Q1 Trading Update

International Distribution Svcs PLC

18 July 2024

 

International Distribution Services plc

(Incorporated in England and Wales)

Company Number: 8680755

LSE Share Code: IDS

ISIN: GB00BDVZYZ77

LEI: 213800TCZZU84G8Z2M70

18 July 2024

TRADING UPDATE TO END OF JUNE 2024

Trading in line with expectations - good volume and revenue growth and continued strategic progress in both Royal Mail and GLS

International Distribution Services plc (IDS.L) is today providing an update on trading for the three months to the end of June 2024. Both Royal Mail and GLS have continued to deliver a good performance against a challenging macroeconomic backdrop.

THREE MONTHS ENDED JUNE 2024 (FIRST QUARTER)

	3 months ended June
Volume (m)	2024	2023	% change4
Royal Mail
Total Parcels	315	283	11%
Domestic Parcels (ex. international) 1	268	250	7%
International Parcels2	47	32	47%
Addressed Letters3	1,642	1,703	(4)%
GLS	229	219	5%

	3 months ended June
Revenue (£m)	2024	2023	% change4
Group6	3,256	3,008	8.2%
Royal Mail	2,000	1,808	10.6%
Total Parcels	1,016	923	10.1%
Domestic Parcels (ex. international) 1	845	767	10.2%
International Parcels2	171	156	9.6%
Letters5	985	886	11.2%
GLS	1,261	1,203	4.8%

Royal Mail:

·    In the first quarter Royal Mail maintained its recent positive momentum, with good parcel volume growth supported by improvements in quality of service, and good revenue growth in both letters and parcels. The prior year comparator period includes the impact of customer losses due to industrial action during 2022-23, providing a tailwind to growth in the quarter, which will unwind over the remainder of the year:

o  Total parcel volumes increased by 11% and revenues increased 10.1%;

o  Addressed letter volume decline (ex. elections) was 4%, while total letter revenue increased by 11.2% due to revenue associated with General Election mail, as well as price increases;

o  We continue to urge Ofcom to take urgent action to reform the Universal Service and use its upcoming summer update to consult on a new efficient, financially sustainable model for the Universal Service that protects what matters most to customers.

·    General Election - more postal votes and candidate mail delivered than in any previous election:

o  Deliveries of postal vote returns increased by 50% compared to 2019 General Election, and 30% more candidate mail delivered than in 2019;

o  Royal Mail delivered 50.8 million poll cards, 7.3 million completed postal votes and 184 million pieces of candidate mail.

·    Continuing to expand our out-of-home footprint, with planned increase in drop off locations of more than 50% to 21,000:

o  Royal Mail now in more than 3,300 Collect+ stores, increasing to 5,000 in the coming weeks;

o  c. 400 lockers now operational, 1,500 by year end.

·    Continued operational progress:

o  Quality of Service - continuing on a positive trajectory; year-on-year our First Class quality of service in Q1 improved by over 4.5% and over 93.5% of First Class mail is arriving within two days, up from 91% at full year;

o  Extension of network window and flight removal - implemented the largest operational change in over 20 years, changing frontline start times to enable the removal of 18 domestic flights, improve reliability and increase network capacity for next day and larger items. This will save 1.2 million air miles or c.30,000 tonnes of CO₂ equivalent per year;

o  Rail - Royal Mail will continue to use rail services to transport mail; to improve reliability, cost effectiveness and environmental performance, switching from our own 30-year-old freight trains to commercial rail services;  

o  Sick absence - remains on an improving trend since the introduction of new attendance standards and sick absence policy last year, with frontline absence in June c. 1.5% lower compared to June 2023.

GLS:

·    Trading in line with expectations - continued good performance against a challenging macroeconomic backdrop;

·    Volumes grew 5% year on year in the first quarter driven by B2C (Business to Consumer) and cross border;

·    Revenue growth of 4.8% in Sterling, 7.0% in Euros (including working day effects⁷);

o  Revenue growth in almost all markets: double-digit growth in Spain, Poland and most other Eastern Europe markets;

·    Turnaround of US continuing to make good progress, with losses reduced;

·    Strategic delivery: continuing to invest to transform the last mile and expand out of home (OOH) network; improving digital propositions; upgrading the network to drive productivity and growth against a backdrop of macro and competitive pressures; and growing our international business;

o  GLS OOH network grew by 5% June vs. March 2024, driven by strong growth in parcel lockers of 23%;

o  Network upgrades continuing: new Berlin hub opened in June, creating operational synergies and benefits from automation, as well as providing capacity for further growth; new facility opened in Regina in Western Canada in April 2024, together with the ramp-up of operations in Vancouver which became operational in March 2024; new Paris hub remains on track to be operational in advance of peak this year.

Outlook:

·    Confirming Royal Mail outlook from May 2023 - continue to expect a return to adjusted operating profit (before voluntary redundancy costs) in 2024-25 (the "Royal Mail Profit Forecast")^8,9 - which remains valid at the date of this announcement.

Recommended Cash Offer by EP UK Bidco Limited (Bidco)

·    Board is unanimously recommending Shareholders accept the Offer;

·    The Offer reflects the value of GLS' current growth plans and the progress being made on change at Royal Mail, and provides Shareholders with the opportunity to realise the value inherent in the IDS business in cash, against the execution risks in delivering IDS' current strategy, uncertainty over the nature and timing of USO reform and the need for significant strategic investments;

·    To deliver sustainable profitable growth in the future, Royal Mail requires further significant investment in automation, network changes and rapid expansion of out-of-home solutions, especially parcel lockers. GLS also requires investment into its strategic priorities. EP Group is a long-term investor in infrastructure with significant knowledge of the postal, logistics and distribution sectors, that has the expertise and access to capital to accelerate and de-risk the delivery of IDS' strategic plans over the long-term, with the goal of developing IDS into one of the leading postal logistics players in Europe;

·    The Board has negotiated a comprehensive package of legally binding undertakings and contractual commitments from EP Group and Bidco for specific periods, which provide customers, employees, unions, regulators and broader stakeholders with important safeguards, including:

o  The provision of the Universal Service Obligation and ensuring Royal Mail's compliance with regulatory conditions imposed by Ofcom (including the one-price-goes-anywhere service in the UK and First Class letters still delivered six days a week);

o  Restrictions on distributions or other forms of return of value from Royal Mail unless certain conditions are satisfied;

o  Restrictions on change of control of both Royal Mail and GLS;

o  Use of the "Royal Mail" trading name and commitment to IDS and Royal Mail being UK headquartered and tax resident;

o  Recognition of IDS group's existing unions; and

o  Maintenance of certain employee compensation and benefits (including pension benefits).

Martin Seidenberg, Group Chief Executive of IDS plc, commented:

"The Group delivered good revenue growth of 8.2% in the quarter, with the increase in Royal Mail revenue reflecting the impact of the customer win back programme since industrial action, the focus on improving quality of service and the successful delivery of 50% more postal votes and 30% more candidate mail in the recent general election, compared to 2019. I am proud and thankful for all the extra effort our postmen and women put in to play our part in delivering democracy.

"GLS delivered a good performance despite market headwinds, with 5% volume and revenue growth in the quarter, and further strategic progress in transforming last mile, with 23% growth in our locker network, driving efficiencies and improvements in the customer experience, and growing our network and international business.

"Whilst we are making good progress on our transformation in Royal Mail, we can't do it all on our own and we urgently need to see regulatory reform of the Universal Service. Letter volumes have declined from 20 billion at their peak to just 6.7 billion now, making the one-price-goes-anywhere Universal Service unsustainable in its current form. Ofcom is due to provide an update on Universal Service reform this summer. We urge Ofcom to move quickly to consult on the changes needed to ensure an efficient, financially sustainable Universal Service that protects what customers value the most."

1.        Domestic Parcels excludes import and export for both Royal Mail and Parcelforce Worldwide.

2.        International includes import and export for Royal Mail and Parcelforce Worldwide

3.        Excludes General Election mail.

4.        % changes based on reported numbers.

5.        Includes revenue from General Election mail.

6.        Royal Mail and GLS revenue does not equal Group revenue due to the elimination of intragroup trading.

7.        Revenue growth year on year in Euros was 5.2% after adjusting for the impact of more working days in Q1 2024 vs. Q1 2023. Working day adjusted organic growth in Euros was 4.9%

8.        Reported results are prepared in accordance with UK adopted 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. A full list of the Group's APMs is set out in the section titled 'Presentation of results and alternative performance measures' in IDS' annual report for the year 2023-2024 on pages 238 to 243 (both inclusive). One of the APMs is 'adjusted operating profit' which is the measure adopted in the Royal Mail Profit Forecast. See page 240 of IDS' annual report for the year 2023-2024 for the definition of 'adjusted operating (loss)/profit'.

9.        The Royal Mail Profit Forecast is a profit forecast for the purposes of Rule 28 of the Takeover Code and the required confirmation of the IDS directors, together with the basis of preparation and assumptions, is set out in Appendix 1 to this announcement.

 

Enquiries:

Investor Relations

John Crosse

Email: [e-mail]

Media Relations

Jenny Hall

Phone: [phone]

Email: [e-mail]

Greg Sage

Phone: [phone]

Email: [e-mail]

Royal Mail press office: [e-mail]

 

Company Secretary

Mark Amsden

Email: [e-mail]

The person responsible for arranging the release of this announcement on behalf of IDS plc is Mark Amsden, Company Secretary.

FORWARD-LOOKING STATEMENTS

This announcement 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 announcement.

All written or verbal forward-looking statements, made in this announcement 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 announcement 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 announcement to reflect events or circumstances after the date of this announcement, and does not undertake any obligation to do so.

Other than in relation to the Royal Mail Profit Forecast, no statement in this announcement is intended as a profit forecast or estimate for any period.

POST-OFFER UNDERTAKINGS OR POST-OFFER INTENTION STATEMENTS

No statement in this announcement constitutes a "post-offer undertaking" or a "post-offer intention statement" for the purposes of Rule 19.5 or Rule 19.6, as applicable, of the Takeover Code.

Appendix 1

Profit forecast for purposes of the Takeover Code

On 18 May 2023, IDS released its unaudited preliminary results for the 52-week period ended 26 March 2023, which included the Royal Mail Profit Forecast, as follows:

"Royal Mail: Targeting to restore profitability in Royal Mail over the two remaining years of the recommended pay deal, with a return to adjusted operating profit (before voluntary redundancy costs) in 2024-25."

The Royal Mail Profit Forecast was repeated in IDS' unaudited results for the half year ended 24 September 2023 released on 16 November 2023, as follows:

"On a 2-year outlook, we are still targeting Royal Mail to return to adjusted operating profit (excluding voluntary redundancy costs) in FY 2024-25, although the current weaker macroeconomic conditions represent a significant headwind."

The Royal Mail Profit Forecast was first made before EP Group made an approach with regard to a possible offer for IDS and accordingly the requirements of Rule 28.1(c) of the Takeover Code apply to the Royal Mail Profit Forecast. In the offer document published on 26 June 2024, the directors of IDS confirmed that the Royal Mail Profit Forecast continued to be valid as at that date, had been properly compiled on the basis of the assumptions stated therein and that the basis of accounting used was consistent with IDS' accounting policies.

The directors of IDS confirm that the Royal Mail Profit Forecast continues to be valid as at the date of this announcement.

Set out below is the basis of preparation of the Royal Mail Profit Forecast and the assumptions on which it is based.

Basis of preparation

The Royal Mail Profit Forecast has been prepared on a basis consistent with IDS' accounting policies which are consistent with those applied in the preparation of IDS' results for the 53-week financial period ended on 31 March 2024.

The Royal Mail Profit Forecast has been prepared on the basis referred to above and subject to the principal assumptions set out below. The Royal Mail Profit Forecast is inherently uncertain and there can be no guarantee that any of the factors referred to under 'Assumptions' below will not occur and/or, if they do, their effect on IDS' and/or Royal Mail's results of operations, financial condition or financial performance, may be material. The Royal Mail Profit Forecast should therefore be read in this context and construed accordingly.

Assumptions

The Royal Mail Profit Forecast is based on the assumptions listed below:

1.1       Factors outside the influence or control of the directors of IDS:

(a)        there being no changes to existing prevailing macroeconomic, regulatory or political conditions in the markets and regions in which Royal Mail operates that would materially affect the business, including there being no changes due to any impact of the ongoing Ukraine-Russian and Israel-Palestine crises;

(b)        the inflation, interest, foreign exchange and tax rates in the markets and regions in which Royal Mail operates remaining materially unchanged from the prevailing rates;

(c)        there being no material adverse events that would have a significant impact on Royal Mail's financial performance, including litigation, change in political regime, climate change or adverse weather events;

(d)        there being no industrial action involving Royal Mail;

(e)        there being no reform of the Universal Service Obligation of Royal Mail;

(f)         there being no material changes in market conditions over the forecast period to 30 March 2025;

(g)        there being no business disruptions that materially affect Royal Mail or its key customers or any major breach of information security or data protection regulation as a result of a cyberattack and/or technological issues;

(h)        there being no material impact on stakeholder relationships on account of any offer for IDS;

(i)         there being no material adverse outcome from any ongoing or future disputes with any customer, competitor, regulator or tax authority;

(j)         there being no material adverse impact on the health, safety and wellbeing of Royal Mail's employees, no material change in employee attrition rates and no material change in Royal Mail's labour costs, including medical and pension and other post-retirement benefits driven by external parties or regulations; and

(k)        there being no material changes in legislation, taxation, regulatory requirements, applicable standards or the position of any regulatory bodies impacting on Royal Mail's operations or on the accounting policies of IDS.

1.2       Factors within the influence or control of the directors of IDS:

(a)        there being no further material change to the present management of IDS;

(b)        there being no material adverse change in IDS' ability to maintain customer and partner relationships and to meet customer needs and expectations;

(c)        all long-term customers being retained and continuing to generate revenues in line with their historical trends and past behaviours and there being no loss of customer contracts or volumes of activity unless a contract is due to terminate in the period to 30 March 2025;

(d)        there being no material corporate acquisitions or disposals, developments, partnership or joint venture agreements being entered into by Royal Mail, prior to 30 March 2025 (for the avoidance of doubt, other than any offer for IDS);

(e)        there being no material strategic investments over and above those currently planned;

(f)         there being no material changes in the dividend or capital policies of IDS;

(g)        IDS' accounting policies being consistently applied over the forecast period;

(h)        there being no material change in the operational strategy of IDS and/or Royal Mail; and

(i)         there being no inability to secure ongoing access to finance and/or to manage working capital and cash to support the ongoing running of, and investment in Royal Mail.

Statement of the directors of IDS

The directors of IDS have considered the Royal Mail Profit Forecast and confirm that it remains valid as at the date of this announcement, has been properly compiled on the basis of the assumptions set out above and the basis of accounting used is consistent with IDS' accounting policies.

 

END