Royal Mail's (ROYMF) CEO Moya Greene on Full Year 2016 Results - Earnings Call Transcript

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Royal Mail Plc. (OTCPK:ROYMF) Full Year 2016 Earnings Conference Call May 19, 2016 3:30 AM ET


Moya Greene - CEO

Matthew Lester - CFO


Mark McVicar - Barclays

Angus Tweedie - Merrill Lynch

Damian Brewer - RBC Capital Markets

Penny Butcher - Morgan Stanley

David Kerstens - Jefferies

Sylvia Foteva - Deutsche Bank Research

Chris Combe - JPMorgan

Sam Bland - Investec

Matija Gergolet - Goldman Sachs


Welcome to Royal Mail's Results Presentation. Please ensure you have all mobile devices switched off or on silent. There are no fire alarm tests planned for today. In the event of an alarm sounding, please leave the auditorium using the fire exits clearly displayed in the room. Before we start, we need to draw your attention to the disclaimer on forward-looking statements. This sets out examples of the factors that can cause actual results to differ from any forward-looking statements we may make. The principal risks and uncertainties, which could affect the group, are summarized in the results announcement.

Moya Greene

Good morning, everyone. Thank you for attending our full year results presentation. 500th year, we've come a long way since those Tudor times and Royal Mail has certainly been through a lot of change, enormous change, actually. Probably this year we've delivered more change than any other year since I and Matthew have been at the company.

As usual, I'll take you through our progress against our strategies and Matthew will take you through the numbers in detail.

We delivered very good results, determined and resilient in, I think pretty challenging market environment. Group revenue was up 1%. Group operating profit before transformation costs was up 5%. This is a result of our strategic approach to costs, in the UK business in particular, and a stronger than expected performance in GLS.

In-year trading cash flow was £254 million, reflecting increased investment. And, in line with our progressive dividend policy, the total dividend for the full year is up 5%, 22.1 pence.

Now turning to the UK parcels market. The trends are really much the same as before. The market, including Amazon is still expected to grow around 4% in the medium term, fueled by e-retail. However, the addressable market growth will depend on the extent of Amazon's build-out of its own delivery network.

Through all of the measures that we have taken on the product side, on the services side, with technology, maintaining our tight control on costs, we remain the number one player in the UK parcel market still accounting for over one-half the volume.

However, market capacity continues to grow and that creates downward pricing pressure. E-retail parcel sizes are increasing, due to the growth in clothing and footwear. Larger parcels are expected to be about 6% growth.

The retail sector is driving an increase in the returns traffic. That's outpacing the rest of the market. It's up 6%. We do very well, as you know, in that part of the business.

Consumers' expectations as well, they're changing. They're becoming more demanding. On speed, price, convenience has led to more customer choice for delivery, for pickup and returns.

And in the international space we're seeing the UK market dynamic basically replicated.

As always, we keep an eye on everything that's happening in the market, including the disruptors in the market. And, as a result of everything we've done, we've maintained our preeminent position in the parcels business. We've addressed these trends.

We've delivered, as I said, a huge amount of change. For account customers we are more flexible. We've extended our latest acceptance times to midnight for Tracked 48. And we've added more products to the weekend collection service.

These initiatives have helped us win retail business. And, actually, we've now replaced all of the lost Amazon volumes.

In the consumer SME space we are focused on increasing convenience, with more post offices now open for longer hours and on Sundays. And our people can also drop off or collect parcels at our enquiry offices.

The international space is also very competitive. Especially export, where AURs are the higher of the two spaces, export and the import.

So the international area you will see in 2016/2017 will be an area of focus for us. Just as we have done in the domestic space, we want to solve problems for online shippers, whether they be currency problems, customs clearance, security or returns.

In a competitive market such as we have, and the UK probably the most competitive market, quality, value and ease of doing business, these are the things that will drive customer loyalty. And so it has been for us at Royal Mail.

We have improved our technology backbone. We have transformed our parcel operations. We are offering more customer-orientated propositions and at a greatly accelerated pace.

To drive quality, almost one-half of our parcels carry a barcode and one-third can be tracked by customers. And, just to put that in perspective for you, that's more parcels than our biggest competitor.

Next up will be outdoor doorstep scanning, enabled by our new PDAs. It's probably the biggest rollout of PDAs in the UK and we have added more functionality to that.

In terms of value, you need to keep a laser-sharp eye on pricing in a market such as ours. And we have done that. Pricing is now a core competency for Royal Mail.

I mentioned that we are easier to do business with and that is vital. We've seen our scores in this area go up by 7 points in one year.

Our returns portal is a real great addition for us here at Royal Mail. It's made returns much easier for customers. And we're extending our ability to accept returns now at our enquiry offices as well.

At 58% of our revenue, letters are very important to us. So we continue to invest in the technology, in the service and the product enhancements that will promote the value of mail.

Our addressed letter volumes declined by 3%, which was better than expected, mainly due to the returns of direct delivery volumes but not only that. In the first three quarters of the year we had very good economic growth and, as you know, that's probably the tightest correlation to letter volumes.

E-substitution, however, is still the driving force behind business mail declines and we don't see the rate of e-substitution increasing in the medium term. We are maintaining our guidance at 4% to 6% declines overall in that area.

Direct marketing mail is the fourth largest segment of advertising spend in the UK, after the Internet, TV and total print media. It was up 1% in calendar 2015 but this is likely to weaken now going forwards, as we saw in the first quarter of 2016 a softening of general economic conditions affect that sector.

We have a targeted approach to mail and in terms of how we promote the value of mail. Different letter market segments perform in different ways. As you know, we have invested £70 million in Mailmark and this has seen an increasing customer take-up.

We launched a new digital stamp. I actually have little things that I can show you and this is an example of the new digital stamp in May, after a successful trial with 36 customers, including BT.

We have also expanded our MAILMEN campaign. We now have 22 of the brightest leading lights in advertising advocating the value of direct mail.

For SMEs we launched a new online tool. I also have an example of that for you to take a look at, MailshotMaker. This allows small and medium-sized business to design online start to finish, and we'll deliver for them, their own direct marketing campaign. It's a very good tool. I encourage you to have a look at it.

In the consumer space we continued to support the Keep Me Posted campaign and we just launched a really good new app called Swapshots. This is really a fantastic little tool. It will appeal to a younger audience, but to everybody. It allows you to take a picture anywhere and we'll deliver that picture for you on the date that you tell us to in the online tool.

So these segments of mail we're trying to introduce services and products that will continue to promote the value of mail.

Now you know that at Royal Mail we have had to have, all the time that Matthew and I have been at the Company, a very tight rein on cost and that continues. And I think our strategic approach to cost is really paying off for us.

For two years running our underlying UK PIL operating costs have been down by 1% and our cost-avoidance program is on track. We avoided about £180 million of costs this year and, as you know, by 2017/2018 that will be £500 million of costs.

We have worked very hard with our unions and with our people to drive efficiency across all aspects of our operation. And we have done that at an absorbable rate of change in Royal Mail.

For two years running we have come within our targeted productivity improvement. We are at 2.4% productivity improvement this year. That's probably in the top quartile of UK business.

We are rolling out telemetry. Currently over 16,000 of our 45,000 vans have new technology in them. This improves driver behavior and safety, but also gives us a new tool to reduce maintenance cost.

We are starting to really restructure the network in a positive way. So you will have seen that last year we were able to take four air routes out of our network.

And in other areas of the business as well we continue to chip away with initiatives like productivity improvements in Parcelforce depots, efficiency programs across all of the central functions and throughout customer experience.

I think one of the things that has changed at Royal Mail is that we now have a much more respectful relationship with our unions and with our people. Our levels of engagement now with our people surpass large UK companies. That is a real improvement from some of the bad old days.

We may not always agree on everything with our unions but nothing is hidden at Royal Mail. Everything is discussed, everything is out in the open and we remain determined to continue in this manner going forward.

I know you're aware that this is a negotiations year for us. We have complex negotiations on pay. We have complex negotiations on pensions. And it's true that when you're into a negotiations year like that sometimes the temperature gets a little more heated.

But I do value the whole spirit of collaboration that has taken hold in all aspects of our business and I think that that will see us through this year, just like it has in the past. We're not going to negotiate in public but I just want you to know that those negotiations are well underway.

GLS, GLS is a great company. If you compare the performance of GLS over these past four, five, six years you will see that it did better performance than its peers in Europe.

In Europe we are now seeing some of the same trends developing as we have seen in the UK, albeit at a different rate. It depends on the country, how online shopping is developing in that country, the degrees of Internet penetration and how fast Amazon will roll out its own network in these companies.

And also, if we look at the European market generally, as you know, the general economic conditions are pretty fragile. And this is the reason why we are particularly proud of GLS. It has performed very strongly, better than we expected, with a 10% increase in volumes, 9% increase in revenue.

In GLS Germany, where there was a particular challenge brought forward by the new minimum wage legislation, as a result of very good and comprehensive planning the fears that we had that there would have to be a compression in margins by 50 basis points to 100 basis points, thankfully that hasn't happened.

In Italy we continued to see very strong levels of growth. We are probably the strongest player in Italy right now. In fact, we deliver Amazon Prime in Italy.

GLS France. Losses have been reduced but, as you know probably better than I, the general market conditions in France continue to be challenging. And so we are now expecting breakeven next year.

As well as stepping up our investment in efficiency, we are also investing to grow in new areas. We have moved further across the e-commerce value chain. I mentioned that we're looking to solve more problems for online retailers. That is what will keep those online retailers loyal to Royal Mail.

And so you have seen us in 2015 accelerate the speed of new offerings. We have solved problems, whether they are problems in labeling, whether they are problems in inventory management. We continue to look at what we can do to make it easier for online retailers, particularly the small and medium online retailer, grow their business.

We're also looking at ways to leverage existing assets in new ways. Our fleet is a good example. We have one of the biggest fleets, for sure, in the UK, almost 100 fleet workshops with substantial expertise in fleet maintenance. So we are trialing now third-party fleet servicing at seven different locations across the country.

As you know, over the past five years we've had to invest considerably in legacy technology. We've had to rebuild the technology backbone of the company to stabilize it to ready us to be able to offer more customer-facing improvements on the technology side.

That effort is now paying off for us. Not only have we resized our current network, our investment spend going forward, you will see, will be increasingly skewed towards projects and initiatives that support our growth.

I'm now going to turn things over to Matthew. He'll take you through the numbers.

Matthew Lester

Thanks Moya. Good morning. So starting with revenues of almost £9.3 billion, representing an underlying 1% improvement year-on-year. On the next slide we set out the arithmetic of the underlying calculation, so I'll take you through that then.

Operating profit before transformation cost was £742 million on an adjusted basis, if you look at the reported number, £485 million. The difference there is the difference between the cash and the IAS 19 P&L rate. That difference this year was £257 million, hence the difference you can see.

Transformation costs were up at £191 million as we invested behind the cost reduction program, and we talked about that at the interims. And as a result, margins declined slightly to 6.0%.

Again because of the investment that we are making both in terms of the CapEx that Moya was talking about but also because of the cost reduction program, in year trading cash flow was £254 million, a reduction on the previous year. But, nevertheless, it more than covered the dividend that we declared, which was up 5% at 22.1 pence per share.

So, in terms of the underlying movement, as I said, the arithmetic is on here. It's relatively simple this year. It’s working days and foreign exchange. I'm going to focus on what we're expecting for the current fiscal year. We've got three extra working days in this fiscal year. That is expected to have an impact of £65 million.

In terms of foreign exchange, which predominately impacts the GLS revenues and profits, the rate that we recognized for the last fiscal year was 1.37, the year prior to that was 1.27 not dissimilar to current spot.

There will be some underlying adjustments next year. In particular, we have the £70 million increase in National Insurance due to the introduction of the new single-tier state pension scheme.

So, first of all, looking at the UK. Revenue of £7.7 billion. That's down 1% on an underlying basis but, as Moya has said, so too were the costs down by 1%. Here you can see the impact of the transformation cost increase, in particular, on the UK margins where we reported 5.4% adjusted margin. That's an underlying change of 30 basis points.

Moya has described the key initiatives and factors behind what's gone on here, so I will briefly touch on the revenues. In terms of parcels, revenues were up 1%, volumes were up 3% and here you can see the impact of the mix impact of the growth in imports, which are low average unit revenue, and a decline in export, which are high average unit revenue and that's the main driver behind the adverse mix impact you can see.

In terms of letters, they were down 2% in revenue terms. The volumes benefited by 1 percentage point from the return of the direct delivery volumes. In terms of marketing mail, we think that a flat performance was very good for the year, when you take that in the context of what goes on with other print-related media.

But, as you can see, the second half was not as good a performance as the first half, very much reflecting the change in the underlying economic conditions.

Moving on to the costs here, we've set out how the underlying costs have moved. First of all, we would underline the fact that the cost program is on track to deliver the £500 million worth of benefit that we announced during last fiscal year.

Cost avoided just in the last fiscal year was £180 million. You can see the cost pressures, which we've described before. And in terms of the management reorganization, that is getting the full-year benefit of the management reorganization, which we undertook in '14, '15.

So in terms of a little bit more detail, if you look on the people costs, total core network hours were down 2%, which resulted in a 2.4% improvement in productivity, that's to say workload was actually up 0.4% year-on-year.

It's an important feature that people do not realize about the time that Moya and I have been at the Royal Mail workload has actually increased very slightly during that period, as the amount of hours it takes to process parcels has slightly more than offset the reduction in the hours necessary to transfer the lower volumes of letters.

Importantly, there is also some volume-driven increases in here, as Moya pointed out, a very strong performance in Parcelforce, where volumes are up 12%. Clearly that comes with the greater variable costs that are associated with that business.

In terms of non-people costs, another good performance here down 3% year-on-year underlying. Distribution and conveyance was down 5%. This is partly due to lower terminal dues but also due to lower fleet management costs and reduced use of UK air routes.

Infrastructure is flat year-on-year. We had the impact of higher IT-related costs, which were offset by other cost-reduction initiatives. And then the other is down 2%, and I think that just represents another year of just challenging every pound that we spend and how we go about doing our business in Royal Mail.

Looking forward to 2016, '17, just to bring a bit more light to what I've talked about before. In terms of the underlying adjustments we're going to have, not only in the next year we're going to have the single-tier impact I referred but, going forward, the year after that you're going to have things like the apprentice levy. It's a feature of employing large numbers of people as we do.

You'll also then have the impact of the acquisitions, which we will strip out of the underlying cost calculation. And then, as you can see, in the balance of year we will have the impact of new initiatives which have variable costs, things like fleet that will obviously put cost pressures on there.

We'll also see an increased depreciation and amortization charge of about £20 million, reflecting the higher investments in IT that you've seen over the last couple of years.

In terms of transformation costs, we talked quite a lot about this at the half-year. They came in at £191 million, largely reflecting the accelerated voluntary redundancy program that we were talking about associated with the cost reduction. I'm expecting to see about £160 million worth of charge in the current fiscal year.

Moving on to GLS, thank you, Rico. We have we are pleased to report revenue of almost €2.2 billion and operating profit of €160 million. Obviously on a sterling basis you don't see the year-on-year improvement you see in the euro profits, because of the weakening of sterling to which I referred.

Revenue. As Moya has already said, we saw revenue growth across pretty much all markets. 4% in Germany in all sectors, but in particular in the export area.

Italy was a particularly strong performance where we saw revenues up 18%. That was another year of strong double-digit growth. I don't think it would be reasonable of us to expect that to occur again this fiscal year.

And, as Moya has said, we saw revenue growth in France of 6% and the losses have pretty much halved since we talked about it with you at the time of the IPO. But the challenging market means that we don't expect the turnaround to occur in the next fiscal year. It will take just a little longer than that.

In terms of GLS costs, they are up 9%, in line with revenues, and also they reflect the increased costs associated with both how we addressed the German minimum wage legislation in terms of our own people cost, but also in terms of the higher sub-contractor costs which we incurred.

Moving down the P&L and moving into the finance costs, you can see that they have halved year on year. And that reflects the refinancing of the revolving credit facility late last year.

In terms of the tax charge, we're seeing 22% as the effective rate. That reflects both an improvement in the UK underlying rate, which you are familiar with, but also changes to Italian tax with respect to allowable costs in that market.

On the next slide we've set out all the specific items, they are described here. I'm pleased to say there are no items which we haven't previously talked to you about. The only one that I'm going to refer to is the biggest one, which is the difference between the cash and the IAS 19 pension charge.

As you know, last year there was a £257 million charge. We know now that for this fiscal year it will be £230 million, due to a slight strengthening in the AA bond rate at the end of the year.

So on to the really important thing, cash flow. EBITDA is flat at just over £1 billion. We do see some absorption of working capital, as we see a shift in our business from the more prepaid to the more account-based revenues and also into the international area as we see more import and less export. So I'm expecting a similar level of working capital absorption in the current fiscal year.

Total investment of £694 million, I'm going to spend a bit of time on the next slide. In terms of income tax paid, we continue to benefit from the shelter from brought forward losses and capital allowances. And I'm expecting two more years of benefit from that shelter. And that resulted in-year trading cash flow of £254 million more than enough to cover the dividend.

The rest of this I would describe as more of a source and application of funds, and that's how we're going to cover this going forward and also later in this presentation.

So looking at that investment, when you take off the sale of the operating properties, in this case it was the Croydon delivery office, you get to a net position of £656 million. You can see that the big shift here is in terms of growth CapEx and that reflects spends on parcel systems, parcels automations and purchase of PDAs and further investment in GLS.

I expect for this fiscal year to have a net cash investment back between the £550 million and £600 million, which we previously indicated.

In terms of the uses of cash and to sort of move change in how it impacts net debt, we started with net debt of £275 million. I've explained the ins year trading cash flow and the operational asset disposals. The acquisition of business interests was mainly net dispatch and also some GLS Italian franchises.

In terms of the London property portfolio, we said that we were likely to spend the proceeds from Paddington on getting ready to sell both Nine Elms and Mount Pleasant. And, lastly, we saw an outflow of £23 million, but I expect to see most of that being the £100 million being spent in the current fiscal year. Then you can see the dividend of £213 million, such that we closed with net debt of £224 million.

In terms of pensions, on the left-hand side we've set out the movement on an accounting basis and I'm happy to discuss that with any of those of that persuasion afterwards.

In terms of an actuarial basis, the one that we are currently talking to our trustees about, we saw a broadly flat surplus of £1.8 billion. That includes £550 million of surplus relating to the pre-hedging of liabilities, which we've discussed previously.

As Moya has said, we're well under our way with negotiations and discussions with both the trustees and the union as to the nature and form of pensions that we will offer post March 2018.

And finally, in terms of property. We continue to prepare the sites and get ready for sale. We are marketing Nine Elms but, as you can imagine, with Brexit and other issues overhanging us there is not a lot of active interest at the moment, though we remain in conversations with a few parties. And in terms of Mount Pleasant, this is a year where there's a lot of work to be done to get this ready to sell. Moya?

Moya Greene

It's really the success of our strategy that underpins our commitment to our progressive dividend policy and just to remind you, our strategy is anchored on the following.

We're going to stay number 1 in parcels in the UK. We are going to continue to prove out the value of mail, and we are going to grow carefully, prudently, profitably in new areas.

I mentioned that we are solving more problems for online retailers, particularly small and medium size, by doing things for them that are a little further up the e-commerce value chain. We are leveraging existing assets in new ways.

GLS has wide and deep experience, expanding successfully into new markets. It's now in 41 different markets. That's four more in Europe. And we're going to see GLS take that very careful approach to deep partnerships and careful geographic expansion in new ways.

And we are going to look at expanding our place in niche B&B business. As you know, in the UK we're primarily a B2C player, 70% B2C, 30% B2B. Not so in GLS, it's primarily B2B and about 30% B2C.

So all of that is enabled. The reason why I think we've been successful, we've certainly taken a very strategic approach to our costs. We've been successful at that.

We have deepened our ability to move forward, stabilize the technology backbone, added new things, new customer service things to our technology. So the innovation pace has picked up.

And I think, very importantly, going forward, maintaining a good relationship with our people and our unions. Thanks a lot.

Question-and-Answer Session


A - Matthew Lester

So if we could do the usual move to Q&A. If you could say your name and who you are representing and our good fellows here will pass you a microphone. We'll start over there. And Mark, want to kick-off.

Mark McVicar

Thank you. Mark McVicar from Barclays. First question is really on - is on GLS. A lot of your slides on GLS talked about it moving more and more into the B2C markets. What do you have to do with the product and the infrastructure and the systems to make that successful, because you can't just take a dedicated B2B network and start running it past houses, it doesn't work?

Could you explain a little bit more about you're transitioning it or how you have transitioned it in some countries already?

Moya Greene

It does depend on new products and services. So for example, you have seen GLS have the patent for and now roll out things like ParcelLocker. You have seen GLS expand ParcelShop opportunities to increase drop density in lots of new markets, and you are right, you have to be very careful how you do it.

For the most part, it is still a B2B company, but the things are starting to meld, B2B and B2C. And GLS has done that very well. It has a lot of experience in restructuring its routes and its route networks year-on-year. It is primarily a subcontractor driver model, which makes things easier to do in that area.

And as a result, they have fielded that change, I think, better than anybody else in the space. And, as I mentioned, in places like Italy they're the Prime Amazon provider right now.

Mark McVicar

Parcels for a second, you talked about the parcels business in the UK in the three blocks: business accounts, consumers SME and international. Could you give us - I know you don't disclose it formally, but could you give us some idea of the different sizes of those businesses and the kind of differing requirements that you have to deal with from them?

Matthew Lester

So accounts is about one half and then SME and international about like a percent, split the rest of the difference.

Moya Greene

And you know, basically, the selling approach for the different segments of the market are quite different. With respect to account, you are really looking at making sure that you have a network that can handle big volumes in terms of pick-up and delivery. We do that brilliantly in the UK and elsewhere because of the way in which GLS has approached that segment of the business.

On the consumer side of the business, I think it is our very deep partnership with the Post Office that helps us. Consumers like convenience, whether it's in terms of dropping off their parcel or having their parcels delivered. 85% of people still want their parcels delivered to the home. Our delivery network in the UK is structured for exactly that.

We have done a lot in the network over the past 5 years to right size it and now with technology and automation enabling it, we're able to take larger parcel sizes through the Royal Mail core network.

And, obviously, as you know, we have the Parcelforce network as well, which has grown pretty significantly this year. It's primarily a B2C network and can take the much heavier traffic, up to 30 kilos and is more in the express space, and its technology enablement is also very strong.

So for all of those reasons, you have to look at your parcel capacity in terms of what different segments of the market are looking for. Consumers are looking for convenience and maintaining control, as much as possible over the delivery, having lots of options for where the delivery goes.

Obviously, they are very interested in price. You will know that we've taken a very laser-sharp approach to pricing and that is particularly evident this year. In the UK, for example, we have reduced the cost of our medium-sized parcel by almost 40%.

For online customers, again you have to look at what online customers are expecting. We've got new labeling solutions in place. We've got better shipping tools in place for online customers. And on pricing, we've tried to keep our pricing in the small and medium-sized parcels constant, understanding that we are in a very different competitive market than we were say, four or five years ago.

So in each of these segments you have to do different things. You have to sell in a different way. You have to be more alert to what people want. But you also have to be prudent.

We are determined to offer changes that will make people loyal to us, and we've seen our numbers show that the changes we have introduced have done that. But we want to make sure that we are geared toward profitable growth.

Angus Tweedie

It’s Angus from Merrill Lynch. Just a couple of questions. On GLS is it fair to say that you can't really expand margins, then, if you're going to keep investing or should we expect some of the CapEx to be funding the investments, moving into B2C going forwards?

I was just going to say, on your natural attrition on your staff numbers it seemed quite low compared to some of your peers. Can you remind us on the average age of your workforce, and when, I suppose, will be the hump, once we can pass that?

And then, finally, just on non-property investments were up this year. I think you said before it would be about £100 million you need to spend. So should we expect about another £70 million, £80 million next year or how to think about that? Thanks.

Moya Greene

On GLS margins what I would say is that, if you remember, we guided that as a result of the German minimum wage, the margins in GLS would probably be compressed by 50 basis point to 100 basis points and that didn't happen. So we kept margins flat this year at 7.4%.

And I don't want to be too dogmatic about that going forward, because I look at the overall EU economy and there are certainly challenges there. But I also look at the performance of GLS over the last number of years and GLS is very geared towards profitable growth.

In terms of investment, the levels of investment in GLS over the past, let's say, three or four years have been pretty constant. No big spikes there, but there is no question that, if you look at our overall investment plan for the future, we are going to try to skew towards growth.

We think that we've done a huge amount of heavy lifting in the past four years to move in terms of right sizing the UK network. And, in terms of the stabilization of the technology backbone, that was a huge problem for Royal Mail.

I used to joke, half in earnest, sadly that technology was state of the ark at Royal Mail. That isn't true any more. And it isn't true because of all of the very grinding, heavy lifting that we have had to do with this big, huge legacy IT infrastructure that was Royal Mail.

I'm not saying that we don't have anything left to do on that front, we still do. But it is like miles ahead of where we were when we started. So, again, you will see a lot of the technology spend going forward skewed toward things that the market expects us to provide.

Matthew Lester

So I think the overall GLS margins we are not expecting to see expansion in the short term because I think we've done a very good year of holding them where they…

Moya Greene

Where they were…

Matthew Lester

In terms of the investment in property, yes is the answer, about 80.

Damian Brewer

Damian Brewer from RBC. Two questions, please. First of all, can I just come back to the technology investment in the leap forward you made in the last year? It's sort of - initially, on the surface surprising to see that the avoided cost change doesn't get any bigger in '16, '17.

So could you talk a little bit more about the payback profile on that investment? Is it the case that some of that puts cost in, in things like people time and scanning, before you then get the revenue and cost payback, and could you talk a little bit more about that?

And then, secondly, just on parcels. I remember the first presentation after the IPO, Moya, you were talking about two years of disruption after Amazon's in-sourcing of some of its delivery.

I notice now that the Amazon mix of your revenue has gone from 6%, I think it was then at the time in the IPO prospectus to 5% today, and the Q4 parcel unit revenue at least looks a little bit more hopeful.

Could you give us your latest prognosis on what you think is happening there? With your account volume up 7%, are we beginning to see the worst of the shake-out go or are there new things you worry about?

Moya Greene

Let me deal with the Amazon question first and then, Matthew, why don't you deal with the payback on technology, because there's different kinds of technology spend.

Amazon. Anybody who prognosticates a return to some kind of equilibrium in a market such as the UK is brave and I don't know if I should hazard down that territory.

But what I would say is that, because of the work that has been done by our COO Sue Whalley in the network, making the network more flexible, making it more adaptable, making it more responsive to what shippers need from our network, because of the huge work that Catherine Doran and the technology team did to stabilize the backbone and put us in a position to start offering the customer-facing things that we need, we're now tracking, from a standing start, more parcels than any competitor behind us.

So we've probably got 40% of our parcel volumes now tracked and that will increase dramatically going forward.

All of that has mitigated considerably the Amazon impact. It took a while but here we are now. We're able to compete successfully for big account retail traffic. And the wins, John Lewis M&S, Waterstones, Boohoo, these are very important wins.

We still very much appreciate the Amazon traffic and nobody was more pleased than I was that when their network got into trouble on Cyber Friday and Monday that we actually had enough capacity to be able to help out. And we will continue to do that.

But it does make a big difference when your networking, your technology and your pace of change can pick up so that you can go after sectors that were not there before.

In terms of Amazon spend in the UK, they are big in the UK now. They got 7,000 drivers, 8,000 employees, 10 fulfillment centers. That's a very big network here in the UK. And they have announced that they are going to build out networks in Germany and in other parts of Europe.

I suppose that a lot of the heavy lifting in terms of building out that network in the UK has already been done and so they're probably going to concentrate on the expansion of the geographic footprint. But that won't change the dynamic. We still have 20% overcapacity in the UK market.

And retail as a sector, as you know, has had some pretty crushing blows to it in terms of margin over the past two years. So it's a difficult sector more generally.

So I think what you have to do is what we have done is you have to really stay tightly focused on your game. Make sure you know what your customers in all segments are expecting of you to keep them loyal to you. Move things through the system faster, and, as I said at the outset, we've done that and, as a result of doing that, we have maintained that number one place by a country mile.

Matthew Lester

In terms of the cost reduction program, it’s payback and how does technology play with that. So, first of all, the technology spend, as you can see, was skewed more this year towards growth initiatives towards the parcels and items that I called out.

That's not to under call the amount that's still necessary to go and spend in order to fix the backbone and we're largely through that piece now, but there will be more to spend on that in the future but more skewed, as I said before, to enable more things. But that's more top-line oriented, I would say.

In the last fiscal year, yes, we did use technology to enable some of the cost-reduction programs but it's not one of those ones where actually the cost-reduction program was predicated upon a very large technological enablement.

It's much more about actually unpicking how we did things and then putting them back together. That's why you've seen the project costs actually increase year-on-year. That's what's going on there.

So overall, it doesn't surprise me at all actually that this year's number is not dissimilar to last year's number. It wasn't as though we had not started things. It wasn't as though we started the cost-reduction program on April 1, 2015. This was something that we were working up to and then we were ready to announce in October.

So, in terms of the overall paybacks, they are fast paybacks because these are things that, when you look at the nature of what we're doing, often it's really about putting some people together in a room and looking about how to do things differently with a very clear objective, rather than any big sort of three year program that ultimately results in a big difference. That's not what we're doing as part of that strategy. Penny, do you want to get back in before it passes you again?

Penny Butcher

Penny Butcher from Morgan Stanley. Two questions. One is - first one is regarding more, I guess, a view on timetable. I appreciate that you can't talk about sensitive exact labor negotiations.

But what is your thinking on can you get the pay agreements and potentially productivity done with the pensions or is this going to be a kind of staggered process at least out through '18, when the pension component becomes more important? And, mixed in with that, the view on Ofcom and how many more weeks do we need to wait for an update?

The second question is actually back on the property side. Your comments seem to suggest that the intentions are still towards the possibilities around residential development and the economy not helping the marketing of that.

Have you actually considered, as I understand from our real estate colleagues, one of the hot areas of London property right now is actually for logistics and industrial development because it's becoming quite scarce and companies need to move outside London more often?

Could you re-market it and potentially become a landlord of sorts on that side and have a stream of income that way, as opposed to thinking about development and selling the property?

Moya Greene

I'll leave the property to Matthew and I'll talk a little bit about where we are with our people and our unions. One of the very big changes at Royal Mail is that we have a much more collaborative and open approach with our unions. And there's no question that, even if you do, you get into periods where formally you have to get to a particular result.

But I think the work that we have done with our people everywhere in the network, if you look at our customer engagement scores, they're better than UK large companies now, and, believe me, they weren't anywhere near that five years ago.

I think the work that we have done and the openness with which we operate and the intelligence of the people who represent our people in our unions, there's just nothing hidden. They know what the inflationary environment looks like. They know what the pension situation is.

So I'm not going to say to you that I think it's going to be a smooth sail. I don't know. I hope it is. I hope that we've put enough into the relationship over these past few years that there will be no disruption anywhere for our customers. And I look at the things that we have negotiated, Penny, over the past five years.

We've negotiated some really, really difficult things and we just stayed at it and kept talking, kept the creative hat on and we've gotten there. And so the optimistic side of me thinks that this should be no different. We will get there and we will get there in a way that is affordable for the company and that doesn't damage relationships with our people, our unions or our customers.

And generally regulations, really you should ask Ofcom. But all I can say is we respond in good time to a very, very comprehensive and significant amount of questioning all throughout the summer.

In fairness, it is a lot of material. In fairness, you have to give your regulator a chance to get through it. And I'd rather see them take the necessary time to really understand the market and the position of the universal service in the UK, rather than do things quickly and miss something important.

Penny Butcher

I guess I was trying [Technical Difficulty] if you need to wait for the regulator in order to…

Moya Greene

No, I don't think so. No. Again, I would say our unions are very alert to the regulatory challenge. And whether we get a signal of it tomorrow or three weeks from tomorrow or three months from tomorrow, our unions are very alert to that challenge and the view that our regulators take to things that are important to our people.

Matthew Lester

On the property, the planning consents that we have are for residential, not for the other ones. If your property team know that people are paying more than £1,000 a square foot for sheds, please could you send them my way straightaway, because I'll be more than happy to convert that planning permission in that regard.

I think the key thing here is at the times, if you go back to when we first talked about it and people got very, very excited about this, we were always aware that these are large and complicated sites, which is why we did not go and promote very great valuations against this area that went, I think, completely off the scale.

We're going through what happens every now and then with London, that people get a bit of cold feet. We, fortunately, have a very strong balance sheet. We can take the long view. We've not predicated any of our other investments on the sales of these sites.

So we have a great asset here and we will make sure we maximize the value, and if we don't need to sell it in the next year, that's fine by me. My balance sheet is in a good shape. Thank you.

David Kerstens

Good morning, everybody. It’s Dave Kerstens from Jefferies.

Matthew Lester

Hi, Dave.

David Kerstens

Question on your operating expenses. With a similar amount of cost savings expected to come through this year and 2.8% wage inflation last year, would you be confident to say that operating expenses will be, again, lower this year or is it still too uncertain?

And regarding the union negotiations, would you expect a short-term deal just focusing on the labor wage pay deal for this year or are you trying to solve everything at once, including the pension reform?

And then maybe finally - sorry, can you comment on the management changes that you announced last week? I think the deal as CEO you're made responsible for all your global parcel operations now.

Moya Greene

Let me deal with the last question first. This is a big company. You are part of a big company. I don't want people to make a big deal out of this. We have about 500 people in our company that, as a matter of good governance, we look at succession plans for.

And the top of the house is no different, that's no different than anything that we have done and that the Board has done in the six years I've been at the company. It is true that, as part of the development of your top team, you look for ways to expose your top team to new areas of the company. And then you look for the experience and the expertise of individuals on your top team to be applied in new ways. And that's good for them and it's good for us as a company.

So I just would not want people, and I said this morning when I was asked earlier, I wouldn't want anybody to make a big deal out of this. This is business as usual, as far as I'm concerned. Every single year that I've been at the company we've looked at ways in which that we can develop people that are in the senior leadership group and it goes pretty deep. So that's normal.

Matthew Lester

In terms of the expenses, we're not going to comment more about what we may or may not do in terms of negotiations, putting them together or separating. I think Moya has covered that pretty well.

In terms of the overall level, no, we're not going to comment because it does depend ultimately on what pay deal you actually agree.

I would point out there is a £70 million headwind in addition, which we didn't have last year, and also we're not going to have the £40 million benefit year-on-year from the management reorganization, which, obviously, I showed in my slide also impacted the last fiscal year.

Sylvia Foteva

Hi, good morning. It’s Sylvia Foteva from Deutsche Bank. Two questions, please, on parcels in the UK. And on the SME, if we can pick out the SME part of SME and consumer, could you tell us a little bit about how that's trending in terms of growth rates?

Do you feel that, obviously, you have made some investments to buy acquisitions and organically do you think that you have a unique selling point or are there more capabilities you need to build out? And how do you think about market share in that SME market?

And then the second one, you've not mentioned the 1% to 2% growth in your addressable market, is that on purpose, and what can we read into that? Thank you.

Moya Greene

In terms of the 1% to 2%, I don't think this is going to be much changed going forward. The overall rate of growth, I think, would be as we posited three or four years ago. But Amazon's a very big retailer and when Amazon puts that kind of traffic through its own network that changes things.

In terms of the SME, it's very important to keep in mind that we are the number 1 player in the UK and the SME customer is a crucially important customer for the Royal Mail. The things that we have done to try to solve a broader array of problems that SME customers face, whether it's on the labeling side or it's just having the ability to connect our systems and to give them shipping tools that they can use to connect with us that don't take weeks to get connected but can be done now in a matter of a couple of days, all of those things count in terms of maintaining the loyalty of the SME group, the small online retailers. We want to be their partners in growing their business.

And so it's a combination of things. And in the UK, if you look at the increase in scores that measure from one year to the next are you getting better or worse or staying the same, in terms of are you simple to do business with, our customers are telling us that we are much easier to do business with. We've gone up by about 7 points in that score. We have an 82% customer satisfaction score overall.

We are, by far and away, the biggest and most trusted delivery company for small and medium-sized business. I don't say that we get everything 100% right and we certainly cannot afford, like anybody in this business, to be complacent. We have to keep adding. We have to keep listening, what is it that they need, what is it that we can help with them with in terms of growing their business?

But I look at what our parcels team has done, what our core network, what kind of change they put in place in terms of later acceptance times, in terms of Sunday pickup, in terms of returns. We've probably done more in this year on the returns side to just make it very, very easy, especially for the small and medium sized customer to get things back to them.

And that's just going to be the way it has to be, because we're committed to being absolutely their partners for growth in the future.

Sylvia Foteva

Can I just follow up? If we think about your growth into this year and over the next couple of years then, do you have any - are you working on other big account wins, potentially? I'm sure you are but should we expect anything on that side or are you working quite a lot on the SME side?

And on the SME side, do you think that the economy being slower has an impact or are you still increasing your penetration, being quite active…

Moya Greene

We're working across all fronts. I'll just leave it at that.

Chris Combe

Chris Combe from JPMorgan.

Matthew Lester

Hi, Chris.

Chris Combe

Hi. I had a question about your market share slide. It looks like, compared to last year, gave up about 1%. How do you account for Amazon in that calculation? Is that removed from the pie?

Matthew Lester

It's removed.

Chris Combe

It is, okay. So second question, could you comment a bit on the rest of the UK competitive space, do you feel they're keeping pace with innovation, you are leaping ahead?

And, after that, any change of view with respect to GLS on potential opportunities from FedEx-TNT? I think your initial comments last year were that you didn't really see much opportunity, has that changed in any way?

And then, lastly, what is the Amazon contribution to GLS in Europe? Thanks.

Moya Greene

On the TNT-FedEx deal, which I think I read in the newspaper today, congratulations to both companies. I think the deal has closed. I don't have anything to add from what we said. I don't think it's going to be a big impact.

We're, in Europe, mostly a deferred parcel surface parcel operation, so I don't think it's going to have anything new to say there. And, in terms of where we are with the competition, we're watching everything that is going on in the UK market. It is an incredible dynamic market. You can't get up any day and see there hasn't been something change.

The biggest concern that I had is the one that I had last year and that is the addition of capacity. And we're about 20% overcapacity in the UK today and you see that some of our competitors continue to add capacity. I think we'll have more capacity come on stream later this year.

And certainly 2017 we've seen reports of more capacity coming on stream. So, actually, even if you do as we have done, continue to solve problems, particularly for small and medium-sized business, and you continue to make your technology just more adaptable and easier and make you easier to do business with, I think you are going to see pricing pressure continue, as a result of that constant overcapacity situation not showing any signs of alleviation.

But I'm very happy with what Royal Mail has done this year. We've gone from a standing start not having barcodes on parcels to now having about 50% of what will be barcode-able barcoded in one year. We've got 40% of our products now in our network, in our core network, is being tracked.

You look at the developments in the Parcelforce network, their growth has been very significant this year. And I expect that their presence in the market will continue to show that sort of improvement. So I'm not in any way unhappy with where we are, but you cannot be complacent and you have to keep your eye on the ball.

In terms of the market share numbers, we have taken out now - it was really hard up until maybe 18 months ago to get a fix on how you compare the international content in our competitors' numbers with our numbers. And these numbers are a year trailing, anyway.

So part of what you're seeing in that 1 point differential is that not only is the Amazon traffic excluded, we're now able to make a better pass at taking out the international traffic so you are comparing more on a like-for-like basis.

Matthew Lester

And in terms of Amazon in Europe, I'd repeat is what we said in the release, no customer accounts for more than 2% of GLS revenues. We'll take two more questions, we can…

Chris Combe

Thank you.

Sam Bland

Hi. It’s Sam Bland from Investec.

Matthew Lester

Hi, Sam.

Sam Bland

You've sort of spoken about the £550 million to £600 million of investment over the medium term, and I think that's moving more towards CapEx and less OpEx.

I just wonder if you could or maybe if you look at the longer term, are there some projects possibly connected with one wave that will drop out of that over time, such that your longer term need for investment is lower than that £550 million to £600 million number?

And then, I guess, you've seen from some of the union, yes, some of the union communications with members that they've been, I guess, maybe slightly frustrated that you haven't yet made an open offer. I believe you made a closed offer on April 18 and haven't yet come back with an open offer.

I just wonder what the, maybe the holdup is there, are you waiting to see what Ofcom comes out with before going back and proposing something that can be discussed in public?

Moya Greene

I don't want to negotiate in public. I mean, that's just not right, anything that we do should be really in front of our unions first, that's the respectful way to go. But I wouldn't say that open or closed offers have very much to do with Ofcom, just to take that out of the equation.

Matthew Lester

I think the £550 million to £600 million, look, I wouldn't get too obsessed with one thing coming in or one thing going out. What we've tried to do is to give an overall sense of how much cash needed to be reabsorbed out of that £1 billion or so of EBITDA we've been producing for a while.

And it will change over time in terms of where we're focusing the particular efforts. Obviously, whilst it's been costs you've got within the current number effectively, two large amounts of voluntary redundancies that have gone through this fiscal year, together with a number of other things. But we will just tweak that over time. We treat that as that capital decision is the biggest decision that Moya and I make every year.

And we really, really are very concerned about where do we target that for the best returns. Sometimes it's going to be for cost reduction, sometimes it's going to be growth, sometimes, hopefully, we can get some things going in GLS.

So that £550 million to £600 million, while we think is a good number going forward, it will change in mix, that's right. Matija, why don’t you go through your name, and we'll close it up.

Matija Gergolet

Matija Gergolet from Goldman Sachs. Three questions from me. The first one on parcels. I mean, you've depicted very well how the quality of service ultimately has improved. But why are you therefore, not a little bit more bullish on the potential parcel volume growth? I mean, it is accelerating, the guidance is still for now, basically similar to this year, that would be like a first question.

Second question on the cost cutting, I appreciate you don't want to comment, say on wages. But, say, if I just do the numbers, so you did 182 last year of avoided cost, another 180, roughly, you're guiding for this year. This leaves us with 130, 140 for the last year.

So should we expect like the best projects are already underway and therefore you are going to have a deceleration? Or actually that you could, given the current trend line, beat your £500 million of avoided cost on a three year basis?

And, lastly, just on the balance sheet. So you have a strong balance sheet, one, to your view we could have some real estate proceeds. How are you thinking about it, now is there any M&A, for example, Europe for GLS on the horizon or is this maybe a topic that we'll touch on say, in a year's time when we have the real estate perhaps a bit closer to completion?

Moya Greene

Well let me deal with the parcel ambition. I think that we have a very strong ambition. We're going to stay number one and we're going to do everything that we have to do to retain profitable, you know, sensible growth.

But we already deliver one in two parcels in the UK. And we are certainly reshaping our network and everything that Sue has done in the past couple of years and everything that Catherine Doran and her team did over the past three on technology positions us to make sure that that strategic objective remains very clear and uppermost in our mind.

But I just think that we have to be sensible. Amazon's a very big retailer. They've got a very big network already, and there is too much capacity. The pricing pressure, I think, is going to continue.

And so we have tried and you have known us since the IPO, we've tried always to be very prudent in what we choose to do, in the timing of it, in the staging of it, in what we go after to make sure that the company remains in a good position.

So I just don't want you to walk away and think that the situation that I see now in the market is going to change in any significant way over the next year or so.

Matthew Lester

In terms of the cost program, I mean, I think the truth is that, yes, the nature of these cost programs tends to be that you can get after the easier stuff earlier, no matter where you start from, it's always the easier stuff you get earlier.

So it doesn't surprise me the overall profile there. The people who report to me on the program obviously get a rather different message to that. So we'll see where we come out.

In terms of - yes, the balance sheet is strong. M&A, clearly is something that could be used but, at the moment, with valuations that we see out there for anything that is strategic or valuable to us, we have been passing.

So it's not something which we see as the specific or targeted necessity at the moment, but if the right opportunities arose we would use them in the right way, if they represented the right strategic decision.

Matthew Lester

With that, I recognize we've kept you here for more than an hour. And we thank you very much and look forward to seeing you next time.

Moya Greene

Thank you.

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