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Parcels growth drives Royal Mail's profit beat, shares rise
May 18, 2017 / 6:31 AM / 5 months ago

Parcels growth drives Royal Mail's profit beat, shares rise

FILE PHOTO: A Royal Mail vehicle drives along the M6 motorway near Knutsford, northern England, April 8, 2016. REUTERS/Phil Noble/File Photo

(Reuters) - Royal Mail’s (RMG.L) annual profit fell by less than expected as tighter cost controls and growth in its European delivery and UK parcel businesses helped offset a continued decline in letters.

After years of underinvestment, Royal Mail was privatised in 2013 and has since reduced layers of management, improved vehicle utilisation rates, upgraded technology and cut its property bill. The former monopoly has closed over 30 mail centres since 2008 and cut staff numbers by 12,000 in the past four years.

But competition is getting tougher in the parcels market because of new entrants such as Amazon (AMZN.O), while letter volumes continue to fall. Royal Mail also needs to convince unions to back its plan to close a pension scheme.

Chief Executive Moya Greene told Reuters Royal Mail accounted for about 41 percent of the revenue generated in the 6.2 billion pound UK parcels market, although Amazon’s decision to start its own deliveries had further squeezed an overcrowded market.

“(Amazon’s decision has) been a very important change ... because it has, in an overcapacity situation, added more capacity and through the power of its market place given Amazon a very powerful position in our market,” Greene said. “That said, Royal Mail has come through very well.”

The company, which has been able to replace all lost Amazon business, said it had seen an increase in parcels sent through its account and noted higher delivery productivity in its UK unit.

Full-year adjusted operating profit before transformation costs fell 6 percent to 712 million pounds, versus consensus of 694 million pounds. Total dividend was up 4 percent at 23 pence.

Hargreaves Lansdown senior analyst Laith Khalaf said Royal Mail was well placed to capitalise on expectations of higher parcel volumes as more shoppers use mobile devices to order goods.

“Royal Mail has posted a solid set of results against a challenging backdrop...A decent rise in full-year dividend, combined with share price falls over the last year, means the stock is now yielding over 5 percent,” he said.

Shares were up 1.7 percent at 438 pence at 1209 GMT, making it one of the top FTSE 100 gainers .FTSE. The company's stock is down 14 percent over the past year as its last two updates showed that uncertainty due to Brexit had worsened the decline in letters volumes.

Full-year addressed letter volume, excluding the impact of political parties’ election mailings, were down 6 percent and Greene said she expected business uncertainty to continue for a while yet, with marketing and business mail volumes hit.

Royal Mail said that if business uncertainty persisted the fall in volumes would be at the higher end of a previous forecast of a 4 to 6 percent decline annually.

Greene said that while she did not know how soon pension talks with unions would complete, she remained optimistic.

(The story was refiled to correct the spelling of the CEO’s surname throughout)

Reporting by Esha Vaish in Bengaluru; editing by Jason Neely and David Evans

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