- Q1 parcel revenues fall
- Parcel revenues lower for full year
- Profits expected to be in line through cost cutting
Tougher competition in the corporate market during the first quarter has resulted in Royal Mail enduring weaker than expected performance in UK parcels, meaning full year revenues are likely to be lower than expected.
The recently privatised group said it was hit hard by Amazon's changes to minimum order level for free delivery and expansion of its own delivery network, both of which reduced addressable market volumes, while intensifying competition from other parcel firms had led to aggressive price cutting and stronger sterling weighed on export volumes.
Group revenues were up 2%, while the UK Parcels, International and Letters (UKPIL) division saw revenues up 1%, which Chief Executive Moya Greene said was in line with strategy. Letter volumes were not as low as expected, while revenue was up 3% thanks to price increases and the uplift from the elections traffic.
On the upside, there was a good performance in letters, with the decline in addressed letter volumes better than management's expected range. General Logistics Systems (GLS), Royal Mail Group's continental European parcel carrier, continued to perform well with volumes and revenues both up 6%, but is expected to be hit by sterling effects over the full year.
Greene's cost management plans have performed better than expected, with the management reorganisation programme announced in March 2014 on track to cut £25m of costs, with the benefits expected to begin coming through in the second half of the year.
But the troubles in the key parcels arm, where volumes were up 1% in the division but revenues down 1%, is worrying for investors.
The effects of strong sterling on export volumes along with increasing competition cut revenue growth in the period by around 150 basis points, which is not expected to reverse in the full year.
Self-help initiatives that should benefit the second half include opening the network longer on Saturdays and on Sundays to receive goods from e-retailers, and a new Sunday delivery service from Parcelforce Worldwide for online shoppers.
Greene said cost control and continued good letters performance led her to expect the impact on profit for the full year will be offset such that overall performance would remain in line with expectations.
"Our parcels revenue will be dependent on our performance in the second half, which includes the Christmas trading period, and on no further weakening in our addressable UK parcels market," she added.
Looking forward, she expects the UK addressed letter market volumes to decline by 4-6% per annum, hitting the top of this range in 2014-15.
Broker Panmure Gordon said the attractive dividend yield of 4.5% should support the postal firm's shares
despite the parcels disappointment.
Panmure highlighted RMG's concerns earlier in the year about more intense competition in the parcel business and increased competition in the letters business.
"These concerns, combined with the recently announced French competition authority investigation into alleged antitrust breaches in France, are likely to continue to weigh on the share price in the near term."
Shares in RMG bounced back from an early plummet to be down 0.7% at 462.7p at 10:20.