Royal Mail PLC
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Earnings Call Transcript
Other Earnings Calls
Good morning, everyone, and welcome to International Distribution Services Half Year 2022/'23 Results Presentation. I'm [ Sabrin Kan ] from Investor Relations.
Just before we start, I wanted to draw your attention to the usual disclaimer in our release this morning on forward-looking statements. This sets out examples of the factors that can cause actual results to differ from any forward-looking statements that we may make. A summary of the principal risks and uncertainties, which could affect the group, will set out in today's release, and these will be updated in the annual report next year. All of these risks and uncertainties have the potential to impact the group's business results of operations financial conditions and prospects adversely.
So without further ado, I'll hand over to our Chair, Keith Williams. Keith, over to you.
Thanks, [ Sabrin ]. And thanks for taking over from John Crosse, who unfortunately has been in hospital and is ill today. Hopefully, he'll join us next time around.
Good morning, everybody, and thanks for joining us. We're trying to gain in obviously before the Chancellor's autumn statement later this morning. And I'm joined as usual by Mick Jeavons, our Group CFO; Martin Seidenberg, CEO of GLS; and Simon Thompson, CEO of Royal Mail. I'll start with an overview and summary before I pass on to each of them to give you more detail.
In May last year, at our annual results and again in July at the AGM, we said that the benefits from the pandemic were clearly behind us and that both our businesses were facing into headwinds, particularly from high inflation across all our markets, and that obviously includes the U.K., Europe and North America.
We said that Martin at GLS was well placed with a good business spread geographically and with good product mix. That's proved to be true, as you can see from the GLS results today.
We also said that Simon at Royal Mail had a much more difficult task because of the requirement to deal not only with cost inflation in the U.K., particularly in higher labor costs, but also the urgent transformation in his business to adapt to changes in consumer demand.
In a regulatory regime, that has so far been unchanged. And the change for regulatory change has never been more clear.
We indicated that Royal Mail was accordingly at a crossroads, and that has proved to be true, as you saw last month in Royal Mail's results. And it will be unprofitable without change. Simon is addressing this and will outline the immediate actions being taken to affect operational change across the U.K.
Finally, we said that in the event of a significant operation change at Royal Mail is not forthcoming, but the Board will consider all options to protect the value and prospects of the group, including the separation of the 2 companies, and that position today is unchanged.
So commenting on the results. As anticipated, GLS is on track to weather the short term, but also deliver over the medium term on its accelerate target. Martin will talk to the progress on both in a moment. Our capital investment in GLS is unchanged as it focuses on its targets to become more digital and global.
Since taking over at Royal Mail, Simon has invested in the capabilities to build its future success in new revenue streams, in infrastructure and automation, in new management structures and in trying to build an improved dialogue with the trade union. These remain important investments, but we now need more immediate action. We have a strong balance sheet and brand but urgent need for a business model that matches the needs of our customers.
The current level of losses in Royal Mail is not sustainable and not primarily attributable to the impact of strikes. Indeed, the fact that our customers are to date sticking with us in difficult circumstances underlying that we can succeed, but we need to change to do it.
While well coming talks with the CWU, we can no longer hold back on the changes, which will secure the long-term sustainability of Royal Mail business in the interest of all its stakeholders. And as you know, we gave notice on a number of agreements in September, and Simon will outline what is now happening and can no longer wait.
Finally, if we look at group issues, the steps to change the name of the holding company is now complete. We still, of course, have 2 strong brands beneath the holding company. As you can see, the new structure enables stakeholders to more easily see the performance of the 2 businesses.
The appointment of Jourik Hooghe to the Board has been a good one. He's making valuable contributions and brings experience across a number of areas and augments the Board with his international perspective.
Finally, the Board has decided not to pay an interim dividend given the current level of economic uncertainty and the position in the U.K. But as we've pointed out, firstly, we have a strong balance sheet. And secondly, other than through the pandemic in recent years, the dividend has been supported much more by GLS than it has by Royal Mail. We review the position on dividend in the light of GLS' performance and that at the group at the year-end.
So those are my introductory comments. I'll now pass over to Mick to give you the detail of the financials.
Thanks, Keith. And good morning, everybody. I'll take you through some of the details behind what has been really quite a tough half year, and then I'll reflect on the implications for outlook and capital allocation.
Of course, as Keith headlined, both of our businesses have been hit by the macroeconomic challenges of inflation and the slowdown in consumer spending but GLS has shown itself to be far, far better able to cope with the environment than Royal Mail.
Royal Mail has been impacted very materially by the situation. It's losses further exacerbated by industrial disruption and inability to keep pace with its planned productivity program. At the same time, GLS has fared better demonstrating real agility and resilience. I'll say more an outlook than the implications for capital allocation in a few minutes.
So I'll start with the IDS Group financial headlines. Revenues are down 3.9% to GBP 5.8 billion. The group made an adjusted operating loss of GBP 57 million in the half at a negative 1% margin as the losses suffered in Royal Mail hit our performance quite materially. I'll come to the very different outcomes in our 2 businesses in a second.
As a consequence of the poor U.K. performance, we also suffered a trading cash outflow in the period of GBP 235 million on a pre-IFRS 16 basis. That now means the pre-IFRS 16 net debt position, that's excluding operating lease debt, is now GBP 150 million. Still conservative, but against an ongoing backdrop of cash outflows in the U.K. I'll say more on this when I cover capital allocation in a second.
So moving to Royal Mail. Revenues of GBP 3.6 billion, that's down 10.5% year-on-year, the decline a function of lower consumer spending, reduced volumes of COVID test kits and of course, the negative impact of industrial action. Letter volumes also returned to the level of structural decline experienced pre-COVID. Operating costs increased by 0.7% in spite of the lower volumes in the network with the operation failing to respond effectively to the lower workload going through the operation. As a result, the declining revenue pretty much dropped through to the bottom line, resulting in an adjusted operating loss of GBP 219 million for the half. The pre-IFRS 16 in-year trading cash flow was GBP 330 million, impacted predominantly by the lower EBITDA, but also reflecting the fact that Royal Mail generally sees weaker working capital cash flow in that first part of the year.
A few more facts and figures on revenue and volume. First, I'll cover versus prior year, then I'll go on and do some comparatives with pre-COVID in 2019. So versus last year, total parcel volume is down 15% to 613 million items. Parcel revenues down 14.4% to just under GBP 2 billion. Within this, both domestic and international revenues were down 14%. COVID-19 test kits were around 2% of our volume in the half.
On letters, addressed letter volumes, excluding elections, down 6% year-on-year as the long-term structural decline dynamic returned.
Versus pre-COVID, so 2019, total parcel volumes were flat to 2019 in the half. The revenues were up 14.4%. The total volume position now masks the fact that domestic parcel volumes are up 11% with revenue up 22.6%. Further to that, we estimate that excluding the impact of the industrial action in the first half, revenues up around 28% on an underlying basis against 2019.
International volumes, as we've said before, is a real negative for our parcels business in the U.K., down 42%. Revenue declines have only been partially mitigated by price and mix changes. They're down 13%.
On letters, I think it's worth highlighting the addressed letter volumes, excluding elections, they're down 24% over that 3-year period. So around 8% per annum over the period, and that's not far off the decline rate that we were seeing as we moved into the pandemic. Revenues are down less of 13% following the pricing actions that we've taken.
The year-on-year profit bridge illustrates the year-on-year changes. I've already covered the weak revenue performance. It is worth mentioning that the volume-related cost savings are higher maybe than the normal gearing we might expect from the changes that we've seen. And that's because of the mix of revenue where we've seen the declines, for example. There are more directly variable costs in our international business in Parcelforce and in Ecourier than there are in our main Royal Mail operation, and that's reflected in the GBP 152 million volume-related saving.
To the right-hand side, there's then what I called inflation and other, which is a bit of a mixed bag; and net of cost pressures and savings incremental costs such as the employee national insurance increase, inefficiencies in the frontline operation, a write-down in depreciation. And they're only partially offset by the cost savings initiatives that we've had such as the removal of some of the COVID costs, so things like vehicle hires and the managerial savings from the restructuring program that we did at the start of the year.
I've shown to the right-hand side there, the underlying loss excluding the GBP 70 million impact that we estimate came from the industrial disruption in the half.
Moving on to GLS, where top line trading has been strong in the year, with revenue in euros, up just over 10% to EUR 2.6 billion. That's 6.5% excluding acquisitions. Parcel volumes were actually down 2%, though the revenue growth has been maintained through a combination of significant price increases, together with strong freight revenue progression.
B2C volume share was 54% in the half. And I think GLS is a more balanced portfolio between B2C and B2B has undoubtedly played a role in its more resilient performance. Adjusted operating profit margin for the period was 7.4%. So that's 100 basis points down, but resilient, still and in line with expectations, given the high levels of inflation being experienced across all the markets we are in.
In GLS, I should also mention a specific item that we booked in the half. We always include an amount of amortization on acquisitions in spec items for GLS. But in the half, that's also been impacted by an exceptional charge of EUR 39 million in relation to the expected settlement of some historic VAT adjustments in our Italian business.
On the profit bridge, really, just to pick out here that acquisitions have contributed GBP 16 million for this year's performance to date. So excluding acquisitions, the year-on-year decline in profit is more pronounced than maybe the headline position suggests. There's some country detail in the notes to this slide, but Martin will say more on that in a few minutes.
Cash flow in GLS was robust in the period. Improved EBITDA driving trading cash flow of EUR 111 million. So down on prior year, but that's principally due to timing differences on working capital and higher income tax and lease payments.
Moving on to outlook, where as seems to have become the norm. Unfortunately, these days, again, we face a high degree of uncertainty in the months to come. Clearly, we've issued specific to each business, but first to cover off the common themes. Clearly, the economy is challenging with question marks, for example, over the level and duration of the inflationary pressures. In the short term, of course, for us, there's also uncertainty as to the extent to which the cost of living crisis will impact on peak season consumer spending.
So in Royal Mail, we're still guiding to an operating loss of GBP 350 million to GBP 450 million for the year as we move to in October, but we're now actually saying that this guidance covers up to 12 days of industrial action. Previously, we said this would cover up to 8 days, but our actions to date in containing the impact of the strikes have been more successful than we projected in October. So this guidance now, we've seen 8 days strike to date. This guidance would be robust for a further 4 days of industrial action.
Obviously, in this situation, we're doing everything we can to reduce costs and to tighten cash controls. And in this respect, our recovery plan founded on the reduction of 5,000 FTEs by March targets to generate positive free cash flow next year with a return to adjusted operating profit a year later in 2024, '25.
We mentioned in October that there was a risk of balance sheet impairment this half year. This has been avoided based on the recovery plan. And clearly, we'll have to review that situation again at year-end according to progress that we're able to make.
On GLS, the balance of the year continues to carry further risk to margin. Inflationary pressures remain high. For example, we've just seen the next step-up in minimum wage in Germany. We're continuing to take steps to maintain margin where possible, including further pricing actions and cost containment measures.
In spite of the pressures faced, we're maintaining our outlook guidance, high single-digit revenue growth in euro terms with operating profit in the region of EUR 370 million to EUR 410 million.
Moving on to capital allocation. Royal Mail had a trading cash outflow in the period of GBP 330 million in the period. And overall, this caused group net debt to increase to GBP 150 million at the end of September. The Board though believes this still represents a strong balance sheet position. But against the backdrop of losses in Royal Mail and an ongoing industrial dispute, the current uncertainty requires us to increase focus on cash management, particularly in the Royal Mail business.
At the same time, to further preserve balance sheet strength, we've announced that we won't pay an interim dividend this year. We will, though, as Keith highlighted, in May, look at the potential to pay a final dividend financed from GLS. For now, the Board's priority is on the short-term recovery plan in Royal Mail. As we've said before, and Keith highlighted, the Board will consider all options to protect value for shareholders.
So to summarize, a difficult backdrop, but our businesses impacted very, very differently. Royal Mail with its fixed cost base and in the midst of an industrial dispute has been unable to make progress to date with its change agenda. It must make progress in the next half year, and Simon will take you through those plans shortly. GLS has shown itself to have more operational grip to be more agile. And as a result, it's been much more resilient to the pressures we've been facing.
I'll now hand over to Martin to say more on the progress being made in that business.
Thank you, Mick. I would now like to give you more detailed information on our performance and progress as well as on our strategic outlook.
As Mick mentioned, we have shown resilient results despite the economic backdrop that has continued to worsen since I last spoke to you in May. The unwinding of exceptional COVID effects in Q1 of the prior financial year and the general weakening in consumer demand due to cost of living crisis and war in Ukraine had a negative impact on the volume development. Overall, parcel volume were down 2% on the previous year.
An important factor in the last month has been inflation. Across our European markets, we saw general consumer price inflation increases of around 10% and even higher in some cases. However, this is only part of the story with major input costs for GLS, such as fuel and energy rising with more than 40%. So despite the overall volume picture, our cost base increased by around 12% during the period.
However, our pricing initiatives have been successfully implemented, helping to drive revenue growth of 10.5% and partly mitigate the cost pressure we currently see across our markets. Our performance is also benefiting from higher freight revenue and the acquisition of Rosenau.
Margin was below the prior year at a solid 7.4%. Given what we see in the wider market, I'm very pleased with these results. And once again, this demonstrates that GLS, with a flexible business model and broad customer and geographic exposure, is resilient and well positioned to deal with the economic challenges that we've all started to experience in recent months.
So what have we seen in specific markets? The overall picture is actually quite consistent across all our countries. Across the board, we experienced rising costs, but we're able to respond quickly to the changing market developments.
In Germany, which is one of our key markets, we delivered a solid performance given the economic backdrop. During September, general inflation reached 10.9%. But at the business level, things are even more challenging with labor shortages and increases to the minimum wage. We also see increasing competition with some players aggressively pursuing volume. However, GLS Germany is a high-quality provider, which generates customer loyalty. As a result, we were able to improve our pricing position well and maintain and protect margins.
France continues to progress with gradual and meaningful improvements. We have a strong management team in place that is focused on strengthening the quality, improving market recognition and digitalization.
In recent months, we had to carefully monitor the performance of our business in Central and Eastern Europe due to the geopolitical developments and proximity to Ukraine. Despite this, volume and revenue increased year-on-year. While inflation was higher than in other parts of the EU, for example, inflation in Hungary was 20.7% in September, margins in the region have only declined slightly.
As you will be aware, the North American market is also impacted by the global economic challenges. Nevertheless, our Canadian operations continued to deliver excellent results. The integration of the Rosenau business acquired last year remains on track. However, the situation in the U.S. still requires improvement.
Overall market conditions for all players are challenging with softening volumes and continued cost and wage increases as well as driver shortages. Initiatives have been launched to improve performance, including rightsizing of our network, simplifying the organizational structure, improving financial accountability and accelerating investments in automation to offset the high cost pressure. These measures are being closely monitored but will take time to fully implement.
Before I talk in more detail about what GLS is doing to resolve the current market issues we face, I wanted to highlight why GLS is well positioned to meet these challenges head on and remain on a long-term profitable growth path.
As I showed in the previous slide, GLS has a diverse portfolio of businesses across Europe and North America, and this is an important and balancing strength during these types of economic difficulties.
Another very important key strength is our flexible operating model. We are asset-light, which provides a variable cost base that enables us to quickly scale up and down our operations in response to volume fluctuations. This is supported by a decentralized organization structure, where local management teams are empowered to run their business as if they were their own and therefore respond to opportunities and challenges proactively.
Finally, we operate in both the B2B and B2C segment. In combination with our growing B2C business, we have retained our strong position in the B2B segment, where volumes are typically more stable. This allows us to be less impacted by the e-commerce slowdown than pure B2C e-commerce players. We will continue to build on our strength and competitive advantages to address the economic developments.
So what are we doing on the short and midterm? In general, the headwinds we faced at the start of the year are building. There is not one single market where we operate that is not experiencing increasing cost inflation. In the Eurozone, the inflation was already 10.7% in October compared to 9.9% in September. I expect that the overall environment will continue to deteriorate for some time.
However, GLS is a business that can and already has pulled on levers to mitigate these changes. And if we do so in a clear and deliberate way, we will emerge an even stronger business that can continue to exploit the long-term growth opportunities there are in the sector.
In addition, cost containment initiatives have been intensified and include reductions in discretionary spending and a critical focus on headcount. We're also targeting our investments to accelerate the automation of processes and the rollout of our digital tools to optimize efficiency. Even though we've already been successful in implementing pricing measures, we will continue to review opportunities to further increase prices to mitigate cost pressure.
As Mick said, we reconfirm that we will meet the financial guidance for full year with an adjusted operating profit for the year '22, '23 of between EUR 370 million to EUR 410 million. However, looking further ahead, the outlook is less clear. In May, I stated that achieving our accelerate targets remain achievable provided that there is an economic rebound in the year '23-'24. Clearly, given the deterioration in global conditions, this is no longer expected. As a result, we now expect achievement of our accelerated financial targets to be delayed by 18 to 24 months.
So clearly, GLS will not be entirely immune to the current economic slowdown, but the impact on our business will be temporary. We believe that the positive trajectory and the long-term potential for the business remains unchanged.
So as we look beyond the current market volatility, we still see opportunities to strengthen GLS' position and continue our growth agenda. We want to transform GLS to a digital, sustainable and truly global player. To unlock this potential, we need to continue to invest for the future. But as we also want to protect our financial performance, we will invest in a focused and targeted way.
Our network investments will be centered around automation to improve efficiency and growth. A good example for our investment focus is Parcel Lockers. These provide the potential to improve customer experience and reduce final mile costs. In the last months, we have grown our locker network significantly with further expansion expected in the next months.
We are also laying the foundation for further diversification across GLS to create value. This will include expanding our global presence and capturing growth in markets close to GLS' parcel core.
GLS will also grow and diversify through digital transformation. We will accelerate our digital change to strengthen our position in the market, capture new revenue streams and become a tech-enabled parcel provider. And an example of our recently acquired tech start-up in France, which will enable us to promote product innovation and speed up digitalization efforts.
Whilst growing GLS, we are aiming to reduce our emissions to 0 by the year 2045. We've continued to make good progress in developing our sustainable delivery model. Our 0 and low emission fleet continues to grow steadily. So we are on the right path to achieving our ambition. But of course, there's still a way to go.
So I'd like to summarize that GLS has delivered resilient results in the first half year underpinned by our flexible, balanced and diversified model. We confirm our full year guidance with tighter economic conditions expected going forward. And we remain focused on our long-term growth ambition to become more global, digital and diversified.
Thank you very much, and now over to Simon.
Good morning. We've started turning Royal Mail around, and we'll do whatever it takes. The changes we need are not optional. The losses that we have suffered to date made worse by industrial action are not sustainable. We have a 5-point plan that will make us profitable again, and I'll take you through that today. I will also talk about how we've worked hard to minimize disruption to our customers and protect our revenue during industrial action.
Looking back on this year, a lot of our key infrastructure is now coming to fruition, such as the launch of our Northwest Super Hub in the summer. And last week, we were hitting 70% parcels automation in our existing network. So I'm feeling confident that we will be hitting that consistently by the end of the year.
We now need to make the most of that infrastructure and change our ways of working to compete and win in the parcels market, a key plank of our talks with CWU, which I will come on to later.
I've met thousands of our managers in the last 2 weeks at events at our Midlands Super Hub, and I'm grateful they are on board with our transformation plan. It is our preference, it is my preference that the CWU are also alongside us. But if not, the change we need will still need to be implemented.
We have a 5-point plan to get us back to profitability again, and we've already started to execute the following: one, we are in the process of rightsizing our business to match workload; two, we will continue to fund that transformation by creating the financial headroom to invest; three, we are changing our resourcing models to make our business more competitive; four, we are making changes to our networks and how we use our assets; and five, we continue to build our management capability and effectiveness.
So turning now to the actions we've already started taking to turn Royal Mail around and returning us to profitability again. Point number one, we are in the process of rightsizing our business to match workload. We have a cost issue, and that's largely as a result of our inflated labor costs, which has been the case for some time, and that inflated cost base is made worse by the downturn in volume.
We could not react quickly enough to the downturn and match our resources to volumes, but we have taken action. In October, we announced that we will reduce our operational head count, 5,000 FTEs by March 2023 and 10,000 by the end of August 2023. Wherever possible, we will achieve this plan through reductions in overtime temporary workers and natural attrition. However, this will not be enough.
Based on current estimates, 5,000 to 6,000 redundancies may be required. Wherever possible, any redundancy will be achieved on a voluntary basis. The preferencing process for this activity has now begun. This process will be managed on a unit by unit basis across all 1,200 delivery offices and our processing sites with route revisions activity aligning resources to workload. We will implement dedicated parcel-only routes at the same time to ensure we're delivering larger and next-day parcels in the most efficient manner. This means we can get late-night e-commerce orders to our customers the next day.
Two, we will continue to fund our transformation by creating the financial headroom to invest. We have a strong balance sheet, so we can afford to keep investing in our transformation, which will allow us to compete and win in the parcels market. We are focused on strong cash management, and we've reduced our CapEx expenditure this year by GBP 100 million, from GBP 350 million to GBP 250 million.
Point three. We're changing our resourcing models to make our business more competitive. We need to be more flexible and match workload and labor more effectively during the peaks and troughs of demand. In October, we removed the cap on Parcelforce Worldwide owner drivers, giving the company the ability to increase the mix of self-employed drivers. Owner drivers are more efficient, and they're open to working more flexible duty patterns. This is the model operated by most of our competitors.
This month, we introduced new starter terms and conditions, which has started to give us the operational flexibility we need for our customers while still providing the best in terms and conditions in town. Our new starter terms and conditions are based on working 5 days out of 7, which means we can now cover our growing Sunday business with the core team. Our retail customers pay the same price for a parcel delivered on a Sunday or as any other day of the week. So our costs need to reflect this.
Our absence rate is still too high. This reduces our productivity, and it means that those that do come to work have more to do. To address this, we have developed a new attendance policy, which will go live in quarter 1 next year. It's focused on those that have regular absence and will not impact those that have occasional absence.
Point four. We're making changes to our networks and how we use our assets. Last year, we developed Scan-in, Scan-out technology in our processing sites, and we've now just completed the deployment of Scan-in, Scan-out technology across our delivery network. The handwritten attended sheets have now gone.
We are rolling out dedicated parcel routes across our delivery network. Around 60 hubs have already been deployed, with the remaining 290 to be completed by year-end. This means we can get late-night e-commerce orders to our customers the next day.
We are also now exploring the utilization of a number of Parcelforce Worldwide locations as parcel hubs for both Royal Mail and Parcelforce parcels.
Our Northwest Super hub opened in June 2022 on time. We are now moving larger parcel volume from our mail centers to this new super hub. Our Midlands Super Hub is on track to open in summer 2023. And as it comes on stream, again, we will move parcel traffic from our mail centers to the Super Hub. Our Super Hubs are better for quality, cost and allow us to accept parcels from our retailers late in the day. Because this is what the consumer wants, late night orders delivered the next day.
Point five. We continue to build our management capability and effectiveness. Our managers are on board with our change agenda. In the next few days, most of our 7,500 managers will have attended our Beyond event at the Royal Mail Academy, which is located at our Midlands Super Hub, a half-day event that has allowed them to see where we are going and importantly understand the role they play in reinventing Royal Mail for the next generations. I must say the feedback has been very positive and it has been great to meet everyone.
We are also pleased to confirm that after 3 weeks of productive discussions under ballots, the pay offer we negotiated with Unite CMA has been accepted by their members. We agreed to pay off or worth 5.5% plus GBP 1,000 one-off cash payment for our managers, which is to be backdated to the 1st of September 2022.
Our managers have been through enormous change. Delivering for the future was our biggest change to the delivery operational structure in over 30 years. We've reduced leadership layers from 8 to 5 and reduced team sizes. Decision-making is now moving closer to the customer, ensuring we deliver the service the customer wants, and we are already seeing operational benefits.
Even against a background of industrial action, our frontline trust scores have gone up. Our frontline managers' teams are saying they are more involved in change that impacts them. Our managers are keeping their promises, and teamwork continues to improve. Our managers are ready to lead the reinvention of Royal Mail.
But our 5-point plan is only a start. We will give you a more detailed explanation of our additional plans of the full year results next year. But for now, please let me provide a quick overview.
Reviewing our mail center footprint. As the super hubs come on stream and based on early estimates of parcel volumes, we expect that the number of mail centers we will require in the future will likely reduce. More efficient utilization of the Royal Mail and Parcelforce Worldwide networks. Too often, Parcelforce and Royal Mail go over the same ground every day. It's time to have a detailed look at this reality and ask ourselves, is this good for our customers? Does this make financial sense?
Review of our customer service points. Customers want first-time delivery. To enable this, we've introduced a range of new delivery options, including free redelivery, the option to leave a parcel in a safe place and in-flight redirection to a different day through the app. With customer footfall down around 50% at our 1,200 customer service points compared to pre-pandemic levels. And as our first-time delivery percentage continues to increase, it's time to conduct a review to determine the role of customer service points.
New and faster trials. A new trials framework has been developed to speed up the introduction of new technology and ways of working. And as an example, we are commencing a small-scale trial on new indoor delivery office sourcing methods to reduce the amount of time spent resorting mail. We will soon be assessing what changes have the greatest impact on quality and productivity.
Fleet financing and maintenance. We have introduced alternative lease and maintenance options for our fleet in the current year to provide a capital light and lower cost of ownership option for the rollout of new electric vehicles.
There are also elements of structural change that are not wholly in our control but are just as important, such as the universal service. I want to be very clear. We are committed to the one price goes anywhere universal service, but you just can't get away from the fact that letter volumes have declined by more than 60% since their peak. Our own regulators research shows that a 5-day Monday to Friday, letter service would meet the needs of 97% of customers. To ensure the sustainability of the universal service, we need urgent reform. So we have approached government to seek an early move to 5-day letter deliveries.
Coming back to today. I want to talk about our experience during industrial action, as I know it's front of mind for many people. Due to our significant investments made in maintaining service, months of continuously planning and the tireless communication between our commercial team and our customers, the negative impact of strike action has been contained.
I would also like to take this opportunity to thank our nonoperational managers who left their day jobs behind to help us deliver our customers' parcels. Thank you.
And as the chart shows, our recovery from industrial action has been strong, and we've improved as we learned with each strike day.
When our service is back up and running, our retailer customers are happy to use this again. I would also like to take this opportunity to thank them for their support. Thank you.
We've also made sure that any priority items such as test kits and NHS letters are delivered as soon as possible, and we understand how important these items are for our customers.
Now I'd like to cover off our industry relations. Earlier in the year, we tabled what we believed was a fair pay offer to the CWU. It was worth up to 5.5% for CWU grade colleagues. It reflected the inflationary pressures in the market, the changes we need to win in the market and a GBP 1 million a day loss.
We have always said the more change, the more pay. Over a 6-month period, we attempted to talk about the change we need. As you know, no agreement was reached, and CWU validated its members twice on pay and change. On the 25th of October and after a month of waiting, we were pleased to enter into talks with the CWU at ACAS. Those talks are ongoing. Please bear this in mind in Q&A because we do not negotiate in public.
We have now made an improved offer worth 9% over 2 years, comprising a 7% salary increase; 5.5% this financial year made up of 2% that's already paid; and a further 3.5% salary increase from the state the deal is agreed; 1.5% for next financial year effective from April 2023; plus a lump sum payment of 2% of this year's paid upon the successful implementation of a local revision or other local change.
The offer is conditional on reaching agreements on key change items, including implementation of seasonal hours flexible resourcing model in delivery, later start times in delivery, reforming attendance and sick pay policies, a tapering of benefits for ill health retirement and the buyout of legacy allowances.
We must modernize our ways of working, so we can compete and win in the parcels market whilst also delivering letters to a quality standard our customers expect.
On the 22nd of September, we served notice on a number of historic agreements. Now that the notice period has elapsed, we are implementing changes that previously we were unable to do. We now have new starter terms and conditions, which gives us the operational flexibility we need for our customers while still providing the best terms and conditions in TAM. We have also removed the cap on owner drivers in Parcelforce worldwide. We will also move to a more modern industrial relations framework with the CWU, which will allow Royal Mail to be more agile and move at the pace of the hypercompetitive parcels market.
So to conclude, we have started turning Royal Mail around, and we will do whatever it takes. The changes we need are not optional. They are also very urgent. The losses that we have suffered to date made worse by industrial action are not sustainable. We need to adjust to economic headwinds and give our customers what they want. That way, we will compete and win in the market and provide our team the long-term job security that they deserve.
We want to bring our people along with us. We've made an improved offer, the most we can afford. Further industrial action that damages our business will mean our offer will no longer be affordable. We are implementing immediate steps to stabilize our business and rightsize the cost base to reflect the new realities of a likely protected -- apologies, protracted economic downturn.
These immediate actions will start making a difference in the short term, including 5,000 FTE reduction by March 2023, a sad reality but very necessary to match our costs and workload. And then there's the structural changes to improve and better leverage our network, including in delivery. We believe these measures will get Royal Mail to cash flow positive in the next financial year '23, '24 and a return to operating profit in financial year '24 25.
Royal Mail is a great business. We can win. I'm certain of that and have always been certain of that, but only if we change. And we have already started to change, and we will do whatever it takes to turn Royal Mail around. Thank you.
Great. Thank you, Simon. We'll now move into the Q&A. I think Maria is our operator for today. So Maria, I'll hand over to you, and we'll start the Q&A on the line if we could, please.
[Operator Instructions] The first question is from the line of Alex Irving with Bernstein.
[Technical Difficulty] So first, could you please confirm the level of cash resources in each of Royal Mail and GLS at the end of the half year and the minimum level of liquidity you would see is required [Technical Difficulty] at the beginning of COVID, you highlighted that there were net debt to EBITDA and EBITDA interest cover covenants on your debt. Are these still in place, please? And if so, do you [Technical Difficulty] if Royal Mail itself becomes in need of additional liquidity beyond some organic cash flows, could you please confirm whether borrowing would be or whether this would be realized from borrowing or asset sales at the operating company level and not at the group level?
Thanks, Alex. I think your questions were breaking up a little bit, but I think they were all related to liquidity and cash resources and net debt. I'll ask Mick to talk you through the response.
Alex, so look, we don't actually give details of the cash positions in Royal Mail and GLS. And maybe I'll think about that as we move forward into May. They do both maintain their own balance sheets and manage their own reserves appropriately. We actually raise finance currently at the group level. So facilities like the RCF, the bonds are raised at the group level rather than in the Royal Mail business or in GLS.
In terms of the minimum liquidity they require, I think that clearly, we have seasonal and in month working capital swings. If I go back some years, which is last time, I think, maybe in Royal Mail 10 years ago when we were suffering, we used to think about GBP 200 million of liquidity and Royal Mail being kind of a low point where we would want to be taking actions and watching the day-by-day, week-by-week working capital movements. And that's probably not a bad guide for today as well.
In terms of the covenants, yes, we still have the covenants in place around the RCF. What I would say is that the recovery plan and the outlook guidance that we have outlined today is not in breach of covenants, but -- and so we are comfortable that the RCF facility would be in play. But nor indeed do we need to utilize that RCF given the guidance that we've put out today.
In terms of additional liquidity needs, I think what I would say is in the Royal Mail business, in particular, there are many levers the Royal Mail business can pull. I mean, Simon outlined that we've reduced our outlook for capital expenditure in the year from GBP 350 million to GBP 250 million. But that is still maintaining the transformation investment that we need. We're still continuing with the investment in the new Super Hub in the Midlands, for example, within that reduced investment envelope.
So there is further we can go on cost containment in Royal Mail to help the liquidity position if we want to do that. But of course, we want to get on with modernization and transformation at the same time. So we are balancing how we're responding at the moment on cash, getting a really firm grip on the tiller and making sure that we stay within our ratios and with our constraints. And of course, if things change, we'll have to take appropriate action in that respect.
At the moment as well, I think it's important to say that GLS has been left untouched and [ unscaled ] by what's going on to get on with its investment plans and its investment in growth. And that's really, really important to the Board that there's no cross-contamination of the issues that we're facing in Royal Mail to prevent us being seen as a good and responsible owner for GLS, allowing it to reach its potential. And so that also is inherent in the guidance and position that we're outlining today.
So you mentioned additional liquidity in Royal Mail as well. Look, of course, it has a strong balance sheet, royal Mail. It's got a large asset base and options available to raise money, further money if required. But we'll continue to monitor where we're at. At the moment, that's not a feature of the outlook for this year.
The next question is from the line of Sam Bland with JPMorgan.
[Technical Difficulty] All right. I'll just repeat. It's on the [indiscernible], I think the first 3 days had a GBP 70 million impact. Now we have 8 days at GBP 100 million. It looks like the [indiscernible] GBP 6 million a day versus initial [indiscernible] per day [indiscernible] the math is right there.
And the second question is on GLS guidance. I think [indiscernible] term just a little bit [indiscernible] slower profit growth year-on-year? Or are you thinking that could be a year-on-year decline in profit at some point and then growing from that low base?
Sam, Mick will talk to strikes and number of days and impact in a second. But if I just turn to Martin first, I think your question was relating to this year's profit and where it is on Accelerate, I think, is what I picked up.
Yes. Sam, so as you've seen from our confirmation of the guidance, the first half of the year was impacted by a lower volume, but we were able to compensate with quite a good pricing measures.
Moving into the second half of the year, we do confirm our full year guidance. But given the current macroeconomic environment and the likelihood of economic either recession or at least stagnation, we expect that this will be -- the volumes will be impacted a bit stronger. So I think the second half, in terms of our margin, will be a bit lower than the first half. And that then obviously will lead us into the year after.
But since it's such a volatile environment currently, I think it is rather impossible to give a further outlook beyond this fiscal year. But I think what is a common sense is that the full next calendar year will somewhat be impacted by the economic situation and the inflation that we're seeing around the countries. Beyond that, I'm rather careful of giving any further outlook because I think it's just not possible.
Okay. And on strikes, Mick?
Sam, look, I know everyone would love to be able to convert the impact of strikes into its x million per day. And we do kind of try and talk about it a little bit like that sometimes, but it's actually a bit more complicated. So customer behavior and reaction to the threat of strike can cause a change in behavior and potential loss of revenue. And so as the industrial distribute built in half 1 even ahead of strike, some customers would have diverted traffic away from us and maybe to other providers.
And so that GBP 70 million impact in the first half wasn't just on the day strike impact. It was kind of in the period up to the end of September. It's also important to note that it's a combination of revenue that may be moves away from Royal Mail, but also we invest really quite heavily in contingency planning, in additional drivers, in agency labor to allow us to provide service, both on the build up to strike, but also in recovery after industrial action. And that's offset against the pay abatements on the day when we don't pay post this on the day if they take industrial action.
So there's a number of moving parts that contribute to GBP 70 million in the first half. I think the GBP 30 million for the 5 days of industrial action in October was, from our perspective, a real positive. I think we had anticipated when we gave the guidance in October that the strikes would have impacted us more severely. But I think it's, in some ways, a testament to the investments that we have made to try and protect customer service and the efforts of our account teams in closely managing expectations and promises to customers that, to date, have allowed us to contain the impact of the industrial action to a lesser amount than we might have originally feared.
And so when we gave the outlook guidance today, we -- I'm sure you've noted, Sam, we're now saying that the guidance covers us for 12 days of industrial action. So the 8 that have already been taken, and potentially a further 4 that we've already been notified of. But of course, we will see what happens in the talks with CWU over the next week or so ahead of those days of industrial action.
So there's a number of offsetting parts, but it's been a positive response from customers and the business actually to the industrial action taken during October.
Sam, yes, Mick answered that fully. But just to make 1 clear point that he said is that we've had 8 days of strikes. We've been notified of 4 more, 24th and 25th of November and the 30th of November and the first of December. That came in yesterday. And clearly, that just doesn't take anything away from the actions that need to be taken in the business. So Simon is still going to continue with the actions that are needed to turn around Royal Mail around.
The next question is from the line of Muneeba Kayani with Bank of America.
On GLS cash and capital allocation, you talked about the growth opportunities at GLS. So can you help us understand how you're thinking about capital allocation and why you would use that cash for dividends, is my first question.
Secondly, if I could go back, Simon, to slide on the new CWU offer and the 3.5% funded by change. This is firstly related to change. Is that still related to change? Can you help clarify that? And then just following up on the earlier question on strike impact. So what does your guidance assume for the planned 4 days of strikes?
So I'll start by giving you something on the dividend and then turn it to Martin for the growth and Simon can cover the offer. But it is linked to change. I don't know if you want to say anything on that, Simon. It is linked to change the 2%?
Yes. Well, actually, Keith, maybe I'll cover it off now. Sorry, [ if I ] derailed a little bit. But yes, the 3.5% is linked to change, and the payment will be effective from the point that the change has been agreed. So Keith, hopefully, that covers that off.
Now your question on GLS was capital allocation. What Mick made clear is that GLS is not constrained. And GLS is investing in 2 areas, and Martin can cover it. One is digital improvement, an acceleration, and the other is his geographical footprint. And neither of those is constrained by the group at the moment.
In terms of the dividend, if you actually analyze it, except for the COVID period, the dividend that is being paid by group has been increasingly over the years, funded by GLS and not by Royal Mail. Indeed, if you look at one of the reasons we've looked at the change in the name of the holding company and the 2 brands underneath, in part, it was driven around that transparency. I think a number of commentators haven't quite understood that actually, the dividend was increasingly coming from GLS's cash inflows over time anyway.
And clearly, as you can see this year is Royal Mail is going to have a negative cash flow, a significant negative cash outflow. But GLS will be positive, which is why, as a Board, we're saying we'll look at the dividend at the year-end. Martin, do you want to cover anything on growth? And then Mick...
Yes, certainly. Look, GLS is a winning business model, and it shows especially in these days. And we will continue to invest. We have never stopped investing, and we are very strongly supported by our mother company. So no restrictions there. And we indeed foresee in order to achieve also our accelerate targets to invest heavily in digitalization, which we're doing. One, to own developments, very customer-oriented applications, but also through investments in digital companies.
And the other thing is, as Keith mentioned, we are -- our business model works in almost any geography. So we are seeking to expand further our footprint. And on top of that, also to have a more balanced portfolio. It is likely that we will continue to look into, invest into areas that are adjacent to our core parcel business model. And I think that mixture is where we are focusing our investments on. Of course, next to investing in our, let's say, core business to increase the footprint with new hubs and new automation, new sortation. And that mix is what makes GLS stand out. And I think going forward, we have lots of ideas, and I can't see us being constrained in our investment opportunities, and we will move ahead.
Mick, next on strikes.
Well, look, I mean, clearly, the 4 days of industrial actions that were notified of at the end of this month and early December are clearly there's certainly the second 2 days falling into Black Friday, Cyber Monday weekend. We're really starting to play with fire at that time of year in terms of the potential impact on revenue and our customers.
And so it's absolutely critical really that the union see sense and seeks to avert impacting our customers like that, because if they're afraid of a raise to the bottom, then that really is the starting of that sort of trajectory. We need to serve our customers at this time of year.
The company is in a level of distress financially. We announced a loss of GBP 219 million. Further losses expected for the second half year. And I think it's really important now is that we start to get on with the change program, working together against a backdrop of a difficult economy that's hard for our customers and our people. So I think from my perspective, we need to move forward. We need to get through the talks and we need to service our customer through their busiest and our busiest trading period.
The next question is from the line of Sathish Sivakumar with Citi.
I've got 3 questions here. So firstly, on the attrition rate on the Royal Mail U.K. Just can you share some color on it, actually? As you're going through this industrial action and so on, what has been the impact on the attrition rate? And also on the long-term [indiscernible], obviously, we have seen the peak of it last year, but I just wanted to get a sense where we are right now.
And the second one is around the Parcelforce. It looks like you made a focus on restructuring that through [ sourcing model ]. Would you actually consider reorganizing some of the operational activities that are carried out to Royal Mail to Parcelforce? Is there any overlap [indiscernible] that you could just move some of those activities on a newly restructured or are there some -- you're making some progress there, right?
And then the third one, into the peak season, historically, you hired about 20,000 FTE. What is your thoughts about 20,000 agents [indiscernible] workers? What is your thought into this year? And also related to that, obviously, with the industrial actions coming in, especially during the peak period, what has been your discussion with your key customers?
Let me just say something on attrition, and then I'll pass it over to Mick or Simon. In progress in Parcelforce, you're right, and Simon can cover that again in a second.
In terms of attrition, you need to think about it is that we are 1,200 delivery offices, yes. So there is some recruitment going on because you don't get a direct match of people leaving the business to people joining the business. But overall, we are seeing attrition. I think it's run about 250 a week.
250 a week, Keith. That's right.
About 250 a week, yes. But you are seeing some recruitment at the same time. What -- you can link that to the current need for workers during peak. And obviously, we're in the middle of peak or getting into the middle of peak. But what is different this year to previous years is we're coming into peak with a much higher base headcount to begin with, yes. So whereas last year in COVID, I think we recruited something like 25,000 people for peak. That's just not happening this year because of the -- what's happening in the business generally. But Mick, do you want to say anything on long term?
I don't think we've put a number actually, but it's running a couple of percentage points above what would be a kind of pre-pandemic norm still. So there's still advances to be made in absence management. And I think Simon outlined as part of what we plan to move forward with in the future is a change to our attendance policy, which will look to tighten up people who are more frequently absent maybe than the norm.
Yes. I think each 1% of sickness is about GBP 40 million of...
GBP 25 million.
Right. GBP 25 million of cost, yes. [indiscernible]?
What was the specific question, Keith, I didn't quite capture that.
I think it was a question on the integration of Parcelforce [ to ] Royal Mail.
Okay. So as I mentioned, is that we currently go over the ground twice in many cases. So Royal Mail vehicles and a Parcelforce vehicle will go over to exactly the same place. And the question we've got is, why -- is that good for customers? Is it good for cost? We don't think that it's good for either of those things.
So as we roll out our dedicated parcel depots, around about 350, we've done 60 already, the question that we're asking ourselves is can the Parcelforce depots we have, around about 50 or 60 of them actually become those dedicated parcel hubs for both Royal Mail and Parcelforce parcels. And that's the deep study that we're in at this particular point in time, we'll be able to update in due course.
And the other thing that we've done as well as we have opened up the owner-driver cap as well, which is also now done. And as I said, in my presentation that owner drivers are good for productivity, but they are also more open to working different duty patterns that also reflects the changes that our retail customers want.
Yes. So last thing I'll -- just going back to peak is we have the people already there for peak. As you saw in the presentation, what you're seeing in the first quarter of next year -- this -- between January and March, fourth quarter of our year, is a reduction of 5,000 [ FTE or their ] thereabouts against last year's number. So it's a like-for-like number, and that is reflecting really the volume changes in the business.
So the 5,000 FTEs like coming off from your voluntary attrition or is it going to be on top of the attrition?
It's a mix, yes. Some of it's voluntary, some of it's attrition. And obviously, attrition is cheaper than voluntary redundancy. So -- and then what Simon, I think, gave you on the 10,800 that were going to come out over the 12 months to August, I think he gave you the number that we expected by way of voluntary.
5,000 to 6,000. So 10,000 FTEs between now and August 2023, of which we estimated 5,000 to 6,000 may be required through redundancy.
The next question is from the line of Alexia Dogani with Barclays.
I had 3 questions as well. Maybe on Royal Mail. Just firstly, clearly, Simon, last year, you were painting a much more constructive picture with the unions. And we are now in one of the most extreme disputes we have seen in recent years with mounting losses. You could easily say the Plan A is not working. I guess, what is Plan B? And how can you be confident of [ stemming ] these losses given the backdrop? So that's one.
And secondly, I think you've put in a statement that you expect Royal Mail to return to operating profit in FY '25, not next financial year. How should we think about the evolution of losses into next year? And what does your plan assume currently? Is it a [ halfing ] of the losses? Is it getting close to breakeven? Any color on that would be very helpful given the situation at the moment.
And then finally, just a clarification, maybe Mick can help. In the statement, you say that in October, you were loss-making excluding the strike action of around GBP 18 million. That's clearly an improvement from the GBP 1 million loss per day to roughly GBP 500,000. Well, how much is that due to underlying compared to just seasonality, because clearly, calendar Q4 is a higher revenue quarter.
Simon, do you want to go?
So I'll take the union question. What I would say, and I covered it in the presentation today is that we had our largest change that we had in our operational delivery management population that we've had for 30 years. And we've worked with Unite CMA in a very constructive way, where we've actually made that change. We've embedded that change. We've had both the cost benefits and also the operational benefits as well. And we've also agreed just the other week, a pay deal as well. It went to a ballot and had a positive outcome.
And I think when I look at that, our managers are ready to lead the reinvention of Royal Mail. And I think that's really, really positive. And I think it's a great example to all on how it is and you can work together to get the change we need so the business can be successful.
On the CWU, the reality was, is we tried for 6 months, and we weren't successful in getting meaningful engagement on the change. But I am pleased, and I've said it very, very clearly today, and I've said it many, many times, is that our preference, and our preference is that we can have the CWU alongside us during this change. And the talks are currently ongoing. It took a while for us to start those talks [ today, but they ] have been going on intensively. They went on over the last weekend. And I wouldn't like to prejudice that situation by any form of further update today, but let's see what comes in the coming days.
But the key point is the change we need is the change we need. And what is required to turn Royal Mail around, we will do that. Keith?
Okay. And I'll let -- Mick will talk to current operating and next year.
Alexia, yes, look, in terms of next year, according to the recovery plan and the 5,000 FTEs and 10,000 by August of next year. And given the outlook guidance that we've given next year is on a trajectory back towards breakeven. We've said that next year, we'll look to target positive free cash flow. And inherent within that, obviously, is a degree of uncertainty around the economy, which is why I've chosen free cash flow rather than trading cash flow as the reference point because I think we would look to seek to make the U.K. business at least cash generative next year. And if required to be supplemented by an asset sale or 2 on the property side, for example, that's how we would look to accommodate achieving that target given the uncertain backdrop.
In terms of October trading, you're trying to get really precise in 1 month of data. Look, for starters, our impact of industrial action is an estimate in its own right. So maybe it's give or take 10% or 15% in its own right. So taking a read across to the losses having been contained to under GBP 1 million a day, yet that is a function of the arithmetic. But I think splitting hairs, I think October is normally a stronger trading period than maybe the periods across the summer. So I think we've got a lot to do to stem the tide of those losses in the balance of the year rather than to look at 1 month.
Great. And if I can just -- if I can follow up, in terms of the losses next year, I appreciate the comment of towards breakeven, and I appreciate the free cash flow comment as well. But I guess is next year, there for the last kind of resort year that will make you say, okay, we need to change stack because we've now had 2 years of significant losses? Are you giving yourself, I don't know, 6 to 12 months more? That's kind of what I'm asking.
Well, I think the immediate thing is to look to next May when we talk again because the focus at the minute is on the next 6 months and making progress in the next 6 months. When we get to the full year results, we'll obviously update you on what we see for the following year. Yes, but it's too early to say. Mick will start filling those gaps as we see what's happening in the next 6 months.
I mean, the trajectory -- the cost trajectory of this year is absolutely critical. The economy to some degree where we can't control. Obviously, if there is a more protracted impact from industrial action, again, we'll have to accommodate that as well in any outlook guidance. But I think from my perspective, this turnaround has got to be seen as within our control to be delivered through cost containment and improved efficiency.
The next question is from the line of Cristian Nedelcu with UBS.
Maybe the first 1 in the U.K., you talked about the action plan, the new terms for the new hires, the change in absence and so on. You offer us a first view of the ballpark cost savings that you anticipate here. And so could you tell us if within the guidance of an operating loss for next year you already include benefits coming from all these measures that you started implementing?
The second one on GLS, we have your revenue guidance for the full year, which is very helpful. But can you comment a bit for the second half on your expectations on volumes versus expectations on pricing just to get a bit of a better feel on your thought there?
And the last one, maybe specifically on Germany, we had this minimum wage increase of almost 25%. And I believe your labor force is somewhere around 60%, 70% of your costs. Could you elaborate a little bit what you're doing there in terms of pricing to -- and if you believe you can fully offset this minimum wage increase for pricing or other cost measures.
Cristian, so we're not providing detailed guidance as to the specific benefits of each of the initiatives that we outlined at the moment. But you -- we'll look maybe as to what detail we'll add as we move forward into next year. But yes, the benefits of the initiatives that have been outlined, some of which impact next year, some of which maybe are into the following year are absolutely included in the guidance that we've offered.
In terms of GLS volumes, we're not guiding to volume. I think Martin has always been clear, the economy is uncertain. We'll continue to respond and react as inflation and the economy and demand moves over the course of the period. I think to date, we've been successful in responding with pricing and efficiency initiatives to maintain margin. And that strategy that's been pretty successful in the first half will continue into half 2. I don't know if there's anything to add, Martin, on that.
No, I think that is spot on, Mick. So indeed, we yes, we will see that volumes will not be stronger than in the first half. That is clear. And we will be impacted. But as I mentioned earlier, we have a pretty resilient business model. And especially in Germany, we have also a good mix between B2B and B2C volumes that will -- and they react differently to the economic situation and in terms of also volume decline are different. And that puts us in a good position in terms of to balance the effects. And on the other hand, we have seen quite a healthy price increase already in Germany, and we intend to -- and we have to continue with reviewing our pricing position as well in Germany to mitigate those costs.
And so far, we have been quite successful because in Germany, we are absolutely seen as a high-quality provider, and that helps us, of course, to be successful in getting our cost increases under control and to mitigate them as much as we can.
The next question is from the line of Gerald Khoo with Liberum.
Two questions, if I can, both on the U.K. In Royal Mail, just looking at the slide you put up showing volumes and revenues, it seems like it's a relatively narrow gap between the 2. Could you talk a bit about what's happening on price mix and why you don't seem to be getting the same uplift as GLS is achieving?
And secondly, on the USO and proposed switch to 5 days, can you sort of elaborate on what sort of savings you would expect from that to what sort of sources of those savings? And what's the timeline in terms of government agreements and any legislation, please?
I'll cover the last aspect, and then turn to Mick, maybe, to answer the revenue and volume. And we're not giving the financial impact of the USO because it's dependent on what actually comes out and it's not built into our models at the moment, anyway.
If I talk through progress on the USO quickly is, look, it's not -- this isn't a new issue. We actually raised it first off in 2019 before the pandemic. And clearly, the pandemic sort of changed things temporarily. But the USO is built around 2 things. It's built around meeting consumer demands and it's built around the financial stability of the provider, Royal Mail.
On the first that Simon put in his commentary is that 97% of users accept a change in the USO to a 5-day proposition would not adversely impact customers. And we have ideas in train on how we would satisfy customers on the 6th day, Saturday, and on the seventh day as well. So I think the consumer demand test is sort of satisfied through what Ofcom has been saying.
The financial stability question is the one that I think is increasingly being recognized by both Ofcom and by government. And what -- as we said this morning, if you look at that is, over the last 10 years, is we've only met the regulatory hurdle of a 5% to 10% EBIT in 2 of those 10 years. You can see the amount of change that we are putting through this business. But we are fighting against a decline of 60% in letters, yes. So it is in the interest of all stakeholders, government, Royal Mail, unions, everyone to get the right USO for the future. And that's the approach to government and the talks we're having with government. I don't think you are going to talk about the financial changes, Mick.
No, not on U.S.
And volumes and revenues?
Yes, look, we always get into the debate on the price mix change on the volumes and revenues, and that's because we don't provide the detail behind what is quite a wide portfolio of services that we offer, both within the parcels and letters and international space. And maybe just a few comments, I think, on the letter side, we obviously have put in quite significant price rises on business mail. And we're reasonably pleased with how that's gone, and we'll be putting in more price rises this month on business mail, an 18% price rise, in fact, going in this month, which is a couple of months earlier than we would normally do, which is, I guess, energized, if you like, to be accelerated because of how pleased we've been from how the earlier price rise landed and stuck.
I think there's obviously a dilution though on total revenue. I think we've said on the year-on-year volume slide, advertising letter revenues were broadly flat there. They were relatively low AUR service and one in which we try to contain price rises because advertising letters are in competition with other advertising media. And so we have lower price rises in a letter service that has performed better than may be the norm. And so does that kind of balancing offset in terms of how the price mix comes through when you look at the total.
Similarly, on parcels, we've had lower volumes of test kits this year. They were higher AUR last year. So that's introduced a dilution year-on-year. And also some of those were kind of premium services. So our courier service did quite a lot of business on test kits. And again, higher AUR volumes that dropped out year-on-year. So underlying that, actually, the price increases that we've introduced on things like fuel surcharges on parcels and so on. They have been reasonably successful in sticking and managing the year-on-year flow of revenue. So I do understand that we don't get all of those dynamics from the chart that we put out, but that's -- we're not intending to change that anytime soon, I'm afraid.
Can I just push you on the USO change you've invested, what's the timeline on that?
Well, Gerald, if you look at it, it means any change needs secondary legislation, yes? So it's by statutory instrument. And clearly, that is in the hands of government to put forward in legislative -- in normal legislative timetables. I can't determine what that would be.
But obviously, the sooner we get that, the sooner we'll get the financial stability that we need and is required under the Postal Services Act.
I mean, once the changes made, what's the sort of lag between you implementing the changes...
That one, there's no lag. We've actually, in the past, implemented this change under emergency legislation, yes. So during COVID, there was a temporary period where actually the 5-day service was implemented. So it's not an implementation problem from our side. It's really a regulatory change.
Probably get 80% of the benefit the following week and the rest to be managed in.
Yes. So it's a regulatory change, not a Royal Mail implementation change.
The next question is from the line of Andy Chu with Deutsche Bank.
Three questions, if I may, please. Two on Royal Mail. Could you just let us know what sort of projects you're cutting with your reduction of GBP 100 million of CapEx? And looking forward, what should we be penciling in for next year and the year after, please, for CapEx?
Secondly, I think there was an announcement yesterday from the post office picking Evri as the sort of first store-to-door deliverer. Can you just remind us what sort of volume are you thinking in terms of volume losses as under your new sort of 10-year deal?
And then just a simple one on GLS. What was the organic decline in operating profit in the first half year-on-year, please?
You want to take, Mick?
Yes. Look, we're not giving huge detail on the projects that we've -- what we've done is maybe focus on those programs that are obviously around legal and compliance because we're not trying to diminish what we invest in those areas. We want to prioritize the key transformational investment that we've got going on at the moment, which is getting our Midlands Hub up and running in the summer. And beyond that, we've absolutely focused on those initiatives that pay back sooner rather than later. So that's how we've approached it.
In terms of outlook for next year. I think all I would say, we're not giving a number today, but we haven't just snowplowed this year's cut forward into next year a large part of the reduction has been a red pen and a line rather than -- a line drawn into the program rather than us just pushing things backwards and -- so I'm not about to surprise you with a balloon step-up next year as a result of the deferrals and reductions.
I think it's fair to say that GBP 250 million is the normal run rate at Royal Mail. It's been accelerated over the last few years.
Yes. So there have been some things trimmed out. So I think GBP 250 million is more of a kind of BAU run rate that we should be expecting. And -- but obviously, within that, this year, we're accommodating some transformation investments. So it's probably on the BAU side a bit lower than the norm.
Yes. Thanks, Mick. Simon?
Yes, on the Post Office and Evri, the first thing I would say is that actually our relationship with the Post Office is good. We continue to work well together. I think it's important to emphasize what we're focused on. And what we're focused on is increasing the amount of business that we get direct to Royal Mail and our online direction on account -- non-account volumes, direct is now getting closer to 40%, a significant uplift on what we had pre-pandemic. And a lot of that driven by some real great success in terms of a better wrap, a more simplified product offering and also Parcel Collect. So that's very much what we're focused on.
Yes. So as we disclosed in the RNS in GLS, the reported revenue decline is minus 3%, and the organic is minus 13%.
And I think we can now go to our last question from Achal.
So first of all, on your contracts with your retailers, so with the strikes going on and with the risk of further strike, what kind of discussions do you have with your customers? Do you see a risk of permanent loss of business anywhere? So that is my first question.
Simon?
Yes. I mean, I think we've always been very, very clear that strike action damages the business. And that in a hypercompetitive parcels market, it's 1 press of the button to move volume from us to the competitors. So what strike action actually does is weakens us and makes the competitors stronger. However, what I would say, and I covered it off today, and I think thanks to a really strong Net Promoter Score on the doorstep, we remain #1 on that, what our retailers are doing is bringing the volumes back to us as best as they can, which is why it is the strike action we covered off today is having less an impact than perhaps what we'd originally thought.
And as Mick covered off as well earlier on, the investments that we've made to make sure that on a strike day that we can recover quickly and also deliver on that day. I think all of these things are helping. But I think it's also important to emphasize what it is that our customers are asking us for, and what they're asking us for is turning the great GBP 900 million worth of infrastructure investments into what it is that their customers want, which is midnight orders delivered the next day with great quality at a cost that helps them be competitive, and also with low CO2.
And I think the big message that I hear from the retailers is, please, deliver your change, because that's the change we need for our business, as well as yours. So I hope that helps today.
Okay. That's great. So I think that's all we have time for today. So thank you, everyone, very much for joining us this morning. As always, I'm here with the rest of the Investor Relations team if you have any further follow-up questions. But otherwise, do have a very good morning, and that's a goodbye from us.
Thank you very much.