Earnings Transcript for ROYMF - Q2 Fiscal Year 2015

Executives: Moya Greene - Chief Executive Officer Matthew Lester - Chief Financial Officer

Analysts: Matthew O'Keeffe - Berenberg Matija Gergolet - Goldman Sachs Damian Brewer - Royal Bank of Canada Chris Combe - JPMorgan Andrew Hollingworth - Holland Advisors Dominic Edridge - UBS Hugo Turner - Credit Suisse Dave Kerstens - Jefferies Doug Hayes - Morgan Stanley Joel Spungin - Merrill Lynch

Moya Greene: Good morning, ladies and gentlemen. Welcome. Very pleased to see you all here again. Very pleased to report our Results for the Half Year. We have delivered 2% revenue growth and margin expansion as we expected. As you know, we are the preeminent player in the U.K. parcels market and as a result of the number of initiatives that we have accelerated and brought forward, we are still the preeminent player we remain and we planned to remain there. Our volumes are up 2%. Letters actually did better than we expected. We are not changing our guidance. We think the structural decline in letters are still in the range of 4% to 6%, but they came in a bit better at 3% volume decline. GLS has performed strongly, better than expected, 7% increase on revenues, 7% increase on volumes and this is in Eurozone where, as you know is a pretty flat backdrop economy. Our operating costs are flat, we think that’s a very good performance and they will be flat as well at the year end a that has mitigated pressures the topline. And so, we have really concentrated our energies on making sure that we protect our profit. Now if you look at to slide four. I am going to talk a bit now about what is -- what faces is more challenging market. Last time we met, I mentioned that, Amazon would be delivering its own parcels in the U.K. What that has meant? I don’t think it changes the rate of growth in the parcel markets. It’s still around 4% to 5%. But what it does is it changes the addressable market for all parcel players in the U.K. for the next couple of years or so, until it washes itself through. As a result of the capacity that Amazon has added to the market and other players as well have added new capacity to the U.K. market, just in time to see the number of parcels available for the industry come off a bit, that has put some pressure on average unit rates. We are maintaining our discipline in the market. You will see, as I mentioned, that our volumes are up 2%. We will come on to this in a minute. We have introduced a number of new initiatives that make sure that our offering remains a very strong offer in the parcels business. It requires innovation to keep a preeminent place and that is exactly what we have done. So what you will see is that, as a result of the increase in competition in the parcels market, we have brought on steam and accelerated a number of initiatives. We are targeting sectors of the online business that we had not been strong in. We are certainly making all of our services better. We have got local collecting place now for 20,000 small and medium size customers. We have changed the size of our small parcel. While I mentioned that we are maintaining discipline on price, there are areas where we can, be even a stronger value product offering in the market. We have done that. You saw that we reduced the price of the parcels between 1 and 2 kilograms and we have got a seasonal price promotion on for Christmas. We have got a better track return product in the market now. We are able now to hire the some of the technology improvements that we have had to make over the past two or three years. You will see that within a six-week period we have offered a range of Sunday services, so that delivery is more convenient. If you are not home, you can now pick your parcel at any one of the 100 busiest enquiry offices. Actually, Sunday delivery is already our third busiest day. We are delivering on a trial basis inside the M25 area. Our whole network now is open later on the weekend, so people can induct their parcels with us at later period of time and still have them delivered the next day. We’ve got a good partnership with post office, so we have got literally 10,000 click and collect opportunities, collect opportunities with the post office. So I think all of these initiatives certainly on the technology side. You go on to our website now. It’s a lot easier, if you were a parcel shipper to connect to Royal Mail today than it was even six months ago. And the opportunities that you have on our website used to be pretty clunky, it’s now pretty select. Used to take weeks to connect your shipping system, two hours now takes matter a days and if you are parcel shipper today. If you go on to our site in three easy clicks, you can get to the sent button. You can pay on our site with PayPal, if your account is with PayPal. You can pay on our site, if your account is with us, with the Royal Mail or with your eBay account. So we have accelerated all of these initiatives to make sure that we maintain our place as the preeminent player in the U.K. parcels business. I mentioned that we had to do work on the technology side. The technology backbone of Royal Mail needed upgrade as a result of two years of investment on the technology side. We are able to harvest that. You will heard, for example, that over the next few years we will be spending another £130 million to rollout the next-generation of PDAs for post men and women. We are going to have barcodes on more and more parcels, by this time next year about 80% of our parcel. And remember, that’s not a small fee. We are a big player. We have got a billion parcels. Some of our competitors are -- they have got about 100 million or 150 million parcels. So we will have about 80% of our parcels will have a barcode on them. We are making good strides on parcel automation. We have got a very good track returns offer now with eBay and I already mentioned the Click and Drop. So these -- all of these things taken together have helped us retain a very strong position -- the strongest position in U.K. market. So just look at the numbers. As I mentioned in the opening, looking at performance in the first half, Mathew is going to take you through the detail. But volumes are up by 2%. We are still experiencing account growth and we are winning new contracts. That’s helping to offset volumes loss to Amazon. As you know, even though Amazon’s are brilliant and a large online player, we were never dependent on Amazon traffic. Of course, I am happy to take Amazon traffic, but we were in a position that we were not dependent on Amazon traffic and we are moving into other sectors so that it will be less of an issue for us, their decision to develop their own delivery network in the U.K. Our international import parcel volumes were higher than we expected. Export is affected by the same factors that we see, some of the same factors that we see in the U.K. So as a result, revenue was down. But that’s really a change in mix. We have got more lower AUR parcels and not as many high AUR parcels, excuse me. GLS, as I mentioned, turned in a stronger performance than we expected. Revenues up 7% and margins at close to 7%. That is a -- they are ahead of plan in terms of the restructuring of France. They have managed the continuing cost pressure that we called out the last time we met in Germany pretty well and in Italy that is a very strong performer for the whole GLS network. GLS is focusing on improving both its B2C. But also as you know, the core business in GLS is B2B. But on the B2C side it has introduced FlexDelivery, which allows recipients to change delivery details in flight. That is being rolled out in other countries and so, we are very, very pleased with a better than plan expected from GLS -- performance from GLS. The letter side of the business, as I mentioned, came in better than we thought. And this again is -- it will, I think, the rate of decline at 3% is partially attributable to the economy. But it’s also attributable to things like the investments that we have made in the past couple of years in the letter business. You heard about the Mailmark innovation. This allows address business mailers to know where their envelopes, each and every envelope is, the minute it hits our system, that is delivering value for business mailers. We have also now got a really good partnership going with 70 leading U.K. charities and consumer organizations and businesses to help them understand the value of mail and that’s coming together very well. I think, it’s a real pleasure for me to see after a two years of investment, how we are doing on the marketing mail side. The market reach initiative now is showing gain and you will see that our marketing mail is up 5%. I think the story today that, I am really proud to put some emphasis on is the cost story. I mentioned that, the costs are flat compared to the half year last year. I have to congratulate our Chief Operating Officer. He has made very hard --he has always made very hard. He has made a particularly hard to spend any money at Royal Mail. And as a result, you will see 50% of our costs are people, 40% of our costs are non-people. Our non-people costs are down by 4%. And that has -- we have had a slight uptick in the people side of the business. But even there, Sue Whalley, our Chief Operating Officer has done a great job. The productivity performance is strong at 2.1%. That has partially offset the wage increase. So that productivity performance, if I read the news papers correctly, I mean, that puts us probably in the leading U.K. companies productivity not -- from what I read in the news paper is not doing that well for U.K. companies. We were really proud. Again, our -- all the people in our operations have worked very, very hard to make sure we handle the traffic with fewer and fewer hours and we have also handled the traffic very well. You will see that our delivery performance is some of the best delivery performance that we have turned in. So I think what you are seeing on cost side is a really good story, that cultural frugality that Matthew has brought to the business ever since he came to the business. He is now starting to bid in every where and that will continue. I think, as I mentioned, costs will be flat at the year end and I think, at least flat for next year. Number of actions have been taken on the costs side, I will just mention a few, because I think, its really important to understand that, we still believe that is very important for us, if you got pressure on the topline is very important to protect the profit picture by keeping a very tight rate on cost and that’s what we have done and that’s what we intend to do. And we believe that these opportunities will continue to be harvested going forward. Any company is going to have changes that they have to cope with. And I’m very proud of the amount of change that we have brought to Royal Mail but we haven’t comprised in any way our customers. And our customer’s perceptions of us keep getting better. You will see that our Net Promotion Score from our customer has gone up significantly compared to the half last year/ Our customer’s satisfaction scores always are also up. And as I mentioned, it’s a lot of things. It’s being innovative. It’s responding to what your customers need, that’s for sure. Making easy for your customer’s do business with you, that’s for sure. But at the end of the day, we are a delivery company and the high quality delivery and some of the best delivery numbers that we’ve had in a number of years that has also helped. And at the end of the day, if you do that, you will always do well in the terms of delivery in your overall strategy. So I would say, it’s -- the initiatives are now in place to protect our preeminent position in the parcels market. And we intend to bring forth more and more of them. As I said, the technology backbone has become more stable. We’re able to add more technology to the parcel’s business. We are promoting the value of letters to businesses and to people who want to market goods and services in U.K. I mentioned the last time we met that the Universal Services in Britain is a precious thing. And we still need regulatory reform to make sure that it is not cherry picked and the economics of the Universal Service are not deliberately undermined. So we’re continuing to advocate for that. The tight cost control is a very important feature of daily life at Royal Mail. Matt is going to talk more in detail about that. And I remember when I first stood up in front of you. Some of you asked, was GLS core to the business. GLS is core to the business. The performance of GLS, turning in that kind of a performance in a weak economy has given us the sort of diversification that we will always want to have. So at that, I’m going to turn things over to Matthew to take you through the numbers. Thanks very much.

Matthew Lester: Good morning everybody. So starting by running down the Group P&L, for the half year, we reported revenues of just over £4.5 billion on an operating profit before transformation cost of £279 million. And that means, we delivered margins of 6.2% on a reported basis. We’ve highlighted in the release the issues that we have to address in terms of underlying adjustments. And I’m going to cover those in detail on the next slide. But importantly, you can see the differences these make to the underlying margin whereby before transformation cost, the Group actually delivered a 20 basis point improvement in the period and after transformation cost that increased to a 70 basis point improvement, resulting in operating profit margin after transformation cost of 5.1%. Earnings per share excluding specific items are 16.3 pence. And we have declared our first interim dividend to 6.7p per share. That’s one-third of the annual dividend in accordance with our policy which we announced at the time of the IPO. So the underlying adjustments, all of these have previously been highlighted to you, some of them as much as a year ago. First of which is the bank credit where we adjust for the year-on-year difference between the exceptionally large credit we got last year and one we received this year, that adjustment is worth £30 million. The period-on-period difference in the non-cash IAS 19 pension cost is £34 million in the period and will be £70 million in the full year. Working day impact on profit was £20 million. And there is a small net FX adjustment of £3 million, meaning that the underlying operating profit for the comparable period was £266 million compared to the £279 million which we reported for this period, an improvement of £13 million. The next slide is really there for your reference as I’m going to talk about all of the remaining detail -- remaining issues in detail subsequently. So starting with the U.K. business, revenue of just over £3.7 billion. You can see that on an underlying basis, revenue and operating costs were both flat. We again have made irrelevant adjustments in the table on the right hand side of this slide to show how you reconcile the reported and underlying margins. But before transformation costs, margins again increased by 20 basis points to 5.9%. Transformation cost of £47 million in the period, slightly lower than they were this time last year. And importantly for the full year, we’re not expecting any major management reorganization to need to be accrued for and therefore there will not be that £100 million or so in the second half of this fiscal year compared to last. As a result, we see in the first half of the year, operating margin after transformation cost of 4.6%. So starting with the revenue drivers, Moya has covered the commercial issues behind this. So I’ll just touch on how they come through numerically. As Moya said parcel volumes are up 2% but there is a negative price and mix impact and that’s mainly mix i.e. selling more items, which are lower average unit revenue, which offsets this by about 3 percentage points producing overall 1% decline in UKPIL parcel revenues. Letters on the other hand produced 1% improvement in revenues. You can see that what we’ve got here is a strong economy and that often produces very good results in the marketing mail enhanced by our investment that Moya described. And we have the benefit of the elections also increasing the year-on-year revenues. In terms of costs, I’m going to go into the detail behind this on two subsequent slides. But the key thing message here is what Moya has really called out. That is that on underlying basis, they were flat in the period. And we expect them to be flat for the full year. And we are targeting even flat for the year after that as well. Starting with people costs, the two underlying movements are the productivity improvement of 2.1%. We’re particularly pleased with this given the -- actually the management who are charged with driving this improvement were actually going through their own reorganization in the first half. So to get back within the range of that, I think it’s particularly strong performance by Sue and the team. And then you have the other items that we’ve previously been highlighting. We have impacted the wage agreement that we agreed this time last year. And then on top of that, we are rebuilding our IT team. So we’ve now got almost 400 people in our IT department that we actually pay ourselves. They are not the outsource part of it. And we’ve been investing in parcelforce to deliver the volume growth that you’ve seen in this morning’s release. In terms of non-people cost, you can see here the element of the VAT credit difference that relates to non-people cost, which we strip out on an underlying basis. And I’m going to just cover couple of items here. In particular in distribution and conveyance, improved fleet management has delivered a very strong performance and that’s a greater year-on-year impact than even the reduction in the terminal dues of the export cost that we have incurred. We’ve actually reorganized the property management under one coordinating management team. And they have delivered significant improvements this year. We also benefit from lower cost in relation to post office. However, if you look at other cost, where we used to recognize the credit where we used to recharge them for those costs, obviously that is no longer there since we have now de-merged and the agreement between us has come to an end in terms of property management. But what you’ve got going on there as well is this culture we have introduced over that very much a four-year period of really being very tight on everything we spend. So we look forward to the contribution to your coffee at the end of this. Transformation costs, we’ve put the main drivers and movements on the right hand side of the slide. So I won’t go into detail there. But as I said earlier, they are lower than they were this time last year. However, but for the full year, I’m expecting that £120 million to £140 million that we have said is this going to be a consistent feature over our P&L. What we would say though is that the actual amount will very much depend upon when we announce or actually make any specific changes vis-à-vis the timing of our actual year end. Moving onto GLS. I think Moya has already summarized this very well. Good revenue, good profit, as a result, we can see the profit margin moving to 6.9%. First of all, in terms of revenues, you can see here the FX does have a material impact on the reported Sterling figures. However, when you look on a Euro basis, you can see that this is very much a volume driven performance and that has occurred in all of our major markets and across the rest of the portfolio as well. So very strong performance given the economic backdrop there. In terms of costs, it’s worthwhile just giving a bit of explanation on a couple of items. People costs up 8%, that’s driven predominantly about the fact that we do need to put some more people costs into our own operations when we have higher volumes. And the fact that GLS like Royal Mail is investing extensively in building its IT capability in order that they can have a preeminent position when it comes to technologically driven solutions for our customers. Distribution and conveyance costs, up 7%. Yes, that’s up in line with volume but recall we were calling out that there was continued pressure coming from the costs of the rates charged by German sub-contractors across the rest of the group that impact has been mitigated. So we’re very pleased with that performance. Key things to note though is that in Germany we do have the impact of minimum wage legislation which will come in at the beginning of the next calendar year, really have a material impact on the next year. We are unable yet though to give an assessment to precisely how the market will react to those changes. Moving to slightly more technical parts of the P&L, I am going to discuss a couple of items on this slide. First of all, the net finance costs down substantially to £14 million, that simply reflects the fact that we’re no longer paying the government rates of interest that we were prior to privatization. In terms of taxation, excluding specific items that is the tax rate, effective tax rate of 25% for this period, compared to 27% for the prior period. Those drivers that exactly what we called out this time last year namely changes to U.K. corporation rates and the impact of lower French tax losses, sorry, lower French losses on the taxable position for GLS. In terms of specific items, there’s nothing here that we have not previously highlighted. Within the business related cost is the provision in relation to the French competition investigation. And in terms of profit on disposal of property that does not yet include the benefits of the profits on disposing of Paddington, because that is yet to close, that will be reflected in the full year. Probably the most important slide for me, cash flow. First thing I’ll talk about is the trading working capital movement. As you can see, it’s almost exactly the same as the movement we saw in the same period last year. For the full year as a whole, I’m expecting the trading working capital to be flat i.e. that it would require an inflow in the second half of the year, but we expect, as I said, overall flat for the full year. I’m going to talk about investments on the next page and as usual, we’ve actually excluded the distorting items separately from the in-year trading cash flow. However, this year on a net basis, there actually about the same total amount as the prior period. So if you look at the free cash flow and adjust for the VAT credit and the management reorganization, you get free cash flow inline on a year-on-year basis. In terms of net investments, again we put some detail in the slide here. I think I call out a couple of things. First of all, you can see, as we said at the time of the IPO, we were going to be increasing our investment in non-transformation CapEx. In the period, I would highlight that we’ve invested substantially in GLS and in IT-related projects. We will expect to see a further cash outflow in relation to the management reorganization program of about £60 million in the second half of this fiscal year. But cumulatively, I still believe that we will spend around about £1.2 billion in terms of the total investment over the last fiscal year and the current fiscal year. And going forward, I’m anticipating spending between £550 million and £600 million on the items covered on this page annually, of which between £250 million and £300 million is in the form of maintenance or replacements CapEx. In terms of net debt, not real lot to say. The free cash flow pretty much offsets the dividend. We have refinanced number of the term loans or we passed the term loans through the issuance of €500 million, 10-year of Eurobonds. In terms of pension on an accounting basis, you can see that the surplus has increased to £2.1 billion. Probably more importantly on an actuarial basis, the surplus has increased to £1.6 billion and this has been driven by the asset performance that you can see in this chart. But it’s important to note that actually a lot of this asset performance is in the timing in nature and we still expect to see that this surplus on an actuarial basis will actually be eliminated by March 2018, the time at which we have given our commitment to keep the defined benefit plan open to accrual. Lastly, from me a word on property, as I’ve indicated, we continue to expect to receive the proceeds of selling Paddington in the second half of this year, just over £100 million. As you are aware, Nine Elms is currently being marketed. And in terms of Mount Pleasant, we’re very pleased to see that the Mayor supported our position and we are in the final stages of agreeing the financial contributions that we make to local authorities. The next step is to complete the design work and separate the operation from the redevelopment scheme. Thank you very much.

Moya Greene: Now just few words on the outlook, our performance for the full year will be inline with our expectations. Despite a challenging market and more challenging market on the parcel side, we’re pulling out all the stocks to make sure that we stay the number one player. Very importantly, we will continue to hold the reins on cost very tightly, so that we will deliver flat underlying costs for the U.K. business at the year end and we expect to be at least there as well in ’15, ’16. We’re really like many retailers in one respect. Christmas is a really important season for us. I can tell you that we are ready to deliver again another great Christmas, just as we did last year. We start planning for Christmas early and that always pays off. But performance depends on how people spend over the Christmas season. So I’m going to stop there now and we can get to your questions.

A - Matthew Lester: We will -- perhaps we will do the usual, mic and people could say name and company before ask, that would be helpful to know where you live.

Moya Greene: Okay. Where do we go first, Matthew…

Matthew O'Keeffe: Can you hear me? Is that working?

Matthew Lester: Please go to microphone. Great. Right at the back. Hello?

Matthew O'Keeffe: Can you read me?

Matthew Lester: I can you hear you.

Moya Greene: I can hear, but we can’t see you.

Matthew Lester: We can’t see you.

Matthew O'Keeffe: It's Matthew O'Keeffe from Berenberg. Just three questions from me please. I mean, back in May, you alarm some of us with your talk of competitive headwinds in a £200 million whole in topline, which I think, if I remember was based upon your assessment of the published plans as made clear by your main competitor here? I mean, since then, obviously, Whistl's frozen investment in the U.K. So my first question is how you see that whole now, is it smaller, is it more distance, you still as worried about as you were? Two other questions, I wonder just with respect to the working capital movement such a way you see net debt at the end of the year? And then, just finally, on the property question, I noticed one of your options for Nine Elms is developments in partnership with someone else? My question here it is, you don’t think that you have enough challenges ahead of the group without trying your luck as a property developer as well? That’s it for me, just those three.

Moya Greene: Well, I’ll deal with the direct delivery issue and I’m going to ask Matthew to deal with the working capital, net debt and the property issue. In answer to your question, I will invite you to draw distinction between what is here now and what will happen. I’m just as worried. I mean, whether it happens in 2017 or it happens in 2019. What I can tell you is, if you undermine the economics of this precious universal service and this kind of cherry picking in a world where there is structural decline in the revenue pool that is available to pay for the universal service, a cherry service in the U.K. If you allow somebody to just extract from that revenue pool, it so steepens and deepens the decline and what is available to pay for the universal service that, it is the kind of problem actually that just does not age very well and it is the kind of problem where you have to get ahead of the curve and you have to layout the ground rules. This is very unfair competition to allow party to do that to cherry pick the profitable, easy to serve areas of the country and to dump into our network in a supervised pricing environment, which is the legacy of the regulatory approaches of the path, dump into our network what they don't want to deliver and what is very high cost to deliver. So I'm just as worried and we have as a result, continued to garner support for our position. It’s not a difficult position to understand. And I do believe that Ofcom should start looking at this as soon as possible, because it will be complex to come up with a solution for it. On the working capital, net debt and property.

Matthew Lester: I just think one thing Moya, I mean, when Moya and I talk about this and where we game it. If you were in Whistl's position, ask yourself, you’ve just made that proposition to Ofcom' that this is a next substantial issue for you. Do you go and roll out tactically? I think there’s a lot to be thinking go through in that way, how you actually play this for the long-term. In terms of working capital and net debt position, I think where -- what we are saying here is overall we would expect to see reduction in net debt, the absolute amount will depend upon the time, it would very materially effected actually by the property disposals and what we chose to go and do. So as I said, I don’t actually have a particular target that we share here. You can work it through in terms of whatever you projected for our numbers this year and the guidance we’ve given in terms of reinvestment. In terms of that question you had here in terms of Nine Elms. I think we’ve given enough numbers. In terms of Nine Elms, yeah, the proposition here is a very simple one. We are not about to go and establish our own buildings unit and suddenly you have Royal Mail construction established here, but there is, you’re seeing people like National Grid for instance announced it recently. There is a piece here where our shareholders are telling us, please don’t just give the great property development profits to somebody else. We would like to participate in those if it’s the right thing to do, but it’s far too early for us to call back. If we get some fantastic offers where the risk return participating in those profit is not the right thing to do then Moya and I will happily accept a very large check, thank you very much. But what we’re saying here is we have seen probably and certainly, if you go wind back clock a year. There was a lot of question, were we doing the right thing, just selling these assets. It appears that there was a good amount of profit to be made from that as well. But we will only find out when we get the bids in

Moya Greene: One here behind this gentlemen as well.

Matija Gergolet: Matija Gergolet from Goldman Sachs in London. Three questions. One on cost efficiency and one more on real estate. Firstly on the -- should I start with efficiency, can you give us an update of what is your current level of automation and parcels? You mentioned that you want to get to 80%, what’s the current level, what kind of cost savings should be expected from that increase in the automation? Secondly on the cost, more on the numbers, can you help me understand why do you say you have a flat cost structure when actually I see is more like a 2% growth in the U.K. field, if I just look at the numbers but you call it flat?

Moya Greene: We will go the underlying, Matthew.

Matija Gergolet: And just more on real estate. We keep seeing that now every quarter or every six months you report £20 million, £30 millions of other smaller real estate disposals. So if you start summing them up, they actually start becoming quite material. Now how many more say semesters should we expect to have some nice over 20 million, 30 million items from real estate? Thank you.

Moya Greene: Let me start with the parcel automation question and Matthew will take you through really, I think strong performance on costs and where we are going on disposals. We’ve seen a lot of people waste a lot of capital, parcel automation poorly planned. So we’ve taken a decision that we are going to learn from everybody’s mistakes and we are going to go at parcel automation the way we go at everything in a pretty deliberate way. But we started. We’ve got an our fee in the market now for equipment and we are trailing the equipment and we have a good plan put together now that will see us automate the sortation of parcels and particularly in the larger sites. And in terms of modeling that is all -- the cost of that is all in our capital planning budgets going forward. How much cost will it take out? Well, it remains to be seen in terms of the numbers of people, obviously will have a positive impact. We have not quantified yet. We want to see what we are going to do, how we are going to do it and how fast we are going to bring it on stream. But there will be savings attributable to moving from a manual sortation process to an automated one. In terms of barcoding and being able to track more and more parcels to our system, as I mentioned, we’ve made a lot of investment over the past three years in the legacy backbone of the technology estate in Royal Mail, which I think is fair to say had suffered from chronic underinvestment. So we’ve now stabilized that and we are able to now start adding on to it, the sorts of services that our customers want. Our customers want to be able to connect with us easier. I think that part has come on very strongly in the half year. They also want to be able to track more and more of our product and we have a very big parcel estate and a lot of parcel product that needs to be tracked, much-much more, much bigger scale than anybody else in the U.K. market. We will have barcodes on 80% of our parcels by this time next year. We have doubled the ability to track our parcels through a system in the past year and we will continue to do that and offer more and more services more dynamic information flow to the end recipient, for example we will start to be able to do. So all of that I think is very beneficial to our customers and helps us retain our preeminent position. There is a cost upside to parcel automation that we haven’t quantified yet but it is real.

Matthew Lester: In terms of -- I’m glad to say you’ve got the same question as my Audit Committee had. So if you go to slide 18, you can see that there are two adjustments that are relevant to costs. That is the VAT credit, which was a benefit to last year’s costs which we did not get this year and the same extent and as the year-on-year IAS pension charge difference. Those two add up to £64 million. If you add the £64 million pounds to the operating costs of £3,417 billion, you get to £3,481 billion and you compare to operating costs of £3,484 billion. I admit that is a £3 million adjustment on £3 billion. And if you’ve got anymore on that, Mike is front of you. He says you can whatever. In terms of the small disposals, this is what we said of the full year. We were going to differentiate between the -- sort of what we’d describe as developmental opportunities and the ones which are actually part of business as usual where we said and Catherine has been openly talking about this. What’s going on there is that we will see those properties and we will reinvest the proceeds of that back into the business, either because we’ve actually got to reprovide within the same locations, which literally just moving office if you were or alternatively if we are able to do any consolidation, it won’t be a large amount of this. There is a big program and you’ve seen it. It’s actually in the deck here. We are just upgrading the experience to both our staff have in terms of what they get to work in, let’s be honest. It’s not great in many places, we having to upgrade that. But as important, probably more importantly, the experience when you guys go to pick up a parcel from delivery office that needs enhancing the 45 delivery offices I think are still under renovation just in this period.

Moya Greene: There is a question behind. Goldman Sachs. Go ahead.

Damian Brewer: Thank you. Damian Brewer from Royal Bank of Canada. Three questions especially today. First of all on costs, flat as in real terms of decline, as you look beyond the ’15, ‘16, is what happens after that dependent on parcel to make sure is that more in terms of efficiency on the other parts of the cost base still to go for in the business as you begin to pick through the still existing legacy issues? Secondly in the very short-term, some of your parcel competitors are looking increasingly financially work lead. If one of them doesn’t make it through Christmas, how much contingency do you have in system to pick that up, or will you simply look at doing what you’ve got already and pricing up on that? And then very finally, looking into next year, you obviously got two less working days, a little bit more charge on the pension, as you thought about the dividend policy for the interim this year, how do you think of dividend potentially approaching next year and how do you handle that? Thank you.

Moya Greene: I’m going to ask Matthew to handle the working days issue and the dividend issue. Let me -- I'm going to deal with the parcel capacity issue at Christmas first. We start planning for Christmas earlier and earlier and this year we started planning for Christmas in April. It’s a very important time for us. We delivered an absolutely outstanding Christmas last year and some of our competitors weren’t as fortunate. I attribute that outstanding performance to really good planning and early planning for Christmas and we’ve done the same this year. So we are prepared to deliver another great Christmas. Because we plan and we prepare in advance, we try to take a fix on how much traffic we are going to have to deal with. So we do that in a number of ways, obviously very tight connections to our customers but also very careful view of what’s going on in the market. And we say to our customers, look, don’t just come to us in the month of December and expect us to deal with your capacity issues is better that we plan. But obviously we have some capacity like everybody else and we plan for that. So, I’m thinking in terms of all the work that we have done to try to assess how much volume is going to be there and the lead time planning that we’ve done we are good. We’ve got -- if a little bit extra comes our way, we can always handle but our people at Christmas time pull out all the stuffs. Yes, it is true that this business sometimes goes through periods like this one where there is a bit of a -- what I call indiscipline in the market. People have brought on capacity in advance of need. There has been a change in the addressable market for everyone because of what Amazon is done and so there were a few appraisals for everybody to buy for in the U.K. And that is going to put pressure on average unit rates. When you have capacity basically is more overall than the market needs at a period. So it just takes and I’ve seen this before. I have been in the business a long time. It takes a couple of years for that to wash itself through. In terms of the financial position of some of the players in the market, it’s amazing though how long they can lose money. I have been in the -- I've been on this for five years now. Some of these players have been losing money for the whole period of time I have been in the U.K. And for various reasons, either because they’ve got big banks behind them or big investors behind them, they continue to lose money. Whether or not that’s going to somehow consolidate immediately after Christmas I don’t know. I have been predicting in my own head consolidation in the parcels market for five years, so haven’t see any?

Matthew Lester: I was just saying. We’ve got a new movable capacity. I think you asked about sort of cost beyond ’15, ’16, I don’t think we’ve got much to add to what we had in the prospectus. We have set long-term structural targets here, which is very much around delivering this year-on-year productivity improvement which is at the core of the way we work with our union. There is not something out there that we suddenly see. Here is a major shift and indeed. When we talk about the parcel thing, again, consistent with what we said, that is the way for us creating opportunity which we will harvest over time and that’s what when Moya was saying. As we invest carefully, we were building opportunity, we will then harvest that as it come through and obviously we do have, both the parcels called out two things that are big there. One, the next renegotiation of the unions’ rates and things like that that is to come and as you rightly say, there is the parcel investment that we will be making. In terms of working days, I think year-on-year it’s one less or two less next year. Two less in ’15, ’16, so, yes less working days which is not good, and in terms of dividend, nothing really more to say other than which we’ve said previously. We are absolutely genuine when we come back to this point about the regulatory impact of this business. It is very, very significant. Until such time, we’ve got greater clarity on what that actually means. It’s not right for us to update the capital return policy for the business.

Moya Greene: There is a question here and then there is one, two rows back and then the gentleman in the blue sweater next again. There -- yes.

Matthew Lester: We just can’t recognize face.

Moya Greene: We can’t see because of the lights.

Matthew Lester: We can’t see because of the lights.

Chris Combe-JPMorgan: Chris Combe from JPMorgan. Also, three questions. Just to pick up on the regulatory front, do you expect an explicit reply from Ofcom in response to the document you submitted back in June? That’s the first one. With respect to the Amazon guidance you provided today, the impacts on the market, what do you expect in terms of your own wallet, a share of wallet with Amazon, which I believe is about £200 million of revenue? And lastly, given all the non-cash movements impacting EBIT, could we see it move towards the cash EBIT basis, that’s been adopted by one of your peers? Thanks.

Moya Greene: Okay. I am going to ask Matthew to deal with the EBIT question. I do expect a reply from Ofcom. We put a huge amount of work into our submission. We had the benefit of a great contribution from highly credible professional, account metricians and lawyers in the preparation of that document. And we have worked with people, who have worked on the regulatory side for a long time in the preparation of that document. So we think that it is, we put together a compelling and reasoned set of arguments to accelerate the review, which they have to do anyway. They have to start it by the end of 2015. Now, and also, as you know, TNT has complained about our zonal access pricing that we tried to introduce. And we thought we were acting completely in line with. And we still continue to believe that those prices are completely in line with the guidance that we were given in 2012. So that needs to get resolved one way or the other and the sooner the better on that as well. And Ofcom has announced itself that it wants to do a review of access pricing. And again, that we’re ready and willing to participate in all of that. And that eventually has to give clarity as to what we can do. There is no question that there is a piece of regulatory legacy if I can put it that way. That cease the Royal Mail in a completely different light from how the Royal Mail is today. The Royal Mail 10 years ago probably could have been considered dominance in the letters market. It’s a really open question, whether any of those definitions are sensible in a world, where the new duty is to secure this precious thing called the universal service. So yes, we do expect answers on all of that, all of those fronts and the sooner the better. I cannot tell you when we will get them. There are highly professional group of people in Ofcom. We’ve had lots of discussions with them. Because they are professional, they are very deliberate about everything they do, which is good. But I think like many regulators, the deliberation in the legal process that they must follow sometimes means that they can’t be as fast as you were and I would like them to be. On the Amazon Wallet, we don’t give out numbers of how much one customer actually has with us at any given time, but I can say -- tell you that it is certainly less than 6% of our revenues. And we are not dependent on Amazon. I have huge regard for Amazon. They’re brilliant company. And obviously, I am very happy to deliver their traffic for them if they want me to, but I think they have made a decision in another direction that they have chosen to deliver their own traffic. So we are not dependent. We are putting in place all of the necessary things to make our offer even more compelling than it is today. Technology supports more convenience, more partnerships, new ways for customers -- parcel customers to connect with us. All of that is what at the end of the day is going to make sure that we may retain our place.

Matthew Lester: In terms of cash EBIT number, yes, I mean, effectively that’s what we will get to. What we will do is that we will make the adjustment that you can see in the cash flow statement between the difference the cash cost of the pension and the IAS cost of the pension and we will disclose that impact on our key profit and earnings numbers.

Moya Greene: The gentleman in the blue sweater has been asked how to stand up for sometime.

Andrew Hollingworth: Thank you. Andrew Hollingworth from Holland Advisors. Just following up on two points most relevant. On the Amazon expansion, could you just give us your understanding of what their sort of -- or guess what their long-term plans might be in terms what they are planning to deliver some traffic, all of their traffic, other people’s traffic, because obviously they have got different business models in other areas, they have expanded an outside of issue faces? And then in terms of the Ofcom discussion, I understand that off-season going, but one thing that of course comes out of this, as you got a limited power of appeal or limited power of pushback if you don’t like, what else come out ultimately come up with and how your thoughts evolving on that and can that situation change in terms of power of [PLO] [ph] respect with USA?

Moya Greene: Okay. Let me deal with the last question first, then I will go back to Amazon. I am not even thinking about appeals at this front -- at this point. I think we made a very compelling argument to our regulator. Our regulator, as I mentioned, is very professional. Its primary duty is quite different today than the regulator’s duty even four or five years ago. The primary duty of the regulator is not competition in the UK. The primary duty of the regulator is to secure a financially-viable universal service and a universal service everywhere and certainly here in the U.K., where it’s a really high quality universal service. It is a precious thing, because everywhere the profit pool that is available to support the universal service is under pressure because of the structural decline that I mentioned earlier. So if you steepen the rate of that decline by allowing this kind of arbitrage as universal service, you are going to not secure the financial viability. So I am not thinking about appeal. I am thinking about giving Ofcom the space and the arguments that I think are sufficiently compelling to allow them to come forward with the framework that will be beneficial for all participants in the market. With respect to Amazon and its plans, I am a great admirer of Amazon. I just finished reading that wonderful Brad Stone book, The Everything Store. And one thing that comes through -- this is the history of Amazon, the one thing that comes through with that book is that, this is a company which is brilliant in many, many respects and it is constantly changing its strategy. So I am not privy to those strategic decisions. For me and the Royal Mail and all of our team at the Royal Mail, I have always said to our team do not count on any customer, including Amazon, being your customer forever. You have to make sure that you have an offer that is compelling, that is price right with the product suite, that has got the right service dimensions to it, very, very high quality delivery, and go after with the vengeance, all the traffic that is out there and that’s what we are doing. And we think if you look at this business every where in the developed world at least, if you look at this business it goes through periods like this when you have to wash through the capacity configuration of the industry. And I think that’s what we are going to have to do as far as I can see which is only out about a couple of years. And whether they will start to deliver for other people, I don’t know. But I would say to you and everybody, including Amazon, Royal Mail is a very, very high quality delivery company.

Matthew Lester: Dominic has been waiting for.

Dominic Edridge-UBS: Hello, it’s Dominic Edridge from UBS. Just let me stick with two questions. First, just in terms of the possible product, could you just maybe talk about what sort of -- what solution you would be -- or what products you would be offering to your customers in 12 months’ time that you don’t today? In other words, as a customer, what am I actually going to see? And secondly, could you just say how that compares to maybe some of your big competitors in the market, i.e., now suppose my concern is I would look at you and say you are catching up to maybe where your competitors are today, is there a chance you can actually sort of jump ahead and add some more bells and whistles on more products over time to get ahead of the curve? And then in light with that, obviously you gave an update on your view of what the market growth is going to be in past, so the 1% to 2%. Obviously that stay different maybe from what the expectations have been in the past. I know that in the past the suggestion is maybe you are looking to grow underlying margins by 1 percentage points a year, this year is 0.5 percentage points. Does that mean that the 1 percentage point because of the lower growth rates in parcel isn’t going to be achievable against the median at least the next couple of years? Thanks so much.

Moya Greene: First, you do the margin and I will talk about bells and whistles without compromising our competitive position in the market. So on the bells and whistles, you have seen our commercial team and we have the leading members of our commercial team here, Mike Newnham and Nick Landon, and actually on the letter side, Stephen Agar. You have seen them in the past year at a lot of bells and whistles to our offer. We were one of the first to offer the Sunday services. The shipping tool already is probably one of the best shipping tools. In fact, some of the biggest parcel companies themselves are saying, oh, wow, we didn’t expect it to get that good that fast and they have difficulty adapting their own shipping systems. So we are getting better and better. When we get the next-generation of handheld, the PDAs out there, that’s they are going to have a lot more functionality than they do today. We have added a lot of track and trace. For us to add a track and trace to sort of 40% of our business, that’s two times our competitors in terms of scale. So for us to say that we’re going to have a barcode on 80% of our parcels by this time next year, that is a big step-up in terms of your ability now to not just to understand where every single item is in your system, but to have a lot more information about the item two is to where it can go. So dynamic delivery, things like that, special delivery in hands, you will see for example in the next year. And I think I will just stop there, because we really like surprising and delighting the market. And I think when we got the Sunday service, this is a real credit to our unions and to our operating colleagues, Sue Whalley and Stuart Simpson are here with us today, real credit to them. They got those Sunday services up and running in the operation from the time that we conceived of them till the time that we actually put them in the market in six weeks. We have done Click and Drop from the time that we designed it, we designed it, tested it, launched it in 10 weeks. So that tells you that the technology backbone that really, really was a big drag on our business because it had, it waited us because of chronic underinvestment. We still got our ways to go, but as Matthew said, we got a great team now. We had no team four years ago. And we’ve got a great team. We got a new set of technology partners. And so we are able to do a lot more today than we could even have thought about three years ago.

Matthew Lester: I think in terms of the margin progression. I think it is, I am afraid somewhat grainier. If the topline is not growing as fast, as it was before the ability to expand margins as rapidly as we previously that people may have projected is clearly going to be not as easy. So, I think in the short-term you are right, David, we continue to project the margin improvement of the order that you were taking about for this fiscal year. But I think after that, it is definitely going to be the case, it will take us longer to get to the margins that we had indicated that we were targeting, which was competitive margins then people had thought we might. I think we were taking this time last year that we will very much on the close end of the three to five year timeframe that we gave. We would say, yeah, this reinforces our view that five years is more likely.

Moya Greene: We got two in the second row and a gentlemen down there. He’s had his hand up for quite a while. So, first, we’ll start there.

Hugo Turner: Okay. I’ve got the mike. It’s Hugo Turner from Credit Suisse. I’ve got four questions. The first is, I think there have been some quite senior changes at Ofcom. I think Ed Richards is stepping down at the end of the year and there is another senior move that’s leaving. It’s not going to influence the decision-making process and potentially a delay in your view, or is that really quite insignificant? That’s the first question. The second question goes back to parcels automation. If you did accelerate that process, I think the question is would you be able to take out headcount under the current labor agreement with the Communications Workers Union? And if you could just remind us, when that ends will be useful as well? The third question is could you give a bit more detail around the £25 million in incremental cost savings that coming through in the second half? I think that comes from the management reorganization, just a bit more detail will be useful? And then the last one really goes on the surplus property portfolio. So the cash that you get from those disposals over the medium-term is the plan to return it to shareholders, or is it going to be cash that’s going to be reinvested in further transformation costs in the future to try and drive the underlying EBIT growth?

Moya Greene: I’m going to leave the property question to Matthew. Let me just say -- senior changes at Ofcom, I don’t know. I mean, Ofcom has a lot of bench strength. It’s a really highly professional organization. But there is no question that we have really, really enjoyed our relationship with Ed Richards. He is a first-class professional. He is a very practical man as well as being technically very strong. So my sense is I don’t know and I do want to call out that they got a lot of strength over there. But he is a really key person, there is no doubt about it and this is a big issue for Ofcom. And so I expect if it were me, if I were the Chairman over there I would want to give the new CEO an opportunity to get his or her arms around it. But I don’t know that. On parcels automation, we think we are going at it the right way. We’ve got a good plan and we think we are going at it at the right pace. And I really try to be very, very collaborative with our union. Our people put their heart and their soul into building this company and delivering for it day-to-day, and so the labor agreement is not going to be an agreement that in anyway impedes us or deters us from going forward. In fact, I think the labor agreement, as it has engendered a much higher degree of collaboration with our unions is a facilitator of these sorts of change. Our operating colleagues are now in discussions with our trade union on everything we are doing. And I can tell you that at the top of the CWU, the national executive level of the CWU and probably all throughout the CWU. There is a real understanding of this business and a need for change. So, I don’t think the labor agreement in terms of when it expires, it expires at the end of 2015. It’s a three-year agreement. I don’t think it’s the labor agreement that’s going to impede us. I think we’ve got a good process going now for discussions with our union and I just want to elaborate and expand on those.

Matthew Lester: In terms of the £25 million that comes from the management reorganization program, which we announced in March and what we’ve called out in this period is that we expect for the next fiscal year to actually achieve annualized savings of ₤70 million. And we are expecting to achieve £25 million at least in the second half of the current fiscal year. So that’s the management reorganization that’s driving that. In terms of surplus property, it is again, as I said before, the capital returns policy is something, which is depended upon the regulatory environment. So anything I say regarding this has to be couched in the context of, we are genuinely waiting for that. As we said before, we think that there is a roundabout need to invest £550 million to £600 million into the organization in any year in order to affect the sort of changes that Moya has been talking about. Just throwing more cash at it actually doesn’t help, why, because there is only a certain amount of change that any organization in a particular state can absorb. And we think the £550 million to £600 million is around, is what you can actually get out in terms of a sensible investment and expecting a sensible return.

Moya Greene: The gentlemen here in the….

Matthew Lester: The person in the front.

Moya Greene: Yes.

Dave Kerstens: Good morning. Dave Kerstens from Jefferies. I have two questions. One on letters and one on pensions. Regarding your letter volume, the 3% underlying decline, can you quantify what the impact has been from competition on this number? I understand in some areas that some of your managers have said they lost 10% of their mailbag due to competition, is that effect also feasible on your overall number? And secondly related to this, what do you expect the impact on your volume in letters will be from your customer campaign? And then would that keep you at the better end of your 4%to 6% guidance range next year? And then secondly on pensions, I think you were guiding for a slightly lower pension operating cost for this year of £70 million while rates have further decreased. How does this affect exactly work, and do you have any guidance already which you can use for next year? Thanks very much.

Moya Greene: On letters in the areas where TNT-Whistl is delivering in those postcode areas but yes, we do see already an impact on the mailbag. They can get to 14% market share in some of those post codes in four to six months period. So we have seen that. I don’t know, if we have disclosed the number and so I’m going to leave it, if we have disclosed it, Catherine will tell you of what the impact has been this year. I just don’t want to trip up. I don’t think, we have. I do the number but I don’t think that we have disclosed it. In terms of our guidance, we’re sticking with 4% to 6% range, we think that’s a safe range from all of the variables that go into letters. There are whole lots of things, the underlying economy, whether there are elections, how big the marketing spend is, what share of the marketing, overall marketing spend in the U.K. do we garner in the mail medium. So there are lot of things that go into it, and of course, direct delivery. So I think that it would be imprudent of me to be anymore precise for you in what I think the letter’s volumes is going to be next year. So if it is on the fourth side, we’re good, if it is on the sixth side, we’re not so good.

Matthew Lester:

. : So what will happen is that then next year, you reset the rate again, and as we called out the impact, if nothing was to change on the non-cash IAS charge would be a further increase of almost £45 million, which is why to one of your colleagues question’s earlier, we feel it necessary to start moving towards the cash base recording because the delta is just getting too big for us to just continue to explain we need to put that in numerical. Last two, shouldn’t we?

Moya Greene : Yeah

Doug Hayes: Good morning. Doug Hayes from Morgan Stanley. Three questions please. First, just going back on the guidance for the full year, did I understand you correctly that you still think you can achieve 50 basis point increase that you had originally mentioned at the full year results?

Moya Greene: Last month. Yes

Matthew Lester: Yes.

Doug Hayes: Okay. Thank you. Secondly, on the cash flow side of things, you mentioned that the trade working capital was flat year-over-year in the first half. But if you look at some of the other working capital movements, those were actually down year-over-year or cash out flow. Can you give us some more insight into that and how you expect that to develop for the rest of the year?

Matthew Lester: In terms, these are the ones that we take to strip out from the non-in-year element, is that the one you’re referring to?

Doug Hayes: Yes. You have the trade working cap and the other working cap on your slides.

Matthew Lester: Basically, the only thing I would call out is already -- we've already put that there is that we will have in the second half of the year compared -- sorry, if we look at the year as a whole, compared to the previous year as whole, the big thing that will be in there that I can call out now is that you have the impact that we will actually pay our managers two days after the period end. And that again has £45 million year-on-year benefits. Apart from that, a lot depends upon things like whether or not we do a stat price increase and things like that, which we’ve not made any decision on yet.

Doug Hayes: Thank you. And finally just on the revenue mix in parcels, you mention that the negative mix was due to selling lower price goods rather than our price or something like that. Is this because customers are actively trading down into these lower price goods or is Royal Mail actively trying to sell some of the lower price goods?

Matthew Lester: The best example, I can give off this is if you look within the international portfolio, actually we -- we’ve sold and we’ve increased our revenue year-on-year within international. However, that has resulted from a significant increase in the amount of imports that we actually distribute in this country. The AURs of those imports are roughly a third of the exports. And so that’s the sort of switch we’re getting. So it’s so much people trading down. It’s actually different economic activity occurring which then is reflecting a different mix of what we actually sell.

Doug Hayes: Thank you.

Matthew Lester: One last one.

Joel Spungin: Excuse me. Good morning. It’s Joel Spungin from Merrill Lynch. Just a couple of questions. First, I will just start with the general election coming up in the U.K. next year. Based on your sort of previous experience, you have a sense of what the impact on volumes from general election is. Obviously, we saw an election this year but the general election is obviously a much bigger event? That’s my first question. And second, I’ll just come back on Amazon. Given what are you saying about Amazon's plans and what it’s going to do to the B2C market? Given we’ve seen significant capacity added in the B2C space in the last couple of years. Is it a fair assumption, the pricing is going to remain on the significant pressure for the next two years, your shares are trading down 9%. So the market clearly thinks it does, so anything you can say that is obviously helpful? And my final question is just because there were some stuff in the press around the plants hiring for temporary work has entered into the Christmas period. And I think I saw a remark somewhere that the number of people you’re hiring this year is less than it had been in previous years. I’m just curious to understand why that might be?

Moya Greene: Well. Let’s talk about, I’m not going to say too much on elections because we always -- we do know pretty -- quite specifically what it means. And I don’t think it is material difference. Amazon's capacity, adding that kind of capacity and when you look at the other players in the market, capacity has been added by others as well, not just added Amazon. When you add that kind of capacity to the market that is usually the case that it increases pressure on price. I mean, I think that’s clear. Then £19,000, that we have taken is just slightly lower than what we took on last year. And I think that, we just learned -- we learn every year how to get ready for Christmas. And we just learnt that we probably didn’t need as many as we had taken on last year. And so by planning earlier and by really trying to anticipate the fall to earth of the traffic more precisely, we feel that we can be more effective at that number.

Matthew Lester: It’s a smooth, if in time.

Moya Greene : It’s not like that.

Matthew Lester: You’re not talking the big numbers here, to be honest?

Moya Greene: In terms of your model.

A - Matthew Lester: Great. Thank you very much indeed. And we look forward to seeing you next time. If you have got a couple, any one else got anymore near detailed questions, we will be hanging around for five minutes or so afterwards.