Merger problems hit City Link profits

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Express operator City Link made an operating loss of £16.9m in the first quarter of 2008 compared with a profit of £9.3m last year, parent company Rentokil Initial has revealed in its first quarter results. And it has warned that it is “likely that the division will incur a significant full year loss”.

The group said the problems were due to “difficulties experienced in integrating the City Link franchisees and the Target Express acquisition with the core City Link business”.

A new senior management team has been put in place at City Link to address the operational problems within the business.

“This team, consisting largely of individuals experienced in running non-franchise networks, has already enjoyed some success in improving service levels and in re-establishing relationships with customers,” the group said.

The new management at City Link has put in place a seven point plan to turn the business around including:
* Re-instituting a service orientated culture by ensuring customer services are in close proximity to our customers.
* Establishing operating systems that enable information to be shared across the combined network, reliably and securely.
* Establishing control systems and processes that enable transparency of information and enable central control of costs, where appropriate, rather than the dispersal of costs and controls across each of the 94 depots.
* Reviewing the size, number and location of hubs and depots.
* Right-sizing resources to match the cost base to current levels of revenue.
* Considering how to capitalise on the growth opportunities in the parcels market; in particular the growth of B to C driven by internet purchases.
* Ensuring that the organisation has the capability to drive this agenda efficiently and effectively.

The group said the loss of revenue was primarily from small accounts, which had been particularly adversely affected by the buy-back of franchisees and the problems experienced as a result of the attempted integration of Target Express and City Link.

“Headline costs have risen sharply from £84.3 million in Q1 2007 to £110.6 million (adjusted to exclude one-off items of £1.5 million) in Q1 2008. Approximately £13 million of this increase is attributable to the cost bases of the acquired franchisees (offset by the acquired revenue). A further £8.5 million is attributable to non-recurring costs (which were not restructuring costs and do not meet our definition of one-off items) and the balance of £5 million to underlying cost increases.”

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