* FY operating profit up 12 pct to 671 mln stg
* Parcel rev up 7 pct, letters down 2 pct
* Sees rising parcel competition
* Calls on Ofcom to review rival mail delivery service
* Shares down 6.7 pct
(Writes through, adds comments, details, shares)
By Neil Maidment
LONDON, May 22 Newly privatised Royal Mail
pointed to tougher times ahead on Thursday as it said
competition in parcels was intensifying and warned the emergence
of a rival British mail delivery service threatened its growth
The blunt reference to the headwinds it is facing took the
shine off a 12 percent rise in full-year profit for the company,
which remains embroiled in a political storm over its
privatisation, sending its shares down 6.7 percent as the day's
biggest faller in the blue chip FTSE 100 index.
Royal Mail's growth prospects continue to split analyst
opinion, with differing views over its ability to manage
declining letter volumes and increasing competition, at the same
time as growing its parcels business and cutting costs.
Chief Executive Moya Greene said full-year results had met
the company's expectations and added it would stick to its
target of single-digit revenue growth, margin expansion and
underlying free cash flow growth for 2014-15, despite the
gloomier outlook which she said there were plans to manage.
"The parcels side is certainly a more intensely competitive
environment than it was last year," Greene told Reuters. "On the
letters side, the headwind is direct delivery," she added,
referring to the prospect of its first mail delivery rival in
its 500 year history in the form of TNT Post UK, part of
"Without timely regulatory action, direct delivery could
undermine the economics of the universal service and our ability
to generate sustainably a 5 to 10 percent operating profit
margin in our reported business," Greene said.
Competition in parcels, worth 51 percent of Royal Mail's
turnover, is ramping up as firms compete on price and extend
hours to service a market booming on demand for online shopping.
In the past year Amazon.com Inc, Royal Mail's
single biggest parcels customer, worth 6 percent of sales,
launched its own delivery service.
To better compete, Royal Mail has matched rivals by
launching a trial Sunday parcels delivery service and is
targeting a greater portion of the clothing returns market.
CALL FOR ACTION
In letters, where volumes are falling at a rate of between 4
and 6 percent annually as customers switch to email, TNT Post
UK's plans for a UK mail delivery service by 2017 is a big
headache for Royal Mail, due to its tactic of targeting only the
most profitable areas of the country and leaving Royal Mail to
deliver the remaining less profitable, or loss-making, areas.
Royal Mail says it will be much harder to deliver its
six-day-a-week, anywhere service and at the same time grow
operating profit margins to a targeted range of 5 to 10 percent.
It wants regulator Ofcom to review the industry ahead of its
commitment to do so by the end of 2015.
Without regulatory action, Royal Mail estimates direct
delivery could impact its revenue by over 200 million pounds by
2017/18. Greene said the group was talking to legislators to
help garner support for an earlier review and it would submit a
report pushing for this to Ofcom in coming weeks.
An earlier move to mitigate the impact of TNT Post's
rollout, through proposed wholesale price hikes, was suspended
by Ofcom in April and now faces a review.
Analysts at brokerage Panmure Gordon said competition
concerns would drag on Royal Mail's shares in the near term but
maintained its "hold" rating on the stock.
"Longer term prospects remain attractive, as we expect an
element of regulatory intervention to protect Royal Mail's need
to achieve a commercial return on its activities," they said.
Ofcom, however, said in a statement the financial
sustainability of the universal service was not under threat.
"We would expect Royal Mail to take appropriate steps to respond
to the challenge posed by competition, including improving
efficiency," a spokesman said.
Royal Mail, which had long posted financial losses until two
years ago, said on Thursday operating profit before
"transformation" costs - such as mail centre modernisation and
staff cuts - rose to 671 million pounds ($1.1 billion) in the
year to March 30, in line with a consensus forecast.
Group revenue rose 2 percent to 9.46 billion pounds, helped
by a 7 percent rise in parcel sales, where higher prices made up
for flat volumes. UK letter revenue fell 2 percent on volume
down 4 percent, at the lower end of a guided range between 4 and
The privatisation of Royal Mail was heavily criticised for
short-changing the British taxpayer, with government ministers,
banks and advisors hauled before lawmakers to explain why shares
in the firm rocketed as much as 87 percent above the 330 pence
price at which Britain sold a 60 percent stake in October.
($1 = 0.5925 British Pounds)
(Editing by Kate Holton and David Holmes)