parcelforce Worldwide being
GLS' partner in the UK.
(2) The comparative period revenues have been re-presented as a
result of the move to a new revenue allocation methodology which
reduces reliance on sampling by using Post Office traffic data.
This change only impacts the allocation of revenue between stamped
letters and parcels, and some international export products.
Advertising and business letters (including metered products),
account parcels, and Parcelforce Worldwide revenues and volumes are
not affected by this change. Total UKPIL revenue remains unchanged,
but the allocation between letters and parcels revenue changes as a
result of using Post Office traffic data rather than an estimate
based on sampling.
4. Taxation
The Group reported tax charge is GBP20 million on a reported
profit before tax of GBP173 million. This gives a low effective tax
rate compared with the UK statutory rate which arises mainly due to
there being no tax charge on profits on property disposals due to
reinvestment relief and non-taxable 'net pension interest' income.
Other contributing factors include deferred tax asset recognition
in the UK on losses and other timing differences which were
previously unrecognised. The impact of these items on the effective
tax rate is partially offset by the Regulatory fine which is not
tax deductible and losses in GLS France and GLS US for which no
deferred tax asset is recognised.
Details of the adjusted tax charge and effective tax rate are
provided in the Financial Review.
5. Earnings per share
26 weeks ended 29 September 26 weeks ended 23
2019 September 2018
----------------------------------
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) 153 42 111 5 (131) 136
Weighted average number
of shares issued (million) 999 n/a 999 1,000 n/a 1,000
Basic earnings per share
(pence) 15.3 n/a 11.1 0.5 n/a 13.6
Diluted earnings per share
(pence) 15.3 n/a 11.1 0.5 n/a 13.6
----------------------------------- -------- -------------- -------- -------- -------------- --------
(1) Further details of specific items can be found in the
Financial Review.
The diluted earnings per share for the 26 weeks ended 29
September 2019 is based on a weighted average number of shares of
999,572,008 (H1 2018-19: 1,003,327,899) to take account of the
potential issue of 601,714 ordinary shares resulting from the
Deferred Share Bonus Plan (DSBP) for certain senior management.
Management have historically elected to settle this scheme using
shares purchased from the market.
The 1,029,706 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
ended ended 26 weeks 26 weeks
29 September 23 September ended ended
2019 2018 29 September 23 September
Pence per Pence per 2019 2018
Dividends on ordinary shares share share GBPm GBPm
----------------------------- ------------- ------------- ------------- -------------
Final dividends paid 17.0 16.3 169 162
----------------------------- ------------- ------------- ------------- -------------
Total dividends paid 17.0 16.3 169 162
----------------------------- ------------- ------------- ------------- -------------
The final dividend of 17.0 pence per share was paid on 4
September 2019 to shareholders whose names appeared on the register
of members on 25 July 2019.
7. Retirement benefit plans
Summary pension information
26 weeks 26 weeks
ended ended
29 September 23 September
2019 2018
GBPm GBPm
========================================================= ============= =============
Ongoing UK pension service costs
UK defined benefit plans (including administration
costs)(1) (189) (187)
UK defined contribution plan (47) (39)
UK defined benefit and defined contribution plans'
Pension Salary Exchange (PSE) employer contributions(2) (88) (85)
========================================================= ============= =============
Total UK ongoing pension service costs (324) (311)
GLS defined contribution type plan costs (4) (4)
========================================================= ============= =============
Total Group ongoing pension service costs (328) (315)
========================================================= ============= =============
Cash flows relating to ongoing pension service
costs
UK defined benefit plans' employer contributions(3) (146) (154)
Defined contribution plans' employer contributions (51) (43)
UK defined benefit and defined contribution plans'
PSE employer contributions (88) (85)
========================================================= ============= =============
Total Group cash flows relating to ongoing pension
service costs (285) (282)
========================================================= ============= =============
RMSEPP deficit correction payments - (1)
Pension related accruals (timing difference) - 2
========================================================= ============= =============
Pension charge to cash difference adjustment (43) (34)
--------------------------------------------------------- ------------- -------------
(1) These pension service costs are charged to the income
statement. They represent the cost (as a percentage of pensionable
payroll - 19.6 per cent for the DBCBS (2018-19: 41.0 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 GBP5 million (H1 2018-19: GBP2 million) and the DBCBS
of GBP1 million (H1 2018-19: GBP2 million) continue to be included
within the Group's ongoing UK pension service costs.
(2) Eligible employees who are enrolled into PSE opt out of
making employee contributions to their pension and the Group makes
additional contributions in return for a reduction in basic
pay.
(3) The employer contribution cash flow rate forms part of the
payroll expense and is paid in respect of the DBCBS (15.6 per cent)
(2018-19: RMPP (17.1 per cent to 31 March 2018) and the DBCBS (15.6
per cent from 1 April 2018). This includes payments into RMPP
pension escrow investments. The contribution rate 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.
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 (IAS Actuarial funding Accounting Actuarial funding
19) (IAS 19)
======================= ===================== ===================== ===================== =====================
At 29 At At 30 At At 29 At At 30 At
September 31 March September 31 March September 31 March September 31 March
2019 2019 2019 2019 2019 2019 2019 2019
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
======================= ========== ========= ========== ========= ========== ========= ========== =========
Fair value of
plans' assets(4,5) 626 402 622 402 12,286 10,803 12,292 10,877
Present value
of plans' liabilities (777) (474) (607) (393) (7,990) (7,097) (12,093) (10,818)
======================= ========== ========= ========== ========= ========== ========= ========== =========
(Deficit)/surplus
in plans (pre
withholding
tax payable)(6) (151) (72) 15 9 4,296 3,706 199 59
Withholding
tax payable n/a n/a n/a n/a (1,504) (1,298) n/a n/a
======================= ========== ========= ========== ========= ========== ========= ========== =========
(Deficit)/surplus
in plans(7) (151) (72) 15 9 2,792 2,408 199 59
----------------------- ---------- --------- ---------- --------- ---------- --------- ---------- ---------
(4) 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.
(5) An agreement has been made with the Pension trustee to
ringfence certain RMPP employer contributions in an escrow
arrangement. These contributions are not considered to be Plan
assets as the Trustee does not have any control over the
assets.
(6) Any reference to a withholding tax adjustment relates to
withholding tax payable on the distribution of a pension
surplus.
(7) On an actuarial funding basis, the excess of DBCBS assets
over liabilities is as a result of the risk reserve.
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 DBCBS RMPP and
At 29 September RMSEPP At At 31 March RMSEPP
2019 29 September 2019 At 31 March
2019 2019
============================== ================ ============= ============ ============
Retail Price Index (RPI) 3.2% 3.0% 3.2% 3.2%
Consumer Price Index (CPI) 2.4% 2.2% 2.2% 2.2%
Discount rate
- nominal 1.6% 1.8% 2.2% 2.4%
- real (nominal less RPI)(8) (1.6)% (1.2)% (1.0)% (0.8)%
Constructive obligation for
increases 4.4% - 4.2% -
------------------------------ ---------------- ------------- ------------ ------------
(8) The real discount rate used reflects the average duration of
the RMPP of around 27 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 - 315
Increase in inflation rate
(both RPI and CPI simultaneously)
of 0.1% p.a. 10 205
Decrease in discount rate
of 0.1% p.a. 10 205
Increase in CPI assumption
(assuming RPI remains constant)
of 0.1% p.a. 10 40
Increase in constructive
obligation of 0.1% p.a. 10 -
------------------------------------ ------------------ -----------------
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:
Net defined
Defined benefit Defined benefit benefit
asset liability surplus
======================================== ================== =================== ===================
At 29 At 31 At 29 At 31 At 29 At 31
September March September March September March
2019 2019 2019 2019 2019 2019
GBPm GBPm GBPm GBPm GBPm GBPm
======================================== ========== ====== ========== ======= ========== =======
Retirement benefit surplus (pre
withholding tax payable) at 1
April 2019 and 26 March 2018 10,803 10,361 (7,097) (7,038) 3,706 3,323
======================================== ========== ====== ========== ======= ========== =======
Amounts included in the income
statement
Ongoing UK defined benefit pension
plan and administration costs
(included in People costs) (5) (8) - (5) (5) (13)
RMSEPP buy-in settlement - operating
specific item - (64) - - - (64)
Pension interest income/(cost)(9) 129 247 (84) (168) 45 79
======================================== ========== ====== ========== ======= ========== =======
Total included in profit before
tax 124 175 (84) (173) 40 2
======================================== ========== ====== ========== ======= ========== =======
Amounts included in other comprehensive
income - remeasurement gains/(losses)
Actuarial gain/(loss) arising
from:
Financial assumptions - - (877) (197) (877) (197)
Demographic assumptions - - - 169 - 169
Experience assumptions - - 28 67 28 67
Return on plans' assets (excluding
interest income) 1,399 344 - - 1,399 344
======================================== ========== ====== ========== ======= ========== =======
Total remeasurement gains/(losses)
of the defined benefit surplus 1,399 344 (849) 39 550 383
======================================== ========== ====== ========== ======= ========== =======
Other
Employer contributions(10) - 3 - - - 3
Benefits paid (40) (78) 40 78 - -
Movement in pension-related accruals - (2) - (3) - (5)
======================================== ========== ====== ========== ======= ========== =======
Total other movements (40) (77) 40 75 - (2)
======================================== ========== ====== ========== ======= ========== =======
Retirement benefit surplus (pre
withholding tax payable) at 29
September 2019 and 31 March 2019 12,286 10,803 (7,990) (7,097) 4,296 3,706
======================================== ========== ====== ========== ======= ========== =======
Withholding tax payable n/a n/a n/a n/a (1,504) (1,298)
======================================== ========== ====== ========== ======= ========== =======
Retirement benefit surplus (net
of withholding tax payable) -(-)
-at 29 September 2019 and 31 March
2019 n/a n/a n/a n/a 2,792 2,408
---------------------------------------- ---------- ------ ---------- ------- ---------- -------
(9) Pension interest income results from applying the plans'
discount rate at 31 March 2019 to the plans' assets at that date.
Similarly, the pension interest cost results from applying the
plans' discount rate as at 31 March 2019 to the plans' liabilities
at that date.
(10) Excludes payments into pension escrow investments of GBPnil
(2018-19: GBP7m).
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
are analysed as follows:
Defined benefit Defined benefit Net defined
asset liability benefit deficit
======================================== ================== ================== ==================
At 29 At 31 At 29 At 31 At 29 At 31
September March September March September March
2019 2019 2019 2019 2019 2019
GBPm GBPm GBPm GBPm GBPm GBPm
======================================== ========== ====== ========== ====== ========== ======
Retirement benefit deficit at
1 April 2019 and 26 March 2018 402 - (474) - (72) -
======================================== ========== ====== ========== ====== ========== ======
Amounts included in the income
statement
Ongoing UK defined benefit pension
plan and administration costs
(included in People costs) (1) (2) (234) (465) (235) (467)
Pension interest income/(cost)
(11) 6 - (8) - (2) -
---------------------------------------- ---------- ------ ---------- ------ ---------- ------
Total included in profit before
tax 5 (2) (242) (465) (237) (467)
======================================== ========== ====== ========== ====== ========== ======
Amounts included in other comprehensive
income - remeasurement gains/(losses)
Actuarial gain/(loss) arising
from:
Financial assumptions - - (70) (16) (70) (16)
Experience assumptions - - 2 - 2 -
Return on plan assets 29 8 - - 29 8
Total remeasurement gains/(losses)
of the defined benefit deficit 29 8 (68) (16) (39) (8)
======================================== ========== ====== ========== ====== ========== ======
Other
Employer contributions(12) 197 403 - - 197 403
Employee contributions 2 4 (2) (4) - -
Benefits paid (9) (11) 9 11 - -
Total other movements 190 396 7 7 197 403
======================================== ========== ====== ========== ====== ========== ======
Retirement benefit deficit at
29 September 2019 and 31 March
2019 626 402 (777) (474) (151) (72)
---------------------------------------- ---------- ------ ---------- ------ ---------- ------
(11) Pension interest income results from applying the plans'
discount rate at 31 March 2019 to the plans' assets at that date.
Similarly, the pension interest cost results from applying the
plans' discount rate as at 31 March 2019 to the plans' liabilities
at that date.
(12) Includes PSE contributions of GBP54 million (2018-19:
GBP110 million).
8. Leases
The adoption of IFRS 16 significantly impacts the Group balance
sheet at the 1 April 2019 transition date, 'Right of Use' (ROU)
assets have been recognised as 'Property, plant and equipment'
along with associated 'Lease liabilities'. Certain prepayment,
onerous lease provision and rent incentive balances have also been
impacted. The following table shows the detailed line by line
impact on the balance sheet:
Reported
Reported at at
31 March 2019 IFRS 16 impact 1 April 2019
GBPm GBPm GBPm
------------------------------ -------------- -------------- -------------
Non-current assets
Property, plant and equipment 2,066 1,045 3,111
Deferred tax assets 64 - 64
Other non-current assets 3,647 - 3,647
------------------------------ -------------- -------------- -------------
5,777 1,045 6,822
Assets held for sale 36 - 36
------------------------------ -------------- -------------- -------------
Current assets
Trade and other receivables 1,310 (20) 1,290
Other current assets 278 - 278
------------------------------ -------------- -------------- -------------
1,588 (20) 1,568
------------------------------ -------------- -------------- -------------
Total assets 7,401 1,025 8,426
------------------------------ -------------- -------------- -------------
Current liabilities
Trade and other payables (1,883) 4 (1,879)
Lease liabilities (37) (118) (155)
Provisions (58) 1 (57)
Other current liabilities (11) - (11)
------------------------------ -------------- -------------- -------------
(1,989) (113) (2,102)
Non-current liabilities
Lease liabilities (88) (944) (1,032)
Deferred tax liabilities (55) - (55)
Provisions (104) 1 (103)
Other non-current liabilities (546) 32 (514)
------------------------------ -------------- -------------- -------------
(793) (911) (1,704)
------------------------------ -------------- -------------- -------------
Total liabilities (2,782) (1,024) (3,806)
------------------------------ -------------- -------------- -------------
Net assets 4,619 1 4,620
------------------------------ -------------- -------------- -------------
Equity
Retained earnings 4,576 1 4,577
Other equity 43 - 43
------------------------------ -------------- -------------- -------------
Total equity 4,619 1 4,620
------------------------------ -------------- -------------- -------------
Reconciliation of operating lease commitments to the equivalent
IFRS 16 lease liabilities at 31 March 2019
GBPm
--------------------------------------------- -------
Undiscounted operating lease future minimum
lease payments at 31 March 2019 (1,327)
Irrecoverable VAT included in future minimum
lease payments at 31 March 2019 88
Impact of discounting 182
Short-term/low-value leases 18
Other reconciling items (net) (23)
IAS 17 operating lease liabilities at 31
March 2019 in scope for IFRS 16 (1,062)
Impact of IFRS 16 on financial statements in the period
At 29 September 2019 the Group has right of use assets of
GBP1,043 million and associated lease liabilities of GBP1,065
million in relation to leases which were previously classed as
operating leases and held off balance sheet.
Under IFRS 16 the Group recognises depreciation and interest
charges on leases which have been brought onto the balance sheet,
as opposed to rental costs which were previously treated as
operating costs in the income statement. For the 26 weeks ended 29
September 2019 the Group recognised GBP72 million depreciation and
GBP12 million interest in relation to leases which were previously
classed as operating leases.
9. Provisions
Specific items Other Total
GBPm GBPm GBPm
------------------------------------- -------------- ----- -----
At 31 March 2019 (100) (62) (162)
IFRS 16 opening adjustments - 2 2
------------------------------------- -------------- ----- -----
At 1 April 2019 (100) (60) (160)
------------------------------------- -------------- ----- -----
Arising during the year:
Charged in operating specific items (52) - (52)
Released in operating specific items 8 - 8
Charged in other operating costs - (21) (21)
Released in other operating costs - 2 2
Amounts reclassified in the period - (19) (19)
Utilised in the period 1 28 29
Unwinding of discount - industrial
diseases claims (1) - (1)
------------------------------------- -------------- ----- -----
At 29 September 2019 (144) (70) (214)
------------------------------------- -------------- ----- -----
Disclosed as:
Current (57) (46) (103)
Non-current (87) (24) (111)
------------------------------------- -------------- ----- -----
At 29 September 2019 (144) (70) (214)
------------------------------------- -------------- ----- -----
Disclosed as:
Current (9) (49) (58)
Non-current (91) (13) (104)
------------------------------------- -------------- ----- -----
At 31 March 2019 (100) (62) (162)
------------------------------------- -------------- ----- -----
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 launched
an appeal with the Competition Appeal Tribunal (CAT). On 12
November 2019, the CAT issued its judgment, which upheld Ofcom's
decision. Royal Mail is considering all legal options, including
whether to seek permission to appeal and to request that payment of
the penalty, which would otherwise become payable, be stayed
pending any appeal. In light of the CAT judgment, a provision has
been made for GBP51 million, charged to operating specific items,
representing the fine and associated interest.
GBP19 million has been reclassified to other provisions during
the period (previously presented within accruals) in respect of GLS
liabilities, mainly in respect of employee benefits and litigation
claims. Other provisions also include transformation costs
provisions, previously presented separately.
10. Contingent liabilities
In October 2018, Whistl filed a damages claim against Royal Mail
at the High Court relating to Ofcom's decision of 14 August 2018,
which found that Royal Mail had abused its dominant position.
Whistl's High Court claim is on hold until after the completion of
any further appeal process. Royal Mail believe Whistl's claim is
without merit and will defend it robustly if Whistl decides to
pursue it.
11. Events after the reporting period
Acquisition of Mountain Valley Express (MVE) and Mountain Valley
Freight Solutions (MVFS)
On 30 September 2019 General Logistics Systems North America
Inc., a subsidiary of General Logistics Systems (GLS) acquired 100
per cent of the shares of MVE and MVFS, leading overnight and
second day freight service providers based in California. The
consideration was $18.5 million cash (approximately GBP16.4
million) with a further $4.5 million (approximately GBP4 million)
deferred consideration subject to the future performance.
No fair value disclosure has been made in these financial
statements as the acquisition balance sheet is still being compiled
under the terms of the purchase agreement.
Issue of EUR550 million 1.250 per cent bond
On 8 October 2019, Royal Mail plc issued a EUR550 million bond
with coupon of 1.25 per cent and maturity date of 8 October 2026.
To hedge the foreign exchange risk, Royal Mail chose to take out a
cross currency swap. The combined interest rate of the coupon and
the cross currency swap is 2.7 per cent.
Competition Appeal Tribunal (CAT) judgment
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. Royal Mail lodged an
appeal with the CAT on 12 October 2018 to have both Ofcom's
decision and fine overturned. On 12 November 2019, the CAT issued
its judgment, which upheld Ofcom's decision and fine. Management's
view is that it is probable that Royal Mail will be required to pay
the fine and, accordingly, a liability has been recognised in these
financial statements. Royal Mail is considering all legal options,
including whether to seek permission to appeal and to request that
payment of the penalty, which would otherwise become payable, be
stayed pending any appeal. In October 2018, Whistl filed a damages
claim against Royal Mail at the High Court relating to Ofcom's
decision. Whistl's High Court claim is on hold until after the
completion of the appeal process. Royal Mail believe Whistl's claim
is without merit and will defend it robustly if Whistl decides to
pursue it.
Ofcom Statement of Objections
In May 2018, Royal Mail made a leniency application in relation
to an anti-competitive market sharing agreement between Parcelforce
Worldwide (PFW) and its reseller The Sale Group (TSG). Ofcom issued
a Statement of Objections on 19 September 2019 together with a
public announcement that revealed PFW has been granted immunity
from fines and that TSG has settled the case and accepted a fine of
GBP40,000. This was confirmed by Ofcom on 14 November, 2019 when it
updated its bulletin webpage to indicate that it had issued its
final decision and closed the case.
Interim dividend
The Board has declared an interim dividend of 7.5 pence per
ordinary share (H1 2018-19: 8.0 pence per share). The dividend
amounts to GBP75 million (H1 2018-19: GBP80 million) and will be
paid on 15 January 2020 to shareholders on the register at the
close of business on 6 December 2019. The ex-dividend date is 5
December 2019.
RESPONSIBILITY STATEMENT OF THE DIRECTORS IN RESPECT OF THE HALF
YEAR FINANCIAL REPORT
We confirm that to the best of our 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
Group 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 2018-19 with the
exception of the following Board changes:
Les Owen Stepped down 22 May 2019
Orna Ni-Chionna Stepped down 18 July 2019
Maria da Cunha Appointed 22 May 2019
Michael Findlay Appointed 22 May 2019
Sarah Hogg Appointed 01 October 2019
Lynne Peacock Appointed 01 November 2019
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 Officer Chief Finance and Operations Officer
20 November 2019 20 November 2019
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 29 September 2019 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 29
September 2019 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.
The impact of uncertainties due to the UK exiting the European
Union on our review
Uncertainties related to the effects of Brexit are relevant to
understanding our review of the condensed financial statements.
Brexit is one of the most significant economic events for the UK,
and at the date of this report its effects are subject to
unprecedented levels of uncertainty of outcomes, with the full
range of possible effects unknown. An interim review cannot be
expected to predict the unknowable factors or all possible future
implications for a company and this is particularly the case in
relation to Brexit.
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
20 November 2019
FORWARD-LOOKING STATEMENTS
This document contains certain forward-looking statements
concerning the Group's business, financial condition, results of
operations and certain 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.
1 The Group adopted IFRS 16, with effect from 1 April 2019. The
impact on the results for the first half of 2019-20 is a GBP7
million increase in operating profit, a GBP67 million increase in
in-year trading cash flow, and a GBP1,065 million increase in net
debt. The results for the first half of 2018-19 have not been
restated for the impact of IFRS 16.
2 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. For further details on
Adjusted Group operating profit, reported results and Alternative
Performance Measures (APMs) used, see section entitled
'Presentation of results and Alternative Performance Measures'.
3 All percentage changes reflect the movement between figures as
presented, unless otherwise stated.
4 Re-presented to reflect intragroup revenue from trading
between UKPIL and GLS.
5 On 22 May 2019, we announced that we were rebasing the
dividend and changing the dividend policy. Reflective of the
Board's confidence in the Group's updated strategy, strong balance
sheet position and future cash generation, the Board committed to
underpin an annual dividend at not less than 15.0 pence per share
from 2019-20 to 2023-24. The Board would expect to pay an interim
dividend each year equal to half of the annual dividend.
6 UK letters and parcels revenue and volumes have been allocated
using a new methodology which reduces our reliance on sampling by
using Post Office traffic data which has been tested for accuracy.
This change only impacts the allocation of revenue between stamped
letters and parcels, and some international export products. Total
UKPIL revenue remains unchanged.
7 The Rise of Night-time Online Shopping, John Lewis Partnership
Card, September 2019
8 2018-19 half year results have been re-presented as described
in the section entitled 'Changes in disclosures and metrics used in
external reporting'
9 The voluntary redundancy charge to cash difference represents
the timing difference between when the voluntary redundancy charge
is expensed to the income statement and when the cash payment is
made.
10 Comparisons with a prior period are no longer presented on an
underlying basis. All percentage changes represent the movement
between the results as presented. Any factors having a material
impact on period on period comparisons are highlighted in the
narrative to the results
11 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 year. The current year
FTE is calculated on a 38 hour week basis
12 Details of specific items in the pension adjustment can be
found under 'Specific items and pension charge to cash difference
adjustment' in the Group Results section.
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 BMBJTMBMTTLL
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