U.S. Markets closed

Edited Transcript of RMG.L earnings conference call or presentation 22-May-19 8:30am GMT

Full Year 2019 Royal Mail PLC Earnings and Strategy Presentation

London Jun 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Royal Mail PLC earnings conference call or presentation Wednesday, May 22, 2019 at 8:30:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Catherine Nash

Royal Mail plc - Director of IR

* Keith Williams

Royal Mail plc - Chairman

* Rico Back

Royal Mail plc - Group CEO & Director

* Stuart Simpson

Royal Mail plc - CFO & Director

================================================================================

Conference Call Participants

================================================================================

* Arthur David Truslove

Crédit Suisse AG, Research Division - Research Analyst

* Chi Onn Chu

Deutsche Bank AG, Research Division - Research Analyst

* Damian Brewer

RBC Capital Markets, LLC, Research Division - Analyst

* Daniel Roeska

Sanford C. Bernstein & Co., LLC., Research Division - Research Analyst

* David Kerstens

Jefferies LLC, Research Division - Equity Analyst

* Edward John Rodney Stanford

HSBC, Research Division - Analyst

* Gerald Nicholas Khoo

Liberum Capital Limited, Research Division - Transport Analyst

* Joel Adam Spungin

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Mark John McVicar

Barclays Bank PLC, Research Division - Head of European Transportation Research

* Matija Gergolet

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Samuel James Bland

JP Morgan Chase & Co, Research Division - Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Catherine Nash, Royal Mail plc - Director of IR [1]

--------------------------------------------------------------------------------

Good morning, ladies and gentlemen, and welcome to Royal Mail's 2018-'19 results and strategy presentation. I'm Catherine Nash, IR Director here. We've got a lot to get through today, and it's my job to try and keep us all on time.

Some housekeeping before we get started, though. Please ensure all your mobiles are on silent. There are no fire alarm test plan for today. So in the event of alarm sounding, please leave the auditorium by the exits indicated. In the breaks, refreshments will be available just outside the auditorium, and lunch will be served in the Watergate lounge next door. Please allow plenty of time to get back to your seats. There are a lot of people here today, and we like to try and start the sessions promptly. Please note this presentation is being webcast live and will be recorded.

Before we start, I need to draw your attention to the disclaimer on forward-looking statements. This slide sets out examples of 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. All of these principal risks and uncertainties have the potential to impact the group's business, results of operations, financial condition and prospects adversely.

So here's the agenda for today. You see that we have sessions covering key topic areas. You will also see that there are plenty of opportunities for Q&A. Please wait for a mic to reach you and introduce yourself before asking your questions. And if possible, keep -- please keep your questions succinct rather than in groups of 3 as we want to get around as many people as possible, and we're also taking questions from the webcast as well.

I would now like to introduce you to our incoming Chair, Keith Williams, who will say a few words before we start with the presentation with a video on our history.

--------------------------------------------------------------------------------

Keith Williams, Royal Mail plc - Chairman [2]

--------------------------------------------------------------------------------

Good morning, everybody. Yes. I can add my welcome as well to Catherine's to those of you in the room and those of you listening on the webcast. I see a number of familiar faces, but I also see a number of new ones. And I hope that I'm going to get to know you over the next months and years.

Today is about results, and it's about our plans for the future. Rico and Stuart are going to talk you through that. From my side, given it's sort of my first day as Chairman, I thought I might say a few words about me, just so you get to know me a little bit as I hope to meet you much more in the next months. But also, I'd like to talk to you a little bit about some of the changes at the Board that we are making today.

So a little bit about me is I joined Royal Mail just over 12 months ago. My recent background was primarily at British Airways, and I see some similarities between BA and Royal Mail. Both very known British icons, both with tremendous opportunity in Royal Mail's case and in BA's case here in the U.K. and overseas. What I also see is we're on a journey to transformation. BA was privatized in 1985, so it's way ahead of Royal Mail in terms of transformation. But what Rico and Stuart are going to talk to you today is about the future transformation of Royal Mail in the U.K. They'll also talk to you about the group overseas, which is sometimes neglected, I think. And James and Rico will talk to you about

(technical difficulty)

and it is clear that Royal Mail needs transformation, and Rico and Stuart are the right people to take us along and the Board that is equipped to help as well.

So today, we're announcing 2 new additions to the Board. One is Michael Findlay. Michael is experienced both investment banking, and he has experience in letters businesses. He's been involved in letters businesses in the past. He will

(technical difficulty)

primarily from capital allocation, links with investors and generally add advice to the Board.

The other person who we're adding today is Maria da Cunha.

(technical difficulty)

Maria da Cunha has a history in industrial relations. She has a history in people and a

(technical difficulty)

culture. And I

(technical difficulty)

along the people journey in the U.K. So those are 2 additions to the Board today. You should expect some more additions into the future.

But finally, and most importantly, it's Les Owen. It's his last day as Chairman of the -- of Royal Mail. Les has been on the Board for 9 years, and Les stepped into the role as Chair when Peter Long left last year. I think Les' knowledge, his integrity and his experience is something that we will truly miss. He has done, I think, a fantastic job of stepping into a difficult role at a difficult time. And I think we're all on the Board sad to see him go. So I just

(technical difficulty)

a huge thank you to Les. Thank you all for coming today. Thank you.

(presentation)

--------------------------------------------------------------------------------

Rico Back, Royal Mail plc - Group CEO & Director [3]

--------------------------------------------------------------------------------

Welcome to the Royal Mail Group Capital Market Day and Results Presentation. I hope you enjoyed the video as I did. I've seen that a couple of times. But every time I see it, I feel, wow, what a heritage, what a tradition. And what is constant is the change in Royal Mail. Let's start.

As you know, I took over as CEO in June last year. It has been a challenging year. I was disappointed to have to do a trading update on October. It was not what I expected or what I wanted. At that time, I set out our action plan for the second half of the year, which we have delivered. We have implemented targeted price increases across our businesses. We have improved productivity to 1.9% in the second half of the year from minus 0.2% in the first half. We have reduced our head office management by 13%. We have completed a number of reviews, including a complete review of the U.K. network, and an assessment of the CWU agreement. We have delivered operating profit before transformation of GBP 509 million, in line with our revised guidance. And we are proposing a final dividend payment of 17p per share, taking the full year dividend to 25p per share.

The reviews have informed our strategy and our direction for the next 5 years, which is what we're going to share with you today, alongside with our '18-'19 results.

As a business, our focus is to connect customers, companies and countries. We have started our journey to 2024. Our ambition is to become a business that's growing, efficient and diversified, growing with 2% to 3% revenue increase per year over the next 5 years; efficient, a relentless focus on efficiency will be delivered, and we will deliver operating margins of above 5%.; diversified, in terms of products, over 70% of our revenue will be generated from parcels. In terms of geography, 40% of our revenue will be delivered outside of the U.K.

To achieve this, Royal Mail needs to change from a letter business that delivers parcels to a parcel business that delivers letters. This will be delivered by focusing on 3 strategic priorities: Number one, turning around and grow the U.K.; number two, scaling up and grow GLS; number three, expanding in cross-border. I will talk to you in more details about these strategic priorities. But before I do this, let me tell you where are we today.

Royal Mail has some great strength. It's our people. It's our brand. It's our scale, and it's a joint delivery of parcels and letters in the U.K. In the U.K., we generate about GBP 3.8 billion revenue from domestic letters. But we're already become increasingly diverse. In the U.K., our turnover from domestic parcels and our international activities is also GBP 3.8 billion. In GLS, we have one of Europe's leading ground-based parcel networks with a 30-year track record of growth and revenue of about GBP 2.9 billion. Within our U.K. and GLS businesses, we have cross-border services which jointly generate GBP 1.7 billion of turnover and are growing strongly. As a result of that one, our U.K. letter revenue account now for less than 38% of group's revenue.

You would be familiar with the key market trends. E-substitution continues the way we communicate. We expect letter volume to decline by between 5% to 7% during '19, '20, mainly to the impact of the GDPR law and the current economic uncertainty we have here in the U.K. However, we expect letter volume decline to slow from 2020 onwards and today reconfirm our medium-term letter volume guidance of 4% to 6% decline per year. This aligns with the market study which was published by PwC today.

Whilst e-substitution impacts our letter volumes, technology is providing our parcel business with significant growth opportunities. E-commerce where, digital means -- meets physical, is fueling growth in parcels in the U.K., in Europe and overseas. I'm pleased to say today that, last year, parcel revenue in the U.K. offset the decline in letters. Looking forward to the addressable parcel market in the U.K., that market is forecasted to grow at about 4% to 5% per year. We expect to outperform this with U.K. parcel revenue growing above 5% per year.

In GLS, our revenue growth would be over 6%.

Our challenge in the U.K. is costs. Our review shows that our network is not designed to handle parcels efficiently. Only 12% of parcel are automated compared to 90% of letters. This is because we have not changed our operation for a number of years. The last transformation in the period from 2010 to '15 delivered real change. We're automating mail, centers, revising our delivery route and renationalizing mail centers. As a result, the operating margin profit before transformation increased from at that time GBP 72 million in '10-'11 to a GBP 625 million in '15, '16. But since that time, profit has declined as operational change slowed.

If we turn to productivity, the last transformation program delivered, on average, about 2.6% productivity improvement per year. However, since that time, productivity is falling, dropping to minus 0.2% in the first half of '18, '19. This has been made more challenging by the agreement we took with our unions in 2018. An assessment of the productivity and efficiency opportunities underline the need for a turnaround program in the U.K. It concluded that the pension settlement had delivered significant benefits compared with a defined benefit scheme, but they found out that a step change was required to fund the overall cost of this agreement. Their review also found that whilst the overall direction set in the agreement is right, was greater use of technology, the initiative designed to fund it, they were not enough nor were they all on track to deliver. So a major shift in focus and pace is therefore needed. We have taken immediate corrective action, focusing on operational grid, and just gripped on it which has already yielded today against during the second half of the year, we achieved 1.9% productivity improvement.

A new transformation plan will be launched across our U.K. operation. As a result, we expect to deliver cumulative improvements over the planned period of 15% to 18% productivity gains, and the business will benefit from improved operational gearing as our parcel revenue grows. At the moment, for every 1% decline in letters, we need twice as much parcel revenue to maintain the same level of profitability. From '24 onwards, the transformation will mean that a 1% decline in letters will be more than offset by 1% increase in parcel revenue.

Our network redesign has already started. The U.K. network will be modernized. There would be 3 dedicated parcel hubs to handle bigger parcels and items from larger clients. The remaining 60% of parcel, our small and untracked parcels, will continue to grow through existing network, but 30 additional small parcel sorters will be installed in our mail centers to drive efficiency.

On delivery, approximately 85% of parcels will be continued deliver, alongside with letters, to benefit for the lower cost of joint deliveries. Our bigger parcels and those arriving later in the day will be delivered through a dedicated parcel route. This change will give us a number of benefits. Our existing processing cost will be reduced as we will automate smaller parcel production. Processing costs for bigger parcels will reduce as we move them into our parcel hubs. Our redesigned network will allow us to improve service and means we can accept parcels into our network later through a standardized network. The investment costs needed to execute this are around GBP 400 million to GBP 500 million above our typical capital expenditure spend. This is an ambitious transformation plan that will lead a staged approach and needs a close working with our people and unions. Stuart Simpson will share more details later this morning.

Royal Mail operates one of the leading ground-based parcel networks in Europe through GLS. GLS has been a growth engine for our business for the past 20 years and has delivered more than EUR 900 million of net cash. We will continue our grow and -- scale up and growth strategy with organic expansion be supplemented by careful, selected acquisition. The outlook for GLS is largely positive. We expect revenue to grow to GBP 4.5 billion revenue on '23, '24. Tight labor markets in Europe, North America remains a challenge across our sector, but corrective action have taken place in the last 6 months, mainly price initiatives, which helped to deliver an operating profit margin of 6.1% for the full year. We expect to see operating profit margin return to the upper end of 6% to 7% range in the medium term driven in part by improved performance in our U.S., French and Spanish operations.

Cross-border. When I say cross-border, I mean the movement of parcels from one country to the other. This has been a key element of the success story of GLS, and it is an attractive area overall for the Royal Mail group. The addressable market is valued in excess of USD 60 billion with growth driven by e-commerce. Today, our cross-border activities in Royal Mail and GLS already generate GBP 1.7 billion revenue per year. Despite our existing scale, we see exciting opportunities to create value by combining the best of GLS and Royal Mail offerings which are complementary. Royal Mail operates in the small parcel segment. Its low cost ideally suited for e-commerce, and the postal network provides access to over 230 countries and territories in the world. GLS operates under the third parcel segment, generally between 2 to 30 kilos, and is very competitive in the premium B2C segment.

In the past, Royal Mail and GLS have not had joint operations and have been limited by only playing in selected weight segments. By integrating our 2 international businesses, we can offer a broader parcel solution and extend our reach through our own network, commercial and postal partners. Our cross-border strategy involves exploiting opportunities that already exist with our own network. It is an asset-light approach with low investments required.

We are investing in Royal Mail to change and grow. In 5-years' time, we will turn over about GBP 12 billion, having delivered growth of 2% to 3% per year. Our U.K. transformation will make us more efficient with a modernized U.K. network that make most of a joint delivery achieving productivity of 15% to 18% over life of the plan. This will help us to deliver group operating profit margin of at least 4% by '21, '22 and at least 5% by '23,'24. We'll also become increasingly diverse. In terms of product, over 70% of revenue will be generated in parcels. And in terms of geography, about 40% of revenue will be generated outside of the U.K.

Our plan assumes incremental capital expenditure of between GBP 400 million to GBP 500 million over the next 5 years with peak spending during year 2 and 4 as we invest over the network. The GBP 400 million and GBP 500 million is excess of the usual spend which we have. We have given careful consideration to our spending plans and are convinced that this is a right level of investment to create a business that is sustainable long term. We remain committed to capital discipline and maintain our strong balance sheet. During 2018 and '19, we are proposing to continue with our historic dividend policy. However, to fund the turnaround in the U.K. from '19, '20 onwards, we will reset the dividend to 15p per share underpinned. That was not an easy decision. We know that this will be difficult for shareholders, but Royal Mail needs to change. This may be supplemented by additional payouts in years where we have substantial excess of cash flow.

As I said at the start, our people are real strength for us. I've spent some times in the operation over the last few months. Mail centers, delivery offices, regional distribution centers, I have met many great people. And all of them are passionate about our business, and they recognize the need to change. We have now informed our unions about the shape of change required. We will work closely with them in the coming month on the details of our plan. Later today, you will hear from some of the management team who will lead the business through this transformation.

So summary. Royal Mail needs to change. We now have a clear vision to transform Royal Mail group over the next 5 years. We have a strong base on which to build for the future with the biggest network in the U.K. and excellent international capabilities through GLS and our postal networks. The market trends remain unchanged and in favor parcel growth in the U.K. and overseas, but we are facing immediate cost challenges in the U.K. that have been recognized and that will be fixed.

Major operation has stalled in recent years, and the U.K. network needs to be redesigned to handle parcels efficiently. But our ambitious turnaround plan will enable Royal Mail to benefit from operational gearing as our U.K. business returns to growth. We will continue our scale up and growth strategy for GLS. Growth within the U.K. and GLS will be partly underpinned by our cross-border operations, an exciting but underexploited area within the group where we can create value by improving the international integration between our U.K. and international assets.

Our journey to 2024 will support growth, efficiency and diversification. Royal Mail will be transformed. Our change program will be staged as we work with our people and work with our unions. This will require investment of GBP 400 million to GBP 500 million above our typical capital expenditure spend, mainly incurred during the years 2 and 4 of our journey and plan. We have introduced a new dividend policy reset to 15p per share underpinned, but this may be supplemented by additional payouts in years where we have substantial excess cash flow.

Stuart will take you through the results in detail. Thank you very much.

--------------------------------------------------------------------------------

Stuart Simpson, Royal Mail plc - CFO & Director [4]

--------------------------------------------------------------------------------

Thank you, Rico, and good morning, everybody. Thank you for coming. I know we need to go through the outlook in some detail, but I think it's important we start with the results. There's some things in the results that give me confidence in the plan that Rico and I are putting forward today.

So starting with the '18-'19 financial summary. We are in line with the guidance that we gave. I think that's important to note. What we said we'd do, we have done over these past few months. Highlights being group revenue is up 2%; transformation costs, slightly less than we anticipate, and I'll expand on that; profit where we said it would be; margin down to 3.6%. I'll talk about the end year trading cash flow differences later on. Some of those timing differences as you're already familiar with. So as Rico said, we're pleased to announce a final dividend of 17p per share.

Now turning to the individual business units, starting with UKPIL. This was an important year for the U.K. and a difficult year. The letters decline of 8% is the worst it's been for 5 or 6 years. But actually despite that, the parcels' revenue offset it, and we were flat. A really important point to note was we look at the outlook we're putting forward. The operating costs were up 2%. And then just touching on transformation. The turnaround has started. In second half of the year, Rico and I undertook a very detailed review of our portfolio of spending. We canceled 39 projects, we resized 41 and rebalanced and refocused the spend on the future. That's why the transformation cost came in slightly less than we anticipated. Note that also in that number is around GBP 24 million of management restructuring. As Rico said, we exited around 13% of the management population. So again, the transformation has started.

Moving to parcels' revenue. It's a 7% increase for the year and 8% volume increase. The best it's ever been. Just 3 years ago, that was close to 0%. We now have the right products, the right quality and the right brand. The brand has always been there. But in the past, we didn't have the right products for the market. The price pressures remain. It is a very competitive market. But we've proved we can make a difference. From essentially flat a few years ago, now growing at 7%.

Moving to letters revenue. A challenging year. We did say at the start of the year, we'd be outside our 4% to 6% guidance. We anticipated around 7%. Actually, combination of GDP being softer than anticipated and GDPR having a bigger impact took us to 8%, in line with what we said in January. Guidance for next year is 5% to 7%, thereafter returning to 4% to 6%.

Just to draw your attention to at the right-hand side, positive price and mix. So a bit more ambition and targeted price rises than we've seen in the past, and you can see that dropping through. Steven will talk about that later.

Moving to people costs. These were up 1% year-on-year. Headwinds were the pay and the shorter working week. If you look at the bottom right of the chart, you can see the productivity. First half, we went backwards. We spent more to do less. Second half, we recovered, back close to 2%. So again, the turnaround just started. We're back on track on a key metric.

Looking at non-people costs. Historically, this had been a real area of opportunity for us. But you can only take out the flight to Edinburgh once. So this is getting tougher. But there are still opportunities. We had a tough year last year when we did the portfolio review, some things we had to impair, put through some accelerated depreciation. But again, it's a sign we've started this turnaround.

Moving to GLS. Again, strong revenue. 8% up. Unfortunately, costs up 9%. The margin came down and the profit went back. But again, things are changing. In the first half, the margin was 5.7%. Second half, 6.5%. So again, things are starting to come back for us. Full year margin of 6.1%. So another good year from GLS, a good second half of the year as we turn things around. If you dig into the GLS revenue, the key countries continue to be strong. Germany, up 9%. Italy, that's had fantastic growth for many years, slowed a bit as Amazon opened their network and took traffic away from us. But you'll recall, we always said we knew that would happen, and we didn't allocate capital behind that. And a great performance to be growing at 5% in a market where Amazon are taking the traffic off you.

Spain, strong growth. France, strong growth, particular high points being Denmark and Eastern Europe. So the revenue of GLS continues to look good.

Turning to the GLS margin. Costs were up primarily due to the tight labor market. You'll have seen that in many businesses, particularly in this industry. Important things to note, though, there are real opportunities to drive the margin forward. The losses in France can be turned around, the U.S. and Spain. Again, they give us confidence we will get this back on track.

So moving back to group, adjusted profit after tax. The key thing to note, finance costs remained low in line with our conservative balance sheet. Tax charge, the percentage a bit higher because the mix of earnings between the U.K. and GLS was higher this year. And an earnings per share basic, 30.5p.

Moving to specific items. If you look at the right-hand side, profit before tax. The delta between the GBP 241 million and the GBP 398 million, that's the GBP 157 million that you can see at the bottom of the column on the right-hand side. A couple of things to draw out, there's an accounting impact of the RMSEPP buy-in, so we derisked that. It's a noncash adjustment. And note at the bottom, the pension charge to cash difference of GBP 70 million, in line with what we said.

Moving to in-year trading cash flow. The EBITDA before transformation cost, GBP 935 million. Key things to note on this, the trading working capital movement. We thought we highlighted these several times in the past. Just to remind you, there was GBP 100 million timing of pay for the front line, GBP 47 million relating to having a 53-week year, and a 13 monthly payment for managers. The same for VAT with GBP 17 million. The balance of that is related to timing differences on international sales and also on a change in the bonus accrual. If you come down to the bottom of that page, you can see the adjusted in-year trading cash flow, GBP 282 million.

Looking at investment. As I said, the turnaround just started. So we conducted a portfolio review. That meant we came in tighter than the guidance that we said. That includes the voluntary redundancy we paid to exit the managers.

Moving on to uses of cash. We started the year in a net cash position, EUR 14 million. During the course of the year, we've had our in-year trading cash flow, as previously mentioned, the acquisition was Dicom primarily, the acquisition in Canada and then the dividends paid, giving us a net debt at the end of the year of GBP 300 million.

Now moving to the financial outlook. I'll provide some highlights then go into the details of this. At a high level, we are projecting the U.K. revenue to grow. Something that's not happened for 5 years. But we're confident that, that will take place. We've seen it this year with those parcels moving forward.

The UKPIL people cost at the end of the plan will be flat with where we are in this year, '19-'20 as productivity kicks in through the plan. The total U.K. cost will drift off a little bit. We've got some headwinds, you deliver more parcels, you have more van runs, et cetera. But the delta between those 2 is positive, so we'll have margin expansion in the U.K.

GLS will continue to grow. When you pull it all together, as Rico said, the group will grow to 3% to GBP 12 billion from GBP 10.5 billion. The margin will be greater than 4% in '21-'22, greater than 5% in '23-'24.

I'll then touch on the capital prioritization through this period. So going through this in a bit more detail, starting with the UKPIL. Revenue. As I said, this hasn't grown for 5 years. So it's quite a bold statement to say that we are going to grow it. But we're confident. The parcels' dynamic has changed in this business. 3 or 4 years ago, the operations were not open to take acceptance from parcels after 5:00 or 6:00. The Internet shopping has switched to later in the day, so we were excluded from that part of the market. We couldn't track and trace, which is vital in the retail sector. We couldn't handle returns. We've now got those things in place, underpinned by the right brand. People always want to work with us. 7% growth last year. We're projecting 5% CAGR through this period.

Looking at letters. PwC have done the same review they did prior to the IPO. Their conclusion is, in line with ours, that it gets back to a 4% to 6% decline over the next 12 to 18 months. The combination of that, combined with some more targeted price increases in letter that I think we've shown the appetite and ambition to do this year means that the U.K. will return to growth and be around GBP 8 billion revenue in 5 years.

Looking at UKPIL costs. Starting with productivity. We thought it was worthwhile just explaining why we look at this and why we talk about this metric. 70% of our U.K. costs are people. They are the backbone of what we do. They're the face of the brand, but they are also 70% of our cost.

First thing to look at, the first component of productivity is workload. So if you go back around 9 years when I joined, 10 years when I joined, we didn't have an industrial engineering team that analyzed what we did. So we established that around 8, 9 years ago. That feeds into an activity-based costing model that I'm sure people will be familiar with. These engineers look at every activity through the pipeline. They've consolidated down grouped together into around 570 activities that feed into our cost model. That lets us extract what this should take time cost should take time and hence cost be at every step through the pipeline. You have to have that to understand how you manage an operational business. So we have that now. We spent a lot of time on it, and we've got high confidence in what it gives us. The next thing is the hours. The hours is what it did actually take you because we know what we paid. When you put those 2 together, you get a ratio. The ratio we use is weighted items per gross hour. It's just the ratio of the workload versus what you spend to do it. Every year, we target improving that by 2% to 3% and, over the life of this plan, an 18% improvement.

Now turning to the next page. We're confident we can do this. If you look at the left-hand side of this chart, you can see there was a period where we were delivering around 2.6% every year, 5 or 6 years. That was a period when we made substantial method, technical and footprint change, so when you eliminate the work, we've got a track record being exiting and working with our people in a great way, so we have done this before. If you look at the middle part of the graph, there was a significant decline in the substantive change that we did. No major method changes, no major technical changes, no footprint changes, nothing was being closed or changed. So the productivity drifted down.

In addition, there were some structural changes. You see the first half of this year, it was down at less than 0. Second half has bounced back. And it's bounced back because we've put a structure in place to let us better control it. And I'll talk a bit more about that this afternoon. We're confident looking forward because we have a plan that now addresses a technical change, automating parcels. A method change in delivery, looking at how we go around delivering. And a footprint change, putting up 3 parcel subs. So we are doing things differently that changed the day-to-day job. That's why we believe we can do this.

This was a chart to try and show how the gearing changes for this business. If you look at the left-hand side, the revenue simply says today for every 1% we lose in revenue on letters, you've got to sell more parcels because we have a higher letters revenue than parcels revenue. Through the life of this plan, in fact, the next couple of years, the parcels revenue in the U.K. is greater than the letters revenue, so you've got a rebalancing of this, a naturally growing business rather than a naturally shrinking business. It's an important point to note.

If you look at the right-hand side, the contribution. As we lost a percent of letters, we had to sell over 2% of parcels. We weren't doing that, and hence, the profit was going backwards by making these operational changes, we can respond faster, and the revenue on the parcels will drop through quicker. So that ratio improves dramatically over this 5-year plan. Again, it gives us confidence we can drive the U.K. back to a positive position.

Moving to the summary of the UKPIL costs. It's worth just taking a moment to go through this. If you look towards the middle of the slide, the short-term guidance. People costs. In this year, the cost pressures will not be offset by productivity. You get beyond this year and the productivity will offset the people costs. We'll keep people costs flat at the end of this period. If you go down to non-people costs, there are some challenges.

The headwinds are there of depreciation and, in terms of delivering parcels, it just costs a little bit more. But the net between those 2 is that the growth in the cost is less than the growth in the revenue, so the margin will expand. If you go down the short term to the bottom, we've got a cost avoided of GBP 150 million to GBP 200 million. Just to remind you, that means if we see an inflation of say GBP 200 million on cost base, we'll offset that to hold it flat. The cumulative avoided cost over the period is GBP 1 billion. And when we talk going forward, we'll talk more about absolute cost, but as a transition from avoided to absolute, today is the start point on that. One thing to note, 40% of the avoided cost this year are outside the operation as we continue to look across all the functions: IT, central functions, commercial, parcel force. So this isn't just going after operations. We've got opportunities across the business.

Moving to GLS. GLS has had very strong revenue performance over the last few years. Around 10% CAGR on the existing business, around 3% through acquisitions. You can see at the right-hand side, that's 6% to 7%. It's a bit of an element of as the number gets larger, it's kind of harder to keep those very high rate of growth up. But I think that we'll get there. I think they'll be at the 7%. That'll take the revenue to GBP 4.5 billion in 5 years.

If you look at the GLS margin. Margin's been above 7% for several years until this year. But there are structural changes. That tight labor market is a difference, being felt by us and other players in the industry. As I said before, there are opportunities there. Fixing the U.S., driving Spain forward, getting France back on track. I expect to see GLS at the 7% margin.

We thought it was worth drawing your attention to, to the mix change in our revenue. If you look at the right-hand side, you can see the ambition, the underpin of the GBP 12 billion revenue. GLS had a great track record of driving forward. I've talked about how parcels will underpin the U.K. growth. At the bottom, we returned to a 4% to 6% letters decline in the medium term.

That takes us from GBP 10.5 billion, GBP 10.6 billion to GBP 12 billion in 5 years. The mix change within that, just 3 years ago was 50%-50%, letters to parcels. By the end of this plan, it'll be 30% letters and 70% parcels. This year, we have around 30% of the revenue outside the U.K. That will be 40% in just a few years. So there's 2 different dynamics working here for us.

Now turning to capital prioritization. This has started. As I've said, we reviewed the portfolio. We've canceled 39 projects, 41 rescoped, the balance refocused. But what we know is, you have to invest in the U.K. to protect that. And you have to invest in the right things. As Rico said, the business needs to change, the market is changing, and we have to participate to protect the business for the next years. So we believe there's around GBP 400 million, GBP 500 million incremental CapEx over this period. Split across hubs, digital investment, a little bit of infrastructure capture. But that investment underpins the return to a profitable position for the U.K. business. The GLS investment drifts up a little bit in line with the growth. In terms of capital prioritization, in the last 5 years, we spent a significant amount of money in the U.K. and GLS. As we look forward though, we're being more focused in how we really prioritize what we spend.

Just turning to the next page. The first red bar is the ongoing CapEx. What we think we need to put into the businesses, this is broadly in line with where we've been in the past. The next bucket is the GBP 400 million to GBP 500 million to really transform the U.K. We know we need to do that to protect the long-term future of the business. The next thing is the dividend. So it's a very difficult decision to make the dividend cut, but we think it's the right thing to do, to protect the business and transform the U.K. We are very confident that we can underpin the 15p through cumulative trading cash flows over this period. And then at the bottom, if there's things left, we will look at what we do with it and that'll be an annual discussion.

Now just wrapping up with the group level. The revenue will grow from just under GBP 10.5 billion to GBP 12 billion. The operating profit this year will be between GBP 300 million to GBP 340 million. The margin will expand to greater than 4% in 3 years and greater than 5% in 5 years. To do that, we need the incremental CapEx of around GBP 400 million to GBP 500 million. And we're confident to underpin the 15p dividend. Thank you.

--------------------------------------------------------------------------------

Catherine Nash, Royal Mail plc - Director of IR [5]

--------------------------------------------------------------------------------

Thanks for listening. We're ready to take Qs&As.

--------------------------------------------------------------------------------

Rico Back, Royal Mail plc - Group CEO & Director [6]

--------------------------------------------------------------------------------

Before we start, just one thing. We have some more presentations to come, as you know. So we have letters here, we have parcels here, we have GLS here, we got international here. So I think it is very important, even though we're happy to answer all the questions that we just maybe save some for our friends, so they have a chance to hear for the first time. We are a team here, so that's very important that everybody has the chance to answer the questions. So we're happy to answer it, but maybe the more depth the answer will be after we have the letters, the parcels, the GLS and the international presentations. And our people presentation, let's not forget. The discussions we're having with our people. So just as a starter.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Catherine Nash, Royal Mail plc - Director of IR [1]

--------------------------------------------------------------------------------

Have the mic, please. Have a mic.

--------------------------------------------------------------------------------

Mark John McVicar, Barclays Bank PLC, Research Division - Head of European Transportation Research [2]

--------------------------------------------------------------------------------

Mark McVicar from Barclays. Perhaps before we get into detail 2, kind of, slightly high-level questions. First one is, what level of discussions have you had about this plan with the regulator? Depends on how we model your plan, but you're either not quite getting to or just getting to a 5% margin in UKPIL by the end of the period. That is right at the bottom of the range, and I think we're also conscious that quite small movements in some of your performance criteria could save you quite a lot of costs. So has that been part of the debate? And then the second question, reshape forward. Where do you see the key points of execution risk in this plan? Is it unions? Is it people? Is it keeping the business going as you shift to a radically different network, which is I think what you're outlining here? Where are the bits that would keep you awake at night?

--------------------------------------------------------------------------------

Rico Back, Royal Mail plc - Group CEO & Director [3]

--------------------------------------------------------------------------------

Well, first of all, I sleep very well at night, so that's important. I had a talk with Sharon White last evening -- or late, it was late. About 8:00 or so. And she is aware, we will share the plan with her that we will have detailed discussions with her. I think for her, the key importance was we're going back to growth. The key importance, we're going back to efficiency so efficiency is going. We're doing a lot for the U.K. population on services. I mean our new network design, which we will tell you more in detail will be able that we just deliver picked up parcels about midnight next day. So it's less than 24 hours, which is sort of a new way of how you order items. And the most important thing is that the investment we're going to put this, about GBP 1.8 billion investment in the U.K., which in summary about GBP 4 billion since privatization. A key point I was asked by the journalist this morning, underpins that the sustainability of our Universal Service obligation, which is a great concern to her and she was pleased to hear it. We will share more details with her during the course of the next 2 weeks. There are meetings settle, we will explain her the plans. And I think we have a regulator whose understanding exactly where we are going through and the supporting of our transformation journey. So I think that is sort of the regulator which I want to say.

On the execution risk, I once had a Chairman who said to me, 20% is strategy, 80% is execution. And a lot of people sometimes make a difference. They say 80% is strategy and forget the execution. So that's sort of a problem sometimes. We are focusing. We have formed a separate transformation team. You will hear about this transformation team, which we have separate. So we can set one part as our business as usual, which will focus on quality, the standard cost efficiency, which we have delivered this year. If I look to the 1.9 the second half, and we look to the exit rate, it gives me the confidence that this plan, where all of us stand behind it, will be delivered. So that's one part of the company.

The other part of the company is saying, we just will implement the change. When you look to our parcel hubs when you look to how we operate with our new digital tools. We have a digital tool, which is now is the our data captures. We have a resource schedule of how we best we put our resources in there, electronically fiddle my optimization, which means better routing system away from manual things, all that sort of things.

So we got these 2 teams, which will merge and work very close together. So therefore, the execution risks are clear there, like all the other transformation programs. And I'd tell you, we will find unforeseen things when we are on our journey. But I think we will manage it. I'm very confident. Royal Mail has changed since Henry VIII when we see the picture, many times. And the last big change program where we have revised our all of our routes, that we have revised all our technique, all that has delivered the increase in productivity. And we are confident that we can deliver this again.

--------------------------------------------------------------------------------

Catherine Nash, Royal Mail plc - Director of IR [4]

--------------------------------------------------------------------------------

Would you pass it along to David?

--------------------------------------------------------------------------------

David Kerstens, Jefferies LLC, Research Division - Equity Analyst [5]

--------------------------------------------------------------------------------

It's David Kerstens from Jefferies. Well, first of all, you mentioned that you had reviewed the agreement with CWU and that you have also informed CWU of your new turnaround plan in the U.K. I think you had agreements in principle to reduce the working week to 35 hours, so first 2 hours and then another 2 hours. Has there been any change to these agreements with CWU that will positively impact your expected people cost inflation in coming years? My first question.

Then maybe secondly, give them all at once. On the parcel volume dynamic in the fourth quarter, I think you reported 6% at a 9 months stage and 8% for the full year. What was the strong improvement in the seasonally more slower quarter than in the first 9 months? And finally, on the letter volume decline. I think most of your peers in Europe, they are highlighting increasing letter volume pressure because of an increased digitization push. Why would you expect letter volume to return to the 4% to 6% medium-term guidance range? Why do you not expect a similar push to happen in the U.K.?

--------------------------------------------------------------------------------

Rico Back, Royal Mail plc - Group CEO & Director [6]

--------------------------------------------------------------------------------

Let me start with the CWU. We had several meetings with them and have informed them what is the plan. Yesterday evening, we had a meeting before I talked to the regulator, I had the privilege of talking to our unions. And I think important is that the unions see the necessity of change. So Terry Pullinger in CWU, they want to grow. Royal Mail wants to grow. We will just have to make the work how.

And at sometimes, when you talk about change, which is very constant in our life, everybody thinks change is good as long as you do not have to change by yourself. So there might be -- there will be discussions how we do that best. But I am confident if I look back to the history that this change has taken place from '10 to '15. If I look at the -- the post you see is that you have less letters and more parcels. They see that it is not only us, there is a market outside. We got 51% market share in the U.K. but the others are not sleeping. If we're not developing, we will lose out, so therefore they have seen the changes in the parcel program. They have seen that we are winning in parcel. They have seen that the IT tools, which have been developed, the new app which we're doing. I don't want to talk a lot about this stuff. I'm coming into your segment, Nick, I'm sorry. I'm just -- got a little bit carried away. But they see these changes. So I think that we have a good chance, we have informed them. They're ready to talk to us. They need -- they understand the need and they want to grow. We are going to find a way how to get there. So I am confident that this is clear.

On the parcel volumes and the letter volume decline, I think parcel volume is partly seasonal, so you're right. But it's important to understand that we have a significant quality improvement now, so we had done great quality investments. We did, looks like especially in the second half of the year. So we have delivered an excellent performance over the peak period where we employed more than 20,000 people extra just to deliver letters and parcels, which was very important. And you look how the letter volume has been calculated. We work there with the Cambridge analytics together, so there's people where we really go on the long-term trends. You got the e-substitution part, which is sort of a constant. It's about 8.5%. You have the big part, which is what happens to our GDP. And when we talk about the 5% to 7% guidance for the next year, it's a big part as what will the GDP in the U.K. do. It's very difficult to predict. So that's a part which has a big influence.

And then we have this General Data Protection Regulation law, which took away parts of our revenue, but it's coming back. And the analytics have shown that the people leave that the uncertainty will be solved. And that over the planned period, if you would just go down to 4 to 6, which mean at the end of the plan, it's even less. So right now, it's 5% to 7%. At the end, it'll be like the previously studies that's down to about 3% to 5%. So therefore over the planned period, if you level that out, it's 4% to 6%. And when you look to our prognosis, which we have done in the past, it quite supports them. The difference was the last 2 years because the business uncertainty we have at the new rules we're having, which are heavily influencing it. They can be offset by other activities, which are not standard.

--------------------------------------------------------------------------------

Catherine Nash, Royal Mail plc - Director of IR [7]

--------------------------------------------------------------------------------

Please give the mic to Arthur.

--------------------------------------------------------------------------------

Arthur David Truslove, Crédit Suisse AG, Research Division - Research Analyst [8]

--------------------------------------------------------------------------------

Arthur Truslove from Credit Suisse. Three questions for me, please. So firstly, you mentioned that historically, you have needed 2% parcel growth to offset a 1% decline letter revenue from a margin perspective, but do you expect this to change to one-for-one or slightly better going forward? Just out of interest, when do you actually expect that to change? And if you can just talk us through how that evolves, that will be very helpful. Second question on letter pricing mix, you mentioned that there was a positive GBP 75 million resulting from the price mix effects from letters. Can you just tell us how that was delivered by quarter? Obviously, you put prices up in January. And secondly, you mentioned that you want to get your EBIT -- or thirdly, you want to get your EBIT margin above 5% in 2023, 2024. Are you able to just summarize your assumptions for letter revenue and parcel revenue growth within that, please?

--------------------------------------------------------------------------------

Rico Back, Royal Mail plc - Group CEO & Director [9]

--------------------------------------------------------------------------------

I think that's for Stuart today.

--------------------------------------------------------------------------------

Stuart Simpson, Royal Mail plc - CFO & Director [10]

--------------------------------------------------------------------------------

Oh blimey. That's a lot of questions. In terms of the ratio, I'm not going to say when that's going to happen but the key driver is really the hubs. Because what you're doing then is taking a lot of the parcels, pushing through an automated environment, so you get the benefit of, first of all, automating them while we have people sourcing manually. But second, you're actually assessing up the networks. You've taken out a couple of network nodes within it. The third thing is, we've talked about putting a van network in. That van network will deal with heavier and the larger items the minute if they're out on a normal postal route, are actually quite disturbance with the posting because they have to park the van or carry a heavy item or distract off the route, go somewhere and do it. So it's 3 different levels of benefit that will underpin this change in ratio.

But we're not going to commit to when it is because it depends on how and when as Rico said, if this is all about execution. So we're on the way. We know that'll happen. We're confident with the analytics behind that. But we're not going to commit to anyone. Sorry, your second one was in terms of letters and parcels mix?

--------------------------------------------------------------------------------

Arthur David Truslove, Crédit Suisse AG, Research Division - Research Analyst [11]

--------------------------------------------------------------------------------

No. At the price mix effect of -- worth GBP 75 million over the course of the year. Just really how much of that was in the fourth quarter since the start of January (inaudible) price of?

--------------------------------------------------------------------------------

Stuart Simpson, Royal Mail plc - CFO & Director [12]

--------------------------------------------------------------------------------

So we're going to break it out by quarter, but as you know, we put in prices in Q4. We're very forensic. We're very targeted. We break the market down into all the key segments. And I think in the past, we've been a little bit maybe shy, little bit under our peer on those. This year, I think we've felt, it was the right thing to do, to make sure we're getting really rewarded and paid properly for what we do. So we targeted them at the sectors where we believed it would stay. And so far, we're really, really pleased with the results. I think it's a -- we won't be able to do things that bold there for you, but it's a sign of what we want to do.

--------------------------------------------------------------------------------

Edward John Rodney Stanford, HSBC, Research Division - Analyst [13]

--------------------------------------------------------------------------------

Edward Stanford from HSBC. Two questions, please. Conscious that I might be straying into presentation later. But you've talked about turning around GLS in France. If memory serves that's been a bit of a problem area for some time. What's different this time? And could you just refresh my memory as to when you need -- when you're due to negotiate with the unions on a future pay deal?

--------------------------------------------------------------------------------

Rico Back, Royal Mail plc - Group CEO & Director [14]

--------------------------------------------------------------------------------

The France situation, it's true. It's a situation which we have lingered. And what we're talking about is, we want to improve the U.S., we want to improve Spain and we want to improve France. The French plan, which has been put together, I think James will talk about this later on and partly in more detail. It's showing a gradual improvement, and we have good signs in our other markets, which are, let's say, a little bit disturbed by one-off events which will not recur. So that we have a good thrust that, especially in the U.S. and in Spain, will be quite successful and shorter. France might take a little bit longer. It took longer and it will take longer.

But just to make it clear, the GLS organization is a network. And if you'll look of the margins being made by exports into France and add that to the results, it boils down that it is value accretive for the GLS organization. Without that network part, we would not be able to be a European network. So therefore, we're not thinking about exiting France. First, we are confirming that we believe that the network philosophy is a big philosophy of GLS as driver for growth. And the profits for exports from all the other countries intra-France are more than offsetting the losses we're having there. Just to make it also clear.

--------------------------------------------------------------------------------

Catherine Nash, Royal Mail plc - Director of IR [15]

--------------------------------------------------------------------------------

We have Daniel then and Joel at the back, and then…

--------------------------------------------------------------------------------

Edward John Rodney Stanford, HSBC, Research Division - Analyst [16]

--------------------------------------------------------------------------------

Just on the staff wage deal?

--------------------------------------------------------------------------------

Stuart Simpson, Royal Mail plc - CFO & Director [17]

--------------------------------------------------------------------------------

The pay deals, we don't run through until next April. So we'll start getting into negotiations on the next round, probably January time, maybe a bit before Christmas.

--------------------------------------------------------------------------------

Daniel Roeska, Sanford C. Bernstein & Co., LLC., Research Division - Research Analyst [18]

--------------------------------------------------------------------------------

Daniel from Bernstein. Two questions, if I may. Number one on the U.K. staff. I mean, could you share any recent insights or survey kind of how is your staff in the U.K. feeling right now and the employment engagement studies you've been doing? And then maybe comment going forward on your framework, kind of, how you're planning to track and monitor the ability and the appetite of the U.K. staff to actually deliver that transformative change? And then secondly, maybe on -- maybe broader comment. It seems as though parcel growth will need to be underpinned by B2C parcels rather than B2B parcels. Could you comment more broadly on the European sector, maybe saying where you think profitability in B2C is headed? Because we really haven't seen that much success in noncombined dedicated B2C parcels. And of course, how are you going to make it work?

--------------------------------------------------------------------------------

Rico Back, Royal Mail plc - Group CEO & Director [19]

--------------------------------------------------------------------------------

So about our people, very, very important sector. And I'm looking forward for Sally Ashford's presentation. Should we talk about there, about our engagement score? And I think it'll -- it's just a very good outcome of what we are expecting. So let's maybe park that one to her. Like I said in my presentation, I must say, I was really impressed by our people. We had, with our Board together, a closer relationship to have the views of our workforce incorporated into the decisions the Board is making. So we are gaining views from people, we have meetings outside. And it's interesting when you see them, and I've been in a couple of them. What they really are driving is to say, how can we grow and offset our letter decline? What do we have to do better? What is our market? What's our competition?

I have seen many, many engaged people. And it's also interesting when you looked on the local level, how good they work together with our unions. So our managers and the union representative, they're working together. And that is in line with what I've discussed with Terry last night saying, if you're not growing, you won't have fun. So we need to be a good company, and then we can maintain our good employee state. And I think that's very clear. So engagement score goes from -- goes to Sally. Our view to our people are very, very important so for tomorrow, for example, you're going to see all our managers and explain them what we're going to do.

On the B2C subject and GLS that was your question. GLS has successfully focused on the premium to C segment. And it is part of James' presentation how different the group is, so we have countries. For example, if you looked to Denmark, where we operate our own on parcel shops, we have a strong growth in B2C, we have this -- the C problem is always a delivery issue if you not have enough scale. So the private parcel operators have some issues sometimes. And they deliver for example to parcel shops. We will pick it up, it's just a search for us for delivering at home. It's the way how you produce B2C and that is pure country different. GLS has delivered a premium to C approach, no buying in of big volumes, no dependency, not one client has more than 1% of our revenue now, which is a very, very important. And you look at Amazon is below 1%, by the way. So it's very important. And that B2C system is working in a gradual approach. So we have increased our B2C share, but carefully, and maintained our year-end management in margin. More details will come in the presentation from James.

--------------------------------------------------------------------------------

Stuart Simpson, Royal Mail plc - CFO & Director [20]

--------------------------------------------------------------------------------

If I could just add on the people side of things that one of the things my other hat on, want to talk over running the operation again. I felt it was a bit of a gap that happened between the management and the people again. So one of the things we've done with the structure is, put more people back and fill to be able to engage and lead the people. But also, working with Shane, our Director of communications. We've got a very intense plan over the next few weeks for all of us to be formally out there talking to managers in the frontline, to make sure they understand where we're going as a business. This isn't something we sat, Rico and I drew it up in our desk, right? I passionately believe, if you communicate with people, they are very engaged, and Sally will talk about scores. But we will be out there with them, and they will want to come with us.

--------------------------------------------------------------------------------

Catherine Nash, Royal Mail plc - Director of IR [21]

--------------------------------------------------------------------------------

And we'll go to Joel.

--------------------------------------------------------------------------------

Joel Adam Spungin, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [22]

--------------------------------------------------------------------------------

It's Joel Spungin from Berenberg. I have got 3 as well, I'm afraid. So first of all, just maybe continuing with the point that Ed made earlier about the unions. I assumed you've made some assumption in your plan around labor cost inflation and a potential new deal. What reassurances can you give us that you have been sort of suitably conservative in the view you've taken on that? Because it feels that a lot of people are going to identify the CWU as potentially being a big risk to the plan. My second question is, do you have any plans for any separately disclosed items or restructuring costs as part of the transformation you haven't highlighted anything, I don't know if it's something related to that, that you can say? And then third, a bit more prosaically, just in terms of the what's going on with the London portfolio and the cash that you're expecting from that. If you could just give us an update. I actually thought you would have more in by the year-end, I don't know whether some of it's being pushed back into the new financial year but that will be helpful.

--------------------------------------------------------------------------------

Rico Back, Royal Mail plc - Group CEO & Director [23]

--------------------------------------------------------------------------------

The discussion we had with our people, the union like I said before is that nobody is questioning the necessity to transform our business. So we have to make the Royal Mail ready for the growth in parcel and the absorption of letter decline. And going in total back to growth, it's a different approach. The unions are informed, and they have the same plan. There's is no reason for the unions not to have that plan. They have to protect the interests of their members and the interest of their members is good Royal Mail. So therefore, we have the same interest in that one. So I have assumed that we'll find a good solution with the unions, like we have done at the first transition from '10 to '15 and like we had done from let's say, '10 onwards. So our assumption is that we find a good solution with the union repo time enough in it to negotiate. They need to be convinced, they need to be a part of it. Terry Pullinger is somebody who looks very, very careful, and is focused on delivering growth. But he has to look for the interest of the member. But the discussion I had with him was very clear, we don't have a disagreement in our interest that is a clear-cut. So the productivity improvement, which has been delivered in the last 6 months, which is about the 1.9%, we only could do that with the support of our union. The change of our network. I mean, we are picking up now in the Midlands up to 130 letter acceptance we had. We couldn't have done that if few union wouldn't support us. So many of the changes has been supported by the union. Our assumption that this support will go on that we will have successful negotiations with them. On the London portfolio, I mean that's good for you.

--------------------------------------------------------------------------------

Stuart Simpson, Royal Mail plc - CFO & Director [24]

--------------------------------------------------------------------------------

So there's 3 plants down at Nine Elms. The cash will come in over the course of the next few months, '19, '20. You're right, one of them we originally thought might come in probably 18 months ago. We said it might come in towards the end of last fiscal year. Things are actually proceeding pretty well, so it got through planning, et cetera. That stage took a little bit longer than we anticipated, but it's now coming in on time. In terms of Mount Pleasant, we sold just over 6 acres for just under a couple of hundred million a few years ago. We've had around 64 million of stage payments. And so far, we continue to do the really important enabling work. So what I mean by that is, you may recall, we're still going to operate that our that side. So we've had to dig a basement and put a very large, strong concrete roof on it, on which they'll build resi flats. So that's going really well. Actually, we're really pleased with that and the cash from that plays in a little bit later. We got 4 blocks down at Nine Elms that we'll probably start marketing over the next few months.

--------------------------------------------------------------------------------

Joel Adam Spungin, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [25]

--------------------------------------------------------------------------------

Any exceptions?

--------------------------------------------------------------------------------

Stuart Simpson, Royal Mail plc - CFO & Director [26]

--------------------------------------------------------------------------------

As it stands today, no. We -- Rico has been very clear in terms of open communication with the union, with the regulator. So this is what we think we'll achieve.

--------------------------------------------------------------------------------

Catherine Nash, Royal Mail plc - Director of IR [27]

--------------------------------------------------------------------------------

Go to Andy here. And then stand behind.

--------------------------------------------------------------------------------

Chi Onn Chu, Deutsche Bank AG, Research Division - Research Analyst [28]

--------------------------------------------------------------------------------

It's -- I'm Andy Chu from Deutsche Bank. Just one question for me. In terms of your guidance for this year, in order to sort of hit the top end of that range, can you get there with the lesser volumes at the bearish end of your 5% to 7% decline. Do you think that's possible?

--------------------------------------------------------------------------------

Stuart Simpson, Royal Mail plc - CFO & Director [29]

--------------------------------------------------------------------------------

Sorry, could you just repeat the question? I was actually doing something.

--------------------------------------------------------------------------------

Chi Onn Chu, Deutsche Bank AG, Research Division - Research Analyst [30]

--------------------------------------------------------------------------------

Sure.

--------------------------------------------------------------------------------

Rico Back, Royal Mail plc - Group CEO & Director [31]

--------------------------------------------------------------------------------

Let me just take that. We just got something from the union, so therefore we will see it in the afternoon.

--------------------------------------------------------------------------------

Chi Onn Chu, Deutsche Bank AG, Research Division - Research Analyst [32]

--------------------------------------------------------------------------------

Just in terms of your guidance for this year. So it's hit the upper end of the range at GBP 340 million of profit after transformation cost. Do you think you can get there at the bearish end minus 7% letter volume declines or will there be price...

--------------------------------------------------------------------------------

Stuart Simpson, Royal Mail plc - CFO & Director [33]

--------------------------------------------------------------------------------

We can certainly go into that GBP 300 million to GBP 340 million range at the more bearish end.

--------------------------------------------------------------------------------

Chi Onn Chu, Deutsche Bank AG, Research Division - Research Analyst [34]

--------------------------------------------------------------------------------

Any other assumptions that are sort of bottom end? What are the things should we think about, is it a range in that? Because you've got some flex within transformation cost, or is it mainly around the letter volumes that caused the range to...

--------------------------------------------------------------------------------

Stuart Simpson, Royal Mail plc - CFO & Director [35]

--------------------------------------------------------------------------------

We are, as you know, we're a very skinny margin business, right? Trying to shoot between 2 enormous numbers in the U.K., so I think that's a reasonable range. And in terms of the modeling, it's a good place for you to step off and let the Investor Relations team to model going forward. That's really why I wanted to do it. To be clear, listen, there are some changes in how we report. I think this gives a very good and clear commitment from Rico and I in the management team what we're going to deliver, but also a good point for modeling.

--------------------------------------------------------------------------------

Catherine Nash, Royal Mail plc - Director of IR [36]

--------------------------------------------------------------------------------

Give it Sam behind you, and then Damian.

--------------------------------------------------------------------------------

Samuel James Bland, JP Morgan Chase & Co, Research Division - Research Analyst [37]

--------------------------------------------------------------------------------

It's Sam Bland from JPMorgan. 2 for me, please. First one is on that letter volume point in FY '20. I think you're now going to 5% to 7% volume decline. That's obviously down from an exit rate from last year I guess 8%. And I think if I remember it, January trading up that you said 7% or 8% through FY '20. Is there anything specific that has changed that's caused you to slightly reduce that letter volume decline expectation? And the second question is on the 1.9% productivity improvement in H2. Was that generated from some short-run projects in reaction to the problems you had in the first half? Or are we seeing the start of the proceeds from some of the long-term projects you put in place that will generate the cost savings over the next 4 or 5 years?

--------------------------------------------------------------------------------

Rico Back, Royal Mail plc - Group CEO & Director [38]

--------------------------------------------------------------------------------

Go for it.

--------------------------------------------------------------------------------

Stuart Simpson, Royal Mail plc - CFO & Director [39]

--------------------------------------------------------------------------------

So in terms to the letter's volume and the reason we've come down to 7% from the 8%. As you run through last year's numbers, you'll see there was a pretty tough hit on the GDPR in H1. GDPR regulations kicked in at the end of May, so as we come out from lapping that period, we expect to be in good shape. So that's one of the things that gives you a little positive uplift from the 8% to the 7%. We're not bullish about GDP, which is another key component, right? We know that'll be tough, again, this year, the economic environment.

In terms of the 1.9% productivity, it's really just getting back on top of the day today. They -- there is nothing we've done in terms of changing the method of parcels. So we don't have a hub that's open. We're not automating through the hubs or anything. What we have done, though that I think, does underpin the second half.

During the course of the year, we've been landing the small parcels automation machines through the mail center footprint. We had 10% as of yesterday. We'll have 11% as of next week. We automated about 12% through the course of the year. The average, the exit rate was 18%. So that gave us a little bit of a lift on that. But it's really just about getting back on top of the day today. Thank you.

--------------------------------------------------------------------------------

Damian Brewer, RBC Capital Markets, LLC, Research Division - Analyst [40]

--------------------------------------------------------------------------------

Damian Brewer, RBC. Two parts question, coming back to the bigger picture of capital allocation. First of all, in your own slides, you've got the GBP 479 million you've spent on M&A in the last 5 years. You've got the U.S. losing money. Spain's behind plan. French losses have ballooned and that's about the same amount of money you're cutting the dividend by, cumulatively in the next 5 years, to reinvest in the U.K. So first question really is, do you think you have the right metrics to measure return on investment given that historical performance? And if you don't or haven't had, what's changed?

And then secondly, in terms of capital allocation. Your shares last night traded at 3.6x EV/EBITDA. And there seems to be at least a buy-side consensus, you could sell GLS for 10 to 12. How big are the cross synergy benefits you expect between Royal Mail and GLS that will prevent you realizing that significant multiple uplift from GLS, instead of continuing to trade with it?

--------------------------------------------------------------------------------

Rico Back, Royal Mail plc - Group CEO & Director [41]

--------------------------------------------------------------------------------

The GLS organization has been built through acquisitions over a period of a long time. And there was a strong track record of buying companies, integrating them, changing them. One thing, which is also in common, if you buy a company, it's just not always going according to the plan, which you have written as you bought the company. There might be some time delays. There might be some others. And I can remember, in the beginning, we even had to -- there was even a write-down on the GLS investments about 2 years after because not fast enough. If you look to GLS now, you mention that it has a bigger value. So with the nudge of hindsight, maybe that write-down could have been avoided. So that's the same for us. If I look at it, I -- we believe that the GLS organization in Europe is growing strongly organically. And we have just not too many acquisition opportunities because Europe is sort of settled. Maybe there are 1 or 2 opportunities, small ones in Italy but not many.

The question about the expansion in the U.S. that is a big market. I believe and I said it after the 6 months that, would you still have bought the company what you know now? If you would know now, would you have done that? Yes. I said, yes, I would. I just would have made a different plan. I would just make it a little bit later.

So you have a disappointment when you're not achieving that in the time, but the history has shown that when you get it right and you have to have some patience and a long breath, you're generating value. And I am confident that the American activities will generate value. There are big changes in America. I mean you suddenly have -- you only had 2 competitors, now you got a third one. I mean Amazon has really invested strongly to be logistics player there.

Markets are always changing. You have to adopt. That might sometimes delay plans. But it does not change the real economical on the transactions, which we have done. If you look to our Dicom transaction, it's better than plan. If I look to the first activities we do in the U.S. it's a promising signs. So from that point of view, I believe the value will come and would be a strong part of the -- our GLS group and activities.

--------------------------------------------------------------------------------

Stuart Simpson, Royal Mail plc - CFO & Director [42]

--------------------------------------------------------------------------------

In terms of the right metrics, I think we worked very closely with GLS over many years. I think we've got the right metrics. As Rico said, sometimes not everything goes to plan.

I think your other question was the cross synergies between GLS and the U.K. And we are developing those. We've got actually GLS team members now managing parts of the U.K. There is a lot of cross-border and international traffic, and you'll hear from Saadi this afternoon. He will talk about how closely integrated they are and how they really work with each. And GLS can help the U.K. growth, and the U.K. can help GLS's growth. So they're very much key part of our business working together.

--------------------------------------------------------------------------------

Damian Brewer, RBC Capital Markets, LLC, Research Division - Analyst [43]

--------------------------------------------------------------------------------

Can I just ask one follow up? At any point, did the Board ever consider selling GLS? Or was it being purely focused on an organic strategy?

--------------------------------------------------------------------------------

Rico Back, Royal Mail plc - Group CEO & Director [44]

--------------------------------------------------------------------------------

I think that every company has the responsibility to always consider if something pops up. And I think that our Board is a very focused board, which takes these responsibility very seriously.

--------------------------------------------------------------------------------

Catherine Nash, Royal Mail plc - Director of IR [45]

--------------------------------------------------------------------------------

Matija?

--------------------------------------------------------------------------------

Matija Gergolet, Goldman Sachs Group Inc., Research Division - Equity Analyst [46]

--------------------------------------------------------------------------------

Matija Gergolet from Goldman Sachs. Two questions for me. The first one is on the dividend. So you mentioned 15p underpinned. And then you look at the cash flows of the year. How should we think about the real estate disposals? Are those going to be no exceptional cash flows in the year that might be distributed out as dividends or not?

And the second question, back to parcels. So for the U.K., you're talking about even it's not going to be at 4% to 5% volume growth but revenues ahead of 5%. So there should be a positive yield management. What is the driver behind that? I mean in the last few years, we typically had a bit of a negative price mix in parcels. Maybe it was a Chinese volumes. But if you could just a little bit elaborate on how are you thinking about the yield management for parcels in the U.K.?

--------------------------------------------------------------------------------

Stuart Simpson, Royal Mail plc - CFO & Director [47]

--------------------------------------------------------------------------------

In terms of the 15p dividend underpinned, we're confident to underpin that based on our plan. We're looking at it not a in-year trading cash flow, but cumulative cash flow over the period.

Second thing is in terms of real estate, we will look at what the cash flows are in-year trading, then whatever we're getting through the portfolio. We'll look at everything in the round. So we're not making any commitment on that today.

--------------------------------------------------------------------------------

Rico Back, Royal Mail plc - Group CEO & Director [48]

--------------------------------------------------------------------------------

What we have said is that we have -- if we have excess cash flow, which means significant access, then we will just consider. So I think we have to see where we are in that in that. Every year -- that's what we've done every year the basis.

For us very important is to have a sustainable and strong balance sheet to maintain it. Because we have a high-operation gearing. It's not good, also, to have high-financial gearing. So therefore, that is a strong focus for us to have and maintain that strong balance sheet, which we're having.

On the volume growth, I think that is a big part of Nick's presentation. I can start talking about this, and I know I'd love to. But I'll take most of this stuff away, which I don't want to. So therefore, can we park the parcel in-depth journey when we just see our parcel presentation that would be very appreciated.

--------------------------------------------------------------------------------

Catherine Nash, Royal Mail plc - Director of IR [49]

--------------------------------------------------------------------------------

We probably got time for one more question, if there is one before the break. No? Oh, one at the back, sorry. Thank you.

--------------------------------------------------------------------------------

Gerald Nicholas Khoo, Liberum Capital Limited, Research Division - Transport Analyst [50]

--------------------------------------------------------------------------------

Gerald Khoo from Liberum. Two for me. Perhaps, slightly directly, what is the head count implications of parcels automation? I'd love to suspect that there may be for later discussion, but I'm going to ask the question, nonetheless.

And also, following up of what you said about financial leverage. Have you got specific parameters in mind, in terms of what you deemed to be low leverage? And how is that potentially impacted by IFRS 16, please?

--------------------------------------------------------------------------------

Rico Back, Royal Mail plc - Group CEO & Director [51]

--------------------------------------------------------------------------------

So I do the headcount, you do the leverage update. Great. Good stuff. What we have planned is the 15% to 18% productivity improvement, which is our core target. So what we measure is the hours which we need to produce our products. These hour has to be more efficient. When you look to our portfolio, let's say, people, it's a big part of what Sally will talk to you later about it.

The system which we have in place right now is been designed through our commitment with our union agreements. So you have natural attrition, which is significant. You have a lot of overtimes in there. You got agency workers, which we have. So what we assume is that the productivity improvements will be have -- will be done without any compulsory redundancy, will be done with voluntary redundancy, which is in line with our commitments, which we had with our unions, and Royal Mail stands with that commitment very strongly.

--------------------------------------------------------------------------------

Stuart Simpson, Royal Mail plc - CFO & Director [52]

--------------------------------------------------------------------------------

In terms of financial leverage, we don't set specific metrics. Rico has already said this, we have very high operational gearing. And we are not going to mix that with very high financial gearing. It just doesn't work.

Particularly, as we've said, we're going into a change period. So as we stand back and look at it, we really want to make sure we maintain conservative balance sheet. We target investment-grade metrics, but we don't set out specifically to hit any level of leverage.

--------------------------------------------------------------------------------

Catherine Nash, Royal Mail plc - Director of IR [53]

--------------------------------------------------------------------------------

Thank you very much, ladies and gentlemen. That brings to a close this session. There's now a break outside the auditorium. Please be in your seats by 11:20 prompt, so we can start the next session. Thank you very much.