30% fall in profits at Connect Group

Specialist logistics company Connect Group has reported a 30% fall in profits for the six months to February by comparison to 2017, to £15.1 million.

Revenues fell by 3.4% from £793.3 million to £766.5 million.

Commenting on the results, Mark Cashmore, the group’s Chief Executive Officer, said: “In a period of challenging trading, our profit was impacted by a combination of cost and margin pressures compounded by the extent of change across the Group.

“The priorities for the second half are clear with action underway to improve the performance of Tuffnells and re-engineer our Click & Collect proposition.”

Looking at the companies within Connect Group, the newspaper and wholesaling business Smiths News had a “resilient performance with sales in line with established trends”.

Connect Group added: “Sales of newspaper and magazines were down by 4.2% reflecting the established trends in printed media and in line with management expectations. Adjusted operating profit was £20.4m excluding losses incurred by Pass My Parcel compared to £22.0m in HY2017. Revenue and margin in FY2018 is expected to benefit from a boost in sales of sticker collections and publications related to the FIFA World Cup.

“Operational challenges at the new Hemel Hempstead Hub resulted in one off operational costs of circa £0.6m this period – these issues have now been resolved. Service levels elsewhere have remained strong, underpinning the ongoing cost reduction across the network and giving confidence in the achievement of our targeted £5m annualised savings, which this year will now be second half weighted. Expected integration savings, particularly from headcount reduction, have been delayed as a result of the wider business challenges.

“Looking ahead, the ongoing resilience of the Smiths News business, together with the relative predictability of its markets is a key strength of the Group. The business remains the clear market leader and is well positioned for the forthcoming contract renewals with publishers.”

Connect Group said that the click and collect service Pass My Parcel had generated “growing volume” but its performance had been “impacted by margin and customer mix”. The interim management report also noted: “In light of continuing losses, the Click & Collect proposition is being re-engineered.”

Going into more detail, Connect Group said: “Revenue of £3.4m was up by 250% on HY2017. This reflects a significant growth in volumes that were up 389% year on year, driven by the take up of the Amazon returns service through local parcel shops.

“Despite the increase in volume, Adjusted net losses in the period were £3.5m and it is clear that the growth of returns parcels alone cannot provide a sustainable platform in the absence of significant new customers and a material improvement in the margin mix. We therefore confirmed in the trading update in January 2018 that full year losses are now expected to be similar to last year.

“While service KPIs have remained strong and the capability of our network has been demonstrated in coping with the rapidly increasing returns volumes, this has come at a significant cost.”

At this point, Connect Group indicated that some major changes could be on the cards: “In the light of the expected future losses, we have concluded that the proposition cannot continue in its current form, and consequentially we have written down the £2.0m of associated assets on the balance sheet to £nil.

“The re-engineering of our role in the Click & Collect market is focusing on how we can best leverage our proven last mile capability without incurring unsustainable fixed and variable costs. We will provide further clarity on our progress in the July 2018 trading update.”

Delivery company Tuffnells, meanwhile, had a “challenging period for revenue and costs, with performance further impacted by service shortfalls”. External revenue was up to £87.3m from £86.6m – but the company reported an adjusted operating loss of £0.2m, compared to a £4.3m profit in the prior period.

Connect Group commented: “In line with established trends, we expect an improvement in profitability in the second half from a combination of the seasonal peak, the impact of the annual rate increase and actions we are taking to improve efficiency.

“In a challenging period the business grew overall revenue despite increasing competition for customers and price sensitivity in the market. Less positively, the revenue per consignment has reduced as a consequence of the price competition and an increasing mix of smaller B2C deliveries from our customers.

“The level of change across the business has impacted service and given rise to a number of cost challenges in the period. Driver vacancies continue to be a significant drain on both cost and service – and this was compounded by a high turnover of depot managers and key operational roles in the period. This loss of experience and process know-how reduced our ability to manage the changing conditions with sufficient speed and agility. The business was further impacted by the delivery and collection of Pass My Parcel volumes that are not well suited to the core operation.”