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UPDATE 2-Royal Mail delivers rosy outlook after COVID-19 Christmas

* Royal Mail says Q3 stronger-than-expected

* Sees FY adjusted operating profit over 500 mln STG

* Says decline in letter volume slowed

* Shares rise to more than 2-yr high (Recasts, adds shares, detail, background)

Feb 11 (Reuters) - Britain’s Royal Mail on Thursday forecast annual profits ahead of market expectations as COVID-19 restrictions pushed parcel delivery demand to record levels and Christmas mail eased a slide in letter volumes, sending shares higher.

“The third quarter saw unprecedented parcel volumes in Royal Mail, driven by online shopping and the peak Christmas period, with 496 million parcels handled, the busiest in our company’s long history,” Chairman Keith Williams said.

Shares in the London-listed company rose as much as 11.5% to 479 pence, hitting their highest level since October 2018.

Royal Mail underwent several changes in 2020, including the departure of former Chief Executive Rico Back after years of union resistance to his 1.8-billion-pound turnaround plan. It resolved a dispute with the union in December, allowing it to focus more on parcels.

Postal firms have seen exceptional parcel volumes during the coronavirus crisis as more people shop online, but analysts at Jefferies said last week the benefits of the pandemic could start to fade in 2021.

January was robust, Royal Mail said, due to new lockdowns and package returns to retailers after Christmas. However, it warned that costs would rise due to COVID-19 measures and as it deals with higher than expected parcel volumes.

The company also resolved to retain about a third of the flexible workers it employed during the Christmas peak, while keeping extra vans and some temporary parcel sorting centres open as it conceded to a fall in service quality.

Royal Mail, which helps deliver vaccination letters and COVID-19 test kits, said letter revenues fell 8.5% in the quarter that ended in December.

Royal Mail said it has seen limited impact from Britain’s new trade deal with the European Union, with international volumes falling as expected, but added that the future impact was not clear.

Annual group adjusted operating profit is expected to be more than 500 million pounds, Royal Mail said, compared with 325 million pounds it reported a year earlier and 403 million pounds as per analysts’ expectations. ($1 = 0.7223 pounds) (Reporting by Yadarisa Shabong in Bengaluru; Editing by Uttaresh.V and Shounak Dasgupta)

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