International Distribution Services' (IDS) half year total revenue rose by 0.4% to £5.9bn. The Group's largest division, Royal Mail saw revenue fall by 2.9% as total parcel volumes fell by 6% and letters by 9%. This was more than offset by growth at the international parcel service GLS, where revenue grew by 5.9%, in line with volumes.
The group's underlying operating loss of £57m, nearly trebled to £169m largely due to lower revenue and the new pay deal agreed between the unions and Royal Mail.
Free cash outflows totalled £33m compared to £174m. The improvement was largely down to the timing of certain payments and lower capital expenditure. IDS ended the half with net debt of £1.5bn.
For the full year the Group now expects operating profit be around breakeven against previous guidance of a positive result before redundancy costs at Royal Mail.
The board has decided not to pay an interim dividend, but expects to be able to pay a modest dividend from GLS at the full year. However, Royal Mail will not be able to fund the group dividend until it returns to positive cash generation.
The shares were down 0.9% in following the announcement.
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Our view
We were hoping that the pay deal at Royal Mail combined with the injection of new blood at the top might be enough to draw a line under the parent company's woes. But so far, a turnaround is proving more difficult than expected. The new Group CEO Martin Seidenberg tells us that customers are coming back to Royal Mail but that's not been borne out in trading with parcel volumes down 6% in the first half and letter deliveries falling at an even faster rate.
To be fair, there has been some decent early progress on the 'five-point-plan' to turn Royal Mail around. It's already delivered a 10k headcount reduction which should somewhat offset the increased costs coming due to the pay agreement with the union.
There's a lot to do, and the underlying business is under some pressure. Parcel volumes are down from the booming demand seen over the pandemic, and letters have long been in a structural decline. IDS wants to be allowed to right size its infrastructure to reflect the modern day reality. But any reforms are likely to be a long time coming. In the meantime, winning back customers is a major focus. Christmas is a key time and Royal Mail can't afford any slippages in festive deliveries. It's investing big in temporary workers and if that's not met with an improvement in revenues that could impact the bottom line further. Competition within the previously tied post office network is an obvious headwind.
There are some bright spots. We're encouraged that GLS, the international parcels division is still growing revenue, and we believe this division has some long-term growth opportunities, but growing margins is proving to be a challenge. That may become easier if inflation subsides further. Potential bolt-on acquisitions to GLS are also on the table. Management has previously hinted that splitting the two businesses is an option - that looks less likely now that the Group is investing in Royal Mail's recovery.
A possible return to dividends has also been floated in front of shareholders, but given the ongoing issues its unlikely to be material for now, and there can be no guarantees.
The agreement with the unions whilst welcome is certainly proving to be no magic wand. The expected return to profitability looks further out than first thought, and at the divisional level there's still a CEO role to fill at Royal Mail. It's too early to judge Martin Seidenberg's scorecard on the huge task at hand. The valuation remains well below the long-term average suggesting there could be some upside if he gets it right. But there remain some major challenges ahead.
IDS key facts
All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.
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