Earnings Transcript for ROYMF - Q4 Fiscal Year 2016

Executives: Moya Greene - CEO Matthew Lester - CFO

Analysts: Dominic Edridge - UBS Damian Brewer - RBC David Kerstens - Jefferies Edward Stanford - HSBC Andy Schiff - Deutsche Bank

Operator: Ladies and gentlemen, 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 want 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: Okay. Good morning, ladies and gentlemen. Thank you for joining us today. As usual, I'll take you through our progress against our strategic priorities this year, and Matthew will take you through the numbers. And then we'll have a few questions at the end. I think the results are pretty darn good. All businesses are finding this a more challenging period, but on balance, Royal Mail has come through well. These results show we can and do respond, taking action on costs in the face of top line pressures in the U.K. and investing more efficiently while making progress on all of our strategic imperatives. Overall, we have shown a resilient financial performance. Group revenue was up 1%, continued great performance in GLS, offsetting the impact of letters decline in UKPIL. Our focus on cash means we have delivered very good cash generation at £ 420 million, and that is key to supporting our progressive dividend policy. Over the last three years, we have been working to create platforms that will support future growth and help create a business that is strong and has sustainable cash flow characteristics. In the U.K., we now have the capacity to offer retail account parcel customers a fully tracked service. Three years ago, you will remember, our systems just didn't have the capacity to cope with this. More than 8 billion items have now been sent with the Mailmark. And in revenue protection alone, this investment has paid for itself in just about three years. GLS is an excellent business, with a 25-year track record of growing successfully, and we now want to leverage GLS further, and I'm going to say more about that later. We have delivered three years of underlying cost reduction in UKPIL, and we have further to go. Our continued strategic focus on cost is critical for this. We now, finally, have the technology backbone to offer faster, data-rich services to our customers. We couldn't have done any of this without a much better relationship, a more collaborative relationship that we have forged with our people. On employee engagement now, even this year, when we have some critical negotiations underway, we are on par with any large organization in the U.K. It certainly wasn't like that a few short years ago. Looking at our strategic priorities in turn. First, winning in parcels. The U.K. parcel market continues to evolve, but we are still the market leader, with 53% of the total volume and 41% of the revenue. The trends are basically a continuation of what we have already seen. There are arguably still too many players in the U.K., but so long as people think there is money to be made, they will continue to invest, and so it's not getting any easier. We noticed that Amazon's focus may be expanding in terms of geography well beyond the U.K. As a result, we estimate that the addressable U.K. market is growing at around 3%. That said, customer expectations are getting higher. They want more convenience, more choice, good price and very high quality. Cyber Week or Weeks is a phenomenon that is here to stay. Christmas starts earlier and goes on longer. Players in the industry are upping their game. So last Christmas, no one had major issues as far as I can recall. And now we are seeing the impact of a weaker sterling that is creating opportunities for exporters, but it's slowing imports. For us, we need a system change to be able to increase our tracking capacity, and that has been an abiding objective. We have, I think, broken the back of that. We still have some work to do, but certainly a lot has been accomplished. And as a result, now, our tracked volumes are growing faster than the market. This huge technology rebuild over the last five years has been a key enabler for the repositioning of what was already a very good parcels business. It is making us a better, safer and more cost-effective operation. Without bar-coding, we wouldn't be able to compete in the account parcel space. It's kind of table stakes now in the industry, that and being more flexible in the network, doing things like accepting shipments, consignments much later in the evening. We've done that, and there's still more we can do. Marketplaces generate a significant proportion of retail parcels in the U.K. We've improved our presence in this space by making it easier for retail customers to connect with our systems. Delivery confirmation for the majority of barcoded parcels is now available, and we are piloting estimated delivery times and other features that have also been enabled by our improved IT backbone. Our new PDAs, which are effectively smartphones-made [indiscernible], have given our people more convenience in doing their jobs and also improved convenience for our customers. By leveraging technology and making these operational improvements, we have maintained our preeminent position in the competitive U.K. parcels market. In the international business, a weaker pound has impacted trade flows, with imports slowing and export trends improving. Forecasts predict strong and sustained growth for global cross-border e-commerce. And in order to more actively manage this area, we have created a new international business unit. We are focused on improving our AUR on imports. For instance, we have an improved delivery service now for China Post at higher AURs. Exports remain a very competitive market with a lot of players, but we're planning to attack this market with new services this year. I mentioned earlier that GLS is a great business, operating across 41 European countries and 7 U.S. states, with different languages, different labor models, different regulatory environments. This has been a strategic focus for the group. GLS has a very clear strategy that has been built on a track record of strong financial performance wherever it operates, and this year was no different. Its expertise and focus on parcels positions GLS as a platform to capture opportunities for future growth at an accelerating rate. For example, in Eastern Europe, we have created substantial businesses in a very short space of time, and we are able to leverage its deep operational expertise to help us forge a presence in other areas outside Europe, such as important regions of the United States, where we can provide a high-quality deferred alternative to the express offers. Now turning to letters. Since IPO, we have benefited really from good tailwinds, favorable economic conditions, no increase in the rate of e-substitution and the return of direct delivery volumes last year. So as expected, addressed letter volume declines have been at the better end of our forecast 4% to 6% range of decline. However, post the EU Referendum, increased business uncertainty has impacted both business and marketing mail. We are monitoring the situation very closely, but we believe that our forecast range of declines still holds true. However, we would expect letter declines to be at the higher end of the range if business uncertainty persists this year. We can't really reverse the structural decline in letters, but we can take action to defend letter volume and revenues, and that is what we have done. Our media experts in MarketReach are reeducating a whole new generation of marketers and admen about the value of marketing mail. We've also introduced incentives to encourage customers to send more mail. We work now very closely through collaborations with industry partners, such as the strategic mailing partnership, and we have put in place campaigns that promote the value of mail, such as the Keep Me Posted campaign. We are winning business, including contracts for London Boroughs and from the Scottish Public Bodies. The financial benefits from Mailmark have now covered the GBP 70 million cost of building and implementing this important program. It helps us by ensuring that we get paid fairly for the services that we have provided, and it also helps our customers so that they can track their mailing and make sure that we are performing to their specifications. With the top line challenges that we face, we've had to adopt a very effective cost response. To a large extent, the improvements that we have made in the IT systems have empowered a multi-year approach to costs. It gives us the fact base that we need to be more cost effective. Again, we have laid that platform for the future by creating the office of strategic cost reduction. This is driving the cost avoidance program, which delivered £225 million of costs avoided in 2016, '17 and we are on track to deliver our cumulative £600 million target next year. But we have ambitions beyond that, and as you know, changing the culture in an organization, it takes time, but it's showing that we are being successful on that front as well. I want to say now a few words about the pensions and the pay negotiations. We really can't do anything in this company without the support of the amazing 138,000 people in the UK part of the business. And even with the backdrop of what are very important and complex negotiations, we have been able to achieve a productivity improvement number that is a five-year high. We continued to deliver very high customer satisfaction numbers and, this year, some of the best quality of service numbers that we have achieved in years. We have had now a large member-wide consultation, which ended early March, on our pension. We announced in April that we have to go ahead with the decision to close the RMPP in March 2018. This is because to continue with the current plan would be unaffordable and unsustainable, given economic conditions. This is a very important matter. We understand that. So we have put forward a proposal which we believe we can afford and we can continue to sustain while reflecting some of the attributes that were contained in our union's pension proposal. We're talking to our union and our people about new ways of working in the future that will match what we have to do to remain number one in this very challenging and competitive UK market. And in the year, when we have had to manage our way through these complex negotiations, it is really satisfying to know that we haven't compromised on the gains that we have made with respect to engaging our employees over the past several years. In fact, this year, we achieved, as I mentioned, scores in employee engagement that put us actually slightly ahead of any large UK company. Now before I turn things over to Matthew to take you through the numbers, I would like to take this opportunity in front of all of you to thank Matthew Lester for what has been an outstanding contribution to our company. I will tell you that Matthew Lester has been just an exceptional business partner for me as the CEO of Royal Mail. And one of the hallmarks of leadership, I think, is that you plan your own succession. You build the bench, and you build its seats. And that is one of the things that you have done, Matthew. And as a result, we are very fortunate to have Stuart Simpson agree to take on this role. He is also an outstanding executive, and I got to say, Matthew -- I thought it would be really hard to top you, but just to not put too [Indiscernible] Mr. Simpson's actually got a lot more experience than you had with this company when you came here. So welcome, Stuart. And with that, I'll turn it over to you, sir, to take us through the numbers.

Matthew Lester: Probably the nicest way of saying mind your [Indiscernible] on the way out, yes. Anyway, good morning, everybody, and we will get on to the numbers. Just to orientate everybody, revenue here at £9.8 billion, operating profit pre-transformation of £712 million, and then because of the significant reduction in transformation costs, which we talked about last year, down to £137 million, you can see operating profit after transformation costs at £575 million. And that's a margin of 5.9%, an improvement of 10 basis points on an underlying basis. EPS up at 44.1 pence, and particularly pleasingly, in year trading cash flow back over £400 million at £420 million. The debt -- I will take you through the movements of that, but ended the year at £338 million, and we have announced a 4% increase in the dividend to 23 pence a share. On the right-hand side of this slide, you can see that we put the reported figures against the adjusted figures, the key difference being the cash to IFRS monthly charge. That's £222 million in the last fiscal year. This very, very volatile item will be a -- go up to £444 million in the current fiscal year. In terms of the underlying movement, you will be familiar with the items that we have laid out and which we adjust for. The only one that I would highlight in specific terms for next year is that the working days will have an adverse impact on profit of about £15 million year on year. The net underlying performance for the last fiscal year was a reduction of £47 million. So first of all, on to the U.K. I will talk in detail about each of these items in a moment, but just to summarize, revenue at almost £7.7 billion, operating profit before transformation cost, £548 million, but as I said, the transformation costs coming down such that we saw operating profit after transformation costs down 4% at £411 million. That's a margin of 5.4%, a reduction on an underlying basis of 10 basis points. So first of all, with U.K. revenue, that's down 2% on an underlying basis. Parcels revenues were up 3%, driven by strong volume performance, and that was pretty much across all of our key sub segments. In the account area, as you can see here, away from Amazon, we saw volumes growing by 4% during the year, another strong performance, winning business and showing how we can adapt our network to do that. Moya has already alluded to the impact on the change in the foreign exchange rate. But important, we told you this time last year we were going to focus on changing the mix of traffic, and you can actually see, on the import level, a 20% improvement in average unit revenue. We continue to see improvements through what we call the consumer channel. That's mainly through post office. On the letters side, as we said at the half year and in the update, this has been a period where we have seen business confidence has been affected, and that impacts, in particular, things like marketing mail, where we saw an 8% reduction year-on-year in the revenue that we got there, but that's still well over £1 billion worth of revenue there, and the reduction is in line with other media, such as television. Moya's talked about our cost program, and I'm pleased to report another year of a reduction on an underlying basis here. We are on target for our 600 million, and I'm going to talk in more detail on subsequent slides about how we got there during this year. So first of all, I think, people cost is the real highlight here this year. Moya was talking here about how we've been achieving there, and I think it's really important to contextualize that. This is a year when you see all of our key metrics make significant improvements, so whether it's customer satisfaction, productivity at the highest range, the highest level that we've seen for several years or our employee engagement, all of that has been achieved, whilst at the same time, we've taken 2% of the hours out of the core network. We've also started more management restructuring, delayering it and looking for efficiencies where we can take them. Overall, full time equivalents are down 3,500 year-on-year. In terms of non-people costs well, I'm afraid it's getting a bit boring here. It's the same; it's another process review, reorganization under Mike Prince, as Moya referred to, our strategic cost guru, a really frugal mindset, which is absolutely necessary to offset the impact of inflation. But importantly, we also see here as we continue to be successful in parcels, there are cost of sales headwinds. There are true marginal costs, particularly in the international area, and that will impact distribution and conveyance going forward. So what is the outlook like for this? Well, we're sticking at the moment to our guidance of 600 million. As Moya has said, we hope that we will be able to raise that over the period, but we only do that when we've got plans that are actually in place to deliver it. The cost pressures that we see that we will adjust for next year include a further increase in the cost of employing people in this country. For us, the Apprentice Levy will cost £20 million more in this fiscal year than last. Cost pressures, I think I've alluded to already. I'm going to talk about one on this slide, which is the depreciation charge, where we expect to see a further increase of £30 million this fiscal year. That reflects the fact that, as Moya said, we have been investing in our technology, we've broken the back of that, but we continue to make sure that our products are relevant for today's markets. But after that increase, I expect the level of depreciation to stabilize at that level going forward. Transformation costs came down significantly this year. As we highlighted, the main driver of that is lower voluntary redundancy costs, and I'm expecting that we will continue to see transformation costs of between £130 million and £150 million going forward. It's a pleasure to report GLS, and the great news is, you lucky people have got a whole presentation on that later, so revel in that please. Revenue is now over €2.5 billion Rico, thank you very much, indeed, up 9% and operating profit is up 17% to €196 million. These numbers look particularly good in sterling and we benefited from the stronger foreign exchange. Operating margin is 7.8%, up 50 basis points. And I'm going to go through some of the drivers of this performance in a moment, but I'm pleased to say that the acquisitions that we undertook during the year are performing well. First of all, on revenue, this as I said is up 9%, excluding the impact of the acquisitions. We saw growth in pretty much all of our markets, and saw very strong performance in Germany and, particularly, Italy. Notwithstanding another good year of performance in France, the market dynamics there means that despite the losses narrowing, we don't expect to see that getting to a breakeven position in the short term. On the cost side, you can see that the costs have gone up on a percentage basis pretty much in line with revenues. That's not a surprise, given the operating model and the fact that we absorb the costs that we've undertaken of researching and doing the acquisitions within these numbers, because they are not material to adjust for them on a group basis. One item of costs that I will call out, though, is that Germany has increased their minimum wage, and that is going to have a full year impact of about € 5 million in the current fiscal year. So going a bit further down the P&L, as we start with operating profit after transformation costs of 575 million, then we have finance costs, which are up to £16 million. That's due to the fact that we, most of our debt is in euro's. We don't hedge that, because we actually have the benefit of the translation coming through the P&L from the GLS profits, which themselves are euro denominated, principally. Tax charge of 22% is pretty much where we expected it, and that's what produces the improvement in earnings per share of 44p to 44.1p. As usual, we have laid out in quite a lot of detail here the specific items. I don't propose to read through them. There are no new items that are on here. The one item that's worthwhile just talking about is that the employee free share charge will reduce very rapidly now over the next two years. There will be a charge of about £ 40 million in the current fiscal year and de minimis the year after. Then on to the key, the cash. Well, for me, this was a real proud moment to see that despite what we , what happened during the year, another year of EBITDA, before the cost of transformation, over £ 1 billion. And you can see the fact that the investment, as we've said, was going to reduce the gross number is £ 529 million. I'm going to talk about that on the next slide. In terms of the income tax charge on a cash basis, that was an increase this year due to some payments and a reversal in the prior year of a refund. We will then have, going forward, the cash tax is now only expected to normalize in 2021 due to R&D credits and some other benefits that the tax team have been working on. So in terms of that investment, as we said, it was likely to come down. I'm really pleased with the focus we put on this. It's another piece here where it's not just a case of being very careful where you choose to spend your money. It's how you do that. And I think you will see some other businesses that are similar to the journey that Royal Mail has been on have gone through a similar experience here in terms of we do need to make change, but the costs of making those change is coming down at Royal Mail. As a result, I'm expecting a further reduction next year in the total investment to £450 million, and going forward, I expect it to be less than £500 million of investment per annum. So we've laid out the drivers of the movement in net debt on the next slide. I'm going to refer to three of them. First of all, the in-year trading cash flow, £420 million. Then you have the cost of the acquisitions, which were a net 165 million and the cost of our dividend of £222 million during last year. This was a slide that we introduced this time -- sorry, the half year. It's -- I think it sets out very neatly why, on an actuarial basis, which is obviously the most relevant one, we expect that the surplus will be eliminated during 2018. You can see that this surplus, as we've disclosed on an actuarial basis, is £1.1 billion, including the pre-hedging benefit. The contribution that is made to RMPP is about £0.4 billion, including those from employees. The actuarial costs [indiscernible] provide net benefit is £1.3 billion next year -- or, sorry, in the current year. As a result, that arithmetic is pretty compelling. I'm afraid to say the surplus will be eliminated at or around March 2018. In terms of property, we are in the active marketing mode on both properties. I'm pleased to say that we are at the stage where we will not be spending any more money in terms of preparing these properties before we actually receive proceeds. That's where we brought you now, and you can see on the bottom left-hand side the cumulative position, which, notwithstanding the costs of getting these properties ready to sell, is actually a healthy surplus. And with that, I'll hand back to Moya.

Moya Greene: I mentioned at the start that over the past 3 years, we've been working to create the platforms that will support us in future growth and deliver that sustainable cash generation. So after all the heavy lifting that we have done, we are now a more resilient company. We're better able to cope with the challenges we see on the horizon, and that provides the base for us to move forward. So this slide is just meant to summarize how we think these platforms have helped us and in what areas. The investments that we've made in parcels, that big technology rebuild, now growing and leveraging more fully our positions with GLS, and of course, a strategic focus on costs, and that's what's led to a sustainable, cash-generative company. I think now, at this point, we should take any of your questions.

Q - Dominic Edridge: It's Dominic Edridge from UBS. Just a couple of questions. First, just about the point for FTs versus employees and the changing mix that you're doing in UKPIL. Could you just talk a little bit more about that and the people you're hiring versus the people who are leaving, and how that's going to change going forward? Or what -- and also, what have been discussions with the unions on that as well? And then second question is on GLS. And I don't know if it's right to take it now or later on, but just about France, just understanding what are the sort of the structure issues there about what's going to stop you from getting to breakeven there? And then the last point is on the cash investments. Obviously, you've brought that down by round about GBP 50 million sort of level. Can you just talk about some -- what are the areas where you still think are still necessary to invest in? Where have you saved? And I suppose, just going forwards, where's the risks effects for you going forward?

Moya Greene: Okay. On the people side, because of the -- well, first thing, we don't do anything in the operation without a full discussion with our union. So there's nothing hidden in Royal now. On the people side, the reason why we have been able to reduce our voluntary redundancy costs this year, but to improve our productivity and take hours out of the operation at the same time, is that because of the investments that we have made in the past, we're able to be more precise about where we can do things differently. So we've been able to reduce overtime spend, for example. We've been able to reduce agency spend. You know that every year, depending on the peaks and valleys in the business, we rely upon the help that we get from agency employees, and of course, that's a very big number at prime times like Christmas. And this year, because of all the work that Sue Whalley and her colleagues in the operation have done, we've been able to plan Christmas much more carefully and precisely and, therefore, have a very good Christmas without taking on quite as many people as we had in the past. So all of those things combined, the technology change, the operational changes we've already made, have allowed us to improve productivity, but not to have that productivity so reliant on actually parting company with our full- and part-time permanent people. Of course, some of our full-time people have left the business. I think it's about 730 people this year, but most of the improvement in hours out and productivity has been done through the measures that I've just mentioned. I'm going to ask Rico to give you the detail on France. In terms of investment, I think Matthew and I always said, if you go back to privatization, that we would have to make up for years of chronic underinvestments in the U.K., and we would need to plan very big multi-year projects, many of them on the technology side, but not just that, I mean, rationalizing our network, if you look at how many mail-processing facilities we have today relative to what we had in 2010. There were big operational changes that had to be done as well. I would say we've probably -- it took us an extra year to get through the peak of that investment of -- if we went back to where we were thinking about it in 2012. But we're now there, and we think that we still have lots more to do, which is the reason why the number is -- that we are setting forth is what it is. It's still a very heavy degree of investment, £450 million. We think that we can do all that we need to do and all that we can absorb-ably do inside that number. I'll stop here.

Matthew Lester: I think to sort of give some numbers, do I expect the change -- the costs -- cash cost of that is going to be £130 million, £150 million going forward? Yes, I think you can see some reduction in that, because, as I said, the cost of change will come down, so some of that managerial OpEx will come down over time. Key projects within [indiscernible] that we would have to go and spend on are going to be more -- parcel systems have got to come up. So number one is IT technology. There's going to be about £75 million spent across the GLS network going forward. What's that on? It's upgrading the technology, and you can see that 9% volume growth is the straight capacity spend that's got to be done there. In terms of the operation, the main focus this year is actually going to be more in OpEx as we spend a lot of the money on in terms of improving our managerial capability there, but you've still got an ongoing requirement to keep your stakes up to scratch, and we will be spending some money on parcels automation.

Moya Greene: Rico, do you want to [indiscernible] on France?

Matthew Lester: Rico, [indiscernible] few minutes on France?

Moya Greene: Do you want to do it at the GLS session? Is that all right?

Damian Brewer: Damian Brewer from RBC. Could I ask three questions as well, please? First on [indiscernible] pension, I appreciate there's only so much you can say, but could you give us at least some feel as to how you are balancing the need to obviously the DB scheme members within UKPIL with a very substantial DC scheme members and how you're sure they don't feel left out as the DB members transition to some form of DC? Secondly, just on the parcels business in UKPIL, can you talk a little bit about -- more about parcel return volumes? What's that doing in terms of costs, but also in terms of revenues? And is that margin accretive as that seems to be significantly outgrowing the market? And then very finally, just can you remind us on your set of priorities, when you do have spare capital, where you invest that, i.e., sort of dividends versus M&A and how you think of the returns on that?

Moya Greene: On the pension, this is, as I've said several times, this is a really, really important matter, and we are really thankful that our union has put so much time and effort into putting together what is a very credible proposal. I don't want to negotiate here. I mean, we are having very cordial and constructive discussions with our union, and we are communicating regularly as well more broadly to our people on this. The way I think the proposal that we have on the table strikes that balance, people will have a choice of defined benefit cash pot at retirement or a defined contribution plan. And it builds on some of the principles and policies that are in our union's proposal. But it does so in a way that is affordable for the company. I don't want to offer something that -- or make a commitment that I don't think we're going to be able to live with five or six years out. And with our balance sheet, you can get it swamped pretty easily if you're not really careful in this area, which is what I think our proposal does. And I think it does balance the interests of the people that are in the current defined contribution scheme. We are proposing to improve that scheme significantly, and as I said, that can -- the communications that we've done to our people and to our unions. So we're -- I think we're having really good discussions on it, because everybody knows it's really important, and we have to get to the right place, something that's good for our people, but it's going to be affordable and risk manageable for the company. In terms of returns, you are absolutely right. There's been a real growth in this area of the parcels market, and that's likely to continue because of the shopping habits of people. And where the type of parcel is coming from, it's in the clothing and footwear area. It's up 18% this year. It is margin accretive for us. We do very well in that space. We're very reliable, and with -- again, with the technology build that we did over the past three years, we've been able to leverage that now to make that returns process very slick. We've got more places than probably the rest of the industry combined, where people can return their parcels and in our inquiry office or our customer service point, that is now enabled with very good technology that makes it pretty easy and slick for people. And the priorities, why don't you do that, Matthew.

Matthew Lester: So I think we've got debt of, as I see it round about less half return, even on a gross basis, so I think that we're in a situation where we certainly see that there is much opportunity for us to invest that in growth areas rather than any additional return. We're very pleased to be able to grow the dividend again this year, into very substantial dividend yield response from our point of view, we think that shareholders would like us to see and take advantage of the opportunities that we do find and provided that they are well researched and send.

Unidentified Analyst: Two questions. One if I may, first question on the U.S.A. and what changes would you like to see in terms of regulation to make the U.S.A. more sustainable for Royal Mail and do you see any opportunity for you to engage with [indiscernible] and more education or dialogues of the peers they have and they are set out right now. And second question maybe just an outlook on the UK personal markets we've saw you UPS moving into Ireland and we can probably expect something coming out of FedEx and TNT once they get their act together in the Netherlands. So what would be your outlook on the UK parcels market, given the increasing competition, what will be your priorities to strengthen Royal Mail position on that? You mentioned the investment into personal automation would you be looking to accelerate that what would be some of the programs that you are setting into place. And lastly can you give us the brief summary of the U.S. strategies with the two acquisitions that are difficult to your current regional footprint. The operating model of the two business is a little bit different to DLS and the asset light model and there were less synergy definitely to the existing network in Europe, so what's your outlook for the U.S. and how would you look to continue or grow that what's the end game if you will as moving into that market which others have tried before?

Moya Greene: Well, let me deal with the U.S. first briefly because Rico is going to cover that in his presentation. This is a highly experienced company in terms of being successful in lot of different kinds of geographies and the U.S. the states that we are in, in the U.S. California alone is in economic the side of UK is growing faster than the UK and I think the company that we have there has been built by a founder with very similar ideas about business building as we go back. But we are going to be careful about it. We are not fool hearty. But I'll let Rico say more about that. The outlook for the UK parcels market I think is more or the same for the being. I mean Amazon is a hugely successful company and between its -- the size of its online retail operation, its own retail operation and the market place that it has, the ability to work with its third-party retailer on that market place and the scale of the network, it is a different competitive environment today than it was even three years ago. That the Amazon factor is important one, but it's not just that. We have more players in the UK than any other geography in the world. How are we going to hold around? By just doing what we have always done, paying attention, being on our gain, investing in the right places, going after the traffic, being [indiscernible] determined to get it, make sure that our customer satisfaction scores continue to be some of the best in the industry, make sure that we are very slick in terms of what customers expect us to have, whether its shipping systems that can be connected easily or lots of places to easily return product and to manage return product. So we are just going to keep doing what we have always done which is stay on our game and do determine to be the number one player, no matter what that competitive environment throws at us, but there is no question, over the past three years we have seen that it control a lot at you. In terms of Ofcom in the USO I think we have a very, very constructive relationship with Ofcom I mean with Sharon White for whom I have great respect, on a regular basis. Over the past three or four years. They have gotten to understand the challenges in our business and have gotten a much more precise feel for what's happening in our business. I don’t really want any changes to the USO. I think the USO in our country really advantages consumers in the UK whether we're talking about those who were still really wanting to get their mail and to get their mail on time or that new emerging interest that comes from peripheral consumers. I expect at some point internet to decent feature we are going to have to figure out ways to go maybe even further into funding delivery not just at the peak time but funding delivery at more ongoing. So we are not there yet but we are going to make sure that our business continues to evolve in line with what we think the market requires. So that's the USO that holds us there. I think where I would put some more emphasis in the future is on that whole area of the level playing field, it is the playing field level and are the thing that might have been completely appropriate for the regulatory bodies to look at 10 years ago, are those archaic now and maybe we need to turn our sites in new directions. So those are the two areas that I think we need to probably shift our gaze a little bit.

David Kerstens: Good morning it's David Kerstens from Jefferies, also three questions please. First of all, the letter volumes are declining by 8% in the second half of the year, while economic conditions were still relatively benign, why are you still comfortable that the 4% to 6% volume decline guidance range is still valid and do you expect to be at 6% this year. Secondly with rate inflation, likely to go up this year, do you think your remaining cost of ordinance measures will be sufficient to compensate or which also need more inflation in your top line, stand price I think have already been increased, but will it be sufficient to keep operating cost where they are today. And finally regarding pensions, revised pension proposal following the consultation, what does that imply in terms of pension cash contributions compared to what you’re currently paying.

Moya Greene: Let me deal with pension first, we're very clear that 400 million which is what we're paying now that's what we can afford to pay. So the proposal does not push that beyond the 400 million that we currently pay. In terms of wage inflation and will we need additional stamp price increases, we have to keep our pricing continuously under review and that's what we do. And I think our guidance that we put out at the time of privatization of increases roughly in line, not in every single product area but roughly in line with RPI increases is still about right foot, you are right, we have to keep that under review. And you have to be careful because there is a tension between if the increase the price of mail to much, you will at some point accelerate the e-substitution that is the basis of the structural decline. So you will see volumes drop of more than you would like to see, so it's almost like a short-term, medium term play. But you've raised a very good point and that’s exactly where we have on eyes on and we are looking at every single product now, making sure that we still provide value and that we’re still competitive, but that we're getting paid fairly for what we have to provide and only we and UK have to provide by various this cherished universal service. So Matthew do you want to talk about the guidance on that --?

Matthew Lester: Again, it’s the problem we're looking at overall numbers as oppose looking at the underlying. If you look at underlying business comfort its remained low throughout that period. Business confidence drives what people actually chose to go and spend on a discretionary basis, this is the accumulation of many small decisions, so miserable people like myself going, well actually we're just going to turn this down a bit, I want you to send less of this, find another cost that you move it like that. It's not a massive change, but every one of those adds up to a situation and as I said you're seeing numbers come through with ITV, were they're down 8% percent in that quarter. So I think we're seeing a very similar level of activity in that period to that which we -- worst we saw in the last quarter of the calendar year.

Unidentified Analyst: If I can try and address three questions too. In terms of the cost savings you achieved or you're on track to achieve 600 million, what do you see the scope to increase that? And sort of part of that, we can hear from some of your -- we are hearing from some of your peers about technological progress, new things be it autonomous vehicles and that sort of thing which could yield substantial efficiency gains in the future, is there anything you are looking at, and I imagine that your employees could be quite excited about this, because really these things could make their jobs easier. Conversely, back to Ofcom, if for a instance, I mean your margin has moved onto 5.4% up, so haven't calculated your or seen the regulatory margin, but I am imagining it would be a similar kind of profile. If that was to get down to the 5% level, how do you envisage Ofcom reacting? Do you think that could be any change to their stance, but there is an awful lot more that you can do on the efficiency side? Or do you think that you need to be presenting them with some ideas to things that can help you certainly prevent the margin going below that level?

Moya Greene: Well let me deal with the margin issue first. The margin is regulated business, is always about a point lower than the margin in UKPIL generally because UKPIL includes some elements that are not part of the regulatory business like [indiscernible] and property, et cetera. So there is no question that the statue in 2011 was very plan, this was an important change in the statues that the universal service network had to be able to achieve a commercial rate of return. But Ofcom is on record of saying that while they want to keep that commercial rate of return number that as they have out there which is they looked at all of the postal operations around the world and they said yes, it should be between 5% and 10%. And of course, we are long away from that. They did also say that if it went below 5% one year and when above 10% one year, they wouldn’t necessarily feel like they were obliged to intervein. But they are very sensible people and if there was -- if they had a view that there was a persistent sustainability issue inside the universal service. They have said on a number of occasions that they would act. It has been my contention for some time, that this is something that we need to closely watch, because there is no question that we have to be efficient, we can just jack up prices willy nilly, it will cause the traffic to erode and it's not fair to consumers. It's very gratifying to me that when Ofcom looks across the whole consumer industry or the consumer facing industries everything, the only one that where consumer 75% of them said the only one that they thought provided value for money was Royal Mail, so that’s very gratifying. He says that we are balancing all of these things about right. But I think you will -- we will -- it's one of those things and we have to play by the ear a bit unfortunately.

Matthew Lester: So yes, look I mean the whole point of setting up a strategic office is not to get to 600 sort of sit back. Second point is, it's all about looking for more fundamental change as well as, what Moya would say is that, just get on do it type of change as well. So it's clearly stuff that we can look at, but as I've said in my notes, we are only trying to lift that as and when we have underpinned programs and yes, what they are looking at the moment is what else can be do to underpin the programs.

Edward Stanford: Edward Stanford from HSBC, just couple of questions please. First of all, excuse me for asking about sums again, but it's perhaps a matter to the board as well. I mean I appreciated it’s a strategic market but how long do you tolerate losses in that business? Secondly, could you just perhaps give us a little bit of an update on the process, is marketing the proxy, how close are you do you think to realizing some, some value from this?

Moya Greene: [Multiple Speakers] Matthew why don't you take the property, on France, I think they're going to get an opportunity with Rico to go through this in quite a considerable amount of detail, but suffice to say you know nobody tolerates losses, it's not like people are sitting around clapping their hands and saying, oh boy, they're not. We're working very hard and what you will see I think when Rico speak to you about it later on is that, on the sales side they've made a great deal of progress. But you know let's face it, France is a difficult jurisdiction, everybody knows that and they have significantly reduced the losses and when we started this program we only had €8 million and now if you take out the overhead it's probably around €2 million. So you know it's close but no cigar yet. What I would say is that and you come from a very international institution, so you know that France is a very difficult place and even if you make progress on the top line doesn’t necessarily translate into what you'd like to see on the bottom line. But we're certainly on it. There are no eyes being taken off of it.

Matthew Lester: And I think what Rico's going to tell you is the fact that when you look at the value it’s the network it's a positive contributor, so it's not something that we're going to sell because it is actually got to a level now where when you take the value of the inputs actually it’s making a positive contribution to the network, but he'll take you through how we get there. In terms of property I don't know if you ever tried to sell a house. You know you sold the house when you sold it, and it’s all been there are many, many fluttering of eyelids and much posturing and the London market is full of that at the moment. So I'm in a situation where we've let Martin spend the money he needs to make sure that it's absolutely ready and in the appropriate level, but we will not spend more money now on until the proceeds come in and we'll announce it when we are highly, highly confident that it's done.

Moya Greene: Like the money's in the bank.

Matthew Lester: I am afraid I am not allowed to wait that long, I've tried to ask you. If we're done on that, oh you are there, I wonder why you're hiding Andy the back there, I thought you just got a few [indiscernible]. So this will be the last one.

Andy Schiff: Thank you, good morning it’s Andy Schiff from Deutsche Bank, I have three questions please. First question's around marketing mail and could you give us a flavor of the sort of current run rates of revenue and movement and what your expectations might be for this full year and second question, second and third question's around investment cash pensions. Can I just ask why the longest or longer-term net cash flow investment for $500 million hasn't come down given that your guidance of 450 this year and the 500 million number hasn't changed? And then in terms of pensions, I guess when you look at the sort of net cash flow of the business it's still in positive net cash flow post dividends and that obviously should improve as the investment sort of tails off, so when you talk about a sort of 400 million pension, cost is being sort of maximum affordable, why is that the case given the cash flow of this business should materially improve?

Moya Greene: Well, Matt and I, ever since we've been at the company, we do really start middle and on -- what is the cash generating capability of our company? Because we think that in terms of long term sustainability and the various stakeholder's legitimate needs that has to be satisfied, that's what you have to do, and we'll continue to do that and as we look forward we think in terms of retirement income for our people, 400 million is a sustainable number that we can afford, but not more. The marketing mail situation, I can't give you guidance on marketing mail because we don't do that, but what -- I'm going to say two things. There's no question that there is a business uncertainty issue in the UK today. We saw it, actually a couple of months before the Brexit vote, it continued after the Brexit vote, and on the basis of the research that I read it hasn't gotten much better. It has continued. Now when I was just sitting around and sort of thinking oh, we're going to let that very important stream of revenue it's £1.1 billion of revenue fall away from us. We've got a number of things that we're doing. We got -- we now spent two years training a whole new generation of marketers about the value of mail, and we are really intensifying our efforts in that area, because it is -- there was a generation of admin [ph] that, they used almost every other meeting, but they didn't use mail, we have the research now that is absolutely clear that returns on mail as a medium for marketing are better than returns in any other area. Secondly, we're doing things like trying to make it easier for customers that have not used mail as part of their marketing strategy, make it easier for them to do so, whether it is through new online products or just helping them with the various components of that campaign from the design, to the print, to the actually getting it into the right hands, so that we can feel very confident that their returns are going to be there. So, those are the types of things that we're doing to try to overcome this more generalized uncertain malaise that has persisted in the market.

Matthew Lester: So, in terms of the investment number which you asked about, here, I could really get in stuff you completely and say well we're never go and spend more than this, than that would be a completely wrong thing for me to go and do. The way the nature of this is that, if the right investment comes along, this is a relatively volatile number, as we said before, it could be -- because it's the right time for us to go and accelerate the R program [ph], it could be the right time for us to really get behind parcel automation, if something there we found something, we'll go and do. Let's be clear, this is something whereby there's still work to do in the UK business and we therefore -- and given the right opportunities arise elsewhere, we want to take advantage of that and shareholders are telling us that that's what they want us to do. Just on your pension point, I think cash is one element of it, but we asked about the Ofcom situation, we already are at a very bottom of the -- what they concern investable range. If we were to increase about the 400, that margin goes below. Ofcom are not going to give us a pass for that, they already think that we are, and we do, give very good terms to our employees, they would simply say that's your problem that was a management action that you choose to go and do it. So I think you are looking possibly even wrong constraining factor Andy there. So Catharine's asked me to clear the room, in order to go and do that one and if you've got any more questions I'm more than happy to hang around outside and do that. Before we go I do want to say, Thank you. First of all, you both, It's been a hell of a partnership, that's probably the thing I'm going to miss the most when I to return to the garden or whatever I'm going to do next and to Catharine, sorry. [Call Ends Abruptly]