International Distributions Services : 2023 Annual General Meeting Transcript

International Distribution Services plc

Annual General Meeting

20 July 2023

Introduction

Keith Williams

IDS Non-Executive Chair

1. Welcome

Good morning, ladies and gentlemen. It's 11.00, so we'll start the meeting. My name's Keith Williams, chair of the company, and welcome to you all to the 2023 annual general meeting of International Distribution Services plc. I'm very pleased to be able to welcome shareholders who are participating virtually, as well as those who are present here today. We're delighted that you've been able to join us despite the current train strike. I look forward to answering your questions during the Q&A session, which we have coming up.

Since privatisation in 2013, 10 years ago in October this year, we've taken the AGM to venues around the country, meeting in Birmingham, Cardiff, Edinburgh, London, Sheffield, Exeter and York, to provide our shareholders across the country with a chance to meet the board. Today, we're hosting the AGM in Norwich, said to be the most complete medieval city in the UK and designated as England's first UNESCO City of Literature in 2012.

It is a city that Royal Mail has a long association with. We have our mail centre in Thorpe Road, of course, but you may not know that Norwich is also the home of the postcode. It was in this city in 1959 that postcodes were first piloted before being rolled out nationwide in the 1970s, and now, of course, postcodes provide not only the geographical bedrock of everything from pizza deliveries to ambulance services nationwide. They are also a fantastic innovation that has been replicated right throughout the world over. As someone with an interest in trains myself, as well as Royal Mail, I thoroughly recommend looking up the recent episode of the Great British Railway Journeys programme with Michael Portillo if you want to know a little bit more on that subject, including the behind-the-scenes footage at our mail centre just up the road.

But, coming back to today's business, let me introduce you to my fellow directors present today. I'm joined immediately on my left by Martin Seidenberg, who I'm delighted to say will be the group CEO, as we announced earlier today. Next to him, Mick Jeavons, who's the International Distribution Services company group chief finance officer; as well as non-executive directors Lynne Peacock, who chairs the ESG committee; Michael Findlay, who chairs the audit and risk committee; and, on the far left, our newest board member, Ingrid Ebner, who joined the board on 28 June this year.

And looking to the right, next to me on the right is Mark Amsden, our company secretary; Baroness Sarah Hogg, our senior independent non-executive director; Maria da Cunha, our non-executive director for engagement with the workforce and chair of the remuneration committee; and finally, Shashi Verma. Although he's not able to be here today in person, Jourik Hooghe is joining us virtually. We're also joined by John Crosse, our director of investor relations; and Jenny Hall, director of corporate affairs.

Classified: RMG - Internal

Annual General Meeting

International Distribution Services plc

I'd like to take this opportunity to personally thank Simon Thompson, who stepped down as CEO of Royal Mail in May. We're grateful for his dedication and what he achieved at the company and wish him well for the future.

1. Group Summary

Before we get into the formal businesses of the meeting, I'll give you an overview of where we are as a group, followed by an update on the Royal Mail business, and then Martin will provide you with an update on GLS. When we look at our performance of the two group companies, they tell very different stories.

Royal Mail made an adjusted operating loss of £419 million in the year last year, whereas GLS made an adjusted operating profit of £348 million. Looking back at the year, it's been a difficult year for everyone: our customers, our people and, of course, our shareholders. We recognise that the financial performance of the group last year was disappointing, especially given the impact of 18 days of industrial action at Royal Mail, and we had to make a decision not to pay a dividend.

We've been at a crossroads for the last year, but at Royal Mail, we now have an agreement with the Communication Workers Union, and we're pleased that this was overwhelmingly passed in a ballot last week. We now have a clear sight of the road ahead. The new agreement offers a real opportunity to deliver positive change for all our stakeholders. It's good for customers, increasing our ability to improve our services and our quality. It's good for employees retaining their job security, committing to no compulsory redundancies and giving our people a pay rise. And it's good for the environment, allowing us to reduce our reliance on air by taking out half our domestic flights every day and thus reducing our carbon emissions. And finally, it's good for shareholders, supporting growth and the long-term sustainability of the business.

The successful delivery of the CWU agreement is now essential. However, until we see the delivery of that plan and a successful turnaround, the board will continue to consider all options to protect the value and prospects of the group, including a potential separation of both companies.

GLS delivered a good performance despite a tough macroeconomic backdrop. The company's flexible business model, balanced B2C and B2B portfolio and diversified geographical exposure continues to underpin its performance. Over the year, the business has seen revenue growth in almost all markets, with Germany, the largest GLS market, delivering growth of 5.1%.

Unfortunately, the US performance was disappointing, with a revenue decline of 3.4%, but a turnaround plan is in progress, and measures to lower unit costs and increase sales are in place. In Canada, the integration of Rosenau is on track, and the business is performing ahead of plan. The Canadian business continues to deliver margins above the GLS average.

And, following the completion of the Royal Mail investment phase, which has culminated in the opening of our new Midlands Super Hub last month, the board has decided to switch investment focus to GLS. The investment will focus on the development of GLS's last mile proposition, including the expansion of lockers and growth in new geographies and services.

1. Royal Mail

Given that we've just announced the appointment of Martin as CEO of the group, it would be a little unfair for me to ask him to present Royal Mail performance for the year. So if I may, I'll go into a little bit more detail about its performance. While the Royal Mail business still has much to do, there are now grounds for optimism. There's now a clear path towards a more competitive and profitable Royal Mail. We've made good progress on our five-point plan to stabilise the business and the loss

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that was partly offset by actions to reduce costs and right size the business in the second half of the year.

We revised postmen's and women's routes across 1,200 or so delivery offices across the country, saw a reduction in 10,000 full-time equivalent roles against our initial plan of 5,000 by the end of the financial year, launched the dedicated parcel hubs, and launched both the North West Super Hub last June and the Midlands Super Hub only a few weeks ago. New contracts, including recent wins with the Passport Office and even BT for the distribution of phone books again - who'd have thought of that one? - are further reasons for optimism for the future.

However, there is still an urgent need for change in the business. The new agreement with the CWU and the positive ballot result last week helps to draw a line on an extraordinarily challenging year, but we must acknowledge the impact that the year has had on our employees, our customers and our performance. We cannot ignore that our quality of service has been disappointing. It simply must improve, and we're focused on ensuring that it does. We're providing additional support to the offices that need it so we can improve quality of service.

The new deal also helps address quality of service by improving indoor sorting methods to relieve more time for deliveries, moving 1.5 million delivery hours from the quieter summer months to peak season, and creating a single parcel network for simplifying products and improving our services. We're really sorry that we've not delivered to the high standards of service our customers expect, but rest assured that improving quality of service is the executive team's top priority.

But there's also been much to be proud of over the last year. We've seen a significant increase in automation across the network, now running at around 80%, and expected to be higher soon with the successful opening of the latest hub, increasing capacity and the efficiency of the network. New services such as auto-redelivery help to improve the successful delivery of parcels to customers. Over 99% of parcels are now delivered to customers on the first or second attempt, reducing the need to get the bus, walk or drive with your Something for You card down to the local delivery office to collect your parcels. And new drone trials for delivery to certain remote locations - rural locations have been given the go ahead.

We're proud also of leading work on reducing our environmental impact. We now have the largest electric vehicle fleet in the UK, with 5,000 vehicles delivering across the country. Our 85,000 posties walk up to a billion steps a day, and one in five delivery routes are now zero emission. This is all helping to give us the lowest CO2 emissions per parcel in the industry. And, this week, we announced our move to use hydrotreated vegetable oil instead of diesel in some of our trucks, with 10 million litres of the low emission biofuel being used in the first year.

We're doing all we can to make the company fit for the future, but we've made no secret of the fact that we need government and Ofcom to do their bit too. We're committed to the 'one price goes everywhere and anywhere' universal service. It's part of our DNA, and we believe in it, but it does need urgent reform to reflect the dramatic decline in letters and the growth in parcels. Letter volumes are down by more than 60% since their peak in 2004-05 and down 30% since the pandemic alone. Our posties are only delivering around a third of the volume of letters they were at our peak - down from more than 20 billion letters to around seven billion letters now - whilst the number of addresses they have to deliver to has grown by about 3.8 million in the same period. So it's more addresses but fewer letters to deliver each time they walk up the path with the mail.

A shift to the five-day week would help make the universal service more sustainable while meeting customers' needs. Indeed, Ofcom's own research shows that a five-day, Monday to Friday letter service would meet the needs of 97% of consumers and SMEs. And employee feedback shows that there is growing support for this too. We're speaking to Ofcom and government about moving to a

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Monday to Friday universal service for letters instead of the six-day current Monday to Saturday obligation, but words will only get us so far. We need action from Ofcom and government to make sure the universal service can be sustainable for the future, and we need that action fast.

I will shortly hand over to Martin to give you an update on GLS and say a few words on his new position, but, before I do, on behalf of the board, congratulations to Martin. We're delighted that you'll be taking over as our group CEO. Your extensive international logistics experience and proven track record means that we know we have the right person to lead the group over this critical juncture. And with that, over to you, Martin.

GLS

Martin Seidenberg

CEO, GLS

Thank you, Keith, and good morning, everyone. Firstly, I would like to say how proud I am to be trusted with the responsibility of guiding the IDS group into the future. It's a privilege to lead a company such as IDS with two great brands at Royal Mail and GLS. I look forward, together with the leadership teams in both companies, to ensure we deliver on our promises to customers, employees, shareholders and the public at large.

Today, however, I'll be focusing on GLS, sharing with you more details on its financial performance and direction and outlook for 2023-24 and beyond. GLS again had a good year, despite the strong macroeconomic headwinds which have impacted our markets. We were able to preserve volumes despite the economic slowdown and lapping a stronger prior period due to Covid.

Maintaining our volume levels in an environment where consumers face lower disposable income due to high inflation and increasing interest rates represents a good achievement for the group. We delivered revenue growth of 8.6%, driven predominantly by a robust pricing strategy. Our high- quality services and strong international network allowed us to increase our prices, while still maintaining a strong customer base.

Additionally, operating profit was €403 million, slightly exceeding the prior-year performance. With those results, we remain around 70% larger in profit terms compared to just three years ago. Our pricing strategy, together with dedicated cost containment measures and the full-year contribution from our Canadian business, Rosenau, has led to this good result, despite the challenging headwinds.

Driving deeper into our individual markets now, in our western European markets, which include Germany, Italy and Spain, we showed good resilience. Despite facing high inflation and labour costs, we managed to increase our revenues and minimise the impact those challenges. France achieved an exceptional performance this year. We were able to grow revenue and efficiency to a new level, resulting in a slight profit this year. It's our best performance in 10 years and reinforces our confidence in the French business.

In eastern Europe, our business experience growth in both volume and revenue, despite the war in Ukraine and the general economic downturn. However, inflation was higher in these markets, and we faced increased competition. Nevertheless, we remain very enthusiastic about the future growth in this eastern European region.

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International Distribution Services plc

Shifting our focus to North America, as Keith mentioned, the integration of Rosenau into our Canadian operation is progressing well and delivering positive results for the group. However, our performance in the US was disappointing. The market conditions were challenging, with all players having difficulties. To address the situation, we are implementing strong measures and are already starting to see some positive results. Cost control measures, such as general headcount reduction, have already been successfully implemented. Additionally, we are capturing new customers with intensified sales activities and are reviewing our service offering in some regions. Taken together, I'm confident that these measures and initiatives will bear fruit in the near future.

So, overall, GLS again had a strong year, which demonstrates the resilience of our business. There are various factors which drive this. Firstly, our business model is designed to adapt well to changes in the economy. We use a flexible business model, which allows us to quickly adjust our operations, based on fluctuating demands. This flexibility helps us navigate through different economic cycles.

Secondly, our widespread presence across Europe and North America, along with a balanced customer base serving both businesses - B2B as well as B2C segments - reduces the risks associated with specific regions or industries.

And thirdly, our local entrepreneurial approach to business emphasises a strong focus on quality, efficiency and cost control. When market conditions change, our teams are quick to react on the ground. They adapt our services and find ways to manage costs without compromising on quality.

Finally, we are implementing strategic initiatives to drive our business and financial performance forward. These include upgrading our network, expanding our portfolio of services and transforming our last mile delivery capabilities. These initiatives are key to our growth and future success. Therefore, I would now like to give you more details on these important initiatives.

Let me start with the investments we are making to upgrade and automate our network. With high inflation, people shortages and increased wages in all our markets, we see new opportunities by investing more into automation and new facilities. In October '22, for example, we opened a new state of the art hub in Madrid. This facility will consolidate several smaller sites into one automated centre, eliminating nearly one million linehaul miles per year and significantly improving our sorting productivity. Network investments such as the one in Madrid are important, as they represent high- impact projects, delivering good returns, while providing high-quality service to our customers.

Growing our market position through portfolio diversification and geographic expansion is another key pillar of our strategy. In the past year, we've been actively seeking new opportunities to expand the capabilities of GLS beyond our core business of parcels and to grow our footprint. In selected eastern European countries, we have already expanded our in-country offers, introducing a two- person handling service and same-day delivery, whilst, in Germany, we recently acquired a small fulfilment company. These additions will continue to enhance our service offering and bolster our ecommerce proposition.

Geographically, GLS is always looking for new opportunities to expand our current network footprint. In 2023, we recently entered the Serbian market, establishing a new greenfield entity that will strengthen our presence in eastern Europe and unlock new opportunities.

Finally, we come to our last mile transformation strategy. To succeed in our industry, it is important for GLS to offer customers a variety of delivery options that maximise customer and consumer convenience. In the recent years, we have expanded our out-of-home services with investments in parcel lockers, adding to our already strong ParcelShop network. Additionally, we are focusing on building digital solutions to enhance customer experience and improve our efficiency.

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