October 1, 2018 / 3:30 PM / 22 days ago

UPDATE 2-Royal Mail shares slide on profit and costs warning

* Forecasts 20-28 pct full-year profit fall

* Cites letter volumes and productivity pressures

* Shares down 14 pct (Adds detail, context, quotes)

By Justin George Varghese

Oct 1 (Reuters) - Royal Mail forecast a 20-28 percent drop in full-year profit in the face of worse than expected pressures on letter volumes and productivity, sending shares of the UK post and parcels company sliding more than 20 percent on Monday.

The former British postal monopoly has been struggling to stem falling letter volumes in the era of e-communication and more recently warned that the new European data privacy law could reduce traditional marketing mail.

Royal Mail forecast a drop in adjusted operating profit before transformation costs to between 500 million pounds ($653 million) and 550 million pounds, compared with last year’s 694 million pounds.

The company said it expects to cut costs by only 100 million pounds, well below the 230 million pounds forecast previously. A range of short-term cost actions will be implemented, it said without elaborating.

In June the company said there was some uncertainty among its customers about the General Data Protection Regulation (GDPR), which imposes new requirements on how companies collect and process personal information about users and came into force on May 25.

The company now expects a 7 percent decline in addressed letter volume compared with its previous forecast of a 4-6 percent decline for the medium term.

‘CHALLENGING CONDITIONS’

“Trading conditions in the UK are challenging. Our letter volumes, especially marketing mail, are impacted by ongoing structural decline, business uncertainty and GDPR,” said Chief Executive Rico Back.

“Our UK productivity and cost performance has been disappointing.”

Royal Mail also said said it expects productivity for 2018-19 TO be significantly below its previous target, which was at the upper end of the 2-3 percent range.

The company attributed the decline in productivity to a “challenging agenda” set out in the agreement signed with the Communications Workers Union (CWU) in March to replace Royal Mail’s defined-benefit pension scheme.

“It is taking longer than anticipated to deliver the required productivity increases,” the company said months after it ended a 10-month dispute with CWU over pensions, pay, a shorter working week, culture and operational changes.

It also said that labour market and other cost pressures would have a higher than expected impact on margins at the company’s fast-growing European parcel business, GLS.

Royal Mail shares were down 14.5 percent at 407.7 pence at 1507 GMT, the biggest faller on the FTSE 100 index.

However, it said revenue and volume growth for 2018-19 were now expected to be better at its UK parcels business than a year earlier. ($1 = 0.7658 pounds) (Reporting by Justin George Varghese in Bengaluru Editing by David Goodman and Emelia Sithole-Matarise)

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