Royal Mail battles to keep revenues flat in first quarter

Royal Mail delivered a cautious first half trading statement broadly in line with expectations, with group revenues flat but management forced to step up their efforts to combat a challenging market that saw UK revenues down 2%.

In the three months to 28 June, a period of relative lesser importance compared to the key Christmas season, there was a 2% decline in revenues at the parcel and letter arm UKPIL, counterbalanced by 8% growth at European parcels arm GLS.

These were a continuation of the overall market trends seen last year, chief executive Moya Greene said, and she kept guidance for the full year steady and reiterated her focus flat or better UKPIL underlying costs.

"We have benefitted from the parcel initiatives that took effect in the second half of last year and a good performance from GLS," she added. "Our trading environment remains challenging and we are stepping up the pace of change to drive efficiency, growth and innovation, while maintaining a tight focus on costs."

Royal Mail's competitive environment was also hit by an announcement from regulator Ofcom on Friday that suggested imposing a cap on prices on the postal service business, rolling back some of the commercial flexibility it granted the Royal Mail in 2012

Read more: Royal Mail's shares slide as Ofcom suggests capping prices

UKPIL's sales suffered from a 4% fall in letter revenue, which more than offset a 2% rise in parcels that partly reflected a relatively weak comparative period last year and a 20% increase in the smaller Parcelforce Worldwide express parcels unit.

Addressed letter volumes decreased by 5% excluding the impact of election mailings, but this is within the group's forecast range of a 4-6% decline per year.

GLS performed better than expected, with volumes largely driven by a continued good performance in Italy and a better performance in Germany.

But the FTSE 100 company warned that it was "monitoring how the market is reacting to the change in German minimum wage legislation", which it expects could hit GLS margins by around 50-100 basis points this year.

Broker Investec noted that flat revenues compared to its estimate of 0.1% increase, with parcels and GLS better than expected but letter revenues slightly weaker.

"We do not anticipate Ofcom’s regulatory review resulting in any substantive changes when it is expected to conclude in 2016," analysts added.

RBC Capital Markets analysts noted that both Parcelforce and export parcels suffered from greater competition chasing higher unit-per-revenue segments of the market, which was reflective on the ongoing domestic parcel pressures in the UK.

"This is important as while almost in line with RMG outlook comments when FY2014/15 was reported (as Parcel was getting slightly better over Q2-Q4 2014/15, later 2015/16E quarters get tougher to deliver improvement in), we have found an expectation amidst some investors that Q4-2014/15 performance would continue into Q1 and thus exert upward profit pressure."

By mid afternoon on Tuesday RMG shares recovered from an initial dip on Tuesday to sit down 0.5% at 509p by 14:35.