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UPDATE 2-Royal Mail sees tough parcel market, focuses on costs

  • Published:

* Parcel revenue up 1 pct, letters down 1 pct

* Warns parcel pricing pressure to continue

* CEO Greene says no plans to quit (Recasts, adds CEO, analyst quotes)

By Neil Maidment

LONDON, May 21 (Reuters) - Intense competition in the parcels market from rivals including Amazon will leave Britain's Royal Mail reliant on cost controls and efficiency improvements to underpin profits this year.

Parcels, which generate half of Royal Mail's 9.4 billion pound ($14.7 billion) revenues, are the firm's focus in light of declining letter volumes. However, growth forecasts have had to be cut because of overcapacity in the market that led to the demise of rival City Link last December.

Royal Mail forecast last November that growth in the British parcels market would fall from 4-5 percent to 1-2 percent for at least two years as Amazon delivers more of its own packages and others seek to muscle in on rising online retail demand.

"We've got a number of competitors adding new capacity in 2015, which is going to keep putting downward pressure on pricing," Royal Mail boss Moya Greene said on Thursday as the company announced annual financial results.

Greene declined to say if parcel revenues would grow in 2015 but said Royal Mail was focused on keeping costs flat or reducing them. The company has 130,000 staff, down almost 30,000 since 2007.

Shares in the firm, controversially privatised in October 2013, traded 1.2 percent lower at 493.6p at 0855 GMT. The shares were floated at a price of 330p in 2013 but quickly shot up in value, prompting criticism that taxpayers had been ripped off.

Britain's government still owns 30 percent of the company.

Royal Mail said adjusted operating profit before transformation costs for the year to March 29 was 740 million pounds, up 6 percent on a year ago and ahead of forecasts of 712 million. Including pensions accounting and other one-off items, however, profit was down 9 percent on a reported basis.

The performance was helped by a better than expected 1 percent fall in operating costs. The company increased its dividend 5 percent to 21p.

"Royal Mail will continue to benefit from one-off gains which will help support a progressive dividend but earnings are likely to continue to come under pressure," said Cantor analyst Robin Byde, who has a sell rating on the stock.

The company did get a boost last week when Whistl, owned by Dutch PostNL, suspended plans for a UK-wide rival mail delivery service that could have hit its revenues by 200 million pounds.

Chairman Donald Brydon announced in January he would step down this year, prompting some analysts to speculate Greene could follow having seen the firm through its privatisation.

However the Canadian told Reuters she wasn't going anywhere.

"I love Royal Mail. I'm in here every morning with bells on. I've always said I'm here as long as the shareholders want me to stay," Greene said.

($1 = 0.6427 pounds) (Editing by Keith Weir)

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