Royal Mail saw a decline in the volumes of letters it sends out after the new General Data Protection Regulation made it harder for businesses to send unsolicited junk mail.
The trading update came ahead of its annual general meeting on Thursday, when shareholders could vote against Royal Mail’s decision to pay a higher salary to its new boss Rico Back – who has also been given a near-£6million ‘golden hello’ – and against a £900,000 pay-off for outgoing boss Moya Greene.
Royal Mail posted a 6 per cent fall in volumes of addressed letters in the three months to June 24, which was at the worse end of its expectations and resulted in the group’s overall letter revenues falling by 7 per cent.
No junk mail: Royal Mail said it has been hit by GDPR, which was introduced at the end of May
Addressed letters are letters sent by companies to potential customers with their name on it, but with the new GDPR companies are unsure whether they are allowed to do that because of the need to get a customer’s consent before using their personal data.
The introduction of GPR came into force only at the end of May, meaning that the full impact is only just beginning to be felt.
Going forward, Royal Mail said that it still expects declines similar to this for the rest of the year- between 4 to 6 per cent – but warned that the impact of GDPR and ongoing business uncertainty could see it get worse.
Meanwhile, Royal Mail’s UK parcel business fared better, with volumes up 7 per cent and revenues up 6 per cent, as it did its European parcel business GLS, which saw volumes rise 10 per cent and revenues rise by 11 per cent, helping to lift overall group revenues by 2 per cent.
Boss Rico Back said that trading in the quarter was in line with expectations and left guidance unchanged.
He also said that the group was making progress with the pension overhaul initiated by his predecessor Moya Greene, who clinched a deal on pensions and pay with unions earlier this year, before announcing her retirement.
‘In the UK, we are making progress with the trials and initiatives under our new Pensions, Pay and Pipeline agreement. We, together with the CWU, are working with Government to enable the introduction of a Collective Defined Contribution scheme’, he added.
It comes as Back is likely to face criticism at the company’s AGM on Thursday after it was revealed that he is being paid a £640,000 annual salary, which is £100,000 more than Greene.
Shareholder advisory group ISS has told investors to question ‘the appropriateness of the increased salary’ granted to Back.
A Royal Mail spokesman said that Rico Back and Moya Greene’s ‘overall fixed cash remuneration – their base salary, pension entitlements and benefits – are broadly the same’.
‘Rico Back’s annual salary is higher than Moya Greene’s to compensate for the halving of the cash pension allowance he would have received were this the same as the pension allowance Moya Greene received,’ the spokesman added.
Royal Mail shares rose 3.4 per cent, or 16.5p, to 497.50p in morning trading.
Pay row: Rico Back, left, is likely to face criticism at the company’s AGM on Thursday
Views from the City
Ed Monk, associate director at Fidelity Personal Investing, said today’s trading update underlines the difficult environment for Royal Mail, only made harder by the new GDPR regime.
He added: ‘At its AGM later this week it will have to explain to shareholders why incoming CEO Rico Back will be paid almost 17 per cent more than outgoing CEO Moya Greene, as well as the £900,000 of bonus that Greene will pick up on her way out.
‘The company scored a big victory earlier this year when it assuaged unions with the promise of a new-style Collective Defined Contribution pension scheme to replace its expensive Defined Benefit plan. It may not be enough, however, to sooth investors who have been increasingly wary that Royal Mail can’t win all its battles.’
Pensions deal: Moya Greene clinched a deal on pensions and pay with unions earlier this year, before announcing her retirement
‘The shares have fallen by a fifth in the past two months, making the dividend yield superficially attractive at 5 per cent and pushing the price to just 11 times earnings before today’s update.
‘That will grab investors’ attention but they are likely to tread with caution.’
Ameet Patel, senior analyst for Northern Trust Capital Markets, said: ‘Royal Mail shares have had quite the rollercoaster ride recently. After being relegated from the FTSE 100 last September, it was re-promoted in March – just ahead of GDPR implementation.
‘We suspect the GDPR effect has only just begun and will likely accelerate as consumers realise just how easily they can opt out of junk mail; and the weight of Brexit risks seems far from over in light of recent events. To us that doesn’t seem like the ideal set up for a stock trading on a valuation well above its historical average.’
Helal Miah investment research analyst at The Share Centre, noted that the market had reacted in a ‘fairly upbeat mood’ this morning but that now all focus would be on the AGM.
He added: ‘Since the share’s promotion back into the FTSE 100, its share price performance has been a little disappointing and this could be explained by the GDPR data regulations.
‘However, there still remain concerns about the level of competition in the sector which could impact on margins. Meanwhile Brexit and macro-economic uncertainty will weigh on parts of the business. We take a balanced view on the shares and continue with our ‘hold’ recommendation but the shares will still be attractive for income seekers.’
The Spam Stopper
The General Data Protection Regulation is the most important change to privacy rules in 20 years.
Since data protection rules were introduced on Friday 25 May 2018, people have more control over how personal information is used.
Companies must ask permission to collect and use information such as names, email addresses and internet browsing habits, and are contacting customers on their databases.
Firms that break the rules face fines of up to £18million, or 4 per cent of their annual turnover.
Richard Hunter, head of markets at interactive investor, said that despite the year starting at a ‘pedestrian’ pace, Royal Mail has been able to replace the lost business of letters with parcels.
‘The proliferation in the parcels business has, inevitably, attracted competition – and serious competition at that. Deutsche Post remains a force to be reckoned with, whilst Amazon is also threatening to park its tanks on the lawn.
‘In response, Royal Mail is attempting to transition its business at pace to becoming a leaner operation, with a rather more slick delivery process, although this transformation is inevitably coming with financial strings attached.
‘Prospects for the business have been recognised by the market, where a rise in the share price of 20 per cent over the last year, as compared to a 3 per cent hike for the wider FTSE100, has seen the company regain its place in the premier index.
‘At the same time, there has been some profit-taking pressure over the last three months, where the shares have dipped some 14% over the period.
‘This element of the price being up with events could continue to weigh in the shorter term, particularly with the shares being on an increasingly punchy valuation. As such, in the absence of some strikingly good news as Royal Mail’s financial year unfolds, the market consensus of the shares as a sell could well remain intact.’