CEO Stuart Simpson on Half Year 2020-21 Results - Earnings Call Transcript

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Royal Mail plc (ROYMF) CEO Stuart Simpson on Half Year 2020-21 Results - Earnings Call Transcript
Nov. 19, 2020 2:56 PM ET | About: Royal Mail plc (ROYMF), ROYMY


Royal Mail plc (OTCPK:ROYMF) Half Year 2020-21 Results Earnings Conference Call November 19, 2020 4:00 AM ET

Company Participants

John Crosse - Director, Investor Relations

Keith Williams - Interim Executive Chairman

Stuart Simpson - Interim CEO

Mick Jeavons - Interim CFO

Martin Seidenberg – CEO, GLS

Conference Call Participants

Daniel Roeska - Bernstein Research

Cristian Nedelcu - UBS

Sam Bland - JPMorgan

David Kerstens - Jefferies

Andy Chu - DB

Alex Paterson - Peel Hunt

Arthur Truslove - Credit Suisse

Gerald Khoo - Liberum

Kayani Muneeba - Bank of America

Nick Tam - Millennium

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Royal Mail Group Half Year 2020-21 results call. My name Hailey and I'll be the operator for your call this morning.

On the call today we have Keith Williams, Stuart Simpson, Mick Jeavons and Martin Seidenberg. There will be a presentation followed by a Q&A session. [Operator Instructions] And I will now hand you over to John Crosse, Director of Investor Relations. Please go ahead.

John Crosse

Thank you, Hailey. Good morning, everyone. Welcome to our results call this morning. Just before we start the usual disclaimer, I just need to draw your attention to the forward-looking statements, paragraphs we have in our release this morning. This sets out examples of the factors that can cause actual results to differ from any forward-looking statements that we may make. A summary of the principal risks and uncertainties which could affect the group are set out in our half year report published this morning, and they'll be updated in the annual report at the end of the year. All of these risks and uncertainties have the potential to impact the group's business, results of operations, financial condition and prospects adversely.

So with that, I'll hand you over to our Interim Chair, Keith Williams, please.

Keith Williams

Good morning, everyone. And thanks again for joining the call. I'll run through a few brief remarks myself and then I'll hand over to Mick to take you through the financials of the first half, and then we'll break it up for Stuart to give you an update on Royal Mail performance, and Martin then to follow on GLS. Then, as usual, we'll hand it over to you for questions.

So if I was to summarize the first half. If you recall back in June, I said that Royal Mail and GLS colleagues has been a source of strength to communities in this country and internationally through GLS, throughout the COVID crisis, and they've continued to play a crucial role in keeping both countries and communities going. And it would be remiss of us not to thank them for all their continuing efforts. And they are continuing obviously today, and I and Stuart can give you some of the information on that later on.

But here in the UK, we've delivered hundreds of millions now - items of PPE and touched about 90% of all the COVID test kits that have been issued in the last six months. And we've managed to keep the network going, despite the extreme volatility in volumes, the social distancing measures, and high absence rates.

Similarly, in GLS, our proven business model and network flexibility, there's been an advantage. And we've delivered a strong performance in the first half on the back of that. Mick will show you later on a couple of slides, which I think will help you understand the volatility, what we've been seeing in the half year, and what we've been responding it to.

I think it's fair to say that we've delivered above our initial expectations in many areas in the first half, and we’ll talk to that later. We've seen a sustained increase in e-commerce and therefore parcel volumes. As you can see, from our perspective, we think this is a structural shift in consumer behavior.

Last time we spoke, I said that the market jumped ahead three years. And indeed we expect this year to deliver the £12 billion of group revenue that we had originally forecast for 2023-24, back at the Capital Markets Day in May 2019.

And to give you an idea is that group wise, 75% of that revenue is now parcels and 25% letters. And if you look at Royal Mail, it's 60% parcels, 40% letters. I'm particularly pleased though, that we've renewed our focus on the customer, and innovation. And you see recently, some of the items that we've been doing such as parcel collect. And we've successfully captured the revenue opportunity in the first half.

Royal Mail has the right strategy, and has delivered the highest revenue growth since privatisation. And that's a definitely a definite shift. We are delivering on our commitments from June around on people costs and the management restructures. And Stuart will talk to that later on.

However, and I'd emphasize again, and we said it before, we need to pivot more quickly from letters to parcels to ensure that we can continue to capture the revenue opportunity in the UK and indeed in GLS in an efficient and sustainable way going forward.

And to that end, I wanted to make a brief comment on our engagement with the trade unions and the CWU. Talks have really intensified over the last few weeks. And both sides were approaching those negotiations positively. Clearly, the environment is different now to the one that we were seeing in June. But we still need to secure change, not least to take advantage of the opportunity that we now see before us.

So against that backdrop, the focus of this talk has been very much around how we can work together to get more flexibility in our operations for the future. So that we can continue to capture growth going forward, secure good jobs in Royal Mail and improve efficiency.

Turning to GLS, we've seen a very strong performance in the first half and Martin has made a great impact in the half. His team has done a good job in terms of managing the shift from B2B to B2C with a real focus on last mile productivity. And our GLS model with our local market presence and operations agility has really demonstrated its value in the performance we've delivered in the first half. Again, Martin will talk to that later on.

So I think there's no doubt we are well positioned with GLS to continue to benefit from the two real growth drivers we see for the future, cross-border and continued growth in B2C. It's also pleasing to say that - to see the way that Martin is focused on the issues we mentioned in June, on focused countries, namely France, Spain, and the US, and all had good performance in the first half, which Martin will talk to later.

As you can see, we've updated our scenario for this year, which unsurprisingly shows an improved revenue number due to the strong growth in parcels we've seen year-to-date. We do expect that parcels growth will remain robust in the third quarter as we go through peak season. But also renewed lockdown restrictions here in the UK, and then a number of European countries are helping as well.

However, it is fair to say that there's more uncertainty over the trends in the fourth quarter with potentially recessionary impacts and the outcome of Brexit, which may affect international volumes in that fourth quarter.

So, while we've reported an operating loss in Royal Mail, the past generation as a group is good. And for the medium to longer term, I'm pleased to say that we're capturing the growth opportunity with a firm focused on the customer and with more innovations to come.

I'm now going to hand over to Mick, who will talk you through the numbers.

Mick Jeavons

Thanks, Keith. Good morning, everyone. And I'll first step you through the results for the first half and then I'll go on to say a few words about how we see the next few months evolving.

So starting with some headlines. Group revenues of 9.8% fueled by strong parcel volume growth in pretty much all of our markets. Parcel revenues now making up 73% of the total and that's up from 63% this time last year.

Ongoing cost pressures in Royal Mail has meant though that the revenue growth has been more than offset with operating profit down to £37 million in the period. As a result, margin is reduced by 250 basis points and 0.7% EPS, down to 0.4 pence. End year trading cash flow was £ 219 million in the half. So this figure was benefited from material working capital movements. So removing that impact on an underlying basis the performance goes back with year-on-year. It's in particular by the lower EBITDA and trajectory.

Net debt has improved to just over a £1 billion, benefiting from the trading cash flow and the decision made by the Board back in June not to pay the dividend in the summer.

Moving to Royal Mail, our UK business revenue of almost 5% to £3.8 billion. That's significantly better than we'd feared back in the spring when COVID-19 first hit. So benefiting really well from the online shopping boom. Indeed, the revenue growth, as Keith mentioned, is stronger than it's been since we IPO back in 2013.

Cost though are up 10.7% to almost £4 billion, though, as expected tipping the business into losses at the half year. Thankfully, perhaps not as severe as were originally projected.

Few words on the top line now, where there's been some really quite material shifts, overall revenue of 4.9%, parcels revenue though now making up 60% of the mix in the UK, so significantly up from less than 50% in the prior year. Within that, parcels revenue up 33% and volume growth of 31%.

Domestic account volumes excluding Amazon are up 51% with our premium trust products at 72%, including returns. Clearly, our ability to provide such excellent service to customers through the crisis has helped to secure really strong growth through the period.

Letters have gone the other way during the pandemic though. Total letter revenue down 20.5%, as previously highlighted, advertising net revenues down most materially down almost 50% in the half. Product volumes also materially down, but less severely.

The disappointing part of the story in the UK is on the cost side where we've been unable to turn the growing top line into improved profitability. So far we haven't been able to make much progress with operational efficiency changes during the last six months. But then I'm not sure either how much change could have sensibly been delivered during the ongoing crisis. And arguably, we've actually been more agile in the last six months than we've ever been in responding to COVID-19. Our people have done a really fantastic job.

There were three cost barriers that I'll highlight. Firstly, the cost of dealing with COVID-19. So on the people cost side there, we've had to cover the high levels of sick absence, social distancing regulations, and so on with a deal of over time and agency resources. And non-staff costs have been impacted by PPE costs.

In addition, we've had to invest in the volume exchange towards parcels. The high volumes of parcels are largely required manual sortation, so headers the next phase of our automation program, and the increased volume metric, to be transported [ph] around the country has required more vehicles.

One area to point out, this become more material during the half from which we're now highlighting is the increased cost of dealing with export mail. Not only has the delivery and fulfillment costs charged by overseas posts increased, following UPU huge changes. But the line haul costs of the flights and conveyances has been much higher as well. So you'll see in a short while how we projected those cost movements forward since we expect each of those elements to flow into the second half. As we also point out the restructuring provision of £140 million that we booked relating to the management review announced in June.

Moving on now to GLS. We previously highlighted that the principal challenge with GLS with B2B able to maintain margins, and this makes the traffic move towards B2C. And I think the response from GLS in the first half has been really encouraging in that respect.

Revenue of almost 22% in the half on 21% volume increases, and the proportion of B2C in the traffic mix increasing from around 46% to 56%. At the same time, GLS’s see margins expand to 8.9%. Now we think around half of that improvement should be considered as one-off in nature, linked to the very peak of volumes we saw in May and June, where we benefited at that time from really good delivery efficiency, as the roads were quiet and also some pricing premium in some markets which has not been sustainable.

As Keith mentioned and Martin will discuss later, the margins also benefited from improved performance in the three focused countries, Spain, France, and the US. The GLS revenue chart highlights the fact that it's volume growth which has driven the revenue improvements in the main - in particular, those markets where GLS is already seen as a predominantly B2C player. So Spain, Europe East, Denmark, for example, they've been able to capitalize on the behavioral changes, most advantageously. International cross border growth has also been strong in the period.

Quickly on costs. Cost in GLS have increased very broadly in line with the volumes that have been handled, though they of course, have also suffered from additional costs of PPE, and so on.

Then to trading cash flow. I mentioned earlier that the inflow of £219 million for the period was somewhat flattened by movements in working capital. And you can see that on this chart, EBITDA lower by £121 million. So excluding the working capital movements in each year, the step backwards in the cash performance is more clear.

I do expect much of the working capital benefit to unwind in the remainder of the year. And as usual, the capital expenditure profile of the business is weighted heavily towards the second half. So while the cash position is certainly more healthy than we might have expected back in June, we like to see further evidence. This is a sustainable, stronger performance, before reconsidering the potential for the reintroduction of dividend. The movement in net debt, since the last balance sheet in March is principally explained by the trending cash flow.

And I'm going to move on to the future and how we are thinking about what might happen next. And starting with Royal Mail. The first chart highlights I think the volatility we've seen in the year-to-date and hopefully give some idea as to why it remains difficult to be sure about the outlook.

And each week as the moment brings as new information that causes us to relook at our forecasts and obviously decisions that impact the national position around COVID-19. So in particular, around the timing, duration and severity of lockdown restrictions are clearly hugely material to us in terms of their impacts on volume.

On the chart, you can see that through August, you can see the gradual unwinding of the most severe impacts of the first lockdown, but then as lockdown started to creep back in, those trends started to - from the original lockdown started to come back. So it's that volatility that we've that we've seen in the very recent past. That means we've continued to hold back from giving profit outlook guidance.

We have though, as you will have seen, we visited our scenario given what we have seen our current trading. So starting with the Royal Mail scenario. The trajectory for the current quarter appears now to be broadly set. We've invested in our operation to enable us to support parcels volume growth at around 40% through the peak trading period. This included recruitment of around 33,000 people.

The growth we're currently experiencing would support that investment and absence a severe downturn in the weather, we still have the potential to throw all the delivery companies off course, we can expect a really quite strong quarter. Into the new year, though, as Keith mentioned, it becomes far more difficult to project you know, what will the position be with respect to lockdown restrictions? What might the impact from Brexit be both in the UK and to cross border, what happens to GDP, each of these areas can have really quite a material impact on our outlook.

So it's against that backdrop that we've refined the scenario. With also revenue of your own letters as we’re in broadly stable since June, material worsening in GDP or ongoing severe lockdown could change the trajectory, but we're not seeing that so far.

With regard to parcels, our outlook has become more positive over time, we’re now projecting revenue growth of 31% for the year. That's around 2.5 times the level of growth that we anticipate back in June.

The combination of renewed lockdown inspections together with an increasingly positive view on the durability of the behavioral changes we see, have contributed to the improvements that we've included in the scenario. We're very conscious, though that even quite small changes in the percentage for the year can result in quite a material impact on the outlook scenario. So we've increased the revenue range to reflect that uncertainty.

On the cost side, the improved outlook for parcel volumes, is result of an increase in the cost of the mix change in September, indeed, given the top line improvement is now maybe better tagged as a cost of growth in terms of the change since September. I've now additionally highlighted the increased costs of overseas conveyance in the scenario as well.

Moving on to the prospects of GLS. Looking at their volume trends to date, again, a clear spike of activity in May and June. And some early signs of a step up into the autumn, slightly more stable trends than we've seen in the UK though, into the intervening period.

But - so moving on to the implications of that chart for the GLS scenario. Clearly, they're grappling with similar levels of uncertainty, but across many more markets, where of course, governments are dealing with the crisis in several different ways. Just as in the UK, GLS has seen new lockdown restrictions take hold in many of its markets. This has resulted in a step up in the volume growth rate that we might expect, since the last scenario view in September.

And also similar to our view in the UK, to add more clarity about the trajectory for quarter three, as opposed to quarter four, where there is significantly more uncertainty creeping into their forecast.

So we've uplifted our view of the second half quite significantly. Current trends improving our revenue growth outlook to be pretty much in line with the first half. Continues to be an expectation of some margin compression in the second half, some of the price premiums that we achieved in quarter one, not likely to be secured moving forwards and some of the delivery efficiencies we gained, as well again unlikely to repeat. But overall, we do now see the potential for an improved margin for the full year from that previously anticipated.

So to summarize, first half performance has been materially better than we feared back in June when we first contemplated these scenarios. Strong parcel growth [ph] and revenue growth has driven a new positivity to our position outlook from that which we had a few months ago.

In the UK, whilst we've suffered from higher costs linked to COVID, and the mix shift to parcels are starting to face up to a future dealing with growth rather than decline really offers a new momentum to the push to turn around the business. We still need to change and become more efficient, but that's more achievable in a growing business.

In GLS they've really proved their agility this year. The responsiveness of their business model, their management team shown itself to be capable of not only successfully capturing B2C growth, but then also translating that growth into improved margins. That's really key in that business.

Our scenarios for the rest of the year is still uncertain. Quarter three seems set to be another strong period, absent the severe downturn in the weather. Quarter four, whilst we move towards it with great momentum is much, much more difficult to project. And so we’ll obviously provide a further update when we've seen our Christmas trading period play out.

With that, I’ll now hand over to Stuart to step through the Royal Mail business.

Stuart Simpson

Hi. Thank you, Mick. Thank you, Keith. Morning, everyone. Thanks for joining. I’ll just like to start and reiterate what Keith said, a huge thank you to all our people for the outstanding job they've done over the past month has been incredible, the resilience, the flexibility, the adaptability they've shown, huge thank you to them.

First, just turning to the commitments that we made in June. In short, we've delivered on all of these, starting with management, restructuring well that is, of course, we're regrettable. And we're continuing to consult with CMA. At the top of the organization, I've taken out over 40% of the top 250 managers to change the culture here to get me and my executive board closer to the customer, closer to the frontline, close to the market to make sure we can drive decisions faster and drive accountability and responsibility. So pleased that we're pressing on with that.

So as non-people costs, as those of you who have followed the business for some time will know we've been on this for some years, it is getting more challenging. Nevertheless, in the first half, we've delivered a £70 million saving and we've got a pipeline of ideas and activities that will lead to the £200 million savings. Those two combined will flow through into next year.

On the CapEx front, I've reviewed the whole portfolio. There we’ve put in a more customer focused. We've re-phased things, but protecting what is making this a more customer-centric business, and a more efficient business. So we've met all three of those commitments we made earlier.

Now, worth just taking a moment on COVID. First, and most importantly, we worked incredibly hard to keep our people safe. We spent over £40 million on PPA, and we changed our operating practices to make sure everyone was safe through this first half, and we continue to do that going forward.

There are some significant challenges that we saw over this first half. Absence was running at around 20% periods, huge volatility in volumes that we were seeing coming into the network. Nevertheless, we managed to keep the organization running. This showed a huge amount of operational resilience and flexibility.

Finally, Keith mentioned this, we have played an essential role - essential roles supporting the government and the country. It's been really challenging, but we're proud to step up into that, and to do that. We've delivered over 400 million items of PPE to care homes, to GPS to other critical healthcare areas. And we've touched over 90% of the tests that are being done in the UK. I think this shows the speed of response and what we can achieve when we work together.

Just flipping to the next page is just a very quick look at the amount of public affection, the high regard within which we've been held. We've had a huge outpouring of support for the business from the public, which has been great.

So now moving on to the next. We are well positioned for growth. But as Mick said, and as Keith said, we must change. We expect parcels revenue for the year to be up over a £1 billion, which is absolutely tremendous. This puts the business in a different position than we've seen before. So the first growth we've seen for many years. But it also shows the need for change. We now have parcels revenue 60% of the business against letters 40%. We have to change our configuration. We have to be focused on driving positive margin in parcels.

And as Mick said, the challenging part of the first half was well the revenue growth was good, the cost came with it. We got a market share. It's been a tremendous performance, but we won't know the absolute data for some time yet. We look at our key competitive parts of the market. Our account parcels are up over 51%. And within that this is the market that we really compete against the other carriers that track service, so scanning of products through the pipeline through to delivery is up over 72%, tremendous performance.

So as I say, we are very well-positioned for growth. We have a tremendous workforce, great people trusted to deliver. We've been introducing new products that build on that trust, the parcel collect, where people can go online on the app, agree for post person to come pick up that item, whether you've paid for the postage online at home, or returns that are already pre paid. The leverage in network force is leveraging the great trust.

We have a phenomenal brand in the top 10 brands in the UK of all companies in the UK. So tremendous respect for the company. I just also point out, we are the global sustainability leader report number two in the world for our sustainability report in the transport sector. That's again, something we're really, really proud of, and we'll continue to build on.

However, if I look at three and four on the page, great products and efficient ways of working. We need to make sure we put the customer at the center of this and make sure we can change fast to this adapting market, where the parcels have really stepped up in growth and make sure we capture that, with a real focus on larger, later and faster parcels.

And then efficient ways of working, as Mick said, the costs have come with this growth. So whilst it's fantastic, we've captured the revenue, we need to drive the efficiency, we need to be able to catch that in an efficient way. So we are sustainable for the long term. So well-positioned, but a lot to do.

Turning onto transformation. As Mick said, its been a challenging half year. However, we have made progress in some areas. Digitalization, if we look at the app and the website constantly been upgrading those. Our website is one of the most visited in the UK, we’ll have close to 500 million visits this year. Our app we're way ahead of where we thought we'd be. We're now up to 3 million downloads already, a tremendous growth in that.

In terms of scan in and out, we've got 20 units enabled with that 12 hours of live. We expect to be rolling that out over the next 12 months or so, 12 to 18 months. Resource Scheduler. This is something that pulls together data and gives us a better view of how we can resource for the workload that we see coming. We still have to finish the trials on that. But we hope to be able to do that in Q4.

In terms of the network, we've been progressing at pace with this. The fit out of our North West hub will start in January. We've signed the lease for the Midlands hub, the Midlands hub when it comes on stream, we'll be able to process a million items per day, a huge step up and what we're able to do.

In terms of what we currently do for automation, more than doubled the number of parcels that were alternate automatically, sorted through our network through first half, a great performance by the team there. However, we are where we expect it to be in 2024. So we need to press on with what we've got in the pipeline. That's clearly no regret. But we do need to look at what else we need to do to make sure we are well positioned for this future growth. And that's what I've got the team working on now.

In terms of dedicated parcel routes. We've been running these on an ad-hoc basis for many years, particularly through the last six months where we've had this huge step up. We know we can do this. We have formal trials going on 22 routes. But we know we can and we will do this going forward.

Just moving to employee engagement. We recognized that the employees are absolutely key in this business. And it's been a challenging two years for people with no change, despite many people wanting change and recognizing from their daily job, that actually their route is not doable now. So we want to build on this. We want to get into the change. We want to get into that locally. And we are rebuilding the trust with our people, putting a lot into communication. We've got a lot of the senior team out talking to units on a regular basis to build a common connection there.

As you can see at the bottom of the chart, what we're getting is a very strong response from people. People understand the need for change. People want the change. It's up to me take the executive team to deliver the environment for that, so we can move at pace and capture this growth.

Industrial relations. , Keith has already talked about this. The talks are ongoing, they have intensified. Keith myself talked with Dave Ward, the General Secretary and Terry Pullinger, the Deputy General Secretary several times over the past weeks. The background has changed to where we were six months ago. We are now living in what we anticipated four years. Hence, we need to make sure we can drive that change quickly now, so we can get back to being efficient and sustainable. I genuinely believe we'll find a way forward on that. But we have to do it quickly. As I said earlier, we continue to engage with, you know, at CMA on the management restructuring.

Just before I summarize, quickly touching on peak. As most of you know, an incredibly challenging time for the business. This year even more so, this will be the biggest ever online Christmas. There is a structural shift in retail to online, which I'm sure many of you are familiar with. But that's been given an extra boost by the COVID situation.

This year, we're investing £100 million more than we did last year to make sure that we are secure for this incredible step up in volume. We got over 100,000 applicants to work with us for a temporary basis. This is more, you know, we'll take on board 33,000 people, we can breathe that up if we see even more volume than we currently anticipate.

To give you a sense of the scale of that, the whole of the Royal Navy in the UK is 30,000 people. So we are stepping up an incredible operation over this next six, eight weeks.

To try and make things as manageable as possible, we've done a shop early, send early campaign that's already out in the advertising world. It was around all of last week. And we've got our first TV after Christmas again, urging people to shop early and use the omnichannel way of getting parcels into our network that supports flattening that peak. So we expect Q3 to be challenging. But we're well prepared for it. As Keith and Mick mentioned, Q4 looks more challenging, given the economic uncertainty.

So in summary, really pleased with the first half revenue performance, it shows our focus is right, in terms of focusing on parcels, putting the customer at the center of this business, driving innovation, moving faster is what we need to do. That will continue going forward with parcels been a key focus for the business.

We've delivered on the commitments we set, I am please that we've managed to do that. And then finally, as we look to the future, we're well-positioned for growth. We've got a great people, a great workforce, a great brand. But we do need to change to make sure that growth is driving margin enhancements that were sustainable in the long-term.

With that, I'll hand over to Martin.

Martin Seidenberg

Yeah. Thank you, Stuart. Good morning. My name is Stuart and I'm the CEO of GLS. Today, I would like to talk to you about four things. Firstly, I would like to remind you what GLS is really about and what our foundations of success are. The GLS business model is, from my perspective, a very sound one, and its strength and flexibility has become even more apparent during the pandemic.

Secondly, I will briefly provide further input on our strong half one performance, as outlined by Mick previously. Thirdly, I'm pleased to provide more detail about our efforts to drive our profitable growth forward in a rapidly changing market environment.

Markets have leapfrogged a couple of years and during the pandemic, and we believe that the acceleration of some trends such as the shift to 2C & international deliveries are here to stay, which is a challenge and an opportunity at the same time. And finally, I would like to confirm the positive outlook given for our half two.

So what is GLS about? GLS provides a really powerful combination of strength and particularly in the current environment these play into our hands. GLS covers, as you can see on the slide, key European countries and parts of North America with own country organizations, and one common cross border network, supported by a high number of own hubs and local network goes across the network.

As a result, our extensive physical footprint is a key differentiator and allows us to serve our customers internationally with our own network. So just to make this clear, for example, if you ship a different part of a GLS, say from Copenhagen to Madrid, it is being picked up by, sorted, line hauled and delivered all within the GLS network. That allows us to provide swift transit times and have full control of the parcel, i.e., high quality and one pace to the customer. This is a valuable asset and particular in growing cross border trade, and it shows in our cross border growth rates which I’ll come to you shortly.

Additionally, we operate a decentralized structure, with each country being served by local management teams, with a high degree of commercial independence, meaning each country portfolio has freedom to tailor services, as well as self to be and to see to the local market situation and needs.

When combined with the entrepreneurial spirit embedded within our GLS DNA, this allows us to stay close to market developments and our customers. So, it is a bit like a best of both worlds, I would call it, as we offer unified international service to capture cross border opportunities, and also tailor our domestic approach to local requirements.

And the benefit of this setup is reflected in the financial performance of GLS in recent years, as you can see, on the following page. The GLS has demonstrated a clear track record of delivering robust financial performance. As you can see, revenue has grown by over 13% per year since 20 – ’15, ‘16. Over the same period, operating profit grew by around 10% now. And this was achieved despite a significant shift towards to 2C, which increased from 33% to 47% in four - in just four years.

So, the flexibility of the GLS business model has helped to deliver steady and sustainable growth and profit. Despite I don’t think it's important to mention of strong competition in our industry, cost challenges and changing market dynamics.

Now, it is important that GLS will continue on the successful path. Being in the role now for a few months, I would like to share with you a few strategic observations and beliefs regarding our business.

So taking a step back and looking at GLS from a more strategic perspective, I think it is fair to conclude the following. Firstly, I strongly believe that GLS is positioned so that it can adapt quickly and flexibly to new market trends. For example, regarding attending to B2C mix domestically and internationally. This is a real asset. And we have seen benefit from this in recent months, the 2C and international segments but growing substantially, and GLS was able to fully exploit that.

Secondly, I believe that we have the potential to capture more existing volumes in the countries where we are already operating. So the focus will be to secure and strengthen our footprint in our existing GLS countries.

Thirdly, at a time when markets are changing rapidly in terms to key focus, digitalization and internationalization, we need to set clear common key strategic priorities on an international and local level to ensure best possible delivery against the objectives.

Finally, we do have a strong GLS leadership team in place, which I trust to deliver success in all those areas mentioned. We are – we at GLS, we are excited about our current trajectory. But we are also aware that it takes hard work to maintain and even accelerate the momentum going forward.

So what is the momentum, which I'm talking about? What do the numbers look like? As Mick highlighted earlier, we delivered record performance during the first six months of this year. And countries exceeded expectations. As you can see on the slide growth was largely driven by international, which grew with 28% versus prior year.

And 2C, we experienced a decline in 2B segment but have seen first signs of recovery in recent months. I think it is worthwhile to note that despite a strong pivot towards 2C operating profit margin increased to 8.9%. We managed to swiftly benefit from the market dynamics and also from the scale impact on operation unit costs.

In addition, we were successful in implementing cost containment measures at the start of the COVID outbreak and to drive operational efficiency up. Also, we managed to leverage the tailwinds to achieve material improvements in our focused countries.

Therefore, I would like to now briefly talk about our focused countries, Spain, France and the US. Overall, our focus countries have all emerged stronger in half one, despite positive trajectory with solid revenue growth and good financial performance. We have effectively leveraged our leading 2C position in the Spanish market and maintain good service levels throughout lockdown.

Going forward, Spain will continue to focus on leveraging their strong market position further and to fully exploit the potential which is in this market. GLS, France, the performance of France has improved significantly, revenues grew by double digits and results improved visibly. GLS, France remained fully operational during the initial lockdown period. And this provides us with a competitive advantage in the French market.

As a result, France secured new customers and profitable segments, which support revenue growth, but also help to reduce unit costs. Our highly motivated French team is now focusing on securing this positive momentum also for half two.

Now coming to the US, the US generated revenue growth of 15% resulting in a breakeven performance during half one. We also can observe a shift towards to 2C in the US business, managing the economics around this segment shift both operationally and commercially, for example 2C pricing and residential surcharging is instrumental in strengthening our results in the US.

The US team continues to focus on these elements, which I mentioned. And I will personally continue to support US on its way to strengthen their results. So in terms of focused countries, I believe we have indeed made significant progress so far. But what do these structural developments mean for the months to come?

First of all, as a result of recent changes to the market, the US group has already become a B2C delivery company. With its majority of business share now being already B2C. We already have an extensive 2C offering, particularly in key European markets, at Spain, Europe East and Denmark. The development analyze the potential that GLS has, and what I have been talking about this morning.

Our business model has enabled us to respond quickly to the pace of change in all markets. However, I would like to emphasize that 2B will remain an important second for GLS. We have proven our ability to maintain the high service and reliability that our B2B customers demand and this will only be reinforced in the future.

So going forward, we have defined a clear set of tasks to further capture 2C growth, including further refining our operations, and focusing on the GLS customer experience by digitalizing, and improving customer connectivity.

And internationally, as you can see, our strong international network is a differentiating factor in the market. And it addresses current market requirements quite well. As outlined earlier, we provide one touch and feel throughout the international positive journey. Obviously, we will invest further time and effort in this growth segment to serve our customers and capture the potential growth. Our efforts will cover the network size itself, as well as the international service portfolio.

So to conclude, I would like to summarize that GLS has a proven business model and a clear track record of profitable growth. We delivered a strong performance in half one. For the future, GLS is well-positioned to capture growth in key markets and segments. We confirmed the positive outlook for half two and I'm convinced that we are taking the necessary steps to prepare GLS for continued growth, also beyond the years 2020, ‘21.

Thank you very much. And let me now hand back to Keith.

Keith Williams

Thanks, Martin. I hope that gives you more of an insight of GLS. And you know, Martin's made a great impact in his six months there. But it's pleasing particularly to see the progress on B2B to B2C and how we've managed to retain our margins as that transition has happened, I think that's a real positive. And again, the focus on the countries that were underperforming. You can now see the improvement there.

So for me to summarize, we've got good momentum at the moment and COVID has undoubtedly accelerated market trends. The first half demonstrated the resilience of both businesses despite the volatility in volumes and the challenges of operating during a pandemic. We still got the challenges of the peak in Q4, which we’re obviously prepared for. And we're looking to see what might happen in the fourth quarter when we might see some recessionary impacts. And then, of course, in the UK, we've got Brexit.

But we've reached a point at Royal Mail, where parcels revenue is higher than letters, first time ever. And we need to deliver the changes we need to make to make sure we continue to capture that growth opportunity, which we obviously want to do in partnership with our unions. I hope that we can get some agreement soon.

In the UK, as Stuart outlined, we’re delivering on our commitments from June. While there's still some uncertainty about the fourth quarter, I believe we're in a good position overall, as Stuart outlined in our combination of scale, reach, brand and innovation. We're well placed to capture growth opportunities for the future.

On GLS, as you've just heard from Martin, we're delivering strong revenue and profit growth. And we're well-positioned for the future to capitalize on the structural trends in e-commerce and customer needs.

Finally, just as a reminder, we're still away with interest Ofcom's user needs report, and how that will inform our views on the US. That's due, hopefully in the next couple of weeks. But, you know, we still believe as we demonstrated by the loss in the reporting business in the first half, that the USO does need some change to be sustainable for the future, and better serve the current needs of customers.



Well, February will be our nine months update. And I think all of you know where IR is if you have any follow ups in the coming days. So do feel free to get in touch and I look forward to speaking again soon.

Keith Williams

Thanks. So if we don't talk to you before have a great Christmas.

Stuart Simpson

Have a good Christmas overall. Thank you.

Keith Williams

Thank you.

Operator

Ladies and gentlemen, the conference has now concluded. This presentation has now ended.

[Phantom]

Still not saying what so called "efficiencies" changes they want to introduce.

This my friends is the key to "what's going on" and how they are going to break it to us.