RMG.L Regulatory News (RMG)

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.

ROYAL MAIL plc

AGM TRADING STATEMENT

Royal Mail plc (RMG.L) will hold its 2020 Annual General Meeting (AGM) today at 13.00 in the Company's registered office, 3rd floor, 100 Victoria Embankment, London EC4Y 0HQ. Due to the social distancing measures in place in relation to COVID-19, shareholders will regrettably not be able to attend the AGM in person. As a result, we intend to publish a pre-recorded, virtual shareholder event on www.royalmailgroup.com at 15:00 today, following the formal business of the AGM.

Interim Executive Chair, Keith Williams, Interim Royal Mail Chief Executive Officer, Stuart Simpson, and GLS Chief Executive Officer Martin Seidenberg will comment on the performance of the Group in the 2019-20 financial year and provide an update on the Group's progress in the first five months of the 2020-21 financial year.

The results of voting at the AGM will be announced later today.

Trading update covering the five months ended 30 August 2020

Royal Mail

· Parcel volumes up 34% (177 million more parcels) and revenue up 33.1% year on year.

· Addressed letter volumes (ex. elections) down 28% (1.1 billion fewer letters)

· Letter revenue down 21.5%

· Total revenue up £139 million

In the first five months of the year, we have seen a substantial shift in our business from letters to parcels. The strong growth in parcel volumes is being driven by B2C and e-commerce. Whilst this has driven better than expected revenues, as discussed previously, our legacy in letters has held back operational changes needed to adapt our business to a market that has fewer letters and more parcels. As a result, the mix shift from handling more parcels and fewer letters increased costs in the period by £85 million.

In addition, costs related to COVID-19 (elevated absence, social distancing, additional protective equipment and other costs) were £75 million in the first five months.

As previously announced, we have taken action to speed up decision-making and improve our financial position. Our management restructure will deliver a £130 million cost benefit from FY2021-22, and we are also targeting flat non-people costs in FY2021-22 vs. FY2019-20, excluding depreciation, through delivery of £200 million of savings.

These changes have also helped us to focus capital expenditure on delivering key projects and delivering them more quickly, whilst also reducing capex spend by around £250 million over the next two years.

In both GLS and Royal Mail, parcel revenues are significantly ahead of our expectations pre-COVID, but while this has increased profits in GLS, it has not halted the long term decline in Royal Mail profitability. We continue to expect Royal Mail to make a material loss this financial year 2020-21 and will not become profitable without substantial business change.

GLS

· Volumes up 19%, revenue up 18.6% year on year.

· Adjusted operating margin 8.1%

While the current COVID-19 crisis has brought both additional challenges and extra costs, the market changes accelerated by it have created opportunities. GLS is well positioned to achieve further success in its markets and has continued to benefit from the growth in B2C parcel volumes, in addition to its strong position in B2B parcels, with both volumes and revenues up by around 19%. Revenues have increased significantly in GLS companies which already had a relatively high proportion of B2C volumes pre-COVID-19, for example Spain and Europe East. Performance has also been better in the previously underperforming "focus countries" France, Spain and the US.

Actions taken to mitigate associated additional costs of B2C, including increased use of digital and route optimisation tools to improve last mile efficiency have been effective to date.

Scenarios for 2020-21

Given the level of uncertainty, we are still unable to provide specific guidance for FY2020-21. In June 2020 we provided two illustrative scenarios for FY2020-21, not as guidance or management's views on outlook but to outline possible impacts of COVID-19 on the Group.

Whilst to date Royal Mail revenue is better than shown in Scenario 1, costs are currently higher and are likely to remain challenging for the rest of the year. There are still significant ongoing challenges including the impact of the recession, changes to international postal rates and the potential frictional impact on cross border trade from Brexit.

GLS has delivered a good performance in the first five months, although the remainder of the year carries some uncertainties and challenges, including the pace of recovery in B2B volumes, the impact on parcel volumes from easing lockdown restrictions and recessionary impacts in most GLS countries.

Based on trends seen in the year to date (five months ended 30 August 2020), Scenario 1 has been updated:

Scenario 1 (change vs. prior year)

1. Includes elections in 2019-20 (£82 million)

* Costs of elevated absence, social distancing, additional protective equipment and other COVID-19 related costs

Scenario 2 remains unchanged as a downside stress test.

The results for the half year ending 27 September 2020 are expected to be announced on 19 November 2020.

Discussion with our unions

The trends we are experiencing in letter and parcel volumes may slow after the pandemic but we do not expect them to reverse. There is an opportunity to benefit from the rapidly growing demand by customers for parcels and if Royal Mail can adapt its business quickly enough, we will be well positioned to meet customers' demands for more and more items, to and from more people, delivered more frequently. But we need to move quickly. Currently, too many parcels are sorted by hand and we are failing to adapt our business to fundamentally lower letter volumes and are holding on to outdated working practices and a delivery structure that no longer meets customer needs.

Royal Mail has been in ongoing discussions with both Unite CMA and the CWU on the changes needed.

We have made good progress in a number of areas and we have tabled the changes that we need to make. For example, we want to work together on:

· our network strategy to support our new parcel hubs and trials of separate daily parcel deliveries;

· dispensing with old, outdated ways of working such as handwritten sign-in sheets, moving to automated clock-in, clock-out systems as used by other businesses for decades;

· agreeing on the removal of old letter-sorting machines, unneeded when letter volumes have halved since 2004; and 

· reviewing processing and distribution on a regular basis, to adapt them in line with the rapid decline in letter volumes.

It is disappointing that we have not yet been able to reach agreement. Without these changes, we cannot achieve essential improvements in operational efficiency and better focus our efforts on the ever increasing demands of our customers. We have increased the intensity of our discussions in recent weeks in recognition of the need to make progress more quickly.

Regulatory change

Given the pace and extent of change in what customers want from Royal Mail, the business also needs the flexibility to adapt its customer offering to deliver what our customers want.

We have surveyed the views of thousands of customers about what they want from postal services. We have also held hundreds of sessions with colleagues about how they think the Universal Service Obligation (USO) may need to change for the future. The headline insights on the USO that we have gained are clear.

· First, our customers want to retain the 'one price goes anywhere' principle of the USO.

· Second, they want more ways to send letters and parcels - whether it is online postage or parcel postboxes - and more frequent and convenient parcel deliveries. We want to look again at whether there is enough customer demand for a seven-day parcel service.

· Third, they still want an affordable next-day letters service. This is especially important for businesses during the working week.

These findings tell us that the best way to ensure the Universal Service continues to meet our customers' needs is to rebalance our service model more towards the growing parcels market, particularly urgent parcels and urgent letters. We are currently exploring what a rebalanced Universal Service might look like. We remain committed to the universal, affordable "one price goes anywhere" nature of the USO, but we would like to deliver the items that customers want more often, not less. To do that we need a regulatory system fit for the future rather than the past.

Over the coming weeks we will be meeting with more customers and other stakeholders to explore these issues in greater detail. We will share our insights with Ofcom and the Government in the Autumn. The upcoming Ofcom review of both USO user needs and its wider regulatory framework for the postal market will be vital in securing a platform which permits both the investment required to deliver the USO demanded by the public and for that service to be delivered sustainably. Any decision is a matter for the Regulator, Government and ultimately Parliament - but we need to make sure this review process is considered swiftly given the rapidly changing customer needs and the financial sustainability of the Universal Service.

Enquiries:

Investor Relations

John Crosse

Phone: 07483 390 957

Email: investorrelations@royalmail.com 

Royal Mail investor relations line: 020 7449 8183

Media Relations 

Jenny Hall

Phone: 07776 993 036

Email: jenny.hall@royalmail.com

Beth Longcroft

Phone:07435 768 549

Email: beth.longcroft@royalmail.com

Royal Mail press office out of hours: 020 7449 8246

Company Secretary

Mark Amsden

Phone: 020 7449 8289

Email: cosec@royalmail.com  

Disclaimer

Figures presented in this trading update are not audited. This trading update contains certain statements that constitute "forward looking statements". Such forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievements of the Group or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Persons receiving this release should not place undue reliance on any forward-looking statements. The Group disclaims any obligation or undertaking to update or revise any forward-looking statements contained in this document to reflect any change in its expectations or any change in events, conditions or circumstances on which such statements are based unless required to do so by applicable law, the Prospectus Rules, the Listing Rules or the Disclosure Guidance and Transparency Rules of the Financial Conduct Authority.