Royal Mail posts strong rise in profits as parcels improve

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Royal Mail's annual profits have jumped 25% thanks to better-than-expected growth in its parcel delivery business.

Parcel deliveries rose 3% thanks to shoppers' insatiable appetite for online shopping, although the number of letters posted fell by 6%.

Royal Mail put the rise in parcels down to upgraded computer systems, which allow the packages to be sorted faster.

Pre-tax profits rose to £335m in the year to 26 March from £267m, while revenues grew 1% to £9.8bn.

The market reacted positively, sending shares up nearly 4% to 446.8p to highs not seen since January.

Chief executive Moya Greene said: "We have made good progress against all of our strategic priorities. This has been a more challenging period for UK businesses and we have come through it well."

Brexit impact

Despite the boost in profits, the company was cautious over its prospects in the UK, where it makes three-quarters of total sales.

The fall in letter deliveries was at the higher end of expectations, with the company blaming uncertainty over the Brexit referendum for the decline.

"This [fall] reflected the levels of business uncertainty following the EU Referendum and a strong prior year which saw a one-off return of direct delivery volumes," it said.

The company is also unlikely to cash in heavily from the upcoming general election, as it admitted the short campaign would mean revenues were likely to be below that seen from mailing sent out during last year's EU referendum and 2015's general election.

Royal Mail's letters business in the UK struggled, with letter volumes down 6%, but this was offset to some extent by the company's parcels operations.

Helped by a huge 50% market share for parcel deliveries in the UK, Royal Mail managed to improve its revenues by 3% to £3.3bn.

'Force for growth'

But the business's most impressive performance came from its overseas division - General Logistics Systems (GLS) - where sales jumped 9% to £2.5bn.

Ms Green said: "GLS is performing very well and is growing revenue organically and through acquisitions.

"Its deep expertise and focus on B2B parcels in multiple geographies - now 41 European countries and seven states in the US - positions it to be a greater force for growth for the company.

"We will continue to invest in careful and focused international expansion by GLS."

Despite the strong performance from its international operation, the company described its Italian and French businesses as "challenging" and said it had lost out in Germany due to a rise in the minimum wage.

But the City was impressed overall, with the share price rising almost 4% in early trading, sending the stock to a four month high of 446.8p.

When the government listed the business on the stock market in 2013, some people argued that the price offered was too low. The shares were floated at 330p each.

It led to criticism that ministers had underpriced the former state asset.

The company is also facing strikes in the UK over plans to close its defined benefit pension scheme in 2018.

Royal Mail reiterated that, although the pension plan was in surplus, it was unsustainable and contributions would need to increase to more than £1bn by 2018.

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