GLS Drags Royal Mail Toward Profit by the Skin of its Teeth

Royal Mail

Amidst the possibility of a takeover by its biggest shareholder EP Group, Royal Mail’s parent company International Distribution Services (IDS) made a -0.2% profit margin only thanks to its international courier GLS in the financial year ending 2023. For the 53 week financial year, IDS saw a 4.1% y-o-y revenue growth to £12,679m while it achieved an adjusted operating loss of £28m, up from a stunning £742m loss in 2022.

Royal Mail segment – losses due to redundancies

The universal service obligation arm of IDS, Royal Mail attributed its £348m loss in the 2023-24 52 week comparable financial year to voluntary redundancies made after the reforms that led to the nationwide industrial action in 2022. The loss was still 16.9% less than 2022-23, helped in part by revenue growth of 3.8% y-o-y to £7,411m.

The losses made by the division in this financial year were put down to the hangover from 2022-23’s industrial action. The huge losses in 2022-2023 were also from industrial action as the main workers’ union fought its employer over the internal reforms. Even while his organisation reduced Royal Mail’s staff related costs through swingeing cuts to pay and conditions for new-intake posties, Non Executive Chair Keith Williams was careful to say, “We are a people-driven business and our colleagues across the Group have contributed to the performance and progress we have made.”

Parcel volumes were up 5.6% y-o-y to 1,101m while parcel revenues grew 3.3% to £4,040m in the 52 week financial year. Even so the parcel and mail operator is lobbying hard for reform of the universal service obligation. Under proposals made in April this year, it would retain six-day-per-week delivery of First Class letters and endeavour to deliver them within the next day throughout the UK. However:

•   2nd Class post would be delivered every other day

•   Business bulk mail would be aligned with 2nd Class mail and delivered within three days as opposed to the current two

•   Universal service obligation parcels will have tracking as standard, an improvement on the service at present

Pointing out that the changes proposed by Royal Mail do not require legislative reform, IDS CEO Martin Seidenberg, said of the postal regulator Ofcom, “They just need to get on with it.” Ofcom is unlikely to just get on with anything remotely controversial before the UK general election on July 4th, so it seems that IDS will just have to wait!

GLS profits fall but fail to offset Royal Mail 

IDS’s international parcel delivery arm GLS was responsible for all of the move towards operating profit of the Group in 2023. Its operating profit fell 8.0% y-o-y to £320m on revenues that grew 4.6% to £4,865m. Volumes grew 5.0% to 905m pieces, but macroeconomic headwinds continued to buffet the parcel carrier, even as Seidenberg pointed out that revenues grew in most territories it operates in.

Williams explained, “GLS is continuing to build on its proven track record of delivering top-line growth, strong margins and good cash flow generation, enabled by its flexible operating model, broad customer base and geographic diversity.”

EP Group – deal or no deal?

There is a possibility IDS could be sold to Czech Republic based EP Group, IDS’s largest current shareholder, in the coming months. This would put a key piece of UK national infrastructure in foreign hands. Amongst other things, asset-light and strongly profitable GLS could end up being target for a spin-off from IDS in any acquisition. Though proposals have been made by EP Group for a takeover for £3.70 a share, and the IDS Board is likely to recommend such a proposal to shareholders, no formal bid has been made.

Speaking of the possible takeover, Williams continued, “The Board has been mindful of the impact on Royal Mail and GLS and their stakeholders and employees, as well as broader public interest factors. The Board has sought, and the EP Group has agreed to offer as part of the proposal, a set of contractual undertakings to protect key public interest factors and recognise Royal Mail’s status as a key part of national infrastructure.”

The domestic arm of Royal Mail is still loss-making and continues to make larger losses than the international GLS arm. Though suffering an apparent hangover from the last battle between management and staff, a move towards profitability for the UK postal operator is by no means guaranteed. Leadership seem to believe that a transformation towards a structure similar to that of GLS is necessary, but other European postal operators haven’t followed such a path and achieved better margins. The future for the organisation isn’t abundantly clear or rosy.

Author: Richard Shrubb

Source: Ti Insights

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