royal mail plc half year 2017-18 results mail half... · this presentation does not contain or...
TRANSCRIPT
Royal Mail plc Half Year 2017-18 Results
16 November 2017
Disclaimer
This presentation contains various statements and graphic representations (together, ‘forward-looking statements’) that reflect management's current views and projections with respect to future events and financial and operational performance. The words ‘target’, ‘objective’, ‘growing’, ‘scope’, ‘platform’, ‘future’, ‘forecast’, ‘expected’, ‘estimated’, ‘accelerating’, ‘expanding’, ‘continuing’, ‘potential’, ‘sustainable’ and similar expressions or variations on such expressions identify certain of these forward-looking statements. Others can be identified from the context in which the statements or graphic representations are made. These forward-looking statements, as well as those included in any other material discussed as part of this presentation, involve known and unknown risks, uncertainties, assumptions, estimates and other factors, which may be beyond Royal Mail Group's control and which may cause actual results or performance to differ materially from those expressed or implied from such forward-looking statements. All statements (including forward-looking statements) contained herein are made as of the date of this presentation and Royal Mail Group disclaims any obligation to update any forward-looking statements, whether as a result of new information, future events or results or otherwise. There can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Accordingly, readers should not place undue reliance on forward-looking statements due to the inherent uncertainty therein. This presentation does not contain or constitute an invitation, inducement or offer to underwrite, subscribe for, or otherwise acquire or dispose of any securities or financial instruments or any advice or recommendation with respect to such securities or other financial instruments.
Moya Greene Chief Executive Officer
Underlying
change
Revenue £4,829m 2%
Adjusted operating profit before transformation costs £323m 7%
In-year trading cash flow £125m £9m
Interim dividend per share 7.7p 4%
Revenue Flat
Adjusted operating profit before transformation costs 7%
Revenue
Operating profit
9%
8%
H1 2017-18 Results overview
Note: Adjusted results exclude specific items and the pension charge to cash difference adjustment. Underlying change is calculated after adjusting for working days in UKPIL, foreign exchange movements, acquisitions, and other one-off items that distort the Group’s underlying performance
3
Good UK performance, continued strong GLS performance
UKPIL
Royal Mail plc
Full year outcome dependent on Christmas trading and potential impact of industrial relations environment
4
Sustainable cash generation
Progressive dividend policy
Growing GLS
Leading position in the UK
Strategic focus on UKPIL costs
Investment in growth and innovation
Creating a more resilient company focused on cash generation
Growing GLS
5
• Establishing strong footprint in local markets
• Further growth in existing markets as well as geographic expansion
• Focus on B2B with selective B2C growth
• Group strategic goals framework for national strategies
• National strategies to:
— increase revenues and EBIT
— address specific country requirements
— ensure customer proximity
• Underpinned by technology
H1 2017-18 Performance
£m H1 2017-18 H1 2016-17
Revenue 1,205 942
Operating profit 90 73
Operating profit margin 7.5% 7.7% GLS group strategy
Individual country strategies
Stable IT infrastructure
Strategy
Continued strong performance
• Underlying revenue growth of 9%
– driven by strong revenue growth in Italy, Denmark and Poland
• 19% revenue growth including acquisitions
Growing GLS - scale up and grow strategy
6
GLS Italy GLS Spain USA
6
• Expanding network by acquiring
selective franchisees
• Acquired express parcels company ASM in June 2016
• Created Spain‘s second largest domestic parcel network
• Acquired regional carriers GSO (2016) and Postal Express (April 2017)
• Creates an overnight parcel service with full US West Coast coverage
GLS ENTERPRISE OTHER FRANCHISEES
Acquired franchisees in last two years
GLS Spain sites ASM sites GSO sites Postal Express sites
Scale up existing businesses in core markets to strengthen market positions Grow through acquisitions to capture higher growth segments outside EU
Growing GLS - selective B2C growth
7
FlexDeliveryService ShopReturnService ShopDeliveryService
300 1.200
7
European roll-out of B2C services
• Allows recipients to choose when/where to take delivery of items
• Available in 19 countries
• Allows recipients to drop off returns at GLS ParcelShops of their choice
• Available cross-border in 7 countries
• Consignors can send parcels directly to GLS ParcelShops/partner parcel shops
• Recipients can select parcel shop during order process
Available Available
Planned
Available
Planned
0
20
40
60
80
100
120
140
160
180
200
2011-12 2012-13 2013-14 2014-15 2015-16 2016-17
Vo
lum
es (
m)
1 Tracked 24®/48® and Tracked Returns® 8
• Total parcel volumes up 6%
• Total parcel revenue up 5%
• Account volumes (ex. Amazon) up 4%
— successfully targeting faster growing sectors and winning volumes
• Royal Mail Tracked 24®/48® and Tracked Returns® volume growth outpacing market
— H1 2017-18 c.90m items; c.38% growth
• International cross-border initiative contributed c.2 ppts volume/c.1 ppt revenue growth
• Import (excluding cross-border initiative) and export volumes improved
• Parcelforce volumes up 1%
H1 2017-18 Performance Royal Mail Tracked products1 growth
Domestic & international initiatives driving growth
19%
42%
16%
43%
36%
H1 38%
32%
Leading position in UK - Parcels
E-retail CAGR 7%
0
50
100
150
200
250
300
350
400
2014 2016 2018e 2020e 2022e
Ove
rall
reta
il va
lue
(£b
n)
Overall Retail E-retailE-retail as % of overall retail
13%
Leading position in UK - Parcels
9
Larger account customers
What customers want
• Later acceptance times
• Predicted delivery times
Marketplace sellers
• Low prices
• Tracking
Individual senders
• Value for money
• Reliable service quality
Receiving customers
• Control of deliveries:
— tracking
— delivery timeslots
— in-flight redirection
Growth in online shopping1
• Simple online shipping
• Reliable service quality
• In-flight redirections
• Reliable service quality
• Convenient access points
15% 17% 18% 19%
1 Source: Global Data (Verdict) E-retail in the UK 2017-2022, projected value e-retail growth vs. overall retail, 2016-2022
Overall retail CAGR 2%
Store retail
10
Leading position in UK - Letters
H1 2017-18 Performance
• Resilient performance despite business uncertainty
• Addressed letter volumes down 5% (ex. political parties’ election mailings)
• Total letter revenue down 3%
— better than expected revenue from 2017 General Election mailings
• Marketing mail1 revenue of £534m, down 2%
• Unaddressed volumes up 8%
• Addressed letter volume decline expected to be at higher end of -4% to -6% range in 2017-18 if current levels of business uncertainty persist
1 Includes redirections, Address Management Unit, and addressed & unaddressed advertising mail
Protecting mail volumes
Optimise customer experience
Maximise profitability
Maximising the value of letters
• Introduced incentives for incremental advertising mail
• Enhanced revenue protection measures
• Targeted pricing initiatives to drive incremental volume/profit
• Commencing Mailmark® roll-out to unsorted mail
Investment in growth and innovation
Mar 2017 Core network PDA rollout complete
Meeting customer expectations for convenience, flexibility and quality
Leveraging technology
Operational improvements
Sep 2017 3 more parcel
sorting machines deployed
More PDA functionality
Apr 2017 Delivery
confirmation available for majority of
barcoded parcels
Oct 2017 Started piloting
estimated delivery times
Oct 2017 Launched
Parcelforce app for
receiving customers
Apr 2017 Labels to Go
launched
Aug 2017 Started
deploying electric vehicles
in network Further
extension of LATs within
network
Apr 2017 Credit card
payments taken in Customer
Service Points
Sep 2017 RMSS PDA
rollout complete
11
Sep 2017 Launched
Parcelforce 1-hour delivery
timeslot notification and My Parcel Live
Aug 2017 NOTHS
integrates with Click & Drop
Apr 2017 Leading
e-commerce web platforms integrated with
Click & Drop
Strategic focus on UKPIL costs
12
Central functions Logistics Processing
Maintain target to deliver c.£190m costs avoided in 2017-18
1 Collections, processing and delivery in core network only 2 Cumulative over financial years 2015-16, 2016-17 and 2017-18
Maintain target to avoid c.£600m of annualised costs by 2017-182
Collections Delivery
2013-14 2014-15 2015-16 2016-17 Target
Gross core network hours (2.9%) (2.3%) (2.0%) (1.9%)
Workload (1.3%) 0.1% 0.4% 0.7%
Productivity1 1.7% 2.5% 2.4% 2.7% 2.0-3.0%
Good cost performance in H1; challenges in H2 due to industrial relations environment
Stuart Simpson Chief Finance Officer
H1 2017-18 Financial summary
14
• IAS 19 pension charge to cash adjustment £234m (H1 2016-17: £114m)
— estimated at c.£450m for full year
• Reported results impacted by increase in pension service cost, specific items and tax credit arising from pension accounting
• Interim dividend based on formula, one third of prior year full year dividend
£m Adjusted
H1 2017-18 Adjusted
H1 2016-17
Underlying change
Revenue 4,829 4,583 2%
Operating profit before transformation costs
323 320 7%
Transformation costs (63) (58)
Operating profit after transformation costs
260 262
Operating profit margin after transformation costs
5.4% 5.7% +30bps
Profit before tax 250 252
Earnings per share (basic) 20.1p 19.2p +0.9p
In-year trading cash flow 125 116
Net debt (382) (452)
Interim dividend per share 7.7p 7.4p 4%
Note: Adjusted results exclude specific items and are after the pension charge to cash difference adjustment. Underlying change is calculated after adjusting for working days in UKPIL, foreign exchange movements, acquisitions, and other one-off items that distort the Group’s underlying performance
£m H1 2017-18
Reported Adjusted
Operating profit before transformation costs
89 323
Profit before tax 77 250
Profit after tax 168 198
Earnings per share (basic) 17.1p 20.1p
Underlying movement in operating profit
15
£m
320 [XXX]
323
19
10 7 3
22
200
250
300
350
H1 2016-17Adjusted
operating profitbefore
transformationcosts
Workingdays
ApprenticeshipLevy
FX(GLS and UKPIL)
Impact ofacquisitions
H1 2016-17Underlying
Underlyingperformance
H1 2017-18Adjusted
operating profitbefore
transformationcosts
• (£19m) impact in UKPIL due to c.1 less working day (H1 2017-18: 152 working days; H1 2016-17: 152.8 working days)
— estimated impact c.(£15m) in FY 2017-18 due to c.1 less working day
• Estimated c.£20m full year impact of Apprenticeship Levy
• Net £7m positive impact on Group due to weaker Sterling
— average rate £1 = €1.14 (H1 2016-17: £1 = €1.23)
— £78m positive revenue impact offset by £71m negative cost impact, mostly due to GLS
• £3m contribution from recent GLS acquisitions
• 7% increase in adjusted operating profit before transformation costs
Note: Adjusted results exclude specific items and are after the pension charge to cash difference adjustment. Underlying change is calculated after adjusting for working days in UKPIL, foreign exchange movements, acquisitions, and other one-off items that distort the Group’s underlying performance
7%
UKPIL results
Note: Adjusted results exclude specific items and are after the pension charge to cash difference adjustment. Underlying change is calculated after adjusting for working days, foreign exchange movements, acquisitions and other one-off items that distort the underlying performance
16
£m Adjusted
H1 2017-18 Adjusted
H1 2016-17 Underlying
change
Revenue 3,624 3,641 Flat
Operating costs (3,391) (3,394) (1%)
Operating profit before transformation costs 233 247 7%
Transformation costs (63) (58)
Operating profit after transformation costs 170 189 6%
Operating profit margin after transformation costs 4.7% 5.2% +30bps
£m H1 2017-18 H1 2016-17
Voluntary redundancy (31) (26)
Project costs (32) (32)
Total transformation costs (63) (58)
• Transformation costs reflect activities under cost avoidance programme
— increase in VR reflects managerial headcount reduction
• Ongoing transformation costs expected to be c.£130-150m p.a. dependent on absorbable rate of change
UKPIL revenue
Note: Underlying change is calculated after adjusting for working days, foreign exchange movements, acquisitions and other one-off items that distort the Group’s underlying performance. For volumes, underlying movements are adjusted for working days, acquisitions and exclude political parties’ election mailings in letter volumes 1 Includes elections, philatelic, unaddressed and other non-volume related items 2 Total addressed letter volumes including elections 3 Includes redirections, Address Management Unit, and addressed & unaddressed advertising mail
17
Parcels – Revenue £1,596m, Volumes 563m
• Excluding new cross-border initiative – volumes up c.4%, revenue up c.4%
— mix offsets pricing impacts
• Account volumes (ex. Amazon) continue to grow, up 4%
• Strong growth in letter-boxable parcels from Amazon
• International traffic
— growth in import volumes (including cross-border)
— improved contract export volumes
• Parcelforce continued improvement in volume trend, up 1%
Letters – Revenue £2,028m, Volumes2 5,610m
• Addressed letter volume decline of 5%
— lapping weak Q2 in prior period
• Marketing mail3 revenue down 2%
— rate of decline moderating, lapping higher rate of decline in prior period
• Lower AUR unaddressed letter volumes up 8%
— reflecting initiatives in this segment
3,641 3,622 3,627 3,601 3,601 3,696 3,721
3,624 3,624
19 5 26
95 29 4 97
3,000
3,200
3,400
3,600
3,800
H1 2016-17 Workingdays
FX Parcel price andmix
Parcelvolume
Letter price andmix
Other¹ Addressedletter volume
H1 2017-18
(3%)
£m
2% (5%) (1%) 6%
Flat
5%
People costs flat
• Assumption for pay award as not yet agreed
— H2 2017-18 will reflect status of wage negotiations
with any true up/down as required
• Offset by:
— productivity improvement
— managerial headcount reduction
Non-people costs down 2%
• Terminal dues up £5m due to Sterling weakness (D&C)
• Fleet and fuel cost savings (D&C)
• £20m increase in depreciation & amortisation (infrastructure)
— includes £5m one-off accelerated depreciation of
certain IT/other assets
— depreciation & amortisation expected to be c.£35m
higher for 2017-18
• Benefits from Romec integration, IT transformation
and lower property spend (infrastructure)
• Lower marketing and discretionary spend (other)
• Savings on certain supplier contracts (other)
UKPIL operating costs
18
Operating costs before transformation costs down 1%
Note: Adjusted results exclude specific items and the pension charge to cash difference adjustment. Underlying change is calculated after adjusting for foreign exchange movements, acquisitions and other one-off items that distort the Group’s underlying performance
3,394 3,391
18 10 5
3,200
3,250
3,300
3,350
3,400
3,450
H1 2016-17Adjusted
ApprenticeshipLevy
FX H1 2016-17Underlying
Net underlyingperformance
H1 2017-18Adjusted
(1%)
£m
£m
Adjusted H1 2017-18
Adjusted H1 2016-17
Underlying change
People costs
Non-people costs
2,362
1,029
2,351
1,043
Flat
(2%)
Distribution & conveyance costs
Infrastructure costs
Other operating costs
361
365
303
370
360
313
(4%)
1%
(3%)
Operating costs 3,391 3,394 (1%)
233 233
H1 2017-18Adjusted operating profit
before tranformation costs
Costs avoided Commercial pressures People cost pressures Non-people cost pressures H2 2017-18Adjusted operating profit
before tranformation costs
`
£m
UKPIL H2 2017-18 performance
19
Significant headwinds remain in H2 2017-18
• Costs avoided
— on track to deliver c.£190m costs avoided but skewed to H1 due to timing of projects
— potential impact of industrial relations environment on pace of change
• People cost pressures
— outcome of pay negotiations
— impact of managers pay award from September
• Commercial pressures
— potential customer reaction to industrial relations environment
— continuing business uncertainty
• Non-people cost pressures
— cost of sales weighted to H2 due to Christmas
— costs associated with parcel initiatives and increased tracked/volumetrics
GLS results
20
£m H1
2017-18 H1
2016-17 Underlying
change
Revenue 1,205 942 9%
Operating costs (1,115) (869) 9%
Operating profit 90 73 8%
Operating profit margin 7.5% 7.7% (10bps)
Volumes (m) 276 233 9%
Average £1 = € 1.14 1.23 (7%)
€m H1
2017-18 H1
2016-17
Revenue 1,371 1,155
Operating costs (1,269) (1,066)
Operating profit 102 89
• Performance largely driven by good volume growth – domestic and international
— timing of holidays across Europe reduced underlying volumes and revenue movements by c.3ppts
• Margin impacted by increased people and distribution & conveyance costs
• ASM exceeded performance expectations since acquisition
• Reported Sterling results positively impacted by 7% weakening of Sterling vs. Euro
Note: Movements in revenue, volume and costs are on an underlying basis. Underlying change is calculated after adjusting for ASM, GSO and Postal Express acquisitions (21m volumes; £89m revenue; £86m costs; £3m operating profit) and foreign exchange movements (£73m revenue; £66m costs; £7m operating profit)
GLS revenue
21
• Underlying revenue up 9%
— timing of holidays across Europe adversely impacted volumes/revenue by c.3ppts
• Headline revenue up 19% in Euros including acquisitions
• Germany, Italy and France account for 60% of GLS Group revenue, reflecting impact of acquisitions
• Largest customer represents c.3% of GLS Group revenue
• Germany up 5%, driven by international volumes and improved domestic pricing
• Continued strong growth in Italy, up 18% mainly due to strong B2C volume growth
— growth rate expected to slow going forward
• France growth slowed, up 1%, due to impact of working days and lower export volumes
— break-even unlikely in short-term
Note: Movements in revenue, volumes and costs are on an underlying basis. Underlying change is calculated after adjusting for ASM, GSO and Postal Express acquisitions and foreign exchange movements
942 942
[X] 1,108 1,205
89
73 4
97
600
800
1,000
1,200
1,400
H1 2016-17 Acquisitions FX Underlying Priceand mix
Volume H1 2017-18
9%
£m 9%
Flat
GLS costs
22
£m H1
2017-18 H1
2016-17 Underlying
change
People costs 293 209 10%
Distribution & conveyance costs
725 575 11%
Infrastructure costs 71 57 6%
Other operating costs 26 28 (24%)
Operating costs 1,115 869 9%
People costs up 10% due to:
— semi-variable costs linked to volume
— pay inflation
Non-people costs up 9%
• Distribution & conveyance costs up 11% due to higher volumes and increased sub-contractor costs
— €2.5m impact of new German minimum wage from January 2017
— estimated 12 month impact €5m
• Infrastructure costs up 6% due to one-off provision release for IT-related costs in prior period
• Other operating costs down by 24% driven by one-off provision release this year and costs associated with geographic expansion activities last year
Note: Movements in revenue, volume and costs are on an underlying basis. Underlying change is calculated after adjusting for ASM, GSO and Postal Express acquisitions (£86m) and foreign exchange movements (£66m)
c.6%
c.4%
Group in-year trading cash flow
23
• Higher adjusted EBITDA before transformation costs
• Trading working capital
— no outflow for pay award
— timing of international settlements
• Investment on track - total net cash investment target for 2017-18 of c.£450m
£m H1
2017-18 H1
2016-17
Reported EBITDA before transformation costs 255 352
Pension charge to cash difference adjustment 234 114
Adjusted EBITDA before transformation costs 489 466
Trading working capital movements (130) (127)
Share-based awards (SAYE/LTIP/DSBP) charge 1 6
Total investment (198) (201)
Income tax paid (24) (16)
Net finance costs paid (13) (12)
In-year trading cash flow 125 116
£m H1
2017-18 H1
2016-17
Transformation opex (59) (60)
Replacement capex (53) (61)
Growth capex (86) (80)
Total investment (198) (201)
Operational asset disposals
29 7
Net investment (169) (194)
• Higher cash tax due to GLS
Uses of cash/net debt
24
• Free cash flow of £115m
• Other working capital movements include stamps used but purchased in previous periods, GLS client cash held and other deferred revenue
• Operating specific items are largely additional employer National Insurance contributions on Employee Free Share sales and Romec business integration costs
• Operational asset disposals largely relate to the £24m overage payment from the sale of Rathbone Place in 2011
• Acquisition of business interests relates to the purchase of Postal Express by GLS
• London property cash flows - £9.5m deposit received on exchange of contracts for sale of Mount Pleasant plots net of £14m re-investment
• Foreign exchange movements reflect impact of translation on Euro bond, GLS cash, lease creditors and other loans
• Net debt increased by £44m from year end
(338) (382)
125
29 19 8 8 4 5
154
(500)
(400)
(300)
(200)
(100)
0
Net debt at26 March 2017
In-year tradingcash inflow
Other workingcapital
movements
Operatingspecific items
Operationalasset disposals
Acquisition ofbusinessinterests
London propertycash flows
FXmovements
Dividends paid Net debt at24 September
2017
£44m
£m £115m
Nine Elms 13.9 • Outline planning consent for 1,950
residential units
• Core infrastructure works underway on
site
• Two plots sold for £101m conditional on obtaining
detailed planning consent
— due to timing on obtaining planning consent, proceeds now expected in 2018-19
— c.£30m to be re-invested in infrastructure associated with sold plots
• Five plots continue to be marketed
• Delivery Office transferred to new site in Aug 2017
• Further investment required (infrastructure, park) for remaining plots when sold
Mount Pleasant
8.6 acres covered by
planning consent (of which 6.25
acres sold)
• Full planning permission in place for up to c.680 residential units
• Separation works now commenced
• 6.25 acres sold for £193.5m in Aug 2017 – of which £9.5m deposit received; remaining £180.5m cash to be paid in staged payments over 2017-18 to 2020-21 and final lump sum payments in 2024
• Separation and enabling works expected to cost c.£100m
Site Acres Key features Status
Property
2014-15 2015-16 2016-17 H1 2017-18
Total proceeds 111 - - 10
Total investment (11) (23) (34) (14)
Net cash position 100 (23) (34) (4)
Cumulative 100 77 43 39
25
2017-18
Sales proceeds received (Nine Elms in 2018-19)
Further investment
26
• Liabilities projected to accrue to March 2018 have been hedged in advance against movements in interest and inflation rates
• RMPP will close to future accrual after 31 March 2018
• Plan now expected to close with small surplus1
• Remaining employer contributions up to 31 March 2018 to be held in pension escrow investments
• Accounting impact of closing scheme
— reduction in deferred tax liability
— P&L tax credit in period
— IFRIC 14 adjustment to surplus
• Discussion with Unions over future benefits post March 2018 continue
¹ Based on roll forward of RMPP March 2015 triennial valuation assumptions
£m IAS 19 Accounting
24 September 2017 Actuarial1
30 September 2017
Assets 9,380 9,303
Liabilities (5,982) (8,533)
Surplus 3,398 770
IFRIC 14 adjustment (1,111)
Post IFRIC 14 surplus 2,287
Royal Mail Pension Plan (RMPP) update
Moya Greene Chief Executive Officer
Outlook
28
Good H1 performance
Headwinds in H2 Continuing business uncertainty
Potential impact of industrial relations environment
UKPIL cost avoidance programme on track, skewed to H1
Medium-term addressed letter volume decline of 4-6% p.a. - outlook unchanged but closely monitoring impact of business uncertainty on letter volumes
UK parcels market remains highly competitive
GLS underlying revenue growth for FY 2017-18 broadly in line with H1 2017-18
Appendix
H1 2017-18 Value drivers (adjusted basis)
30
Revenue Operating costs Transformation
costs Profit after
transformation costs Cash
People costs up 1%
Non-people
costs up 3%
Transformation costs £63m
up £5m
Adjusted EBITDA £489m
up £23m
Net cash investment
£169m down £25m
Low single digit revenue growth
Net operating cost growth below rate of revenue growth
Drives margin expansion
Drives growth in In-year trading cash
flow
2% Growth 2% Growth
Up 30bps
In-year trading cash flow
£125m up £9m
Profit after transformation costs
£260m
Margin 5.4%
UK parcels up 5%
UK letters down 3%
UKPIL
Flat
GLS up 9%
Objective¹ H1 2017-18
Note: Adjusted results exclude specific items and the pension charge to cash difference adjustment. Underlying change is calculated after adjusting for working days in UKPIL, foreign exchange movements, acquisitions and other one-off items that distort the Group’s underlying performance ¹ These objectives do not represent any forecast, target or expectation as to future results or performance
Outlook drivers
31
Revenue
• Volume growth dependent on growth in addressable market • Pricing constrained by competition • Mix dependant on relative proportion of higher AUR vs lower AUR
volumes
• Addressed letter volume (ex. elections) decline 4-6% p.a. medium term
• Expect to be at higher end of decline range in 2017-18 if business uncertainty persists
• Pricing broadly in line with RPI
UKPIL Operating Costs
Transformation Costs
Tax (P&L) • Group adjusted effective tax rate c.22% • Expected to decline longer term but impact of higher tax regimes (Europe/US)
Investment
• Past peak of investment
• Net investment c.£450m in 2017-18
• <£500m ongoing
Pensions • Projected RMPP cash cost c.£320m in
2017-18
Working Capital • Largely dependent on international
traffic volumes and timings of payment settlements
Tax (Cash)
• UK cash tax expected to stay at similar levels to FY 2016-17 until 2019-20
• Expected to normalise to adjusted effective tax rate thereafter
P&L drivers Cash flow drivers
• Expect underlying revenue growth for FY 2017-18 broadly in line with H1 2017-18
• Rate of underlying revenue growth expected to slow over time due to strong historic performance
• Impact of acquisitions
Acquisitions • Funded by borrowings
UKPIL parcels
UKPIL letters
GLS
• People costs
– dependent on outcome of pay negotiations
– targeted productivity improvements of 2-3% p.a.
– impact of wage legislation
• Non-people costs
– increasing cost of sales due to higher tracked volumes
– depreciation & amortisation up c.£35m in 2017-18
• Expecting c.£190m costs avoided in 2017-18
• Targeting c.£600m of annualised UKPIL operating costs avoided over three financial years to 2017-18
Group • Low single digit revenue growth objective
• c.£130 –150m p.a.
Dividend • Progressive dividend policy
Segmental summary
32
£m Adjusted
H1 2017-18 Adjusted
H1 2016-17 Underlying
change
Revenue
UKPIL 3,624 3,641 Flat
GLS 1,205 942 9%
Total 4,829 4,583 2%
Operating profit before transformation costs
UKPIL 233 247 7%
GLS 90 73 8%
Total 323 320 7%
Operating profit after transformation costs
UKPIL 170 189 6%
GLS 90 73 8%
Total 260 262 7%
Note: Adjusted results exclude specific items and the pension charge to cash difference adjustment. Underlying change is calculated after adjusting for working days in UKPIL, foreign exchange movements, acquisitions and other one-off items that distort the Group’s underlying performance
Specific items and pension adjustment
¹ Includes National Insurance which will be cash settled (H1 2017-18: £1m; H1 2016-17: £3m) ² Including RMSEPP deficit payment of £5m ³ Calculated based on value of Employee Free Shares of c.£113m (including £4m National Insurance) pro-rated over the period up to maturity for level/mix of leavers
33
£m H1
2017-18 H1
2016-17
Employee Free Shares charge¹ (18) (79)
Amortisation of acquired intangible assets
(8) –
Legacy/other costs (3) (11)
Total operating specific items (29) (90)
Profit on disposal of property, plant and equipment
44 4
Loss on disposal of business – (2)
Net pension interest 46 60
Total non-operating specific items 90 62
Pension charge to cash difference adjustment²
(234) (114)
• Decrease in Employee Free Shares charge3 due to SIP 2013 maturing in October 2016
• Prior year legacy costs higher due to reduction in discount rate used to calculate industrial diseases provision
• Other costs relate to Romec integration costs
• Profit on disposal of property, plant and equipment mainly from £24m overage payment from Rathbone Place and £22m profit on completion of sale of Phoenix Place
• H1 2017-18 pension interest credit £46m
— £91m in 2017-18
• Pension charge to cash difference adjustment £234m in H1 2017-18
— c.£450m in 2017-18
Group profit after tax
34
£m Adjusted
H1 2017-18 Adjusted
H1 2016-17
Operating profit after transformation costs 260 262
Finance costs (11) (11)
Finance income 1 1
Net finance costs (10) (10)
Profit before tax 250 252
Tax charge (52) (59)
Profit for the period 198 193
Earnings per share (basic) 20.1p 19.2p
Note: Adjusted results exclude specific items and the pension charge to cash difference adjustment
Group tax
35
£m
Reported H1 2017-18 Adjusted H1 2017-18
UK Pension impact GLS Group
Group ex. pension
UK GLS Group
(Loss)/profit before tax (4) - 81 77 77 162 88 250
Income statement tax credit/(charge) 113 106 (22) 91 (15) (28) (24) (52)
Effective tax rate n/a n/a 27% n/a 19% 17% 27% 21%
Cash tax payments (6) - (21) (27) (27) n/a n/a n/a
Cash tax rate n/a n/a 26% 35% 35% n/a n/a n/a
Income statement tax
UK
• Adjusted: broadly in line with UK statutory rate
— lower rate than prior year (H1 2016-17: 21%) due to tax reliefs and lower UK statutory rate
• Reported: distorted by one-off deferred tax credit of £106m related to the decision to close the RMPP to further accrual after March 2018
GLS
• Adjusted: slightly lower rate (H1 2016-17: 29%) due to change in profit mix to lower tax territories together with a reduction in the Italian tax rate
Cash tax
UK
• Expected to stay at similar levels as FY 2016-17 until 2019-20 due to tax reliefs, expected to normalise thereafter
GLS
• Cash tax higher than prior period (H1 2016-17: 13%) due to higher profits and settlement of provision in relation to tax in Italy
• Small difference to income statement tax due to timing of tax payments
Deferred tax - balance sheet
36
UK
• Assets arise due to brought forward tax losses and capital allowances
— tax losses are expected to reverse in short term and capital allowances in medium term
• Gross liabilities largely comprise future tax charges in respect of:
— pensions (£42m) - expected to reverse by March 2018
— as a result of decision to close RMPP to future accrual after 31 March 2018, deferred tax liability of £581m has been released as pension surplus is now treated as being available via refund, net of 35% withholding tax
— Employee Free Shares (£8m) - SIPs unwind over various maturity periods
GLS
• Liabilities relate to amortisation of acquisition intangibles
95
7
50
(52) (42) (42)
(100)
(50)
0
50
100
150 UK GLS Group £m
£43m net asset
Net debt and liquidity
37
• S&P investment grade rating of BBB stable outlook
• Net debt increased by £44m largely driven by dividends offset by free cash flow
• Net debt excludes £23m related to RMPP pension escrow investments which is not considered to fall within definition of net debt
Facility Rate Facility
£m Drawn
£m Facility
end date
Euro bond¹ 2.5% 439 439 2024
Loans in GLS (Spain) 2.0% 1 1 2018
Revolving credit facility
LIBOR +0.55%
1,050 0 2020-22²
Total 1,490 440
£m 24 September
2017 26 March
2017
Loans/bonds¹ (440) (463)
Finance leases (191) (194)
Cash and cash equivalents³ 229 299
Pension escrow (RMSEPP) 20 20
Net debt (382) (338)
Net debt
Borrowings
£m H1
2017-18 H1
2016-17
Stamps used but purchased in prior periods/deferred revenue
(17) (22)
Client cash in GLS4 (2) 6
Other working capital (19) (16)
Other working capital movements
¹ €500m liabilities net of discount and fees at spot rate £1/€1.133 revalued at balance sheet date ² £98m expires in 2020 ³ Includes GLS client cash of £20m (26 March 2017 £22m) 4 Cash collected on behalf of customer, payment on delivery
Pensions
38
£m H1 2017-18 H1 2016-17
RMPP (405) (291)
RMDCP (28) (24)
GLS (3) (3)
PSE² (77) (76)
People costs (513) (394)
Pension costs relating to VR (1) (3)
Total EBIT pension costs (514) (397)
Pension interest credit ³ 46 60
Total net PBT pension costs (468) (337)
Pensionable payroll (£bn) – RMPP 1.0 1.0
Income statement rate RMPP⁴ 41.1% 28.8%
RMDCP 6% 6%
Number of active members RMPP c.86,000 c.91,000
RMDCP c.46,000 c.43,000
£m H1 2017-18 H1 2016-17
RMPP (162)¹ (172)
RMDCP (28) (24)
GLS (3) (3)
PSE² (77) (76)
RMSEPP deficit (5) (5)
Cash contributions (277) (280)
Pension payments relating to VR (2) (7)
Total cash payments (279) (287)
Pensionable payroll (£bn) – RMPP 1.0 1.0
Cash rate RMPP 17.1% 17.1%
RMDCP 6% 6%
¹ Net of £2m pension related accruals ² Under Pension Salary Exchange (PSE) the Group makes additional employee pension contributions in return for a reduction in basic pay ³ Non-operating specific item ⁴ Rate determined by real discount rate at the end of March based on longer term RPI and appropriate AA corporate bond rates at the time Average employer contribution rate for the period, excluding benefits
Income statement Cash flow
5
5
5
Accounting surplusat 26 March 2017²
Movementin real discount rate(corporate bonds)
Asset performance(mainly liabilityhedging assets)
Contributions(inc. employee)
Cost of accrual Accounting surplusat 24 September 2017
Assets
£9.8bn
Liabilities
(£6.3bn)
Assets
£9.9bn
Liabilities
(£6.0bn)
£0.2bn £0.3bn £0.2bn £0.5bn Net surplus
£3.5bn1
Net surplus £3.9bn
Pensions - RMPP and RMSEPP
¹ Pre IFRIC 14 ² Based on roll forward assumptions used in March 2015 valuations 39
Accounting basis
Estimated actuarialsurplus
at 31 March 2017
Changes arising fromMarch 2015 valuations
Movementin real discount rate (gilts)
and other assumptions
Asset performance(mainly liabilityhedging assets)
Contributions(inc. employee)
Cost of accrual Estimated actuarialsurplus
at 30 September 2017²
Assets
£10.1bn
Liabilities
(£9.0bn)
Assets £9.8bn
Liabilities (£9.0bn)
Net surplus c.£1.1bn
£0.2bn
£0.4bn £0.5bn
£0.2bn £0.6bn
Net surplus c.£0.8bn
Actuarial basis
1
UKPIL data
Note: Underlying change is calculated after adjusting for working days in UKPIL, foreign exchange movements, acquisitions and other one-off items that distort the Group’s underlying performance. For volumes, underlying movements are adjusted for working days in UKPIL and exclude political parties’ election mailings in letter volumes. 1 Movement from 26 March 2017
40
Letters H1
2017-18 H1
2016-17
Volumes (m)
Non-access 1,987 2,238
Network access 3,429 3,481
International 194 218
Total addressed (including elections) 5,610 5,937
Underlying change (5%) (4%)
Unaddressed 1,510 1,404
Underlying change 8% 4%
Revenue (£m) 2,028 2,109
Underlying change (3%) (4%)
Parcels H1
2017-18 H1
2016-17
Volumes (m)
Royal Mail core network 516 487
Underlying change 7% 2%
Parcelforce 47 46
Underlying change 1% 2%
Total volume 563 533
Underlying change 6% 2%
Revenue (£m) 1,596 1,532
Underlying change 5% 2%
FTE H1
2017-18 H1
2016-17 Change
Total c. 146,700 c.147,800 c.(1,100)
Headcount1 Leavers Joiners Net
Natural attrition/joiners c.4,400 c.3,700 c.(700)
Voluntary redundancy c.400 - c.(400)
Total c.4,800 c.3,700 c.(1,100)
UK parcels and letters markets
41
UK parcels market UK letters market
DPD 9%
Hermes 8%
Yodel 7%
TNT Express
6%
Others 29%
Hermes 12%
Yodel 8%
DPD 6%
TNT Express
4%
Others 17%
2015: 53% (2014: 54%)
2015: 41% (2014: 41%)
Addressable volume
Addressable revenue
• Estimated blended market volume growth of c.4% p.a. in medium term
• Addressable market volume growth estimated at c.3%
(4%) (4%) (3%)
(6%)
2013-14 2014-15 2015-16 2016-17 Forecast
ex. DD (4%)
• Medium term forecast of 4-6% decline p.a. unchanged
• Rate of e-substitution not expected to increase
• Letters largely B2X so impacted by business uncertainty
• Marketing mail highly geared to business confidence
Addressed letter volume¹ trends
4-6% p.a. decline
¹ Underlying change, excluding the impact of political parties’ election mailings
Sources and definitions
42
Blended market volume growth - internal estimate based on Triangle Management Services/RMG Fulfilment Market Measure (2015); defined as individually addressed parcels and packets, generated and delivered in the UK, weighing up to 30kg, that do not require special handling. Includes access fulfilment large letters & parcels and excludes click‐and‐collect, same‐day, small local operators and all international traffic. Includes Amazon Logistics and other retailers own‐delivery networks. Based on GlobalData UK E‐retail survey and RMG market insight Addressable market volume growth - internal estimate based on Triangle Management Services/RMG Fulfilment Market Measure (2015); defined as individually addressed parcels and packets, generated and delivered in the UK, weighing up to 30kg, that do not require special handling. Includes access fulfilment large letters & parcels and excludes click‐and‐collect, same‐day, small local operators and all international traffic. Excludes Amazon Logistics and other retailers own‐delivery networks Addressable volume and revenue market share - internal estimate based on Triangle Management Services/RMG Fulfilment Market Measure (calendar 2015); defined as individually addressed parcels and packets, generated and delivered in the UK, weighing up to 30kg, that do not require special handling. Includes access fulfilment large letters & parcels and excludes click‐and‐collect, same‐day, small local operators and all international traffic. Excludes Amazon Logistics and other retailers own‐delivery networks Royal Mail Tracked 24®/48® and Tracked Returns® volume growth - Includes Royal Mail Tracked 24®/48® and Royal Mail Tracked Returns®. Growth has been adjusted for working days, and includes an element of some customers uptrading from Royal Mail 24/48 to Royal Mail Tracked products