By Esha Vaish
(Reuters) - Britain's Royal Mail Plc (L:RMG) said it needs to cut more costs on Thursday after the former state-owned monopoly's first-half profit dropped despite a stronger performance in Europe.
Royal Mail shares fell by 2.6 percent to 486.1 pence at 0812 GMT after it posted a 5 percent fall in first-half profit and said it aims to cut annual costs by 600 million pounds per year to March 2018, up from a 500 million target.
The group is cutting costs and modernising its operations to gain a larger share of the parcels market as British households and businesses send fewer letters in an age of electronic communications and economic uncertainty.
It has also been hurt by the loss of some business from Amazon (O:AMZN), which recently started its own delivery network, while rivals such as UK Mail (L:UKM), which is being bought by Deutsche Post (DE:DPWGn), have added extra capacity.
Royal Mail said the costs associated with the transformation of its UK business were now seen at 130 million to 160 million pounds for the year to March 2017, down from a previous forecast of around 160 million.
It said the outcome for the full year will be dependent on its trading over the Christmas period, after operating profit before transformation costs fell to 320 million pounds in the half year to Sept. 25.
Jefferies analysts said in a note that Royal Mail's first-half profit was 8 percent below their expectation of 348 million pounds, driven by a deterioration of 6 percent in second-quarter letter volumes after Britain's vote to leave the European Union.
This was despite a one percent rise in revenue to 4.58 billion pounds, in line with its first-quarter growth, as strong trading conditions its continental European parcels unit continued to offset declines at home.
"The key drivers for the UK letters and parcels markets remain unchanged. Letter volumes, particularly advertising letter volumes, are linked to movements in GDP and we are monitoring developments in the UK economy closely," it said.
Separately, rival firm UK Mail posted a 3.2 percent fall in revenue to 230.2 million pounds for the six months ended Sept. 30, due to declines in its parcels and mail business.
However, it said it was confident heading into its peak Christmas trading period.