Member Info for Hounddog10

Given the political events of the last few days it would seem that K will probably need to act fairly soon or at least sooner than he might have wanted. Judging from the video that Anger posted the CWU are in no mood to back down eg talking of crowdfunding a strike fund. So there will be many strikes up to Xmas and probably beyond. Also I suppose both sides go into 2023 and a new negotiation on 2023 pay (is it based on calendar years or RM 31 March financial years?) with 2022 more than likely still open. So RM will continue haemorrhaging cash amid the arguments.

K’s new problem is that a Labour government looks almost certain and quite possibly may come in during 2023. Although Starmer has so far ruled out re nationalisation of utilities I could see him coming under a good deal of pressure from the unions and within his own party on RM. If Labour do it will be IDS not just RM. So GLS, the jewel in the crown, the business that is an easy asset will be lost to definitely fund RM losses (which to date management has ruled out). So he stands to lose a great deal (and we don’t know how he is financing his RM stake - floating borrowings? Leverage?).

A good deal of attention has been given to the renaming to IDS. Less noticed was that in the last year there was a corporate reconstruction whereby it seems GLS was moved from under Royal Mail Group Limited (the company that houses RM’s businesses) to be under topco (IDS plc). Done I think so that RM stood by itself and an administrator could not get hold of GLS as an asset.

Isle. I too was being rather quick. I suspect the £1m figure was based on days excluding Sundays (only some parcels delivered I think) and possibly even Saturdays (or treating it as a part day). So lower denominator. City analysts would have rung up IDS to clarify this but we have no such access. Anyway as Anger says the £219m figure is what is now important and probably already has had some broad check by the auditors.

Your point on relative cost per head of RM v GLS is one I had previously wondered about. It is a cost to the company figure so will include different levels of employment taxes plus different pay levels between countries. Overall, however I think what it says is that automation is good for the remaining workforce - they can be paid more. However, this is not something that works for the CWU. They need to keep numbers up for membership revenues.

I just hope that the workforce will realise that the numbers out there are broadly correct and increasingly dire. So not swallow the CWU narrative. There is a decent business in RM that can pay better wages than the others (at least for a while) but I fear it is heading very rapidly towards administration and people leaving the business abruptly and on bad financial terms rather than natural attrition or VR.

Scamp. Anger is right on this. I was just about to post the £219m - which works out at an average of £1.2m per day over 183 days.

I have had considerable experience in how listed companies put together these sorts of numbers and why. Until you get to a particular external reporting point - interims or annual report then management tend not to say anything and so only put out the numbers when they are precisely known and get reviewed by auditors (interims) or audited (annual report) and auditor adjustments potentially made. However, management are also obliged to keep the market informed of material changes in the business - so in that case they have to put out some sort of numbers that are broadly right. So there is always a bit of a tension between giving enough information to guide the market properly and not being too precise. I expect the £219m figure has already broadly been looked at by the auditors, KPMG I think, as they will have to check it by review when the formal half year numbers come out next month. There are also a good deal of rules around this and management run regulatory and legal risks if they mislead one way or the other.

You are right that a £12.5bn business might offer some considerable latitude for numbers to be “interpreted” but not really for IDS. From a financial perspective it is quite simple despite its size.

You are right to focus on the labour costs. Really this is the whole problem. With revenue declining labour costs are hugely important and unfortunately the main cost that has to be controlled. For Royal Mail they are set out in the annual report at page 67 and are £5,583m for last year. Non-people costs are £2,515m. It is the other way round for GLS (next page) - £908m people costs, £2,989m non-people costs.

https://www.internationaldistributionsservices.com/media/11769/royal-mail-ara-2021-2022.pdf

https://www.internationaldistributionsservices.com/media/11769/royal-mail-ara-2021-2022.pdf

Cash outflow of around £300m for this first six months. Cash in RM looks like to have dropped from £1,100m to £800m. Cash outflow for second half likely to be £200 -£300m. So will start next financial year on around £500 -£600m which, at the current rate, covers about one year of cash losses. So out of money by mid 2024 when £400m Eurobond to be repaid. Difficult to see how they can cover this. Can’t see a rescue rights or being able to borrow. So I suppose sale and leaseback the only realistic option.

No mention of what they are doing on the dividend but at best can only see a much reduced one being paid out of GLS profits.

“Shanta secured a US$20 m senior debt facility agreement with the Stanbic Bank of Tanzania of which funds were disbursed on 15 July 2022. As a condition to this debt facility agreement, Shanta entered into zero-cost collar contract over the 12 month period from August 2022 - July 2023 of 1,333 oz per month with floor price of US$1,600 per ounce and ceiling price of US$1,950 per ounce.”

Teslo. Yes this is also in the mix and an important factor. With 190,000 members the CWU cannot easily survive a lot of job losses at RM (or BT) where most of their members are. Have to say can’t see the £3m deficit. Thought for 2020 was a £6m surplus in the general fund. But that was only because Covid closed down a lot of activities. 2019 was almost £1m loss.

Other interesting stuff - big pension fund deficit, hedge fund investment, mortgages to officers etc. Sure you have seen it.

2021 is late. 6 month filing deadline.

Anger. I suppose in very difficult situations management reverse ferreting cannot be ruled out. However, even if GLS was used to fund RM I am not sure it could do it for that long. I think the losses in 2024 could be around the billion mark. Time is not RM’s side.

As for K it is certainly very plausible that he might try and take over all of RMG as his desired upping to 29.9% is usually a prelude to that. This rather puzzles me as I cannot see there is any NEAR term value in the RM side (which is contained in the subsidiary Royal Mail Group LIMITED). Stripping out the pension asset (which is a rather strange asset) and intangibles gets to tangible net equity at March 2022 of less than £1BN. That will be heavily denuded by losses by the time K gets hold of it. Even with Govt speeding his way if he was to launch an offer next month it will probably be March 2023 earliest he gets his paws on RMG (Takeover rules, counterbids, competition/Govt clearances etc). There will be then more protracted fights with the CWU as losses mount. So I think he might be quite happy for RM to go into administration and walk away with GLS - otherwise he will have to fund RM through GLS or otherwise. I have always assumed he wants to get hold of GLS and has no appetite for long term restructuring of RM which probably involves up front 20k job losses and 10k a year thereafter from an increasingly embittered work force.

There may be extra value over book value in RM’s property. But I assume most near term are needed to operate the business and even if sold would not compensate for operating losses.

However, it turns out it will not be good for the posties. I hope some realism can creep in.

Possibly. But looking at it from RM’s point of view they have said that they are not going to cross subsidise RM with GLS. So they would have to go back on that if they were to sell GLS and use the funds to help RM. Further, I would assume that it would make pay negotiations with the CWU much more difficult if RMG was sitting on several billions of cash. I would have thought that management’s preferred route is to demerge GLS which would not result in any cash coming in. However, their hand may be forced if an offer for GLS comes in that they cannot refuse.

The Times reports that RM have given the CWU “a final warning” at the broken down talks today and have threatened job cuts. I rather fear the situation is beyond the point of no return. At best a meeting of minds might just come after a few months but that is too late. The CWU apparently want a no strings inflation rise of inflation ie 10% which is completely unaffordable even if the position might be understandable from a cost of living perspective.

RM has about £1.1Bn of cash but with capex (especially the need to finish Daventry) and losses that will be exhausted by mid/end next year. So it seems administration beckons.

At the current level the share should be excellent value, albeit may go lower. However, investors have to be braced for no dividend and the shares being suspended during administration as the business is sorted out.

They will have to put something out. Not least on profit outlook. Last guidance was that RM would be “materially loss making”. Not sure that is harsh enough now. If the strikes cost £25m per day and there are 9 full strikes and ten mini ones I would imagine that could be £300m -£400m of extra losses if they go ahead. Some customers will go permanently.

In some ways it is good that the CWU are crystallising matters. Better to have the fight now rather than RM limp on with escalating losses.

Surely two members of staff is pushing it. Cannot the person doing the feeding not then sprint to the end and do the collecting? Would have to be fit though.

I am sure the Warrington superhub has nice views. Perhaps the CWU and RM management can co-locate there in rooms at the top. Then they can watch the future whizzing away under their feet.

Well perhaps they should think about it. More like a few rooms in wherever one of the big unions eg Unite hang out. This battle is quite existential not only for RMG but CWU. They cannot afford to lose members. Over half their 190,000 membership work at Royal Mail.

The CWU have their own problems. Declining membership, big pension deficit and generally losses (although in 2020, their last annual return, a surplus mainly because COVID curtailed activities eg Conference and so costs). Also quite a bit of their balance sheet is commercial property particularly their Wimbledon HQ, above the shopping centre, which probably is not worth as much now.

They have yet to file their 2021 annual return with the Certification Office - or at least it is not on the government website.

Although downplayed letters are still important to RMG. In the 2021/22 year they made £3,714m. Parcels £4,800m. The problem is that they are in terminal decline. Currently dropping at 7%. In my view that rate will start to accelerate quite steadily. Other “analogue” processes such as cheques, cash, bank branch visits, physical newspapers were around that level five or so years ago. Now they are more like a 15% decline. Indeed, recent figures for newspapers show an almost 20% decline for some. A 7% decline costs RMG £250m in revenue. Of course that snowballs relative to the starting point - £250m decline this year, £500m next year, £750m the year after. I would guess by 2030 letter revenue would be more or less immaterial.

Although the future is obviously parcels and that looks bright it has some challenges. In its annual report RMG quotes a figure that 43% of the retail market in the UK is now digital e-commerce. What might be the maximum - probably no more than 80%. So RMG could possibly double parcel volume over time if holding market share but they will need to be hyper efficient and start now. Also I suspect a decent part of the market will go to click and collect and into lockers rather than door to door. Again in its annual report RMG quotes a figure that 44% of people in Denmark prefer a parcel store/locker while 87% in UK prefer door to door. RMG thinks this is hopeful but I am not so sure. Apparently there is a Czech guy (not K) who is going to put lockers into supermarkets. Supermarkets get some rental income plus potential for more footfall. Delivering parcels to lockers is apparently (and unsurprisingly) over 10 times more efficient than door to door.

Thanks hardup. I have sent an email to Lloyds to try and clarify one or two matters. I would also note for those that have not clicked on the link that one graph in the report envisages that base rates may need to go to 9.9%(!!) by the end of the year to quell inflation. Not very likely but I think base rates have much further to run - as those of us who remember the early 1990s might think.

JB. Thanks. The debt is set out in a table on page 206 (Note 23) of the annual report. RMG have issued two Eurobonds - one for Euro500m (£416m) and another for Euro550m (£456m). They also have a facility for £925m. The first Eurobond matures in July 2024, the second in 2026. The facility, which as I noted before is undrawn, was extended to 2026 by RMG in October 2021.

The Eurobonds are uncovenanted, as is usual. The facility, again as is usual, has EBITDA (Earnings Before Interest Tax Depreciation and Amortisation) covenants (see page 207). One of EBITDA versus net debt and the other against interest. Without going into numbers you essentially need to have a decent amount of EBITDA to comply with these tests and the big variable factor in this is earnings which will now be losses. Also at the last balance sheet they had significant cash (£1,137m) but that probably is getting run down heavily due to losses and more particularly capex, particularly for the second SuperHub. So their net debt will be rising rapidly (previously they actually had net cash). That makes one of the tests much more difficult.

Looking more closely at the numbers I think I am wrong that they are currently in breach of the facility but think they will be some time next year. There are no particular repercussions at the moment anyway because the facility is undrawn but it looks to me (because of largely matching size of amount and dates) that the facility is there to fund the Eurobonds when they mature. Without the facility they will have to find from elsewhere Euro500m to repay the first Eurobond in July 2024. That is not too far away and will be a major issue in assessing RMG’s financial viability.

Two other reasons why I think they will have increasing difficulty on debt facilities:
(I) When, during the pandemic, they were (wrongly) expecting losses of the magnitude that might now come through in the next year or so they got the bank to relax the covenants. Whether the bank will do that again is uncertain particularly giving rising rates and potential rating downgrade.
(2) I don’t think S&P are assuming the facility will be available as they are suggesting that RMG could do sale & leasebacks on its properties to raise money. This is a bit of a last resort if it is to fund losses and won’t please K as balance sheet value is being eroded.

No the analysts at the banks cannot be trusted. They are invariably wrong - but nearly always on the upside. For those that do not have much knowledge here is a brief explainer. The City has a buy side (investors) and a sell side (those that are trying to flog services to companies - aka the corporate finance (deals) crowd). The analysts align with the the sell side. By regulation the buy and sell side are separated by Chinese walls, which more or less work. There is little money in traditional equity trading for banks - razor thin margins. So why then do the analysts analysing company results exist? Well, it is a tenuous existence but it is largely there to support flogging corporate finance services ie deals (which can be very profitable) to management. A top rated analyst’s bonuses really depends on this (albeit indirectly). So the analysts are nearly always consistently upbeat about a company’s prospects. It is only when it becomes blatantly apparent that things are going badly that they change their outlook.

As for the rating agencies which singularly failed to spot the impending failure of banks (along with the auditors) before the financial crisis they too are conflicted. The company pays them. Given that what do you think their outlook when rating a company might be? So for them to downrate is simply catching up with reality.

RMG (or the RM bit) is in real trouble. It looks to me that they are now in breach of their (undrawn) c£900m facility so that falls away. Their existing debt could be downgraded to junk status and they have to repay one of their Eurobonds in July 2024. A gathering storm.

GJL9 - Sell side analysts are almost hardwired to be positive about companies. Buy recommendations perennially vastly outweigh hold/sell recommendations. It takes quite a bit for them to turn negative.

Yes - in terms of parcel growth I meant, but did not make clear, over the next couple of years. I don’t see how it will grow during that period, which is the critical one for RM. However, there are some long term headwinds there - online retailers clamping down on over ordering/returns, more click & collect, parcels going into lockers etc.

It is on the cost side they have to move. 140,000 permanent RM staff each costing £29k each. So every 10,000 people reduction is £290m off the cost base. I suspect most of the loss of personnel could be done by natural attrition. But the unions have to allow it.