Royal Mail cuts losses on parcels growth amid takeover suspense

Royal Mail reduced its losses significantly over the past six months thanks to higher parcels volumes and revenues, including a surge in international business, while GLS profits have fallen amid challenging trading conditions, according to the half-year results of parent company International Distribution Services plc (IDS) released today (November 21).

Despite a difficult market environment, IDS delivered revenue growth of 8.2% to £6,343 million in the April – September 2024 period and returned to adjusted operating profit. The group reported an adjusted operating profit of £61 million compared to a loss of £169 million in H1 2023-24, mainly due to a significantly reduced loss in Royal Mail. The reported loss was reduced to £26 million from £243 million.

The results came amid continuing media speculation over whether the new British government will approve Czech entrepreneur Daniel Kretinsky’s £3.6 billion agreed takeover offer for IDS following a national security review. He has made several commitments to safeguarding jobs, pay agreements, the universal service and other core activities in order to win stakeholder backing.

IDS reiterated today that it expected the recommended offer to become or be declared unconditional in Q1 of calendar year 2025 (i.e. October – December 2024), subject to required conditions being satisfied or waived.

Royal Mail parcels growth

In the UK, Royal Mail increased half-year revenues by 10.7% to £3,921 million and slashed its reported operating loss to £138 million from £383 million in the same period of the previous year.

The improvement was driven by good parcel revenue growth of 8.9% to £2,017 million, despite the weaker than anticipated market in the first half of the new fiscal year, and volumes increased by 9% to 629 million items.

Domestic parcels volume grew by 5% to 533 million items and revenue grew by 8.9% to £1,670 million. “The first half of the year has seen volume growth driven by customer win back in account parcels which grew by 8%. As well as higher volumes, revenue also benefitted from contract price rises since the previous half year,” the company noted.

International recovery

International parcels revenue grew 9.1% on the prior period to £347 million due to volumes which were 37% higher at 96 million items. The prior period performance was impacted by lower consumer spending and a cyber incident, which mainly impacted international import volumes where, following a short closure to the international operation, volumes took some time to recover.

“Growth this year has been driven by commercial import parcel volumes which were 63% higher than the prior period, however these imports have a lower price and so impact less on revenue. The higher imports have more than compensated for a decline in export volumes,” the company commented.

Higher letter prices

Meanwhile, total letter revenue saw an increase of 12.7% to £1,904 million (+7.2% excluding General Election revenues). Volumes for addressed letters excluding elections fell by 5%, reflecting the ongoing structural decline in the letters market. However, this volume decline was more than offset by price increases.

Operationally, Royal Mail made its biggest change for over 20 years, changing frontline start times to enable the removal of half of domestic flights, improve reliability, increase network capacity and reduce emissions. Moreover, parcel sorting automation reached 84% of volumes as of end-September thanks to ongoing investments, with c. 90% expected by March 2025.

In parallel, Royal Mail is continuing to expand its out-of-home delivery network, aiming to reach over 21,000 drop off locations by the end of March 2025, including c. 7,500 parcel shops (with Collect+) and c. 1,500 lockers through partnerships and Royal Mail’s own network.

“Ready for Christmas season”

Looking ahead, IDS said that Royal Mail on track to return to adjusted operating profit, before voluntary redundancy costs, for FY 2024-25. However, fiscal and regulatory backdrop is adding cost and inflexibility to the business, making USO reform even more urgent.

Martin Seidenberg, Group CEO, commented: “The modernisation of the Royal Mail network continues at pace, with innovation to improve our services to customers, including the rapid expansion of our out of home footprint. As we enter our busiest period, we are well prepared to deliver Christmas, with around 4,000 new vehicles being delivered before peak, 16,000 extra people, extended delivery hours until 8pm and our growing network of parcel lockers and parcel shops.”

But he stressed: “We are delivering on the changes we can control, but the cost environment is worsening just at the time when we need to invest. As a major employer with around 130,000 permanent employees, the changes to National Insurance will disproportionately impact our business relative to competitors. This makes Universal Service reform even more urgent.”

GLS costs outpace revenues

On the international front, GLS increased its half-year revenue by 4.4% to £2,432 million as volumes grew by 4% to 449 million parcels, driven by cross-border business, B2C shipments and slightly improved pricing.  But operating profit weakened to £112 million from £140 million one year earlier as operating costs increased by 5.7% year-on-year. Adjusted operating profit weakened by 14.7% to £128 million.

In euros, GLS half-year revenue was up 6.3% at €2,863 million, costs were 7.6% higher and adjusted operating profit was 13.3% lower at €150 million.

IDS explained that the adjusted operating profit was lower year-on-year due to macroeconomic and regulatory pressures, particularly in Germany and Italy. In response, GLS is implementing further pricing and efficiency measures, while continuing investments in additional capacity, innovative technologies and expanding its out-of-home network to about 61,000 points (+11% vs. March 2024).

Seidenberg commented: “GLS’ flexible business model, diverse geographic footprint and commitment to high quality has enabled it to navigate a challenging environment. We are taking action to drive efficiencies and control costs while continuing with our strategy to invest to expand our out of home network, develop new digital solutions for customers and upgrade the network to drive productivity and growth. We are also expanding our global service offering across the US and Asia-Pacific.”

Looking ahead, IDS said the macro environment across Europe remains challenging, with regulatory pressures in certain markets, and continued investment in GLS is required to deliver strategic ambitions and support growth.

Germany revenues up, profits down

The following individual market summaries detail GLS growth in Euro terms in the April – September 2024 half-year.

In Germany, the largest GLS market by revenue, revenues were up 7.8%, benefitting from additional working days, with underlying volumes flat. Price increases were implemented in response to inflationary effects on the cost base. Wage inflation resulted in higher subcontractor rates for pick-up and delivery, as well as higher labour costs in hubs and depots; in addition, linehaul tolls doubled.

“Germany is seeing record-high business bankruptcies and is on the cusp of recession, a challenging environment that has driven operating profit and margin decline compared with the prior period,” IDS noted in its half-year report.

Profitable growth in Spain

Revenue in Italy grew by 3.4%, including the impact of more working days but operating profit declined compared with the prior period due to increasing operational costs resulting from wage inflation and regulatory effects on the subcontractor base, which have placed downward pressure on margin.

Organic revenues in Spain grew by 11.1% driven by double-digit volume growth with prices relatively flat, and operating profit improved, boosted by the capacity of the new Madrid hub opened in 2023.

Higher loss in France

In France, revenue grew by 7.6%, due to a combination of volume growth and improved pricing. Volumes benefitted from significant growth in cross-border, with domestic volumes marginally higher. Losses were slightly higher than the corresponding period of the prior year.

In September 2024 the new hub in Le Coudray (Paris) was opened providing additional capacity ahead of the peak season. The new facility is expected to generate efficiency savings once fully scaled-up and further improve quality across the French network.

New US focus

In the US, underlying revenues declined by 7.3% in Euro terms (7.5% decline in USD terms), due to lower parcel volumes resulting from lower B2C volumes including the impact from yield management initiatives. Despite the volume and revenue decline, improved operational productivity resulted in a marginal improvement in total operating losses.

On 1 September the US Freight business was divested for consideration of USD 21 million resulting in a gain on disposal of USD 0.4 million. GLS US management will now focus on the core parcel operations, including leveraging cross-border traffic to/from Europe and Canada. Shipments from US to Europe commenced in February 2024 and are on a good trajectory.

Meanwhile, Canada organic revenues increased by 2.8% in Euro terms (4.4% in CAD terms) principally due to a combination of higher parcel volumes and growth in freight revenues. Operating profit was slightly up on the prior period despite fragile economic conditions. The integration of Rosenau and Altimax to create a unified national operation in Canada continues to progress well.

Other markets

Revenue growth in GLS’ other developed European markets was 3.7%, driven by a combination of higher volumes and better pricing. Operating profit was above the prior year, with good progression in most markets including positive developments in Belgium, Denmark and Austria.

In other developing markets, where GLS has a high exposure to B2C, organic revenue increased 13.1% in the period, with growth in all markets. Overall operating profit was slightly below the prior period, with performance in Poland broadly offsetting profit declines in some other eastern European markets. Investment in strategic initiatives, such as the roll-out of parcel lockers with initial start-up costs, are impacting profit development.

In Hungary the acquisition of fulfilment business iLogistic was completed on 28 June 2024 for initial consideration of €3 million with a further €2 million deferred contingent consideration subject to future performance. iLogistic will complement GLS Hungary’s parcel operations and represents a further step in expanding GLS’ European fulfilment footprint.