Weaker market hits City Link recovery

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Weakening demand in the express parcels market has hit City Links recovery, parent company Rentokil Initial has revealed in its second quarter results.

Thje company has been following a seven-point recovery plan to restore its profitability following its takeover of Target Express.

“Customer relationships have improved, attrition has slowed and overall service levels have been restored to a very high level – now consistently above our internal target of 98.5 per cent.”

“However, despite the service improvement, the revenue trend has weakened as the quarter progressed, which we believe to be the result of generally weakening demand.”

First half sales, at £191.3 million, were down 5.8 per cent on last year while the business delivered a first half adjusted operating loss of £27.9 million.

The group said that network revenue, which includes the turnover of those franchisees we had not acquired last year, and which therefore gives a more consistent view of revenue, declined by 8.8 per cent.

“Some £29.0 million of this network revenue decline in H1 can be attributed to the in-year effect of customers lost in 2007.

“The new sales team put in place at the beginning of the year has continued to make good progress, with new business wins now marginally ahead of business lost, in contrast to 2007. Net uptrading from existing customers during Q2 generated some £10 million of net in-year revenue, although this was slightly stronger in Q1.

“This is a marked difference from Q4 2007 where customers were net downtrading. The current new business pipeline continues to improve. Some excellent new major accounts have already been secured and these are trading in line with expectations.

However, it said that average revenue per consignment was £8.13, a decline of 2.3 per cent year-on-year. In addition, volumes in both the B2B and B2C sectors weakened further in June, falling 9 per cent in the month. Until the end of May, volumes had been trending down some 6 per cent to 7 per cent year-on-year.

“June’s performance was not due to customer losses but appears to be indicative of weakening demand which we believe can be attributed to the UK economy. July and August have shown a similar trend to June,” it said.

During the first half, City Link’s new management team was been predominantly focused on service but, said Rentokil Initial, its focus for the second half would be on addressing the cost base of the business.

“City Link’s trading outlook for H2 remains unclear and will be largely dependent on volumes during Q3 and the peak Christmas trading period in Q4, historically the business’s busiest period. Cost action plans will also produce a small positive effect. However, it is prudent to assume that the current runrate of losses will continue for the remainder of the year,” it said.

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