TIDMIDS
RNS Number : 6982G
International Distributions Svc PLC
17 November 2022
International Distributions Services plc
(Incorporated in England and Wales)
Company Number: 8680755
LSE Share Code: IDS
ISIN: GB00BDVZYZ77
LEI: 213800TCZZU84G8Z2M70
This announcement contains inside information for the purposes
of Article 7 of the Market Abuse Regulation (EU) 596/2014 as it
forms part of UK domestic law by virtue of the European Union
(Withdrawal) Act 2018 ("MAR"), and is disclosed in accordance with
the company's obligations under Article 17 of MAR
17 November 2022
INTERNATIONAL DISTRIBUTIONS SERVICES PLC
RESULTS FOR THE HALF YEARED 25 SEPTEMBER 2022
26 weeks ended 26 weeks ended
25 September 26 September
Reported measures (GBPm)(1) 2022 2021 Change(2)
----------------------------- --------------- --------------- ----------
Revenue 5,838 6,072 (3.9)%
Operating (loss)/profit (163) 311 (152.4)%
(Loss)/profit before
tax (127) 315 (140.3)%
Basic earnings per share
(pence) (9.0)p 27.0p (36.0)p
Adjusted measures (GBPm)(1)
----------------------------- --------------- --------------- ----------
Operating (loss)/profit (57) 404 (114.1)%
Operating (loss)/profit
margin (%) (1.0)% 6.7% (770)bps
(Loss)/profit before
tax (80) 378 (121.2)%
Basic earnings per share
(pence) (7.3)p 30.3p (37.6)p
Pre-IFRS16 in-year trading
cash flow(3) (235) 181 (229.8)%
Net debt (1,472) (540) 172.6%
Net (debt)/cash (pre-IFRS
16) (150) 685 (121.9)%
------------------------------ --------------- --------------- ----------
Summary segmental results(1)
Revenue Adjusted operating (loss)/profit
------------------------------------------------------------- -------------------------------------------------------
26 weeks 26 weeks ended 26 weeks ended 26 weeks
ended 26 September 25 September ended
25 September 2021 2022 26 September
(GBPm) 2022 Change(2) 2021 Change(2)
----------------- ------------------- --------------------- ---------- --------------- -------------- ----------
Royal
Mail 3,647 4,074 (10.5)% (219) 235 (193.2)%
GLS 2,200 2,010 9.5% 162 169 (4.1)%
Intragroup (9) (12) (25.0)% - - -
----------------- ------------------- --------------------- ---------- --------------- -------------- ----------
Group 5,838 6,072 (3.9)% (57) 404 (114.1)%
----------------- ------------------- --------------------- ---------- --------------- -------------- ----------
Key points:
-- International Distributions Services (IDS) revenue down 3.9%
period-on-period, driven by weakness in Royal Mail
-- IDS reported operating loss of GBP163 million (H1 2021-22:
GBP311 million profit); adjusted operating loss of GBP57 million
(H1 2021-22: GBP404 million profit) IDS
- Material adjusted operating loss in Royal Mail of GBP219
million (H1 2021-22: GBP235 million profit), driven by weak parcel
volumes, inability to deliver productivity improvements and impacts
from industrial action
- GLS adjusted operating profit of GBP162 million (EUR191
million), down 4.1% (down 3.0% in Euros), with 7.4% adjusted
operating margin (down 100 basis points), driven by inflationary
pressures
-- Royal Mail:
- Revenue 10.5% lower period-on-period. Due to management
action, strike impact has been contained. Revenue flat vs. H1
2019-20 (pre-pandemic)
- Five point plan to stabilise the business already underway
with a focus on rightsizing the business, tighter cash management
and improving operational grip
- Successfully completed Delivering for the Future management
change and agreed a new pay deal with Unite/CMA
- Talks with CWU continue although we are already moving ahead
with required changes. Talks will cease if further industrial
action goes ahead
- Ensuring future sustainability depends critically on urgent
reform of the Universal Service. Government has been approached to
seek an early move to five day letter delivery, whilst we continue
to improve parcel services
-- GLS:
- Robust trading in the first half with pricing initiatives
helping to mitigate inflationary cost pressures. Investment focused
on growth, efficiency and digitalisation
- Revenue up 9.5% in Sterling (10.5% in Euros), driven by better
pricing, higher freight revenues and contribution from
acquisitions
- Parcel volumes declined 2% due to unwinding of temporary
benefits from COVID-19 lockdown restrictions in the prior period
and current macro-economic environment
-- Group in-year trading cash outflow pre-IFRS 16 of GBP235
million (H1 2021-22: GBP181 million inflow), driven predominantly
by the decline in trading performance in Royal Mail
- Royal Mail GBP330 million in-year trading cash outflow
pre-IFRS 16 (H1 2021-22 GBP64 million inflow)
- GLS GBP95 million in-year trading cash inflow pre-IFRS 16 (H1 2021-22: GBP117 million)
-- Despite increase in net debt, strong balance sheet remains
with net debt GBP150 million (pre-IFRS 16)
-- No interim dividend to be paid. We will look at the potential
to pay a final dividend for FY 2022-23 from earnings in GLS
-- As previously stated, in the event that significant change
within Royal Mail is not achieved, all options remain open to
protect the value and prospects of the Group, including separation
of the two companies
-- Outlook:
- Royal Mail FY 2022-23: We continue to expect a full year
adjusted operating loss of around GBP350 million to GBP450 million,
including the direct impact of 12(5) days of industrial action
(previously eight days, reflecting revenue resilience in strike
action to date) which have taken place or have been notified to us,
but excluding any charges for voluntary redundancy costs
- Targeting Royal Mail to generate positive free cash flow in FY
2023-24 and return to adjusted operating profit in FY 2024-25
- GLS FY 2022-23: maintaining guidance of high single digit %
revenue growth in Euros and adjusted operating profit in the range
of EUR370 to EUR410 million
- GLS Accelerate(4) targets (EUR500 million operating profit and
EUR1 billion accumulated free cash flow(4) in FY 2024-25) delayed
by c.18-24 months given current worse than anticipated
macro-economic backdrop
Keith Williams, Non-Executive Chair, commented:
"The difference between the performances of our two companies
could not be more stark. GLS has adapted well to inflationary
pressures across its geographies. However, we have been standing at
a crossroads with CWU in the UK for several months. We are now
heading in a clear direction in light of the substantial losses in
Royal Mail.
"Whilst our frontline management population under Unite/CMA has
agreed both pay and change in the last few months, progress on a
deal for frontline employees has been blocked by the actions of
CWU. Accordingly, we have started to implement the change needed to
rightsize Royal Mail which will ensure that it is both better
placed to serve our customers' needs in parcels, as well as
letters, bring it back to profitability and provide a sustainable
future. We believe that this is the best course of action for the
long-term survival of Royal Mail even if it results in short-term
disruption. A sustainable future must also include urgent reform of
the Universal Service. Government has now been approached to seek
an early move to five day letter delivery, whilst we continue to
improve parcel services.
"The Board reiterates that in the event of the lack of
significant operational change in Royal Mail it will look at all
options to preserve value for the Group including the possibility
of separation of the two businesses."
Simon Thompson, Chief Executive, Royal Mail said:
"We have always been clear we need change to survive. We have
started turning the business around and will do whatever it takes.
We have worked hard to deploy our contingency plans to minimise
disruption to customers and impact on revenue. Our infrastructure
plans are on time and we are now making the operational changes to
turn Royal Mail into a thriving business that will provide great
service for our customers at a competitive price and long-term job
security for our people.
"We would prefer to reach agreement with the CWU, but in any
case we are moving ahead with changes to transform our
business."
Martin Seidenberg, Chief Executive, GLS added:
"We delivered a robust performance in the first half against a
challenging macro-economic backdrop, underpinned by our flexible
business model, balanced B2C and B2B portfolio, and diversified
geographic exposure.
"Despite the weakening global economic conditions, GLS is
maintaining its full year revenue and adjusted operating profit
guidance.
"We continue to focus our efforts on pricing strategies and cost
measures to mitigate short term headwinds, while focusing our
investments on long-term growth and efficiency, pushing GLS to
become more global, digital and
diverse."
1. Reported results are in accordance with International
Financial Reporting Standards (IFRS). Adjusted results exclude the
IAS 19 pension charge to cash difference adjustment and specific
items, consistent with the way financial performance is measured by
Management and reported to the Board. The APMs used are explained
in the section entitled 'Presentation of results and Alternative
Performance Measures' and reconciliations to the closest measure
prescribed under IFRS are provided where appropriate.
2. All percentage changes reflect the movement between figures
as presented, unless otherwise stated.
3. The comparative trading working capital movements and thus
in-year trading cash flow have been re-presented to include
deferred revenue movements (including Stamps In The Hands Of the
Public (SITHOP)) which were previously presented in other working
capital. This presentation is consistent with the presentation that
has been adopted since the year ended 27 March 2022.
4. GLS Accelerate free cash flow is calculated as pre-IFRS 16
in-year trading cash flow plus disposal proceeds.
5. 12 days of industrial action includes eight that have already
taken place and four for which we have received formal
notification.
Results presentation
A results webcast presentation for analysts and institutional
investors will be held at 09:00 today, Thursday 17 November 2022,
at
https://www.internationaldistributionsservices.com/en/investors/financial-results-presentations
.
Enquiries:
Investor Relations
John Crosse
Email: investorrelations@royalmail.com
Media Relations
Jenny Hall
Phone: 07776 993 036
Email: jenny.hall@royalmail.com
Greg Sage
Phone: 07483 421 374
Email: greg.sage@royalmail.com
Royal Mail press office: press.office@royalmail.com
Company Secretary
Mark Amsden
Email: cosec@royalmail.com
The person responsible for arranging the release of this
announcement on behalf of International Distributions Services plc
is Mark Amsden, Company Secretary.
Financial Calendar
Q3 trading update 9 February 2023
INTERNATIONAL DISTRIBUTIONS SERVICES PLC
Overview
The first half of the year has been challenging as a result of
ongoing macro-economic headwinds and the unwind of temporary
benefits from COVID-19 lockdown restrictions, resulting in lower
parcel volumes across both Royal Mail and GLS.
In Royal Mail, we have also suffered from the impact of the
industrial dispute with CWU, which saw the first national strike
action since 2009. The business has to date failed to rightsize its
resources to the lower parcel volumes, and this is now a critical
priority for the coming period, where the focus is on continuing
action to address this inefficiency, focus on cash management and
modernise working practices.
GLS remains focused on taking actions to mitigate the
macro-economic headwinds and on securing and optimising its
long-term growth prospects.
Financial performance
Group revenue declined by 3.9%, driven by the decline in revenue
in Royal Mail. Group operating loss was GBP163 million on a
reported basis (H1 2021-22: GBP311 million profit). Group adjusted
operating loss was GBP57 million (H1 2021-22: GBP404 million
profit), impacted by the significant operating loss in Royal Mail.
GLS adjusted operating profit in Euros reduced 3.0%, although was
4.1% lower in Sterling terms, due to adverse foreign exchange
movements. Adjusted basic loss per share was 7.3 pence (H1 2021-22:
30.3 pence profit per share).
Strategy
Royal Mail's strategy to transform the business into a more
efficient parcels-focused operation that meets our customers'
changing needs continues to be the right one. Whilst management
action has ensured that the impact on revenue from industrial
action has been contained to date, the position of Royal Mail has
deteriorated due to poor cost performance, the impact of the
industrial dispute and an inability to deliver the productivity
improvements agreed with CWU under the Pathway to Change agreement.
The business was also unable to reduce costs of full time
equivalent (FTE) operational roles quickly enough in line with
deteriorating parcel volumes.
Talks on change and pay with CWU are continuing. It is clear
from the first half results that Royal Mail is not changing quickly
enough to adapt to the demands of a highly competitive parcels
market. This is due, in part, to the unique, complex, costly and
highly restrictive union agreements and structures built up over
many years. Royal Mail announced on 22 September it would review or
serve notice on a number of historic agreements and policies. Now
that many of these agreements and policies have lapsed, we are
implementing a range of changes we had previously been prevented
from doing, such as new starter contracts and removing the cap on
owner drivers in Parcelforce Worldwide. We will move to a more
modern industrial relations framework designed to make the business
more agile, and able to compete more effectively.
We have already commenced the deployment of our five point plan
to stabilise the business , supported by a strong balance sheet
with available liquidity of around GBP1.7 billion. This includes
rightsizing the business with a c.5,000 FTE reduction by March 2023
(on a rolling 12 month basis), deployment of new resourcing models
and optimising the efficient use of our network and assets. This is
further enabled through investment in management capability and
effectiveness. Further detail is provided in the Royal Mail
operational review.
We anticipate these measures, with successful execution, will
enable Royal Mail to generate positive free cash flow in FY 2023-24
and return to adjusted operating profit in FY 2024-25.
It is also clear that in order to be financially sustainable,
the Universal Service requires major reform now. The current
financial position of Royal Mail means this change is critical.
Government has been approached to seek an early move to a five day
letter delivery, whilst we continue to improve parcel services.
Notwithstanding challenging trading conditions across its
markets, GLS' strong portfolio - with a flexible business model,
B2B/B2C balance and geographic diversity - underpinned its
resilient performance in the first half. Performance across Europe
and Canada was robust, with continued positive momentum in France.
However, performance in the US continues to be impacted by strong
inflationary pressures and volume slowdown. GLS is taking pricing
actions and stepping up cost containment and efficiency measures to
combat competitive and inflationary pressures. GLS remains focused
on its long-term growth prospects and continues to invest to grow
and diversify.
Capital allocation, dividend and separation
IDS has seen a pre-IFRS 16 in-year trading cash outflow of
GBP235 million in the first half. The cash outflow was driven by
the poor performance of Royal Mail, which saw a pre-IFRS 16 in-year
trading cash outflow of GBP330 million. GLS generated pre-IFRS 16
in-year trading cash inflow of GBP95 million in the period.
Net debt (pre-IFRS 16) is now GBP150 million (GBP307 million of
net cash at 27 March 2022). Net debt is GBP1,472 million.
The maintenance of a conservative balance sheet has always been
at the heart of the capital allocation policy. In this respect, the
Board considers the Group's net debt of GBP150 million (pre-IFRS
16) to represent a robust position as at the half year. Further,
the Group has available liquidity of around GBP1.7 billion,
including GBP768 million of cash and cash equivalents (excluding
GBP36 million GLS client cash and GBP21 million RMSEPP pension
escrow) along with undrawn bank syndicate loan facility of GBP925
million. It is not expected that the facility will be drawn during
the current financial year.
The Board considers that both its businesses have potential to
be successful.
The short-term priority for the Board is securing the urgently
required change in Royal Mail. Royal Mail has a valuable asset base
and during Covid demonstrated that it is capable of generating good
cash returns. A transformed and modernised Royal Mail, with its
established customer centric brand, ESG leadership and unparalleled
network is targeting to return to adjusted operating profitability
in FY 2024-25.
Given the material losses currently being experienced, including
the ongoing uncertainty in relation to industrial disruption, the
Board has already taken action to tighten cash management in that
business and a five point plan to stabilise Royal Mail is already
underway, including the reduction and deferral of capital
investment and rightsizing of the workforce to reflect the material
decline in parcel and letter volumes experienced in the year.
GLS has a flexible business model. Its reliable track record of
delivering top line growth, strong margins and good cash flow
generation continues to represent a platform for organic and
inorganic growth.
However, as a result of the ongoing uncertainty in Royal Mail
and in order to further conserve the balance sheet position, the
Board has taken the decision to not pay an interim dividend. The
situation will be reviewed again in May 2023, when the Board will
look at the potential to pay a final dividend financed by earnings
in GLS.
The Board re-iterates its position that, in the event that
significant change within Royal Mail is not achieved, all options
remain open to protect the value and prospects of the Group,
including separation of the two companies.
Board changes
As previously announced, Rita Griffin stepped down from the
Board following our AGM in July. Lynne Peacock has succeeded Rita
as Chair of the ESG Committee and stepped down as Chair of the
Remuneration Committee but remains a member. Maria da Cunha, who
was an existing member of the Remuneration Committee, has taken
over from Lynne Peacock as Chair of this Committee. Maria continues
in her role as Designated Non-Executive Director for engagement
with the workforce.
Jourik Hooghe joined the Board with effect from 1 June 2022 and
became a member of the Nomination and Audit and Risk Committees. At
the time of Jourik's appointment he was Executive Vice President
and Group Chief Financial Officer of Wizz Air Holdings Plc. It was
announced in August 2022 that he will be stepping down from these
positions at Wizz Air but will remain available for a transitional
period until the end of the calendar year. The Board greatly
benefits from his strong international strategic, financial and
accounting expertise.
Name change
The name of the company changed from Royal Mail plc to
International Distributions Services plc on 3 October 2022. This
better reflects the Group structure of two separate companies,
Royal Mail and GLS, the increased importance of GLS to the Group,
our strength in markets outside the UK, and our position in the
wider logistics and distribution markets. It will not have any
impact on the brands Royal Mail, Parcelforce Worldwide and GLS.
Outlook
The trading environment continues to be uncertain for both Royal
Mail and GLS. All of our markets are impacted by the more
challenging global economy, including increasingly high levels of
inflation and expectations of lower future economic growth.
Royal Mail
In Royal Mail, we continue to expect revenue decline in FY
2022-23 driven by continued macro-economic pressures. The domestic
parcels market in the UK is expected to decline and we anticipate
that the majority of COVID-19 test kit volumes we delivered last
year will not repeat. Letter volumes are reverting to a more normal
structural rate of decline and we continue to expect addressed
letter volumes excluding elections to decline by a high single
digit percentage.
We have agreed a pay offer worth 5.5%, plus a GBP1,000 one off
cash payment, with Unite/CMA and have made an improved offer to
CWU: 2% paid from April 2022, a further 3.5% offered from the date
the deal is agreed and a 2% lump sum payment on delivery of change.
A further 1.5% pay increase has been offered from April 2023. Talks
with CWU are continuing.
Our three-year rolling hedging strategy for fuel and energy is
mitigating much of the inflation we are facing, which, when
combined with the fuel surcharges introduced into some contract
prices, means we should not see an overall negative impact
year-on-year.
The impact of the three days of industrial action in the first
half of the year on adjusted operating profit was estimated to be
c.GBP70 million. In October(1) there were an additional five days
of industrial action, which we estimate had an additional c.GBP30
million impact on adjusted operating profit. Excluding the
estimated impact of industrial action, the adjusted operating loss
in October was c.GBP18 million. As such, following significant
investments made in maintaining service and in customer management,
the negative impact to date has been reduced.
As a result of our inability to reduce FTE costs in line with
lower volumes quickly enough in the period, our cost saving
initiatives targeted for the full year have now reduced from
c.GBP350 million to c.GBP200 million of year-on-year benefit. This
includes benefits from our operational management restructure,
removal of residual costs from COVID-19, including rental vans and
resource covering absence, and our non-people cost reduction
programme. Failure to deliver on Pathway to Change savings
represents the major reason for the reduction in expected cost
savings. The in year benefit excludes the planned new redundancy
programme in frontline operations announced in October.
In order to offset the revenue and cost headwinds, and focus on
cash management, we are delivering our five point plan (detailed in
the Royal Mail Operating Review) and we have accelerated price
increases on some high volume letter services to November, which
would normally be introduced in January, including an 18% increase
on business mail letters and 5% on advertising mail.
We continue to expect a full year adjusted operating loss of
around GBP350 million to GBP450 million, including the direct
impact of 12 days of industrial action (previously eight days,
reflecting revenue resilience in strike action to date) which have
taken place or have been notified to us, but excluding any charges
for voluntary redundancy costs.
The actions already underway will reduce costs and improve
performance, but they are not in themselves sufficient to secure
the long-term sustainability of the business. We need a more
efficient and more flexible cost base in order to be competitive
and respond to the daily and seasonal volatility in the workload of
a parcels business. We are moving forward with further structural
efficiencies to better leverage our network including: a review of
our Mail Centre footprint, more efficient utilisation of the Royal
Mail and Parcelforce Worldwide networks, a review of our Customer
Service Points and new and faster trials, including indoor delivery
sorting methods. In addition, we will now seek regulatory reform in
order to modernise the Universal Service.
We anticipate these measures, with successful execution, will
enable Royal Mail to generate positive free cash flow in FY 2023-24
and return to adjusted operating profit in FY 2024-25.
GLS
Whilst we anticipate further cost pressure in the second half,
absent any significant deterioration in the macro-economic
environment, the combination of specific pricing actions, service
quality and targeted efficiency measures that are being undertaken
should allow us to deliver our full year outlook of high single
digit % revenue growth and operating profit in the range of EUR370
to EUR410 million.
Given that a macro-economic rebound in FY 2023-24 to
pre-pandemic levels is now unlikely, the EUR500 million Accelerate
operating profit target in FY 2024-25 and EUR1 billion accumulated
free cash flow target over five years are likely to be delayed by
c.18 - 24 months.
1. Period 26 September to 30 October
ROYAL MAIL OPERATING REVIEW
Operating performance
First half revenue decreased 10.5% and on a reported basis the
operating loss was GBP283 million (H1 2021-22: GBP150 million
profit). The adjusted operating loss was GBP219 million (H1
2021-22: GBP235 million profit). This trend continued into October,
with an adjusted operating loss of GBP48 million (c.GBP18 million
loss excluding the c.GBP30 million impact of industrial action).
Whilst revenue remained relatively robust against the impact of
industrial action, the disappointing performance was driven by
increased costs, due to the impact of the industrial dispute, an
inability to deliver the joint productivity improvements agreed
with CWU under the Pathway to Change agreement, and ongoing
macro-economic headwinds. The business also did not reduce FTE
costs quickly enough in line with deteriorating parcel volumes.
In-year trading cash outflow was GBP274 million (H1 2021-22:
GBP114 million inflow). In-year trading cash outflow pre-IFRS 16
was GBP330 million (H1 2021-22: GBP64 million inflow). Gross
capital expenditure reduced by GBP32 million to GBP110 million due
to a decline in both transformation and maintenance capital
expenditure. Further detail is included in the Financial
Review.
Parcels
Domestic parcel volumes (excluding international) decreased by
16% reflecting a reduction in COVID-19 test kits, ongoing
macro-economic headwinds and the industrial relations environment.
Domestic parcel revenue (excluding international) decreased by
14.4%, reflecting price increases and mix. Volumes for our premium
products, Tracked 24(R) / 48(R) and Tracked Returns(R) , declined
12% (H1 2021-22: 21% growth). The decline excluding COVID-19 test
kits was 5%. Total revenue from parcels accounted for 54.2% of
total Royal Mail revenue (H1 2021-22: 56.7%).
International parcel volumes, including import and export
parcels for Royal Mail and Parcelforce Worldwide, were down 8%, a
slower decline and improvement compared to the prior period (H1
2021-22: 40% decline). July 2022 marked the first anniversary of
the introduction of new customs requirements and since then
performance has improved with growth in some product streams.
Compared to pre-pandemic levels (H1 2019-20) domestic parcel
volumes (excluding international) increased 11% and revenue was up
22.6%. International parcel volumes, including import and export
parcels for Royal Mail and Parcelforce Worldwide, were down 42% and
revenue was down 13.5%.
Letters
Addressed letter volumes (excluding elections) were down 6%
reflecting a return to the long-term structural rate of decline in
letters. Advertising mail volumes were broadly flat in the first
half, after suffering particularly steep declines during the
pandemic. Business mail volumes declined 6% driven by ongoing
structural decline in the letters market. Total letter revenue was
down 5.3%, benefitting from pricing, partially offset by mix
effects.
Compared to pre-pandemic levels (H1 2019-20) addressed letter
volumes (excluding elections) were down 24% reflecting the
continued structural decline in the letters market.
Costs
Reported operating costs of GBP3,938 million increased by 0.4%.
Total adjusted operating costs increased 0.7% to GBP3,866
million.
Our target of GBP350 million year-on-year cost benefits has
shown mixed progress. Whilst we are making progress with our
non-people costs savings, have seen a reduction in residual
COVID-19 costs, made further progress in automation, and secured
the financial benefits of the operational management
simplification, we have not delivered the expected savings from
Pathway to Change. As a result we are now expecting c.GBP200
million of year-on-year benefits.
Adjusted people costs increased 1.6%. Due to the industrial
relations environment, we did not undertake planned revisions in
delivery or processing in the period, which combined with the
reduction in parcel and letter volumes and inability to reduce
people costs quickly enough, meant that productivity fell by 1.4%
and planned Pathway to Change benefits resulted instead in a cost.
People costs include the 2% pay award for frontline staff that has
already been paid out. People costs also include a number of other
inflationary pay pressures such as the flow through impacts of the
one hour reduction in the working week implemented in FY 2021-22,
managerial pay deals and increases due to changes in the National
Insurance social care levy. There are no residual COVID-19 costs
although absence is still higher than pre-pandemic levels.
Non-people costs decreased 1.3%. Distribution and conveyance
costs decreased as a result of lower volumes and the removal of
COVID-19 related vehicle hires as part of social distancing,
partially offset by higher air conveyancing costs and costs
associated with industrial action. Infrastructure costs increased,
largely driven by higher depreciation and amortisation costs, a
result of the accelerated depreciation of the resource scheduling
asset. Other operating costs increased predominantly due to the
purchase of new frontline uniforms.
Progress on a number of key priorities was impacted by the
prolonged CWU dispute in the first half. Quality of Service
performance was below target, exacerbated by industrial action and
continued high levels of absence. However we made progress in other
areas - on automation we are now at 65% parcel automation, up from
54% in May and reached over 70% in recent weeks. And despite the
industrial disruption, we have maintained our number one position
on net promoter score for receiving customers and in the second
quarter we regained our number one position for sending
customers.
Strategic focus for this year - five point plan to stabilise the
business
We have a clear five point plan to restore cash generation and
operating profitability in the UK business. We have already started
to deliver the following actions:
1. Rightsizing our business
- FTE reductions: In October, Royal Mail announced it would seek
to rightsize the business by reducing c. 5,000 FTEs by March 2023
(on a rolling 12 month basis). Our operational FTE workforce will
need to reduce by an estimated c.10,000 by the end of August 2023
(on a rolling 12 month basis). Wherever possible, we are achieving
FTE reductions through reductions in overtime, temporary workers
and natural attrition. However, based on current estimates,
c.5,000-6,000 redundancies may be required. We have started the
process by today opening a portal that will allow people to express
a preference for voluntary redundancy. Where possible any
redundancy will be achieved on a voluntary basis, with compulsory
redundancy only to be used as a last resort.
- Revisions: We are progressing revision activity to align
resource to workload in our delivery, processing and distribution
functions. We are planning revisions in all our 1,200 delivery
offices.
2. Creating the headroom to invest
- We have created incremental liquidity to continue to fund our
transformation by focusing on cash management and reducing capex
this year from c.GBP350 million to c.GBP250 million.
3. New resourcing models
- Removal of the cap on Parcelforce Worldwide owner drivers: In
October, the 25% cap on owner drivers in Parcelforce Worldwide was
removed, giving the company the ability to increase the mix of
self-employed drivers. This is designed to improve productivity and
gives more flexibility to manage peaks and troughs in demand.
- New starter contracts: In November 2022 we introduced new
employment contracts and are already hiring new frontline recruits
with market-competitive rates and Sunday working as part of
standard terms. We are proud to offer the best terms and conditions
in the industry.
- Attendance policy: We have developed a new attendance policy
which will go live in Q1 2023-24, to reduce our sick absence rate
which has remained elevated post pandemic.
4. Efficient use of our network and assets
- National roll out of Scan In, Scan Out technology in delivery:
In October Scan In, Scan Out technology replaced handwritten sign
in sheets in every delivery office across the Royal Mail
network.
- National roll out of dedicated parcel hubs: We are deploying
dedicated parcel routes from c.350 hubs for the delivery of larger
and next day parcels. c.60 hubs have already been deployed with the
remainder to be completed by the end of this financial year. As
part of our efficiency initiatives we are exploring the utilisation
of a number of Parcelforce Worldwide locations as hubs for both
Royal Mail and Parcelforce Worldwide parcels.
- Moving parcel volume from Mail Centres to Super Hubs: Our
Warrington Super Hub opened in June 2022 and is scaling up. Our
Midlands Super Hub is on track to open in Summer 2023. With this
significant investment in our future, we will start to divert
parcels from Mail Centres to our Super Hubs to deliver a more
efficient service.
5. Building management capability and effectiveness
- Management restructure complete: We have completed the biggest
change to the delivery operational structure in 30 years enabling
improved performance management of the operation. We have
fundamentally restructured the operational management team to
improve focus and accountability for operational performance. We
are seeing the benefits from the new operational management
structure in terms of the expected cost savings, the reduced
leadership layers (from eight to five) and smaller team sizes which
have pushed decision making closer to the customer.
- Investment in our managers: In July we launched the Royal Mail
Academy, a new dedicated facility at our Midlands Super Hub that is
equipping managers to deliver our transformation. During November
all of our c.7,500 managers are attending intensive Academy
sessions focused on their role running our business and delivering
the required changes. Both the new operational structure and the
Academy were developed in partnership with Unite/CMA.
Further structural change is required
The five point plan has already started to reduce costs and
improve performance, but in itself that is not sufficient to secure
the long-term sustainability of the business.
We need a more efficient and more flexible cost base in order to
be competitive and respond to the daily and seasonal volatility in
the workload of a parcels business. We are moving ahead with
further structural efficiencies to better leverage our network
including:
- Review of our Mail Centre footprint: We are reviewing the
future requirements for our Mail Centre estate to take into account
the reduced workload outlook, and the additional capacity that the
Super Hubs provide. Based on early estimates we expect that the
number of Mail Centres we will require in future will likely
reduce.
- More efficient utilisation of the Royal Mail and Parcelforce
Worldwide networks: Currently there is duplication across the Royal
Mail and Parcelforce Worldwide networks, with both companies
carrying the same format of parcels and visiting the same customers
on the same day. We will implement a single large parcel network to
optimise synergies across both Royal Mail and Parcelforce
Worldwide. Most smaller parcels will continue to be delivered by
Royal Mail, with medium and larger parcels delivered by Parcelforce
Worldwide.
- Review of Customer Service Points: Royal Mail has introduced a
range of new delivery options designed to improve our first time
delivery rates. This includes free redelivery, the option to leave
parcels in a Safeplace and in-flight redirection through the App
and website. With customer footfall down around 50% at our c.1,200
Customer Service Points compared to pre-pandemic, we are conducting
a review to determine the optimum number of locations, taking into
account efficiency and changing customer preferences.
- New and faster trials, including indoor delivery sorting
methods: A New Trials Framework has been developed to speed up the
introduction of new technology and ways of working. We are
commencing a small-scale trial on new indoor delivery office
sorting methods to reduce the amount of time spent re-sorting mail
and will assess what changes have the greatest impact on
productivity.
- Fleet financing and maintenance: We have introduced
alternative leasing options for our fleet in the current year to
provide a capital light and lower cost of ownership option for new
electric vehicles.
Achieving transformation is not optional; it is urgent. The
losses that we have suffered to date, exacerbated by the industrial
action, are not sustainable. Management is committed to doing
whatever it takes to turn this business around and complete the
transformation.
Regulatory reform
According to Ofcom, a financially sustainable Universal Service
should be achieving an EBIT margin of 5-10%. Since privatisation,
the Universal Service network has only achieved this twice. It is
clear that when letter volumes have declined by more than 60% since
their peak, that in order to be financially sustainable the
Universal Service requires major reform now. The current financial
position of Royal Mail means this change is critical. Ofcom's own
research shows that a five day (Monday-Friday) letters service
would meet the needs of 97% of consumers and SMEs. Being required
to provide a service that customers have said they no longer need,
at significant structural cost to Royal Mail, increases the threat
to the sustainability of the Universal Service. We urge the
Government to recognise Ofcom's findings, to enable this change
quickly, and work with us to protect the long-term sustainability
of the one-price-goes-anywhere Universal Service.
Industrial relations update
We entered into pay discussions with CWU earlier in the year and
tabled what we believed was a fair pay offer, worth up to 5.5% in
total for CWU grade colleagues, recognising current inflationary
pressures whilst enabling the transformational change which the
business needs. CWU balloted its members twice, on pay and change,
and both ballots returned a majority in favour of industrial
action. There have been eight days of industrial action so far this
year (to 16 November) which we estimate have had a direct net
impact of c.GBP100 million on adjusted operating profit. As a
result of management action, the direct revenue impact of more
recent strikes has been contained.
On 25 October we were pleased to enter into talks through Acas.
As part of those talks, Royal Mail made an improved offer, worth 9%
over two years, comprising:
-- 7% salary increase over two years:
o 5.5% this financial year: made up of the 2% already paid, and
a further 3.5% salary increase from the date the deal is agreed
o 1.5% next financial year from April 2023
-- Plus, a non-pensionable lump sum payment of 2% of this year's
pay, paid upon the successful implementation of a local revision or
other local change
Talks with CWU are continuing, although we are already moving
ahead with required changes. Talks will cease if further industrial
action goes ahead. Further strike action will necessitate more
restructuring and job losses and make our new offer
unaffordable.
We are pleased that after three weeks of productive discussion
and a ballot, the pay offer we negotiated with Unite/CMA has been
accepted by their members. We agreed a pay offer worth 5.5% plus a
GBP1,000 one off cash payment for our managers, which is to be
backdated to 1 September 2022. The pay offer comprises three
elements:
-- 2% basic pay increase
-- 3.5% basic pay increase linked to change
-- a GBP1,000 one-off payment for those managers in Royal Mail
who did not receive this in October
The second element (3.5% basic pay increase) is contingent upon
agreeing to implement changes prior to June 2023 for managerial
resourcing (e.g. seven day working and attendance time changes to
fit with our transformation plan) and a review of pay progression
and alternative reward mechanisms that enhance our ability to
retain talent and reward high performance.
GLS OPERATING REVIEW
Operating performance
We continued to make good progress in the first half against the
three key objectives of our Accelerate GLS strategy: strengthen
GLS' top position in the cross border deferred parcel segment;
strongly position GLS in the 2C(1) parcel market, whilst securing
our leading position in the 2B segment; and inspire the market. For
example, we have invested in our new Madrid hub which is due to go
live in the second half. This hub will provide new growth
opportunities and increase efficiency, for example through a fully
automated small parcel sorter. In France, as another example, we
acquired a start-up company specialising in developing digital and
sustainable solutions, which will enable us to further optimise the
last mile customer experience. Continued, focused execution on our
strategy will enable us to become more global, digital and
diverse.
GLS performed well in the first half with revenue growth of 9.5%
to GBP2,200 million, driven by better pricing, increased freight
revenue and the contribution from the Rosenau acquisition in Canada
(excluding acquisitions, revenue was up 5.5% in Sterling). Parcel
volumes declined 2% reflecting weaker volumes as a result of the
unwinding of positive effects from lockdown restrictions in the
prior period, and a general weakening in macro-economic conditions.
B2C share of volume was 54%, one percentage point below the prior
period, with B2B share at 46%.
Adjusted operating profit declined, as expected, to EUR191
million (H1 2021-22: EUR197 million), in line with our full year
guidance range of EUR370 to EUR410 million. A decline in volumes
and continued cost pressure was to a large extent offset through
higher prices.
During the first half, the impact of foreign exchange movements
adversely impacted revenue by GBP21 million and favourably impacted
costs by GBP19 million, resulting in a reduction in operating
profit of GBP2 million.
We continue to invest in growth and automation to generate
efficiency savings, with capital expenditure in the first half of
GBP44 million (H1 2021-22: GBP52 million). In-year trading cash
inflow pre-IFRS 16 remained robust, at GBP95 million, which
compared with GBP117 million inflow in the prior period. In-year
trading cash inflow was GBP131 million (H1 2021-22: GBP147 million
inflow). Further detail is included in the Financial Review.
Market performance
Most markets saw a decline in parcel volumes compared to the
prior period but through pricing actions, good customer retention
and higher freight revenue, underlying revenue growth was achieved
in almost all markets.
Performance in our key markets is highlighted below, with
revenue growth and cost development detailed in Euro terms.
In Germany, the largest GLS market by revenue, revenue grew by
4.9% despite a slow-down in the economy and strong competition.
Revenue growth benefited from strong price increases implemented to
mitigate inflationary pressures, including the impact from the
higher German minimum wage. Overall operating profit declined as
better pricing could not fully mitigate cost increases.
In Italy revenue grew by 5.3%, driven by better pricing and
slightly higher volumes. Operating profit decreased compared with
the prior period due to an increase in operational costs which
impacted margin development.
Revenues in GLS Spain grew by 3.1%, driven by better pricing
which compensated a marginal decline in volumes. Operating profit
was below the prior period as higher operational costs could not be
fully offset through improved pricing.
France continues to progress, with gradual and meaningful
improvements. GLS France revenue grew by 4.1%, benefiting from
better pricing which mitigated a decline in volumes. Volume decline
was driven by lower B2C volumes, partly compensated by higher B2B
volumes. Losses narrowed slightly compared with the prior
period.
In the US revenue grew by 10.0% in Euro terms, driven by foreign
exchange movements (4.0% decline in USD terms). The decline in USD
terms was driven by lower volumes partly mitigated by better
pricing. Final-mile and line-haul costs were impacted by
inflationary pressures which resulted in an increase in operational
costs and an overall loss. Measures focused on improving unit
operational costs and the quality of revenue, including yield
management activities, are continuing.
GLS Canada revenue increased by 30.1% in Euro terms (17.4% in
CAD terms) on an organic basis, driven by higher yield, including
the benefit from higher fuel surcharges. The integration of Rosenau
with our pre-existing business GLS Canada is on track, with planned
synergies being secured. The Canadian business continues to perform
well, delivering margins above the GLS group average.
Other developing markets, where GLS has a high exposure to B2C,
continued to grow despite the impact from the war in Ukraine.
Revenues were up 9.8% in the period, with double-digit revenue
growth achieved in Poland, Croatia, Slovenia and Czech
Republic.
1. 2C = to consumer. Includes Business to Consumer and Consumer
to Consumer.
Our Principal Risks and Uncertainties
The Board has considered the principal risks faced by the Group
for the remaining six months of the year and has provided an update
on those risks as described at pages 56 to 61 of Royal Mail plc's
(now International Distributions Services plc) Annual Report and
Financial Statements 2021-22:
https://www.internationaldistributionsservices.com/media/11769/royal-mail-ara-2021-2022.pdf
A decline in the global macro-economic environment post pandemic
and slowing GDP growth has put pressure on several of the Group's
principal risks which were already categorised as high risk.
Furthermore, in the UK, there is an ongoing dispute between Royal
Mail and the CWU over pay and change which has resulted in
industrial action. These factors have adversely affected Royal
Mail's sales volumes and revenue, increased underlying operational
costs and put pressure on productivity and quality of service. The
external economic environment remains uncertain and a prolonged
dispute with the CWU will further exacerbate these factors.
As a result, the following principal risks faced by the Group
have regressed further within the high risk category:
-- Risk 1: Failure to reduce our cost base
-- Risk 2: Economic and political environment
-- Risk 5: Industrial Action
The regression of these risks and the subsequent adverse impact
on Royal Mail's financial performance in the first half of the year
has created a new liquidity risk in the Royal Mail business and
Group.
The following new risk has therefore been added to the Principal
risks of the Group: "Liquidity: The risk that the Group fails to
secure ongoing access to finance, complies with covenants and/or
manages working capital and cash to support the ongoing running of,
and investment in, the Royal Mail business and medium/long term
growth strategies."
In response to these increasing risks, Royal Mail management
have taken the following additional short-term mitigating
actions:
-- Implementation of measures to reduce costs and conserve cash
in Royal Mail including a consultation on the reduction of c.10,000
operational roles to control headcount and rightsize the workforce
(Risk 1: Failure to reduce our cost base)
-- Implementation of required transformation activities
alongside continued dialogue with CWU on pay and change (Risk 5:
Industrial Action)
-- Enactment of operational contingency plans for industrial
action to minimise disruption to customers (Risk 5: Industrial
Action)
-- Updated business planning and cashflow forecasting to support
assessment of future financing requirements (New Risk:
Liquidity)
Medium to long term remediation plans to several principal risks
are dependent upon Royal Mail sustainably resolving the Industrial
Relations dispute in a timely manner to create a new, more
productive and agile relationship with the CWU to enable the rapid
transformational change required by the UK business.
The following risks remain materially unchanged from those
disclosed in the 2021-22 Annual Report and Financial
Statements:
-- Risk 3: Major breach of information security, data protection regulation and/or cyber attack
-- Risk 4: Customer expectations and Royal Mail's responsiveness to market changes
-- Risk 6: Talent - workforce for the future
-- Risk 7: Our UK regulatory framework
-- Risk 8: Environmental and sustainability
-- Risk 9: Actual or suspected breached in material law and/ or regulation
-- Risk 10: Business continuity and operational resilience
-- Risk 11: Health, safety and wellbeing
FINANCIAL REVIEW
Summary results (GBPm)(1)
Reported Specific Adjusted(2) Reported Specific Adjusted(2)
26 items
weeks items and 26 weeks 26 weeks and 26 weeks
September pension September September pension September
2022 adjustment 2022 2021 adjustment 2021
------------------------------------ ----------- ------------ ------------ ----------- ------------ -----------
Revenue 5,838 - 5,838 6,072 - 6,072
------------------------------------ ----------- ------------ ------------ ----------- ------------ -----------
Royal Mail 3,647 - 3,647 4,074 - 4,074
GLS 2,200 - 2,200 2,010 - 2,010
Intragroup revenue(3) (9) - (9) (12) - (12)
------------------------------------ ----------- ------------ ------------ ----------- ------------ -----------
Operating costs (5,967) (72) (5,895) (5,751) (83) (5,668)
------------------------------------ ----------- ------------ ------------ ----------- ------------ -----------
Royal Mail (3,938) (72) (3,866) (3,922) (83) (3,839)
GLS (2,038) - (2,038) (1,841) - (1,841)
Intragroup costs(3) 9 - 9 12 - 12
------------------------------------ ----------- ------------ ------------ ----------- ------------ -----------
Operating (loss)/profit
before specific items (129) (72) (57) 321 (83) 404
------------------------------------ ----------- ------------ ------------ ----------- ------------ -----------
Operating specific items (34) (34) - (10) (10) -
------------------------------------ ----------- ------------ ------------ ----------- ------------ -----------
Operating (loss)/profit (163) (106) (57) 311 (93) 404
Operating (loss)/profit
margin (2.8)% - (1.0)% 5.1% - 6.7%
------------------------------------ ----------- ------------ ------------ ----------- ------------ -----------
Royal Mail (283) (64) (219) 150 (85) 235
Royal Mail Operating (loss)/profit
margin (7.8)% - (6.0)% 3.7% - 5.8%
GLS 120 (42) 162 161 (8) 169
GLS Operating profit margin 5.5% - 7.4% 8.0% - 8.4%
------------------------------------ ----------- ------------ ------------ ----------- ------------ -----------
Profit/(loss) on disposal
of property, plant and equipment
(non-operating specific
item) 6 6 - (2) (2) -
------------------------------------ ----------- ------------ ------------ ----------- ------------ -----------
Net finance costs (23) - (23) (26) - (26)
------------------------------------ ----------- ------------ ------------ ----------- ------------ -----------
Net pension interest (non-operating
specific item) 53 53 - 32 32 -
------------------------------------ ----------- ------------ ------------ ----------- ------------ -----------
(Loss)/profit before tax (127) (47) (80) 315 (63) 378
------------------------------------ ----------- ------------ ------------ ----------- ------------ -----------
Tax credit/(charge) 41 31 10 (45) 30 (75)
------------------------------------ ----------- ------------ ------------ ----------- ------------ -----------
(Loss)/profit after tax (86) (16) (70) 270 (33) 303
------------------------------------ ----------- ------------ ------------ ----------- ------------ -----------
Earnings per share (basic)
- pence (9.0)p (1.7)p (7.3)p 27.0p (3.3)p 30.3p
------------------------------------ ----------- ------------ ------------ ----------- ------------ -----------
In-year trading cash flow(4) (143) 261
------------------------------------ ----------- ------------ ------------ ----------- ------------ -----------
Royal Mail (274) 114
GLS 131 147
------------------------------------ ----------- ------------ ------------ ----------- ------------ -----------
Pre-IFRS 16 in-year trading
cash flow(4) (235) 181
------------------------------------ ----------- ------------ ------------ ----------- ------------ -----------
Royal Mail (330) 64
GLS 95 117
------------------------------------ ----------- ------------ ------------ ----------- ------------ -----------
Gross capital expenditure (154) (194)
------------------------------------ ----------- ------------ ------------ ----------- ------------ -----------
Royal Mail (110) (142)
GLS (44) (52)
------------------------------------ ----------- ------------ ------------ ----------- ------------ -----------
Net debt (1,472) (540)
------------------------------------ ----------- ------------ ------------ ----------- ------------ -----------
1. Reported results are prepared in accordance with
International Financial Reporting Standards (IFRS). In addition,
the Group's performance is explained through the use of Alternative
Performance Measures (APMs) that are not defined under IFRS.
Management is of the view that these measures provide a more
meaningful basis on which to analyse business performance. They are
also consistent with the way financial performance is measured by
Management and reported to the Board. The APMs used are explained
in the section entitled 'Presentation of results and Alternative
Performance Measures' and reconciliations to the closest measure
prescribed under IFRS are provided where appropriate.
2. The Group makes adjustments to reported results under IFRS to
exclude specific items and the IAS 19 pension charge to cash
difference adjustment. A full reconciliation of reported to
adjusted results is explained in the section entitled 'Presentation
of results and Alternative Performance Measures.'
3. Intragroup revenue and costs represent trading between Royal
Mail and GLS, principally a result of Parcelforce Worldwide
operating as GLS' partner in the UK.
4. The comparative trading working capital movements and thus
in-year trading cash flow have been re-presented to include
deferred revenue movements (including Stamps In The Hands Of the
Public (SITHOP)) which were previously presented in other working
capital. This presentation is consistent with the presentation that
has been adopted since the year ended 27 March 2022.
Group results
Group and Royal Mail results are for the 26 week period to 25
September 2022. GLS financial performance is presented for the 6
months to 30 September 2022.
Period-on-period Group revenue declined 3.9%, driven by the
challenging macro-economic conditions and the comparator being
bolstered by COVID-19 restrictions and lockdowns. For Royal Mail
the prior period also benefited from elevated COVID-19 test kit
volumes, whilst the current period has been adversely affected by
industrial action.
People cost performance was disappointing in Royal Mail, where
savings were not achieved despite a fall in volumes. We were unable
to reduce full-time equivalent (FTE) related costs quickly enough
in response to lower parcel and letter volumes. GLS' cost base has
also been affected by cost and wage inflation.
Reported operating loss before specific items was GBP129 million
(H1 2021-22: GBP321 million profit), GBP450 million lower than the
prior period. Operating specific items were a cost of GBP34 million
(H1 2021-22: cost of GBP10 million)
On a reported basis the Group operating loss margin was 2.8% (H1
2021-22: 5.1% profit margin), with the decline primarily due to the
operating loss made by Royal Mail. Adjusted Group operating loss
was GBP57 million (H1 2021-22: GBP404 million profit) driven by
losses in Royal Mail. GLS' performance was broadly in line with the
prior period including the effect of the Rosenau acquisition.
Excluding Rosenau GLS' adjusted operating profit was down 13.0%.
Adjusted Group operating loss margin was 1.0%, a significant
decline on the prior period which saw an operating profit margin of
6.7%. GLS experienced a fall of 100 bps in its margin, primarily as
a result of the economic environment as well as cost and wage
inflation. Royal Mail suffered a significant deterioration in its
margin from a 5.8% profit margin to a 6.0% loss margin driven by
the challenging trading environment as a result of the
macro-economic conditions, industrial action, and the inability to
reduce FTE costs quickly enough. The comparative also benefited
from increased volumes during the lockdowns.
Non-operating specific items were a cost of GBP59 million (H1
2021-22: cost of GBP30 million).
Reported loss before tax of GBP127 million (H1 2021-22: GBP315
million profit) comprises a GBP239 million loss in Royal Mail (H1
2021-22: GBP159 million profit) and a GBP112 million profit in GLS
(H1 2021-22: GBP156 million profit). Basic reported earnings per
share decreased to a 9.0 pence loss per share (H1 2021-22: 27.0
pence profit per share).
26 weeks ending September % change
-------------------------------------------------- --------------------------- ------------
Revenue (GBPm) 2022 2021 2022 vs 2021
-------------------------------------------------- ------------- ------------ ------------
Group(5) 5,838 6,072 (3.9)%
-------------------------------------------------- ------------- ------------ ------------
Royal Mail 3,647 4,074 (10.5)%
Total Parcels 1,975 2,308 (14.4)%
Domestic Parcels (excluding international)(6) 1,635 1,911 (14.4)%
International Parcels(7) 340 397 (14.4)%
Letters 1,672 1,766 (5.3)%
-------------------------------------------------- ------------- ------------ ------------
GLS 2,200 2,010 9.5%
-------------------------------------------------- ------------- ------------ ------------
26 weeks ending September % change
-------------------------------------------------- --------------------------- ------------
Volume (m units) 2022 2021 2022 vs 2021
-------------------------------------------------- ------------- ------------ ------------
Royal Mail
Total Parcels 613 725 (15)%
Domestic Parcels (excluding international)(6) 539 645 (16)%
International Parcels(7) 74 80 (8)%
Addressed letters (excluding elections) 3,598 3,816 (6)%
-------------------------------------------------- ------------- ------------ ------------
GLS 410 417 (2)%
-------------------------------------------------- ------------- ------------ ------------
5. Royal Mail and GLS revenue does not equal Group revenue due
to the elimination of intragroup trading (H1 2022-23: GBP9 million,
H1 2021-22: GBP12 million).
6. Domestic Parcels excludes import and export for both Royal
Mail and Parcelforce Worldwide.
7. International includes import and export for Royal Mail and
Parcelforce Worldwide.
Group revenue fell by 3.9% in the period. Total Group parcel
revenue fell 3.3% in the period. Parcel revenue accounted for 71.4%
of total revenue (H1 2021-22: 70.9%), a marginal increase on the
prior period due to the growth in GLS revenue.
Segment - Royal Mail
Royal Mail adjusted operating loss was GBP219 million (H1
2021-22: GBP235 million profit). Adjusted operating loss margin was
6.0% (H1 2021-22: 5.8% operating profit margin). Reported operating
loss was GBP283 million (H1 2021-22: GBP150 million profit). The
decline was due to lower revenue driven by a combination of the
macro-economic environment impacting customers' disposable spend
and uncertainty caused by industrial action. The comparative also
benefited from higher test kit revenue. The cost base was also slow
to adjust to lower volumes as we were unable to reduce our FTE
costs quickly enough and the performance of further efficiency
measures was disappointing. We estimate that there was a direct
negative impact of c.GBP70 million on reported and adjusted
operating profit from three days of industrial action in the
period.
Revenue
Royal Mail revenue declined 10.5% versus the prior period
reflecting weakening retail trends, lower test kit volumes, the
impact of industrial action and a return to structural decline in
letters. The comparative also benefited from higher volumes during
the lockdown periods.
Parcels
Total parcel revenue reduced period-on-period by 14.4% with
volumes down 15%. Parcel revenue represented 54.2% of total Royal
Mail revenue, this is down from 56.7% in H1 2021-22. COVID-19 test
kits accounted for c.2% of total parcel volumes (H1 2021-22:
c.5%).
The prior period included periods of COVID-19 restrictions, as a
result the comparative revenues and volumes benefited as consumers
were sending more parcels and e-commerce sales were higher, leading
to more parcels in the network. This year consumers' disposable
income has reduced as a result of the uncertainty in the
macro-economic environment leading to a reduction in parcel
volumes. Furthermore, industrial action has adversely impacted our
revenue as customers moved volumes away from our network. These
factors have led to a decline in the revenue and volumes in all of
our parcel revenue streams.
Domestic parcels (excluding international) performance against
the prior period for both revenue and volume saw declines of 14.4%
and 16% respectively. This revenue stream includes Royal Mail's
premium products, Tracked 24(R) /48(R) and Tracked Returns(R) which
experienced volume declines of 12% (H1 2021-22: 21% growth). As
well as the factors outlined above the reduction in test kit
traffic also impacted this revenue stream. The decline in Tracked
products excluding COVID-19 test kits was 5%. To support the
reversal of this decline specific growth initiatives are being put
in place and the continued shift from standard to Tracked products
is expected to continue.
Compared to pre-pandemic levels (H1 2019-20) domestic parcel
volumes (excluding international) increased 11% and revenue was up
22.6%. International parcel volumes, including import and export
parcels for Royal Mail and Parcelforce Worldwide, were down 42% and
revenue was down 13.5%.
Until July 2022 international revenue continued to experience
headwinds post Britain's withdrawal from the European Union, driven
by additional customs checks and data complexities which were
introduced in July 2021. Since we passed the anniversary of these
additional checks in July 2022 the period-on-period revenue decline
has slowed, with growth in some product streams.
We are currently losing market share due to the impact of
industrial action and reduction in test kit mailings.
Letters
Total letter revenue declined 5.3% versus the prior period, with
volumes for addressed letters excluding elections down 6%. Letter
volumes reflect a return to the long-term structural rate of
decline in the letters market experienced pre-COVID-19.
Advertising mail volumes were broadly flat period-on-period.
Advertising mail volumes were especially negatively impacted by the
pandemic and only recovered partially in the prior period, they
have still not returned to pre-pandemic levels. Despite price
increases of c.2.9% implemented in January 2022 advertising
revenues still remained broadly flat.
Business mail volumes fell 6% driven by the structural decline
in this market. Revenue grew by 0.9% despite the fall in volumes
due to positive pricing actions of c.9.3% from January 2022.
Compared to pre-pandemic levels (H1 2019-20) addressed letter
volumes (excluding elections) were down 24% reflecting the
continued structural decline in the letters market.
Adjusted operating costs(2)
Adjusted Adjusted
26 weeks 26 weeks
September September
(GBPm) 2022 2021 % change
----------------------------------- ---------- ---------- --------
People costs (2,693) (2,651) 1.6%
----------------------------------- ---------- ---------- --------
Non-people costs (1,173) (1,188) (1.3)%
----------
Distribution and conveyance costs (400) (456) (12.3)%
Infrastructure costs (410) (387) 5.9%
Other operating costs (363) (345) 5.2%
----------------------------------- ---------- ---------- --------
Total (3,866) (3,839) 0.7%
----------------------------------- ---------- ---------- --------
2. The Group makes adjustments to reported results under IFRS to
exclude specific items and the IAS 19 pension charge to cash
difference adjustment. A full reconciliation of reported to
adjusted results is explained in the section entitled 'Presentation
of results and Alternative Performance Measures.'
Total adjusted operating costs increased 0.7% period-on-period
despite the 10.5% fall in revenue. The increase in costs was driven
by our people costs as we did not reduce FTEs quickly enough in
response to reduced volumes whilst also facing inflationary cost
pressures.
People costs
People costs have increased 1.6% compared to the prior period.
The increase in costs, despite the fall in revenue illustrates our
need to reduce FTEs. The increase in people costs has been driven
by a number of factors.
Due to the industrial relations environment, we did not
undertake planned revisions in delivery or processing in the
period, which, combined with the reduction in parcel and letter
volumes, meant that productivity fell by 1.4% and planned Pathway
to Change benefits resulted in a cost.
The 2022-23 frontline pay award is still under negotiation with
CWU. First half people costs include the 2% pay award for frontline
staff that has already been paid. People costs also include a
number of other inflationary pay pressures such as the flow through
impacts of the one hour reduction in the working week implemented
in FY 2021-22, managerial pay deals and increases due to changes in
the National Insurance social care levy.
There are no residual COVID-19 costs (H1 2021-22: GBP29 million)
however the level of absence remains higher than prior to COVID-19.
In the current period the average total sick absence rate was 7.1%
compared with 7.5% in the prior period. In H1 2019-20 (prior to the
pandemic) average total sick absence was 5.3%.
Non-people costs
Non-people costs decreased by 1.3% versus the prior period.
Distribution and conveyance costs decreased by 12.3% driven by
lower volumes and a reduction in COVID-19 related van hires. The
prior period included GBP32 million of costs related to social
distancing. This reduction has been partially offset by higher air
conveyancing costs and additional costs associated with industrial
action. Total diesel and jet fuel costs decreased to GBP82 million
(H1 2021-22: GBP89 million) driven by a decrease in the volume of
diesel used as a result of a combination of lower volumes and fewer
vans, the benefit of the reduction in fuel duty and a stronger
hedge position limiting the exposure to the spot market.
Infrastructure costs increased period-on-period by 5.9% largely
driven by higher depreciation and amortisation costs. Depreciation
and amortisation costs were GBP16 million higher mainly as a result
of accelerated depreciation on our resource scheduling asset.
Before this adjustment, underlying depreciation was broadly
flat.
Other operating costs increased by 5.2% driven by a variety of
factors but predominantly linked to the purchase of new frontline
uniforms.
Segment - GLS(8)
6 months 6 months
to to
30 September 30 September
Summary results(9) (GBPm) 2022 2021 % change
--------------------------------------- ------------- ------------- --------
Revenue 2,200 2,010 9.5%
--------------------------------------- ------------- ------------- --------
Operating costs (2,038) (1,841) 10.7%
--------------------------------------- ------------- ------------- --------
Operating profit before specific items 162 169 (4.1)%
--------------------------------------- ------------- --------
(EURm)
--------------------------------------- ------------- ------------- --------
Revenue 2,587 2,342 10.5%
--------------------------------------- ------------- ------------- --------
Operating costs (2,396) (2,145) 11.7%
--------------------------------------- ------------- ------------- --------
Operating profit before specific items 191 197 (3.0)%
--------------------------------------- ------------- ------------- --------
8. The results for H1 2022-23 include GBP16 million operating
profit before specific items contribution from acquisitions, of
which GBP15 million was from Rosenau Transport acquired on 1
December 2021.
9. The Group makes adjustments to reported results under IFRS to
exclude specific items and the IAS 19 pension charge to cash
difference adjustment as set out in the section entitled 'Specific
items and pension charge to cash difference adjustment'. As the
pension charge to cash difference is not applicable to GLS, the
operating profit before specific items is the same on a reported
and adjusted basis, and thus no separate adjusted measures have
been presented.
In Sterling terms, operating profit before specific items was
GBP162 million (H1 2021-22: GBP169 million). Foreign exchange
movements adversely impacted revenue by GBP21 million and
favourably impacted costs by GBP19 million resulting in a net
reduction to operating profit of GBP2 million.
Operating profit before specific items in Euro terms decreased
by 3.0%. Margin deteriorated by 100 bps, to 7.4%, due to
operational cost pressures including general inflation and driver
shortages across most markets.
Revenue
Revenue increased by 9.5% in Sterling terms (10.5% in Euro
terms). Excluding acquisitions, revenue was up 5.5% in Sterling
terms, driven by better pricing and higher freight revenues.
Revenue grew despite the strong performance in the previous period
which benefited from lockdown restrictions. Revenue growth was
achieved in almost all markets, with particularly good performances
in Canada and Eastern Europe. GLS' European markets represented
86.2% of total revenue (H1 2021-22: 90.1%), with the North American
market contributing 13.8% (H1 2021-22: 9.9%).
Overall volumes decreased by 2% impacted by unwinding of
temporary benefits from COVID-19 lockdown restrictions in the prior
period and a general deterioration in the economic environment. B2C
volume share of 54% was one percentage point below H1 of the prior
period.
Operating costs
Reported Reported
6 months 6 months
to to
30 September 30 September
(GBPm) 2022 2021 % change
----------------------------------- ------------- ------------- --------
People costs (489) (431) 13.5%
----------------------------------- ------------- ------------- --------
Non-people costs (1,549) (1,410) 9.9%
----------------------------------- ------------- ------------- --------
Distribution and conveyance costs (1,350) (1,247) 8.3%
Infrastructure costs (146) (117) 24.8%
Other operating costs (53) (46) 15.2%
----------------------------------- ------------- ------------- --------
Total (2,038) (1,841) 10.7%
----------------------------------- ------------- ------------- --------
Total reported operating costs in Sterling terms increased by
10.7%, or 7.3% excluding acquisitions.
Costs were impacted by significant increases in inflation rates
during the period in the markets in which GLS operates. A
combination of higher fuel costs, wage inflation (for example
higher minimum wages in Germany), rising utilities costs and driver
shortages all contributed to increases in subcontractor costs for
collection, delivery and line-haul services. The reported increase
in Euro terms is presented below.
Reported
Reported 6 months
6 months to to
30 September 30 September
(EURm) 2022 2021 % change
----------------------------------- ------------- ------------- --------
People costs 575 503 14.3%
----------------------------------- ------------- ------------- --------
Non-people costs 1,821 1,642 10.9%
----------------------------------- ------------- ------------- --------
Distribution and conveyance costs 1,588 1,453 9.3%
Infrastructure costs 171 136 25.7%
Other operating costs 62 53 17.0%
----------------------------------- ------------- ------------- --------
Total 2,396 2,145 11.7%
----------------------------------- ------------- ------------- --------
People costs
In Euro terms people costs increased by 14.3%, or 7.6% excluding
acquisitions, due to a combination of factors including higher unit
operational labour costs driven by wage inflation across GLS'
markets.
Non-people costs
Non-people costs increased by 10.9%, or 8.5% excluding
acquisitions. Distribution and conveyance costs were up 9.3%, or
7.6% higher excluding acquisitions, driven by higher sub-contractor
rates resulting from wage inflation and increased fuel costs.
Infrastructure and other operating costs increased by 25.7% and
17.0% respectively (16.9% and 13.2% respectively excluding
acquisitions), principally due to higher depreciation, as a result
of increased investment in the prior year, and utilities costs.
Country overview
The following individual market summaries detail revenue growth
in Euro terms, unless otherwise stated.
In Germany, the largest GLS market by revenue, revenue grew by
4.9% despite a slow-down in the economy and strong competition.
Revenue growth benefited from strong price increases implemented to
mitigate inflationary pressures, including the impact from the
increase in the German minimum wage. Overall operating profit
declined as better pricing could not fully mitigate cost
increases.
GLS Italy revenue grew by 5.3%, driven by better pricing and
slightly higher volumes. Operating profit decreased compared with
the prior period due to an increase in operational costs which
impacted margin development.
Revenues in GLS Spain grew by 3.1%, driven by better pricing
which compensated for a marginal decline in volumes. Operating
profit was below the prior period as higher operational costs could
not be fully offset through improved pricing.
France continues to progress, with gradual and meaningful
improvements. GLS France revenue grew by 4.1%, benefiting from
better pricing which mitigated a decline in volumes. Volume decline
was driven by lower B2C volumes, partly compensated by higher B2B
volumes. Losses narrowed slightly compared with the prior
period.
In the US, revenue grew by 10.0% in Euro terms driven by foreign
exchange movements (4.0% decline in USD terms). The decline in USD
terms was driven by lower volumes partly mitigated by better
pricing. Final-mile and line-haul costs were impacted by
inflationary pressures which resulted in an increase in operational
costs and an overall loss. Measures focused on improving unit
operational costs and the quality of revenue, including yield
management activities, are continuing.
GLS Canada revenue increased by 30.1% in Euro terms (17.4% in
CAD terms) on an organic basis, driven by higher yield, including
the benefit from higher fuel surcharges. The integration of Rosenau
within our pre-existing business GLS Canada is on track, with
planned synergies being secured. The Canadian business continues to
perform well, delivering margins above the group average.
Revenue growth in GLS' other developed European markets was 6.3%
driven by better pricing.
Other developing markets, where GLS has a high exposure to B2C,
continued to grow despite the impact from the war in Ukraine.
Revenues were up 9.8% in the period, with double-digit revenue
growth achieved in Poland, Croatia, Slovenia and Czech
Republic.
Other Group financial performance measures
Specific items and pension charge to cash difference
adjustment
26 weeks 26 weeks
ended ended
25 September 26 September
(GBPm) 2022 2021
----------------------------------------------------- ------------- -------------
Pension charge to cash difference adjustment (within
people costs) (72) (83)
Operating specific items
GLS VAT adjustments (33) -
Amortisation of intangible assets in acquisitions (10) (8)
Legacy/other items 9 (2)
Total operating specific items (34) (10)
----------------------------------------------------- ------------- -------------
Non-operating specific items
Profit/(loss) on disposal of property, plant and
equipment 6 (2)
Net pension interest 53 32
----------------------------------------------------- ------------- -------------
Total non-operating specific items 59 30
----------------------------------------------------- ------------- -------------
Total specific items and pensions adjustment before
tax (47) (63)
----------------------------------------------------- ------------- -------------
Total tax credit on specific items and pensions
adjustment 31 30
----------------------------------------------------- ------------- -------------
The pension charge to cash difference adjustment largely
comprises the difference between the IAS 19 income statement
pension charge rate of 23.3% (H1 2021-22: 24.4%) for the Defined
Benefit Cash Balance Section (DBCBS) from 28 March 2022 and the
actual cash contribution rate agreed with the Trustee of 15.6% (H1
2021-22: 15.6%). The charge was GBP72 million in the period (H1
2021-22: GBP83 million). The decrease in the IAS 19 pension charge
rate is due to the increase in the net discount rate (versus CPI)
between March 2021 and March 2022.
The specific item of GBP33 million (EUR39 million) in GLS
relates to the expected settlement of VAT adjustments in Italy,
covering the years 2016 to 2021.
Amortisation of acquired intangible assets of GBP10 million (H1
2021-22: GBP8 million) largely relates to acquisitions made by GLS
in Canada, Spain, the US and Italy.
The legacy item relates to a GBP9 million credit in respect of
Industrial Diseases claims, the credit is as a result of an
increase in the discount rate versus the prior period due to an
increase in gilt yields at the half year date. The prior period
charge of GBP2 million related to employee share schemes and
interest on the Ofcom fine that was provided for in H1 2019-20. The
Ofcom fine has been settled in the current period.
The profit on disposal of property, plant and equipment of GBP6
million (H1 2021-22: loss of GBP2 million) primarily relates to the
sale of a number of Royal Mail properties.
Net pension interest credit of GBP53 million (H1 2021-22: GBP32
million) is calculated by reference to the net pension surplus at
the start of the financial period. The increase in the period of
GBP21 million is as a result of a higher overall pension surplus
and higher discount rate used at 27 March 2022, compared with 28
March 2021.
Net finance costs
Reported net finance costs of GBP23 million (H1 2021-22: GBP26
million) comprise interest on leases of GBP16 million (H1 2021-22:
GBP14 million), interest on bonds (including cross-currency swaps)
of GBP12 million (H1 2021-22: GBP12 million), interest/fees on the
bank syndicate loan facility of GBP1 million (H1 2021-22: GBP1
million), and other net interest payable of GBP1 million (H1
2021-22: GBP2 million). This is offset by interest income of GBP7
million (H1 2021-22: GBP3 million) which has increased as a result
of higher interest rates.
The bank syndicate loan facility expires in September 2026.
The blended interest rate on gross debt, including leases for
2022-23, is approximately 3%. The impact of retranslating the
EUR500 million and EUR550 million bonds is accounted for in
equity.
Taxation
The Group recognised a reported tax credit of GBP41 million (H1
2021-22: GBP45 million charge) which consists of a tax credit of
GBP77 million (H1 2021-22: GBP9 million charge) in Royal Mail and a
tax charge of GBP36 million (H1 2021-22: GBP36 million) in GLS.
The Royal Mail reported tax credit of GBP77 million (H1 2021-22:
GBP9 million charge) arose on a loss of GBP239 million (H1 2021-22:
GBP159 million profit). This leads to an effective tax rate of
32.2% (H1 2021-22: 5.7%) which is 13.2% higher than the UK
statutory rate of 19%. The effective tax rate is mainly impacted
by; the remeasurement of deferred tax balances to the future UK
statutory rate of 25%; net pension interest income on which there
is no tax charge and Super-deduction capital allowances claims
which create an enhanced credit for qualifying capital
expenditure.
The Royal Mail adjusted effective tax rate of 20.6% (H1 2021-22:
17.2%), is lower than the reported effective tax rate as it does
not include the effect of specific items such as the remeasurement
of deferred tax balances to the future UK statutory rate of 25% and
net pension interest income.
The GLS reported effective tax rate of 32.1% (H1 2021-22: 23.1%)
is higher than the UK statutory rate mainly due to the expected
settlement of VAT adjustments in Italy for which no tax credit is
assumed; the effect of losses in the US and France for which no
deferred tax credit is recognised and higher rates of tax in some
of the countries in which it operates.
The GLS adjusted effective tax rate of 24.8% (H1 2021-22: 23.3%)
is lower than the reported effective tax rate as it does not
include the effect of the expected settlement of VAT adjustments in
Italy which is treated as a specific item.
Earnings per share (EPS)
Reported basic EPS was a loss of 9.0 pence per share (H1
2021-22: 27.0 pence profit per share) and adjusted basic EPS was a
loss of 7.3 pence per share (H1 2021-22: 30.3 pence profit per
share).
In-year trading cash flow(1)
26 weeks ended 26 weeks ended
25 September 2022 26 September 2021
-------------------------------------- ---------------------- ----------------------
Royal Royal
(GBPm) Mail GLS Group Mail GLS Group
-------------------------------------- ------- ----- ------ ------- ----- ------
Adjusted operating (loss)/profit (219) 162 (57) 235 169 404
Depreciation and amortisation 215 81 296 199 68 267
-------------------------------------- ------- ----- ------ ------- ----- ------
Adjusted EBITDA (4) 243 239 434 237 671
Trading working capital movements(10) (157) (18) (175) (146) 6 (140)
Share-based awards (LTIP and
DSBP) charge adjustment - - - 2 - 2
Gross capital expenditure (110) (44) (154) (142) (52) (194)
Estate Upgrade Programme(11) (7) - (7) - - -
Net finance costs paid (18) (8) (26) (22) (8) (30)
Dividend received from associate
undertaking - - - 5 - 5
Income tax received/(paid) 22 (42) (20) (17) (36) (53)
-------------------------------------- ------- ----- ------ ------- ----- ------
In-year trading cash flow(10) (274) 131 (143) 114 147 261
-------------------------------------- ------- ----- ------ ------- ----- ------
Capital element of operating
lease repayments(12) (56) (36) (92) (50) (30) (80)
-------------------------------------- ------- ----- ------ ------- ----- ------
Pre-IFRS 16 in-year trading
cash flow (330) 95 (235) 64 117 181
-------------------------------------- ------- ----- ------ ------- ----- ------
1. Reported results are prepared in accordance with IFRS. In
addition, the Group's performance is explained through the use of
APMs that are not defined under IFRS. Management is of the view
that these measures provide a more meaningful basis on which to
analyse business performance. They are also consistent with the way
financial performance is measured by management and reported to the
Board. The APMs used are explained in the section entitled
'Presentation of results and Alternative Performance Measures' and
reconciliations to the closest measure prescribed under IFRS are
provided where appropriate.
10. The comparative trading working capital movements and thus
in-year trading cash flow have been re-presented to include
deferred revenue movements (including Stamps In The Hands Of the
Public (SITHOP)) which were previously presented in other working
capital. This presentation is consistent with the presentation that
has been adopted since the year ended 27 March 2022.
11. Capital expenditure on the properties in this programme is
funded via the disposal of other properties. The disposal proceeds
are recognised outside of in-year trading cash flow.
12. The capital element of lease payments of GBP100 million (H1
2021-22: GBP91 million) shown in the statutory cash flow is made up
of the capital element of operating lease payments of GBP92 million
(H1 2021-22: GBP80 million) and the capital element of finance
lease payments of GBP8 million (H1 2021-22: GBP11 million).
Group in-year trading cash outflow was GBP143 million, compared
with GBP261 million inflow in the prior period. This decrease was
predominantly driven by the decline in the trading performance in
Royal Mail.
Royal Mail trading working capital cash flow declined by GBP11
million period-on-period predominantly driven by the increased
voluntary redundancy payments in the period. The current period
outflow was driven by the payment of invoices received late in FY
2021-22 but paid in H1 2022-23, voluntary redundancy payments and
the settlement of international balances. This has been partially
offset by an inflow in relation to trade debtors due to the reduced
revenues.
GLS trading working capital cash flow reduced by GBP24 million
period-on-period as it was impacted by timing of receipts and
payments around period end.
Total gross capital expenditure was GBP154 million (H1 2021-22:
GBP194 million), of which GLS spend was GBP44 million (H1 2021-22:
GBP52 million). Royal Mail capital expenditure was GBP110 million
in total (H1 2021-22: GBP142 million), of which GBP63 million (H1
2021-22: GBP73 million(13) ) was transformational spend.
Transformational spend predominantly relates to our investment in
parcel hubs and automation. Royal Mail maintenance spend was GBP47
million (H1 2021-22: GBP69 million(13) ), the decrease from the
prior period is due to the comparative including our PDA refresh
spend which has not repeated in the current year.
Income tax paid decreased by GBP33 million. Royal Mail income
tax received of GBP22 million predominantly related to a receipt
following HMRC's agreement of the patent box claims. GLS income tax
paid of GBP42 million was GBP6 million higher than the prior period
due to increased tax payments on account following the Rosenau
Transport acquisition and the timing of payments across other
jurisdictions.
The capital element of operating lease repayments of GBP92
million (H1 2021-22: GBP80 million) reflects the net impact on
in-year trading cash flow as a result of adopting IFRS 16. The
increase is due to new leases in the current and prior year.
Excluding the capital element of operating lease repayments,
in-year trading cash flow was a GBP235 million outflow (H1 2021-22:
GBP181 million inflow).
13. The comparative transformation and maintenance spend has
been re-presented to reflect the reallocation of certain projects
from maintenance to transformation following a review of the
portfolio.
Net debt(1)
A reconciliation of net debt is set out below.
26 weeks ended 26 weeks ended
25 September 26 September
(GBPm) 2022 2021
------------------------------------------------------ -------------- --------------
Net debt brought forward at 28 March 2022 and
29 March 2021 (985) (457)
------------------------------------------------------ -------------- --------------
Free cash flow (195) 260
------------------------------------------------------ -------------- --------------
In-year trading cash flow(14, 15) (143) 261
Cash cost of operating specific items (54) (3)
Proceeds from disposal of property (excluding
Estate Upgrade Programme(15) and London Development
Portfolio) plant and equipment 2 5
Proceeds from disposal of property relating
to the Estate Upgrade Programme 8 -
Acquisition of business interests (4) -
Cash flows relating to London Development Portfolio (4) (3)
------------------------------------------------------ -------------- --------------
Purchase of own shares - (10)
------------------------------------------------------ -------------- --------------
Movement in GLS client cash(16) (3) (6)
------------------------------------------------------ -------------- --------------
New or increased lease obligations under IFRS
16 (non-cash) (87) (225)
------------------------------------------------------ -------------- --------------
Foreign currency exchange impact (75) (2)
------------------------------------------------------ -------------- --------------
Dividends paid to equity holders of the Parent
Company (127) (100)
------------------------------------------------------ -------------- --------------
Net debt carried forward (1,472) (540)
------------------------------------------------------ -------------- --------------
Operating leases(17) 1,322 1,225
------------------------------------------------------ -------------- --------------
Pre-IFRS 16 net (debt)/cash(18) (150) 685
------------------------------------------------------ -------------- --------------
1. Reported results are prepared in accordance with IFRS. In
addition, the Group's performance is explained through the use of
APMs that are not defined under IFRS. Management is of the view
that these measures provide a more meaningful basis on which to
analyse business performance. They are also consistent with the way
financial performance is measured by management and reported to the
Board. The APMs used are explained in the section entitled
'Presentation of results and Alternative Performance Measures' and
reconciliations to the closest measure prescribed under IFRS are
provided where appropriate.
14. The comparative in-year trading cash flow has been
re-presented following the re-allocation of deferred revenue
(including SITHOP) from other working capital to trading working
capital to reflect the trading nature of this balance. GLS client
cash movements, which were previously disclosed in other working
capital are now presented separately outside of free cash flow.
This presentation is consistent with the presentation that has been
adopted since the year ended 27 March 2022.
15. Capital expenditure on the properties in this programme is
funded via the disposal of other properties, the capital
expenditure is presented within in-year trading cash flow.
16. GLS client cash movements are presented as part of the
working capital movements line in the statutory cashflow. The
movement in the period excluding foreign currency exchange impacts
is GBP3 million (H1 2021-22: GBP6 million). The foreign currency
movement on GLS client cash in the period was a gain of GBP3
million (H1 2021-22: GBPnil) which is included in the GBP75 million
foreign currency exchange impact line in the table (H1 2021-22:
GBP2 million).
17. This amount represents leases that would not have been
recognised on the Balance Sheet prior to the adoption of IFRS
16.
18. This measure is considered as the Group's banking covenants
are calculated on a pre-IFRS 16 basis.
The cash cost of operating specific items was an outflow of
GBP54 million (H1 2021-22: GBP3 million outflow) consisting mainly
of the Ofcom Regulatory fine payment of GBP52 million and
Industrial Diseases claims of GBP2 million. The prior period
consisted of GBP2 million for Industrial Diseases claims and GBP1
million relating to National Insurance payments for Employee
Shares.
Acquisition of business interests of GBP4 million outflow
relates mainly to the acquisition of Tousfacteurs (GBP5 million)
offset by a purchase price refund in respect of the acquisition of
Rosenau Transport in the previous year.
The net cash outflows relating to the London Development
Portfolio were GBP4 million (H1 2021-22: GBP3 million). Further
details are provided in the London Development Portfolio
section.
The amount of GLS client cash held at 25 September 2022 was
GBP36 million (H1 2021-22: GBP35 million).
New or increased lease obligations under IFRS 16 of GBP87
million (H1 2021-22: GBP225 million) relate to additional lease
commitments that were entered into during the period. Property
lease additions, modifications and acquisitions totalled GBP71
million (H1 2021-22: GBP205 million). Lease obligations have also
increased by GBP16 million (H1 2021-22: GBP20 million) as a result
of vehicle and plant and machinery additions.
London Development Portfolio
In total we have invested GBP4 million in the period on works to
separate the retained operational sites from the development plots
at Mount Pleasant and infrastructure works at Nine Elms.
1) Mount Pleasant
This development site includes the sale of 6.25 acres to develop
c.680 residential units. In 2017 an agreement was reached with
Taylor Wimpey UK Ltd (Taylor Wimpey) for the sale of the Calthorpe
Street development site, subject to specific separation and
enabling works for the site being completed. The sale was
completed, and the site handed over to Taylor Wimpey in March 2021,
following the successful completion of the separation and enabling
works. The combined proceeds for the Calthorpe Street site, and the
adjacent Phoenix Place site (sold to Taylor Wimpey in 2017-18) was
GBP193.5 million (including GBP3.5 million non-cash consideration).
For accounting purposes, GBP39.5 million of the proceeds were
allocated to Phoenix Place and GBP154 million to Calthorpe Street.
GBP115 million of the total combined cash proceeds for both sites
has been received as at 25 September 2022 (no proceeds were
received in the current period). The remainder of the cash is due
to be received through a stage payment in 2023-24 (GBP66 million)
and a final payment in 2024-25 (GBP9 million).
2) Nine Elms
This site covers the sale of 13.9 acres with planning consent to
develop 1,911 residential units, split into various plots:
- Plots B and D sale completed June 2019 for GBP101 million to
Greystar Real Estate Partners, LLC.
- Plot C1 sale completed June 2019 for GBP22.2 million to
Galliard Homes.
- Plot A sale completed December 2020.
- Plots E, F and G sale completed January 2022 for GBP111.2
million to London Square Developments Ltd.
Further investment by Royal Mail will be required in relation to
infrastructure obligations.
Pensions
Royal Mail makes contributions to two main schemes in the UK;
the Royal Mail Defined Contribution Plan (RMDCP), and the DBCBS of
the Royal Mail Pension Plan.
The Group also operates two additional UK defined benefit
schemes which are closed to future accrual, the legacy section of
the RMPP, and the Royal Mail Senior Executives Pension Plan
(RMSEPP).
The buy-out of the RMSEPP was completed in June 2022, when the
bulk annuity policies held were exchanged for individual policies
between the insurers and all remaining members.
The Group's obligations under the RMSEPP have now been fully
extinguished and the Group expects to proceed to wind up the plan
in the coming months. The scheme still holds residual assets of
GBP9 million which are expected to be returned to the Group
following the wind up of the scheme subject to the payment of any
remaining closure expenses and the deduction of withholding
tax.
Royal Mail also aims to introduce a new pension scheme, the
Royal Mail Collective Pension Plan (RMCPP) which will replace the
existing DBCBS and the RMDCP and will comprise a Defined Benefit
Lump Sum Section (DBLS), similar to the existing DBCBS, and a
Collective Defined Contribution (CDC) Section. The Trustee has now
submitted an application to the Pensions Regulator for
authorisation.
The CDC Section will be accounted for as a defined contribution
scheme and the DBLS as a defined benefit scheme with the accounting
treatment expected to be similar to the DBCBS. The new arrangements
will have fixed employer contributions of 13.6%, plus an additional
1.0% for employees who choose to save for an additional lump sum
payment. Standard employee contributions will be 6.0%.
Cash pension costs
The Group's cash pension costs in respect of all UK pension
schemes were GBP196 million in the period, excluding Pension Salary
Exchange (PSE).
When the design of the RMCPP was agreed in 2018, the fixed
employer contribution rate of 13.6% of pensionable pay was designed
to be affordable and sustainable for Royal Mail. The expected cost
of RMCPP based on pensionable payroll at that time was
approximately the same as the cost of the existing schemes, at
around GBP400 million per year. The new RMCPP is expected to
increase cash payroll costs by c.GBP30 million per annum, based on
2021-22 payroll, when it is introduced. The main reason for the
increase is that although the estimated cost of the RMCPP as a
percentage of pensionable pay will remain broadly the same as in
2018, payroll costs have increased. In addition, since the RMPP
closed to accrual in 2018, the cost of existing plans has been
reducing over time relative to overall pay costs, as DBCBS members
leave and are replaced by new employees who join the RMDCP, at a
lower employer contribution rate.
Defined benefit schemes - balance sheet position
An IAS 19 deficit of GBP188 million (27 March 2022: GBP390
million) is shown on the balance sheet in respect of the DBCBS;
however, the scheme is not in funding deficit and it is not
anticipated that deficit payments will be required. The significant
decrease in the deficit in the period is largely due to a
considerable increase in the 'real' discount rate (the difference
between RPI and the discount rate based on corporate bond yields),
as a result of a large increase in corporate bond yields at the
balance sheet date, versus the year end which has had the effect of
significantly reducing liabilities.
The RMPP scheme closed to future accrual in its previous form
from 31 March 2018. The pre-withholding tax accounting surplus of
the legacy section of the RMPP at 25 September 2022 was GBP2,897
million (27 March 2022: GBP4,182 million). The pre-withholding tax
accounting surplus has decreased by GBP1,285 million in the period.
This was the result of a significant increase in index-linked gilt
yields, against which the RMPP liabilities are hedged, driving a
large proportion of the GBP3,805 million reduction in the value of
this section's assets. This movement was however to a large degree
offset by a significant increase in the 'real' discount rate
driving a large proportion of an overall GBP2,520 million reduction
to the value of the RMPP's calculated liabilities versus the year
end. Although the surplus has decreased in absolute terms, the
funding level on an accounting basis (assets as a proportion of
liabilities) has improved since the year end as a result of the
significant decrease in liabilities.
Further details of all the Group's pension arrangements can be
found in Note 7 to the Consolidated Financial Statements.
Dividends
A final dividend for FY 2021-22 of 13.3 pence per share was paid
on 6 September 2022. No FY 2022-23 interim dividend to be paid.
PRESENTATION OF RESULTS AND ALTERNATIVE PERFORMANCE MEASURES
(APMs)
The Group uses certain APMs in its financial reporting that are
not defined under IFRS, the Generally Accepted Accounting
Principles (GAAP) under which the Group produces its statutory
financial information.
These APMs are not a substitute for, or superior to, any IFRS
measures of performance. They are used by Management, who considers
them to be an important means of comparing performance
period-on-period and are key measures used within the business for
assessing performance.
APMs should not be considered in isolation from, or as a
substitute for, financial information presented in compliance with
GAAP. Where appropriate, reconciliations to the nearest GAAP
measure have been provided. The APMs used may not be directly
comparable with similarly titled APMs used by other companies.
A full list of APMs used are set out in the section entitled
'Alternative Performance Measures'.
Reported to adjusted results
The Group makes adjustments to results reported under IFRS to
exclude specific items and the IAS 19 pension charge to cash
difference adjustment. Management believes this is a useful basis
upon which to analyse the business' underlying performance (in
particular given the volatile nature of the IAS 19 charge) and is
consistent with the way financial performance is reported to the
Board.
Further details on specific items excluded from adjusted
operating profit are included in the paragraph 'Specific items and
pension charge to cash difference adjustment' in the Financial
Review. A reconciliation showing the adjustments made between
reported and adjusted Group results can be found in the section
headed 'Consolidated reported and adjusted results'.
Presentation of results
Consolidated reported and adjusted results
The following table reconciles the consolidated reported
results, prepared in accordance with IFRS, to the consolidated 26
week adjusted results.
26 weeks ended 26 weeks ended
25 September 2022 26 September 2021
---------------------------------- ----------------------------------
Specific
Specific items
items and and
pension pension
Group (GBPm) Reported adjustment(1) Adjusted Reported adjustment(1) Adjusted
------------------------------------ -------- -------------- -------- -------- -------------- --------
Revenue 5,838 - 5,838 6,072 - 6,072
Operating costs (5,967) (72) (5,895) (5,751) (83) (5,668)
People costs (3,254) (72) (3,182) (3,165) (83) (3,082)
Non-people costs (2,713) - (2,713) (2,586) - (2,586)
------------------------------------ -------- -------------- -------- -------- -------------- --------
Distribution and conveyance
costs (1,741) - (1,741) (1,691) - (1,691)
Infrastructure costs (556) - (556) (504) - (504)
Other operating costs (416) - (416) (391) - (391)
------------------------------------ -------- -------------- -------- -------- -------------- --------
Operating (loss)/profit
before specific items (129) (72) (57) 321 (83) 404
Operating specific items(1)
:
GLS VAT adjustments (33) (33) - - - -
Amortisation of intangible
assets in acquisitions (10) (10) - (8) (8) -
Legacy/other items 9 9 - (2) (2) -
Operating (loss)/profit (163) (106) (57) 311 (93) 404
Profit/(loss) on disposal
of property, plant and equipment
(non-operating specific
item)(1) 6 6 - (2) (2) -
------------------------------------ -------- -------------- -------- -------- -------------- --------
(Loss)/profit before interest
and tax (157) (100) (57) 309 (95) 404
Finance costs (30) - (30) (29) - (29)
Finance income 7 - 7 3 - 3
Net pension interest (non-operating
specific item)(1) 53 53 - 32 32 -
------------------------------------ -------- -------------- -------- -------- -------------- --------
(Loss)/profit before tax (127) (47) (80) 315 (63) 378
Tax credit/(charge) 41 31 10 (45) 30 (75)
------------------------------------ -------- -------------- -------- -------- -------------- --------
(Loss)/profit for the period (86) 16 (70) 270 (33) 303
------------------------------------ -------- -------------- -------- -------- -------------- --------
Earnings per share (pence)
Basic (9.0)p (1.7)p (7.3)p 27.0p (3.3)p 30.3p
Diluted (9.0)p (1.7)p (7.3)p 26.9p (3.3)p 30.2p
------------------------------------ -------- -------------- -------- -------- -------------- --------
Segmental reported results
The following table presents the segmental reported results,
prepared in accordance with IFRS.
26 weeks ended 26 weeks ended
25 September 2022 26 September 2021
---------------------------------------- ----------------------------------------
Royal Intragroup Royal Intragroup
Group (GBPm) Mail GLS eliminations Group Mail GLS eliminations Group
------------------------- ------- ------- ------------- ------- ------- ------- ------------- -------
Revenue 3,647 2,200 (9) 5,838 4,074 2,010 (12) 6,072
People costs (2,765) (489) - (3,254) (2,734) (431) - (3,165)
Non-people costs (1,173) (1,549) 9 (2,713) (1,188) (1,410) 12 (2,586)
------------------------- ------- ------- ------------- ------- ------- ------- ------------- -------
Operating (loss)/profit
before specific
items (291) 162 - (129) 152 169 - 321
Operating specific
items(1) 8 (42) - (34) (2) (8) - (10)
------------------------- ------- ------- ------------- ------- ------- ------- ------------- -------
Operating (loss)/profit (283) 120 - (163) 150 161 - 311
Profit/(loss) on
disposal of property,
plant and equipment
(non-operating specific
item)(1) 5 1 - 6 (3) 1 - (2)
------------------------- ------- ------- ------------- ------- ------- ------- ------------- -------
Earnings before
interest and tax (278) 121 - (157) 147 162 - 309
Net finance costs (14) (9) - (23) (20) (6) - (26)
Net pension interest
(non-operating specific
item)(1) 53 - - 53 32 - - 32
------------------------- ------- ------- ------------- ------- ------- ------- ------------- -------
(Loss)/profit before
tax (239) 112 - (127) 159 156 - 315
------------------------- ------- ------- ------------- ------- ------- ------- ------------- -------
Tax credit/(charge) 77 (36) - 41 (9) (36) - (45)
------------------------- ------- ------- ------------- ------- ------- ------- ------------- -------
(Loss)/profit for
the period (162) 76 - (86) 150 120 - 270
------------------------- ------- ------- ------------- ------- ------- ------- ------------- -------
1. Details of specific items and the pension adjustment can be
found under 'Specific items and pension charge to cash difference
adjustment' in the Financial Review.
Alternative Performance Measures
APMs used in this report are consistent with the 2021-22 Annual
Report. Updates to any APMs and reconciliations to IFRS measures
are set out in the section below.
Earnings before interest, tax, depreciation and amortisation
(EBITDA) before specific items
EBITDA is reported operating profit before specific items with
depreciation and amortisation added back.
Adjusted EBITDA is EBITDA before specific items with the pension
charge to cash difference adjustment added back. This measure is
used by management to assess the underlying trading performance as
it removes volatility caused by specific items. The true trading
position can also be observed due to the exclusion of depreciation
and amortisation.
The following table reconciles adjusted EBITDA to reported
operating profit before specific items.
26 weeks ended
26 weeks ended 26 September
(GBPm) 25 September 2022 2021
--------------------------------------------- ------------------ --------------
Reported operating (loss)/profit before
specific items (129) 321
Depreciation and amortisation 296 267
--------------------------------------------- ------------------ --------------
EBITDA before specific items 167 588
Pension charge to cash difference adjustment 72 83
--------------------------------------------- ------------------ --------------
Adjusted EBITDA 239 671
--------------------------------------------- ------------------ --------------
Pension charge to cash difference adjustment
This adjustment represents the difference between the total IAS
19 income statement pension charge and the cost of the Group's cash
contributions to the schemes recognised in the income statement in
the period. Management believes this adjustment is appropriate in
order to eliminate the volatility of the IAS 19 accounting charge
and to include only the true cash costs of the pension plans in the
adjusted operating profit of the Group.
This largely represents the difference between the IAS 19 income
statement pension charge rate of 23.3% (H1 2021-22: 24.4%) for the
DBCBS and the cash contribution rate agreed with the Trustee of
15.6% (H1 2021-22: 15.6%).
Free cash flow
Free cash flow (FCF) is calculated as statutory (reported) net
cash flow before financing activities, adjusted to include finance
costs paid and exclude net cash from the purchase/sale of financial
asset investments and GLS client cash movements. GLS client cash
movements were previously presented in FCF but have now been
removed as this better reflects cash movements available to the
Group. As a result, the comparative period has been re-presented.
This presentation has been adopted since the year ended 27 March
2022. FCF represents the cash that the Group generates after
spending the money required to maintain or expand its asset base,
thus is useful for Management in assessing liquidity. FCF is also
shown on a pre-IFRS 16 basis as it is used to support dividend
cover analysis, taking into account all cash flows related to the
operating businesses.
The following table reconciles free cash flow to the nearest
IFRS measure 'net cash inflow before financing activities'.
Re-presented
Reported Reported
26 weeks ended 26 weeks ended
25 September 26 September
(GBPm) 2022 2021
------------------------------------------------- --------------- ---------------
Net cash (outflow)/inflow before financing
activities (95) 246
Adjustments for:
Finance costs paid (33) (32)
Movement in GLS client cash(1) 3 6
(Sale)/purchase of financial asset investments (70) 40
------------------------------------------------- --------------- ---------------
Free cash flow (195) 260
------------------------------------------------- --------------- ---------------
Capital element of operating lease repayments(2) (92) (80)
------------------------------------------------- --------------- ---------------
Pre-IFRS 16 free cash flow (287) 180
------------------------------------------------- --------------- ---------------
1. The movement in GLS client cash is shown excluding foreign
currency exchange gain of GBP3 million (H1 2021-22: GBPnil).
2. The capital element of lease payments of GBP100 million (H1
2021-22: GBP91 million) shown in the statutory cash flow is made up
of the capital element of operating lease payments of GBP92 million
(H1 2021-22: GBP80 million) and the capital element of finance
lease payments of GBP8 million (H1 2021-22: GBP11 million).
In-year trading cash flow
In-year trading cash flow reflects the cash generated from the
trading activities of the Group. It is based on reported net cash
inflow from operating activities, adjusted to exclude movements in
GLS client cash and the cash cost of operating specific items and
to include the cash cost of property, plant and equipment and
intangible asset acquisitions, net finance payments and dividends
received from associates. The prior period has been re-presented to
reflect the re-allocation of deferred revenue (including SITHOP)
into trading working capital (included within net cash inflow from
operating activities). These balances were previously excluded from
in-year trading cash flow as part of other working capital
movements. This presentation is consistent with the presentation
that has been adopted since the year ended 27 March 2022. In-year
trading cash flow is used primarily by Management to show cash
being generated by operations less cash investment. In-year trading
cash flow is also shown on a pre-IFRS 16 basis as it is used to
support dividend cover and covenant analysis.
The following table reconciles in-year trading cash flow to the
nearest IFRS measure 'net cash inflow from operating
activities'.
Re-presented
Reported Reported
26 weeks ended 26 weeks ended
25 September 26 September
(GBPm) 2022 2021
------------------------------------------------- --------------- ---------------
Net cash (outflow)/inflow from operating
activities (13) 471
Adjustments for:
Movement in GLS client cash(1) 3 6
Cash cost of operating specific items 54 3
Purchase of property, plant and equipment (120) (162)
Purchase of intangible assets (41) (32)
Dividends received from associates - 5
Net finance costs paid (26) (30)
------------------------------------------------- --------------- ---------------
In-year trading cash flow (143) 261
------------------------------------------------- --------------- ---------------
Capital element of operating lease repayments(2) (92) (80)
------------------------------------------------- --------------- ---------------
Pre-IFRS 16 in-year trading cash flow (235) 181
------------------------------------------------- --------------- ---------------
1. The movement in GLS client cash is shown excluding foreign
currency exchange gain of GBP3 million (H1 2021-22: GBPnil).
2. The capital element of lease payments of GBP100 million (H1
2021-22: GBP91 million) shown in the statutory cash flow is made up
of the capital element of operating lease payments of GBP92 million
(H1 2021-22: GBP80 million) and the capital element of finance
lease payments of GBP8 million (H1 2021-22: GBP11 million).
Net debt
Net debt is calculated by netting the value of financial
liabilities (excluding derivatives) against cash and other liquid
assets. Management consider this APM to be useful as it is a
measure of the Group's net indebtedness that provides an indicator
of the overall balance sheet strength. It is also a single measure
that can be used to assess the combined impact of the Group's
indebtedness and its cash position. The use of the term net debt
does not necessarily mean that the cash included in the net debt
calculation is available to settle the liabilities included in this
measure. Net debt is also shown on a pre-IFRS 16 basis as the
banking covenants are calculated on a pre-IFRS 16 basis.
A reconciliation of net debt to reported balance sheet line
items is shown below.
At At
(GBPm) 25 September 2022 27 March 2022
---------------------------- ------------------ --------------
Loans/bonds (933) (872)
Leases (1,364) (1,341)
Cash and cash equivalents 768 1,101
Investments - 70
GLS Client cash 36 36
Pension escrow (RMSEPP) 21 21
---------------------------- ------------------ --------------
Net debt (1,472) (985)
---------------------------- ------------------ --------------
Operating leases(1) 1,322 1,292
---------------------------- ------------------ --------------
Pre-IFRS 16 net (debt)/cash (150) 307
---------------------------- ------------------ --------------
1. This amount represents leases that would not have been
recognised on the Balance Sheet prior to the adoption of IFRS
16.
Loans and bonds increased by GBP61 million, largely as a result
of exchange rate movements on the value of bonds.
Cash and cash equivalents and Investments decreased by GBP403
million, largely as a result of free cash outflow of GBP195 million
(FY 2021-22: GBP420 million inflow), the payment of GBP127 million
in external dividends (FY 2021-22: GBP366 million) and by the
capital element of lease repayments of GBP100 million (FY 2021-22:
GBP192 million). In FY 2021-22 there were also outflows relating to
the share buyback (GBP201 million) and purchase of own shares for
awards schemes (GBP17 million).
Net debt excludes GBP193 million (FY 2021-22: GBP192 million)
related to the RMPP pension scheme of the total GBP214 million (FY
2021-22: GBP213 million) pension escrow investments on the balance
sheet which is not considered to fall within the definition of net
debt.
Adjusted effective tax rate
The adjusted effective tax rate is the adjusted tax charge or
credit for the period expressed as a proportion of adjusted profit
before tax. The adjusted effective tax rate is considered by
Management to be a useful measure of the tax impact for the period.
It approximates to the tax rate on the underlying trading business
through the exclusion of specific items, including the pension
charge to cash difference adjustment.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed consolidated income statement
Reported Reported
26 weeks 26 weeks
ended ended
25 September 26 September
2022 2021
Notes GBPm GBPm
Continuing operations
Revenue 2 5,838 6,072
Operating costs (1,2) (5,967) (5,751)
----------------------------------------------------- ----- ------------- -------------
People costs 3 (3,254) (3,165)
Distribution and conveyance costs (1,741) (1,691)
Infrastructure costs (556) (504)
Other operating costs (416) (391)
----------------------------------------------------- ----- ------------- -------------
Operating (loss)/profit before specific items
(2) (129) 321
Operating specific items(2) 4
GLS VAT adjustments (33) -
Amortisation of intangible assets in acquisitions (10) (8)
Legacy/other items 9 (2)
Operating (loss)/profit (163) 311
Profit/(loss) on disposal of property, plant
and equipment (non-operating specific item)(2) 4 6 (2)
-------------
(Loss)/profit before interest and tax (157) 309
Finance costs (30) (29)
Finance income 7 3
Net pension interest (non-operating specific
item)(2) 4 53 32
----------------------------------------------------- ----- ------------- -------------
(Loss)/profit before tax (127) 315
Tax credit/(charge) 5 41 (45)
----------------------------------------------------- ----- ------------- -------------
(Loss)/profit for the period (86) 270
----------------------------------------------------- ----- ------------- -------------
Earnings per share 6
Basic (9.0)p 27.0p
Diluted (9.0)p 26.9p
----------------------------------------------------- ----- ------------- -------------
(1) Operating costs are stated before operating specific items
which comprise: GLS VAT adjustments, amortisation of intangible
assets in acquisitions and legacy/other items.
(2) Details of Alternative Performance Measures (APMs) are
provided in the Financial Review.
Condensed consolidated statement of comprehensive income
Reported
26 weeks Reported
ended 26 weeks ended
25 September 26 September
2022 2021
Notes GBPm GBPm
------------------------------------------------------------ --------- ------------- ---------------
(Loss)/profit for the period (86) 270
Other comprehensive (expense)/income for the
period from continuing operations:
Items that will not be subsequently reclassified
to profit or loss:
Amounts relating to pensions accounting (681) (8)
------------------------------------------------------------ --------- ------------- ---------------
Withholding tax adjustment relating to the
defined benefit surplus 7 450 (20)
Remeasurement (losses)/gains of the surplus
in RMPP and RMSEPP 7 (1,338) 23
Remeasurement gains/(losses) of the deficit
in DBCBS 7 276 (27)
Deferred tax (69) 16
------------------------------------------------------------ --------- ------------- ---------------
Items that may be subsequently reclassified
to profit or loss:
Foreign exchange translation differences 84 2
------------------------------------------------------------ --------- ------------- ---------------
Exchange differences on translation of foreign
operations (GLS) 114 3
Net loss on hedge of a net investment (EUR500
million bond) (29) (1)
Net loss on hedge of a net investment (Euro-denominated
lease payables) (1) -
---------------
Designated cash flow hedges 49 32
------------------------------------------------------------ --------- ------------- ---------------
Gain on cash flow hedges deferred into equity 88 37
(Gain)/loss on cash flow hedges released from
equity to income (40) 1
Loss released from equity to the carrying value
of non-financial assets 3 -
Gain on cross currency swap cash flow hedge
deferred into equity 10 -
Loss on cross currency swap cash flow hedge
released from equity to income - interest payable 4 4
Gain on cost of hedging deferred into equity 1 -
Gain on cost of hedging released from equity
to income - interest payable (1) (1)
Tax on above items (16) (9)
------------------------------------------------------------ --------- ------------- ---------------
Total other comprehensive (expense)/income
for the period (548) 26
------------------------------------------------------------ --------- ------------- ---------------
Total comprehensive (expense)/income for the
period (634) 296
------------------------------------------------------------ --------- ------------- ---------------
Condensed consolidated balance sheet
Reported Reported
At 25 September At 27 March
2022 2022
Notes GBPm GBPm
--------------------------------------------- ----- ---------------- ------------
Non-current assets
Property, plant and equipment 3,655 3,571
Goodwill 472 428
Intangible assets 473 488
Investment in associates 1 1
Financial assets 8
Pension escrow investments 214 213
Derivatives 62 30
RMPP/RMSEPP retirement benefit surplus - net
of withholding tax payable 7 1,889 2,723
Other receivables 94 94
Deferred tax assets 93 116
--------------------------------------------- ----- ---------------- ------------
6,953 7,664
--------------------------------------------- ----- ---------------- ------------
Assets held for sale 1 -
--------------------------------------------- ----- ---------------- ------------
Current assets
Inventories 44 34
Trade and other receivables 1,541 1,659
Income tax receivable 38 41
Financial assets 8
Investments - 70
Derivatives 101 74
Cash and cash equivalents 8 804 1,137
--------------------------------------------- ----- ---------------- ------------
2,528 3,015
--------------------------------------------- ----- ---------------- ------------
Total assets 9,482 10,679
--------------------------------------------- ----- ---------------- ------------
Current liabilities
Trade and other payables (2,168) (2,332)
Financial liabilities 8
Lease liabilities (213) (213)
Derivatives (3) (8)
Income tax payable (10) (10)
Provisions 9 (58) (176)
--------------------------------------------- ----- ---------------- ------------
(2,452) (2,739)
--------------------------------------------- ----- ---------------- ------------
Non-current liabilities
Financial liabilities 8
Interest-bearing loans and borrowings (933) (872)
Lease liabilities (1,151) (1,128)
Derivatives - (36)
DBCBS retirement benefit deficit 7 (188) (390)
Provisions 9 (84) (94)
Other payables (38) (32)
Deferred tax liabilities (62) (54)
--------------------------------------------- ----- ---------------- ------------
(2,456) (2,606)
Total liabilities (4,908) (5,345)
--------------------------------------------- ----- ---------------- ------------
Net assets 4,574 5,334
--------------------------------------------- ----- ---------------- ------------
Equity
Share capital 10 10
Retained earnings 4,355 5,248
Other reserves 209 76
--------------------------------------------- ----- ---------------- ------------
Total equity 4,574 5,334
--------------------------------------------- ----- ---------------- ------------
Condensed consolidated statement of changes in equity
Foreign
currency
Share Retained translation Hedging Total
capital earnings reserve reserve equity
GBPm GBPm GBPm GBPm GBPm
----------------------------------------- ----------- --------- ------------ --------- -------
Reported at 28 March 2021 10 4,802 7 (14) 4,805
Profit for the period - 270 - - 270
Other comprehensive (expense)/ income
for the period - (8) 2 32 26
---------------------------------------------- ------ --------- ------------ --------- -------
Total comprehensive income for the period - 262 2 32 296
Dividend paid to equity holders of the
Parent Company - (100) - - (100)
Share-based payments
Employee Free Shares issue - 1 - - 1
Long-Term Incentive Plan (LTIP) - 1 - - 1
Deferred Share Bonus Plan (DSBP) - 1 - - 1
Purchase of own shares(1) - (10) - - (10)
---------------------------------------------- ------ --------- ------------ --------- -------
Reported at 26 September 2021 10 4,957 9 18 4,994
---------------------------------------------- ------ --------- ------------ --------- -------
Profit for the period - 342 - - 342
Other comprehensive income/(expense)
for the period - 422 (2) 51 471
---------------------------------------------- ------ --------- ------------ --------- -------
Total comprehensive income/(expense)
for the period - 764 (2) 51 813
Transactions with owners of the Company,
recognised directly in equity
Purchase of own shares(1) - (7) - - (7)
Share buyback - (201) - - (201)
Dividend paid to equity holders of the
Parent Company - (266) - - (266)
Share-based payments
Long-Term Incentive Plan (LTIP) - 1 - - 1
Reported at 27 March 2022 10 5,248 7 69 5,334
---------------------------------------------- ------ --------- ------------ --------- -------
Loss for the period - (86) - - (86)
Other comprehensive (expense)/income
for the period - (681) 84 49 (548)
---------------------------------------------- ------ --------- ------------ --------- -------
Total comprehensive (expense)/income
for the period - (767) 84 49 (634)
Transactions with owners of the Company,
recognised directly in equity
Dividend paid to equity holders of the
Parent Company - (127) - - (127)
Share-based payments
Employee Free Shares issue - 1 - - 1
Reported at 25 September 2022 10 4,355 91 118 4,574
---------------------------------------------- ------ --------- ------------ --------- -------
(1) Purchase in respect of employee share schemes.
Condensed consolidated statement of cash flows
Reported Reported
26 weeks 26 weeks
ended ended
25 September 26 September
2022 2021
Notes GBPm GBPm
-------------------------------------------------------- ----- ------------- -------------
Cash flow from operating activities
(Loss)/profit before tax (127) 315
Adjustment for:
Net pension interest (53) (32)
Net finance costs 23 26
(Profit)/loss on disposal of property, plant
and equipment (6) 2
GLS VAT adjustments 33 -
Amortisation of intangible assets in acquisitions 10 8
Legacy/other items (9) 2
Operating (loss)/profit before specific items(1) (129) 321
Adjustment for:
Depreciation and amortisation 296 267
EBITDA before specific items(1) 167 588
Working capital movements (178) (146)
-------------------------------------------------------- ----- ------------- ---------------
Increase in inventories (8) (3)
Decrease in receivables 163 95
Decrease in payables (233) (222)
Net increase in derivatives (35) (5)
Decrease in provisions (non-specific items) 9 (65) (11)
-------------------------------------------------------- ----- ------------- ---------------
Pension charge to cash difference adjustment 7 72 83
Share-based awards (LTIP and DSBP) charge - 2
Cash cost of operating specific items (54) (3)
-------------------------------------------------------- ----- ------------- ---------------
Cash inflow from operations 7 524
Income tax paid (20) (53)
Net cash (outflow)/inflow from operating activities (13) 471
-------------------------------------------------------- ----- ------------- ---------------
Cash flow from investing activities
Dividend received from associate undertaking - 5
Finance income received 7 2
Proceeds from disposal of property (excluding
London Development Portfolio), plant and equipment
(non-operating specific item) 10 5
London Development Portfolio net costs (non-operating
specific item) (4) (3)
Purchase of property, plant and equipment (120) (162)
Purchase of intangible assets (software) (41) (32)
Acquisition of business interests, net of cash
acquired (5) -
Purchase price refund in respect of prior years'
acquisitions 1 -
Sale/(purchase) of financial assets investments
(current) 70 (40)
Net cash outflow from investing activities (82) (225)
-------------------------------------------------------- ----- ------------- ---------------
Net cash (outflow)/inflow before financing activities (95) 246
-------------------------------------------------------- ----- ------------- ---------------
Cash flow from financing activities
Finance costs paid (33) (32)
Purchase of own shares - (10)
Payment of capital element of obligations under
lease contracts (100) (91)
Dividend paid to equity holders of the parent
Company (127) (100)
Net cash outflow from financing activities (260) (233)
-------------------------------------------------------- ----- ------------- ---------------
Net (decrease)/increase in cash and cash equivalents (355) 13
Effect of foreign currency exchange rates on
cash and cash equivalents 22 1
Cash and cash equivalents at the beginning of
the period 1,137 1,573
-------------------------------------------------------- ----- ------------- ---------------
Cash and cash equivalents at the end of the
period 804 1,587
-------------------------------------------------------- ----- ------------- ---------------
(1) Details of Alternative Performance Measures (APMs) are
provided in the Financial Review.
Notes to the condensed consolidated financial statements
1. Basis of preparation
The comparative figures for the 52 weeks ended 27 March 2022 are
not the Company's statutory accounts for that financial period.
Those accounts have been reported on by the Company's auditor and
delivered to the registrar of companies. The report of the auditor
was (i) unqualified; (ii) did not include a reference to any
matters to which the auditor drew attention by way of emphasis
without qualifying their report; and (iii) did not contain a
statement under section 498 (2) or (3) of the Companies Act
2006.
The annual financial statements of the Group are prepared in
accordance with UK-adopted international accounting standards. As
required by the Disclosure Guidance and Transparency Rules of the
Financial Conduct Authority, this condensed consolidated set of
financial statements has been prepared applying the accounting
policies and presentation that were applied in the preparation of
the Group's published consolidated financial statements for the 52
weeks ended 27 March 2022, which were prepared in accordance with
International Financial Reporting Standards (IFRSs) adopted
pursuant to Regulation (EC) No 1606/2002 as it applies in the
European Union and in accordance with international accounting
standards in conformity with the requirements of the Companies Act
2006.
This condensed consolidated set of unaudited financial
statements has been prepared in accordance with IAS 34 'Interim
Financial Reporting' as adopted by the UK i.e. on a 'Reported'
basis. The Group's financial reporting period ends on the last
Sunday in September and, accordingly, these Financial Statements
are prepared for the 26 weeks ended 25 September 2022 (2021-22: 26
weeks ended 26 September 2021). GLS' reporting half year-end date
is 30 September each year. There were no significant transactions
between the respective reporting dates that required adjustment in
the Financial Statements.
In some instances, Alternative Performance Measures (APMs) are
used by the Group. This is because Management is of the view that
these APMs provide a useful basis on which to analyse business
performance and is consistent with the way that financial
performance is measured by Management and reported to the Board.
Details of the Group's APMs are included in the Financial
Review.
Going Concern
In assessing the going concern status of the Group, the
Directors are required to look forward a minimum of 12 months from
the date of approval of these financial statements to consider
whether it is appropriate to prepare the financial statements on a
going concern basis. The Directors have reviewed business
activities, together with factors likely to affect its future
development and performance, as well the as the Group's principal
risks and uncertainties.
The Board has concluded that it is appropriate to adopt the
going concern basis having undertaken a rigorous assessment of the
financial forecasts, with specific consideration of the trading
position of the Group in the context of the current global economic
environment, and the industrial relations landscape in relation to
the UK business, for the reasons as set out below.
At 25 September 2022 the Group had total assets less current
liabilities of GBP7 billion and net assets of GBP4.6 billion.
Liquidity available as at that date was GBP1.7 billion (excluding
GLS client cash and RMSEPP pension escrow), made up of cash at bank
GBP400 million, cash equivalent investments of GBP368 million and
committed and an undrawn bank syndicate loan facility of GBP925
million - available until September 2026. The bank syndicate loan
facility contains financial covenants.
In its assessment of going concern over the 12 months from 17
November 2022 (the 'going concern period'), the Group has modelled
two scenarios referred to below as the Base Case and the Downside
Case. The GLS Base Case aligns with their Accelerate strategy. The
Royal Mail Base Case takes into account the Board's and
Management's views on the anticipated impact and recovery from
industrial action in relation to Royal Mail, across the going
concern period.
1. Basis of preparation (continued)
The key inputs and assumptions underlying the Base Case include
the economic impact driven by the ongoing macro-economic headwinds
in both Royal Mail and GLS and the impact of industrial action
taking place in Royal Mail. It also assumes the costs and
associated benefits from the activity required to transform Royal
Mail into a more efficient parcels-focused operation. This
transformational activity includes the costs required to rightsize
the operation, including the impact of c.5,000-6,000 voluntary
redundancies as announced on 14 October 2022. The Base Case also
assumes no dividend payment over the going concern period, although
there is sufficient headroom to introduce a final dividend financed
by earnings in GLS for 2022-23. The Board will consider this,
subject to progress made, in May 2023. The EUR500 million bond,
with a maturity date of July 2024 (outside of the going concern
assessment period), will be refinanced, but at a higher cost
reflecting current market conditions.
In the Base Case it is projected that the Group will have
sufficient cash and liquidity and although covenant headroom given
the scale of the business would be marginal over the going concern
period, the GBP925 million bank syndicate loan facility would
remain available, as covenants would not be breached.
The Downside Case applies further stress to the Base Case to
model further deteriorating economic and market conditions
impacting GLS and either further deteriorating economic conditions
or further industrial action beyond what has already been modelled
in the Base Case in relation to Royal Mail. The Directors believe
that the downside is a severe but plausible scenario, recognising
that the Base Case already anticipates significant negative impacts
from the weak economy and industrial action, and also having regard
to the extent to which capacity exists in the market to absorb
volumes that customers may seek to direct to Royal Mail's
competitors.
If the severe but plausible scenario were to materialise, the
Directors would be required to take mitigating actions to preserve
cash and maintain liquidity by building covenant headroom. The
Directors have identified a number of mitigations, all within
Management's control, to reduce costs and optimise the Group's cash
flow, liquidity and covenant headroom.
Whilst the Group is already undertaking actions to conserve
cash, including reduction in capital expenditure, reduction in
discretionary expenditure and working capital initiatives, a number
of the mitigations in the downside would only be triggered in the
event of the severe downside scenario materialising. The mitigating
actions include:
- reducing capital and investment expenditure through postponing
or pausing projects and change activity;
- deferring or cancelling discretionary spend (including
management bonus, reducing marketing spend and reductions in
overtime and agency spend);
- delaying implementation of the new pension scheme which has a higher cost to the Group;
- reducing the terms for voluntary redundancy payments over and
above those currently being negotiated;
- pricing actions; and
- should the current pay offer not be accepted, resulting in
further strike action, the timing and amount of the cashflows in
respect of certain elements of the pay offer would need to be
revisited.
The Directors have assessed the Group's financial commitments
and consider that in the Downside Case, after taking into account
mitigations and cash generated from operations and existing
facilities, the business is forecast to have sufficient cash and
liquidity. Whilst covenant headroom given the scale of the business
would be marginal over the going concern period, the covenant would
not breach, ensuring sufficient liquidity to continue to operate
and to discharge its liabilities as they fall due over the going
concern assessment period.
Having reviewed the Base Case, and Downside Case, the Directors
have a reasonable expectation that the Group has sufficient
liquidity to continue in operational existence over the going
concern assessment period and hence continue to adopt the going
concern basis in preparing the financial statements.
1. Basis of preparation (continued)
New accounting standards and interpretations in 2022-23
No new UK Accounting Standards, which affect the presentation of
these condensed consolidated financial statements, have been
issued.
Key sources of estimation uncertainty and critical accounting
judgements
The preparation of the condensed consolidated financial
statements requires management to make certain estimates and
judgements that can have a significant impact on the financial
statements. These estimates and judgements are continually
evaluated and are based on historical experience and other factors,
including expectations of future events that are believed to be
reasonable under the circumstances.
The significant judgements and estimates applied by the Group in
these condensed consolidated financial statements are consistent
with those applied in the Annual Report and Financial Statements
2021-22 with the exception of the impairment assessment of the
Royal Mail UK excluding Parcelforce Worldwide cash generating unit
(CGU) and Going Concern (see previous page).
Impairment assessment - Royal Mail UK excluding Parcelforce
Worldwide CGU
As a result of the poor trading performance of the Royal Mail UK
business, exacerbated by industrial action, Management identified
an indicator of impairment, and as a result performed an impairment
assessment of the Royal Mail excluding Parcelforce Worldwide CGU
('the CGU').
In assessing whether the CGU was impaired, the carrying value of
the CGU of GBP1,412 million was compared to its recoverable amount.
As required by IAS 36, for the purpose of assessing whether the CGU
is impaired, the recoverable amount of the CGU should be considered
as the higher of value in use (VIU) and its fair value less costs
of disposal (FVLCD).
Royal Mail's strategy is to transform the business into a more
efficient parcels-focused operation and the future cash flows in
the three-year business plan reflects both the costs and benefits
associated with this transformation. Under the VIU calculation,
estimates of future cash flows should not include cash inflows or
outflows that are expected to arise from a future restructuring or
improving or enhancing the assets which an entity is not yet
committed at the balance sheet date. The VIU approach, after
adjusting for the restructuring and transformational cash flows,
resulted in a valuation below the carrying value of the CGU.
Management therefore assessed the recoverability of the CGU
using the alternative FVLCD methodology. This considers a
discounted cash flow modelling from the perspective of a 'market
participant' i.e. a buyer transacting in the principal market for
an asset of this type.
The assumptions used by management in estimating the FVLCD
are:
Discount rates
The discount rate is based on the UK-specific post tax discount
rate of 11.0%, which is deemed to be the rate a normal market
participant would use. The discount rate (13.3% pre-tax under VIU
valuation) has increased since the 27 March 2022 year end date,
reflecting the market volatility at the balance sheet reporting
date of 25 September 2022.
Approved budget period
Forecast cash flows for the initial five-year period are based
on the Board approved forecast for years one to three. For years
four and five, Management have used judgement to determine the
expectation of performance, based on revenue growth trajectory and
cost inflation. The cashflows for years one to three reflect both
restructuring and transformational cashflows required to transform
the business.
1. Basis of preparation (continued)
Long-term growth rates
A long-term growth rate of 0.5% has been used for cash flows
subsequent to the five-year plan period. This long-term growth rate
is considered by Management to be a conservative rate, in that it
is lower than the long-term historical growth rates of the
industry.
The application of the FVLCD methodology as outlined above
results in a valuation in excess of the carrying value of the CGU
with significant headroom on the basis that Royal Mail delivers on
its transformation programme. Therefore, Management has concluded
that an impairment of the CGU is not required.
Sensitivity to changes in key assumptions
The valuation of the CGU is predominantly dependent upon
judgements used in arriving at discount rates applied to cash flow
projections, and delivery of the transformational cashflows in the
plan. Management have modelled a number of sensitivities
individually including an increase in the discount rate and
non-execution of a proportion of the transformational cashflow
benefits. An increase in the discount rate to 13% would reduce the
headroom by c.GBP500 million. Assuming a proportion of the
transformational benefits and associated cashflows are not
realised, would reduce the headroom by c.GBP300 million. Whilst the
sensitivities would reduce headroom there would still remain
adequate headroom and would not result in an impairment charge for
the half year ended 25 September 2022.
2. Segment information
The Group's operating segments are based on geographic business
units whose primary services and products relate to the delivery of
parcels and letters. These segments are evaluated regularly by the
International Distributions Services plc Board - the Chief
Operating Decision Maker (CODM) as defined by IFRS 8 'Operating
Segments' - in deciding how to allocate resources and assess
performance.
The key measure of segment performance is operating profit
before specific items (used internally for the Corporate Balanced
Scorecard). This measure of performance is disclosed on an
'adjusted' basis i.e. excluding specific items and the pension
charge to cash difference adjustment, which is consistent with how
financial performance is measured internally and reported to the
CODM.
Segment revenues have been attributed to the respective
countries based on the primary location of the service
performed.
Seasonality
Parcel and letter volumes are subject to seasonal variation. The
Group's busiest period is from September to December, when there
is: typically an increase in marketing mail as businesses seek to
maximise sales in the period leading up to Christmas; an increase
in parcel volumes as a result of online Christmas shopping; and an
increase in addressed letter volumes as a result of the delivery of
Christmas cards. During this period, Royal Mail and GLS would
expect to record higher revenue, as greater volumes of parcels and
letters are delivered through their respective networks. We also
incur higher costs, particularly in Royal Mail as we hire large
numbers of temporary workers to assist in handling the increased
workload.
Other seasonal factors that can affect the Group's results
include the Easter period, the number of bank holidays in a
reporting period and weather conditions. Typically, late spring and
summer months are less busy in Royal Mail and GLS.
2. Segment information (continued)
Specific items
26 weeks ended 25 September and pension
2022 Adjusted adjustment Reported
------------------------------------ ------------------------------------------ ---------------- --------
Royal Royal
Mail GLS Eliminations(1) Group Mail GLS Group
Continuing operations GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------------ ------- ------- --------------- ------- --------- ----- --------
Revenue 3,647 2,200 (9) 5,838 - - 5,838
People costs (2,693) (489) - (3,182) (72) - (3,254)
Non-people costs (1,173) (1,549) 9 (2,713) - - (2,713)
------------------------------------ ------- ------- --------------- ------- --------- ----- --------
Operating (loss)/profit
before specific items (219) 162 - (57) (72) - (129)
Operating specific items
GLS VAT adjustments - - - - - (33) (33)
Amortisation of intangible
assets in acquisitions - - - - (1) (9) (10)
Legacy/other items - - - - 9 - 9
------------------------------------ ------- ------- --------------- ------- --------- ----- --------
Operating (loss)/profit (219) 162 - (57) (64) (42) (163)
Profit on disposal of
property, plant and equipment
(non-operating specific
item) - - - - 5 1 6
------------------------------------ ------- ------- --------------- ------- --------- ----- --------
(Loss)/profit before
interest and tax (219) 162 - (57) (59) (41) (157)
Finance costs (26) (11) 7 (30) - - (30)
Finance income 12 2 (7) 7 - - 7
Net pension interest (non-operating
specific item) - - - - 53 - 53
------------------------------------ ------- ------- --------------- ------- --------- ----- --------
(Loss)/profit before
tax (233) 153 - (80) (6) (41) (127)
------------------------------------ ------- ------- --------------- ------- --------- ----- --------
Specific items
26 weeks ended 26 September and pension
2021 Adjusted adjustment Reported
------------------------------------ ------------------------------------------- ---------------- --------
Royal Royal
Mail GLS Eliminations(1) Group Mail GLS Group
Continuing operations GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------------ ------- ------- ---------------- ------- ------- ------- --------
Revenue 4,074 2,010 (12) 6,072 - - 6,072
People costs (2,651) (431) - (3,082) (83) - (3,165)
Non-people costs (1,188) (1,410) 12 (2,586) - - (2,586)
------------------------------------ ------- ------- ---------------- ------- ------- ------- --------
Operating profit/(loss)
before specific items 235 169 - 404 (83) - 321
Operating specific items
Impairments - - - - (2) - (2)
Amortisation of intangible
assets in acquisitions - - - - - (8) (8)
------------------------------------ ------- ------- ---------------- ------- ------- ------- --------
Operating profit/(loss) 235 169 - 404 (85) (8) 311
Loss on disposal of property,
plant and equipment (non-operating
specific item) - - - - (3) 1 (2)
------------------------------------ ------- ------- ---------------- ------- ------- ------- --------
Profit/(loss) before
interest and tax 235 169 - 404 (88) (7) 309
Finance costs (25) (7) 3 (29) - - (29)
Finance income 5 1 (3) 3 - - 3
Net pension interest
(non-operating specific
item) - - - - 32 - 32
------------------------------------ ------- ------- ---------------- ------- ------- ------- --------
Profit/(loss) before
tax 215 163 - 378 (56) (7) 315
------------------------------------ ------- ------- ---------------- ------- ------- ------- --------
(1) Revenue and non-people costs eliminations relate to
intragroup trading between Royal Mail and GLS, due to Parcelforce
Worldwide being GLS' partner in the UK. Finance costs/income
eliminations relate to intragroup loans between Royal Mail and
GLS.
3. People information
Reported
26 weeks Reported
ended 26 weeks ended
25 September 26 September
2022 2021
GBPm GBPm
============================================================ ============= ===============
Wages and salaries (2,608) (2,544)
------------------------------------------------------------ ------------- ---------------
Royal Mail (2,170) (2,160)
GLS (438) (384)
------------------------------------------------------------ ------------- ---------------
Pensions (see Note 7) (368) (367)
------------------------------------------------------------ ------------- ---------------
Royal Mail defined benefit plans (including administration
costs) (204) (217)
Royal Mail defined contribution plan (64) (56)
Royal Mail defined benefit and defined contribution
plans' Pension Salary Exchange (PSE) employer
contributions (96) (90)
GLS (4) (4)
------------------------------------------------------------ ------------- ---------------
Social security (278) (254)
============================================================ ============= ===============
Royal Mail (231) (211)
GLS (47) (43)
============================================================ ============= ===============
Total people costs (3,254) (3,165)
------------------------------------------------------------ ------------- ---------------
People numbers
The number of people employed, expressed as both full-time
equivalents and headcount, during the reporting period was as
follows:
Full-time equivalents (FTEs)(1) Headcount(2)
------- -------------------------------------------------- --------------------------------------------------
Half-year end Average Half-year end Average
26 weeks 26 weeks 26 weeks 26 weeks 26 weeks 26 weeks 26 weeks 26 weeks
September September September September September September September September
2022 2021 2022 2021 2022 2021 2022 2021
------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Royal
Mail 142,751 150,579 149,318 151,030 137,369 137,437 138,517 137,445
GLS 21,562 18,734 20,476 18,208 22,075 22,844 22,497 22,218
------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total 164,313 169,313 169,794 169,238 159,444 160,281 161,014 159,663
------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
1 These people numbers relate to the total number of paid hours
(including part-time, full-time and agency hours) divided by the
number of standard full-time working hours in the same period. GLS
has changed its FTE calculation methodology in the reporting period
to align better with Royal Mail. This change has been applied
prospectively and no changes have been made to the prior year
numbers stated.
2 These people numbers are based on permanent employees.
4. Specific items and pension charge to cash difference
adjustment
26 weeks 26 weeks
ended ended
25 September 26 September
2022 2021
-------------------------------------------------------- ---------------- ---------------
Pension charge to cash difference adjustment (within
People costs) (72) (83)
----------------------------------------------------------------
Operating specific items:
GLS VAT adjustments (33) -
Amortisation of intangible assets in acquisitions (10) (8)
Legacy/other items 9 (2)
---------------------------------------------------------------- ------------ -----------
Total operating specific items (34) (10)
---------------------------------------------------------------- ------------ -----------
Non-operating specific items:
Profit/(loss) on disposal of property, plant and equipment 6 (2)
Net pension interest 53 32
---------------------------------------------------------------- ------------ -----------
Total non-operating specific items 59 30
---------------------------------------------------------------- ------------ -----------
Total specific items and pensions adjustment before
tax (47) (63)
---------------------------------------------------------------- ------------ -----------
Tax credit on certain specific items and the pension
charge to cash difference 31 30
---------------------------------------------------------------- ------------ -----------
The pension charge to cash difference adjustment largely
comprises the difference between the IAS 19 income statement
pension charge rate of 23.3% (H1 2021-22: 24.4%) for the Defined
Benefit Cash Balance Section (DBCBS) from 28 March 2022 and the
actual cash contribution rate agreed with the Trustee of 15.6%. The
charge was GBP72 million in the period (H1 2021-22: GBP83 million).
The decrease in the IAS 19 pension charge rate is due to the
increase in the net discount rate (versus CPI) between March 2021
and March 2022.
The GBP33 million (EUR39 million) in GLS relates to the expected
settlement of VAT adjustments in Italy, covering the years 2016
through to 2021.
The legacy item relates to a GBP9 million credit in respect of
Industrial Diseases claims, resulting from a significant increase
since the year end to the rate at which liabilities are discounted
(see Note 9 for further details). The prior period charge of GBP2
million related to Employee Free Share schemes and interest on the
Ofcom fine.
The tax credit of GBP31 million (H1 2021-22: GBP30 million)
includes a net credit of GBP14 million (H1 2021-22: GBP18 million)
in relation to the tax effect of certain specific items and the
pension charge to cash difference and, a net credit of GBP17
million (H1 2021-22: GBP12 million) in relation to the
remeasurement of certain UK deferred tax assets and liabilities at
the future UK corporation tax rate of 25%.
5. Taxation
The Group reported tax credit is GBP41 million (H1 2021-22:
GBP45 million charge) on a reported loss before tax of GBP127
million (H1 2021-22: GBP315 million profit). This consists of a tax
credit in Royal Mail of GBP77 million (H1 2021-22: GBP9 million
charge) on a reported loss of GBP239 million (H1 2021-22: GBP159
million profit) and a tax charge in GLS of GBP36 million (H1
2021-22: GBP36 million) on a profit of GBP112 million (H1 2021-22:
GBP156 million).
The tax credit in Royal Mail relates to the recognition of a
deferred tax asset in respect of the reported loss. The Royal Mail
reported effective tax rate is higher than the UK statutory rate
mainly due to the remeasurement of deferred tax balances to the
future UK statutory rate of 25%, the non-taxable net pension
interest income on which there is no tax charge and the
Super-deduction capital allowances claim which creates an enhanced
credit for qualifying capital expenditure.
The GLS effective tax rate is higher than the statutory rate,
mainly due to higher tax rates in some of the countries in which it
operates and the expected settlement of VAT adjustments in Italy,
for which no tax credit is assumed.
Details of the adjusted tax results and effective tax rates are
provided in the Financial Review.
5. Taxation (continued)
Deferred tax assets
The Group assesses the recoverability of deferred tax assets at
each reporting date. Given the loss incurred by Royal Mail during
the period, there is increased uncertainty that future taxable
profits will be generated to utilise those losses.
In assessing the recoverability of the deferred tax asset,
Management have modelled the expected utilisation of the tax losses
using profit forecasts. Forecast profits for the initial five-year
period are based on the Board approved forecast for years one to
three. For years four and five, Management have used judgement to
determine the expectation of performance, based on revenue growth
trajectory and cost inflation. The profits for years one to three
reflect both restructuring and transformational changes required to
transform the business. For the purposes of the tax modelling,
Management have assumed that profits beyond year five will be
maintained at the same level as year five. The modelling indicates
that the losses will be utilised over the next seven years.
Sensitivity analysis was also undertaken which assumes a 25%
worsening of operating profit relative to the approved forecasts.
The sensitivity analysis shows the tax losses being utilised one
year later. Given the expected utilisation of the losses within a
reasonably foreseeable time period, Management are of the view that
the Royal Mail net deferred tax asset should be fully recognised.
Should the expected improvement in performance from the
restructuring and transformational changes not arise as forecast,
then the net deferred tax asset may be written off in future
periods.
6. Earnings per share
26 weeks ended 25 September 26 weeks ended 26 September
2022 2021
------------------------------- ----------------------------------- --------------------------------
Specific
items and Specific
pension items and
adjustment pension
Reported (1) Adjusted Reported adjustment(1) Adjusted
------------------------------- -------- ----------- -------- ---------- -------------- --------
Attributable to equity holders
of the parent Company
(Loss)/profit from continuing
operations
(GBP million) (86) (16) (70) 270 (33) 303
Weighted average number
of shares issued (million) 956 n/a 956 1,000 n/a 1,000
Basic earnings per share
(pence) (9.0) n/a (7.3) 27.0 n/a 30.3
Diluted earnings per share
(pence) (9.0) n/a (7.3) 26.9 n/a 30.2
------------------------------- -------- ----------- -------- ---------- -------------- --------
(1) Details of Alternative Performance Measures (APMs) are
provided in the Financial Review.
The diluted earnings per share for the 26 weeks ended 25
September 2022 is based on a weighted average number of shares of
958,775,868 (H1 2021-22: 1,004,337,921) to take account of the
potential issue of 437,680 (H1 2021-22: 2,070,299) ordinary shares
resulting from the Deferred Share Bonus Plan (DSBP) and 2,408,279
(H1 2021-22: 2,632,630) ordinary shares resulting from the
Long-Term Incentive Plan (LTIP). Management have historically
elected to settle this scheme using shares purchased from the
market.
The 263,566 (H1 2021-22: 365,008) shares held in an Employee
Benefit Trust for the settlement of options and awards to current
and former employees, are treated as treasury shares for accounting
purposes. The Company, however, does not hold any shares in
treasury.
7. Retirement benefit plans
Summary pension information
26 weeks
ended 26 weeks ended
25 September 26 September
2022 2021
GBPm GBPm
========================================================= ============= ==============
Ongoing Royal Mail pension service costs
Defined benefit plans (including administration
costs)(1) (204) (217)
Defined contribution plans (64) (56)
Defined benefit and defined contribution plans'
Pension Salary Exchange (PSE) employer contributions(2) (96) (90)
========================================================= ============= ==============
Total Royal Mail ongoing pension service costs (364) (363)
GLS defined contribution plan costs (4) (4)
========================================================= ============= ==============
Total Group ongoing pension service costs (368) (367)
========================================================= ============= ==============
Cash pension service costs (3)
Defined benefit plans' employer contributions(4) (132) (134)
Defined contribution plans' employer contributions (68) (60)
Defined benefit and defined contribution plans'
PSE employer contributions (96) (90)
========================================================= ============= ==============
Total Group cash pension service costs (296) (284)
========================================================= ============= ==============
Pension charge to cash difference adjustment (72) (83)
========================================================= ============= ==============
(1) These pension service costs are charged to the income
statement. They represent the cost (as a percentage of pensionable
payroll - 23.3% for the DBCBS (H1 2021-22: 24.4%)) of the increase
in the defined benefit obligation, due to members earning one more
half year's worth of pension benefits. They are calculated in
accordance with IAS 19 and are based on market yields (high quality
corporate bonds and inflation) at the beginning of the reporting
period. Pensions administration costs for the RMPP of GBP5 million
(H1 2021-22: GBP5 million) and the DBCBS of GBP3 million (H1
2021-22: GBP2 million) continue to be included within the Group's
ongoing UK pension service costs.
(2) Eligible employees who are enrolled into PSE opt out of
making employee contributions to their pension and the Group makes
additional contributions in return for a reduction in basic
pay.
(3) These values exclude the impact of any timing differences in
pension payments and represent the equivalent cash costs of the
amounts charged to the income statement in the period.
(4) The employer cash contribution rate of 15.6% (H1 2021-22:
15.6%) forms part of the payroll expense and is paid in respect of
the DBCBS. This contribution rate is fixed, with actuarial funding
valuations carried out every three years to determine whether
additional deficit contributions are required. These actuarial
valuations are required to be carried out on assumptions determined
by the Trustee and agreed by Royal Mail. The most recent triennial
valuation at 31 March 2021 was completed in May 2022 and no
additional contributions were required.
Royal Mail Senior Executives Pension Plan (RMSEPP)
The buy-out of this scheme was completed in June 2022, with the
bulk annuity policies being exchanged for individual policies
between the insurers and all remaining members.
All the Group's obligations under the plan have now been fully
extinguished and the Group has therefore de-recognised all
liabilities under the scheme as well as the corresponding assets
that had previously represented the value of the bulk annuity
policies.
The Group expects to proceed to wind up the plan in the coming
months. The scheme still holds residual assets which are expected
to be returned to the Group following the wind up of the scheme,
following the payment of any remaining closure expenses. This
refund however will be subject to a withholding tax deduction of
35%, hence the surplus is presented on the balance sheet net of a
GBP3 million adjustment which represents the tax that would be
withheld on the surplus amount.
7. Retirement benefit plans (continued)
Movement in RMSEPP assets, liabilities and net position
Defined benefit Defined benefit Net defined
asset liability benefit surplus
H1 2023 H1 2022 H1 2023 H1 2022 H1 2023 H1 2022
GBPm GBPm GBPm GBPm GBPm GBPm
Retirement benefit surplus
(before withholding tax)
at 28 March 2022 and 29 March
2021 320 373 (312) (364) 8 9
Amounts included in the income
statement:
Pension interest income/(cost)(5) 2 4 (2) (4) - -
-------------------------------------- -------- ------- -------- ------- -------- --------
Total included in profit
before tax 2 4 (2) (4) - -
-------------------------------------- -------- ------- -------- ------- -------- --------
Amounts included in other
comprehensive income - remeasurement
losses/(gains):
Actuarial (loss)/gain arising
from:
Financial assumptions - - 64 (22) 64 (22)
Return on plan assets (excluding
interest income) (63) 23 - - (63) 23
-------------------------------------- -------- ------- -------- ------- -------- --------
Total remeasurement (losses)/gains
of the defined benefit surplus (63) 23 64 (22) 1 1
-------------------------------------- -------- ------- -------- ------- -------- --------
Other:
Benefits paid (8) (9) 8 9 - -
Transfer of assets and liabilities
to insurers following buy-out (242) - 242 - - -
-------------------------------------- -------- ------- -------- ------- -------- --------
Total other movements (250) (9) 250 9 - -
-------------------------------------- -------- ------- -------- ------- -------- --------
Retirement benefit surplus
(before withholding tax payable)
at 25 September 2022 and
26 September 2021 9 391 - (381) 9 10
-------------------------------------- -------- ------- -------- ------- -------- --------
Withholding tax payable n/a n/a n/a n/a (3) (4)
-------------------------------------- -------- ------- -------- ------- -------- --------
Retirement benefit surplus
(net of withholding tax)
at 25 September 2022 and
26 September 2021 n/a n/a n/a n/a 6 6
-------------------------------------- -------- ------- -------- ------- -------- --------
(5) Pension interest income in the period results from applying
the plan's discount rate at the preceding year end date to the
plan's assets at that date. Similarly, the pension interest cost
results from applying the plan's discount rate at the preceding
year end date to the plan's liabilities at that date.
Royal Mail Pension Plan
Accounting surplus/(deficit) position - DBCBS and Legacy
RMPP
Below is a summary of the assets and liabilities of the two
sections of the Royal Mail Pension Plan on an accounting (IAS 19)
basis.
DBCBS Legacy RMPP
--------------------- ---------------------
At 25
September At At 25 At
2022 27 March September 27 March
GBPm 2022 2022 2022
(6) GBPm GBPm GBPm
-------------------------------------------- ---------- --------- ---------- ---------
Fair value of plans' assets 1,463 1,536 7,337 11,142
Present value of plans' liabilities (1,651) (1,926) (4,440) (6,960)
-------------------------------------------- ---------- --------- ---------- ---------
(Deficit)/surplus in plans (pre-withholding
tax payable) (188) (390) 2,897 4,182
Withholding tax payable(7) n/a n/a (1,014) (1,464)
-------------------------------------------- ---------- --------- ---------- ---------
(Deficit)/surplus in plans (188) (390) 1,883 2,718
-------------------------------------------- ---------- --------- ---------- ---------
(6) The closing balance sheet position at 25 September 2022
allows for both market conditions at the balance sheet date and the
impact of RPI/CPI inflation over the period to the extent that it
is expected to feed into future benefit increases.
(7) Any reference to a withholding tax adjustment relates to
withholding tax payable on distribution of a pension surplus.
7. Retirement benefit plans (continued)
The legacy RMPP section's liabilities and assets are impacted by
movements in interest rates and inflation. In order to reduce the
risk of movements in these rates driving the RMPP into a funding
deficit, the RMPP Trustee has hedged the funding liabilities,
predominantly through investment in index-linked gilts and
derivatives.
In the RMPP section, many of the inflation linked increases that
apply are also restricted to a maximum increase of 5% in any year.
The scheme's rules therefore give some protection from the risk of
significantly high levels of inflation.
The pre-withholding tax accounting surplus of the legacy section
of the RMPP at 25 September 2022 was GBP2,897 million (27 March
2022: GBP4,182 million), a decrease of GBP1,285 million in the
period. This was the result of a significant increase in
index-linked gilt yields, against which the RMPP liabilities are
hedged, driving a large proportion of the overall GBP3,805 million
reduction in the value of this section's assets. This movement was
however to a large degree offset by a significant increase in the
'real' discount rate (the difference between RPI and the discount
rate based on corporate bond yields), as a result of a large
increase in corporate bond yields in the period, driving an overall
GBP2,520 million reduction to the value of the RMPP's calculated
liabilities versus the year end. Although the surplus has decreased
in absolute terms, the funding level on an accounting basis
(proportion of assets versus liabilities) has improved since the
year end as a result of the significant decrease in
liabilities.
The nature of the risks and their mitigation are similar for the
DBCBS, although the level of hedging is less than that of the RMPP.
An IAS 19 deficit of GBP188 million (27 March 2022: GBP390 million)
is shown on the balance sheet in respect of the DBCBS; however,
this section is not in funding deficit and it is not anticipated
that deficit payments will be required. The significant decrease in
the deficit in this section in the period is again largely due to
the considerable increase in the 'real' discount rate which has had
the effect of significantly reducing liabilities. The value of the
DBCBS assets has also decreased to offset this, but to a lesser
extent than those of the RMPP, since the level of hedging is
lower.
The recent turmoil in UK financial markets impacted defined
benefit pension schemes with investment strategies designed to
protect against interest and inflation rate movements. The RMPP
Trustee has taken actions to protect the Plan and ensure that
members' benefits remain secure, and the strong funding level has
been maintained. There was no request for the Group to pay any
additional funds to the Plan beyond the normal monthly employer
contributions as required under the Plan rules.
The most recent triennial valuation of the RMPP at 31 March 2021
was agreed in May 2022. Based on a roll forward of the same
assumptions used in that valuation the surplus at 31 March 2022 was
estimated to be c. GBP500 million and, when updated to market
conditions at 30(th) September, the funding position is estimated
to have improved further.
The DBCBS is still estimated to have a small surplus at 30
September 2022 equal to the amount held in respect of the risk
reserve for that section.
Major long-term assumptions used for accounting (IAS 19)
purposes - DBCBS, RMPP and RMSEPP
The major assumptions used to calculate the accounting position
of the pension plans are as follows:
RMPP and
DBCBS RMPP (8) DBCBS RMSEPP
At 25 September At 25 September At 27 March At 27 March
2022 2022 2022 2022
====================================== ================= ================ ============= =============
Retail Price Index (RPI) 3.6% 3.5% 3.8% 3.5%
Consumer Price Index (CPI) 3.2% 3.2% 3.4% 3.2%
Discount rate
- nominal 5.2% 5.0% 2.8% 2.8%
- real (nominal less RPI) (9) 1.6% 1.5% (1.0)% (0.7)%
Constructive obligation for increases 5.2% - 5.2% -
-------------------------------------- ----------------- ---------------- ------------- -------------
(8) Since the RMSEPP was fully bought out in June 2022 no
assumptions have been derived at 25 September 2022.
(9) The real discount rate used at 25 September 2022 reflects
the average duration of the RMPP of around 20 years and the DBCBS
of 13 years.
8. Financial assets and liabilities
Classification, carrying amount and fair value of financial
assets and liabilities
The following analysis shows the classification, carrying amount
and fair value of the Group's financial assets.
At 25 At 25
September September At 27 March
2022 2022 2022 At 27 March
Carrying Fair Carrying 2022
amount value amount Fair value
Level Classification GBPm GBPm GBPm GBPm
-------------------------------- ----- -------------- ---------- ---------- ----------- -----------
Financial assets
Cash 1 436 436 312 312
Cash equivalent investments 1 368 368 825 825
================================ ===== ============== ========== ========== =========== ===========
Money market funds FVTPL 287 287 725 725
Amortised
Short-term deposits - bank cost 81 81 100 100
================================ ===== ============== ========== ========== =========== ===========
Cash and cash equivalents 1 804 804 1,137 1,137
Current asset investments
- short-term deposits - Amortised
bank 1 cost - - 70 70
Pension escrow investments 1 FVTPL 214 214 213 213
Amortised
Trade and other receivables 2 cost 1,418 1,418 1,553 1,553
Derivative assets (current) 2 FVTPL 101 101 74 74
Derivative assets (non-current) 2 FVTPL 62 62 30 30
-------------------------------- ----- -------------- ---------- ---------- ----------- -----------
Total financial assets 2,599 2,599 3,077 3,077
-------------------------------- ----- -------------- ---------- ---------- ----------- -----------
The following analysis shows the classification, carrying amount
and fair value of the Group's financial liabilities.
At 25 At 25
September September At 27 March
2022 2022 2022 At 27 March
Carrying Fair Carrying 2022
amount value amount Fair value
Level Classification GBPm GBPm GBPm GBPm
-------------------------------- ----- -------------- ------------ ---------- ----------- -----------
Financial liabilities
Amortised
Lease liabilities (current) 2 cost (213) (213) (213) (213)
Interest-bearing loans
and borrowings:
Amortised
EUR500 million bond 2 cost (445) (433) (416) (429)
Amortised
EUR550 million bond 2 cost (488) (438) (456) (453)
Amortised
Lease liabilities (non-current) 2 cost (1,151) (1,002) (1,128) (1,110)
Amortised
Trade and other payables 2 cost (1,940) (1,940) (2,078) (2,078)
Derivative liabilities
(current) 2 FVTPL (3) (3) (8) (8)
Derivative liabilities
(non-current) 2 FVTPL - - (36) (36)
-------------------------------- ----- -------------- ------------ ---------- ----------- -----------
Total financial liabilities (4,240) (4,029) (4,335) (4,327)
-------------------------------- ----- ------------------ -------- ---------- ----------- -----------
Net total financial liabilities (1,641) (1,430) (1,258) (1,250)
-------------------------------- ----- ------------------ -------- ---------- ----------- -----------
Derivatives that do not qualify for hedge accounting are
classified as fair value through profit and loss (FVTPL) and any
gains or losses arising from changes in fair value are taken
directly to the income statement in the period.
The main purpose of these financial instruments is to raise
finance and manage the liquidity needs of the business' operations.
The Group has various other financial instruments such as trade
receivables and trade payables which arise directly from operations
and are not considered further in this Note.
No speculative trading in financial instruments has been
undertaken during the current or comparative reporting periods, in
line with Group policy.
8. Financial assets and liabilities (continued)
Fair value measurement of financial instruments
All assets and liabilities for which fair value is measured or
disclosed in the financial statements are categorised within the
fair value hierarchy, described as follows, based on the lowest
level input that is significant to the fair value measurement as a
whole:
Level 1 - Quoted (unadjusted) market prices in active markets
for identical assets or liabilities.
Level 2 - Inputs other than quoted prices included within Level
1 that are observable for the asset or liability, either directly
(i.e. as prices) or indirectly (i.e. derived from prices).
Level 3 - Inputs for the asset or liability that are not based
on observable market data (unobservable inputs).
The fair value of quoted investments is determined by reference
to bid prices at the close of business on the balance sheet
date.
Where there is no active market, fair value is determined using
valuation techniques. These include using recent arm's length
market transactions; reference to the current market value of
another instrument which is substantially the same; and discounted
cash flow analysis and pricing models.
The Group determines whether any transfers have occurred between
levels in the hierarchy by reassessing categorisation at the end of
each reporting period. For the purposes of disclosing the Level 2
fair value of investments held at amortised cost in the balance
sheet, in the absence of quoted market prices, fair values are
calculated by discounting the future cash flows of the financial
instrument using quoted equivalent interest rates as at close of
business at the balance sheet date. For the EUR500 million and
EUR550 million bonds, the disclosed fair value is calculated as the
closing market bond price converted to Sterling using the closing
spot Sterling/Euro exchange rate.
For the purposes of comparing carrying amounts to fair value,
fair values have been calculated using current market prices (bond
price, interest rates, forward exchange rates and commodity prices)
and discounted using appropriate discount rates.
9. Provisions
Charged as specific
items Charged in operating costs
----------------------------- ------------------------------------------
Property
Industrial Regulatory Voluntary decomm- Litigation
diseases fine Other redundancy issioning claims Other Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------------
At 28 March
2022 (56) (52) (6) (70) (20) (53) (13) (270)
Released/(charged) 9 - - 8 (2) (10) 1 6
Reclassifications - - - - - (2) 2 -
Utilised 2 52 - 58 1 12 - 125
Forex adjustment - - - - - (2) (1) (3)
At 25 September
2022 (45) - (6) (4) (21) (55) (11) (142)
Disclosed as:
Current (9) - - (4) (3) (40) (2) (58)
Non-current (36) - (6) - (18) (15) (9) (84)
At 25 September
2022 (45) - (6) (4) (21) (55) (11) (142)
Disclosed as:
Current (8) (52) - (70) (5) (39) (2) (176)
Non-current (48) - (6) - (15) (14) (11) (94)
At 27 March 2022 (56) (52) (6) (70) (20) (53) (13) (270)
9. Provisions (continued)
Specific items provisions
Royal Mail has a potential liability for industrial diseases
claims relating to individuals who were employed in the General
Post Office Telecommunications division and whose employment ceased
prior to October 1981. The provision is derived using estimates and
ranges calculated by its actuarial adviser, based on current
experience of claims, and an assessment of potential future claims,
the majority of which are expected to be received over the next 25
to 30 years. Royal Mail has a rigorous process for ensuring that
only valid claims are accepted. In the first half year, the rate by
which liabilities are discounted increased by 183 bps, which
resulted in a GBP9 million release of the provision at 25 September
2022.
Royal Mail's appeal against the Competition Appeal Tribunal's
judgment to uphold Ofcom's decision to fine it GBP50 million was
rejected by the Court of Appeal (CoA) on 7 May 2021. On 7 June
2022, the Supreme Court refused Royal Mail permission to appeal the
CoA judgment, which means that the appeal process has now
concluded. The fine and interest (c.GBP52 million) was paid to
Ofcom on 10 August 2022.
Operating costs provisions
In January 2022, Royal Mail announced a management restructure
affecting over 3,000 managerial level employees, mainly within its
operational function. The new management structure went live at the
end of May 2022 with the majority of voluntary redundancies taking
place in May and June 2022.
Property decommissioning obligations represent an estimate of
the costs of removing fixtures and fittings and restoring the
leased property to its original condition.
Provisions for litigation claims, based on best estimates as
advised by external legal experts, mainly comprise outstanding
liabilities in relation to road traffic accident and personal
injury claims.
10. Contingent liabilities and contingent assets
Contingent liabilities
2022-23 Regulated Quality of Service
Our current performance on our Universal Service products'
Quality of Service is below Ofcom's regulatory targets. We are
actively engaging with Ofcom, explaining why current performance is
below target due to the difficult circumstances we face. However,
Ofcom may consider it necessary to open an investigation in due
course when our full year Universal Service Quality of Service
results are published, the outcome of which cannot be determined at
this time.
Whistl Damages Claim
In October 2018, Whistl filed a damages claim against Royal Mail
at the High Court relating to Ofcom's decision of 14 August 2018,
which found that Royal Mail had abused its dominant position (see
details of regulatory fine in Note 9). Whistl's High Court claim
was paused until after the completion of the appeal by Royal Mail
against the Ofcom decision. Following the exhaustion of Royal
Mail's appeal against the Ofcom decision, the stay on Whistl's
related damages claim has been lifted. Royal Mail believes Whistl's
claim is without merit and will defend it robustly.
Contingent asset
Royal Mail is pursuing a follow-on damages claim in the UK
Competition Appeal Tribunal against DAF Trucks in relation to the
European Commission's decision of 19 July 2016 finding that DAF
participated in an illegal cartel with other European truck
manufacturers. The trial took place in Spring 2022 with the
Competition Appeal Tribunal likely to issue their judgement later
this calendar year or early 2023.
11. Events after the Reporting Period
Holding Company name change
On 3 October 2022 the Group's holding company changed its name
from Royal Mail plc to International Distributions Services
plc.
Rightsizing the UK business
We have begun the process of consulting on rightsizing the
business in response to the impact of industrial action, delays in
delivering agreed productivity improvements and lower parcel
volumes. Short-term cost efficiencies are expected to be achieved
through an estimated reduction of around 5,000 full time equivalent
operational roles (FTEs) by March 2023 and c.10,000 by end of
August 2023 (on a rolling 12-month basis). Based on current
estimates, c.5,000-6,000 redundancies may be required by the end of
August 2023.
CWU frontline pay offer
On Monday 24 October it was announced that, following an
invitation from Acas, Royal Mail and CWU agreed to jointly engage
with Acas facilitation, in an attempt to resolve the current
disputes on Pay and Change. An opening session took place on
Tuesday 25 October with the objective to reach an agreed approach
for further facilitated talks.
On 31 October, Royal Mail proposed a new pay-for-change offer to
the CWU worth 9% over two years.
On Friday 4 November, it was announced that there would be an
intensive period of negotiations on all aspects of pay and change,
facilitated by Acas, from Monday 7 November to Tuesday 15 November.
On 16 November it was announced that talks are continuing to allow
more time for a resolution to be reached.
RESPONSIBILITY STATEMENT OF THE DIRECTORS IN RESPECT OF THE HALF
YEAR FINANCIAL REPORT
The Directors confirm that to the best of our knowledge:
-- The condensed set of financial statements, which has been
prepared in accordance with IAS 34 Interim Financial Reporting as
adopted by the UK, gives a true and fair view of the assets,
liabilities, financial position and profit or loss of International
Distributions Services plc as required by DTR 4.2.4R; and
The Interim Management Report includes a fair review of the
information required by:
-- DTR 4.2.7R of the Disclosure Guidance and Transparency Rules,
being an indication of important events that have occurred during
the first six months of the financial year and their impact on the
condensed set of financial statements; and a description of the
principal risks and uncertainties for the remaining six months of
the year; and
-- DTR 4.2.8R of the Disclosure Guidance and Transparency Rules,
being related party transactions that have taken place in the first
six months of the current financial year and that have materially
affected the financial position or performance of the Group during
that period; and any changes in the related party transactions
described in the last annual report that could do so.
The Directors of International Distributions Services plc are as
listed in the Royal Mail plc Annual Report and Financial Statements
2021-22, with the exception of the following changes:
Jourik Hooghe was appointed as a Non-Executive Director with
effect from 1 June 2022.
A list of current Directors is maintained at
https://www.internationaldistributionsservices.com/en/
By order of the Board
Mick Jeavons
Group Chief Financial Officer of International Distributions
Services plc
16 November 2022
INDEPENT REVIEW REPORT TO INTERNATIONAL DISTRIBUTIONS SERVICES
PLC
Conclusion
We have been engaged by the company to review the condensed set
of financial statements in the half-yearly financial report for the
six months ended 25 September 2022 which comprises the condensed
consolidated income statement, the condensed consolidated statement
of comprehensive income, the condensed consolidated balance sheet,
the condensed consolidated statement of changes in equity, the
condensed consolidated statement of cash flows and the related
explanatory notes.
Based on our review, nothing has come to our attention that
causes us to believe that the condensed set of financial statements
in the half-yearly financial report for the six months ended 25
September 2022 is not prepared, in all material respects, in
accordance with IAS 34 Interim Financial Reporting as adopted for
use in the UK and the Disclosure Guidance and Transparency Rules
("the DTR") of the UK's Financial Conduct Authority ("the UK
FCA").
Scope of review
We conducted our review in accordance with International
Standard on Review Engagements (UK and Ireland) 2410 Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity issued by the Auditing Practices Board for use in the
UK. A review of interim financial information consists of making
enquiries, primarily of persons responsible for financial and
accounting matters, and applying analytical and other review
procedures. We read the other information contained in the
half-yearly financial report and consider whether it contains any
apparent misstatements or material inconsistencies with the
information in the condensed set of financial statements.
A review is substantially less in scope than an audit conducted
in accordance with International Standards on Auditing (UK) and
consequently does not enable us to obtain assurance that we would
become aware of all significant matters that might be identified in
an audit. Accordingly, we do not express an audit opinion.
Directors' responsibilities
The half-yearly financial report is the responsibility of, and
has been approved by, the directors. The directors are responsible
for preparing the half-yearly financial report in accordance with
the DTR of the UK FCA.
As disclosed in note 1, the latest annual financial statements
of the Group were prepared in accordance with International
Financial Reporting Standards adopted pursuant to Regulation (EC)
No 1606/2002 as it applies in the European Union and in accordance
with international accounting standards in conformity with the
requirements of the Companies Act 2006 and the next annual
financial statements will be prepared in accordance with UK-adopted
international accounting standards. The directors are responsible
for preparing the condensed set of financial statements included in
the half-yearly financial report in accordance with IAS 34 as
adopted for use in the UK.
Our responsibility
Our responsibility is to express to the company a conclusion on
the condensed set of financial statements in the half-yearly
financial report based on our review.
The purpose of our review work and to whom we owe our
responsibilities
This report is made solely to the company in accordance with the
terms of our engagement to assist the company in meeting the
requirements of the DTR of the UK FCA. Our review has been
undertaken so that we might state to the company those matters we
are required to state to it in this report and for no other
purpose. To the fullest extent permitted by law, we do not accept
or assume responsibility to anyone other than the company for our
review work, for this report, or for the conclusions we have
reached.
Andrew Bradshaw
for and on behalf of KPMG LLP
Chartered Accountants
15 Canada Square
London
E14 5GL
16 November 2022
FORWARD-LOOKING STATEMENTS
This document contains certain forward-looking statements
concerning the Group's business, financial condition, results of
operations and certain Group's plans, objectives, assumptions,
projections, expectations or beliefs with respect to these items.
Forward-looking statements are sometimes, but not always,
identified by their use of a date in the future or such words as
'anticipates', 'aims', 'due', 'could', 'may', 'will', 'would',
'should', 'expects', 'believes', 'intends', 'plans', 'potential',
'targets', 'goal', 'forecasts' or 'estimates' or similar
expressions or negatives thereof.
Forward-looking statements involve known and unknown risks,
uncertainties and other factors, which may cause the Group's actual
financial condition, performance and results to differ materially
from the plans, goals, objectives and expectations set out in the
forward-looking statements included in this document.
All written or verbal forward-looking statements, made in this
document or made subsequently, which are attributable to the Group
or any persons acting on its behalf are expressly qualified in
their entirety by the factors referred to above. Accordingly,
readers are cautioned not to place undue reliance on
forward-looking statements. No assurance can be given that the
forward-looking statements in this document will be realised;
actual events or results may differ materially as a result of risks
and uncertainties facing the Group. Subject to compliance with
applicable law and regulation, the Group does not intend to update
the forward-looking statements in this document to reflect events
or circumstances after the date of this document and does not
undertake any obligation to do so.
This information is provided by RNS, the news service of the
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END
IR GBBDBSBBDGDR
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November 17, 2022 02:00 ET (07:00 GMT)
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