International Distributions Services H1 24/25 Earnings Call Transcript

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November 21, 2024

There are 4 speakers on the call.

Operator

Good morning, everyone, and welcome to International Distribution Services' Half Year Results Presentation. I'm John Cross, Director of Investor Relations. Before we start, I wanted to draw your attention to the usual disclaimer in our release this morning on forward looking statements. This sets out examples of the factors that can cause actual results to differ from any forward looking statements that we make. An update to the principal risks and uncertainties which could affect the group was set out in today's release, and they're also included in the group's annual report, which was published in June this year.

Operator

All of these risks and uncertainties have the potential to impact the group's business results of operations, financial condition and prospects adversely. As you'll know, we're also in an offer period, which means we're subject to the rules of the UK takeover code. This means that today's presentation will focus on our performance in the first half of twenty twenty four-twenty five, and we will be making no additional forward looking statements. Now turning to today's agenda. Martin will kick off with some initial comments, Michael will then take you through the financials, and then we'll go back to Martin to cover the business updates for both raw mail and GLS.

Operator

We'll also have some time for questions at the end. I'll now hand over to Maarten.

Speaker 1

Thank you, John, and good morning, everyone. It's great to be here presenting our results for the first half of the 'twenty four, 'twenty five financial year. I'm pleased to say that the group delivered a good performance despite a weak macroeconomic backdrop and regulatory pressures. We delivered an adjusted operating profit of GBP 61,000,000 compared to a loss of £169,000,000 last year. At Royal Mail, we are delivering on what we promised.

Speaker 1

The business has maintained its momentum and the transformation is delivering an improved financial and operational performance with strong revenue growth and significantly reduced operating losses. The modernization of our network continues at pace, improving efficiency and quality, and we're expanding our out of home footprint. We're on track to return to adjusted operating profit before we are cost for the full year. GLS made further strategic progress, expanding its out of home offering, upgrading its network to drive productivity and growth and launching new innovative digital solutions. We have enhanced our global service offering with new transatlantic routes and increased our distribution capabilities in Asia Pacific.

Speaker 1

However, GLS margin was lower year on year against a challenging economic and regulatory backdrop. In response, we've implemented cost reduction, pricing and efficiency measures. GLS' flexible business model, diverse geographic footprint and focus on quality will serve us well and we will continue to invest to support growth. The outlook in the UK and Europe remains challenging with significant fiscal headwinds next year in the UK. We are delivering on the changes we can control, but the cost environment is worsening just at a time when we need to invest.

Speaker 1

This makes universal service reform even more urgent. Before I update on both businesses in more detail, I will hand over to Mikael to run you through the group financials for the first half.

Speaker 2

Thank you, Martin, and good morning, everybody. The group delivered a good top line performance, increasing revenue by 8.2 percent to €6,300,000,000 Growth was seen in both raw mail and in GLS against the backdrop of a difficult trading environment. In Parcels, we saw volume growth of 7%, taking the total number of parcels handled in the period to 1,100,000,000 This parcel volume generated 4,400,000,000 of revenue, a 6.4% increase year on year. Profit on an adjusted basis was £61,000,000 compared to a loss of £169,000,000 in the prior year. This reflects top line growth and a significant reduction in losses at raw mail.

Speaker 2

Excluding voluntary redundancy, or VR, costs, the adjusted loss in raw mail was €52,000,000 a significant improvement on last year's adjusted loss of €319,000,000 As Martin said, the business is on track to return adjusted operating profit before VR costs for the full year. Free cash flow was an outflow of €47,000,000 compared to an outflow of €72,000,000 last year, largely driven by the improved trading performance. Compared to March, net debt increased by €178,000,000 to €1,900,000,000 reflecting our investment in transformation and growth. Despite that increase, the group maintains a strong conservative balance sheet, and we continue to focus on cash management and liquidity. The recently announced changes to Employers National Insurance mean our costs at Royal Mail will rise by around £120,000,000 next year, a significant and disproportionate impact compared to our competitors given the nature of our 130,000 strong permanent workforce.

Speaker 2

We expect to eventually mitigate the impact of this through pricing and cost measures, but in the short term, this will impact on profitability. And as a result, we've had to reduce the carrying value of raw mail by £134,000,000 Moving on to raw mail in more detail. Total revenue was up 10.7% with growth in both letters and parcels, driven by pricing and higher parcel volumes. The general election in July added 5.5 percentage points to letter revenue growth with underlying revenue growth of 7.2%. Parcels saw good volume growth of 9% in a weaker market than anticipated, with price increases offset by negative mix.

Speaker 2

On costs, we made further progress on the modernization agenda and CWU deal, which Martin will cover in

Speaker 1

more

Speaker 2

detail. Tight control on expenses and investment means that against the 2% pay deal and higher workload, including the additional resourcing we needed to deliver the general election, people costs only grew by 2.2% or 1.7% excluding BR. Together, this means that the adjusted operating loss reduced by €252,000,000 to €67,000,000 a significant reduction. The financial tables on this slide are provided to give more detail on the raw mail performance. As you can see, this shows the reduction in adjusted loss in line with expectations, but also the improvements in adjusted EBITDA.

Speaker 2

Trading working capital movements were driven by a number of factors, including higher international settlements in the current period, seasonality of payroll costs and actions taken in the prior year that did not repeat. Turning now to GLS. As mentioned, against the difficult economic backdrop, GLS delivered a resilient 4.4 percent increase in revenue in sterling terms or 6.3 percent in euros, with revenue growth in most markets. This was driven by increased parcel volumes, which were up 4% and also pricing measures. You can see the slowdown in growth year on year on the charts, which is reflective of market conditions.

Speaker 2

On costs, we saw several external headwinds, including wage inflation on staff costs and subcontractor rates. Competitive and regulatory pressures, particularly in Germany and Italy, contributed to a 14.7 percent reduction in operating profit for the half to €128,000,000 or €150,000,000 in euros Foreign exchange movements also had a negative impact, resulting in a net decrease of €2,000,000 in operating profit. Adjusted operating profit margin declined by 110 basis points to 5.3%. To counter this, GLS has taken action, implementing yield management and cost reduction measures alongside price increases. This slide presents the GLS results in more detail, both in sterling and euros.

Speaker 2

You will see the growth in revenue alongside the cost pressures and margin compression. We continue to maintain a strong balance sheet position. At the period end, we retained liquidity at the group level at £1,600,000,000 including £925,000,000 relating to the undrawn RCF. We also maintained our investment grade credit rating. I'm pleased to say that in October, Royal Mail launched the U.

Speaker 2

K. 1st collected defined contribution pension plan, demonstrating further investment in our people and innovation. In summary, a good operational performance in half 1 and the group back to adjusted profit. Royal Mail is on track to return to adjusted operating profit before voluntary redundancy costs for the full year. GLS is seeing margin pressure, but we are taking action and the model continues to prove resilient.

Speaker 2

The market environment remains challenging with fiscal headwinds next year in the U. K. As I outlined, but we continue to focus on what we can control. With that, I'll now pass it back to Martin to take you through the strategic and operational updates.

Speaker 1

Thank you, Michael. I will now take you through the business updates for both Royal Mail and GLS. Starting with Royal Mail, I'm pleased to say the transformation of the business continues at pace. In the first half of the year, we pushed back start times of our frontline teams, which was the biggest operational change in the business for over 20 years, improving reliability, increasing network capacity and reducing emissions. 14 out of the 18 domestic flights have already been stopped.

Speaker 1

New seasonal working patterns are now in place, a key enabler to deliver efficiencies. We have increased the number of permanent employees on new contracts to over 19,000, reducing our reliance on agency workers and in turn improving quality and flexibility. Our new attendance standards, sick pay and well-being programs have contributed to 1.4% reduction in sick absence rates. Quality of service has continued to improve over the past 12 months for both Commercial Track and Universal Service products. This is a good improvement, although there is clearly more to do.

Speaker 1

Parcel Automation capacity is expected to hit 90% by the end of this financial year. And our 850,000 Yorg Containers now have digital tags, improving network visibility and allowing better planning. We have continued to make good progress on our channel strategy. Royal Mail's out of home network is planned to increase to over 21,000 locations by the end of this financial year. In the second half, we will further accelerate our investment in out of home with the launch of our own locker network.

Speaker 1

Last of all, Christmas is coming and we are well prepared for peak with later deliveries up to 8 p. M, 16,000 extra people joining the team for the festive period and 4,000 new vehicles. However, challenges remain. We continue to see cost of living pressures and weak consumer confidence. The recent budget also introduced significant fiscal headwinds going into next year, as Mikael explained.

Speaker 1

Against this backdrop, our transformation will take time and money. Progress will not be linear. This is why reform of the universal service is so desperately needed. Whilst Ofcom has now set out a timeline, we have no certainty on the outcome and we are continuing to make the case for urgent action. So whilst we made good progress in half 1, considerable change and investment is still required.

Speaker 1

And now over to GLS. Despite a challenging trading environment, GLS delivered a robust financial performance in the first half. We are continuing to invest to transform the last mile and expand our out of home network. It has now grown to over 61,000 access points. Lockers grew to around 10,000 driven by both partnerships and our own locker network.

Speaker 1

We are continuing to upgrade our network with the Berlin and Paris hubs now open. There's also a new depot in Copenhagen under construction, which is due to open next year. This will increase inbound handling capacity and deliver significant operational efficiencies. We are also expanding towards a more global offering. We've enhanced our global distribution capabilities into the Asia Pacific region with our new Chinese network partner, SF Express.

Speaker 1

In Europe, as announced in October, GLS acquired 20% of ACS in Greece, the country's largest domestic parcel carrier. In the US, we divested our freight operation and are now focusing on the core parcel business. We're leveraging cross border traffic to and from Europe by opening up new transatlantic shipping lanes. This is an important area for future growth. However, across Europe, the macroeconomic environment is difficult with regulatory and competitive pressures.

Speaker 1

This is particularly true in Germany and Italy, 2 of GLS's largest markets. In response, we've implemented cost reduction, pricing and efficiency measures in a number of countries. GLS' flexible business model, broad customer base and geographic diversity will enable it to navigate through these more challenging times. We will also maintain investment to support the less organic and inorganic growth opportunities. To summarize, IDS delivered a good performance in the first half despite a challenging market environment.

Speaker 1

At Royal Mail, we significantly reduced losses and made further progress on our transformation and modernization agenda. We are on track to deliver our target of an adjusted operating profit for the full year, excluding VR costs. However, whilst we are delivering on the changes that are within our control, market and fiscal headwinds remain, making universal service reform even more urgent. At GLS, we implemented cost reduction, pricing and efficiency measures in a number of countries to counter a weaker macro environment. We will continue to invest to support GLS' strategic ambitions.

Speaker 1

Finally, a word on the recommended offer. We continue to expect the offer to be declared unconditional in the Q1 of 2025, subject, of course, to the required conditions being satisfied or waived. Thank you for listening. Michael and I are now happy to take your questions and I will pass back to John to start the Q and A session.

Operator

Great. Thanks for that, Martin. Just a reminder, as Serge said at the beginning, if you're on the phone and you have a question, please do push star 1 on the phone. Those of you listening via the webcast, there's a facility on the webcast to type in your question and then it will come through to us in the room and I can read it out and get your question answered that way. I'll just pause a second for people to register questions on the phone.

Operator

So questions have come here on the webcast. Just Mike, I think it's one for you. Just talking through the impact of NI, what's driving that? And what sort of mitigating actions can we take to try and offset that?

Speaker 2

So we've already said the changes announced in National Insurance will impact us by circa GBP 120,000,000 from the 1st April. We expect in time to be able to mitigate that through a variety of measures around pricing and cost. But in the short term, that will impact on profitability and therefore, that spread into the impairment calculation and resulted in the reduction in carrying value

Speaker 1

of Royal Mail by £134,000,000 Great.

Operator

Thank you. On the calls, if we go to the lines now, I see Achal has registered on the phone. Hi, Achal. Do you want to go ahead and ask your question?

Speaker 3

Yes. Hi, John. Thanks. Good morning, everyone. So I had 3, if I may.

Speaker 3

First of all, historically, I think you mentioned that retailers and the customers have been shifting from track 24 to track 48 and which had some negative impact on the overall average parcel pricing. Given that there is some improvement in the UK economic activity looks like. So do you see that changing now? Do you think the customers are returning back to track 24? So that is my first question.

Speaker 3

Secondly, wanted to understand a bit more about the parcel volumes in Europe and the UK. We are only in November and not sure if you can give a bit of a color in terms of how the volumes looks like. But more importantly, in GLS, you have reported 4% increase in the parcel volumes, despite the fact that you had some positive impact because of additional hubs in Madrid and other places. So on the underlying basis like for like, how do you see the parcel volumes are behaving in Europe? And of course, a third bit of color on the UK and Europe?

Speaker 3

And my final question in terms of CW agreement that you had and then you have done some changes in terms of timing you highlighted, but what other changes have been incorporated or how should we expect the changes in the next financial year, especially with the fact that you are seeing sort of a lot of cost pressure. So do you see that kind of cost pressure can be offset with these kind of changes which you're planning under CW agreement? Thank you.

Operator

Okay. Thanks, Achal. So just to summarize, I think we got 3 questions there. 1 is trading down some of the trends we've seen previously, people trading from track 24 to 48 kind of how's the market generally for that. Just a bit of color on parcel volumes and what the trends we're seeing.

Operator

And then that final question around, I think, actually, we can't give any guidance for next year in terms of what we're anticipating, but we can probably give a few comments on how the implementation of that agreement is going with CWU. So probably, Martin, there's probably 3 of those. Yes. All right. Thank you very much.

Operator

So first of all,

Speaker 1

on your question shifting 24 to 48, that always depends on a couple of factors. One is which is what's the pricing that's being put in place, What's the quality that being presented and what is the overall economic, let's say, state of the situation. And, from our perspective, I would say the trend has either rather stabilized or slightly swung back to a more 24 hours product. But from our perspective, that is also due to our continued delivery of very stable and good quality of service on those products. So whether that now is a trend in the market or not, you cannot really deduct that conclusion from what's happening within Royal Mail, but we are quite pleased with the development of the mix that we're seeing in our product base.

Speaker 1

In terms of parcel volumes, overall, we observe in the UK start with UK and then I come to Europe in the UK. We are seeing a bit of a mixed picture here. But overall, I think people are a bit more careful in terms of spending. We are seeing more parcels coming in from China with lower value goods than you would normally have. So that's probably a bit of a trend.

Speaker 1

But overall, I think we are facing a bit of a reluctance of consumer to spend all their money at a bit of a soft trading, softer volumes, I would say in the market. In terms of Europe, it's a mixed bit of a mixed bag. Some countries quite soft, as you know, probably for example, in Germany, it's on the brink of recession. That obviously has an impact on the consumer spending. People are quite careful there.

Speaker 1

Whereas in other countries, in Europe, some are Southern countries, the worlds are really good and really taking off. So, it's really a mixed bag across the patch and there's no clear trend in Europe. I would probably say with a notch to be people being more careful, but some countries are, the outliers here. In terms of your question on, what are we going to expect, in terms of, going forward as measures, Well, we'll just plow on with our transformation. There's still lots to do to transform Royal Mail from a mail company to a parcel at mail company.

Speaker 1

And that means we will be continuing to invest into automation because that's what you have to do if you want to run an efficient network. So we'll continue with that. And, we, of course, we'll also, we are hoping that there will be some USO change coming your way at some point in time because, the reform is long, long overdue. But once USO change comes, that requires us to quite significantly change the work, the way we work. So we're prepared for that.

Speaker 1

And that's probably, that's also on the agenda, of course, going forward. But of course, to sum it up, we are continuing to transform and that means investment into our network. I've spoken earlier on also that we are launching and growing our, our phone network with, we launched our own parcel lockers next year, which is quite, I think, an important thing for us to be accessible to our customers via various channels. And, yes, probably that's what I would like to comment on your third question. Great.

Speaker 1

Thanks, Martin.

Operator

Thanks, Achal. Just go to the webcast. There's a couple of questions come in there. I could probably handle this first one. It's asking for an update on the FDI review in the UK and timelines for the approvals required for the offer.

Operator

So no, unfortunately, we can't give a running commentary on the approvals process. And as we said in the release, we're still continuing to expect that the offers are effectively going to go unconditional, subject obviously to the required conditions and approvals in calendar Q1 of next year. So unfortunately, we can't give any further update other than that. Another question that's come in online, probably one for you, Martin, it's come from Alex at Bernstein about the transformation of raw mail into a more parcel centric business and the structure of the workforce. And Alex is asking how many daily walks we're doing, how has that changed pre pandemic and year on year.

Operator

And I think that's probably one that goes to reform of the USO actually. So yes, Alex's question about the changing to a more parcel centric business and how that impacts on the workforce.

Speaker 1

Yeah. So thanks for that question. We do have today 54,000 orgs and with the proposal that we've put forward to the regulator for the use of reform, those will decrease by depending on how exactly the shape is going to look like and what number of passes letters will happen in that and the network at a higher point of change. And it will reduce by 7 to 9,000 by 7 to 9,000. And that's driven by, of course, the decline in letters.

Speaker 1

We're coming remind everyone, we're coming from 20,000,000,000 letters to now 6,700,000,000 letters with a further decreasing by the day, whilst we see an increase in the number of addresses that we need to serve by 15% and by the change in the current call rate that we have by delivering the to the addresses in the UK and the current call rate is only 4 in 10 addresses where we'll deliver mail current will deliver or we are delivering mail towards. So those are the changes that we will foresee in terms of the shape of the last mile. Okay. Thanks very much

Operator

for that, Martin, and thanks, Alex, for the question. Another one that's come in online is probably one for you, Michael, actually. Question is, do these results suggest that bids now less valuable than before?

Speaker 2

It's important to say these results are entirely in line with our expectations and the plan that was approved at the start of the year. That's the same plan that the Board used to consider these bidder gains. The only things that have changed since that time are the announcement on National Insurance, which has put another $120,000,000 of cost into the business and as we talked about in the release, a worsened market environment for GLS, which is having an impact on their top line.

Speaker 1

Okay, great. Thank you.

Operator

And then I think probably we'll take this now as the final question. I think, Achal, have you come back into the queue for a final question? Or if you have one more?

Speaker 3

Yes, I have one more John, if you allow.

Operator

Okay, you could be the last question then.

Speaker 3

Okay, perfect. Thanks John. Thank you for this opportunity again. So in fact, I would like to ask 2 questions if you can answer. 1 is on the general behavior among or general motivation among the employees, right.

Speaker 3

It has been going for so long in terms of you've been doing you've done with the you've done the agreement with the CWU and now you're of course making the changes, but then in between this bid go for is going on. So among all these, how do you see the behavior of the employees? I mean, do you think do you see the same kind of willingness among the employees to support your plan changes or do you see there is a reluctance given that they are I mean given that they could expect that there is some change in the ownership. So how that is going on? So that is one question.

Speaker 3

And secondly, in terms of Ofcom, obviously you mentioned that the USO definitely it is quite urgent to modernize the USO. Now what's going on? I mean Ofcom has been doing taking so long. So I mean what are the challenges there? What are your expectations?

Speaker 3

And do you see any government interference in that? So if you could give a bit of a color on that, please?

Speaker 1

Right. Thank you. I will start with the behavior and the motivation of the employees within the current situation. I think we're in a really good spot with our people. It does something to the people that we can post results like we did today because they can see that the hard work that they are putting into Royal Mail day in and day out to delight the customer is starting to pay off.

Speaker 1

We're definitely communicating those, results of course internally and people do appreciate that we are moving in the right direction that does something to the motivation of the people. We have a stable leadership team with Emma Guilford being the CEO of Royal Mail and being also quite often out and about in the field and talking to the people that does something to the people that feel about feeling appreciate and so on. People will also realize that we need further investment in Royal Mail. And I think that the mute music here is that we would have a potential new owner who is in for the long term and willing to invest also in our business because we haven't invested that much in previous years and we need to invest furthermore, to, improve our position in the market. And last but not least, we also do a lot to engage with our employees.

Speaker 1

And some of you might have read about the kids for kids initiative where we support grassroots sports clubs, of our post of our people, which does something to people. It's about pride into the company and visibility of Royal Mail in the day to day. And that's what we are investing in and what people seem to appreciate. With regards to Ofcom, well, to be frank, we would love to have seen the change already taking place. It is quite urgent.

Speaker 1

We are having a quality of service regime that is 18 years unchanged, whilst the market has changed dramatically. In the meantime, we all know that and I've spoken earlier on about the decline of letter volume. So I can just reiterate that the UK is getting left behind with regards to its international peers. Next to UK only Malta is the country that still has a similar universal service regime that we have in the UK. So, when the change will come, I don't know.

Speaker 1

It has to come ASAP. And the role of the government, of course, is that we would, we are, we're urging the government to support it and to also urge themselves the regulator, to provide the reform that is really, really needed for us. Also like what Michael said before, in terms of we have now the NI increased costs coming our way. So we need to get the universal service changed as soon as possible.

Operator

Great. Thanks, Martin. Thanks, Achal. We haven't got any more questions ready in the queue. So with that, I'll say thank you to everybody for joining this morning.

Operator

Obviously, myself and the rest of the IR team are here for any further questions people have. But other than that, thanks for joining. Have a good day.

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International Distributions Services H1 24/25
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