Royal Mail wary of competition

Royal Mail, which critics argue was sold off too cheaply, posted a 12% rise in full-year operating profits to £671 million from £598 million, and said its business is facing tough competition.

Group revenue rose 2% to £9.46 billion, with a 7% rise in parcel revenues offsetting a 2% fall in the UK letter business which declined to £4.63 billion. However, parcel volumes were flat at 1.06 billion items compared with 2012-13.

Operating profit before transformation costs rose to £671 million in the year to 30 March, in line with forecasts. Transformation costs of £241 million for the year include a provision of £104 million in relation to the management reorganisation programme, which will be implemented in 2014-15.

Free cash flow increased to £398 million. This has driven a reduction in net debt to £555 million.

The biggest competitive threat is TNT Post UK whose plans could reduce Royal Mail revenue by over £200 million in 2017-18.

The company said it is preparing a regulatory submission calling on Ofcom to review direct delivery, after a number of changes to Royal Mail's access contracts announced in January, were blocked by a TNT Post UK complaint.

"We believe TNT Post UK's complaint is unfounded," said Moya Greene, chief executive officer. "We believe the changes are fair, reasonable and fully within the guidance provided by Ofcom."

"TNT Post UK now has direct delivery operations in much of London and in Manchester and in Liverpool. It has stated its intention to take its own direct delivery service to a number of other cities, with the aim of covering around 42% of addresses by 2017.

"TNT Post UK can cherry-pick easy-to-serve urban areas; delivering easy-to-handle post to homes less frequently than Royal Mail and to no defined quality standard. Royal Mail is required to deliver six-days-a-week, overnight, throughout the whole country, to stringent quality standards and at a uniform, affordable tariff.

"Moreover, we are also required to deliver any items TNT Post UK does not consider economic to deliver itself. If TNT Post UK is successful in delivering its stated objectives, this could threaten the fundamental economics of the universal service."

With its proposed access price changes suspended and unfettered direct delivery rollout, there is a reasonable prospect that Ofcom's indicative earnings before interest and taxes margin range of between five and 10% for Royal Mail's reported business may never sustainably be achieved, the company said.

Sunday delivery

Royal Mail is piloting Sunday afternoon opening at around 100 of its delivery offices across the UK later this summer, and Sunday parcel deliveries later this summer to addresses within the M25 motorway. Parcelforce Worldwide will also launch a Sunday delivery service in June for online shoppers through participating e-retailers.

The company has made some progress in productivity with collections, processing and delivery up by 1.7%, against its metrics, as it reduced the number of "frontline hours" was reduced at a faster rate than the workload.

Eight mail centres were closed this financial year, taking the total number to 40, and better cost control meant non-people costs in UKPIL (UK Parcels, International and Letters) reduced by 3%.

Other improvements are the tracking that has been added to all contract returns services, and the launch of Local Collect, a click and collect network using 10,500 participating post offices as a parcel collection point.

The firm has completed the expansion of the capacity of Parcelforce Worldwide, with a domestic hub opened in Chorley in 2013 and eleven depots newly opened or upgraded across the UK in the financial year.

The company has also been investing in delivery and in 2011, began a five year IT transformation programme, and reached one important milestone in issuing more than 74,000 handheld scanners to postmen and women in time for Christmas 2013.

Other key areas of investment will provide additional tracking systems, including expanding barcoding and SMS messaging.

These first financial results since its privatisation are encouraging but may do more to fuel the political row about the share price, as the stock has risen as much as 87% above the 330p issue price last October.

Stockbrokers say that the split between buying and selling activity on the shares has evened up from the massive preponderance of selling in the first months after the float, shedding some light on whether initial investors are in it for short or long-term gain.

The board previously recommended a final dividend of 13.3p per share, subject to shareholder approval at the AGM on 24 July 2014.