(UKM) UK Mail Group

16 November 2011

UK MAIL GROUP plc

INTERIM RESULTS

For the 6 months ended 30 September 2011

Highlights

·     Group revenues up 5.7% to £201.6m (2010: £190.7m)

·     Mail revenues up 9.2% to £93.8m (2010: £85.9m)

·     Parcels revenues up 3.0% to £83.5m (2010: £81.0m)

·     Group profit before tax (before exceptional items) £6.8m (2010: £7.4m) reflecting a reduction in margins and the impact of one less working day

·     Exceptional items of £0.8m (2010: £nil) relating to restructuring costs

·     Group profit before tax of £6.0m (2010: £7.4m)

·     Strong balance sheet, net cash at period end of £11.6m (2010: £8.5m)

·     Interim dividend maintained at 6.4p per share (2010: 6.4p)

·     Launch of new consumer focused online parcel delivery service - www.ipostparcels.com 

Guy Buswell, Chief Executive Officer of UK Mail, said:-

"The Group saw a satisfactory first quarter followed by a more challenging second quarter for the markets in which we operate. These conditions have continued into the third quarter to date and we assume that the economic environment will remain tough throughout the current financial year.

"Our mail business remains a market leader with an operational template that is ideally suited to adapt to the demands of an evolving market, and our parcels business maintains a good position compared to its key competitors, thanks to the benefits of our low-cost network and the industry-leading services we are continuing to introduce. 

"Our strategy remains to continue to build competitive advantage, developing and investing in our low cost integrated network, driving down cost, investing in IT infrastructure and bringing to market new products and services to drive profitable revenue growth." 

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Introduction

The performance in the first half of the year comprised a satisfactory trading performance in the first quarter and a more challenging second quarter.

Reported Group revenues for the first half increased 5.7% compared to the same period in the previous year.  Adjusting for the increase in Royal Mail prices implemented on 6 May 2011, offset by there having been one less working day than in the previous year, underlying Group revenues increased by 2.0%.

Our Mail business grew its revenues on a reported basis; on an underlying basis, revenues were in line with the same period in the previous year.  Underlying Mail operating profit reduced compared to the prior year as the continued competitive pricing environment led to a slight reduction in the operating margin.  Our Mail business remains well positioned in its market with a healthy pipeline of new business opportunities.  We saw good progress from our new product areas of imail and packets and these should have a beneficial impact on operating margins in the future.

Parcels revenues continued to grow compared to the same period in the previous year reflecting the benefit of recent customer wins, albeit in a pricing environment that remains challenging and with a continuation of the volume mix seen in the second half of the last financial year.  This mix effect has impacted the parcels operating margin and the underlying parcels operating profit.  We continue to focus on innovation and improving our operational efficiency to help offset the effects of a challenging market.

In our Courier business, contract wins from the prior period helped deliver revenue and profit growth. 

Our Pallets business has performed well in a market that remains challenging, with revenues showing a slight decrease on the same period last year but a good increase in operating profit as a result of strong operational management.

Overall, Group revenues at £201.6m were up 5.7% compared to the prior year and Group profit before tax before exceptional items at £6.8m was down £0.6m on the previous year, although £0.5m of this decrease is a result of there being one less working day.

We have taken further action to reduce the fixed costs of our business. We have closed two depots, reducing our total number of mail/parcels sites to 52. Along with some restructuring in a number of other areas of our business, this has resulted in one off costs of £0.8m. We will continue to monitor closely the potential for further opportunities to reduce our fixed cost base as the year progresses.

We continue to invest in our I.T. systems to develop increased capability and further enhance the customer services we can provide; to this end we have recently successfully completed a significant upgrade to our hardware platform, on time and on budget.

We remain highly focused on innovation to continue expanding the size of the markets available to us and to further increase our share of those markets.  We are continuing to introduce new products and services across both our Mail and Parcels businesses, a number of which are already available to customers and gaining valuable traction.

Our financial position remains strong, with net cash at the period end of £11.6m, compared to £8.5m as at 30 September 2010.

Results

The results can be summarised as follows:

Revenue and operating profit are analysed as follows:

Mail

Mail showed further growth in revenues of 9.2% to £93.8m (2010: £85.9m).  The Mail revenue growth includes the impact of the Royal Mail price increase on 6 May 2011, which will increase prices by some 15% on an annualised basis.  On an underlying basis, also adjusted for the reduction in working days, revenues were in line with the prior year at £86.0m.

Within the overall UK mail market, there has been a decline in transactional volumes of some 4% per annum in recent years. An important factor in the continued progress of our Mail business is therefore product innovation, to open up new segments of the mail market and extend our reach.

imail, our web-to-print postal service, continues to grow successfully.  We are continuing to develop this product to support its market leadership and have recently launched a new easy-to-use web site, which includes many new features, such as data management.  Average daily volumes in September 2011 were double those of a year ago.  We have a healthy pipeline of new opportunities for this product as we identify new areas where it can be applied successfully.

Our Packets product enables us to offer customers a price competitive service in a segment of the postal market that is still growing well, mainly due to the continuing rise in internet-based shopping and we continue to add customers. We have now widened the service offering to the SME market, where we see a strong opportunity.

Mail operating profits were down 9.3% to £5.0m (2010: £5.6m). The operating margin reduced to 5.4% (2010: 6.5%), of which some 0.9% is the mathematical result of the 15% price increase imposed by Royal Mail.  The pricing environment in the transactional mail market remains very competitive.  Overall, mail volumes on a daily basis were in line with the previous year.

The Act for the privatisation of Royal Mail was enacted in June 2011.  One of the key outcomes of the Act is that Ofcom replaced Postcomm as the mail industry regulator in October 2011, a move which we support.  In October 2011 Ofcom issued a consultation document concerning their proposals for Mail regulation from April 2012.  In this document Ofcom stated the importance of access remaining in the future because of the benefits it has brought to the universal service, helping to improve efficiency incentives at Royal Mail, reducing prices for customers and helping to bring innovation to the market.  We are pleased that Ofcom is proposing to continue mandating access to the Royal Mail delivery network, with the headroom between retail and access prices protected by Ofcom.  The nature of headroom control, now referred to as 'margin squeeze protection', is likely to alter but we expect it will continue to be regulated. Given the competitive nature of our mail pricing, we do not expect any material impact on our mail margins. 

We will not know the effect of the new regime on mail pricing until Royal Mail announces its revised prices in early 2012.  We are currently considering the opportunities that may arise for our business once Ofcom concludes its consultation in January. UK Mail remains a market leader with an operational template that is ideally suited to adapt to the demands of an evolving market, and we will continue to focus on growing our overall volumes, by gaining additional volumes from new and existing customers and driving our new product innovations. 

Parcels

Revenues in Parcels, which comprises the Group's business-to-business, business-to-consumer and international parcel delivery service, were up 3.0% for the period to £83.5m (2010: £81.0m).  Operating profit decreased by 14.0% to £5.6m (2010: £6.5m) with the operating margin at 6.6% (2010: 7.9%).

Due to the fixed cost nature of our parcels business, the impact of one less working day reduced operating profit by some £0.4m with an impact on the operating margin of some 0.4%.

Performance was also impacted by the effect of business-to-business volume growth remaining subdued in the first half.  This was however largely offset by stronger business-to-consumer volumes, resulting in an overall volume increase in the parcels we handle of some 11%.

This mix effect placed pressure on margins, although this has been largely offset by the continued improvements in the efficiency and effectiveness of our Parcels operation.  We continue to be successful in winning new Parcels customers as a result of our high service levels, low-cost network and strong brand in the market.

We continue to drive down costs to improve the profitability of our parcels operations.  A key area of focus is our network cost where we have accelerated the plans to reduce our fixed cost base.  This has resulted in the closure of two depots, reducing our total number of sites to 52, along with restructuring in a number of support areas.

We have recently introduced a number of major improvements to our I.T. infrastructure.  These include the provision of industry-leading facilities to our customers, and to the recipients of the parcels they despatch via our services.  All customers can now be notified in advance of expected delivery times and given easy to use facilities if they need to re-arrange deliveries.

An important change we have made is to completely replace our central I.T. hardware.  This was achieved in September 2011 and it is a credit to our I.T. and operations management that such a major change was made smoothly and without impact on our operations, on time and on budget.  This change gives us much improved processing capacity which will allow us to cope with the combined volume growth we are seeing across our business and to introduce new services for our customers.

As part of these improvements we have also introduced a completely new internet platform which will help support business growth and drive down costs. 

Our Retail Logistics product which provides services tailored to the specific needs of retailers continues to make good progress.  This service is targeted at the extensive list of retail customers we have access to through our mail, parcels and courier businesses, and we now have a number of major retailers trading with us. We estimate the Retail Logistics market to be worth £1.2bn overall, supporting our view that this represents a significant growth opportunity for the business.  We have recently enhanced our service offering to include the ability to handle hanging garments, as well as providing customers with returns and inter-store transfer facilities.

The overall parcels market in the UK is challenging with growth linked to economic performance in a highly competitive environment.  Our target position in this market is to be a high quality operator which provides the services that customers want.  The key here is a reliable next day service, providing customers with estimated delivery windows, which can easily be re-arranged, with the strong use of I.T. to provide added information.

Our analysis of the parcels market has shown an increasing trend for customers to buy parcel collection and delivery services on-line, rather than through the traditional contract based approach.  This trend is partly caused by the growth of on-line transaction sites, such as ebay and Amazon Marketplace, which allow small businesses to reach their customers directly.  In response to this trend we are today launching our on-line parcel collection and delivery service, www.ipostparcels.com, which allows any new customer, be they an individual or a small business, to arrange parcel collection and delivery directly with UK Mail through an easy to use website.  We see this as a highly innovative service and a promising growth prospect for the future, making UK Mail's parcels offering more accessible to a much wider audience of small businesses and consumers.

Courier

Revenues in our Courier business, which provides same-day delivery services, increased 6.4% to £10.1m (2010: £9.5m).  Operating margins increased to 11.8% (2010: 10.5%) leading to an increase in operating profit to £1.2m (2010: £1.0m).  The increase in operating margin reflects the actions we have taken to improve effectiveness and reduce overheads in the business.

We have now developed a highly efficient nationwide courier network with a proven ability to support national contracts, which adds to our ability to offer a fully integrated proposition and supports product development across the Group. 

Pallets

Revenues in our Pallets business, which provides a nationwide palletised goods delivery service,decreased by 0.2% for the period to £14.2m (2010: £14.3m). We have however again improved the efficiency of our operations and reduced costs, leading to an improvement in the operating margin to 7.2% (2010: 6.3%).  This improved margin led to an increase in operating profit for the period of 14.7% to £1.0m (2010: £0.9m).

This business has performed well in a market that remains challenging.

We see growth opportunities for this business and will continue to focus on sectors of the distribution market which are best placed to benefit as the economy recovers.

Exceptional Items

As previously indicated the Group has taken action to reduce its fixed cost base.  As a result we have incurred exceptional costs of £0.8m (2010: £nil).  The actions involved a number of initiatives including a reduction in headcount and the closure of two sites, resulting in redundancy costs of £0.6m and property related costs of £0.2m.

Finance costs

Net interest payable reduced to nil (2010: £0.1m).  Our finance costs continue to reduce as our cash balance improves and we repay debt.

Cash Flow and Balance Sheet

The Group has a strong balance sheet with net cash at the end of the period of £11.6m (2010: £8.5m). 

Net cash inflow from operating activities totalled £3.9m (2010: £3.2m). Net cash outflow for the period was £7.2m (2010: £8.6m) which included £5.2m (2010: £6.2m) of cash consumed in working capital, reflecting the normal first half trend in our business. We expect a substantially smaller outflow for the year as a whole.

Capital expenditure for the period was £3.4m (2010: £4.1m).  The capital expenditure for the period includes £2.2m on IT, as we continue to develop our systems infrastructure, and £1.0m on our network.

Earnings per share

Basic earnings per share decreased 16.1% to 8.1p (2010: 9.6p).  The underlying basic earnings per share, excluding the impact of exceptional items, decreased 5.4% to 9.1p (2010: 9.6p).

Dividend

The Board has declared an unchanged Interim Dividend of 6.4p (2010: 6.4p), to be paid on 13 January 2012 to shareholders registered on 2 December 2011.  

CURRENT TRADING & OUTLOOK

The more challenging conditions experienced in the second quarter have continued into the third quarter to date, reflecting depressed end-consumer activity, and we continue to assume that economic conditions will remain tough throughout the current financial year.

We expect a continued decline in underlying mail volumes in the UK market, exacerbated by the price increases imposed by Royal Mail.  This and continuing regulatory reform will represent challenges but also new opportunities, and UK Mail's business model is ideally suited to enable us to adapt as the market evolves. We will maintain our focus on winning additional mail volumes from new and existing customers and driving the growth opportunities presented by our new product developments.

The parcels market will remain challenging and highly competitive, but we believe our focus on key customer segments such as Retail Logistics and new product innovations such as ipostparcels.com will allow us to make further progress in the future. Our parcels business remains in a good position compared to its key competitors thanks to the benefits of our low-cost network and the industry-leading services we are continuing to introduce. 

Our strategy remains to continue to build competitive advantage, developing and investing in our low cost integrated network, driving down cost, investing in IT infrastructure and bringing to market new products and services to drive profitable revenue growth.  By capitalising on our leadership and differentiated positioning, we aim to increase both the size of the markets available to us and our share of those markets, and to take advantage of any opportunities that arise as those markets evolve.

Guy Buswell

Chief Executive Officer

ADDITIONAL DISCLOSURES

Principal risks and uncertainties facing the business

UK Mail's business and share price may be affected by a number of risks, not all of which are within our control. The process UK Mail has in place for identifying, assessing and managing risks is set out in the Corporate Governance Report on page 21 of the 2011 Annual Report and Accounts. The specific principal risks and uncertainties that may affect the Group's performance, together with relevant mitigating factors as identified by the Group's risk management process were discussed on page 15 of the Group's 2011 Annual Report and Accounts. These included risks relating to IT systems, business continuity, legislation and regulation, competition and fuel factors, in addition to financial risks including credit risk. It is considered that these still remain the most likely areas of potential risk and uncertainty, with the position unchanged from that set out in the 2011 Annual Report and Accounts.

Cautionary statement

This interim announcement contains certain forward-looking statements, which have been made by the directors in good faith based on the information available to them up to the time of the approval of this report and such information should be treated with caution due to the inherent uncertainties, including both economic and business risk factors, underlying any such forward-looking information. Nothing in this report should be construed as a profit forecast.

Going concern

As stated in note 2 to the condensed consolidated interim financial statements, the directors are satisfied that the Group has sufficient resources to continue in operation for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the condensed consolidated interim financial statements.