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Royal Mail Holdings pic
Annual Report and Financial Statements
2011-12
Annual Report and Financial
Statements 2011-12
Contents
Overview
Financial and business performance hi
Chairman's statement 07
Chief Executive Officer's review
Our strategy -
Strategy Be brilliant at the basics
Build a commercial future
Drive profitable growth
Our strategy in action: parcels and marketing mail 16
SS ——————————————————————e
Performance Our customers 18
Regulation
Our businesses
UK Parcels, International & Letters (UKPIL)
Post Office Limited
Financial review
Business risk
Corporate responsibility eceeshesneathincerdecsenseesscrenpstorennipsPth
Transparency 57
Governance Our: Board of Directors
Directors’ report 63
Directors’ remuneration report 72
rl
Financial statements Consolidated income statement 83
Consolidated balance sheet
Consolidated statement of changes in equity
Notes to the Consolidated financial statements 89
Royal Mail Holdings plc - parent Company financial
Pro-forma 2011-12 financial statements for Royal Mail Group
excluding Post Office Limited (unaudited) 155
ee
Other information Forward looking statements 162
Corporate information 163
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Who we are
As the sole provider of the Universal Service in the UK,
Royal Mail Group reaches everyone. We deliver six days
a week, to over 29 million addresses across the UK, at
affordable and competitive prices.
The Group is a key component of the UK’s economic
and social infrastructure, providing services to private
individuals, companies and communities. In 2011-12, we
employed nearly 159,000 people in the UK, contributing
£5.3 billion to the economy in wages and other related
people costs, and a further £2.4 billion buying goods
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Overview
On 1 April 2012, Royal Mail Group Ltd
separated from Post Office Limited.
References to “Royal Mail Group” or “the
Group” with respect to the financial year
ending 25 March 2012 (including financial
information) include Post Office Limited
unless expressly stated
In forward looking statements or
comments, including those with regard to
the business strategy, “Royal Mail Group”
or “the Group” excludes Post Office
Limited. See the diagrams on p3 for
changes to the Group's structure
and services.
We are proud to deliver the Universal Service
But, it does require a high fixed-cost network
Our strategy aims to tackle the key challenges
facing Royal Mail Group to build a sustainable,
diversified business, secure the future
provision of the Universal Service and attract
external capital
The Postal Services Act 2011 has set out the
steps the Group must take to secure external
investment. We have made good progress
restoring the Group to financial stability,
obtained significant deregulation and
secured European approval of the transfer
of almost all of the Royal Mail Pension Plan's
pension liabilities and pension assets to
HM Government
Five year Group revenue (£m)
AA great deal remains to be done to secure
further profitable revenue growth and
deliver the efficiencies required through the
modernisation of our core network. This
report explains how we will seek to do so.
Our modernisation programme - one of the
largest ever undertaken in the UK ~ is about
managing the structural decline in the
traditional letters market by making our
network more efficient and effective
To succeed in one of the most liberalised
and competitive markets in the EU, we are
adapting our network, which has traditionally
focused on delivering letters, to also
accommodate ever increasing parcel
volumes. This is a major strategic priority.
2012 2011
9,156
9,532
Five year Group operating profit/(loss) after modernisation costs? (£m)
2012 2011
211 39
2010 2009 2008
9,349 9,560 9,388
2010 2009
2008
180 122 (482)
Five year Group free cash inflow/(outflow) (£m)
2012 2011
234 (213)
2010 2009 2008
(545) (678) 237
Royal Mail Ho
Fron Statements 2011-12 01
‘Annual Report and
Who we are (continued)
Our parcels businesses now account for
48 per cent of Group revenue (excluding
Post Office Limited). They contributed
£4.2 billion of revenues to the Group in
2011-42, including £1. billion from our
European logistics business, General Logistics
Systems (GLS)
Despite increasing parcel volumes, the core
UK parcels network is loss-making. We are
taking steps to reduce these losses and make
the network more efficient. At the same time,
we are seeking to grow our profitable
networks like Parcelforce Worldwide
Royal Mail Group is building its marketing mail
business, which delivers promotional direct
marketing mail to UK homes and businesses,
as well. It already accounts for more than
£1 billion of our annual Group revenue
Working with a number of commercial
partners, we will provide to businesses, large
and small, a “one stop shop” covering creative
development, production, distribution and
customer data management for advertising
mail. This strategy is in the early stages of
its delivery as we seek to add value for our
customers at each point in the value chain
Our business is changing
We are embedding our strategy - and its
delivery - across Royal Mail Group. Later in
this document (p12), we set out the main
elements of this strategy, the ways in which
we will deliver it and the Key Performance
Indicators (KPIs) we will use to track our
progress.
Royal Mail has obtained significant
deregulation. Last year, more than 80
per cent of our revenues were subject to
direct price regulation. Following the
announcement of Ofcom's new regulatory
approach on 27 March 2012, direct price
control now affects almost 10 per cent of
Royal Mail's revenues
Go online for
more information
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Overview
ee
Revenue by business and market (£m)
Growth Traditional
Letters &
Marketing other
mail Trail?
Other
services
Counter
services
Business segment/
product
UK Parcels,
International &
Letters (UKPIL)
General Logistics
Systems (GLS)
Post Office Limited = =
Other 3 -
4,154
Total
Parcels
2,592 1,063
Percentage of revenue by market.
Group revenues
Group revenues (Excluding Post Office Limited)
44 per cent
Parcels 48 per cent
Letters & other mai
37 per cent
40 per cent
11 per cent
Marketing mail 12 per cent
Counter services 8 per cent -
ides traditional white letters, publishing, data
and philatelic,
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‘Anmual Report and Financial Statements 2011-12
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Overview
Toreflect Royal Mail Group Lids prt
from Post Office Limited on 1 April 2012, 25 March 2012 - pre-separ:
Diagram one
we are reporting our revenues including
and excluding Post Office Limited. We are
also showing the contributions of traditional
and growth revenue streams to our
business. We will continue to consolidate
Post Office Limited's financial performance
in future reports.
Royal Mail Holdings ple
Royal Mail Group Ltd?
Group legal structure
Royal Mail Holdings plc is directly owned by
HM Government. It is the ultimate parent Post Office Limited
company of Royal Mail Group Ltd. The Group
primarily operates within the United Kingdom,
including a number of subsidiaries, associates
and a joint venture. It also has a presence in
most European countries, mainly through
General Logistics Systems. The basic legal
structure of the Group as at 25 March 2012
is shown in Diagram one
On 1 April 2012, Post Office Limited was
transferred from under the ownership of
Royal Mail Group Ltd to become a direct
subsidiary of Royal Mail Holdings plc. The Royal Mail Holdings ple
revised Group structure at this date is as
shown in Diagram t¥vo
Further-details omrthe prineipalisubsidfaries -
financial statements.
Royal Mail Investments Limited Royal Mail
Estates Limited?
General Logistics Systems B.V.
1 April 2012 - post-separation
Diagram two
Royal Mail Investments Limited
Royal Mail
Estates Limited’
General Logistics Systems B.V.
The UK Parcels, International & Letters (UKPIL) business
Unit is not a separate legal entity and is included within
Royal Mail Group Ltd and Royal Mail Estates Limited
See p32 for details of the UKPIL business unit,
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‘Anmual Report and Financial Statements 2011-12
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Overview
Where we want to be
Royal Mail Group’s revenues
The UK postal services market has changed dramatically. (excluding Post Office Limited)
We have a strategy in place to deal with these changes:
° We are adapting our core network, which has primarily
delivered letters, to become more efficient and
accommodate ever increasing parcel volumes;
¢ We are diversifying our business model to secure a
sustainable future for the Universal Service and to Soe
attract external capital; and
¢ The recent significant deregulation by Ofcom means 12% (£1,063m)
we have the opportunity to generate a reasonable rate
of return on our products and services.
‘Our strategy
Our business strategy, outlined on
pages 12-13, has three parts:
* Be brilliant at the basics;
* Build a commercial future; and
* Drive profitable growth
The strategy sets out how Royal Mail Group is
diversifying its business model to meet the
challenges of a rapidly changing market,
secure a sustainable future and attract
private capital.
Adapting our network
Royal Mail’s share of communications is
declining year after year. It delivered 15 billion
inland addressed items in the UK this year.
This compares to 129 billion text messages
sent annually'. We delivered around 80 million
items a day in 2006. Today, that number has
fallen to 58 million
We expect traditional letter volumes to fall by
approximately five per cent a year in the
medium-term. We will seek to manage this
structural decline in the letters market by
improving efficiency through the modernisation
programme and a range of other measures.
04
[Letters & other mail and other services
I Marketing mail
BiParcels
We are also adapting our core UK network to
accommodate the ever increasing number of
parcels we deliver.
key partners to provide businesses with
a service covering creative development,
production, distribution and customer
Recent research suggests that online retailing data management.
will account for 12.4 per cent of UK GDP in
2016? - signifying the importance of online
retailing to future growth. Royal Mail is
already the trusted partner of some of the
UK‘s largest online retailing companies.
Supported by continued growth in online
retailing, UKPIL domestic parcel volumes grew
six per cent this year. GLS parcel volumes
grew by three per cent
Our specialised sales team is targeting the
UK‘s top 3,000 advertisers with our full
service offer. We will provide an update on our
progress in future reports.
We will also extend the availability of
our customer data to key partners, as
we look to expand our data business for
business customers
As we adapt our operations to accommodate
increasing parcel volumes, we will seek to
address the fact that our core UK parcels
network - Royal Mail - is loss-making
Growing our share of marketing mail
Marketing mail, promotional direct marketing
mail delivered to homes and businesses
across the UK, currently accounts for
12 per cent - or £1.1 billion - of our revenues
(excluding Post Office Limited). Royal Mail has
the most extensive distribution network in the
country. But, we want to increase our share of
the marketing mail value chain, working with
Ofcom: Communications Market Report UK ~ published
4 August 2011.
Boston Consulting Group: “The £4.2tn Opportunity,
the Internet Economy in the G20"
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Overview
Financial and business
performance highlights
Our financial performance
EE ——————e
Operating profit/(loss) Cash flow
External revenue after modernisation costs’ ‘* Addressing the Group's cash position has
. . 2012 2011 2012 2011 been a major priority. The Group recorded a
Busipecsiawt Em =m Em £m free cash inflow of £234 million, compared
UK Parcels, International & 7,164 6,857 23 (120) toa free cash outflow of £213 million last
Letters (UKPIL) I. year. Excluding disposals, the Group's free
General Logistics Systems (GLS) 1,562 1,485 128 118 cash outflow was £8 million, compared to an
- = outflow of £450 million in the previous year.
Other * S ON deficit to the Royal Mail
Royal Mail Group excluding 8,731 8380 152 TS pee pen Toot ence edith
Post Office Limited
Post Office Limited
801
776 59 a
Royal Mail Group
9,532
9,156 211 39
Revenues and volumes
© Group external revenue increased by
four per cent from last year to £95 billion,
after two successive years of decline.
Parcels are the single biggest contributor
to Group revenues
Revenues in UKPIL, our core UK business,
d from £69 billion to £7.2 bill
UKPIL domestic parcel volumes were up six
per cent during the year. Traditional letter
volumes declined by six per cent, compared
to five per cent in the prior year.
UKPIL parcels revenue increased 10 per
cent to £2.6 billion, driven by strong growth
in online retailing. Revenues at GLS, our
continental European parcels business,
fi
letters & other mail revenue
increased to £3.5 billion as a result of
necessary price increases. Marketing
mail revenues increased to £11 billion
(2011 £11 billion).
Profits and margin
® Group operating profit after modernisation
costs! increased from £39 million to
returned to operating profit after
modernisation costs of £23 million (2011
£120 million loss).
The UK parcels operation is currently
loss-making. The cost allocation
methodology for this part of the business is
under review. We recognise that steps must
be taken to grow margin, revenues and
volumes and to make the operation more
efficient.
GLS and Post Office Limited remain the
biggest contributors to Group operating
profit after modernisation costs?. Their
contributions were £128 million and £59
million respectively
The Group's overall operating profit margin
after modernisation costs" increased from
04 per cent in the prior year to 2.2 per cent.
However, the margin remains low compared
to many other major postal operators.
At 0.3 per cent, UKPIL's operating profit
margin after modernisation costs" is also
very modest
Royal Mail Holdings ple
‘Anmual Report and Financial Statements 2011-12
Pension Plan (RMPP) was made during the
year. This was a result of the transfer of
almost all of the pension liabilities and
pension assets of the RMPP to HM
Government on 1 April 2012. In the
previous year, a payment of £292 million
was made
Significant cash items in the year were
£467 million (2011 £479 million) spent on
ongoing pension contributions and
£429 million (2011 £377 million) on
modernisation investment in UKPIL.
almost all 0 S
pension liabilities and pension assets, built
up until 31 March 2012, were transferred
to HM Government, leaving the RMPP fully
funded at that date.
* However, ongoing pension costs relating to
the pensions of approximately 115,000?
active members, will continue to be material
=
® In light of the events after the balance sheet
date, Royal Mail Group is a going concern
2 Before other operating exceptional items,
? Excludes Post Office Limited
05
Financial and business
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Overview
performance highlights (continued)
Our business performance
Our modernisation programme
* The modernisation programme, one of the
largest business transformations in the UK,
is delivering efficiencies and a more
customer-focused Royal Mail
~ Reduction in gross frontline
{upstream and downstream) hours’
~ 75 per cent of all letters are now
automatically sequenced to reflect the
order in which they are delivered, this
compares with eight per cent in
2009-10, after the first year the
programme was deployed;
in the workplace have reduced by
06
Group reported accidents and injuries
New delivery methods have now been
introduced in 448 delivery offices. The
maximum period of change is now
underway. 908 operating delivery
offices remain to be modernised.
Our customers
* Royal Mail handled over 58 million UK inland
addressed items daily, compared to nearly
62 million in the previous year. Across its
domestic and international operations, the
Group handled 1.2 billion parcels during
programme, Royal Mail achieved a
92.7 per cent First Class retail Quality of
Service performance. At 93 per cent, the
First Class retail Quality of Service target is
the highest of all major EU countries. With
a 98,7 per cent performance, Royal Mail
exceeded the Second Class retail Quality
of Service target of 98.5 per cent
During Christmas 2011, a key trading time
for Royal Mail in the UK, 1.4 billion UK inland
addressed items were handled, including
86 million parcels. A high quality service was
successfully delivered to customers
number of customer initiatives were
successfully introduced, including the delivery
to neighbour trial, which received a customer
satisfaction rating of 92 per cent
he announcement by Ofcom of a new
regulatory framework on 27 March 2012
has significantly increased Royal Mails
commercial freedom. Direct price controls
now affect almost 10 per cent of
our revenues
I
cludes processing hours,
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‘Anmual Report and Financial Statements 2011-12
Chairman’s statement
With State Aid approval,
a more flexible regulatory
framework in place, and an
improved financial position,
Royal Mail Group is making
progress on the path to
a sustainable financial
future and potential
private ownership.
Donald Brydon
Chairman
When I joined Royal Mail Group as Chairman
in March 20039, it was very clear to me that a
great deal needed to be accomplished. Years
of restrictive regulation, a declining traditional
letters market and out of date technology had
all taken their toll on the business.
To deal with these challenges, the Board was
rebuilt and oversaw the creation of anew,
reinvigorated executive management team.
We were delighted to appoint Moya Greene,
formerly head of Canada Post, to the role of
Chief Executive Officer in July 2010. Moya
had a strong track record in her previous roles
as Chief Executive Officer and President of
Canada Post. Royal Mail Group has benefited
from her vast expertise and experience in
a number of key areas, including the
establishment of our business strategy. Many
of the strategic milestones of the past year,
such as the successful achievement of State
Aid authorisation and securing an improved
regulatory structure, would not have been
achieved without her unwavering determination
2011-12
We have delivered improved financial results
in what is a very challenging economic climate.
I am pleased to be able to report a free cash
inflow for the Group for the first time in four
years. Overall revenues were four per cent
higher than the previous year and are
returning to similar levels to those last seen
in 2008-09. Group operating profit! also
improved to £211 million, after modernisation
costs of £231 million, with UK Parcels,
International & Letters (UKPIL) moving from
an operating loss" of £120 million to an
operating profit! of £23 million, and both
General Logistics Systems (GLS) and Post.
Office Limited recording growth in revenues
and operating profits!
The Group has further opportunities for
improved efficiency and continues to face real
challenges. The cost of delivering the
Universal Service is significant: traditional
letter volumes are falling, as the number of
households and businesses to which we must
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Overview
deliver increases. Management is committed
to press on with one of the most complex
modernisation programmes ever undertaken
in the UK
Legislative and regulatory change
The past twelve months have marked an
important transitional phase for the Group.
One of the most significant achievements this,
year has been the successful passage through
Parliament of the Postal Services Act 2011,
which received Royal Assent in June 2011
We are very grateful to both the Department
for Business, Innovation and Skills (BIS) and,
in particular, the then Parliamentary Under-
Secretary of State for Postal Affairs, Edward
Davey, for their role in the successful passing
of this important legislation
On 1 April 2012, after the reporting date,
almost all of the pension liabilities and pension
assets of the Royal Mail Pension Plan (RMPP)
were transferred to HM Government. This will
improve our future cash generation, as we
complete our modernisation programme,
reducing costs and improving the efficiency
of the network. We are again grateful to
BIS for the delivery of this crucial element of
our strategic plan. Jane Newell, Chair of the
Trustee of the Royal Mail Pension Plan, has
also worked tirelessly to secure a more
certain future for our people. Jane has
announced her intention to step down, and
I would like to take this opportunity to thank
her, on behalf of all our people, for her
commitment and counsel.
Just after the year end, we welcomed the
introduction of a new regulatory regime by
Ofcom. Royal Mail now has the freedom -
already enjoyed by most other companies ~
to decide the price of most of the services it
provides. We know how hard itis for
businesses and households in the current
economic climate. It has been necessary,
however, to raise prices. But, we have thought
very carefully about the impact of price rises
on our customers and our business
After modernisation costs before other operating
exceptional items.
07
Chairman’s statement (continued)
Ihave also established an independent inquiry,
to be led by Sir Gordon Langley, into the
prevalence of dog attacks on our postmen and
women. It is an offence to decency that good
people should suffer these attacks when
carrying out their daily jobs and serving the
public. I hope to be able to update you in next
year’s report on our progress on this
important issue for our people, upon which we
are working closely with the Communication
Workers Union
Change continues at pace
Progress continues on the modernisation of
the business. When complete, we will have
delivered a complete overhaul of our entire
delivery operations, and the way in which our
people work. The process is complex and
affects over 127,000 frontline colleagues
employed in the UKPIL business. It is akin to
changing a car engine at 70mph on the
motorway without stopping. There are
inevitably challenges along the way. We are
disappointed that the introduction of new
delivery routes and practices has caused us to
just miss our Quality of Service target in some
areas. We will strive to maintain our standards,
which are amongst the highest in Europe
We are focused on finding alternative sources
of growth in a structurally declining mail
market. Our unique position in the UK market
gives us some very significant opportunities
for development. One of our strategic focuses
will be our strong and growing parcels
businesses. No other operator can match our
network and reach in this growing market. In
addition, our European coverage through GLS
leaves us perfectly placed to capture growth
in overseas markets.
Revenues generated outside the UK from GLS
and UKPIL currently represent approximately
20 per cent? of our annual revenues’. They
will continue to be valued contributors to the
Group's success in years to come
08
Moya Greene and her team are to be
commended for the steps that they have taken
to reshape our relationship with our union
colleagues. Against a backdrop of such change
and uncertainty, itis to the credit of our trade
unions, the Group and, of course, our
hardworking colleagues that we are managing
so many complex changes so effectively. The
Board is delighted to see this important
relationship evolving positively
I am also delighted to report plans for a new
home for The British Postal Museum &
Archive (BPMA). The new site will be
Calthorpe House, on London’s Mount Pleasant
site, where the country’s oldest mail centre is
located. It will allow the BPMA to once again
exhibit objects from its fascinating museum
collection, which is currently held in storage.
Our Board
We saw two departures from the Board in the
year to 25 March 2012. I announced Richard
Handover's retirement in my statement last
year. David Smith left the Group in June 2011,
having joined the Board in April 2010.
On 1 April 2012, Post Office Limited and
Royal Mail Group became sister companies, to
facilitate operational independence and
appropriate governance. At this point, all the
Directors of Royal Mail Holdings plc (see p60)
became Directors of Royal Mail Group Ltd,
with the exception of Paula Vennells, now
Chief Executive Officer of Post Office Limited.
I remain Chairman of the Board of Royal Mail
Holdings plc, and continue as Chairman of the
Board of Royal Mail Group Ltd. I was delighted
to appoint Alice Perkins as the Chair of the
Post Office Limited Board. Her government
and private sector experience will be an
excellent addition to Post Office Limited. Alice
joins me on the Board of Royal Mail Holdings
plc, the parent company of both Royal Mail
Group Ltd and Post Office Limited. I very
much look forward to working with her.
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Thank you
Moya and I are both proud of what Royal Mail
Group has delivered as a business in the past
year, and we are acutely aware of the role of
all our colleagues in this achievement. As the
wholesale changes to the structure and
culture of the business continue, we will be
relying on our people to continue to support
the delivery of our change programme. I
would like to offer my sincere thanks to all
of my colleagues, not only for what we have
achieved to date, but for the commitment.
and diligence I know they will demonstrate
in the future
GRO
Donald Brydon
® Comprises GLS (£1.6 billion) and UKPIL Royal Mail
International (€0.2 billion)
Excludes Post Office Limited revenue,
Chief Executive Officer’s
review
ESTEE A year of significant progress
Our Group operating
profit margin* has
improved to 2.2 per
cent from 0.4 per cent
last year. This remains
modest, however,
compared to other
major postal operators.
Moya Greene
Chief Executive Officer
In my first review as Chief Executive Officer
last year, I explained that the Group was in a
precarious financial position and there were
many significant regulatory and legislative
milestones to achieve
I am pleased to say we have made significant
progress on all fronts. Most importantly, we
are now on the way to restoring Royal Mail
Group's financial health. Details of our key
financial and business achievements can be
found on p5. However, itis worth repeating
that the business is cash positive? for the first
time in four years. We have grown revenues
in UK Parcels, International & Letters (UKPIL)
and it has returned to profitability. General
Logistics Systems (GLS) and Post Office
Limited have also increased revenues and
operating profits! during the year.
Of course, this is only the beginning of
the process of returning the business to a
sound financial footing. Our Group operating
profit margin! has improved to 2.2 per cent
from 0.4 per cent last year. This remains
modest, however, compared to other major
postal operators
Regulatory and legislative environment
Last year, Royal Mail Group was balance sheet
insolvent and had been for some years. That is
why, just after the year end on 1 April 2012,
we welcomed the transfer of almost all of the
pension liabilities and pension assets of the
Royal Mail Pension Plan (RMPP) to HM
Government. We are grateful to the Secretary
of State and his colleagues at the Department
for Business, Innovation and Skills (BIS) for
their tireless commitment to delivering this
transformational milestone.
On 27 March 2012, we were also pleased
with the introduction of a new regulatory
framework. Our new regulator, Ofcom, has
recognised that the prior framework was not
appropriate, that price controls had failed and
that there was a very real risk to the
sustainability of the Universal Service. The
new regulatory approach provides us with
increased commercial freedoms, to better
position us to earn a reasonable return on the
services we deliver. This new approach
underpins the regulator's primary duty and
commitment to safeguarding the Universal
Service in the UK.
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Much remains to be done
Royal Mail Group continues to face significant
challenges. The traditional letters market
remains in structural decline. Volumes in this
market have fallen by more than 25 per cent
since 2005-06. We will continue to manage
this decline by improving efficiency through
the modernisation programme and a range of
other measures. We will also adapt our
network, which has traditionally handled and
delivered letters, to accommodate the ever
increasing number of parcels in the traffic mix.
Our core parcels network in the UK - Royal
Mail - remains loss-making. We will address
this in the coming years with a number of
measures that are designed to return parcels
to profitability, while adding value through
service enhancements our customers want
We will also continue to deliver significant
productivity gains across the business. More
than 50,000 people have left the Group in the
last decade. As we have said before, we will be
a smaller, but a more sustainable, business in
the years to come. However, as we are taking
costs out, we need to do so without
jeopardising our ability to deliver on our
Universal Service commitments at the service
levels which our customers expect
Becoming the best delivery and marketing
mail business in the UK
Our business strategy is about
ing profitable growth
I will now deal with each in turn.
Brilliant at the basics
Royal Mail Group is the only business that can
deliver the Universal Service - overnight, to
more than 29 million addresses across the
country, six days a week
To achieve this, we need to engage and equip
our people to deliver a consistently high
quality service. Royal Mail must deliver on the
promises it makes to its customers and make
the right products available at the right prices.
In addition, we need to continue to modernise,
introduce new technology and delivery
methods, cut costs and improve productivity
across the business
After modernisation costs before other operating
exceptional items
® Free cash inflow.
09
Chief Executive Officer’s review (continued)
Our people
Royal Mail's postmen and women meet our
customers every day on the doorsteps of their
homes and businesses. They are our
ambassadors: a credit to the company
Nothing is more important to me than the
safety of our employees in the workplace and
out on their delivery rounds. Over the course
of the year, reported accidents and injuries at
work have reduced by 22 per cent. Tragically
however, in the past 12 months, seven people
have lost their lives due to road traffic
accidents. A number of initiatives, including
safety courses for all our drivers, are being
rolled out across the country to maintain our
focus in this critical area. See “Our people”
(p25) for more detail
To ensure all of our people are jointly engaged
in our success, we have taken significant steps
to overhaul our internal communications. From
the beginning of the financial year to mid-April
2012, we published 17 regular and special
editions of Courier, our employee magazine
Many senior managers have visited all 11
Royal Mail regions in the UK, talking to around
23,000 colleagues and listening to their
concerns. Weekly programmes on Royal Mail
TV (RMTV) keep our frontline staff up-to-date
on changes we are making and competitive
challenges we must meet. So too does
myroyalmail.com, our extranet for colleagues.
Our customers
We need to continue to put our customer at
the centre of every discussion we have - from
the Boardroom to the delivery office. Our
customer satisfaction levels for business
customers are improving, but are still lower
than we would like.
We are focused on successfully addressing the
root cause of customer complaints. That is why
we are working with our customers to identify
the five key areas in which we can improve
customer service - redirections, misdeliveries,
“Something for You" cards, redeliveries and
proof of delivery. We have already introduced
a range of measures to address them
Royal Mail is the only postal operator in the
UK that is required to publish its performance
10
against delivery targets every quarter. I am
proud that we exceeded our target to deliver
985 per cent of Second Class retail mail on
time. We ended the year just shy of our 93 per
cent target for First Class retail mail, with a
performance of 92.7 per cent. Against the
backdrop of the UK's largest ever business
transformation, we still delivered 1.53 billion
First Class retail items on a next day basis.
Modernisation
Every process that we are involved in -
collecting, transporting, sorting and delivering
mail - is changing as part of our modernisation
programme. The aim of this process is to
make our network more efficient: increasing
productivity, improving the service our
customers receive and reducing the cost of
maintaining the Universal Service
We are optimising our mail centre network,
and have closed 16 mail centres in recent
years. We are also investing: the automation
of the handling of mail in our mail centres is
nearly complete. We have installed 64
intelligent letter sorting machines, easing the
load on our delivery centres. We are a year
ahead of plan in our installation of our walk
sequencing equipment. We have put in 574
walk sequencing machines. This means that
75 per cent of mail is now route-ready for our
postmen and women
We are now implementing a fundamental
change in the way we work across our delivery
operations. This is in order to accommodate
the changing traffic mix - more parcels and
fewer letters. Delivery revisions have taken
place in 448 delivery offices since the
modernisation programme began. We need
to modernise the remaining 908 operating
delivery offices and deliver the targeted savings
consistently across the country. The executive
management team and our union colleagues
agree that the need for transformation is clear
and pressing. We are working closely with
the Communication Workers Union (CWU)
to ensure the consistent and timely
implementation of delivery revisions.
Together, we will deliver our change agenda
as sensitively and transparently as possible.
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Overview
Building a commercial future
Building a commercial future is the second
part of our business strategy.
Ofcom's new regulatory approach, announced
just after the end of the financial year, is a key
first step. The new regulatory approach
provides us with increased commercial
freedoms. But, more remains to be done in
this area
We have had to increase our prices over the
last few years. Of course, nobody likes to raise
prices in the current economic climate. But,
like all businesses, we must earn a reasonable
return for the services we provide. Our rate of
return is improving but is still well below
commercial levels.
The development of end-to-end competition,
where a new entrant could target the most
profitable business (typically in urban areas)
without having to meet the obligations that we
must, is one of the biggest threats to the
Universal Service.
If Royal Mail's competitors are able to target
profitable business through focused end-to-
end competition, of course, the cost of
delivering the balance of our competitors’ mail
increases, as the revenue available to pay
these costs is siphoned away. We are planning
to review our Access contracts during the
coming year and will be looking at this issue
amongst many others; we will be seeking the
views of our customers and Ofcom
Royal Mail Group Ltd and Post Office Limited
became sister companies on 1 April 2012
In January 2012, both companies signed a
major commercial agreement, which provides
continuity and a close working relationship
over the long-term. Post Office Limited, with
the largest retail network in the country,
including a significant presence in rural
areas, will remain a key partner in our future.
Our mutual commercial success is best
served by working closely together for the
benefit of customers
Profitable growth
The third and final part of the business
strategy is to create profitable revenue growth
in marketing mail, parcels and data to counter
the decline in the traditional letters market
Royal Mail Group’s revenues
(excluding Post Office Limited)
48% (£4,154m)
m)
12% (£1,063m)
Hi Letters & other mail and other services
i Marketing mail
Parcels
We are a significant British company, with
a growing proportion of our revenues
generated by incoming and outgoing
international mail. Revenues generated
outside the UK from GLS and UKPIL now
form 20 per cent? of our annual revenues,
excluding Post Office Limited.
Royal Mail Group currently has a £4.2 billion
revenue-generating parcels business that
includes UKPIL’s Royal Mail UK network and
Parcelforce Worldwide; and GLS. Parcels
made up 48 per cent of Group revenue*
across the year. Our UKPIL parcels business
grew its revenue by 10 per cent, while GLS's
revenue grew by five per cent
By 2016, online retailing is expected to
account for 23 per cent of the UK's overall
retail spend’. In addition, UK consumers will
buy products online from overseas providers,
benefiting both our parcels and international
businesses. Royal Mail Group is well placed to
benefit from these growth trends, Our parcels
businesses are best-in-class operators in their
respective markets.
During Christmas 201°, Royal Mail's core
network delivered around 79 million parcels
and Parcelforce Worldwide nearly seven
million express parcels. Parcelforce Worldwide
achieved a 96.6 per cent first-time delivery
rate during this period alone. Growing our
parcels business is a key strategic priority.
We are also developing our marketing mail
business, which contributed £1.1 billion in
revenues this year. Utilising our own assets,
and with the support of several partners, we
will be able to offer a full service solution for
businesses, large and small, covering creative
development, production, distribution and
customer data management for advertising
mail. See “Our strategy in action” on p16 for
more details.
Outlook
We are in a stronger financial position. But,
much remains to be done to ensure we are
leveraging every opportunity our business has
to offer.
The EU State Aid decision has improved our
cash position. As a result of deregulation, we
are better able to generate a reasonable
return in the core UK business. Our margin is
improving, albeit from a very low base. Our
strategies and initiatives are geared towards
delivering, in time, the 5-10 per cent margin
set by our regulator, and a more commercial
margin as compared to other successful
postal operators.
Looking forward, we expect that continued
growth in online retailing will benefit our
domestic and international parcels businesses
The deciine in our core letters business is
expected to continue. We will press on with
our modernisation programme, cutting costs
in the network. We will also adapt the network
to carry increasing numbers of parcels.
Royal Mail Holdings ple
‘Anmual Report and Financial Statements 2011-12
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Overview
We are developing alternative sources of
future profitable revenue growth, leveraging
our key strengths and focusing on our
marketing mail and data businesses
Very few companies face the prospect of
continued change on the scale that we do
am very grateful for the continued help
and support we have received from
HM Government: Secretary of State for
Business, Innovation and Skills, Vince Cable;
both Edward Davey and Norman Lamb as
Parliamentary Under-Secretary of State for
Postal Affairs, and their officials. In addition,
the Group has continued to benefit greatly
from the guidance and thoughtful oversight
of our Board of Directors. I also thank our
union colleagues Dave Ward, Deputy General
Secretary (Postal) of CWU and Brian Scott,
Assistant National Secretary, Unite, for their
ongoing engagement and constructive
challenge to ensure our success
And, of course, I would like to thank all our
colleagues across the Group. I know what we
are asking of them is difficult. I am grateful for
their continued dedication, hard work and
commitment. They continue to be the main
driver of our success as we look towards a
secure and profitable future
GRO
Moya Greene
Comprises GLS (£16 billion) and UKPIL’s Royal Mail
International (€0.2 billion)
“ Excludes Post Office Limited revenue.
© Boston Consulting Group: “The £4.2tn Opportunity,
the Internet Economy in the G20”
© 28 November 2011-25 December 2012,
11
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Strategy
Our strategy
Royal Mail Group has a clear strategy to become the
best delivery and marketing mail business in the UK.
This means responding to the changing mail market:
adapting our core network, which has traditionally
carried letters, to accommodate increasing numbers of
parcels; grasping the opportunities offered by significant
deregulation and using our unique strengths to develop
profitable revenue growth in parcels, marketing mail
and data.
We are making progress. But, there is a good deal to do
to achieve our objective of attracting private capital.
Our business strategy has three parts
Firstly, to be brilliant at the basics. We need
to become more efficient and customer
focused. This means completing the
automation of our core letters network,
reducing the hours taken to complete delivery
and getting it right first time; every time
Secondly, building a commercial future
puts the onus on us to use the new regulatory
framework to earn a reasonable return for
the products and services we offer. Last year,
80 per cent of Royal Mail’s revenues were
subject to direct revenue control. Today, this
figure has fallen to almost 10 per cent.
12
Thirdly, we are continuing to respond to
changing customer needs, building the
business outside our traditional revenues
streams to drive profitable growth. We are
developing our parcels, marketing mail and
data propositions to contribute to the future
success of a financially stable, diversified Royal
Mail Group.
As part of our objective to attract private
capital, we are significantly improving our
disclosure. This year we are for the first time
outlining our twelve KPIs that align to our
business strategy. These KPIs are replicated in
our Corporate Balanced Scorecard, against
which we assess the performance of all our
managers. They are outlined in more detail on
the following pages
Royal Mail Holdings ple
‘Anmual Report and Financial Statements 2011-12
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Strategy
Part one
Be brilliant at the basics Definition
To continue on our journey to become one
of the world’s most modern and efficient
postal services.
We are focusing our efforts on delivering
excellent customer service, backed up by
efficient and cost effective operations
Key initiatives .
* Focused on the safety and well being
and introducing “World Class Mail”,
a comprehensive system to improve
safety, customer service, quality
and productivity, to meet today’s
market needs;
* Investing in engaging with all of our ~
employees and our unions to improve
their understanding of our strategy
and to listen to their concerns; and
* Customer experience is a major focus
for our business as we seek to improve
and adapt our products and invest in
technology to support new services.
Part two
Build a commercial future —_ Definition
To compete on a level playing field with other
companies, we need to deliver a reasonable
rate of return under the new regulatory
framework, so as to attract private capital
We need to be a more customer-responsive
company, now that deregulation means we
have considerably more commercial freedom
Key initiatives
* Making changes for our customers to
secure the benefits of our new, more
fl latory fi d
* As we prepare to attract external
capital, we will take steps to
maintain our strong corporate
reputation with our people, the
unions and the general public.
Definition
To diversify our business model, capitalising
on our expertise in the growing markets of
parcels, marketing mail and data.
Drive profitable growth
We are addressing losses in our core
UK parcels business - Royal Mail
a We will also continue to seek
international partnerships and opportunities,
an area where we have a significant and
growing presence
Royal Mail Holdings ple
‘Anmual Report and Financial Statements 2011-12
+ Ensuring that we get packet and parcel _
delivery right every
further de
e, including
launching new services that will make
around the world to help UK
businesses exploit the massive growth
in export online retailing; and
* Growing our data business, expan
existing services and building new
ones for our business customers.
13
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Strategy
Key performance indicators
The four quadrants below (People; Customer, Performance and Financial) and their respective KPls reflect our Corporate Balanced Scorecard
for the year 2011-12. As the business changes, we may adapt our KPIs in future years to reflect changing priorities
KPI Measured by Key activities in the year
People
Safety Number of RIDDORS! per 1,000 people in the UK businesses. Our Zero Accidents Programme, focusing on road safety risks,
and our basic programmes on slips, trips and falls, continue to
drive down the rate of accidents across our businesses.
Engagement ‘An annual survey measuring what our people think about
Royal Mail, including leadership and strategic direction.
Following a benchmark survey in Autumn 2011, our inaugural
. serisssitssneesssessereees survey took place in Spring 2012, with a 69 per cent
Customer focus An annual survey measuring how focused our people are on response rate.
delivering for our customers.
Customer
First Class Quality of Quality of Service for First Class retail products, including force As part of one of the most comprehensive change programmes
Service majeure? adjustment ever undertaken in the UK, delivery revisions have taken place
in 331 delivery offices across the UK. This is about a more
efficient and effective Royal Mail
Net customer satisfaction Customer satisfaction scores on a number of issues, including A customer satisfaction questionnaire is completed by
price, service quality and customer experience. approximately 700 business customers per month, helping
us to identify key areas for action
Customer complaints Number of complaints captured by our Customer Service tear’. We continue to take action to focus on redelivery, misdelivery,
“Something for You" cards and redirections, with considerable
progress in redirections and redeliveries,
Performance
Group revenue Group revenues Price increases were implemented across the business,
including an eight per cent increase for letters in April and
May 2021. Traditional letter volumes declined by six per cent
during the year, while UKPIL domestic parcel volumes
increased by six per cent in the same period,
Delivery hours reduction Percentage year-on-year reduction in the gross hours spent _Delivery revisions were completed in 331 delivery offices
on delivery activities. during the year, reducing the gross hours spent delivering rail
Process sequencing Percentage of our mail sequenced into delivery order for our 235 new, refurbished or upgraded processing machines were
postmen and women. installed during the year.
inancial
Operating costs Expenditure before modernisation and other exceptional costs We continued our modernisation programme in our frontline
for our UK businesses. operations and completed the reorganisation of Group
central functions.
Group operating profit Group operating profit before exceptional items ‘An increase in Group operating profit was generated by
necessary price rises and cost reductions.
Free cash flow excluding Royal Mail Pension Plan (RMPP) deficit We focused on delivering the RMPP transfer, the sale of non core
payments and finance leases. activities and properties, and working capital management.
Free cash flow
2 Reporting of Injuries, Diseases and Dangerous Occurrences Regulations,
2 This accounts for the impact of factors which are beyond Royal Mail's control. such as floods or the Icelandic volcanic eruptions.
> We allso provide detailed annual disclosure on customer complaints to our regulator, which is publicly available.
1 4 Royal Mail Holdings ple
‘Anmual Report and Financial Statements 2011-12
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Strategy
Strategic links More information
Strategic links key
People
See “Our people” on pages 25-27
See “Our people” on pages 25-27
See “Our customers” on pages 18-21
Customer
See “Our customers” on pages 18-21,
m See “Our customers” on pages 18-21,
See “Our customers” on pages 18-21
See “Financial performance overview” on
pages 38-39
See “Modernising Royal Mail” on pages 22-24
See "Modernising Royal Mail” on pages 22-24
See “Financial performance overview” on
pages 38-39
See “Financial performance overview” on
pages 38-39
See “Financial performance overview” on
pages 38-39
Royal Mail Holdings ple
‘Anmual Report and Financial Statements 2011-12
Being brilliant at the basics
We are on a journey to make Royal Mail
one of the world’s most modern and
efficient postal services.
To do this we need to deliver excellent
customer service, backed up by efficient
and cost effective operations,
Building a commercial future
To compete on a level playing field with
other companies, we need to deliver a
reasonable rate of return under the
new regulatory framework, so as to
attract private capital.
We need to be a more customer-
responsive company, now deregulation
means we have considerably more
commercial freedom
Driving profitable growth
We are diversifying our business model.
capitalising on our expertise in the
growing markets of parcels, marketing
mail and data.
We are addressing losses in our core
UK parcels business - Royal Mail
We will also continue to seek
international opportunities, an area
where we have a significant and
growing presence.
This icon is used to indicate
reporting against a KP!
throughout the document.
15
Our strategy in action:
parcels and marketing mail
Royal Mail Group is more than just a UK-focused,
letter delivery business.
We are leveraging our capacity, reach and expertise
to grow profitable revenue streams in parcels and
marketing mail. This is a key part of our strategy as
we seek to attract private capital.
Parcels
Our parcels business has three networks in
the UK: Royal Mail’s UK parcels operation;
Parcelforce Worldwide and Royal Mail Specialist
Services. Internationally, it has Royal Mail
International (which uses Royal Mail's UK
parcels network), and our European parcels
operator, General Logistics Systems (GLS).
Our UK parcel networks:
* Royal Mail’s UK parcels operation delivered
585 million Universal Service Obligation
(USO) and account tracked and untracked
parcels during the year;
* Parcelforce Worldwide, our express parcels
business, has a separate UK network. It has
one of the highest quality of service
performances in the UK express parcel
market, with a first-time delivery rate of
Together and with the support of global
partners, these businesses handled 1.2 billion
parcels. Over the last year, this represented a
six per cent increase in UKPIL domestic
volumes and a three per cent increase in GLS’ *
volumes. Total parcel revenues for the year
stood at approximately £4.2 billion, with GLS
generating £1.6 billion.
‘oyal Mail Specialist Services is a small but
growing part of our parcels operations,
servicing bespoke delivery needs, including
sameday, parts distribution and very high
value deliveries.
SS
Our main parcels businesses
UKPIL GLS
Royal Mail UK Parcelforce Royal Mail
parcels network Worldwide International
Revenues (Ebn) 17 04 05 16
Volume growth (%) 6 5 2 3
Items handled (m) 585 66 179 315
Network 57 operating 52 depots and Heathrow “hul 660 depots
mailcentres and two delivery 37 central
1,356 operating “hubs” shipment points
delivery offices
Fieet 37,287 vehicles 2,009 vans 16,510 vehicles
Royal Mail Holdings ple
‘Anmual Report and Financial Statements 2011-12
16
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Strategy
International operations:
* Royal Mail’s International operation handled
and delivered 179 million import and export
parcels. It works closely with other overseas
postal administrations to connect businesses
and individuals in the UK and abroad;
* GLS, our continental European logistics
business, is a significant contributor to profits.
Revenues grew five per cent to £1.6 billion,
primarily driven by higher volumes. Its
margin is 8.2 per cent; and
has shown it can grow in an uncertain
European market. But, competition
continues to be intense and prices remain
under pressure. There is significant
overcapacity in the market, putting
downward pressure on prices, especially
in core markets like Germany.
Our strategy
By 2016, online retailing is expected to
account for 23 per cent of the UK's overall
retail spend’. Our strategy is to maximise
profitable revenue growth by utilising our
multi-network parcels platform in highly
competitive markets in the UK and overseas.
The Royal Mail UK parcels operation is
loss-making, We recognise that steps must be
taken to address these losses and make it
more cost efficient
We need to continue to improve customer
experience across all our businesses. In the
core UK operations, initiatives such as our
delivery to neighbour trial, aim to do just that.
We continue to focus on our presence in the
business to business market, which is closely
linked to GDP growth.
We are pursuing growth in Europe through
GLS. Working with Royal Mail International,
it is well-positioned to benefit from future
growth in borderless online retailing
Based on a simplified basis which is currently
being refined.
Boston Consulting Group: “The £4.2tn Opportunity,
the Internet Economy in the G20"
Marketing mail
We aspire to become the best marketing
mail and services company in the UK
Approximately £1.1 billion of Group revenues
in 2011-12 (equivalent to 12 per cent®) came
from marketing mail
We believe there is potential in this market.
where targeted addressed and unaddressed
marketing mail is delivered to consumers
across the UK
Royal Mail is well-positioned to manage the
distribution of this mail. Working with a
number of commercial partners, we will hone
a full-service offer for businesses covering
creative development, production, distribution
and customer data management
Working across the value chain, we aim to
increase our share of this lucrative market.
Our specialist sales team has already begun
contacting some of the UK's biggest
advertisers and securing campaigns.
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Strategy
Q
Our strategy in action
case study 2
é
Businesses thrive thanks to Royal Mail Tracked
Parcel delivery is an increasingly important
part of Royal Mail's business. Growth in
online retailing gives us an opportunity to
build our capability in this area if we get
fulfilment right
Serving businesses of every size, we connect
them with their customers. We help
enterprises thrive and grow. From their
shops and warehouses to their customers’
front doors, Royal Mail Tracked gives
businesses peace of mind and confidence in
our ability to deliver their goods safely and in
good time
Royal Mail is a key service provider for
TalkTalk, a leading broadband supplier.
TalkTalk sends out hundreds of parcels every
week and needs to know where the goods
are at any stage in the mail pipeline. Royal
Mail Tracked enables them to do just that,
“We use Royal Mail
Tracked because we
believe it is the best
value for money.”
says Mike Wakley, the company's head of
supply chain logistics at TalkTalk
“We value the fact that
the equipment that goes
to our customers is
fully traceable.”
For more information visit
www.royalmailgroup.com
Excluding Post Office Limited
Royal Mail Holdings ple
‘Anmual Report and Financial Statements 2011-12
17
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Performance
Our customers
One way to improve our service is by finding out what
customers really think about Royal Mail Group: what
they like and what they want to see improved.
That is what we did in 2011-12, with particular focus on
five specific customer-identified problems. It was a
salutary exercise, entirely consistent with the way that
the Group is changing.
After years of having to put regulatory requirements
first, we are increasingly operating as we need to,
focusing our energies and resources on meeting
customers’ needs.
Building on our strengths
As one customer kindly tweeted on our
recently established Twitter account:
“I love the Royal Mail. Fantastic British
institution. Be proud.”
We are proud that Royal Mail remains a trusted
brand. Over 95 per cent of adults polled by
Ipsos MORI say they know about us; 77 per cent
of our customers perceive us favourably,
After all, we are vital to the UK economy.
Royal Mail Group connects people and makes
commerce happen. Many companies claim to
go the extra mile for their customers. We
literally do just that, by land, sea and air.
Asa result, customers the length and breadth
of the UK continue to enjoy unrivalled access
to mt d
Royal Mail is required to regularly report
on its Quality of Service performance
against publicly stated targets. Our
performance in this important area is one of
the reasons why our customers continue to
choose Royal Mail
18
We delivered 92.7 per cent of First Class
retail products overnight in 2011-12 as we
pressed on with one of the largest change
programmes ever undertaken in the UK. The
target was 93 per cent.
In 2010-11, we achieved a 91.4 per cent
performance rate, before adjustment for
extreme weather and disruptions caused by
Icelandic volcanic ash.
This year, we delivered 98.7 per cent of
Second Class retail products; on time; first
time. The target was 98.5 per cent
A new commercial agreement secured during
the year has played an important part in
ensuring the long-term future of our retail
Post Office network throughout the nation.
With a wider range of services and longer
opening hours, Post Office Limited is making
good use of HM Government funding to invest
in improvement to its business model and to
better meet customers’ needs
Royal Mail Holdings plc
‘Armual Report and Financial Statements 2011-12
What are the five main causes of
customer complaints?
‘© Not doing redirections daily or
continuing to redirect when the
redirection has finished
* Delivery of mail to the wrong
address (Misdeliveries)
* Posting “Something for You” cards when
someone is in to receive their mail/
9
that require them.
What are we doing to tackle them?
* Introducing dedicated redirections sorting
frames to ensure they are carried out
daily and we don't miss any;
© Reminding our employees of the correct
procedure for using “Something for
‘* Extending our delivery to neighbour trial, _
IE hi
* Keeping open around 600 enquiry offices
up to two hours later on Wednesdays and
Saturdays to give customers more
flexibility to pick up items; and
Increasing the use of Postal Digital
Assistants (PDAs) to capture signatures
-we currently have more than 44,000
in use.
Using our new commercial freedoms
Crucial to Royal Mail Group's commercial
future is deregulation
With greater freedom, we are becoming more
responsive to customer needs. We can now
charge commercially viable but competitive
rates for the services that are in demand
We can also be more innovative.
For instance, customers want parcels
delivered at the first go - whether they are at
home or not. But, many items are simply too
big to fit through letterboxes and some require
a signature. The result: frustration for the
sender, the recipient and the postman or
woman who is not able to get the job done.
Previously, the less than ideal solution had
been to leave a “Something for You" card that
asked the recipient to get in touch to restart
the delivery process.
A successful trial scheme has shown a
better way.
Our delivery to neighbour trial has earned
customer satisfaction ratings of 92 per cent.
We extended that trial during the year with
great success. We aim, following a
consultation period, to roll out this delivery
method across the UK.
It is up to us to make the most of our new
freedoms. Part of that process is ensuring
that people know about the innovations we
are putting in place.
Increasingly, we are also using our people as
ambassadors of change.
After all, they meet Royal Mail customers
every day. They are better placed than
anyone else to serve as company advocates
A programme of weekly face-to-face meetings
and regular facility visits by senior managers
is ensuring that our people understand - and
can effectively explain to customers - the
changes underway and planned
Q
Our customers
case study 4 of 2
é
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Performance
Sterling praise
One of Britain's most northerly businesses,
Orkney-based Sheila Fleet Jewellery, regards
Royal Mail as “a lifeline”. We link one of
Scotland's leading creators of naturally-
inspired silver, gold and platinum pieces with
many customers throughout the UK and
around the world
Having started out in a converted shed, the
company now employs 55 skilled
craftspeople in a dedicated workshop and
showroom. As one of the Orkney Islands’
biggest and best-known exporters, Sheila
Fleet counts on the expertise and dedication
of the Kirkwall delivery office
“We have used Royal Mail
since the start of our
business twenty years
ago and know that the
local team will always
provide a service that
truly does go the extra
mile. Royal Mail’s
networks cover the whole
country and the air
service to and from
Orkney is invaluable.”
says Martin Fleet, director of the business.
“Royal Mail enables us
to send packages to
customers throughout
the United Kingdom with
confidence that every
Han
Et" For more information visit
A www.royalmailgroup.com
Royal Mail Holdings plc
‘Armual Report and Financial Statements 2011-12
parcel will reach its
destination safely and
on time.
“This is particularly
important with internet
shopping. We know that
no other courier service
can match Royal Mail in
terms of price and speed
of delivery. And special
delivery comes into
its own during the
Christmas period.
“Royal Mail is an integral
part of our business and
we cannot praise the work
they do throughout the
country highly enough.”
19
Our customers (continued)
Our customers
case study 2 of 2
é
Direct mail; direct benefits
Marketing mail is a simple and effective way
for advertisers and businesses to reach new
and existing companies.
Royal Mail’s unique ability to reach every UK
address provides a significant advantage for
companies and organisations that want to do
door-to-door drops.
That is why we have embarked on a plan to
grow this part of our business over the
coming years
For national charity Children With Cancer, we
have already delivered 28.5 million items
through major campaigns. This effort was
part of a UK-wide campaign to raise
awareness of the organisation's work, which
includes life-saving research and related
welfare projects.
Founder, Eddie O'Gorman, OBE says
“Although we are into our _
25th year, we’re still not
very well known. So, using
Royal Mail’s services in
this way was the most
efficient way of reaching
people across the country.” \
For more information visit
www.royalmailgroup.com
Royal Mail Holdings ple
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Performance
Pricing
After years of regulation that kept Royal Mail
tariffs artificialy low, we took the difficult but
necessary steps to increase our prices.
Effective from 30 April 2012, the price of a
First Class stamp for a standard letter rose
from 46p to 60p; a Second Class stamp for
a standard letter went up from 36p to 50p.
This was the right action to take in a difficult
economic climate. The increase is
safeguarding the Universal Service while
helping us to earn a reasonable rate of return
for the work we do. It is also enabling us to
accelerate modernisation, ensure our
commercial future and drive growth through
investment in IT and development of the
products and services customers most want
Yet we also recognise how hard any increase
is for households and businesses at a time
when economic conditions are so difficult
For Christmas 2012 only, we are offering
stamps to people in low income households
at 2011-12 prices.
Whenever possible, we link higher prices
to higher levels of service. That is what has
happened with our Parcelforce Worldwide
business. Free of the regulatory constraints
that have held back other parts of our
business, Parcelforce Worldwide consistently
earns top scores on customer satisfaction.
Giving customers what they want.
We want customers to continue to choose
Royal Mail Group. This depends on us
becoming more commercially responsive and
providing excellent customer service.
Aseries of customer focused KPIs are built
into the Corporate Balanced Scorecard, to
me ire ever’ -t of customer servic
the way our people think about our
customers, putting them at the centre of
business and operational decisions. We
achieved a score of 70 per cent in our first
year of measurement;
Our net customer satisfaction score
improved, standing at 36 per cent for
2011-12, compared to 31 per cent for the
second half of the prior year’. We aim to
further improve this performance in 2012-13;
and
Customer complaints have risen slightly
from 423,700 in 2010-11 to 439,600
this year. We have already made progress in
redirections and redeliveries. We will continue
to focus on the main complaint types to
reduce this number, which should be
considered in the context of around 15 billion
inland addressed items we deliver annually.
One example of our commitment to
customers was the concerted effort to provide
an excellent service in the months leading up
to Christmas 2011. To ensure that the
contents of the festive mailbag (around
14 billion UK inland addressed items) reached
their destinations on time, we invested an
additional £15 million on top of the usual
seasonal operation funding
Anew “customer focus” measure tracks
Customers want to know where their items
are in the mail pipeline at any given time
We have invested heavily in tracked services
that enable online and catalogue retailers
to improve their own customers’ delivery
experience. We handled 159 million tracked
express parcels during the year. Retailers can
now choose to offer recipients the option of
receiving text or email messages to let them.
know their parcel is on the way.
Improving our product portfolio was a top
priority in 2011-12. One result was the
simplification of our bulk mail services to
make it easier for business customers to
buy and use them. This marked the biggest
improvement to our contract mail products
in many years
We now have four distinct account products:
Advertising Mail, Sustainable Advertising Mail,
Publishing Mail and Business Mail. Each
product can be tailored to meet a customer's
specific needs
Direct contact with customers is making the
changeover to these new products clear and
easy for them.
We have developed another product -
confidential waste and document destruction
- out of our scheduled collection and
delivery service for time-sensitive items
such as cheques. This is called Secure
Document Solutions.
Developments like this are part of Royal Mail's
determination to become the best delivery and
marketing mail business in the UK
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Performance
* Measurement frequency moved from quarterly to
monthly during the year. Therefore, 2010-11
performance is based on last six months’ average,
21
Modernising Royal Mail
The modernisation of Royal Mail is well underway.
Modernising means improving every aspect of our
operation: collections, processing, sorting and delivery.
It also means reducing the hours it takes to process and
deliver the mail.
We will deliver the Universal Service, while maintaining
an efficient and profitable overall network.
Royal Mail’s modernisation programme is one
of the UK's biggest industrial transformation
projects. This work is having a positive impact
on safety and customer service. UK Parcels,
International & Letters (UKPIL) headline injury
accident frequency has reduced by around
40 per cent in the past two years
Before the current modernisation programme
started in 2006-07, most mail was hand-
sorted ~ a slow and cumbersome process.
Early in 2012, we completed our automation
programme for letters on time and below
budget. This involved the installation,
refurbishment and upgrading of over 900
highly efficient machines, including intelligent
letter sorters processing up to 40,000 items
per hour. Nearly two thirds of this equipment
consists of Compact Sequence Sorters,
putting letters in the order in which our
postmen and women deliver mail out on the
f the UK.
Reducing the hours taken to deliver the
mail is central to improving the efficiency
of our core network. Three quarters of our
mail is now walk-sequenced, compared to
34 per cent at the end of 2010-11
GQ Thishas contributed to a 22 per cent
reduction in gross delivery hours - one of
the key efficiency metrics we use to assess
our performance against our modernisation
goals. This reduction compares to 1.8 per cent
in the prior year.
22
We have made significant progress in
changing the way Royal Mail delivers.
Traditionally, postmen and women carried
the full mail weight on their shoulders and
travelled on bicycles. During the year, we
continued to make greater use of safer
high-capacity trolleys, lightweight trolleys
and two-person vans, reducing the risk of
back injury. There are now more than
22,300 new trolleys and around 7,500
new vans in operation
And by the end of the year, we had also
acquired an additional 10,600 Postal Digital
Assistants (PDA). These hand-held electronic
devices, issued to postmen and women during
collection and delivery rounds, enable us to
track mail at key points throughout the pipeline
A market-led initiative
Why is modernisation on this scale so
important for customers, external
stakeholders and Royal Mail employees?
While traditional “white letters” have declined
dramatically in numbers, parcel volumes are
increasing due to growth in online retailing.
This changing mail mix inevitably presents
challenges. Parcels require more space to
process and transport and demand more
customer interaction in delivery. Growth in
parcels also provides opportunities, and
modernisation is enabling us to provide more
customer-focused solutions.
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Performance
But, we have not let any of this activity distract
us from our ongoing obligations. By the end
of the year, we had succeeded in creating
an infrastructure of fully-modernised letter
processing and exceeded our regulator's
fourth quarter First Class retail delivery target
~ having narrowly missed the target for the
full year during a period of substantial change
The modernisation programme we are
implementing is affecting the working lives
of more than 127,000 frontline colleagues
in UKPIL. We understand that change is not
always easy to accept, particularly when it
means working in different ways and keeping
different hours. And as we become a smaller
workforce, better suited to changing market
conditions, voluntary redundancies will mean
the departure of many colleagues.
To help those leaving as a result of this
process, we have a comprehensive
programme in place. This involves help in
finding new work through job searching skills
and career advice as well as the provision of
financial advice. Throughout the modernisation
process, we are committed to treating Royal
Mail people with the dignity they deserve.
Fewer, more productive facilities
By the end of the year, Royal Mail had fewer,
but more productive, facilities. As with
everything to do with our modernisation
programme, this reflected changes in
market demand
In 2011-12, we closed four mail centres
Hemel Hempstead, Stevenage, Southend and
Watford. Subject to consultation, we also
announced plans to shut Derby, Leicester and
Worcester and initiated review processes for
Cambridge, Gloucester and Shrewsbury.
Modernising Royal Mail does not always mean
closures. Where appropriate, and to best
serve our customers, we are also upgrading
and opening new mail centres.
We have completed the first phase of the
£32 million investment programme at Mount
Pleasant - our biggest mail centre in London
This included the installation of four new
Intelligent Letter Sorting Machines (iLSMs)
Each can process over 40,000 items per hour.
To get the most out of these machines, we
provided 96 Mount Pleasant employees with
three days of comprehensive training
Royal Mail also opened the Medway Mail
Centre in Kent and Home Counties North Mail
Centre in Hemel Hempstead. These flagship
facilities represent major investment in our:
processing units with state-of-the-art
machinery and modern working environments
In new and existing facilities, the embedding
of our World Class Mail programme is
revolutionising the way we work
Developed in-house and based on leading
global practice and expert advice, World
Class Mail is a comprehensive system for
improving safety, customer service, quality
and productivity.
By the end of the year, 45 mail centres had
launched World Class Mail continuous
improvement of performance - almost four
times as many as there were two years ago.
Following an independent external audit, the
progress made this year by teams at Leeds
and Norwich Mail Centres was recognised
with Bronze awards. They join previous
Bronze-winning colleagues in Belfast, Cardiff
and Gatwick. All five mail centres are now
working towards Silver status
Q
Modernising Royal Mail
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Performance
Glasgow Mail Centre delivers on safety
Glasgow Mail Centre has gone more than a
year without a single day off work due to an
on-site accident. Minor incidents requiring
only minimal first aid were down to four.
John McPaul, Deputy Manager and former
CWU health and safety representative
attributes this record to the development of
risk prediction cards for every job in the
facility as part of the company’s World Class
Mail (WCM) programme.
“Everything is covered,
from lifting a mailbag
to operating the most
complex machinery,”
he says
“With WCM’s highly visual
approach it’s easy to
follow the correct
processes. Before we
had these, we had to rely
on complex charts and
descriptions. The new
cards, with their clear
images and colour coding,
fit the bill.”
WCM is now in place in all mail centres, with
implementation expanding to other parts of
processing and delivery offices as well
Ultimately, it will become an integral part of
the way Royal Mail operates.
Royal Mail Holdings plc
‘Armual Report and Financial Statements 2011-12
23
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Performance
Modernising Royal Mail (continued)
Q
Modernising Royal Mail
ase study 2 of 2
Royal Mail achieved a great deal in 2011-12
Swansea succeeds We plan to do even more.
In 2012-43 we are spreading the
implementation of new delivery methods and
associated equipment to more delivery offices
By 2016-17 we will have closed around half
of our mail centres, with high productivity in
place at the remaining sites
Thanks to the installation of Compact
Sequence Sorters in Swansea Mail Centre,
the facility has hit its targets for putting mail
in correct street delivery sequence -
delivering an across-the-board bonus for all.
“Machines sort mail better
and faster than by hand.
They represent a major
investment in our
business that benefits
customers and - as
we've seen by the special
payment - employees
as well.”
says Lionel Jones, Swansea's
Automation Manager.
Modernisation is a key way to ensure that
Royal Mail's core business ~ based on the
Universal Service — is placed on a sound,
secure and sustainable footing. This is already
having a positive impact on our customers
and our employees’ working lives.
Modernisation milestones since the
programme began:
Machines, which can sort over 40,000
letters an hour, at nearly twice the speed of
older machines;
* Upgraded and extended 225 Integrated Mail
Processing machines to date;
‘As postman John Davies explains, He Bibs aah
“With machinery doing
the sorting, I don’t have
* Achieved sequencing of 75 per cent of
the mail;
© Closed 16 mail centres since the
to spend time preparing modernisation began. In 2011-12 we closed
four mail centres, announced the closure of
for my round. That gives a further three and began consultation on
me more time to deliver __the closure of three more; and
we eee mail that * Completed delivery revision in 448
often involves getting delivery offices
signatures or filling out
paperwork for redelivery.”
Progress in Swansea also extends to
upgrades on existing machines that do
everything up to and including putting mail
into regional batches ready for sequencing
H For more information visit
“1! www.royalmailgroup.com
2 4 Royal Mail Holdings plc
‘Armual Report and Financial Statements 2011-12
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Performance
Our people
= Efficiency gains in Royal Mail operations
Royal Mail’s people set our brand apart. are actually helping to improve our
safety performance.
In Ipsos MORI research conducted in November 2011, The World Class Mail programme (see
82 per cent of our customers said they were either “Modernising Royal Mail” p22) is producing
“fairly satisfied” or “very satisfied” with the service some encouraging results, significantly
ry reducing our accident rate. One of the
they received. The same percentage rated our people programme's 10 work areas is safety, We
as “helpful” on a scale that ranged from “fairly good” to have found that when people are given the
“excellent” - among the highest ratings for any company Fight time and tools to do their jobs, they work
in the survey. 4
- Safety on the roads is essential. Royal Mail
Royal Mail’s people serve our customers well. and Parcelforce Worldwide now have nearly
. 39,300 vehicles delivering the length and
A benchmark survey, conducted by Ipsos MORI breadth of the UK. Itis our obligation to
ensure that al of them are in the best road
In 2011-12, we introduced management
assessment against a Corporate Balanced in Autumn of 2011, provided initial findings
Scorecard featuring four quadrants: People; that enabled us to take immediate action eG pte i Control of people with
Customer; Performance and Financial. We learned that employees want to know Pratessional driving, stats,
Monthly updates against Scorecard criteria more about our organisation's strategy, their Our Zero Accidents Programme (ZAP) focuses
are now helping to drive responsiveness, role in it and what customers think of Royal 0" SPecific road safety risks. Primary training
accountability and alignment for all our Mail. We reacted and undertook a programme includes pre-use vehicle checks, followed by
managers throughout the UK. of activity to improve this. three hours of in-cab tuition with a qualified
instructor, targeting the main causes of
This system is also ensuring that Royal Mail — There were plenty of encouraging outcomes. collisions experienced by our drivers
rewards performances and behaviours that Over three quarters of people understand the
will advance our key strategies. need for change within Royal Mail. Two thirds Li ede fuse Ear ian eet
In. 2011-42, Royal Mail Group employed of people feel their line manager treats them ps ; i P:
fairly and with respect and well over half are Y€@". Among our younger drivers, collisions
nearly 159,000 people in the UK through roud to work for Royal Mail are down 52 per cent during the year. Such
UKPIL and Post Office Limited. As part of , Royal Matt progress notwithstanding, itis with deep
our effort to improve efficiency and Safety: an enduring priority regret that Royal Mail Group recorded seven.
competitiveness, we have regretfully reduced As Royal Mail changes, one thing remains road deaths associated with olitoperations
our UK workforce by 4,000 people-a large constant: our commitment to the health and jn. 2011-12. four of which were third-
proportion of whom were managers. ____ Safety of our people __. party fatalities
r=] In times like these, it is essential that 8 We are committed to doing everything Developing skills for a changing business
everyone in the Group understands the in our power to reduce the number of {As Royal Mail is modernising, so are the skills
motivation and the benefits of Royal Mail’s accidents to zero over time. of our people. We are achieving this through
modernisation programme We are pleased to report a 22 per cent extensive development programmes internally,
Our inaugural annual employee engagement —_ reduction in RIDDORs (Reporting of Injuries, 8 well as through a policy of recruitment to
survey, independently run by Ipsos MORI, took Diseases and Dangerous Occurrences help young people and the long-term
place in Spring 2012. This achieved a score of Regulations) to 14.3 accidents per 1,000 unemployed to get into employment. In
56 per cent, focusing on employee alignment, _ employees during the year, compared to 2011-12, we invested a total of £11.2 million
involvement and loyalty. The survey will form 18.3 accidents per 1,000 people in the in training and skills development. We have
the foundation of a specific engagement KPI __ previous year. also spent £1.9 million on outplacement
for years to come. We will publish the results programmes for employees taking redundancy.
annually to chart how our people are feeling
about the company, its leadership and
strategic direction
Royal Mail Holdings ple 2 5
Annual Report and Financial Statements 2011-12
Our people (continued)
Our people
case study 4 of 1
é
Sorted: a new generation
Mail’s engineering team. Their mission: to
earn all they need to know to keep our
sorting equipment running at its best.
That includes Royal Mail's latest machines,
which are helping to make Royal Mail safer
and more efficient
Within the course of their three year
programme, our novice engineers will
become masters of equipment that
processes up to 40,000 items per hour
Individual responsibility is a key theme of the
course. And while learning on-the-job how to
minimise breakdowns and maximise output
through ongoing maintenance and repairs,
apprentices are also working towards a
BTEC and NVQ Level 3
Programme participant Alexandra Allsop says:
“The apprenticeship is a
good way of entering the
engineering environment.
I’m looking forward to
working my way up.”
For more information visit
www.royalmailgroup.com
Royal Mail Holdings plc
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Royal Mail's apprenticeship programme has
been one of our most encouraging training
endeavours. It is open to current employees
as well as the wider commurity.
In 2011-12, we revived our engineering
apprentice scheme, which is now running in
parallel with a similar programme for vehicle
technicians. Both lead to a Level 3 National
Vocational Qualification (NVQ) within
three years.
More advanced apprenticeship training is
helping to identify and shape Royal Mail's
future leaders. This programme focuses on
frontline operational colleagues who show an
aptitude for managerial roles.
To help get a better gender balance in Royal
Mail, we have taken an active approach to
developing women. A new women's network
is now raising both skills and awareness
throughout the Group.
Royal Mail's determination in this area
prompted a 2011 Silver rating in Business
in the Community's (BITC) widely-respected
Opportunity Now benchmark exercise
Our workforce is also diverse in terms of race
and ethnicity, reflecting the communities in
which our people live and work. The
proportion of black and ethnic minority (BEM)
employees stands at over 10 per cent, which
is slightly above the proportion of BEM citizens
in the UK as a whole
Royal Mail's approach to diversity means that
we work with several organisations to recruit
in places where we have local opportunities.
One of those organisations is employ, which
helps people with disabilities and health
conditions rejoin the workplace
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Performance
We are also involved with the Ready to Work During a recent visit to the facility, First
programme, part of the Training Foundation. Minister of Scotland, Alex Salmond, Improving career management
Since 2005, more than 450 people have had acknowledged the importance of the scheme. With such a huge workforce, itis critical
Royal Mail work experience. This year, we “+ that Royal Mail has the right people
‘a
agreed to take part in an HM Government Employers, workers, . management system.
initiative to offer work experience for upto83 UNIONS and communities —— ourmew end-to-end integrated People System
young people to spend four weeks working for working in partnership Management Programme (PSP) went live
us on a voluntary basis. .
with HM Government during the reporting year. Now, we are better
We are additionally involved with BITC's able to manage employees’ careers from
Business Action on Homelessness, which to promote workplace recruitment to departure and so significantly
supports people as they gain and sustain learning benefits all of enhance working life at Royal Mail
employment. us - which is why it’s so More than 50 per cent of our workforce used
All of these efforts rightly promote fairness jmportant to recognise PSP in 2011-12. Our aim is to have everyone
and opportunities for all in Royal Mail. But, we on the system by August 2012
achievements like
never lose sight of our prime objective, which _ PSP won the Gold Award in SAP's 2011
is to raise levels of customer service those here. UKI Quality Awards in the New Business
throughout the Group. Alex Salmond Application Implementation category.
For instance, in 2011-12 we identified a need
to equip staff in our enquiry offices with the
right skills for what is a key customer-facing
role. As a result, we introduced a new
NVQ-based training scheme specifically
targeted towards improving our performance
in this area,
PSP is part of a wider effort to simplify
working life at Royal Mail. Having accumulated
over 200 human resources policies over time,
in the past year we reviewed and simplified
this portfolio. Today, we are concentrating on
39 core people policy areas, with revised
policies and procedures in place that are
easier to understand and implement for
employees and managers alike
At Royal Mail, learning is supported by the
activities of our Learn Centres. There are 100
of these throughout the nation We have accomplished all of this with the
cooperation of our unions, the Communication
Workers Union and Unite.
At our Glasgow Mail Centre, for example, all
1,100 employees have access to lifelong
learning opportunities in the workplace. Since
2009, 482 postmen and women have taken
part in over 50 courses covering a wide range
of topics.
Year end people numbers
2012 2011
151,156
Post Office Limited 7198 7782,
UK wholly owned subsidiaries 158,954 162,963
UK partially owned subsidiaries 3926 4.254
General Logistics Systems 13,362 13.167.
Group total 176,242 180,384
Royal Mail Holdings plc 2 7
‘Armual Report and Financial Statements 2011-12
Regulation
The past year has seen major reform to the regulatory
framework under which Royal Mail operates.
Ofcom has acknowledged that “the traditional approach
to price regulation” had failed.
We welcome the significant changes that have been made.
However, some areas of concern remain in regard to the
regulation of postal services.
Royal Mail has played an active part in
bringing about regulatory change
We are confident that reform represents an
important step forward in securing the
Universal Service. Royal Mail is grateful to the
Government, and in particular to the ministers
at the Department for Business, Innovation
and Skills and their officials, for driving
through the legislation that has brought
about much-needed change
The new framework has seen a substantial
reduction in detailed, intrusive ex-ante price
regulation. In its place is a more commercially-
oriented ex-post framework, based largely
on the principles of competition law. Some
ex-ante conditions and controls remain,
around Universal Service and Access services.
The new regulatory regime places significant
responsibility on Royal Mail. In this section, we
set out the main changes to the regulation of
our market. We also explain how we will adapt
our operational approach to work successfully
within the new framework
The Postal Services Act 2011
The Postal Services Act 2011 (the Act), which
received Royal Assent on 13 June 2011,
provided the framework for regulatory reform
The Act's provisions came into force on
1 October 2011. This was when the old
licence-based regime was replaced by
a General Authorisation regime with
Regulatory conditions
28
The new law allows for a regulatory
framework in which Royal Mail can compete in
a liberalised market and respond and adapt to
structural decline in our core business
revenues. Importantly, the Act continues to
safeguard the “one price goes anywhere”,
six-day-a-week Universal Service.
The Act comprises three pillar
* Regulatory reform,
* Asolution to Royal Mail Group's historic
pension deficit; and
* Restructuring of Royal Mail Group,
providing a framework that allows for
private capital investment.
‘Two of the three key measures of the Act have
already been implemented
The legislation allowed for a change in
regulator and regulatory approach. In addition,
on 1 April 2012, after the reporting date,
almost all of the pension liabilities and pension
assets of the Royal Mail Pension Plan (RMPP)
were transferred to HM Government,
following State Aid approval.
Preparation for the third measure ~ securing
private investment for Royal Mail -is
underway. Post Office Limited formally
separated from Royal Mail Group Ltd on
1 April 2012. It will remain publicly owned
Royal Mail Group and Post Office Limited
signed a long-term commercial agreement
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in January 2012. This secures the excellent
existing relationship with Royal Mail's main
retail partner - a benefit to both businesses
and the customers we serve.
The regulatory provisions of the Act respond
directly to the significant financial challenge
faced by Royal Mail in providing the Universal
Service. The provisions include three very
clear protections to the Universal Service
within the Act:
* Ofcom's primary duty is to protect the
provision of the Universal Service, which
only Royal Mail is currently in a position
to provide;
* Ofcom must have regard for the need for
the Universal Service Provider to earn a
com has the power to impose conditions
on anyone who seeks to enter the mails
market to provide end-to-end competition,
where necessary, to safeguard the provision
of the Universal Service
Regulatory developments this year
Implementation of the reforms mandated by
the Act has led to substantial change to both
the nature and extent of postal services
regulation. The responsibility for regulating
the postal sector transferred from Postcomm
to Ofcom. This reflects the changing position
of post. It is no longer a discrete sector, but
one of several options open to consumers
within the wider communications market.
We have worked with Ofcom to help put in
place a major new approach to regulation. The
direction taken is reassuring for the financial
security of the six-day-a-week, one price goes
anywhere Universal Service. The reforms will
allow Royal Mail's Universal Service Obligation
to make a reasonable commercial rate of
return. This was a supplementary duty placed
on Ofcom under the Postal Services Act 2011.
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Performance
Ofcom has lightened Royal Mail's regulatory
load. This includes ex-ante regulation of
pricing, which Ofcom has scaled back to cover
standard Second Class letters, Second Class B
large letters, and (in future) standard parcels
The table below summarises the key changes brought about by Ofcom’s deci
the new regulatory framework, announced in March 2012.
intrusive and complex price regulation No price cap on the majority of products and
up to 2kg, intended to act as safeguard on Universal Service Obligation (USO) and services. A “safeguard” price cap will remain
products. We will also have to comply with }or_Universal Service Obligation products _for Second Class standard letters, Second
dl t-er pine contre tb mmc Efe and services. Class large letters, and standard parcels up
requirements for a margin differential tog
between retail and wholesale services. wen
Removal of other price caps has allowed us to More than 80 per cent of Royal Mail’s
Royal Mail is now able to set prices that
start the process of rebalancing our prices and _ revenues subject to direct price regulation. account for over 90 per cent of revenues,
redesigning our product portfolio to better subject to price control of Access through
meet the needs of customers. These
processes will also enable Royal Mail to cover Royai Mails rivals had potential access to any
all of its costs and earn a reasonable part of Royal Mail's Universal Service network Mail's Universal Service network but Royal
commercial rate of return. and explicit price advantage through a Mail is able to set fair and reasonable
Ofcom has also revised another regulatory _prescriptive price control commercial terms and to set Access prices
requirement that previously hindered Royal that give a reasonable commercial return
Mail’s performance: the regulatory obligation Access prices will be monitored under
which established a guaranteed price a “margin squeeze price control” test. Access
differential for competing mail carriers. From is now restricted to letters and large letters
2005, Royal Mail was obliged to process and at the inward mail centre only. .
deliver mail collected by our rivals. This Royal Mail was generally obliged to provide Royal Mail is now able to change prices and
Tequirement, known as Downstream Access three months’ notice when changing prices. _terms of service with no regulatory notice
(DSA) was subject to strict price controls or terms and conditions for products. These _period for non-USO products and 30 days’
Nearly 48 per cent of the letters posted within restrictions limited innovation. notice for USO services. This allows us to
the UK that we handle are now DSA mail innovate and introduce new products
While we are happy to do this, regulated mare quickly.
access has cost Royal Mail hundreds of
millions of pounds in recent years, The Royal Mail’s competitors were able to take Competitors will have to provide notice to
removal of an explicit price advantage to other Substantial volumes of business mail from Ofcom if they decide to introduce or expand
players provides a more level playing field. Our its end-to-end letters business under a any part of their letters business along the
competitors retain regulatory safeguards for _Teulatory licensed regime, which established end-to-end delivery pipeline. Ofcom has the
access to the network through the margin a guaranteed price differential between ability to impose regulatory conditions on
control condition, upstream and downstream mail activities, operators offering services on parts of or
subject to those competitors complying with —_ on the entire end-to-end delivery pipeline
their licence conditions where there is a demonstrable threat to
provision of the Universal Service
No explicit statutory requirement for the As part of its primary duty, Ofcom must now
regulator to have regard to the need for have regard for the need for the Universal
the Universal Service Provider to make Service Provider to make a “reasonable
a commercial rate of return on its commercial rate of return” on its Universal
USO activities Service activities. Ofcom has determined
that 5-10 per cent EBIT is the appropriate
range, but acknowledges that in the short-
term Royal Mail may need to return a
higher margin.
Royal Mail Holdings ple 2 9
‘Armual Report and Financial Statements 2011-12
Regulation (continued)
Summary of developments:
* May 2010: Postcomm launched a set of
consultations on changes for 2011, which
resulted in a number of incremental
changes to narrow price controls and
started the process of reforming the
regulatory framework
‘August 2011: bulk mail products were
cd from the U 1S
November 2011: start of delivery to
hbour ti
March 2012: Ofcom set new
regulatory framework
Next steps
Operating in a deregulated environment
Royal Mail welcomes Ofcom's
acknowledgement that there are now strong
commercial incentives to treat our customers
fairly; that we understand their needs; and
that we must offer services that customers
want to buy at the right price. Royal Mail is
focused on reorienting the business to place
customers at the heart of everything we do.
The new regulatory regime gives real
incentives to innovate. It provides the ability
to respond to our customers’ needs ina much
more commercial way in terms of speed and
price, whilst continuing to provide safeguards
for users of the Universal Service
30
October 2011 and January 2012: Ofcom
launched a set of consultations, which
resulted in a substantially different
regulatory framework,
Further regulatory change
The reform of the regulatory framework
over the past year represents a major step
forward for the future sustainability of the
Universal Service.
However, regulatory reform will continue
as Ofcom seeks to more closely match
regulatory requirements to a dynamic postal
market. Ofcom will be conducting a “Review
of User Needs’, as required by the Postal
Services Act 2011, which will conclude by
March 2013. Ofcom will also be conducting
a number of further consultations on the
regulatory framework.
Royal Mail will address a number of areas
where we believe that further regulatory
change is necessary. This includes the
framework around Access contracts and the
process through which both mandated and
non-mandated access services are provided
Ofcom will continue to closely scrutinise the
postal services market, and our own
performance, in order to ensure the new
regulatory framework is correctly balanced
to deliver a safe and sustainable Universal
Service. We will work closely with Ofcom to
help achieve a better understanding of the
rapidly changing marketplace and our place
within it.
Royal Mail Holdings ple
‘Armual Report and Financial Statements 2011-12
Performance
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Performance
Our businesses
The Group’s main businesses
Royal Mail Group is organised into three main businesses, which are covered in the
following pages.
Post Office Limited has a national network
of branches and is represented in many
communities across the country. It provides
a trusted access point for around 170
UK Parcels, international & Letters different products and services including
(UKPIL) processes and delivers letters and savings, insurance, loans, mortgages, credit
parcels in line with its Universal Service cards, HM Government services, telephony,
Obligation. It is also a leading provider of foreign currency, travel insurance and retail
collection and delivery services for express mails services.
Parcels through Parcelforce Worldwide, Royal Mail Group Ltd and Post Office Limited
providing both businesses and consumers
with a full range of timed delivery options
UKPIL is responsible for the design and
production of the UK's stamps and philatelic
products. It is also responsible for the
processing of international mail under
reciprocal arrangements with other overseas
postal administrations.
Within UKPIL ar
became sister companies on 1 April 2012
The two companies have signed a major
commercial agreement, which provides
continuity and a close working relationship
over the long-term. The mutual commercial
success of both companies is best served by
Royal Mail and the Post Office working closely
together for the benefit of customers.
CIGLS
General Logistics Systems
Commer
‘orporate parcel
* Consumer
General Logistics Systems (GLS) delivers
high-quality parcel and express services as
well as value added logistics solutions
throughout Europe. GLS is one of the biggest
ground-based parcel service providers in
Europe today. GLS provides a network
coverage of 42 countries through wholly
owned and partner companies and is globally
connected via contractual arrangements.
ind net’
stam,
¢ Centra
Royal Mail Holdings ple 3
rtd Report and Frasca Statements 1
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Performance
UK Parcels, International
& Letters
Trading performance
2011-12 UKPIL revenues
2010-11
External revenues (£m)
Operating profit/(ioss) after modernisation costs (Em)!
Margin (%)
Inland addressed volumes (m)
People employed
6,857
(120)
7,164
23
UK Parcels, International & Letters
(UKPIL)
UKPIL delivers letters and parcels to more
than 29 million addresses in the UK, in line
with the Group's Universal Service Obligation
In addition, the business is also responsible
for:
© Express parcel services through Parcelforce
Worldwide
philatelic products;
* Processing incoming and outgoing
international mail; and
‘¢ The growing marketing mail business
Trading performance
Revenues increased for the first time in four
years, rising four per cent to £7.2 billion
The increase in revenues resulted in an
operating profit after modernisation costs!
of £23 million, compared to a loss of £120
million the previous year. This generated an
operating margin after modernisation costs!
of 0.3 per cent, which remains very modest
compared to other major postal operators.
Parcels volumes (m)
03 (a7)
14,997 15909. .
151,156 155.181, 49% (£3,509m)
Parcels
Revenues increased by ten per cent to 15% (£1,063m)
£2.6 billion 36% (£2,592m)
* Domestic volumes grew six per cent to
651 mill cd
* Parcelforce Worldwide first time delivery
Quality of Service was 96.8 per cent
Mi Letters & other mail
farketing mail
BiParcels
“Our strategy in action” (p16) provides further
detail on our Group parcels strategy, of which
UKPIL is an integral part.
Letters & other mi
* Revenues have increased by one per cent to
£4.6 billion, this included £3.5 billion from
letters & other mail and £1.1 billion from
marketing mail
Our customers includ
MARKS &
SPENCER
amazoncouk
© We delivered over 14 billion inland
addressed letters and large letters, and over
three billion inland unaddressed items;
¢ Inland addressed volumes declined by
six per cent; and
* First Class retail Quality of Service
performance was 92.7 per cent
Marketing mail
£11 billion of our Group revenues were
generated by marketing mail in 2011-12
We are prioritising the development of this
business as a key driver of future profitable
oe growth. The business’ strategy is to
Growth
Royal Mail UK domestic parcels network
Parcelforce Worldwide
Total UKPIL domestic parcels
585 551 6b
63
614 ot
reinvigorate our share of the advertising
Gq Market and increase our share of the value
chain by targeting the UK's top 3,000
advertisers - many of whom do not use direct
66
651
32
mail in their direct marketing mix and do not
realise its potential.
+ Before other operating exceptional items.
Royal Mail Holdings ple
‘Armual Report and Financial Statements 2011-12
———
Return on Investment of direct mail
Total
v Press Outdoor Online
Hi Advertisers using direct mail
lAdvertisers not using direct mail
Source: OMD/Brand Science (2009)
Letters & other mail
Across letters and other mail, necessary price
increases were offset by volume decline in
inland addressed letters items of six per cent
The number of addresses we deliver to
continues to grow, expanding by almost
one per cent every year.
Social mail
Social mail includes stamped letter mail of a
consumer to consumer (C2C) or consumer to
business basis (C2B). This part of the mail
market is declining as UK consumers move to
other forms of digital communication
Business mail
Business mail comprises statements, orders,
invoicing and bill payments that are generally
of a business-to-business (82B) and
business-to-consumer (B2C) nature. This is
the part of the mail market experiencing the
largest decline due to competition from online
and other digital media
Royal Mail believes that it can reduce the
decline in business mail by repositioning it
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Performance
Con]
Decline in addressed inland
letter volumes
as a high value and durable customer
communication. This supports customer
retention and loyalty when complemented
with other media
2008
2009 201020112012
Special stamps
Royal Mail's stamp programme has had a
successful year. Among the highlights were
the stamps we produced to mark the Royal
Wedding, We issued these, featuring the
official engagement photographs by Mario
Testino, shortly before the day itself.
Stamps produced for the two great events of
2012, the Queen's Diamond Jubilee and the
London 2012 Olympic and Paralympic Games,
could prove to be even more successful
e ..
co) LS
DIAMOND JUBILEE
2. 2g
Further information regarding our special
stamps can be found at:
www.royalmail.com/stamps
Royal Mail Holdings plc
‘Armual Report and Financial Statements 2011-12
33
Post Office Limited
Trading performance
2011-12
External revenues (£m)
Operating profit after modernisation costs (Em)!
People employed
Post Office branches
Customer satisfaction (2)
801
59
7,798 7,782
11,818 11,820
87 85
Post Office Limited is visited by nearly
20 million customers a week through its
network of 11,818 branches, providing
around 170 different products and services.
This includes savings, insurance, loans,
mortgages, credit cards, Government services,
telephony, foreign currency, travel insurance
and retail mail services.
External revenues increased by £25 million in
2011-12 to £801 million. Growth in identity
related work, lottery, retail and personal
financial services was more than offset by
the decline in traditional products such as bill
payment and from a reduction in the number
of telephony customers. The main driver of
this growth, therefore, was a £30 million,
increase to the Network Subsidy Payment
to £180 million (2011 £150 million).
The £25 million external revenue increase
was the main driver of the improvement in
operating profit after modernisation’ from
£21 million to £59 million
On 1 April 2012, Post Office Limited became
a sister company to Royal Mail Group Ltd
Alice Perkins was appointed Chair of the Post
Office Limited Board on 22 September 2011
Over the last year, the Post Office has
undertaken rigorous planning in anticipation
of this significant development. A long-term
commercial agreement with Royal Mail was
signed on 19 January 2012 to ensure that
the Post Office continues to provide unrivalled
access and retail customer service in mails
and parcels services
34
Post Office Limited's strategy is based around
growth supported by modernisation and
improved customer service and there are
a number of key programmes in place to
support this
Modernising the Post Office network
In accordance with the Government funding
agreement in October 2010, thousands of
Post Office branches will be modernised. This
will mean service improvements and longer
opening hours to make Post Office branches
more accessible for customers. There will be
no programme of closures
Over the last financial year, more than 124
new main and local-style Post Office branches
have been opened, bringing the nationwide
total to 200. After further testing and
refinement of the new-style branches, Post
Office Limited will roll out the modernisation
programme more widely from summer 2012
By March 2015, around 6,000 branches will
have been converted to the new-style
branches, strengthening the overall network
that reaches every community in the UK
New features of our main Post Office
branches include more modern environments
with open plan counters, dedicated travel
services counters and fast track services for
small and medium sized businesses. Among
the new technology offered in many locations
are self service post & go machines and
leading edge biometric data capture
technology which has been instrumental in
growing new Government business.
Royal Mail Holdings ple
‘Armual Report and Financial Statements 2011-12
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Performance
In local branches, customers now benefit from
open plan counters next to retail counters that
enable people to pay for their groceries and
make the most of Post office products and
services at the same time.
Serving as a front office for Government.
As well as developing the financial services and
mails business, the Post Office is increasingly
becoming established as an effective front
office for local and national Government. This
builds on a long history of delivering essential
Government services. Post Office Limited
continues to manage more than three million
Post Office card accounts for people receiving
benefits, state pensions and tax credit
payments. The Post Office is ideally positioned
as an intermediary between the public and
national and local Government.
Post Office Limited can offer cost-effective
delivery of services; a secure IT infrastructure
in seamless conjunction with back offices
and full front-office service for payments,
applications, identity verification, data capture
and information. The Post Office also offers
digital services for customers who do not have
internet access, and a face-to-face channel for
those transactions that cannot be done online.
Post Office Limited is working with
Government department, agencies and local
councils to explore new farms of service
delivery that improve accuracy, eliminate
fraud and reduce costs. For example, the Post
Office Application, Enrolment and Identity (AEI)
unit uses advanced biometric technology to
capture fingerprints, electronic signatures
and digital facial images. Customers in 752
branches can now use this facility to renew
photo card driving licences and, in around
100 of these branches, to apply for biometric
residence permits. In February 2012, the
millionth customer used this AEI digital service
Sales strength
Post Office products continue to earn
accolades: for the sixth year running, the
British Travel Awards cited the Post Office as
the “Best Travel Insurance Provider” and the
+ Before other operating exceptional items.
“Best Foreign Exchange/ Travel Money
Provider" for the fifth year running, Post Office
Limited also won “Best Savings Provider” at
the MoneySupermarket 2011 Supers Awards
The mail sector continues to account for
around a third of the business. Income from
Royal Mail has increased this year due to an
increase in volumes of parcels and
international mail sold through the Post Office
and the effect of necessary price increases
Within financial services, deposits have grown
to £15.8 billion and opportunities to increase
the range of savings accounts are being
sought. The Post Office recently launched a
new Premier Cash ISA, for example, which is
already proving popular with customers
Through relationships with partner banks,
around 80 per cent of all UK debit card
holders now have access to cash withdrawals
and balance enquiries at Post Office branches.
This year's results have been achieved against
a backdrop of taking steps to secure new
business and services while trialling new-style
branches and preparing to roll out the largest
modernisation programme in the history of
the business over the next three years.
Post )
(orrice)
Royal Mail Holdings ple
Annual Report and Financial Statements 2011-12
Performance
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35
General Logistics Systems
General Logistics Systems (GLS) is one of the biggest
ground-based parcel service providers in Europe today.
GLS is a pan-European business, providing reliable,
business-to-business, high-quality parcel and express
services as well as value-added logistics solutions.
Established in 1999, it has historical networks in each
of the domestic markets in which it operates.
General Logistics Systems
2011-12 2010-11
External revenues (£m)
Operating profit after modernisation costs (£m)!
People employed
1,562
128 118
13,362 13,167
1,485
Overview: continued success in the face of
uncertainty in Europe
GLS is a European leader in quality - provided
through a network coverage of 42 countries,
through wholly-owned and partner
companies - and is globally connected via
contractual agreements.
The GLS network comprises 37 central
transhipment points in Europe, made up of
660 depots and 16,510 vehicles. Its 13,362
people deliver over 375 million parcels annually
for 212,000 customers throughout Europe
Trading results
External revenues were £77 million higher
than the prior year. Underlying revenues were
four per cent higher than the prior year after
adjusting for exchange rate movements as the
Euro strengthened, compared to 2010-11
Revenue growth was principally volume driven,
with domestic volumes three per cent higher
and export volumes nine per cent higher.
Operating profit increased by £10 million
to £128 million, generating a margin
improvement to 8.2 per cent.
36
Strategy in light of European uncertainty
GLS' strategy remains the same - a relentless
focus on high service quality, expanding its
European network, and continued innovation
through investment in technology.
During 2011-12, the core GLS markets in
mainland Europe experienced a weakening in
demand, particularly during the second half,
as governments implemented austerity
measures to reduce their fiscal deficits
Despite the challenging conditions, GLS
increased parcel volumes by three per cent
in total, with higher domestic and export
volumes compared with the prior year.
In particular, export volume growth has
benefited from the leveraging of GLS’
pan-European network. GLS continued to
invest in its European network in 2011-12
by strengthening its physical infrastructure
through investments in operational facilities
and by extending its geographical coverage
Royal Mail Holdings plc
‘Armual Report and Financial Statements 2011-12
Performance
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GLS pan-European networ!
(including partners)
* Albania * Lithuania
© Andorra * Luxembourg
* Austria * Macedonia
* Belgium * Malta
* Bosnia-Herzegovina * Monaco
* Bulgaria * Montenegro
* Croatia * Netherlands
* Cyprus * Norway
* Czech Republic» Poland
* Denmark * Portugal
* Estonia # Romania
* Finland * San Marino
* France * Serbia
* Germany * Slovakia
* Greece * Slovenia
* Hungary © Spain
* Iceland * Sweden
* Ireland © Switzerland
* Italy © Turkey
* Latvia © United Kingdom
* Liechtenstein * Vatican City
(As at March 2012)
Before other operating exceptional items.
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Performance
In May 2012, GLS teamed _- Vision & core values of GLS
up with Itella Logistics for ~~
the export and delivery of
parcels to Lithuania and
Latvia. As both parcel We keep rack of your parcel ; june arrives on time
specialists have already : '
been working together in
Transparency Reliability
Estonia since 2009, this Sires
now means they can serve Pe le
all three Baltic states.
Innovating through technology Flexibility Security
The parcels market in Europe continues to
develop, with growth increasingly driven by We find the right solutions for you Your parcel arrives safe and sound
online retailing. GLS has invested and will b Uh
continue to invest in technology which will
optimise delivery services. New flexible
delivery solutions are being developed which
will enable GLS to communicate directly with Sustainability
recipients, so that parcels can be delivered to
locations most convenient to them. We respect our environment
Climate protection measures
Royal Mail Holdings plc 3 7
‘Armual Report and Financial Statements 2011-12
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Performance
. .
Financial performance
:
overview
Se ee Gowen wae
operating costs before modernisation and
other exceptional costs (for UK businesses); 2
and free cash flow (excluding Royal Mail Share of post tax profits from joint venture & associates b- 4 28
Pension Plan (RMPP) deficit payments and
finance leases). A summary of performance .
against these KPls has been referenced in Modernisation costs (231) (207)
italics in this section, including a comparison
against the prior year.
8 Group operating profit before exceptional items
er net exceptional items
GQ] “r2up revenue increased by £376 million
to £95 billion in 2012. This was Profit before financing and taxation 60
principally driven by UKPIL, as the impact of Net finance costs (including net pension interest) (38) (212)
necessary price increases more than offset. “= 4
overall volume declines. UK inland addressed _ Taxation charge (40) (106)
letter volumes declined by six per cent, UKPIL _Profit/(loss) for the financial year 253 (258)
domestic parcel volumes increased by six per
cent and GLS parcel volumes increased by
lies pen pent u. © Modernisation costs in 2012 were £231 © Net finance costs of £38 million have
* Operating costs increases are lower than million (2011 £207 million). 2011 included reduced by £174 million, mainly due to a
inflation and comprise a reduction in people a £109 million credit relating to the legacy non-cash pension interest credit in 2012,
costs, offset by expected increases in share scheme. Underlying costs have reduced driven by changes in long-term pension
non-people costs, mainly distribution and
conveyance costs.
~ ... ¢ Operating profit after modernisation costs! Taxation charge of £10 million mainly
GB _Overating costs before modernisation of £211 million is £172 million higher than relates to GLS profits, compared with 2011
and other exceptional costs for UK last year, a margin of 2.2 per cent compared which included £79 million relating to the
businesses increased by two per cent to hO4 write-down of UK deferred tax assets.
£77 billion, lower than inflation and mainly
due to expected increases in distribution,
fe fi
pl
include profit on disposal of property, plant
and equipment of £157 million;
[B Stour operating prof xcep
items has increased by 80 per cent,
from £246 million last year to £442 million
in 2012;
Ci
+ Before other operating exceptional items.
3 fs} Royal Mail Holdings ple
‘Armual Report and Financial Statements 2011-12
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Performance
Pi 2012 2011
is £169 million higher than last year due to Free eash flow summary £m &m
__improved trading performance; ___.. EBITDA before pension costs aaa 2)
* The Group is no longer required to make Working capital
pension deficit payments into the main
pension plan, RMPP (2011 £292 million
payment). Significant ongoing/other pension
» Modernisation investment in UKPIL (429) (377)
Other capital expenditure and other exceptional costs (242) (241)
Free cash inflow of £234 million 7
(excluding RMPP deficit payments of
Enil) showed a £155 million improvement on
last year (excluding RMPP deficit payments of
Other (dividends from joint venture and associates, tax, interest)
£292 million) Disposal of property and non-core businesses
Free cash inflow/(outflow) (213)
* Net debt has decreased by £63 million, 2012 2011
mainly due to cash generation, partly offset Balance sheet summary £m £m
by increases in finance leased assets and Net operating assets and investments in joint venture 1,177 1,160
19 Pi
from £4.5 billion in 2011 to £29 billion
in 2012, mainly due to a net £4 billion
improvement in the market value of pension
asset yprterariyy bnextinents ir bide Net assets before pension deficit and pension 270 233
Other net liabilties/assets (taxation, derivatives) (5) 38.
escrow investments
* Pension escrow investments increased by
£222 million, mainly as a result of increased Pension deficit (2,922) (4,501)
On 7 Api
date, almost all of the RMPP pension
liabilities and pension assets, built up
until 31 March 2012, were transferred Net liabilities (4,269) (3,107)
to HM Government. This arrangement left
the RMPP fully funded on an actuarial basis
in respect of historic liabilities at that date;
After the balance sheet date, £149 million of
pension escrow investments held by Royal
Mail Group Ltd were made available to that
company; and
~ in Royal Mail Group Ltd 149 87
* Royal Mail Holdings plc continues to hold
£1.2 billion of investments which previously
were held in pension escrow and which will
not be transferred to Royal Mail Group Ltd
or Post Office Limited.
ludes pension payments relating to redundancy of
£39 million (2011 £30 million), all of which relates to
modernisation, and £8 million (2011 £7 million) pension
deficit payments relating to the Royal Mail Senior
Executives’ Pension Plan,
Royal Mail Holdings ple 39
‘Armual Report and Financial Statements 2011-12
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Performance
Financial review
The Group has delivered an improved financial performance in 2011-12, with each of the three
key business segments, UK Parcels, International & Letters (UKPIL), General Logistics Systems
(GLS) and Post Office Limited growing both revenues and profits both before and after
modernisation costs. Importantly, the UKPIL business broke even after modernisation costs,
but its margins are still very low given the risks and challenges it faces and when compared to
5 Summary Group results
'
H
;
i other major postal operators.
The trading performance resulted in EBITDA of £712 million (2011 £504 million). In addition,
. "the Group generated a free cash inflow - for the first time in four years - of £234 million
Matthew Lester compared to an outflow of £213 million last year. This improvement was mainly as a result of a
Chief Finance Officer £292 million pension deficit payment to the company's main pension plan, the Royal Mail
Pension Plan (RMPP), last year, for which there has been no such payment in 2011-12
The following table highlights the segmental results of each business unit
External revenue Operernisecion carte afternondar Raton cart
2012 2011 2012 2011 2012 2011
Business unit performance £m fm £m £m £m
UK Parcels, International & Letters (UKPIL) 7,164 252 72 23 (120)
General Logistics Systems (GLS) 1,562 1,485 128 118 128 118
Other businesses 5 38 1 20 1 20
Group excluding Post Office Limited 8,731 8,380 381 210 152 18
Post Office Limited 801 776 61 36 59 2
Group totals 9,532 9,156 442 246 211 Ey
Segment performance is discussed in the relevant preceding sections
External revenue
The Group's external revenue increased by £376 million to £9.5 billion, the main driver being revenue growth in UKPIL of £307 million, as
shown in the table below.
UKPIL External Revenue
Prior year to current year
£m
7.500
406
7.250 a r I 109 7.166
2 I
7,000 —
6,857 (295)
6.750
6500
6250
6,000
2010-11 Letters Letters Parcels Parcels Other 2011-12
price/mix volume —price/mix volume UKPIL
increase increase revenues
UKPIL revenues were £307 million higher at £7.2 billion, due to a 10 per cent improvement in parcel revenues (driven by higher volumes and
price increases), Letter price increases in April and May 2011 have offset the volume decrease in letters of six per cent
Before other operating exceptional items,
4 0 Royal Mail Holdings plc
‘Armual Report and Financial Statements 2011-12
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Performance
GLS revenues
GLS revenues increased by £77 million to £1.6 billion and, excluding the foreign currency exchange impact on GLS' Euro revenues, underlying
growth was four per cent. GLS parcel volumes increased by three per cent, with strong growth in international volumes, and prices also
increased by one per cent. There was some softening of growth in the second half of the year, due to a weakening in the European economies
and an increase in competition for domestic parcel volumes from the major European postal operators
Post Office Limited and other businesses revenues
Post Office Limited revenues increased by £25 million to £801 million, including an increase in the Network Subsidy Payment from
HM Government of £30 million. Growth in personal financial services and identity-related services was more than offset by a reduction in
telephony income due to reduced customer numbers and the decline in traditional Government and financial services, resulting in revenue
decreases of £5 million
Other businesses’ revenues contracted, as expected, following the sale of the Romec Services Limited business (a subsidiary of Romec Limited)
early in 2011-12
Group costs (including modernisation costs) &m
People costs
Distribution and conveyance costs
Other operating costs (1,707) (11602)
Operating costs before exceptional items (9,122) (8,938)
Modernisation costs (operating exceptional items) (231) (207)
Total operating and modernisation costs (9,353) (9,145)
Operating costs before exceptional items of £9.1 billion have increased by £184 million. Excluding the foreign currency exchange impact on GLS’
Euro cost base, costs increased by £159 million (two per cent). This compares favourably to an annual inflation rate of five per cent. Lower
people costs have been more than offset by expected increases in non-people costs.
The decrease in people costs of £60 million was mainly due to £82 million (two per cent) lower costs in UKPIL. GLS people costs increased by
£14 million due to higher volumes and bolt-on acquisitions and Post Office Limited's people costs were higher by £5 million
UKPIL - People costs
Prior year to current year
£m
4600
4500 4,677
4,400 (446)
(68)
4,300 ()
4,200
2010-11 Operations Central Operations Pay Other net 2011-12
Modernisation Reorganisations Award movements
Efficiency
UKPIL people costs are £146 million lower due to modernisation of the network. This resulted in a reduction in gross frontline (upstream and
downstream) hours of three per cent? (2011 two per cent). Savings of £68 million were made from the Group reorganisation, which began in
the Autumn of 2010. 2,093 people have left UKPIL on voluntary redundancy terms since September 2010. These savings were offset by higher
pay costs of £99 million, comprising a 1.4 per cent pay increase and the move to a shorter working week once local modernisation targets
are achieved
cludes processing hours,
Royal Mail Holdings plc 4 1
‘Armual Report and Financial Statements 2011-12
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Performance
Financial review (continued)
Group distribution and conveyance costs of £1.8 billion have increased by £139 million, with £77 million principally due to volumes in UKPIU's
Royal Mail International and GLS and £49 million higher vehicle costs ~ as the delivery network is modernised - and higher fuel costs in UKPIL.
Other Group operating costs have increased by £105 million to £1.7 billion, mainly due to a £25 million current year foreign currency exchange
impact in GLS and £59 million higher infrastructure costs (including depreciation, IT and property costs).
Modernisation exceptional costs are £24 million (12 per cent) higher at £231 million, with £229 million relating to UKPIL as shown below.
2012 2011
UKPIL modernisation exceptional costs £m £m
Voluntary redundancy (77) (224)
Business Transformation costs (87) (32)
One-off project costs (60) a)
Property onerous leases and impairments (5) (29)
Total before I hi sh ‘ite back (229) (293)
Legacy share scheme write-back 5 101.
Total (229) (192)
Voluntary redundancy costs of £77 million are £147 million lower than last year as a result of the earlier provision for the significant mail centre
closure programme that was announced in 2010-11. To date, 16 mail centres have been closed. A further 18 have been through the
appropriate consultation process, and are expected to be closed over the period to 2015.
The £87 million Business Transformation costs relate to the pay and modernisation 2010 agreement whereby frontline colleagues receive
payments up to £1,000 based on specific milestones and specific bonuses with respect to modernising the network in 2011-12
£60 million has been charged within one-off project costs, mainly relating to key business modernisation projects such as Delivery Methods,
Mail Centre strategy and automation kit deployment.
The legacy share scheme write-back of £101 million was recognised last year when it was confirmed that the scheme had no value
Operating profit after modernisation costs by business unit (£m)
All four of the Group's business segments returned an operating profit after modernisation costs', resulting in a Group operating profit after
modernisation costs of £211 million, with GLS contributing 61 per cent of the Group total as shown below.
Profit after modernisation costs
before other exceptional items - £m
Other
BUKPIL
mcs
BPost Office Limited
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Performance
Operating profit after modernisation costs - growth/(decline) by business unit (£m)
The Group operating profit after modernisation costs! of £211 million is £172 million higher than last year as shown below.
Operating profit growth/(dect
exceptional items
after modernisation costs before other operating
£m
250 38
I a
200 —— (9)
150
100
50 39
,
2010-11 UKPIL GLS Post Office Other 2011-12
Limited
Share of post tax profit from joint venture and associates
The Group's share of post tax profit from its joint venture and associates of £32 million increased by £4 million from £28 milion last year,
mainly due to higher profit in the First Rate Exchange Services (FRES) Bureau de Change joint venture in Post Office Limited
Net exceptional items, including modernisation costs
2012 2011
Exceptional items £m £m
Operating exceptional items
- Modernisation costs (see p93) (231) (207)
“Other (93) (88)
Non-operating exceptional items:
~ Asset disposals
~ Business disposals 26 4h
Net exceptional items (141) (186)
Modernisation costs are treated as operating exceptional items because of their nature and/or size. An analysis of these costs relating primarily
to UKPIL, is shown on p93.
Other operating exceptional items mainly comprise £36 million for Post Office Limited's asset impairments, £24 million costs associated with
State Aid and the Postal Services Bill and £15 million of Romec Limited transformation costs.
Non-operating exceptional items recorded during the year relate to property disposals of £157 million, £104 million of which relates to the sale
of the Rathbone Place property and £26 million of business disposals, mainly £25 million from the sale of the Group's investment in Romec
Services Limited (a subsidiary of Romec Limited).
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Performance
Financial review (continued)
Net finance and pension interest costs
Net finance and pension interest costs of £38 million (2011 £212 million) comprise £26 million net pension interest credit (2011 £167 million
charge) and £64 million (2011 £45 million) net finance costs relating to cash and debt. The net pension interest credit is explained in the
pensions section on p45.
Net finance costs of £64 million (2011 £45 million) comprise finance costs of £118 million (2011 £114 million), offset by finance income of
£54 million (2011 £69 million).
Taxation
The taxation charge of £10 million (2011 £106 million) comprises £43 million current tax credit (2011 £17 million) with respect to UK operations,
a £38 million (2011 £35 million) current tax charge on overseas profits, a UK deferred tax charge of £8 million (2011 £79 million) and an
overseas deferred tax charge of £7 million (2011 £9 million). In 2011 the Group's UK deferred tax assets were written down and remain at a
minimal level.
Free cash flow
EBITDA before pension costs of £1.1 billion is £169 million higher than £962 million last year, due to the improved Group trading performance
Pension payments of £467 million are £304 million lower than last year’s £771 million, mainly due to a Enil pension deficit payment (2011
£292 million) to the Royal Mail Pension Plan (RMPP), as a result of the transfer of almost all of the pension liabilities and pension assets of the
RMPP to HM Government on 1 April 2012.
Disposal of assets of £242 million mainly comprises property sales of £203 million and the sale of Romec Services Limited of £29 million
Modernisation investment in UKPIL of £429 million mainly comprises £129 million (2011 £108 million) redundancy related payments,
£185 million (2011 £166 million) capital expenditure and £58 million (2011 £25 million) Business Transformation payments
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Net debt
The table below provides a summary of the Group's net debt position, as per the balance sheet at 25 March 2012.
2012
£m
Cash and cash equivalents (including £759m (2011 £704m) in the Post Office network) 1,293
interest bearing loans and borrowings (non-current) (1,522)
Financial liabilities - obligations under finance leases (current) (90),
Financial liabilities - obligations under finance leases (non-current) (237)
Total net debt (902)
Net debt has decreased by £63 million year on year as shown in the table below.
2012
£m
Net debt brought forward at 28 March 2011 (965)
Free cash flow (see p94) 234
interest earned on pension escrow investments (included within the free cash flow above) (45)
Cash purchase of pension escrow investments (not in net debt) - replacing mortgage on Rathbone Place property
Increase in new finance lease obligations - non cash (33)
Foreign currency exchange impact on cash and cash equivalents (4)
Net debt carried forward at 25 March 2012 (902)
Pensions and events after the reporting period
On 1 April 2012 - after the granting of State Aid by the European Commission on 21 March 2012 - almost all of the pension liabilities and
pension assets of the Royal Mail Pension Plan (RMPP), built up until 31 March 2012, were transferred to HM Government. On this date, the
RMPP was also sectionalised, with Royal Mail Group Ltd and Post Office Limited each responsible for their own sections in future. This
arrangement left the RMPP fully funded on an actuarial basis in respect of historic liabilities at this date
Royal Mail Holdings plc continues to hold £1.2 billion of investments. which were previously held in pension escrow and which will not be
transferred to Royal Mail Group Ltd or Post Office Limited. The £149 milion of investments which were previously held in pension escrow in
Royal Mail Group Ltd were made available to that company on 1 April 2012.
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Financial review (continued)
Pension Plans
Royal Mail Group Ltd is the sponsoring employer for the Royal Mail Pension Plan (RMPP) and the Royal Mail Senior Executives’ Pension Plan
(RMSEPP) (both defined benefit plans albeit on a career average), and for the Royal Mail Defined Contribution Plan (RMDCP), At the balance
sheet date, based on assets, the RMPP is one of the largest pension plans in the UK. The assets and liabilities of the defined benefit plans, as
measured under accounting standards, are reported as a net pension deficit in the Group balance sheet at 25 March 2012
The gross assets and liabilities and the net deficit are significantly larger than any of the Group's other assets and liabilities. This results in the
Group being one of the most exposed UK corporates to pension volatility, particularly with respect to movements in equity values and future
expectations of inflation and bond rates.
Both defined benefit plans are now closed to new members. New employees are offered membership of the defined contribution plan, RMDCP.
2012 2012
£m £m
Operatin (419) (458)
Exceptional pension costs (relating to redundancy) (é7)
Net pension interest credit/(charge) 26 (167)
Pension charges (408) (672)
The £39 million decrease in operating pension costs is principally as a result of market conditions, resulting in a pension charge in the RMPP
that is 17.1 per cent of pensionable pay, compared to 178 per cent last year, together with a reduction in the number of people employed. The
percentage applied to the pensionable payroll is determined at the beginning of the financial year and is intended to represent the amount by
which liabilities will increase due to employing active members for one more year.
The net pension interest credit reflects the unwinding of the discount on the plans’ liabilities, less the long-term expected rate of return on the
plans’ assets
Whilst almost all of the pension liabilities and pension assets of RMPP were transferred to HM Government on 1 April 2012, the Royal Mail
Group (excluding Post Office Limited) ongoing pension costs and plan assets/liabilities, relating to the pensions of approximately 115,000 active
members, who are accruing benefits earned on a career salary basis and those within the defined contribution schemes, will continue to be
material
Pension balance sheet amounts
The balance sheet pension deficit has reduced from £4.5 billion at March 2011, to £2.9 billion at March 2012. The reduction in the deficit is
shown below:
Accounting Pension Deficit Movement
£bn
8
0.6 (1.2) 1.2 (0.6)
} I ee a
I II
5 45 (1.9)
4
3 2.9
2 y y
4 Movement in pension liabilities Movement in pension assets
0
March Interest Net changes Employer Benefits Benefits Employer Interest Underlying March
2011 con pension inong term annual paid to paid to and employee on pension —_increase in 2012
liabilities assumptions service cost pensioners pensioners contributions. «assets «market value
and employee (reduces (reduces _into the plan of assets
contributions liabilities) assets)
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Performance
Interest on the brought forward pension liabilities using the Marc iscount rate — this is mainly due to the unwinding of the discoun
factor of 65 per cent on the brought forward labiity of £32 bilionlappreximataly 55 per cent x £322 billon equates to approximately
£1,7 billion higher liability). In line with the relevant accounting standard IAS 19, an AA corporate bond rate has been used to discount plan
liabilities;
* The changes in long-term assumptions which comprise a higher liability as the discount factor has reduced from 5.5 per cent to 51 per cent,
e annual ongoing pension cost of
contributions increase the total to £0.6 billion; and
‘Benefits paid to members of £1.2 billion which reduce the liability
hi hi
* Ongoing Group contributions to the Plan included in cash flow at a 171 per cent rate, together with employee contributions:
«The expected rate of return on pension assets based on the March 2011 65 per cent blended rate (6.5 per cent x £28 billion assets equates
* The additional increase in market value of pension assets, which is mainly driven by the holding in bonds
Pension cash payments for all Plans
Following the transfer of almost all of the pension liabilities and pension assets of the RMPP to HM Government explained on the previous page,
the funding of ongoing pension contributions into RMPP and deficit payments into RMSEPP will be discussed with the respective pension
trustees. The amounts disclosed in the table below are based on existing arrangements for the 2011-12 financial year.
2012 2012
Pension cash funding: Group contributions £m ém
Regular pension contributions (420) (442)
Funding of pension deficit ~ RMSEPP e) (7)
. RMPP - (292)
Payments relating to redundancy (39) (30)
Net cash payments (467) (771)
Regular pension contributions have reduced from £442 million to £420 million in line with lower pensionable pay. The regular future service
contributions cash rate for RMPP expressed as a percentage of pensionable pay remained at 17.1 per cent (2011 171 per cent). The regular rate
of employee contributions for the RMPP remains unchanged at six per cent.
Deficit recovery payments by the Group have decreased by £294 million from £299 million last year. The £8 million (2011 £7 million) deficit
payment relates to the RMSEPP. There was no RMPP deficit payment as a result of State Aid clearance granted on 21 March 2012 and the
subsequent transfer of almost all of the pension liabilities and pension assets of the RMPP to HM Government on 1 April 2012
Treasury management overview
Up to 25 March 2012, Royal Mail Group operated a central Treasury function that managed £1.4 billion of financial asset investments
(substantially all of which were held in escrow in favour of the pension fund trustees until April 2012) and £1.3 billion of cash and cash
equivalent investments (including £759 million cash in the Post Office network funded partly by a Government loan facility), in accordance with
investment restrictions set by the Government. It also managed £2.2 billion of financial liabilities (mainly Government borrowings) and acted as
internal banker for all of the Group's business units. The Group finances its operations largely through cash generated from its operations,
borrowings and grants
Following the transfer of Post Office Limited from under the ownership of Royal Mail Group Ltd to Royal Mail Holdings plc on 1 April 2012, Post
Office Limited now has an independent Treasury function and manages its own financial assets (including network cash) and financial liabilities
(mainly Government loans)
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Performance
Financial review (continued)
Henceforth, the Royal Mail Group Treasury function derives its authority from the Royal Mail Group Ltd Board (in respect of the £1.2 billion
investments held by Royal Mail Holdings plc it derives its authority from the Royal Mail Holdings plc Board), and provides quarterly monitoring
reports for the Board's review. It only has the authority to undertake financial transactions relating to the management of the underlying
business risks; it does not engage in speculative transactions and does not operate as a profit centre. All strategies are risk-averse, and the
treasury policy has remained substantially unchanged during the year. The principal financial instruments are Treasury bills, Government
gilt-edged securities, deposits and long and short-term borrowings
Facilities
The terms of the Government borrowing facilities and the associated Framework Agreement impose strict constraints on the separation of cash
funds within the Group and the purposes for which they can be used. During the year, Royal Mail Group Ltd generated cash but did not reduce
its borrowing from Government as redrawing of the outstanding facilities was not permitted. Since the year end, one of the Royal Mail Group
Ltd loan facilities was amended to increase flexibility, allowing repayment and redrawing against that facility. An associated arrangement fee was
paid, and commitment fees were increased in connection with this amendment. Subsequent to this, during April and May 2012, Royal Mail
Group Ltd repaid £600 million of the total outstanding amount
Covenants
Loan covenants for Royal Mail Group Ltd are tested on a rolling 12-month basis in September and March. Early in 2011, Royal Mail Group Ltd
anticipated the possible breach of covenants resulting from its forecast cash requirements during 2011-12 and an expected pension deficit
payment in March 2012. To mitigate this, Royal Mail Group Ltd and the Government concluded discussions which reset a number of the key loan
covenants for the 12-month testing periods ending March 2011 and September 2011 and March 2012. The revisions were considered to be on
a commercial basis with an arrangement fee and an increase in the borrowing margin, and the revisions were effective up to and including
25 March 2012. The covenants and margin reverted to their original terms from that point onwards, which Royal Mail Group Ltd considers to be
manageable on the basis that the pension deficit payments will be significantly reduced from April 2012. All loan covenants were met at
September 2011 and March 2012
At 25 March 2012 the Group was financed as follows:
Average
interest
rate of loan
Borrower: Royal Mail Group Ltd drawn down Facility Facility Utised Average Loan
Purpose x end date £m £m maturity date
GLS fundin 5.8 2021-2025 500 500 2023
Capital Expenditure and Restructuring 22 2014 600 600 2014
General Purpose/Working Capital ss 2014 300 = "
422 422
General Purpose/Working Capital 12
imited
Network cash 08 2016 1,150 377 2012 I
Total facility/facilities ut 2,972 1,899
Financial risks and related hedging
The Group is exposed to currency and commodity price risk. The Group operates hedging policies which are described in the notes to the
financial statements. The exposures for Royal Mail Group (excluding Post Office Limited) (before hedging) are set out in the table below, together
with how much the 2012-13 operating profit would differ from 2011-12 as a result of the changes in commodity costs/exchange rates up to
25 March 2012, post the impact of the respective hedging programmes
® Loan facilities are repayable on the later of March 2016 and the release of the pension escrow investments. The loan (and facility) increased by £45 million (2011 £40 million)
as a result of accrued interest added to the loan balance. This Royal Mail Group Ltd loan is subordinate to all other creditors
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Performance
Ce rer cel
Impact of no
Impact on further change
operating profit in price/rate on
of a 5k increase 2012-13
in price/ operating
weakening of profit versus
sterling (before 2011-12
hedging) (post hedging)
Exposure - Royal Mail Group (excluding Post Office Limited) EmlossVgain —_ €mrllossgain
Euro
It is anticipated that there will be a £12 million adverse impact on profits arising from the change in effective (post hedging impact) diesel costs
from 45ppl in 2011-12 to an anticipated 51ppl in 2012-13. Without hedging, this adverse variance would be £20 million (based upon closing
fuel prices at 25 March 2012).
The currency exposure arises mainly from the Group’s trading with overseas postal operators, the profits of GLS and inter-company loans with
GLS. There is a significant degree of offset between these exposures and hedge programmes in place which reduce the impact on 2012-13
operating profit.
The Group manages its interest rate risk by maintaining a mix of fixed and floating rate debt. At the year end 61 per cent of the Royal Mail Group
Ltd loans were at fixed rate to maturity. Consequently (and taking into account financial assets held but excluding the pension escrow
investments), an increase of 100 basis points to interest rates during the year end would have resulted in a reduction to profit of £1 million. The
impact of such a change in rates to the pension escrow investments would affect equity and would offset to some degree the impact of the
interest rate change on the pension liabilities.
Counterparty risk is managed by limiting aggregate exposure to any individual counterparty based on their financial strength.
Matthew Lester
Chief Finance Officer
Royal Mail Group
27 June 2012
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Business risk
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Performance
The Corporate Governance section describes in detail how the Group manages its risk from the Holdings Board level, its respective
sub-Committees and through the organisation, Further details can be found on pages 64-71
The table below details the principal business risks, their impact and how the Group mitigates these risks
Principal risk
Impact
Mitigation
Ch
Customer behaviours are constantly evolving
and competition is increasing. Consequently,
there is a risk that our product offerings and
revenue diversification initiatives, and the
customer experience we provide, may not
meet changing customer needs.
In addition, price increases could trigger
significant volumes of physical mail bypassing
Royal Mail, downtrading to lower revenue
products and acceleration in e-substitution:
The market and our share of it may shrink
more rapidly than we expect, leading to lower
growth rates and profitability.
Third parties may set up discrete bypass
networks in urban areas.
* We have placed significant focus on the
key growth area of parcels, including
investment in Parcelforce Worldwide and
enhancing the core network to
accommodate new traffic;
We have introduced initiatives to improve
our product delivery and the customer
experience to drive loyalty and
recommendation;
We have held discussions with key
stakeholders on the risk of competitor
bypass to our financial models;
The focus of our product development and
sales resource is on growth opportunities
with the greatest potential for added value,
especially outside e-substitutable markets
This includes a ring-fenced seed fund for
new ideas. At the same time we have
programmes to simplify our existing
oduct portfolio; and
We review the reliability of our price
elasticity models, and have extended our
analysis to give improved insight on
elasticities by customer type.
Economic environment
Historically, there has been a correlation
between the state of the UK economy and the
level of mail volumes. There is a risk that the
continuation of flat or adverse economic
conditions could impact our ability to stay
profitable, either by reducing volumes or by
encouraging downtrading to lower revenue
products. Our price rises, though necessary,
exacerbate this risk, Additionally, we have
significant European operations, and current
uncertainty and economic weakness in the
Eurozone could impact these businesses.
Adverse economic conditions and uncertainty
would have a direct impact on mail volumes
and, consequently, on Group revenues and
profit. Economic conditions may impact the
ability of key customers or critical suppliers to
continue trading. This would directly impact
our revenues or day-to-day operations.
‘© We continually review our costs to find
areas where we can mitigate the impacts
of any downturn;
* We have conducted a programme of
organisational restructures to reduce
managerial headcount in line with changing
business volumes, and monitor closely our
progress in realising these savings;
We have negotiated substantial loan
facilities, and monitor the position of these
continuously, to ensure we stay within
limits and covenants; and
e:
We have robust econometric models to
provide early warnings of changes to overall
volumes and the profile of postings. We
continually review these models to better
anticipate the impact of price rises and
reflect the increasingly deregulated market.
50
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Performance
Principal risk
Impact
Pi
We need to be in a position to implement the
provisions of the Postal Services Act 2011,
including: reaching a sufficient state of
readiness to attract private capital; overseeing
an efficient separation of Post Office Limited
from the rest of the Group and delivering an
effective pension solution. As a recipient of
State Aid, HM Government must submit to the
European Commission annual reports about
progress with our restructuring
* We are investing in our processes and
data readiness to help ensure we are in
a position to meet any demands of
transaction due diligence,
Far-reaching reforms are required to protect
Royal Mail's Universal Service and uniform
price obligations. Without the changes
provided for by the Postal Services Act 2011,
we would be unable to generate sufficient
cash to meet these obligations on a
sustainable basis
We are working closely with advisors on
balance sheet restructuring, and engaging
and involving the Shareholder to ensure it
has a full understanding of our plan and
business case;
* Negotiations on balanced commercial
arrangements between Post Office Limited
and Royal Mail Group have been concluded,
and detailed migration plans have been put
in place and are underway; and
There is ongoing dialogue with Ofcom
to minimise the risk that the regulatory
regime will be a barrier to our initiatives
to drive profitability.
le are undergoing a significant, extensive
modernisation programme to improve our
equipment and technical and IT infrastructure,
and operating models. The success of the
business strategy relies on successful
extraction of benefits from the programme,
whilst maintaining key business outcomes
such as quality of service levels.
ailure to implement our modemisation
programme effectively and extract benefits
would impact our ability to compete
e progress and outcomes of all revisions
to operational practice are tracked on a
weekly basis to ensure completion to time
and the sharing of good practice and
lessons learned. Quality of Service is
a fundamental consideration prior to
At the same time, a reduction in Quality of
Service standards would result in loss of
traffic and in regulatory sanctions
Failure to improve our IT infrastructure
would increase the risk of delivery or security
shortfalls, and the risk that the IT platform
might not be able to support the business.
plan initiatives.
embedded into delivery operations to
ensure that operational change is backed
by cultural chan
We closely monitor our progress in realising
staff number reductions, in line with what
is enabled by operational changes; and
We are redesigning the IT strategy and
bringing the IT system up to date to ensure
that we have the infrastructure to meet the
business’ needs
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Performance
Business risk (continued)
Impact
The postal industry has specific characteristics Breakdowns in the network would reduce» Business continuity plans are owned,
that bring particular operational and quality of service, increase costs and reduce maintained and reviewed by the
commercial risks. Operations are at risk of revenue, and damage our reputation, Operations Executive;
+ OF ge. could result in resource-hungry model to keep customers appraised of
(either as a target or a conduit), or failure of
investigations, with potentially severe financial
critical suppliers.
consequences and reputational damage.
In addition to the changing regulatory Fe ee eee,
regime in the postal sector, there is a risk th Sone .
of non-compliance with a wide range of © We are developing a structured approach to
legal and regulatory requirements, such relationship management for key suppliers;
as procurement and competition law, contract management activity plans are
and financial services and data
security regulations.
Government and EU stakeholders on future
legislative changes
The Risk Management Committee conducts
formal, ongoing environmental scanning to
identify emerging risks and root causes
of incidents that have impacted other
businesses and might have implications
* We have an extensive compliance
programme, including risk identification,
training and communications, raising
awareness, and improved processes
and procedures.
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Performance
Corporate responsibility
Our communities
Wages and other related people costs - money _ Royal Mail Group UK colleagues signed rT)
that UK employees go on to spend throughout up to Payroll Givings Scheme: £ 45 ll
the UK economy mittion
donated to over 975 charities since
opge
£5 3 billion over 40,000 the Payroll Giving Scheme was launched
ba or around one in four Royal Mail Group in 1989. .
UK colleagues Awarded Guinness World Record for the
Money spent on procurement related activity most registered charities supported by
@ © @ @ aPayroll Giving Scheme.
£2.4 billion OTe
Our environment
We were the first postal services operator Decommissioned bikes donated to African
to achieve the prestigious charity partners Re-Cycle and The 0 ur 7 500
Krizevac Project: 9
C arbon Trust UK-based suppliers adhere to the UN Global
2 8 6 8 Compact provisions which include clear
S tan dar d ’ environmental criteria
teal Os
Our customers
Proportion of our customers that think we are Number of people from low-income households
one
an important part of their local community: who could buy their 2012 Christmas stamps at 5 8 ll
sonia pes mitton
81 er cent cane UK inland addressed items (on average) are
5 mi tli on procecedland delivered every workingiday,
Royal Mail Holdings ple 53
‘Armual Report and Financial Statements 2011-12
Corporate responsibility (continued)
Royal Mail Group makes a major contribution to the UK’s
social and economic infrastructure. As the sole provider
of the Universal Service, we play a vital role, connecting
millions of customers, businesses, organisations and
communities - including those in the most remote
rural areas.
The Group makes one of the single biggest
economic contributions of any UK company.
We employ nearly 159,000 people in the UK
through UKPIL and Post Office Limited. In
2011-12, we paid £5.3 billion in UK wages
and other related people costs - money that
employees go on to spend throughout the
economy.
During the financial year, Royal Mail Group
also contracted business from over 7,500
UK-based suppliers, and spent £2.4 billion on
procurement related activity.
Protecting the Universal Service
Royal Mail Group is committed to protecting
and upholding the Universal Service against a
backdrop of market decline. As the UK's sole
provider, we aim to fulfil our obligation
consistently and on a commercial basis. At the
same time, we need to continue to leverage
our unique position in the UK's economy and
society to benefit all of our stakeholders.
During the year, Royal Mail Group achieved a
“Platinum” ranking in Business in the
Community's Corporate Responsibility Index
A recent Ipsos MORI poll showed that our
employees want greater awareness of our role
in communities. To that end, in 2012-13 we
are further engaging our people to help drive
our performance and to continue to make a
positive impact in the communities we serve
54
A balanced approach
Corporate responsibility is integral to the
transformation of Royal Mail Group. It is as
much about how we generate our revenues
as how we spend what we earn. It means
behaving responsibly and sustainably in
relation to our people, customers, suppliers,
communities and environment.
In 2011-12, we reviewed all of our corporate
responsibility and community investment
strategies. These now reflect the fact that
our corporate responsibility activity must
be focused on improving our financial
performance, as well as our social and
economic impact.
Our revised corporate responsibility strategy
focuses on:
* Delivering economic and social benefit to the
communities we serve;
* Managing our modernisation programme
responsibl
* Driving colleague advocacy of the Group and
feducing the environmental impact of our
business operations; and
© Communicating our management of
corporate responsibilities openly and
transparently.
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Performance
In 2011-12, we integrated corporate
responsibility into Royal Mail's overall
governance structures. Our Board now
reviews corporate responsibility and
community investment strategies on a regular
basis. Major corporate responsibility initiatives
now come under the scrutiny of our Chief
Executive's Committee.
Embedding sustainability
The 2011-12 launch of a new Corporate
Balanced Scorecard encouraged focus on
the integration of Royal Mail's corporate
responsibility and business strategies.
The Scorecard - applicable to all managers
including the senior executive team - features
criteria covering,
1. What our customers think of us and how we
deliver for them
2'What our people think of our company.
3, How well we are modernising our operations,
Luding health and safety fact
4 The financial health of the business
These four areas - Customers, People,
Performance and Financial - are integral to
our core objective: to restore the Group to
financial viability on a sustainable basis
Dedicated to customer service
Our industry is almost unique in providing
both a commercial service to paying
customers and a service to the receiving
household. On average, every working day,
we process and deliver around 58 million UK
inland addressed items, covering over 29
million UK addresses. Meeting the needs of
our customers - large and small -is a core
part of our business strategy
To achieve this, we are currently delivering
one of the biggest modernisation programmes
in UK industry. We are working hard to
maintain customers’ trust and loyalty
throughout this period of significant change
Change notwithstanding, our customers
rightly expect us to keep our basic service
promises - collecting and delivering on time
and meeting and anticipating their needs
Consistent with our Corporate Balanced
Scorecard, we set high targets for our Quality
of Service and customer satisfaction rates.
We are working hard to reduce the number
of complaints we receive. Improving our
performance in these areas is key to the
sustainability of our business.
See “Our customers" (p18) for more
information on how we manage our
responsibilities to our customers.
Giving our best
Our employees have donated over £45 million
through payroll giving since 1989; the money
has helped 975 charities - a figure that has
earned Royal Mail a Guinness World Record.
Royal Mail employees account for six per cent
of all payroll giving donors in the UK. On top of
their payroll generosity, our people, including
Post Office Limited employees, also helped
raise over £1.1 million for charities and other
good causes.
We have formed partnerships with other
organisations to make a big difference at a
local level. Our Charity of the Year programme
is our flagship fundraising initiative. We have
supported colleagues in raising over £2.6
million for the children’s charity, Barnardo's,
since our partnership began.
Royal Mail's matched funding scheme enables
employees to maximise their contributions to
the charities and causes that are important to
them. In 2011-12, our employees claimed
over £180,000 in matched funding
Q
Corporate responsibility
case study 4 of 2
‘
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Performance
Building hope through Barnardo’s
Colleagues voted for Barnardo's to become
our charity partner in 2008. Since then, Royal
Mail's people and the company have raised
over £2.6 milion. This support has helped
over 10,000 children and young people who
are living in poverty, coping with disabilities
and battling youth unemployment
Colleagues from across the business have
generated donations by going much further
than the usual extra mile in a wide range of
sponsored walks, hikes, bike rides, marathons
and fun runs.
In addition, over 1,000 Royal Mail Group
employees made a difference by volunteering
their time for Barnardo's. Royal Mail Group
has offered work placements and permanent
employment to over 100 young people from
Barnardo's projects.
“From us all at Barnardo's,
we would like to say
a huge thank you to
everyone at Royal Mail
Group for your generous
support, enthusiasm and
commitment to helping
us change the lives of
children for the better.”
Anne Marie Carrie, Barnardo's CEO
& For more information visit
www.royalmailgroup.com
Royal Mail Holdings ple
‘Armual Report and Financial Statements 2011-12
}s)
Corporate responsibility (continued)
Corporate responsibility
case study 2 of 2
e
Coe]
Stretch target
Royal Mail purchased around 635 million
elastic bands in 2011-12 - roughly 10 per
cent less than the previous year.
The reduction has been achieved through a
combination of improved internal processes
for the collection and reuse of bands and a
coordinated communication programme
targeting littering,
“Whilst this is a good
start, we’ve still got a
long way to go, which
is why Royal Mail has
an ongoing internal
information campaign
to build on this.”
Geoff Hibberd, Royal Mail Senior
Procurement Manager
1o]
ay
For more information visit
www.royalmail.com
During the year Royal Mail Group made
charitable contributions of £5.2 million
directly to charities and good causes
across the UK, compared to £2.1 m
during 2010-11.
We are removing most of the bicycles from
our delivery rounds. We donate our
decommissioned bicycles to the charities
Re-Cycle and The Krizevac Project which ship
them to Africa. Royal Mail bikes are highly
prized as they are strong and able to carry
heavy loads, We have donated 2,868 so far.
Better environmental management
Royal Mail operations should have a positive
impact on our future and a minimal impact on
the environment.
We were the first postal services operator to
achieve the prestigious Carbon Trust Standard.
This recognises our robust approach to
measuring, managing and reducing our
carbon emissions. Since 2004-05 we have
reduced our carbon emissions by around
20 per cent
In 2011-12 we bought low emission vehicles
and double-deck trailers that will also help to
reduce our emissions.
In 2012, we established a new Environment
Governance Board with senior representation
from across the Group. The Board will meet
on a regular basis to drive our environmental
strategy and develop longer term targets
to enable us to continue improving
our performance
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Performance
Treating suppliers fairly
Royal Mail Groups 7,500 UK-based suppliers
are important to us. Therefore, we treat them
fairly and pay them promptly.
Enforcing strict criteria regarding suppliers’
social, ethical and environmental performance
isa standard part of our procurement
practices. All suppliers added to our supplier
database are requested to confirm their
adherence to the principles set out in our
Responsible Procurement Policy. This policy
is based on the UN Global Compact's
10 principles.
The Chartered Institute of Purchasing and
Supply (CIPS) recently recognised our efforts
in this area by awarding Royal Mail a
certificate of excellence for our purchasing
policies and procedures,
Political donations
In line with Group policy, no donations were
made for political purposes (2011 £nil)
Transparency
Last year, for the first time, our Annual Report included
a section on transparency at Royal Mail.
As a public institution, we are legally obliged to be open
about our operations. We also feel it is important to
ensure information on our performance is comprehensible
and comprehensive, when possible.
Freedom of information requests
2012
604
Freedom of information 2011
590
‘Answered in full
A 116
Not provided 137
Not held 70
Every day, Royal Mail receives questions about
diverse aspects of our business. While we
make every effort to respond to all requests
fully, this is not always possible. As a
commercial operation, we must decline some
requests for information since answers could
compromise competitiveness. Nor are we
permitted to release any information that
would be in breach of the Data Protection Act.
In other cases, we do not hold the data
requested. This year's figures on Freedom of
Information requests are broadly comparable
to those from 2010-11. They represent
requests submitted to our Information Rights
team
Answered in part 114
170
87
Returned letters
Returned letters 2012
140
2011
160
Number of full-time
empl
Number of items
processed (
Revenue from items
sold (
256
21.2
09°
ee
Cost of returned 39°
letters service (Em)
In 2011-12, we safely delivered the
overwhelming majority of all items of mail
we handled.
3.4
A very modest proportion proved to be
undeliverable for a variety of reasons outside
our control. These reasons included
incomplete addresses, recipients who have
moved without leaving a forwarding address
and the lack of return addresses. For these
types of mail, we hold information on the
amount of mail processed at the National
Returns Centre in Belfast. We do not hold
an estimate of the number of items of
undeliverable mail securely disposed of by
other parts of Royal Mail
Our National Returns Centre employs
140 people dedicated to either returning
undeliverable items of mail to the sender or,
if this is not possible, securely disposing of
undeliverable mail, In 2011-12, the Centre
processed 21.1 million items. That should
be set against the total of some 15 billion
inland addressed items of mail we handled
in 2011-12
The majority of items handled by the Centre
are business mail. Under the terms of trade
with our major business customers, if, for
Whatever reason, we cannot deliver the mail,
we securely dispose of it unless a return
address is included. This has been the practice
for many years and is done in agreement with
the customer. We store undeliverable,
high-value items of mail for up to four
months. The majority of items handled at the
Centre have no sale value and if undelivered,
are securely disposed of and recycled
However, if an item is not claimed, and we can
find no address to which to return it, and the
item has some value, we put it out to auction.
All the proceeds, minus a market rate
commission for the auction house, are used to
partially offset the considerable cost involved
in seeking to reunite customers with items of
undeliverable mail. The revenue from items
sold at auction by the Centre for 2011-12 was
£1.2 million. This income represented a
modest contribution to the annual cost of
£3.4 million of running the Centre and
providing its service free to customers.
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Performance
Exceptions to our delivery and
collection service
Exceptions 2012
2,571
2011
2,571
Long-term delivery
exceptions
ve
442
Temporary delivery
exceptions
Long-term collection 2180.
exceptions
2,100
155°
117
Temporary collection
exceptions
Royal Mail aims to deliver and collect every
item of mail that passes through our network
Sometimes this just is not possible. Our
Exceptions Annual Review, published in
October 2011, showed there were 3,013
addresses that were national Universal
Service delivery exceptions in the UK. This
was very slightly up on the number from the
previous year.
Considering Royal Mail delivers to over
29 million UK addresses, the figure represents
only 0.01 per cent of this total
Long-term exceptions are typically made
owing to difficulties our postmen and women
experience attempting to access particular
properties or where there is an unreasonable
risk associated with making a delivery. As an
example, if delivery required crossing
hazardous terrain, we would make an
exception to our normal service. Temporary
delivery exceptions are less common but
are mainly due to concerns for colleague
safety as a result of dangerous dogs in
customers’ gardens.
During 2011-12, there were 2,100 long-term
Universal Service collection exceptions across
the UK. This represents 1.7 per cent of the
125,767 collection points across the UK
These exceptions can be caused by difficulties
in accessing post boxes. There were also 117
temporary collection exceptions of more than
four months. These were due to road or
building works that limited access to post
boxes. We report all such exceptions to Ofcom
ona regular basis
Sy
Transparency (continued)
Mail security Quality of Service
Mail security 2012 2011 Quality of Service (%) 2012 2011
Number of 302312 _First Class retail 14
p Second Class retail 98.2.
ss le into a 993 Standard parcels 963
internal crime raised Spetial Delivery 978
Full criminal 194
investigations into
external crime raised
193°
We are serious about the security of every
item of mail we collect and deliver. Our
security team works round the clock to
identify any threats to the network and we
have robust measures in place to deal with
any breaches.
Royal Mail Group will prosecute anyone found
to be stealing or interfering with mail in
England and Wales. The Procurator Fiscal
deals with cases in Scotland. In Northern
Ireland, this is the responsibility of the Public
Prosecution Service. Post Office Limited also
pursues prosecutions for any thefts.
During 2011-12, 301 former employees of
Royal Mail Group were prosecuted in the UK.
There are nearly 159,000 UK employees and
the number of prosecutions needs to be
understood in this context.
Our security team proactively uses any
available information to safeguard the
integrity of the postal service. For the first
time, we are releasing data on the team’s,
investigation into internal and external crime
The number of investigations into external
crime remained fairly constant from 2010-11
while there was a slight decrease in the
number of new internal crime investigations
58
Our figures on Quality of Service show an
improvement in each of the above categories
when compared to the previous year. For
Second Class retail and standard parcels, we
have exceeded our targets of 98.5 per cent
and 90.0 per cent respectively. We are closer
to our Special Delivery target of 99.0 per cent
and are working hard to meet it. For First
Class retail, we narrowly missed our target of
93 per cent but are over a percentage point
closer to it when compared with last year. This
isa challenging target. We are disappointed
on behalf of our customers not to have
achieved it. However, over 127,000 postmen
and women remain determined to deliver the
best possible service
People
People 2012 2011
Safety 14.3 183
(RIDDORs/1,000)
This new section focuses on some key metrics
affecting our most important asset. The
measures on safety, engagement and
customer focus are derived from the Royal
Mail Corporate Balanced Scorecard.
We continue to reduce injuries, diseases and
dangerous occurrences. While we were helped
by the mild weather conditions in early Winter
2011, this is a positive result as colleague
safety is paramount.
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Performance
Our employee engagement and customer
focus results are taken from our 2012
employee survey, and are new measures for
2011-12
The number of days lost to strike action has
increased since last year from a very low base
This needs to be considered in the context of
the total number of days worked by our people.
We have robust procedures in place to mitigate
the impact of strikes on our customers.
Unfortunately, dog attacks are a hazard faced
by our postmen and women every working
day. During 2011-12, there were 3,186 dog
attacks on Royal Mail people. These attacks
cause great distress and, in too many cases,
serious injuries. If we feel that there is a risk
from a dog, or any other animal, at an
address, we are committed to working with
the customer to agree simple steps to ensure
that we can deliver the mail safely. We always
welcome the cooperation of our customers for
taking responsibilty for keeping their pets
under control. We also regularly communicate
with our people about the dangers of dog
attacks and provide advice on techniques to
minimise harm in the event of an attack.
We are now working more closely with the
Communication Workers Union to reduce the
threat that dogs represent to our people and
hope to make real progress during 2012-13
To this end, the Group Chairman, Donald
Brydon, has launched an independent inquiry
into the prevalence and consequences of dog
attacks in the UK.
Customer
Customer 2012 2011
Net customer 36.0 310
satisfaction (%)
439,600 423,700.
We always seek to deliver the highest
standards of service for our customers.
This is a particularly important part of our
transparency and it is published here for the
first time
Number of complaints
+ New measure introduced in 2011-12.
Our net customer satisfaction score is a
measure from the Group Corporate Balanced
Scorecard. An improvement plan is underway.
This includes better communications with our
customers to support them through this
significant period of change, both operational
and commercial
We are working hard to improve performance
g redirections sorting
frames to ensure a thorough process
every da
Providing our postmen and women with
more Postal Digital Assistants to capture
signatures. We now have more than 44,000
5 i
Ensuring that the correct procedures are
carried out when using “Something for You”
cards and extending our delivery to
neighbour trial to reduce the need for
redeliveries; and
Keeping open around 600 enquiry offices up
to two hours later on Wednesdays and
Saturdays to give customers more flexibility
when picking up items.
We also provide detailed annual disclosure on
customer complaints to our regulator, which is
publicly available.
The Post Office network
network 2012 2011
11,818 = 11,820
Post O
Post Offices branches
open and trading
Crown branches, 373.373.
14,445 11,447
Agency branches,
Network turnover
The vast majority of Post Office branches
change hands - when subpostmasters decide
to sell their business - without a break in
service or closure. This is part of the normal
market turnover of businesses in the UK
Around 97 per cent of Post Office branches
are operated and owned by local business
people who have a contract to offer Post
Office Limited services. From April 2011 to
March 2012, 950 branches changed hands.
The previous year 800 changed hands. These
successful transfers bring new energy and
focus to our network.
There are cases where branches which are
run by independent business people from
their own premises close due to circumstances
beyond our control. When a branch closes in
such circumstances, we communicate the
situation to the local community and
stakeholders and work with them to restore a
sustainable Post Office service when possible
In many cases, we are able to do this
There are cases where this proves to be
impossible, even after considerable efforts
Whenever a Post Office branch is closed, for
whatever reason or however briefly it is not
included in the numbers we use when
reporting network size. Our reported network
size is 11,818 at the end of March 2012
Royal Mail Hol
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Performance
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57
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Governance
Our Board of Directors
. Donald Brydon CBE 2. Moya Greene 3. Orna Ni-Chionna 4. Matthew Lester
Chairman Chief Executive Officer Senior Independent. Chief Finance Officer
Non Executive Director
RO
B
5. Mark Higson 6. Paula Vennells 7. David Currie 8. Nick Horler
Managing Director, Operations Managing Director, Non Executive Director Non Executive Director
& Modernisation Post Office Limited
Details of membership of the
various Board committees can be
...1 found on pages 66-68.
9. Cath Keers 10. Paul Murray 11. Les Owen
Non Executive Director Non Executive Director Non Executive Director
The Group's governance structure was revised after the year end to reflect the separation of Royal Mail Group and Post Office Limited. Please
see the Chairman's comments on p8 for more details
60 Royal Mail Holdings ple
Annual Report and Financial Statemnent
jonal
Appointed to the Board 27 January 2009
as a Director and 26 March 2009 as
Chairman
Skills and experience Donald had a career in
finance, during which he ran two of the major
global asset management companies owned
respectively by Barclays and AXA. He has
since chaired FTSE 100 companies, in addition
to his experience in the drinks, power, market
research and metals industries.
External appointments (current and
former) Currently Chairman of Smiths Group
Formerly Chairman of the London Metal
Exchange, Amersham ple, Taylor Nelson
Sofres plc and the IFS School of Finance and
a Director of Allied Domecq ple and Scottish
Power plc. He is a past Chairman of
EveryChild
Committee membership Chairman of the
Nomination Committee and a member of the
Remuneration Committee.
4, Matthew Lester Chief Finance Officer,
age 48
Appointed to the Board 24 November 2010
Skills and experience Matthew was
previously Finance Director of ICAP plc for five
years and has held a number of senior finance
roles at Diageo ple, including Group Financial
Controller.
External appointments (current and
former) Matthew is a Non Executive Director
of Man Group ple and a main Committee
member of the 100 Group of Finance
Directors.
Committee membership Member of the
Chief Executive's Committee and Chairman
of the Pension Committee
Appointed to the Board 15 July 2010
Skills and experience Moya became
President and Chief Executive Officer of
Canada Post Corporation in 2005. In that
role, she led a wide-ranging transformation
programme to improve quality of service
and efficiency across the organisation
External appointments (current and
former) Currently Director of Tim Hortons.
in Canada. Prior to joining Canada Post,
she held senior roles at companies including
Bombardier Inc and TD Bank
Committee membership Chair of the
Chief Executive's Committee.
5. Mark Higson Managing Director,
Operations and Modernisation, age 56
Appointed to the Board 5 November 2007
Skills and experience Mark was previously
divisional Chief Executive and Group
Operations Director of BPB plc. He has
also held senior positions at Courtaulds plc,
HJ Heinz and British Aerospace.
External appointments (current and
former) Currently President of the World
Class Manufacturing Association (WCMA)
and a member of the IPA Advisory Council
Committee membership Member of the
Chief Executive's Committee.
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Governance
. Orna Ni-Chionna Senior Independen
Non Executive Director, age 56
Appointed to the Board 1 June 2010.
Orna was appointed as Senior Independent
Non Executive Director on 1 April 2011.
Skills and experience Orna is a former
Partner at McKinsey & Company, where
she specialised in serving retail and
consumer clients.
External appointments (current and
former) Currently Senior Independent
Director of HMV plc and Chair of Trustees.
of the Soil Association. Formerly Senior
Independent Director of Northern Foods plc
and of BUPA and a Non Executive Director
of the Bank of Ireland UK Holdings plc and
Bristol & West plc
Committee membership Chair of the
Remuneration Committee, member of
the Audit & Risk Committee and the
Nomination Committee.
6. Paula Vennells Managing Director,
Post Office Limited, age 53
Appointed to the Board 18 October 2010
Skills and experience Paula has worked for
Post Office Limited since January 2007 in a
number of senior roles, including Managing
Director. She was previously Group
Commercial Director at Whitbread plc. Before
that, she held marketing and strategy & sales
director roles with large retailers, including
Argos/GUS, Dixons Stores Group and started
her career with Unilever.
External appointments (current and
former) Currently a Non Executive Director
& Trustee for Hymns Ancient and Modern
Group. Paula Vennells became CEO of Post
Office Limited on 1 April 2012
Committee membership None.
61
Our Board of Directors (continued)
7. David Currie Non Executive Director,
age 65
Appointed to the Board 1 January 2009
Skills and experience David was the
founding Chairman of Ofcom (2002-April
2009), Deputy Dean of London Business
School and Dean of Cass Business School,
City University.
External appointments (current and
former) Currently Chairman of the
International Centre for Financial Regulation
and on the Boards of BDO, the Dubai Financial
Services Authority, IG Group ple and the
Institute for Government.
Committee membership Member of the
Audit & Risk Committee, the Nomination
Committee and the Remuneration Committee.
10. Paul Murray Non Executive Director,
age 50
Appointed to the Board 1 August 2009
Skills and experience Paul has been
Chairman of the Audit & Risk Committee since
August 2009 and is Audit Committee
Chairman at Ginetiq ple
External appointments (current and
former) Trustee of Pilotlight. Formerly Senior
Independent Director of Taylor Nelson Sofres
plc and Group Finance Director of Carlton
Communications plc and of LASMO ple.
Committee membership Chairman of the
Audit & Risk Committee; member of the
Nomination Committee and the
Remuneration Committee.
62
8. Nick Horler Non Executive Director, age 53
Appointed to the Board 1 April 2010
Skills and experience Nick was previously
Chief Executive Officer of Scottish Power
and has held senior strategic roles in major
companies, both in the UK and abroad.
External appointments (current and
former) Currently a Non Executive Director
of Secure Electrans Ltd and The Go-Ahead
Group ple. Nick is also interim CEO at Alderney
Renewable Energy Ltd and also Chairs the
Advisory Board for KPMG's Energy and
Natural Resources Practice.
Committee membership Member of the
Audit & Risk Committee, the Nomination
Committee and the Remuneration Committee.
14. Les Owen Non Executive Director, age 63
Appointed to the Board 27 January 2010
Skills and experience Les is a qualified
actuary with 35 years’ experience in the
financial services industry. From 2000 to
2006, he was the Group Chief Executive
Officer of AXA Asia Pacific Holdings Limited
and responsible for AXA’s Asian Life Insurance
and Wealth Management operations.
External appointments (current and
former) Currently Non Executive Chairman of
Jelf Group plc and Non Executive Director of
Computershare, CPP Ltd, Just Retirement Ltd
and of Discovery Holdings, a South African
listed health and life insurer. He was Chief
Executive Officer of AXA Sun Life plc and a
member of the Global AXA Group Executive
Board and was, until 15 March 2012, a Non
Executive Director of Post Office Limited,
Committee membership Member of the
Audit & Risk Committee, the Nomination
Committee, the Pension Committee and the
Remuneration Committee.
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Governance
9. Cath Keers Non Executive Director, age 47
Appointed to the Board 1 June 2010
Skills and experience Cath was previously
Customer Director and Marketing Director
of 02 UK and has held various marketing,
strategy and business development roles
at Next, SKY TV, Avon and Thorn EMI.
External appointments (current and
former) Currently a Non Executive Director of
Telefénica Europe, Home Retail Group ple and
the insurance group LV=
Committee membership Member of the
Audit & Risk Committee, the Nomination
Committee and the Remuneration Committee.
Directors who left during the year
Richard Handover CBE 30 March 2011
David Smith 13 June 2011
Directors’ report
The Directors present the Group Annual
Report and audited Financial Statements for
Royal Mail Holdings plc for the year ended
25 March 2012 (2011 27 March 2011)
Principal activities
The Group provides a nationwide and
international distribution service, principally
of mails and parcels. The Group also provides
access to a wide range of financial and retail
services through its network of Post Office
branches across the United Kingdom. From
1 April 2012, the principal activities of Post
Office Limited no longer form part of Royal
Mail Group.
To enable you to assess how the Directors
have performed their duty to promote the
success of the Company, the Companies Act
2006 requires the Directors to set out in
this report a fair review of the business of
the Group during the year, the position of the
Group at the end of the year and a description
of the principal risks and uncertainties facing
the Group. Information fulfilling these
requirements can be found in the following
sections of the Annual Report and Financial
Statements and are incorporated by reference.
Index Page
Review of business and +47
future developments
Results 83-132
Dividends 130.
25-27
People
53-56
Corporate responsibility
Disabled employees
89
Going Concern
Policy on the payment of suppliers
The policy of the Company and its principal
operating subsidiaries is to use their purchasing
power fairly. Payment terms are agreed in
advance for all major contracts. For lower
value transactions, the standard payment
terms of the supplier apply. It is the Company's
policy to abide with the agreed terms. The
Company and its principal operating
subsidiaries in the UK have sought to comply
with the Department for Business, Innovation
and Skills’ (BIS) Better Payment Practice
Code. Copies of this can be obtained from BIS.
As the Company is a non-operating company,
the creditor days are zero. The creditor days
of the operating subsidiaries are set out in
their Annual Report and Financial Statements
Land & buildings
The net book value of the Group's land
and buildings, based upon a historic cost
accounting policy and excluding fit-out, is
£685 million (2011 £690 million). In the
opinion of the Directors, the aggregate
market value of the Group's land and
buildings exceeds this net book value by
£436 million (2011 £480 million),
ing third party indemnity
provisions for Directors
A partial qualifying third party indemnity
provision (as defined in section 234 of the
Companies Act 2006) was and remains in
force for the benefit of all the Directors of
the Company and former Directors who
held office during the year. The indemnity is
granted under article 116 of the Company's
Articles of Association. The indemnity is
partial in that it does not allow the Company
to cover the costs of an unsuccessful defence
of a third party claim
Directors and their interests
The Directors of the Company and details
of changes during the year are given on
pages 60-62. The Secretary of State (BIS)
appoints the Chairman; all other Directors are
appointed by the Company with the Secretary
of State’s consent. UK Government is the
Company's sole shareholder and, accordingly,
the Directors have no interest in shares of
the Company.
. Audit information
The Directors confirm that, so far as they are
aware, there is no relevant audit information
of which the auditor is unaware and that each
Director has taken all reasonable steps to
make themselves aware of any relevant audit
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Governance
information and to establish that the auditor
is aware of that information.
Auditor
A resolution to reappoint Ernst & Young LLP
as auditor will be put to the Annual
General Meeting
By Order of the Board
Company Secretary
27 June 2012
Royal Mail Holdings ple
100 Victoria Embankment
LONDON
ECA4Y OHO
Company number 4074919
63
Corporate Governance
} Chairman's introduction
{The Board is collectively responsible for the
long-term success of the business. We take
decisions only after the necessary level of
information has been made available to us
and with the necessary consideration of all the
relevant facts, including risk. The following
statement is intended to explain our
With effect from 1 April
2012, Post Office Limited
became a subsidiary of
Royal Mail Holdings plc and
became a sister company to
Royal Mail Group Ltd.
Donaid Brydon
Chairman
64
governance arrangements in light of the UK
Corporate Governance Code (the “Code”)
principles and provisions and to provide insight
into how the Board and management run the
business for the benefit of the Shareholder.
I can confirm that we are again compliant
with the Code in so far as it is appropriate to a
public company with a single shareholder. I am
pleased to report that Professor Rob Goffe of
the London Business School has undertaken
with us the annual review of the performance
of the Board. I will be discussing with each
Director the outcomes of the annual
performance evaluation process and look
for continued improvements to the way
we function and perform as a Board
I am pleased to report that our transformation
is progressing, with HM Government's recent
announcement of a new commercial
agreement between Royal Mail Group and
Post Office Limited. With effect from 1 April
2012, Post Office Limited became a direct
subsidiary of Royal Mail Holdings plc and
became a sister company to Royal Mail
Group Ltd
At this point, the members of the Holdings
Board, except for Paula Vennells, became
Directors of Royal Mail Group Ltd. The
Holdings Board is much reduced in size and
exists mainly for the consolidation of the
accounts. This restructuring was conditional
on the coming into force of articles 2-12 of the
Postal Services Act 2011 (Transfer of Accrued
Pension Rights) Order 2012
I trust that you will find this Corporate
Governance report helpful and informative.
GRO
Donald Brydon
Chairman
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The Board has focused on the following
matters during the year:
* Safety, including actions to improve
* Discussing with Ofcom the new regulatory __
framework;
* Post Office Limited separation:
* Restructuring plans; and
© Impact of the Bribery Act 2010
Expected Board focus for the next year:
* Safety;
Operations and modernisation;
* Pensions funding
Governance framework
The Board considers that it complied with the
full provisions of the Code during the year.
This report explains the key features of the
governance framework and how it applies
the principles of the Code. The location within
the Annual Report and Financial Statements
of each of the disclosures required in the
Directors’ Report are either disclosed
separately or indexed in the Directors’ Report
and are therefore incorporated by reference.
The role of the Board
The Board is responsible for setting the
objectives and strategy of the Group and
for monitoring performance and risk
management. At the end of the year, the
Board comprised a Chairman, four Executive
Directors and six Non Executive Directors
The biographies of each of the Directors,
setting out their current roles, commitments
and previous experience, are on pages 61-62
The Board met on seven occasions during the
course of the year under review.
The Board has defined those matters that
are reserved exclusively for its consideration
These include the approval of strategic
plans, financial statements, acquisitions
and disposals, major contracts, projects,
and capital expenditure. It delegates
responsibilities to the Board Committees
detailed in this report. For each scheduled
meeting of the Board, the Company Secretary,
on behalf of the Chairman, collates and
circulates the papers, aiming to allow
sufficient time for the Directors to review
the information provided.
The Board is confident that all its members
have the knowledge, talent and experience to
perform the functions required of a Director
of the business. Executive Directors have
rolling 12 month contracts and Non Executive
Directors are generally appointed for
three-year terms. The Board considers that
each of the Non Executive Directors is
independent. This means that in the view of
the Board, they have no links to the Executive
Directors and other managers, and no
business or other relationship with the
Company that could interfere with their
judgement. There is also a clear division of
responsibilities between the Chairman and
the Chief Executive Officer.
The Chairman of each Committee reports to
the Board on matters discussed at Committee
meetings and highlights any significant issues
requiring Board attention. Reports on the
work of the Audit & Risk Committee,
Remuneration Committee and Nomination
Committee on work during the year are given
on pages 66-68. Full terms of reference for
these Board Committees can be found on our
website www royalmailgroup.com,
Performance evaluation of the Board
Performance evaluation of the Board, its
Committees and individual Directors takes
place on an annual basis with the support of
the Company Secretary. This year's evaluation
was conducted with the help of Rob Goffee
of the London Business School, using a
combination of questionnaires, interviews and
a feedback session and was completed during
May 2012
A performance evaluation of the Audit & Risk
Committee was conducted by the Chairman
of the Committee last year. Other Committees
are undertaking a review of their terms
of reference
Director support
Directors may take independent professional
advice in the furtherance of their duties, at the
Group's expense. Alll Directors have access
to the advice and services of the Company
Secretary; the appointment and removal of
whom is a matter for the Board as a whole.
Director appointment and election
All Directors appointed by the Board are
required by the Company's Articles of
Association to be elected by the Shareholder
at the first Annual General Meeting (AGM)
after their appointment. All Directors will be
standing for annual re-election at this year’s
AGM. On appointment, the Directors take part
in an induction programme, in which they
receive information about the Group, the
role of the Board and matters reserved for
its decision, the role of the principal Board
Committees, the Group's Corporate
Governance arrangements and the latest
financial information about the Group. This
is supplemented by visits to key business
locations. The Group engages in two-way
communication with the Shareholder to
discuss information on its strategy,
performance and policies. The Board
receives feedback on these meetings from
the Directors attending them.
Balance is considered a key requirement
for the composition of the Board, not only
in terms of the Executive and Non Executive
Directors, but also with the regard to the
mix of skills, experience and knowledge
Biographical details for all the Directors
can be found on pages 61-62
Outside appointments
The Board believes that there are significant
benefits to both the Group and the individual
from Executive Directors accepting Non
Executive Directorships of companies outside
of the Group. The Board's policy is normally to
limit Executive Directors to one Non Executive
Directorship, for which the Director may retain
the fees (see the Directors’ Remuneration
Report on p78 for details).
Board Committees
The following Committees deal with specific
aspects of the Group's governance. The details
of Committee membership shown are as at
25 March 2012
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Gender balance
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Balance of Non Executive and
Executive Directors
Chairman
lon Executive Directors
[i Executive Directors
36%
65
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Corporate Governance (continued)
Cer aR CET a eer epee
Committee (CEC)
Moya Greene
Membership Stephen Agar (Managing Director, Consumer & Network Access), Rico Back (Chief Executive Officer, GLS), John Duncan
(Director, Group Human Resources), Neil Harnby (General Counsel), Mark Higson (Managing Director, Operations and
Modernisation), Matthew Lester (Chief Finance Officer), Jon Millidge (Company Secretary), Mike Newnham (Chief
Customer Officer), Shane O'Riordain (Director, Group Corporate Affe) Emily Pang (Chief of Staff), Alex Smith (Director,
iness Devel
Role The Committee is responsible for all the key areas of commercial activity within Royal Mail Group. The CEC meets twice a
month. The role of the CEC is to manage the overall framework of financial risk and business controls to meet Shareholder,
regulatory and legal requirements. The Committee also assigns key accountabilities for business performance
Audit & Risk Committee
Chair Paul Murray
Membership Non Executive Directors - David Currie, Nick Horler, Cath Keers, Orna Ni-Chionna and Les Owen
Role The Committee, which is assisted by the Risk Management Committee, provides a forum for reporting by both internal
and external auditors and is responsible for a wide range of matters including
* To oversee the process for managing risks across the business, including review of the Group's corporate risk profile,
and ensuring risks are being addressed by the Board, relevant Committees, and management;
‘© To monitor the integrity of the financial statements of the Group;
* To review the effectiveness of the Group's internal control system;
* To review the effectiveness of the Group's risk management processes;
* To monitor and review the effectiveness of the Group's Internal Audit function;
* To recommend to the Board, for Shareholder approval, the appointment of the external auditor, and to approve its
remuneration and terms of engagement; to monitor and review the external auditor's independence, objectivity and the
effectiveness of the audit process; and to develop and implement policy on the engagement of the external auditor to
supply non-audit services; and
* Where the Committee's monitoring and review activities reveal cause for concern or scope for improvement, to make
recommendations to the Board or management on action needed to address the issue
Work during the year Key matters the Committee considered during the year include:
* Going Concern - consideration of the plan, prospects, and assurances to allow the Board to conclude on the going
concern status of Royal Mail;
© Modernisation - review of reports and action plans covering progress and reporting on the key initiatives around
modernisation of the business;
* Business issues - review of issues around Christmas staff resourcing, eBusiness platform, and IT resilience and
security, to ensure that issues and implications were well considered, appropriate action was being taken, and learnings
were being noted for future application;
Capital restructuring - discussion and review of options and decisions around capital structures;
© IT~review of reports and action plans around key exposure and strategic plans in IT; and
Risk management and profile - review of proposed enhancements to the process of managing and monitoring key risks
across the Group, and specific review of Royal Mail's Group risk profile.
Chairman's statement The role and responsibilities of the Audit & Risk Committee have continued to grow and are under increased scrutiny.
The Committee will continue to consider best practice reporting to stakeholders as an integral part of its business.
We will continue to receive regular reports on risk, compliance and internal controls and expect to work closely with
the Remuneration Committee on matters related to compensation
Paul Murray
Chairman of the Audit & Risk Committee
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Chair Ora Ni-Chionna
Chairman - Donald Brydon, Non Executive Directors - David Currie, Nick Horler, Cath Keers, Paul Murray and Les Owen
Role * To determine and recommend for the Board's approval the framework for the remuneration of the senior executives of
the Group;
To determine the individual remuneration arrangements for the Chairman, the Executive Directors and the Company
Secretary, subject where necessary to the consent of the Secretary of State; and
# To agree the targets for any performance-related incentive schemes applicable to senior executives.
Work during the year Examples of matters the Committee considered during the year include
* Benchmarking executive remuneration;
Long Term Incentive Plan (LTIP) design; and
Executive Director bonus arrangements.
Chair's statement Remuneration of senior management continues to be in the public eye. The Committee fully acknowledges its
responsibilities in this area to ensure that decisions are fully justifiable. The Committee considers the wishes of the
Shareholder when making recommendations, and this is illustrated by the consultation with HM Government in respect
of the new LTIP.
Orna Ni-Chionna
Chair of the Remuneration Committee
Chair Donald Brydon
Membership Non Executive Directors - David Currie, Nick Horier, Cath Keers, Paul Murray and Les Owen
Role * To lead a formal, rigorous and transparent process for appointments to the Board of the Company, to the Boards of
subsidiaries and to other senior executive positions;
To advise the Board on succession planning for the positions of Chairman, Chief Executive Officer and all other Board
appointments; and
# To keep under review the balance of Board membership to ensure that it has the required mix of skills, knowledge
xamples of matters
* Board structure and composition;
* Board evaluation; and
* Ongoing Board succession
Chairman's statement’ The Board will continue to review the balance of skills, experience and knowledge that it needs to perform its
duties effectively
Donald Brydon
Chairman of the Nomination Committee
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Corporate Governance (continued)
Chair Matthew Lester
Membership Jon Millidge (Company Secretary), Neil Harnby (General Counsel) and Les Owen (Non Executive Director)
Role * To review funding, benefits, scheme structure and strategic developments impacting the Group's occupational pension
schemes; and
* To represent the Group in discussions with the Trustees of the Group's occupational pension schemes.
Work during the year Examples of matters the Committee considered during the year include:
* Scheme funding:
* Investment strategy;
« Implications of the Postal Services Act; and
1 Company's pension arrangements
and has worked closely with stakeholders in readiness for the transfer of almost all of the pension liabilities and pension
assets of the Royal Mail Pension Plan (RMPP), thus removing its current deficit.
Matthew Lester
Pension Committee Chairman
During the year, the Directors attended the following number of meetings of the Board and its main Committees
Attendance at Board & Committees
Name Board Audit &Risk Remuneration Nominations
Total number of meetings 7 5 8 2
Chairman
Donald Brydon
Executive Directors
Moya Greene
Mark Higson
Non Executive Directors
David Currie i 4/5 718 1/2
Paul Murray 17 5/5 8/8 2/2
Orna Ni-Chionna 7 1/5 8/8 2/2
les Owen oii 1/5 718 22
68 Royal Mail Holdings ple
Annual Report and Financial Statements 2011-12
Other Committees
Risk Management Committee
The Risk Management Committee is a
sub-Committee of the Audit & Risk Committee
and meets to promote and support the
establishment, communication and embedding
of risk management throughout the business.
Disclosure Committee
The role of the Disclosure Committee is to
assist the Executive Directors in fulfiling their
responsibility for oversight of the accuracy and
timeliness of the disclosures made by the
Company in relation to its financial and other
reporting. The Committee meets on an
ad-hoc basis and is chaired by the Group Chief
Executive Officer.
Non-audit services provided by the
external auditor
In some cases, the nature of advice required
makes it more timely and cost effective to
select the external auditor who already has
a good understanding of the Group. In order
to maintain the objectivity and independence
of the external auditor, the Committee has
determined what work can be provided by the
external auditor and the approval processes
associated with the auditor. The Committee
monitors the level of non-audit fees paid to
the external auditor.
Risk management and control overview
The Board believes that effective risk
management and a sound control
environment are fundamental to the Group
The system is designed to manage rather than
eliminate the risk of failure, as taking on risk
is inherent in undertaking the commercial
activities of the Group.
There is an ongoing process for identifying,
evaluating and managing the significant risks
faced by the Group in accordance with the
guidance detailed by the Turnbull Committee
as part of the “the Combined Code’, including
financial, operational, compliance risks and
risks to reputation. The process incorporates
both a top-down element (which collates
executive management/Board view of key
risks) and a bottom-up element (which
collates the views of the business units and
functions on risks in their area). Taken
together, these two perspectives are
combined to form the Group Risk Profile.
The process has been in place throughout the
year and up to the date of approval of these
financial statements.
The responsibility for joint ventures and
associates rests, on the whole, with the senior
management of those operations. The Group
monitors its investments and exerts influence
through Board representations.
Risk environment
In the main, the principal risks facing the
Group have not changed
The Group has classified its principal risks into
five main categories - changes in customer
preferences; economic environment; preparing
for attracting external capital; business
modernisation and risks inherent in the postal
industry. An analysis of the risks, their
impacts, and mitigating actions is given on
pages 50-52
Risk framework
The Group wide risk management framework
includes risk governance, risk identification,
measurement and management, and
risk reporting
The Group's approach to control is based on
the underlying principle of line management
accountability for internal control and for risk
management. The Group recognises and uses
the principle of the “Three Lines of Defence’,
that is:
a) Primary controls over the risks to
the business are located in the day to
day operation;
b) These are supported by internal monitoring
and oversight; and
c) Independent assessments by Internal Audit
and others provide the third line.
The process for risk identification and
management consists of formal identification
by management at each level of the Group of
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the key risks to achieving their business
objectives and the controls in place to manage
them. The likelihood and potential impact of
each risk is evaluated. Risk management
action plans are monitored at executive level
to ensure key risks are being mitigated
The views of top management and units/
functions are collated and brought together, in
the Group risk profile, to form a comprehensive
view of key risks in the organisation
The process also includes an annual
certification by management that the internal
controls are such that they provide reasonable
assurance that the risks are appropriately
identified, evaluated and managed
The system of risk management and internal
control is embedded into the operations of the
Group, and the actions taken to mitigate risk
or address any weaknesses are monitored
Risk governance and the Board
The Board has delegated responsibility for
specific review of risk and control processes
to the Audit & Risk Committee (ARC), and the
ARC in turn has set up a sub-Committee, the
Risk Management Committee (RMC), to help
discharge its duties. The key responsibilities
for risk and control among the Board, ARC, and
RMC are set out in this section of this report
Royal Mail Group’s attitude to risk
The Group operates in an industry where
elements are in structural decline, and where
margins have been narrow. Allied to this,
the historic position included a restricting
regulatory regime, historic under-investment
in infrastructure, an unaffordable historic
pension obligation, pricing which did not reflect
the value of the product, and an
unsupportable cost base
This backdrop was clearly outside the Board's
risk tolerance, so a number of key initiatives
were established and executed over the past
year to build a viable and sustainable business.
Accordingly, the strategy agreed by the Board
in this context is appropriate but challenging.
69
Corporate Governance (continued)
To help assure success of the programme,
the business has refined the number of key
initiatives, has clarified accountabilities and
specified key milestones, and is focusing on
performance against the critical elements of
the strategy, including significant management
focus to ensure key elements remain on track.
Risk management policy
The risk management policy has been
refreshed in the year and communicated
to business units and functions. The policy
includes minimum mandatory standards
for risk management in the business
Internal control
The Group operates a system of internal
control, including operational, financial, and
compliance controls, and risk management
systems, to control the day-to-day operations
of the Group's activities. In terms of the
“Three Lines of Defence” model, the key
processes and controls include
70
First line
* Management: the Group has an established
management organisation, with structure,
reporting lines, accountabilities and
ey policies and documentation
~ Royal Mail’ activities are mandated
by the Postal Services Act 2011 and
are further bound by regulatory
requirements which cover service
standards, complaint handling, integrity
of mail, access to postal facilties,
accounting separation and process for
postal services.
The Group's Code of Business Standards
sets the principles of professionalism
tandard policies exist within each function
~ Standard daily and monthly
management accounting and payroll
processes through centralised shared
services for the UK businesses.
~ A budget prepared, reviewed and set
once a year, providing clarity on the
short-term strategies for each part
of the Group. This, along with the
delegated authorities, resets the levels
of delegated spend in each area on an
annual basis
Performance management reviews
include production of weekly indicators
and a pyramid of monthly balanced
scorecards from frontline operations
to Holdings Board level, which underpin
quarterly reviews and the interim and
year end results
Five to ten year business plans are
collated on a regular basis and
submitted to both the Shareholder and
the regulator as part of formal external
processes such as regulatory
framework reviews and State Aid
applications. This provides regular
opportunity for executive management
and the Board to reappraise and
confirm long-term strategies and
objectives for the Group.
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Second line
* Regular rolling reviews and audits are
carried out within the operations, covering
key operational areas including quality of
service, corporate security, health and
safety, and fleet.
A self assessment is conducted of key
financial and non-financial processes across
all parts of the UK businesses, including
commercial and operations, and within each
key function
Annual sign-off by Finance Directors
provides a formal confirmation, including
proper preparation of financial results,
compliance with Group accounting policies,
compliance to statutory reporting standards
and tax accounting arrangements, disclosure
of post balance sheet events and related
party transactions, and maintenance of an
appropriate system of internal control,
including disclosure of material weaknesses
and confirmation of remedial action plans.
Third line
Specific and targeted Internal Audit work
programme. The effectiveness of the
internal control system is reviewed regularly
by Internal Audit & Risk Management
(IA&RM), the Group's independent Internal
Audit function. IA&RM reports to the ARC
and provides assurance to executive
management and the Board on the
effectiveness of the internal control system.
Internal Audit reports include an action plan
where issues have been identified, and
progress against action plans is regularly
tracked and reported
IASRM establishes and agrees with the
ARC an annual plan of assignments and
activities based on discussions with the
Board and management, and also taking
into account known issues in the business
xternal audit and other reviews
External audits and reviews take place
during the year to provide management, the
Board and the regulator with assurance on
specific matters, including:
~ The external auditor performs a
statutory year end audit
~ The external auditor performs an audit
of the regulatory accounts.
~ The externally measured end to end
quality of service is audited by an
independent accounting firm (appointed
by Ofcom)
Statement by the independent Non
Executive Directors
A number of structured processes exist
throughout the business to support good
governance. All the Non Executive Directors
are members of the principle Board
Committees: Audit & Risk, Nomination and
Remuneration, which gives each of them
insight into a cross-section of important
issues and informs Board discussions.
The Independent Non Executive Directors are
satisfied that the Company's Corporate
Governance and Internal controls have been
effective throughout the financial year ended
25 March 2012
Governance
( GRO
Orna
Senior Independent Non Executive Director
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71
Directors’ remuneration
report
This report explains the approach adopted by the
Remuneration Committee when setting the remuneration
of the Company’s Executive Directors and certain other
senior executives. It has been prepared taking due
account of the Directors’ Remuneration Report
Regulations, in so far as Royal Mail Group as a non-listed
company can comply with them. In line with these
Regulations, the parts of the report relating to Directors’
emoluments with respect to 2011-12 (including short-
term incentive plan payments for 2011-12 and pension
provision) have been audited.
Chairman's overview
This year has been one of significant
achievement for Royal Mail Group. The
Company is delivering one of the largest
transformations ever undertaken in the UK,
from a financial, operational and regulatory
perspective. Particular highlights include
the following
* We are cash positive! at the Group level for
the first time in four years;
* UKPIL, our core UK business, has returned to
operating profit after modernisation costs’;
# Royal Mail no longer has going concern
issues;
* We have embedded our new business
strategy, clearly demonstrating our path to
put the Group on a sound financial footing,
* Through Ofcom's new regulatory
framework, we have won the potential to
earn an appropriate commercial return on
our products and services; and
rior to the year end, the Government and
the Company achieved European Commission
authorisation for the transfer of almost all
the pension liabilities and pension assets of
the Royal Mail Pension Plan to the
Government, thus cancelling an annual
deficit payment of just under £300 milion.
72
The Committee recognises that executive
reward is a sensitive issue for society at large
We understand that all stakeholders in the
Royal Mail expect executive remuneration
levels to be set appropriately. The Committee
determines remuneration levels carefully and
the Secretary of State for the Department for
Business, Innovation and Skills (BIS) approves
any significant changes to the remuneration
arrangements of Royal Mail's Directors,
including the approach and targets relating to
the short-term and long-term incentive plans.
For the second consecutive year, the
Committee has not awarded salary increases
__ for any of Royal Mail's Directors with the only
exception being Paula Vennells, who joined the
Board in October 2010 and was awarded an
increase in April 2011.
In relation to bonus payments, there is a
clear alignment between payments awarded
and achievement against clearly stated
performance targets. For 2011-12 the
Committee is satisfied that there has been a
strong link between reward under our Short
Term Incentive Plan (STIP) and performance
assessed against the twelve KPIs closely linked
to our strategic objectives, which form the
basis for the STIP.A similar approach is
expected to be adopted in 2012-13, and this
is currently being discussed with the Secretary
of State for the Department for Business,
Innovation and Skil.
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As disclosed in last year's Remuneration
Report, the Company has been in discussions
with the Secretary of State for the
Department of Business, Innovation and Skills
to agree a new Long Term Incentive Plan
(LTIP). This standard element of an executive
package provides a long-term focus on growth
in value alongside the more operational-based
STIP, but the previous LTIP contained some
cumbersome and complex elements. The new
LTIP is simpler than the previous plan and the
Committee believes that it aligns Directors’
interests with the long-term interests of our
Shareholder and wider stakeholders.
On behalf of the Committee I commend this
report to all stakeholders in Royal Mail Group.
GRO
i-Chionna
Chair of the Remuneration Committee
Orna
2 Free cash inflow.
? Before other exceptional items.
Executive pay at Royal Mail
The Company's objectives on Directors’
remuneration are that:
The overall remuneration package should be
sufficiently competitive to attract and retain
executives with the commercial experience
to runa large, complex business in a highly
© A significant proportion of the remuneration
package should be dependent on
performance - both short and long-term;
and
‘incentives should be designed so that they
align the interests of senior executives,
customers and the Shareholder.
The Committee regularly reviews the
remuneration package offered to its key
executives with the aim of ensuring that the
package is reasonable in the circumstances
and that it follows accepted best practice.
In considering any changes to salary, it takes
into account any proposed changes to the
remuneration of all employees
Advice to the Remuneration Committee
The Committee obtains information and
advice from inside and outside the Group.
It takes advice from independent professional
organisations that are best able to assist it on
the particular topic under discussion
During 2011-12, the Committee conducted
a competitive tender for the position of
independent adviser to the Remuneration
Committee, culminating in the appointment
of Aon Hewitt Limited (trading under the
name New Bridge Street). No other services
were provided to the Company by Aon Hewitt
Limited during the year in question
Internal support is provided by the Group
Human Resources Director and the Company
Secretary. Other advice and information has
been provided by specialists from the Human
Resources and Finance functions. This
ensures that the Committee is kept fully
abreast of pay and conditions in the workforce
as a whole.
During the year Towers Watson Limited
provided the Company with advice on
pensions and actuarial matters.
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The main components of remuneration
The table below summarises the main elements of the remuneration packages of the
Executive Directors:
Element of Purpose
Summary of how it operates
Base salary
Help recruit and retain executives
of a sufficiently high calibre
Reflect individual's experience,
performance and role within
the Group
Paid monthly in cash
Reviewed annually (but not necessarily
increased annually) against
appropriate benchmarks and reflecting
the Committee's policy (described
rovide appropriate levels of
retirement benefits
Other benefits
Provide an appropriate, cost effective
benefits package through leveraging
efine
contribution pensions and unfunded
pension guarantees
Company car and health insurance, or
the cash equivalent of any benefits not
Short-term rive and reward annual
incentives performance against financial and
non-financial targets, as outlined
in the Corporate Scorecard
(see p74)
Long-term Drive and reward delivery of
incentives sustained long-term financial
performance measured against
operating profit and Return on Total
Assets (ROTA) targets
ayable in cash annually, based
on performance against a broad
range of targets relating to financial
performance, people, service levels,
other strategic objectives and
personal goals
Payable in cash, normally three years
after initial award, subject to
continued employment and
performance against interdependent
financial targets in the third year
All Directors are paid into personal bank accounts through the PAYE scheme
Further details of each of the above elements of pay are set out on the following pages
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73
Directors’ remuneration report (continued)
Base salaries
As stated above, the Committee's underlying
policy regarding senior executive base salaries
is to set salaries at levels that are enough to
recruit and retain executives of proven ability
to manage a very large and complex company
which faces many challenges. The Secretary
of State's (Department for Business, Innovation
and Skills) consent is required for all significant,
changes to Directors’ remuneration, including
base salary increases
During 2011-12 the Committee conducted a
comprehensive review of the remuneration
packages of the entire senior leadership
population, comparing them to remuneration
in comparable companies. This exercise was
undertaken by AON Hewitt. Appropriate
comparator companies were chosen from the
utilities, consumer services, industrial and
telecommunications industries. The
companies forming this group were chosen
due to their sharing of certain characteristics
including, but not limited to (i) size and
complexity, (i) regulation, (ii) asset intensity
and (iv) large infrastructure management
One of the findings of this review was that the
base salaries of the Executive Directors were
below median, with the Chief Executive
Officer's salary in the lower quartile range.
Notwithstanding this, no salary increases
were made to the Executive Directors’ salaries
during 2011-12, except for an increase to
Paula Vennells' salary from £225,000 to
£250,000 from 1 April 2011
Pensions
A summary of the pension provision of
the Executive Directors can be found on
pages 79-80
Other benefits
Benefits include the provision of a company
car and health insurance, or the cash
equivalent of any benefits not taken. The Chief
Executive Officer is eligible for two return
flights to Canada each year and financial
advice. Relocation expenses are paid where
applicable and are explained in the notes to
the table on p77.
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Safety
Engagement
Customer
focus
Process
sequencing
Delivery hours
eduction
Group revenue
Corporate
Balanced
Scorecard
100%
First Class retail
Quality of Service
Net customer
satisfaction
Customer
complaints
Operating
costs
Free cash flow
Group operating profit
Short Term Incentive Plan (STIP)
In 2011-12, the target STIP potential for the
Chief Executive Officer and for the Group
Finance Director was 60 per cent of base
salary, each with a maximum opportunity of
100 per cent of salary. In the case of the other
executive Directors the figures were 48 per
cent and 80 per cent respectively. In each
case, 80 per cent of the STIP was dependent
on the achievement of corporate targets, with
the remaining 20 per cent dependent on the
achievement of specific personal targets. The
benchmarking exercise undertaken showed
that these levels of opportunity were below
typical market levels.
Royal Mail Holdings ple
‘Anmual Report and Financial Statements 2011-12
A blend of targets determined the extent to
which STIPs could be earned in 2011-12
The Committee reviewed the measures and
targets to ensure that they were appropriate
and consistent with challenging levels of
performance. The chart above illustrates
the Corporate Balanced Scorecard? which
contains a summary of the corporate metrics
used. In addition to these metrics, a minimum
level of operating profit must also be achieved
before an Executive Director becomes eligible
for a payment. The Corporate Balanced
Scorecard (above) is used to determine STIP
awards for all Royal Mail's managers.
The targets relating to Paula Vernells relate to the
performance of Post Office Limited, with the above
weightings marginally different.
Most of the targets were exceeded in each
quadrant of the Corporate Balanced Scorecard
(People, Customer, Performance, Financial)
with the People quadrant achieving the
highest score. Financial performance was
also significantly above the target level. In
“Performance” the score was lower, primarily
due to the lower than planned implementation
of delivery revisions. There was some
variation in performance against “Customer
measures” and overall the Customer
quadrant score came in at just below the
target level. All of the measures have been
independently validated
The total Short Term Incentive Plan payments
awarded to the Executive Directors for
performance in 2011-12 were as follows
Moya Greene ~ 74.5 per cent of salary:
Matthew Lester - 74.8 per cent of salary;
Mark Higson - 63.8 per cent of salary; and
Paula Vennells - 69.1 per cent of salary.
The above payments reflect the achievement
of very strong performance against most of
the measures and targets in the STIP. The
Executive Directors’ annual bonus for
2012-13 will be structured in broadly the
same manner as described above
Executive Directors also participate in the
legacy share scheme on the same terms as all
other eligible employees. This is explained in
the "Basis of preparation and significant
accounting policies” on p136. Itis anticipated
that these awards will have no material value.
Long Term Incentive Plan (LTIP)
During 2011-12, the Committee put in place
a new Royal Mail Group LTIP. The LTIP is a
conditional award, defined as a percentage of
salary, which vests (pays out) based on
performance in the third year after the award
is made, provided that financial performance
targets are met. As noted above, the
Secretary of State for the Department for
Business, Innovation and Skills approved both
the design of the LTIP and the grants made
under the plan to the Executive Directors.
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When designing the new LTIP, the Committee took account of a number of factors, including
Factor LTIP design approach
Policy
Link with
strategy
The LTIP must reflect the general approach the Committee takes to framing
executive remuneration at the Company, as summarised on p73
The LTIP targets support the achievement of the Company's key strategic
objectives. The Company's senior leadership drive this performance and the
propriate, but not excessive, levels of potential rewards shoul
e
available, but only in return for delivery of strong levels of performance
against stretching targets
Risk
Compliance
Excessive operational risk-taking should be neither encouraged nor
rewarded
The LTIP should take due account of best and market practice, while being
iscretion for the Committee to “clawbact
the value of any cash amount
received if it transpires that an award had been paid on the basis of
misstated results because of wilful wrongdoing by employees,
The main features of the new LTIP are
as follows:
* It is intended that regular annual awards will
be made each year. The first awards were
made in 2011-12
* Awards take the form of a right to receive a
cash amount, normally three years after
grant, subject to continued employment and
the satisfaction of performance conditions.
The recent benchmarking exercise
undertaken by the Committee showed that
the award level to the Executive Directors of
70 per cent of salary (1.4 x this amount at a
stretch level of performance) was well below
market norms,
* The performance conditions applying to the
awards made in 2011-12 were based on.
both operating profit and Return on Total
Assets ("ROTA’) targets, further details of
which are set out below; and
The Remuneration Committee has the
discretion to “clawback’ the (after tax) value
of any cash amount received if it transpires
that an award had been paid on the basis of
misstated results because of wilful
wrongdoing by employees. This restriction
lapses after five years from the vesting date.
Royal Mail Holdings ple
‘Anmual Report and Financial Statements 2011-12
The previous LTIP ran from 2007 to 2010
inclusive. It had been the Committee's
intention to make a grant under a new plan in
the 2010-11 financial year which would have
measured performance over the three year
period up to 2012-13. A number of senior
executives were given a commitment that
such a grant would be made in that year.
However, no such grant was made in view
of a number of pressing challenges facing the
business during that time.
To take this into account, the Committee
granted two awards in 2011-12 under the
new LTIP to the majority of participants
(including the Executive Directors). The first
award was made in lieu of the award that
should have been granted in 2010 and
measures performance over the three year
period from April 2010 to March 2013.
However, to provide an additional long-term
focus, the Executive Directors’ awards do not
actually vest until the end of the 2013-14
financial year ie. March 2014.
The second award constituted the 2011
award, thereby measuring performance over
the three year period from April 2011 to
March 2014
75
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Directors’ remuneration report (continued)
As mentioned on previous page, the
performance conditions applying to the initial
awards granted under the new LTIP in
2011-12 are based on both operating profit
and ROTA. The primary measure is operating
profit, with the indicative payout under this
measure then subject to a downward-only
adjuster based on ROTA targets. Therefore,
for awards to pay out in full both the operating
profit and ROTA targets must be met in full
ROTA was chosen as the secondary measure
as it covers the need to make a sufficient
return both on any new investments and on
the existing asset base. The impact of the
performance conditions on the awards made
to the Executive Directors in 2011-12 is set
out below. The Executive Directors’ two
awards were 70 per cent of salary each, with
a multiplier of up to 1.4 applying dependent
on the level of performance achieved as
outlined in the tables below:
In addition, an award only vests under the
operating profit performance condition if ROTA
is at least equal to 75 per cent of plan. If this
is the case then the award vests as follows
® If ROTA is between 75 per cent of plan and
90 per cent of plan there is a 50 per cent
reduction the level of vesting achieved under
the operating profit performance condition;
and
is greater than 90 per cent of plan
there is no reduction in vesting
Following the separation of Post Office Limited,
the LTIP awards in respect of Paula Vennells
will be subject to a different performance
condition, which will better reflect the strategic
goals of Post Office Limited
The Committee intends to grant awards under
the new LTIP in 2012-13. These awards are
intended to be structured in broadly the same
manner as described above.
76
ig profit performance in third
year after award
Less than 70% of target
70% to 80% of target
% award vesting
0%
0% to 80% vesting (straight-line sliding scale)
0% to 56% of
80% to 100% vesting (straight-line sliding
le) ie. 56% to 70% of sal
100% to 140% vesting (straight-line sliding
le) ie. 70% to 98% of sal
lar
80% to 100% of target
100% to 120% of target
More than 120% of target
140% vesting i.e. maximum 98% of salary
Royal Mail Holdings ple
‘Anmual Report and Financial Statements 2011-12
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Directors’ emoluments in respect of 2011-12
The following table summarises the remuneration of Board members in respect of 2011-12:
nn errr en
‘Amount in lieu
Annual Salary/fees Short Term of defined
salary/fees paid in year Incentive Plan Benefits benefit pension 2012 2011
‘£000 £000 £000 £000 £000 £000 £000
Chairman
xecutive
Moya Greene‘ 498 498 371 200 1,107 778*
Mark Higson 428 428 273 171 887 686
Matthew Lester® 428 428 320 171 934 265*
David Currie 40 40 = = = 40 40
Nick Horler 40 40 = = = 40 37
Cath Keers 40 40 = = = 40 31
Paul Murray 50 50 = = = 50 51
Orna Ni-Chionna 60 60 = = = 60 31
Les Owen’ 40 40 = = = 40 37
Former Directors
Adam Crozier® 633 = = = 2 = a
lan Duncan? 325 = = = = = 87
Richard Handover’? 65 a ba a o = 63
Baroness Prosser™ 50 = = 2 = = 32
David Smith"? 250 50 = 3} 6 59 363
Total 2012 2,124 igey 81 578 3,920 =
Total 2011 1,870 371 183 431 = 2,855
* The 2011 amounts for Moya Greene and Matthew Lester are part-year figures as they joined during the year 2010-11,
The figures in the table represent the qualifying emoluments earned and receivable by anyone who has served as a Director at any time during
the financial year, whenever paid. Such emoluments are normally paid in the same financial year, with the exception of the annual performance-
related bonus, which is paid in the year following that in which itis earned
* Details of Moya Greene's pension arrangements are given on p79-80. The Chief Executive Officer is eligible for two return flights to Canada each year, relocation expenses and
financial advice
5 Matthew Lester joined the Board on 24 November 2010.
® Paula Vennells joined the Board on 18 October 2010,
7 Les Owen was also a member ofthe Post Office Limited Board for the full year and was also paid £13,000 in respect of his membership of the Post Office Limited Board for the
period 22 September 2011 to 31 March 2012
® Adam Crozier left the Board on 31 March 2010.
? lan Duncan left the Board on 15 June 2010.
+ Richard Handover left the Board on 30 March 2011.
+ Baroness Prosser left the Board on 31 October 2010.
2 David Smith left the Board on 13 June 2011,
Royal Mail Holdings ple 77
‘Anmual Report and Financial Statements 2011-12
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Directors’ remuneration report (continued)
Executive Directors! Outside 2pPOHN ES)
The annual fees received by the Executive Directorship £000 £000
Directors as at 25 March 2012 in respect of Moya Greene Tim Hortons 16" 22"
their Non Executive Directorships are shown «*~ .
Matthew Lester Man Group plc 79 es
in the table opposite
Contracts ———
The Committee's policy is that Executive Peierent Uneipired
Directors appointed to the Board are given employment term
notice periods of one year, and that they must Dateccolrect conta froanths)
give six months’ notice of departure. The Chairman
Committee nasa defined pallcy an Donald Brydon" 26 March 2009 25 March 2012 7
compensation and mitigation, to be applied .
in the event of a Director's contract being Executive Directors
prematurely terminated, In such Moya Greene 15 July 2010 ~ D
circumstances, steps would be taken to ae .
ensure that poor performance is not Mark Higson 5 November 2007 = 12.
rewarded.
The rolling service contracts and letters of
appointment of the Directors (as shown in the
table opposite) include the following terms as
at 25 March 2012.
The Non Executive Diners nae i
contracts but do not have employment pptieed pied
contracts. The service contract dates for Date of contract service contract (months)
the Non Executive Directors who have Won Executive
served during the year are shown in the Directors
table opposite David Currie TJanuary 2012 34 December 2014 33
Nick Horier TApril2010 34 March 2013 2
Orna Ni-Chionna 1 June 2010 31 May 2013 14
Les Owen 27 January 2010 36 January 2013 i0
The Company is committed to the service contracts for the remaining term of appointments,
subject to annual review and notice, for Non Executive Directors, including the Chairman
© Sterling equivalent of payments received in the year.
* Donald Brydon was reappointed on 26 March 2012 for a
further three year term to 25 March 2015,
2 Paul Murray was reappointed on 24 May 2012 for a
further three year term to 31 July 2015.
7 i} Royal Mail Holdings ple
‘Anmual Report and Financial Statements 2011-12
Non Executive Directors
The fees paid to the Chairman are approved
by the Secretary of State for the Department
for Business, Innovation and Skills. Fees for
the Non Executive Directors are determined
by the executive Directors and are submitted
to the Secretary of State for approval.
Independent market surveys are consulted in
determining them, with due account also taken
of time commitment and responsibilities
Pensions
The Group has a liability to pay pensions in
respect of Directors’ services and, for some
Executive Directors, makes contributions to
pension schemes for this purpose. The
Company pays a cash supplement to Directors
whose contributions to the Company scheme
are restricted by the scheme-specific earnings
cap. The Company continues to apply the
scheme-specific earnings cap, indexed by
inflation each year, as a constraint on the
amount of salary that is pensionable through
the Company scheme.
The Royal Mail Senior Executives Pension
Plan (RMSEPP) is closed to new members
Existing members accrue service on a career
average basis on the basis of a retirement age
of 65. Current Executive Directors who are
members of the plan are subject to a cap on
pensionable earnings which for 2011-12
was £129,600.
Details of RMSEPP are set out in note 9 to the
financial statements. The Plan is a funded,
HMRC-registered defined benefit occupational
pension scheme. It provides for a pension on a
final salary basis for service up to 31 March
2008 and for subsequent service on a career
average basis, The pension is payable from
normal retirement age (currently age 65) and
is subject to the maximum pensionable service
and the scheme-specific earnings cap
Pensions in payment are increased annually
in line with inflation, subject in some cases
toa cap of five per cent. Pensions are also
payable to dependants on the death of the
member and a lump sum is payable if death
in service occurs
For senior executives whose membership of
the Plan (RMSEPP) is restricted by the
earnings cap (£129,600 for 2011-12),
pension provision is made by a combination of
the Company scheme and a cash pension
supplement or its equivalent. David Smith and
Paula Vennells received a cash supplement of
25 per cent of base pay above the earnings
cap. Mark Higson and Matthew Lester are not
members of the Plan and receive a cash
supplement of 40 per cent of base pay.
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For the Chief Executive Officer, the Company
makes a contribution to a UK HMRC approved
pension plan and promises to pay her after
leaving the Company a sum that accumulates
monthly during employment as if it were
invested in Government securities.
The following table is designed to indicate the
increase in the value of Directors’ accrued
benefits during the period. The transfer value
is calculated on the basis of actuarial advice in
accordance with Actuarial Guidance Note
GN11 and excludes Directors’ contributions
Accumulated
accrued benefit
at 27 March
Age at 2011
Year end £
Transfer value of
increase before
inflation less.
Directors
contributions
Accrued benefit, Increase in
‘at 25 March accrued benefits
2012 or date of during the period
leaving earlier "(net of mation
Executive
Directors
David Smith"®
Paula Vennells
47
23,608
53 11,448
20317
35,049
25,223
14,721
1,615
2701
The following table is designed to assess the change in transfer values during the year, taking
into account movement in investment market conditions:
=o
‘Transfer value at
27 March 2011
or at date of
appointment to transfers-in
Age at
Board if later
Year end €
Transfer Movement in the
Plus value at period less
25 March Directors
received Sub total 2012 contributions
€ £ £ €
Executive
ti
David Smith?”
Paula Vennells
194,384
~ 194,384 283,759 81.599.
Royal Mail Holdings ple
‘Anmual Report and Financial Statements 2011-12
2 David Smith left the Board on 13 June 2011 and
his employment with Royal Mail Group ceased on
3 December 2011: his increase in accrued benefits,
net of inflation as a former Director, were £1,498.
»” David Smith left the Board on 13 June 2011 and
his employment with Royal Mail Group ceased on
3 December 2011; his increase in transfer value,
less contributions as a former Director, were £16,687,
79
Directors’ remuneration report (continued)
The transfer values disclosed represent a
potential liability of the pension plan rather
than any remuneration due to the individual
and cannot be meaningfully aggregated with
annual remuneration, as it is not money the
individual is entitled to receive
Moya Greene has been provided with a
contribution of £20,000 to an HMRC approved
defined contribution pension plan in respect of
service during the 2011-12 financial year.
Additionally, contributions of £60,000 were
made into the Royal Mail Defined Contribution
Plan during 2011-12, During 2011-12 the
Company accrued an additional amount of
£120,000 towards Moya’s unfunded promise
to be paid upon cessation of her employment.
The cumulative value of this unfunded
promise was £261,222 at the end of 2011-12,
based on the value of the amounts accrued
having been invested in UK 5-year gilts.
These arrangements provide the Chief
Executive Officer with pension arrangements
valued at 40 per cent of salary, in line with the
other Executive Directors.
Tony McCarthy, a former Director, is in receipt
of an annual payment of £45,094 as a result
of an unfunded unapproved pension promise
made to him when he joined the Company
in 2003
Remuneration Committee Chair
27 June 2012
80
Royal Mail Holdings ple
‘Armual Report
dd Financial Statements 2011-12
Governance
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Our financial statements
Consolidated balance sheet?
Consolidated statement of changes in equity*
ST
Core notes to the financial statements. 88
1. Authorisation of financial statements and statement of compliance with IFRS 89
Going concern and funding
Events after the reporting period 90
Segment information 90
6.
7._ Cash flow information 94
8. Provisions 95
9. Employee benefits - pensions 96
rrr SPEER pe memmmememeeeD
Other notes - financial assets, financial liabilities and hedging programmes 102
10. Financial assets and liabilities - introduction, summary and management
ffi risk 103
11. Pension escrow investments
12. Cash and cash equivalents
13, Loans and borrowings
16. Hedging programmes
SY
Other notes - income statement
19. Net finance costs
2 For the year ended 25 March 2012 and 27 March 2011.
2 At 25 March 2012 and 27 March 2011
Royal Mail Holdings ple 8 1
‘Anmual Report and Financial Statements 2011-12
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Our financial statements (continued)
SS
Other notes - balance sheet 123
21 Goodwill
22. Intangible assets
23. Investments in joint venture and associates
24. Current trade and other receivables
27. Commitments 30
28. Related party information 134
Directors’ and Auditor responsibilities in relation to the Group financial statements
Royal Mail Holdings plc - parent Company financial statements
Pro-forma 2011-12 financial statements for Royal Mail Group excluding
Post Office Limited (Unaudited) 155
8 2 Royal Mail Holdings ple
‘Anmual Report and Financial Statements 2011-12
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Financial Statements
Consolidated income statement
for the year ended 25 March 2012 and 27 March 2011
2012 2011
Notes £m £m
Continuing operations
Turnover 9,352 9,006
Network Subsidy Payment for Post Office Limited 180 150
Revenue 9,532 9,156
People costs 5 (5,657) (5,717)
Distribution and conveyance costs (1,758) (1,619)
Other operating costs i7 (1,707) (1,602)
Share of post tax profit from joint venture and associates 23 32 28
Operating profit before exceptional items 4h2 246
Modernisation costs - operating exceptional items 6 (231) (207)
Operating profit after modernisation costs before other operating exceptional items 211 39
Other operating exceptional items 6 (93) (88)
Operating profit/(loss) 118 (49)
Profit on disposal of property, plant and equipment 157 65
Profit on disposal of businesses 26 4A
Profit before financing and taxation 301 60
Finance costs 19 (118) (114)
Finance income 19 54 69
Net pension interest. He) 26 (167)
Profit/(loss) before taxation 263 (152)
Taxation charge 18 (10) (106)
Profit/(loss) for the financial year from continuing operations 253 (258)
Profit/(loss) attributable to
Equity holder of the parent company 252 (259)
Non-controlling interest 4 1
Royal Mail Holdings ple 83
‘Annwal Report and Financial Statements 2011-12
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Financial Statements
Consolidated statement of
comprehensive income
for the year ended 25 March 2012 and 27 March 2011
2012 2011
Notes £m £m
Profit/(loss) for the financial year from continuing operations 253 (258)
Other comprehensive income/(expense) for the period 1,585 3,432
Translation differences on foreign currency net investments (47) (11)
Actuarial gains on defined benefit schemes 9 1,544 3,424
(Losses)/gains on cash flow hedges deferred into equity 16 (4) 24
Gains on cash flow hedges released from equity to income 16 (15) (7)
Gains on cash flow hedges released from equity to the carrying amount of non-financial assets 16 (3) (3)
Gains on financial assets deferred into equity 11 133 20
Gains on financial assets released from equity to income - (6)
Taxation on items taken directly to equity 18 (23) (9)
Total comprehensive income for the period 1,838 3,174
Total comprehensive income for the period attributable to:
Equity holder of the parent company 1,846 3,173
(8) 1
Non-controlling interest
B4 Royal Mail Holdings ple
‘Annual Report and Financial Statements 2011-12
Consolidated statement
of cash flows
for the year ended 25 March 2012 and 27 March 2011
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Financial Statements
2012 2011
Notes £m £m
Cash flow from operating activities
Operating profit before exceptional items 442 246
Adjustment for:
Pension operating costs 9 419 458
Depreciation and amortisation a} 302 286
Share of post tax profit from joint venture and associates 23 (32) (28)
EBITDA before pension costs 1,131 962
Working capital movements: = (49)
(Increase)/decrease in receivables (156) 14
Increase/(decrease) in payables 110 (44)
Decrease/{increase) in client receivables 20 (9)
Increase in client payables 18 1
Net increase in derivative assets (6) (12)
Increase in non-exceptional provisions 14 1
Pension operating costs paid (428) (741)
Cash payments in respect of operating exceptional items 7 (342) (272)
Modernisation:
Legacy share scheme/Business Transformation (70) (102)
Redundancy (137) (124)
Redundancy related pension costs (39) (30)
One-off projects (55) (8)
Other (4) (6)
Non-modernisation (37) (5)
Cash inflow/(outflow) from operations 361 (100)
Income tax paid (23) (22)
Net cash inflow/(outflow) from operating activities 338 (122)
Cash flows from investing activities
Dividends received from joint venture and associates 23 42 39
Finance income received 53 69
Proceeds from sale of property, plant and equipment 205 164
Proceeds from disposal of businesses 37 a
Purchase of property, plant and equipment (including moderisation investment in UKPIL) (306) (292)
Acquisition of businesses (2) (2)
Purchase of intangible assets (software) (59) (82)
Payment of deferred consideration in respect of prior years’ acquisitions (4) -
Net (purchase)/sale of financial assets investments (non-current) (45) 42
Net purchase of financial assets investments (current) (30) -
Net cash (outflow)/inflow from investing activities (106) 1
Net cash inflow/(outflow) before financing activities 232 (411)
Cash flows from financing activities
Finance costs paid (73) (60)
Payment of capital element of obligations under finance lease contracts (52) (65)
Cash received on sale and leasebacks 88 115
New loans ie) 332
Repayment of borrowings (1) (42)
Net cash (outflow)/inflow from financing activities (36) 280
Net increase in cash and cash equivalents 196 169
Effect of exchange rates on cash and cash equivalents (4) (2)
Cash and cash equivalents at the beginning of the period 1,104 934
Cash and cash equivalents at the end of the period 12 1,293 1,101
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‘Annwal Report and Financial Statements 2011-12
85
Consolidated balance sheet
at 25 March 2012 and 27 March 2011
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Financial Statements
2012 2011
Notes £m £m
Non-current assets
Property, plant and equipment 20 1,825 1,832
Leasehold land payment 3 3
Goodwill 21 189 197
Intangible assets (mainly software) 22 135 126
Investments in joint venture and associates 23 92 105
Financial assets — pension escrow investments 10/11 1,383 1,161
— bank deposits 10/15 - 44
— derivatives 10/15 a 6
Deferred tax assets 18 9 8
3,638 3,482
Non-current assets held for sale 4 4
Current assets
Inventories 38 38
Trade and other receivables 24 1,251 1,135
Income tax receivable 2 -
Financial assets — derivatives 10/15 ol 36
— short-term deposits 10/15 31 1
Cash and cash equivalents 10/12 1,293 1,101
2,624 2,311
Total assets 6,266 5,797
Current liabilities
Trade and other payables 25 (2,085) (1,961)
Financial liabilities — interest bearing loans and borrowings 10/15 (377) (375)
— obligations under finance leases 10/15 (90) (65)
~ derivatives 10/15 (4) (3)
Income tax payable (9) (6)
Provisions 8 (138) (181)
(2,703) (2,591)
Non-current liabilities
Financial liabilities — interest bearing loans and borrowings 10/15 (1,522) (1,478)
— obligations under finance leases 10/15 (237) (193)
— derivatives 10/15 (4) =
Provisions 8 (93) (97)
Retirement benefit obligation — pension deficit 9 (2,922) (4,501)
Other payables (39) (34)
Deferred tax liabilities 18 (18) (10)
(4,832) (6313)
Total liabilities (7,535) (8,904)
Net liabilities (1,269) (3,107)
Equity
Share capital 26 = =
Share premium 430 430
Retained earnings (1,998) (3,803)
Reserves 299 258
Equity attributable to equity holder of parent company (1,269) (3,115)
Non-controlling interest = 8
Total equity (1,269) (3,107)
The financial statements on pages 83 to 132 were approved by the Board of Directors on 27 June 2012 and signed on its behalf by:
GRO I GRO
Donald Brydon Alice Perkins
BG Royal Mail Holdings ple
Annual Report and Financial Statements 2011-12
Consolidated statement
of changes in equity
for the year ended 25 March 2012 and 27 March 2011
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Financial Statements
Foreign Equity
Financial Currency holder Non-
Share Retained Assets Translation Hedging Other of the controlling Total
premium earnings Reserve —Reserve Reserve Reserves I parent _interest equity
£m £m £m £m £m £m £m £m £m
At 28 March 2011 430 (3,803) 64 125 22 47I (3,115) 8I (3,107)
Profit for the period - 252 - - - - 252 Tl 253
Other comprehensive income/(expense) for
the period = 1544 102 (47) (44) -I 1585 -I 1,585
Translation differences on foreign
currency net investments - - - (47) - - (47) - (47)
Actuarial gains on defined benefit schemes - 1,544 - - - - 1,544 - 1,544
Losses on cash flow hedges
deferred into equity = = = = (4) = (4) = (4)
Gains on cash flow hedges released
from equity to income = = 2 — (15) = (15) = (15)
Gains on cash flow hedges released
from equity to the carrying
amount of non-financial assets - = = = (3) = () = (3)
Gains on financial assets deferred
into equity - - 133 - - - 133 - ida
Taxation on items taken directly to equity - - (31) - E} - (23) - (23)
Dividend from non-controlling interest - 9 - - - - 9 (9) -
Total comprehensive income/{expense) for
the period = 1,805 102 (47) (44) = 1,846 (8)I 1,838
At 25 March 2012 430 (1,998) 166 78 8 47I (1,269) =I (4,269)
a ee ee ee
Financial Currency holder Non-
Share Retained ‘Assets Translation Hedging Other ofthe controling Total
premium earnings Reserve Reserve Reserve Reserves parent interest equity
£m £m £m £m £m £m £m £m £m
At 29 March 2010. 430 (6,968) 55 136 12 47 (6,288) 7 (6,281)
(Loss)/profit for the period = (259) = = = = (259) 1 (258)
Other comprehensive income/(expense) for
the period = 3,424 9 (a1) 10 7 3,432 = 3,432
Translation differences on foreign
currency net investments - 7 as (11) 7 (11) - (11)
Actuarial gains on defined benefit schemes - 3,424 - - - - 3,424 - 3,424
Gains on cash flow hedges deferred
into equity = = — - 24 = 24 = 24
Gains on cash flow hedges released
from equity to income - - - - (7) - (7) - (7)
Gains on cash flow hedges released
from equity to the carrying
amount of non-financial assets - - 7 = (3) - () - (3)
Gains on financial assets deferred
into equity 7 ' 20 = ' a 20 = 20
Gains on financial assets released
from equity to income - - (6) - - - (6) - (6)
Taxation on items taken directly to equity - - (5) - (4) - (9) - (9)
Total comprehensive income/(expense) for
the period - 3,165 9 (a4) 10 7 3,173 al 3,174
At 27 March 2011 430 (3,803) 64 125 22 47 (3,115) 8 (3,107)
A description of the nature and application of the reserves in the above tables is included in note 26.
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87
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Core notes to the
financial statements
In simple terms:
The notes in this section are considered by the Board to be particularly important to a reader of the financial statements and show
« that we have followed all relevant Intemational Financial Reporting Standards (IFRSs) in preparing these financial statements (note 1)
why the Directors have concluded that the Group is a going concern (note 2)
certain notable events that occurred after the financial year end, but which did not affect the financial position or performance of the Group
up to 25 March 2012 (note 3). These events do however have a significant impact on the future of the Group
an analysis of the financial results of our main business segments, UKPIL, GLS and POL (note 4)
information about the number of people we employ in all parts of the Group and the costs of their employment (note 5)
an analysis of the non-recurring or restructuring costs (‘exceptional items) that have been disclosed separately (due to their size or
incidence) to allow a more meaningful analysis of underlying operational performance (note 6)
an analysis of the cash spent on exceptional items and a reconciliation of free cash flow — a key indicator used by management to assess
performance — to the statutory cash flow that we have to disclose under IFRS (note 7)
‘a summary of the provisions that have been made in the accounts, including for modernisation costs (note 8)
details of the Group's pension schemes, including an analysis of the costs to the Group of providing the schemes, assumptions used to
determine the pension liabilities, expected rates of return on the pension assets, and a summary of the key movements in the pension
accounting deficit (note 9)
eee eee
1. Authorisation of financial statements and statement of compliance with IFRSs 89
2. Going concern and funding 89
3. Events after the reporting period 90
4. Segment information 90
5. People information 2
6. Operating exceptional items 93
7. Cash flow information 94
8. Provisions 95
9. Employee benefits - pensions 96
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Notes to the Consolidated
financial statements
Introduction
In preparing these financial statements, the Group continues to
consider recent guidance issued by the Financial Reporting Council
(FRC). The FRC outlined principles in its "Louder than Words" and
“Cutting clutter” discussion papers to make corporate reporting
clearer and less complex
Based on our views, as well as the key areas of focus from our
stakeholders, Royal Mail Group has separated the notes to the
financial statements into two sections: "Core" and "Other" in order to
assist the users of the financial statements. While the financial
statements need to be considered as a whole, "Core" notes to the
financial statements represent those that we regard to be of most
importance to a user of the financial statements. All remaining notes,
are included in the "Other" category.
1. Authorisation of financial statements
and statement of compliance with
IFRSs
‘The Group's financial statements for the year ended 25 March 2012
were authorised for issue by the Board on 27 June 2012 and the
balance sheet was signed on behalf of the Directors (as at 25 March
2012) by Donald Brydon and Alice Perkins.
The Group's financial statements have been prepared in accordance
with International Financial Reporting Standards (IFRSs) as adopted
by the European Union and as they apply to the financial statements
of the Group for the year ended 25 March 2012. The principal
accounting policies adopted by the Group are set out on p137.
2. Going concern and funding
Royal Mail Group Ltd
At March 2011 and September 2011 the year end and interim
accounts respectively contained a specific note on going concern,
highlighting that the Directors continued to rely on either the
granting of State Aid by the European Commission to the
Government to take on almost all of the historical pension liabilities
and pension assets of the main pension scheme, Royal Mail Pension
Plan (RMPP), or that if State Aid was not granted, the Government
would continue to provide altemative financing arrangements which
would allow Royal Mail Group Ltd (‘the company) to pay its liabilities
as they fell due.
In light of
the post balance sheet event with respect to pensions described
below:
© the retum to profitability of the UKPIL businesses highlighted on
page 40;
the retum to cash generation at both the Group (page 40) and
company level;
© the recent price increases in April 2012; and
Royal Mail Holdings ple
Annual Report and Financial Statements 2011-12
«a formal review by Directors of cash headroom forecasts, including
a ‘pessimistic but realistic’ downside scenario, which confirmed
there is sufficient cash headroom so the company can meet its
liabilities as they fall due
the Directors have concluded that the company is a going concern
and that it is appropriate to prepare the financial statements on this
basis.
Post Office Limited
Post Office Limited had net liabilities as at 25 March 2012 but has
operated at a profit before exceptional items during 2011-12 for the
fourth year running
On 24 March 2010 a funding agreement was agreed that provided
up to £180m for compensation for losses sustained in parts of the
network in 2011-12 as well as providing access to the working
capital facility of £1.15bn to 31 March 2012. These arrangements
received State Aid approval on 21 March 2011.
A further funding agreement with Government was announced on
27 October 2010 which provided for:
Funding of £410m for 2012-13
Funding of £415m for 2013-14
Funding of £330m for 2014-15
Extension of the existing working capital facility of £1.15bn up to
31 March 2016
State Aid approval for the funding for 2012-13 to 2014-15 was
received on 28 March 2012 and it was also recognised that the
working capital facility was no longer deemed State Aid
This investment will enable Post Office Limited to modernise the
branch network and the continuation of the Network Subsidy
Payment recognises the major social value that Post Offices provide
to communities. New main and local branches are currently being
piloted across the UK and these pilots will help inform the future roll-
out plans. Customers will benefit from a much better retail
experience including extended opening hours. This programme is
designed to make the Post Office network more self-sustaining and,
over time, less dependent on direct subsidy. This programme will not
involve branch closures.
The Directors are satisfied that the plans in place and the substantial
investment secured will enable Post Office Limited to modernise and
to secure its future but note that the scale of change required is.
significant so not without risk.
The Directors recognise that significant progress has been made in
preparing for the coming years of investment in modernisation, and
after careful consideration, continue to believe that Post Office
Limited will be able to meet its liabilities as they fall due in the
foreseeable future. Accordingly, on that basis, the Directors consider
that it is appropriate that these financial statements have been
prepared on a going concern basis.
89
Notes to the Consolidated
financial statements
(continued)
3. Events after the reporting period
On 1 April 2012 - after the granting of State Aid by the European
Commission to the Government on 21 March 2012 - almost all of
the pension liabilities and pension assets of the main pension
scheme, RMPP, built up until 31 March 2012, were transferred to
HM Government. On this date the RMPP was also sectionalised, with
Royal Mail Group Ltd and Post Office Limited each responsible for
their own sections in future. This arrangement left the RMPP fully
funded on an actuarial basis in respect of historic liabilities at that
date.
4. Segment information
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Royal Mail Holdings plc continues to hold £1.2bn of investments
which were previously held in pension escrow and which will not be
transferred to Royal Mail Group Ltd or Post Office Limited. The
£149m of investments which were previously held in pension escrow
in Royal Mail Group Ltd were made available to that company on
1 April 2012.
At the end of March 2013, certain unused tax losses deriving from
past pension contributions will be extinguished in accordance with
regulations made under the Postal Services Act 2011
On 1 April 2012 Post Office Limited became a directly owned
subsidiary of Royal Mail Holdings plc. At that date the majority of
Royal Mail Holdings plc Directors became Directors of Royal Mail
Group Ltd. Alice Perkins and Donald Brydon are the only Directors of
Royal Mail Holdings ple at 1 April 2012.
The Group reports its segments in the way it internally manages its business as follows:
25 March 2012
Other
European
UK operations operations
UK Parcels, Post General
International Office Logistics
& Letters Limited Other Total Systems Total
£m £m £m £m £m £m
External revenue 7,164 801 5" 7,970 1,562 9,532
Revenue between segments 25 359 129 513 = 513
Total segment revenue 7,189 1,160 134 8,483 1,562 10,045
Operating profit before exceptional items 252 61 1 314 128 442
Modemisation costs - operating exceptional
items (229) (2) = (231) = (231)
Operating profit after modernisation
costs before other operating exceptional
items 23 59 1 83 128 211
Other exceptional items 114 (35) 10 89 oh 90
Profit before financing and taxation 137 24 11 172 129 301
* The ‘Other’ segments’ extemal revenue comprises £4m (2011 £37m) relating to the provision of facilities management services by Romec Limited and £1m (2011 £17) for building
engineering services provided! by NDC 2000 Limited.
Finance costs of £118m (2011 £114m), finance income of £54m (2
adjusting the profit before financing and taxation of £301m (2011 £1
£152m loss),
Page 31 describes the activities of the major business segments.
Royal Mail Holdings ple
‘Annual Report and Financial
90
011 £69m) and net pensions interest of £26m (2011 £167m) when
60m) reconciles to the Group profit before taxation of £263m (2011
Statements 2011-12
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Notes to the Consolidated
financial statements
4. Segment information (continued)
27 March 2011
Other
European
UK operations ‘operations
UK Parcels. Post General
International Office Logistics
& Letters Limited Other Total ‘Systems Total
£m £m £m £m £m £m
External revenue 6857 776 38 7.671 1485 9,156
Revenue between segments 28 345 142 515 - 515
Total segment revenue 6885 1121 180 8,186 1,485 9,671
Operating profit before exceptional items 72 36 20 128 118 246
Modernisation costs - operating exceptional
items (192) (15) - (207) = (207)
Operating (loss)/profit after modernisation
costs before other operating exceptional
items (120) 21 20 (79) 118 39
Other exceptional items 12 (35) 4d 21 7 21
(Loss)/profit before financing and taxation (108) (14) 64 68) 118 60
The following amounts are included within operating profit before exceptional items:
25 March 2012
ES
‘Other
European
UK operations operations
UK Parcels, Post General
International Office Logistics
& Letters Limited Other Total ‘Systems: Total
£m £m £m £m £m £m
Depreciation 261 = = 261 28 269
Amortisation of intangible assets (mainly
software) 29 = = 29 4 33
Share of post tax (loss)/profit from joint
venture and associates (2) 34 3 32 = 32
27 March 2011
Other
European
UK operations operations _
UK Parcels. Post General
International Office Logistics
Setters, Limited Other Total Systems Total
£m £m £m £m fm £m
Depreciation 223 = a 223 27 250
Amortisation of intangible assets
(mainly software) 29 - - 29 7 36
Share of post tax (loss)/profit from joint
venture and associates (a) 25 4 28 - 28
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Notes to the Consolidated
financial statements
(continued)
5. People information
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People costs:
2
2012 2011
£m £m
Wages and salaries 4,361 4,398
Pensions 419 458
Social security 304 304
Subpostmasters 483 4715
Temporary resource 90 82
Total 5,657 Stir
People numbers:
The number of people employed, calculated on a headcount basis, were:
Period end employees ‘Average employees
2012 2011 2012 2012
UK Parcels, International & Letters (UKPIL) 151,156 155,181 152,514 157,317
Post Office Limited 7,798 7,782 7,734 8,066
UK wholly owned subsidiaries 158,954 162,963 160,248 165,383
UK partially owned subsidiaries 3,926 4,254 3,972 42hk
General Logistics Systems 13,362 13,167 13,103 13,120
Group total 176,242 180,384 177,323 182,747
Further details about ‘Our people’ are included on page 25.
The number of subpostmasters employed at the period end were:
2012 2011
Total 8,125 8,283
‘The number of subpostmasters employed is not included in the period end and average employees numbers above.
Directors’ emoluments:
2012 2011
£000 £000
Directors’ emoluments 3,920 2,855
Amounts earned under Long-Term Incentive Plans - =
Number of Directors accruing benefits under defined benefit schemes 2 2
The Directors’ Remuneration Report discloses full details of Directors’ emoluments and can be found on pages 72 to 80.
92 Royal Mail Holdings ple
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6. Operating exceptional items
The results for the year include a number of non-recurring or restructuring costs which fall outside of the Group's normal trading activity,
These are items which, in management's judgement, need to be disclosed to provide greater visibility of the underlying results of the
business
An analysis of the exceptional items included within the income statement is as follows:
ES
2012 2011
£m £m Sm £m
Modernisation costs
Legacy share scheme — notional shares - 109
— dividend - 1
— Business Transformation (60) (44)
(60) 69
Modernisation bonus — frontline costs (30) '
Restructuring costs — redundancy costs charged through provisions (78) (237)
~ other costs charged through provisions (3) (19)
(81) (256)
Restructuring costs — project and excess travel costs incurred (60) (8)
(141) (264)
Impairment of property, plant and equipment - (12)
Total modernisation costs (234) (207)
Non-modernisation costs
Charged through provisions-potential industrial diseases claims (10) (30)
Impairments (43) (43)
State Aid and Postal Services Bill (24) (15)
Other exceptional items (16) -
(93) (88)
Total operating exceptional items (324) (295)
The £60m charge (2011 £41m) mainly represents payments linked to the achievement of key modernisation milestones as part of the pay
deal with the Communication Workers Union
A one-off modernisation bonus of £30m (2011 £nil) has been charged in 2011-12 to reflect the progress on frontline efficiency.
Of the £141m (2011 £264m) restructuring costs, £78m (2011 £237m) relates to provisions for redundancy costs in UKPIL and Post Office
Limited and £3m (2011 £19m) mainly onerous property lease costs. The remaining £60m (2011 £8m) principally relates to excess travel
expenses and one-off project costs in support of the modernisation of the business.
Impairments of £43m (2011 £43m) relate to: Post Office Limited comprising £19m (2011 £29m) property, plant and equipment and £17m
(2011 £11m) intangible assets; UKPIL comprising £1m (2011 £nil) property, plant and equipment and £3m (2011 £nil) software assets; and
£3m (2011 £2m) in relation to an associate company carrying value.
Exceptional costs of £24m (2011 £15m) were charged in the year for specific costs relating to the Postal Services Bill, the
State Aid process and the transfer of the Royal Mail Pension Plan (RMPP) pension liabilities and pension assets to HM Government on
1 April 2012.
Other exceptional items of £16m (2011 £nil) largely relate to Romec Limited transformation costs.
Royal Mail Holdings ple 93
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Notes to the Consolidated
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(continued)
7. Cash flow information
Cash flows relating to operating exceptional items
The net cash outflows relating to operating exceptional items charged to the income statement in the current and prior years are as follows:
eee
2012 2011
£m £m
Current year modernisation costs 129 88
Prior year modernisation costs 176 179
Current year non-modernisation costs. 27 5
Prior year non-modernisation costs 10 =
Total 342 272
The £129m (2011 £88m) modernisation cash outflows relating to the current year comprise £22m (2011 £55m) redundancy payments,
£52m (2011 £25m) Business Transformation payments and £55m (2011 £8m) project and excess travel costs. The £176m (2011 £179m)
modernisation cash flows in respect of the prior year comprise £97m (2011 £66m) redundancy payments, £2m (2011 £77m) legacy share
scheme payments, £39m (2011 £30m) redundancy related pension payments, £18m (2011 £nil), redundancy creditor payments £16m
(2011 £nil) Business Transformation payments and £4m (2011 £6m) other costs,
Free cash flow
Free cash flow in Royal Mail Group is defined as the net cash inflow/(outflow) before financing activities (except finance costs paid), less the
net cash purchase/Sale of financial asset investments (current and non-current)
Free cash flow is not a measure defined under IFRS but is a key indicator used by management to assess performance.
A reconciliation of ‘net cash inflow/(outflow) before financing activities’ in the consolidated statement of cash flows to Free cash
inflow/(outflow) is shown below.
a
2012 2011
£m £m
Net cash inflow/(outflow) before financing activities 232 (11)
Finance costs paid (73) (60)
Add back: Net purchase/\sale) of financial asset investments (non-current) 45 (42)
Net purchase of financial asset investments (current) 30 -
Free cash inflow/(outflow) 234 (213)
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8. Provisions
Exceptional
Non-
Modernisation modernisation Other Total
£m £m £m £m
At 27 March 2011 193 30 55 278
Arising during the year:
— charged in operating exceptional items 90 19 - 109
— charged in other operating costs - - 33 33
Unused amounts reversed (9) (2) (5) (16)
Utilised in the year (156) (6) (14) (176)
Discount rate adjustment al 2) = 3
At 25 March 2012 119 43 69 231
Disclosed as:
Current at 25 March 2012 76 7 55 138
Non-current at 25 March 2012 43 36 u 93
119 43 69 231
Current at 27 March 2011 140 3 38 181
Non-current at 27 March 2011 53 27 a7 97
193 30 55, 278
Exceptional modernisation
Modernisation exceptional provisions of £119m (2011 £193m) principally comprise redundancy schemes of £87m (2011 £159m). A further
£32m (2011 £32m) relates to onerous property and commercial contracts associated with restructuring. Current modernisation provisions
of £76m are expected to be utilised in 2012-13 with the remainder expected to be utilised within two to three years, except for onerous
property provisions of £2m likely to be utilised within three to five years and a further £4m expected to be utilised over a period greater than
five years
Exceptional non-modernisation
Non-modernisation exceptional provisions of £43m (2011 £30m) primarily relate to potential industrial diseases claims of £39m
(2011 £30m), of which £3m is expected to be utilised in 2012-13,
Other
Other provisions of £69m (2011 £55m) include those recognised for the expected liabilities arising from property exits in the normal course
of business. These principally comprise onerous lease obligations and decommissioning costs. In addition, further provision amounts arise
from estimated exposures resulting from legal claims incurred in the normal course of business and mainly obligations under onerous
commercial IT contracts. The majority of the ‘Other’ provision amounts are expected to be utilised in 2012-13, with the remainder within two
to three years, except £2m onerous property contracts expected to be utilised within three to five years, and a further
£6m expected to be utilised over a period greater than five years.
Royal Mail Holdings ple
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95
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Notes to the Consolidated
financial statements
(continued)
9. Employee benefits - pensions
On 1 April 2012, after the reporting period end date, almost all of the pension liabilities and pension assets of the Royal Mail Pension Plan
(RMPP) were transferred to HM Government.
The disclosures in this note relate to the year ending 25 March 2012 and show how the value of the assets and liabilities have been
calculated at the balance sheet date.
The Group operates pension plans as detailed below.
EEE... =
Plan Eligibility Type
Royal Mail Pension Plan (RMPP) UK employees Defined benefit
Royal Mail Senior Executives’ Pension Plan (RMSEPP) UK senior executives Defined benefit
Royal Mail Defined Contribution Plan (RMDCP) UK employees Defined contribution
Various other small-scale plans operated by overseas subsidiaries Overseas subsidiary employees Defined contribution
Defined Contribution
A charge for the defined contribution plans of £12m (2011 £10m) was recognised in operating profit before exceptional items within the
income statement. The Company contributions to these plans was £12m (2011 £10m). A new defined contribution plan (RMDCP) was
launched in April 2009. Recruits joining from 31 March 2008 are able to begin paying contributions to the new plan after they have worked
for the Company for a year.
Defined Benefit
Both RMPP and RMSEPP are funded by the payment of contributions to separate trustee administered funds. RMPP includes sections A, B,
and C, each with different terms and conditions:
© Section A is for members (or beneficiaries of members) who joined before 1 December 1971;
© Section B is for members (or beneficiaries of members) who joined on or after 1 December 1971 and before 1 April 1987 or to members
of Section A who chose to receive Section B benefits;
Section C is for members (or beneficiaries of members) who joined on or after 1 April 1987 and before 1 April 2008.
A series of changes to RMPP and RMSEPP began to take effect on 1 April 2008. The changes encompass:
© the Plans closed to new members from 31 March 2008;
all pensions and benefits earned before 1 April 2008 are still linked to final salary at the time of retirement;
from 1 April 2008, defined benefits building up for employee members of the Plans are earned on a career salary basis;
employees can continue to take their pension on reaching 60 but the normal retirement age will increase to 65 for benefits earned from
1 April 2010; and
from 1 April 2010 it is possible to draw pension earned before the change to normal retirement age from 55, and continue working while
still contributing to the Pension Plan until the maximum level of benefits has been reached.
Payment of £408m (2011 £432m) was made during the year in respect of regular future service contributions, with £405m (2011 £428m)
relating to RMPP. The regular future service contributions charge for RMPP, expressed as a percentage of pensionable pay, remained at
17.1% (2011 17.1%), effective from April 2010. This rate is not expected to change materially during 2012-13. For RMSEPP, these
contributions remained at 35.9% (2011 35.9%) effective from April 2010.
Payment of £8m (2011 £299m) was made during the year to fund the deficit in the plans, with €nil (2011 £292m) relating to RMPP. Deficit
recovery payments were agreed for RMPP over the 38 years from the date of the latest full actuarial valuation at March 2009. Following the
State Aid clearance granted on 21 March 2012 and the subsequent transfer of almost all of the pension liabilities and pension assets to HM
Government on 1 April 2012, no RMPP deficit payment was made during the year. For RMSEPP, deficit recovery payments will be £11m
per annum less regular future service contributions, from 1 April 2010 to 31 January 2024
Accurrent liability of £5m (2011 £12m) has been recognised for payments to the pension plans relating to redundancy. During the year,
payments of £39m (2011 £30m) relating to redundancy were made.
A liability of £1m (2011 £1m) has been recognised for future payment of pension benefits to a past Director (see page 80 of the Directors’
Remuneration Report).
96 Royal Mail Holdings ple
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9. Employee benefits - pensions (continued)
The following disclosures relate to the gains/losses and deficit recognised in the financial staternents of the Group for the defined benefit
plans RMPP and RMSEPP.
a) Major long-term assumptions - RMPP and RMSEPP
‘The size of the pension deficit, which is large in the context of the Group and its finances, is materially sensitive to the assumptions adopted
Small changes in these assumptions could have a significant impact on the deficit and overall income statement charge. The major
assumptions were:
‘At 25 March 2012 ‘At 27 March 2011.
% pa pa
Inflation assumption (RPI) tie) 35
Inflation assumption (CPI) eae) 28
Discount rate 5.1 55
Rate of increase in salaries* RPI + 1% RPI + 1%
Rate of increase for deferred pensions - RMSEPP members transferred from
Section A or B of RMPP RPI RPI
Rate of increase for deferred pensions - all other members CPI CPI
Rate of pension increases - RMPP Sections A/B cPI CPI
Rate of pension increases - RMPP Section C RPI RPI
Rate of pension increases - RMSEPP all members RPI RPI
Expected average rate of return on assets 5.9 65
* The rate of increase in salaries for 2012-13 reflects the Business Transformation 2010 and Beyond agreement. From 2013-14 the rate of increase in salaries assumption is RPI + 1%,
In June 2010, the Government announced that it was intending to change the inflation measure used to determine statutory minimum
indexation in deferment and in payment from RPI to CPI from April 2011. Where relevant, the inflation assumption has changed from RPI to
cP
The above assumptions relate to both defined benefit plans, with the exception of the expected average rate of return on assets which is
computed for the combined assets of the plans. The expected average rate of return on assets is a weighted average of the long-term
expected rate of return of each principal asset class (see section b).
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Notes to the Consolidated
financial statements
(continued)
9. Employee benefits - pensions (continued)
Mortality
The mortality assumptions for the larger plan are based on the latest Self Administered Pension Scheme (SAPS) mortality tables with
appropriate scaling factors (106% for male pensioners and 101% for female pensioners). For future improvements the assumptions allow for
‘medium cohort’ projections with a 1.25% floor. These are detailed below
Average expected life expectancy from age 60:
2012 2011
For a current 60 year old male RMPP member 2b years 26 years
For a current 60 year old female RMPP member 29 years 29 years
For a current 40 year old male RMPP member 29 years 29 years
For a current 40 year old female RMPP member 32years 32 years
The following table shows the potential impact on the RMPP liabilities and pension deficit of changes in key assumptions:
ee
Sensitivity analysis on RMPP liabilities
£m
690
Changes in Changes in Changes in Changes in An additional
inflation discount rate real salary cP 1 year life
pension of +0.1%pa_ growth of assumptions expectancy
increase of +01%pa of +0.1%pa
+0:1%pa
b) Plans’ assets and expected rates of return and deficit calculation - RMPP and RMSEPP.
The assets in the plans and the expected rates of return were
Long-term expected rate
Market value of return
2012 2011 2012 2021
£m £m % pa pa
Equities 3,385 4,268 77 82
Bonds 25,356 21,291 5.7 62
Property 1,417 1,590 68 65
Cash/other 333 418 34 42
Derivatives 254 118 5.7 62
Fair value of plans’ assets 30,745 27,685
Present value of plans’ liabilities (33,667) (32,186)
Deficit in plans (2,922) (4,501)
Ninety nine percent of the above assets are held by RMPP
Included within the pension assets are £12.5bn of HM Government bonds.
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9. Employee benefits - pensions (continued)
The expected average rate of return is computed at each balance sheet date based on the market values and long-term rate of return of
each principal asset class as at that date. The rate shown for bonds and derivatives is the combined expected rate of return for bonds/debt
instruments.
There is no element of the present value of plans’ liabilities on the previous page that arises from plans that are wholly unfunded.
The RMPP Trustee has elected to use equity futures and interest rate and inflation rate swaps ("derivatives") to deliver the investment
strategy whilst managing risk as described below. These derivatives are recorded at market value within the table on the previous page and
are commonly used by pension funds. The equity futures retain the effective economic exposure to equity prices whilst de-risking the Plan by
allowing cash which was previously held in equities to be transferred into bonds. The equity futures generate exposure to equity type assets
totalling £10.5bn (March 2011 £11.7bn). The interest rate and inflation rate swaps are used to hedge the exposure to movements in
interest rates and inflation (which are key long-term assumptions used to estimate future pension liabilities) and the economic exposure of
these swaps in total is £30.5bn (March 2011 £31.Obn).
The investment strategy of the RMPP Trustee aims to safeguard the assets of the Plan and to provide, together with contributions, the
financial resource from which benefits are paid. Investment is inevitably exposed to risks. The investment risks inherent in the investment
markets are partially mitigated by pursuing a widely diversified approach across asset classes and investment managers. The Plan uses
derivatives (such as swaps and futures) to reduce risks whilst maintaining expected investment retums. The Plan Trustee recognises that
there is a natural conflict between improving the potential for positive return and limiting the potential for poor return. The Trustee has
specified objectives for the investment policy that balance these requirements. More details of the RMPP investment strategy, principles and
objectives is available in the RMPP Report and Financial Statements 2010-11 at http//www.royalmailpensionplan.co.uk/56/rmpp-report-
and-accounts.
c) Movement in plans’ assets, liabilities and deficit - RMPP and RMSEPP
The pensions accounting deficit has moved in the year as follows:
Accounting Pension Deficit Movement.
£bn
8
7 are
6
5
4
3
2
1
0
March Interest Net changes Employer Benefits Benefits Employer Interest Underlying Mardi
2011 on pension in tong term annual paid to paid to and employee on pension _increase in 201.
liabilities assumptions service cost. pensioners pensioners contributions «= assets_-«=—s market value
and employee (reduces, (reduces into the plan of assets
contributions liabilities) assets)
Royal Mail Holdings ple 99
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Notes to the Consolidated
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(continued)
9. Employee benefits - pensions (continued)
The movements in the pension liabilities include:
1 Interest on the brought forward pension liabilities using the March 2011 discount rate - this is mainly due to the unwinding of the
discount factor of 5.5% on the brought forward liability of €32bn (approximately 5.5% x £32.2bn equates to c&1.7bn higher liabilty)
2. The changes in long-term assumptions which comprise a higher liability as the discount factor has reduced from 5.5% to 5.1%, offset by
lower future pension payments due to RPI and CPI reducing. In line with the relevant accounting standard IAS 19, an AA corporate bond
rate has been used to discount plan liabilities
3, The annual ongoing pension cost of £0.4bn charged to the income statement ‘people costs' line at a 17.1% rate. Employee contributions
increase the total to £0.6bn. Note this offsets the £0.6bn ongoing company and employee contributions below.
4, Benefits paid to members of £1.2bn which reduce the liability although this is offset by an equal and opposite reduction in pension assets
as shown in item 5
Items that impact the pension assets include:
5, Benefits to members which are funded from assets, so therefore a reduction to assets, see item 4.
6. Ongoing company contributions to the main plan, RMPP, included in cash flow at a 17.1% rate, together with employee contributions,
offsetting item 3,
7.The expected rate of return on pension assets based on the March 2011 6.5% blended asset return assumption (6.5% x £28bn assets
equates to £1.8bn higher asset)
8.The additional increase in market value of pension assets, which is mainly driven by the holding in bonds
9. The combination of 7 and 8 comprises the overall retum on assets of £3.7bn and this is the main reason why the accounting deficit has
decreased
IAS 19 requires a reconciliation of opening to closing assets and liabilities. This is shown below and is consistent with the chart on page 99.
Changes in the fair value of the plans’ assets are analysed as follows:
Col
2012 2011
£m £m
Plans’ assets at beginning of period 27,685 25,814
Company contributions paid 455 761
Employee contributions paid 164 152
Movement in Company contributions accrued (8) 6
Finance income (expected rate of return) 1,775 1,714
Actuarial gains (additional increase in market values) 1,869 470
Benefits paid to members (1,175) (1,232)
Plans’ assets at end of period 30,745 27,685
Changes in the present value of the defined benefit pension obligations are analysed as follows:
2012 2011
£m £m
Plans’ liabilities at beginning of period (32,186) (33,855)
Current service cost (407) (448)
Employee contributions (144) (152)
Curtailment costs* (34) (36)
Finance cost (1,749) (1,881)
Actuarial (losses)/gains (recognised in statement of comprehensive income) (325) 2,954
Benefits paid 1,175 1,232
Plans’ liabilities at end of period (33,667) (32,186)
* The curtailment costs in the income statement are recognised on a consistent basis with the associated compensation costs. Estimates of both are included. for example, in any redundancy
provisions raised. The curtailment costs above represent the costs associated with those people paid compensation in respect of redundancy during the accounting period. Such payments may
‘occur in an accounting period subsequent to the recognition of costs in the income statemnent
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9. Employee benefits - pensions (continued)
d) History of experience gains and losses - RMPP and RMSEPP
The cumulative amount of actuarial gains and losses recognised since transition to IFRSs at 29 March 2004 in the statement of
comprehensive income is a £462m gain (2011 £1,082m loss).
2012 2011 2010 2009 2008
£m £m £m £m £m
Fair value of assets 30,745 27,685 25,814 20,071 23,923
Present value of liabilities (33,667) (32,186) (33,855) (26,847) (26,846)
Deficit in plans (2,922) (4,501) (8,041) (6,776) (2,923)
2012 2011 2010 2009 2008
Em £m £m &m &m
Experience adjustment on assets 1869 770 EH69 6481) 1327)
Experience adjustment on liabilities (5) (8) 673 (10) (169)
This disclosure is in accordance with IAS 19.
e) Recognised charges - RMPP and RMSEPP.
A disaggregation of the amounts recognised in the income statement and statement of comprehensive income is as follows:
2012 2011
£m £m
Analysis of amounts recognised in the income statement:
Analysis of amounts charged to operating profit before exceptional items:
— Current service cost 407 448
Total charge to operating profit before exceptional items 407 448
Analysis of amounts charged to operating exceptional items:
— Loss due to curtailments (within provision for restructuring charge - note 8) 15 47
Total charge to operating profit 422 495
Analysis of amounts charged/(credited) to financing:
— Interest on plans’ liabilities 1,749 1,881
— Expected return on plans’ assets (4,775) (1,714)
Total net (credit)/charge to financing (26) 167
Net charge to income statement before deduction for tax 396 662
Analysis of amounts recognised in the statement of comprehensive income:
— Actual return on plans’ assets 3,644 2,184
— Less: expected return on plans’ assets. (1,775) (1,714)
Actuarial gains on assets (all experience adjustments) 1,869 470
= Experience adjustments on liabilities (5) 2)
— Effects of changes in actuarial assumption on liabilities (320) 2,962
Actuarial (losses)/gains on liabilities (325) 2,954
Total actuarial gains recognised in the statement of comprehensive income before deduction for tax 1,544 3,424
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Other notes - financial assets,
financial liabilities and
hedging programmes
In simple terms:
The notes in this section explain how the Group is financed by providing
‘© a summary of financial assets (e.g. cash, investments and deposits) and liabilities (e.g. loans and finance lease obligations) and how the
various risks associated with these assets and liabilities are managed (note 10)
© an analysis of the pension escrow investments balance at 25 March 2012, established as security for the Pension Trustee in support of the
pension deficit recovery period (note 11)
a summary of the cash and cash equivalents balances held, including balances held in the Post Office network (note 12)
¢ details of loans and borrowings, including interest rates, additional loan facilities available and any security provided against the loans
{note 13)
# asummary of the maturity values/timescales for the loans, finance lease obligations and derivative liabilities (note 14)
an analysis of the Sterling carrying values of the financial assets and liabilities held in various foreign currencies, along with details of
interest rates, interest rate risk and maturity timescales (note 15)
e information regarding the various hedging programmes in place to mitigate volatility in commodity prices and foreign currency exchange
rates (note 16)
10. Financial assets and lial 9s — introduction, summary and management of financial risk 103
11. Pension escrow investments 105
12. Cash and cash equivalents 106
13. Loans and borrowings 106
14, Financial liabilities net and gross maturity analysis 108
15. Financial assets and liabilities - additional analysis 110°
16. Hedging programmes 115
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10. Financial assets and liabilities - introduction, summary and management of
financial risk
The Group's financial assets and liabilities are shown in the table below. Subsequent notes provide more detailed disclosures.
2012 2011
Non-current Current Total Non-current Current Total
£m Em £m £m £m £m
Pension escrow investments. 1,383 = 1,383 1,161 = 1,161
Cash and cash equivalents - 1,293 1,293 - 1,101 1,101
Other bank and local authority deposits = 31 31 4h 1 45
Derivative assets 2 ia) 11 6 36 42
Total financial assets 1,385 1,333 2,718 1,214 1,138 2,349
BIS loans to Post Office Limited = (377) (377) = (375) (375)
BIS loans to Royal Mail Group Ltd (1,522) - (1,522) (1,477) bl (1,477)
Miscellaneous loans in subsidiaries - - = (1) = (1)
Total loans and borrowings (4,522) (377) (1,899) (1,478) (375) (1,853)
Finance leases obligations (237) (90) (327) (193) (65) (258)
Derivative liabilities (a) (4) (5) - (3) (3)
Total financial liabilities (4,760) (474) (2,231) (1,671) (443) (2,114)
Financial assets and liabilities — financial risk management objectives and policies
The Group's principal financial assets and liabilities, comprise short-term deposits, money market liquidity investments, Government gilt
edged securities, loans, finance leases and cash. The main purposes of these financial instruments are to raise finance and manage the
liquidity needs of the business operations. The Group has various other financial instruments such as trade receivables and trade payables,
which arise directly from operations and are not disclosed further in this section.
The Group enters into derivative transactions, which create derivative assets and liabilities, principally commodity price swaps and forward
currency contracts. The purpose is to manage the commodity and currency risks arising from the Group's operations.
Itis, and has been throughout the year under review, the Group's policy that no speculative trading in financial instruments shall be
undertaken
The main risks arising from the Group's financial assets and liabilities are interest rate risk, liquidity risk, foreign currency risk, commodity
price and credit risk. The Board reviews and agrees policies for managing each of these risks and they are summarised below.
Interest rate risk
The Group's exposure to market risk for changes in interest rates relates to the Group's loans and borrowings and interest bearing financial
assets. The BIS loans to Royal Mail Group Ltd of £1,522m (2011 £1,477m) are a mix of £600m (2011 £600m) variable rate and £922m
(2011 £877m) fixed interest rate with a combined average maturity date of 2017 (2011 average maturity date of 2017). The BIS loans to
Post Office Limited of £377m (2011 £375m) are at short-dated fixed interest rates with average maturity 1 day (2011 average maturity 1
day). The total interest bearing financial assets of the Group (excluding the non-current investments) of £549m (2011 £397m) are at short-
dated fixed or variable interest rates with average maturity 16 days (2011 average maturity 5 days). These short-dated financial instruments
are maturity managed to obtain the best value out of the interest yield curve.
The Group's policy is to manage its net interest expense using an appropriate mix of fixed and variable rate financial instruments. No external
hedging of interest rate risk is undertaken.
Foreign currency risk
The Group is exposed to foreign currency risk due to: trading with overseas postal operators for carrying UK mail abroad and delivering
foreign origin mail in UKPIL; the balances held to operate the Bureau de Change services within Post Office Limited; and various purchase
contracts denominated in foreign currency, all in UKPIL. These risks are mitigated by hedging programmes managed by Group Treasury.
Where possible, exposures are netted internally and any remaining exposure is hedged using a combination of external spot and forward
contracts. Hedging will not normally be considered for exposures of less than £1m and hedging is normally confined to 80% of the forecast
exposure where forecast cash flows are highly probable
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Notes to the Consolidated
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(continued)
10. Financial assets and liabilities - introduction, summary and management of
financial risk (continued)
The Group's obligation to settle with overseas postal operators is denominated in Special Drawing Rights (SDRs) - a basket of currencies
comprised of US dollar (USS), Japanese Yen, Sterling and Euro. Group Treasury operates a rolling 18-month hedge programme, which is
subsequently reviewed on a quarterly basis. An external SDR hedge was put in place during 2010-11.
For the Bureau de Change business, balances of major currency holdings are hedged along with minor currencies showing a closely
correlated movement.
The Group's obligations to settle conveyance charges in UKPIL in US$ has been hedged to April 2013
The Group has two hedge programmes covering obligations to settle Euro invoices on automation projects in UKPIL.
The Group does not hedge the translation exposure created by the net assets of its overseas subsidiaries mainly GLS. However, it does hedge
the transactional exposure created by inter-company loans with these subsidiaries.
Commodity price risk
The Group is exposed to fuel price risk arising from operating one of the largest vehicle fleets in Europe, which consumes over 130 million
litres of fuel per year, and a jet fuel price risk arising from the purchasing of air freight services. The Group's fuel risk management strategy
aims to reduce uncertainty created by the movements in the oil and foreign currency markets. The strategy uses over-the-counter derivative
products (in both USS commodity price and USS/Sterling exchange rate) to manage these exposures, mainly on a combined basis.
In addition, the Group is exposed to the commodity price risk of purchasing electricity and gas. The Group's risk management strategy aims
to reduce uncertainty created by the movements in the electricity and gas markets. These exposures are managed by locking into fixed rate
price contracts with suppliers and using over-the-counter derivative products to manage these exposures.
Credit risk
Royal Mail considers that a fair and equitable credit policy is in operation for all its account customers. The level of credit granted is based on
a customer's risk profile assessed by an independent credit referencing agent. The credit policy is applied rigidly within the regulated products
area So as to ensure that Royal Mail is not in breach of compliance legislation. Assessment of credit for the non-regulated products is based
on commercial factors, which are commensurate with the Group's appetite for risk
Royal Mail has a dedicated credit management team, which sets and monitors credit limits, and takes corrective action as and when
appropriate. The level of bad debt incurred for the whole Group is 0.4% (2011 0.1%) of turnover.
With respect to credit risk arising from other financial assets of the Group, which comprise cash, cash equivalent investments, available for
sale financial assets, held to maturity financial assets, held for trading financial assets, loans and receivables financial assets and certain
derivative instruments, the Group invests/trades only with high-quality financial institutions. The Group's exposure to credit risk arises from
default of the counterparty, with a maximum exposure equal to the carrying amount of these instruments.
Liquidity risk
The Group's primary objective is to ensure that the Group has sufficient funds available to meet its financial obligations as they fall due. This
is achieved by aligning short-term investments and borrowing facilities with forecast cash flows. Typical short-term investments include
money market funds, time deposits with approved counterparties, UK Government gilts and Treasury bills. Borrowing facilities are regularly
reviewed to ensure continuity of funding
The unused facilities for Royal Mail Group Ltd of £300m expire in 2014 (2011 £300m expiring in 2014). The unused facility for Post Office
Limited of £773m expires in 2016 (2011 £775m expiring in 2012). Additionally, the Group has £200m (2011 £200m) of uncommitted lines
of credit which are reviewed annually.
Capital management
Royal Mail Holdings plc is a public limited company whose shares are not traded and the Group regards its capital as share capital, share
premium, retained earnings and debt provided by the UK Government. The sole shareholder and the provider of the majority of debt to the
Group is the UK Government. The management of capital is closely linked to the Group's relationship with its shareholder. The Group
maintains its liquidity requirements by the management of its internal funds and by the drawing down of equity and debt from its
shareholder as well as drawing on limited external debt facilities. The Group's debt to equity ratio is determined by its shareholder.
Sensitivity
Asa result of the mix of fixed and variable rate financial instruments and the currency and commodity hedge programmes in place, the
Group has no material exposure to operating profit risk from interest rate, exchange rate or commodity prices (2011 £nil).
104 Royal Mail Holdings ple
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11. Pension escrow investments
The pension escrow investments were established to provide security to the Royal Mail Pension Plan (RMPP) Trustee in support of a 38 year
deficit recovery period as agreed with the Trustee in 2009 as part of the last triennial valuation.
‘At 25 March 2012, Royal Mail Holdings plc had £1,234m (2011 £1.074m) of financial assets in the pension escrow and Royal Mail Group
Ltd had £149m (2011 £87m) of financial assets plus mortgages on certain Group properties over which charges have been registered.
At the balance sheet date the pension escrow investments comprised cash, treasury bills, index-linked gilt edged securities and conventional
gilt edged securities with varying effective interest rates. These are analysed in the table below:
SS
2012 2011
‘Average ‘Average
effective effective
interest rate interest rate
% £m % £m
Fixed rate
Cash at bank 04 1 04 3
Treasury bills 04 257 05 242
Gilt edged securities (index-linked) 43 835 47 707
Gilt edged securities (conventional) 48 141 48 122
Held in Royal Mail Holdings plc (page 149) 1,234 1,074
Treasury bills 0.4 45 - -
Gilt edged securities (index-linked) 43 79 47 66
Gilt edged securities (conventional) 48 25 48 21
Held in Royal Mail Group Ltd 149 87
Group Total 1,383 1,161
Treasury bill index-linked gilt edged securities and conventional gilt edged securities are classified as available for sale financial instruments
on the basis that they are quoted investments that are not held for trading and may be disposed of prior to maturity, The investments are
initially recognised at fair value, being the purchase price. After initial recognition, interest is included in the reported profit(loss) for the year,
using the effective interest rate method and the assets are measured at fair value with gains and losses being recognised in the Financial
Assets Reserve until the investment is derecognised
The increase in the pension escrow investments of £222m (2011 decrease of £28m) consists of £45m (2011 £54m) interest on the
investments plus £133m (2011 £20m) movement in fair value deferred into the Financial Assets Reserve, plus £44m paid into escrow on
the disposal of one of the Group's properties previously held under mortgage in escrow (2011 less £102m released from escrow, substituted
by mortgages on certain Group properties)
As from 1 April 2012, following the transfer of almost all of the RMPP pension liabilities and pension assets to HM Government, Royal Mail
Holdings plc continues to hold £1.2bn of investments which were previously held in pension escrow and which will not be transferred to
Royal Mail Group Ltd or Post Office Limited. The £149m of investments which were previously held in pension escrow in Royal Mail Group
Ltd were made available to that company on this date.
Royal Mail Holdings ple 105
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Notes to the Consolidated
financial statements
(continued)
12. Cash and cash equivalents
Cash and cash equivalents include cash in Post Office Limited's 11,818 branches and other cash equivalent investments as shown below:
EE EEE EEE EE EEE EE EE EEE EE EE EEE EEE EEE EEE
2012 2011
£m £m
Cash in the Post Office Limited network 759 704
Cash at bank and in hand 171 100
‘Total cash at bank in hand or in the Post Office Limited network 930 804
Cash equivalent investments: Short-term bank and local authority deposits and money market fund
investments 363 297
Total cash and cash equivalents 1,293 1,101
Cash and cash equivalents comprise amounts held physically in cash, bank balances available on demand and deposits for three months or
less, dependent on the immediate cash requirements of the Group. Where interest is earned, this is either at floating or short-term fixed
rates based upon bank deposit rates. The fair value of cash and cash equivalent investments is not materially different from the carrying
value of £1,293m (2011 £1,101).
13. Loans and borrowings
Below is a summary of loans and borrowings at the year end, the average interest rate, facility availability and security granted.
EE
2012
‘Average
Average maturity
Loans Further interest rate date
and committed Total of loan of loan
borrowings facility facility drawn down drawn down
£m £m £m % year
BIS loans to Royal Mail Group Ltd 1,522 300 1,822 61 2017
BIS loans to Post Office Limited 377 773 1,150 08 2012
Total 1,899 1,073 2,972
SD
2011
‘Average
Average maturity
Loans Further interest rate date
and committed Total of loan of loan
borrowings facility facility drawn down drawn down
£m £m m x ear
BIS loans to Royal Mail Group Ltd 1477 300 1777 63 2017
BIS loans to Post Office Limited 375 775 1,150 08 2011
Committed facilities 1,852 1,075 2,927
Miscellaneous loans and borrowings in subsidiaries 1 = 1 45 2012
Total 1,853 1,075 2,928
The undrawn committed facilities, in respect of which all conditions precedent had been met at the balance sheet date, expire as follows:
See eee eee
2012 2011
£m £m
Expiring in one year or less = =
Expiring in more than one year, but not more than two years 300 775
Expiring in more than two years 773 300
Total 1,073 1,075
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13. Loans and borrowings (continued)
The following securities apply to the Group's committed facilities:
2012 2011
Facility Facility Facility Facility
£m end date £m end date Security
Royal Mail Group Ltd senior debt 900 2014 900 2014 Fixed charges over Royal Mail Holdings plc's shares in
facility Royal Mail Group Ltd and Royal Mail Group Ltd's
shares in Royal Mail Estates Limited. Floating charges
‘over all assets of Royal Mail Holdings pic, Royal Mail
Group Ltd and Royal Mail Estates Limited excluding
certain Group properties over which mortgages are
held as security to the Royal Mail Pension Plan
Royal Mail Group Ltd shareholder 422 i] 377 * None
loan facility
Royal Mail Group Ltd other drawn 500 2021-2025 500 2021-2025 Fixed charges over any Royal Mail Group Ltd loans to
down loans General Logistics Systems B.V., any Royal Mail Group
Ltd loans to subsidiaries of General Logistics Systems
BV. and Royal Mail Investments Limited's shares in
General Logistics Systems B.V. Floating charge over
non-regulated assets of Royal Mail Group Ltd
1,822 4777
Post Office Limited facility 1,150 2016 1,150 2012 Floating charge over all assets of Post Office Limited
and a negative pledge** over cash and near cash items
Total 2,972 2927
* Loan facilites are repayable on the later of March 2016 and the release of the pension escrow investment,
** The negative pledge is an agreement not to grant security over these assets or to set up a vehicle that has the same effect
The Royal Mail Group Ltd shareholder loan increased by £45m (2011 £40m) as a result of accrued interest added to the
loan balance.
The Post Office Limited facility of £1,150m is currently restricted to funding the cash and near cash items held within the Post Office Limited
network.
The BIS loans to Post Office Limited under the facility are short dated on a programme of liquidity management and mature on average
1 day after the year end (2011 1 day). On maturity it is expected that further loans will be drawn down under this facility, which expires in
2016.
The security in place in the previous year was as disclosed above - with the exception of the £60m (2011 £102m) mortgages over certain
Group properties which were established in March 2011.
The BIS loans to Royal Mail Group Ltd and Post Office Limited become repayable immediately on the occurrence of an event of default under
the loan agreements. These events of default include non-payment, insolvency and breach of covenant relating to interest and total
indebtedness. It is not anticipated that the Group is at risk of breaching any of these obligations.
Royal Mail Holdings ple 107
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Notes to the Consolidated
financial statements
(continued)
14. Financial liabilities net and gross maturity analysis
Below is a summary of when all the financial liabilities fall due.
2012
Loans
Finance Derivative
borrowings leases liabilities Total
£m £m £m £m
Amounts falling due in
One year or less or on demand (current) 377 90 4 474
More than one year (non-current) 1,522 237 1 1,760
More than one year but not more than two years 600 55 1 656
More than two years but not more than five years = 145 = 145
More than five years 922 37 = 959
Total 1899 327 5 2,231
SS
2011
Loans
and Finance Derivative
borrowings leases liabilities Total
£m £m £m £m
Amounts falling due in
One year or less or on demand (current) 375 65 3 443
More than one year (non-current) 1.478 193 7 1.671
More than one year but not more than two years = 50 7 50
More than two years but not more than five years 601 109 7 710
More than five years 877 34 7 941
Total 1.853 258 3 2114
Obligations under finance leases are either unsecured or secured on the leased assets. These are repayable in variable and fixed amounts
over their maturity periods. The average interest rate is 4% (2011 5%). The average maturity date is more than five years (2011 more than
five years),
108 Royal Mail Holdings ple
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14. Financial liabilities net and gross maturity analysis (continued)
The tables below set out the gross (undiscounted) contractual cash flows of the Group's financial liabilities. For overdrafts, loans and finance
lease contracts, these cash flows represent the undiscounted total amounts payable including interest. For derivatives which are settled
gross, these cash flows represent the undiscounted gross payment due and do not reflect the accompanying inflow. For derivatives which are
settled net, these cash flows represent the undiscounted forecast outflow.
2012
Gross Gross Gross
loans and Gross payments on payments on
borrowings finance lease derivatives derivatives
commitments instalments Sub-total settled gross settled net Total
£m £m £m £m £m £m
Amounts falling due in
One year or less or on demand (current) 423 102 525 316 3 844
More than one year (non-current) 2,081 351 2,432 3 al 2,436
More than one year but not more than two years 646 63 709 3 1 TAs}
More than two years but not more than five years 88 aley/ 245 = = 245
More than five years 1,347 131 1,478 = = 1,478
Total 2,504 453 2,957 319 4 3,280
a
2011
Gross Gross Gross
loans and Gross payments on payments on
borrowings finance lease derivatives derivatives
commitments _ instalments Sub-total settled gross settled net Total
&m £m £m £m £m £m
Amounts falling due in
One year or less or on demand (current) 424 76 500 379 2 881
More than one year (non-current) 2,144 308 2,452 3 - 2,455
More than one year but not more than two years 51 58 109 3 = 112
More than two years but not more than five years 717 19 836 - - 836
More than five years 1,376 131 1,507 - - 1,507
Total 2,568 384 2,952 382 2 3,336
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Notes to the Consolidated
financial statements
(continued)
15. Financial assets and liabilities - additional analysis
The following tables show the currency, classification, maturity and effective interest rate of the Group's financial assets and liabilities
Carrying amounts and fair values
Trade receivables, payables, prepayments, accruals and client payables have been omitted from this analysis on the basis that carrying value
is a reasonable approximation for fair value. Pension scheme assets and liabilities are also excluded. Fair values have been calculated using
current market prices (forward exchange rates/commodity prices) and discounted using appropriate discount rates. There are no material
differences between the fair value (transaction price) of all financial instruments at initial recognition and the fair value calculated using these
valuation techniques. The fair value of the BIS loans to Royal Mail Group Ltd (non-current) is £1,698m at 25 March 2012 (2011 £1,563m).
The fair value of ‘obligations under finance leases’ is £338m (2011 £262m). For all other financial instruments fair value is equal to the
carrying amount
110 Royal Mail Holdings ple
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15. Financial assets and liabilities - additional analysis (continued)
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The tables below also set out the carrying amount of the currency of the Group's financial instruments:
nn, EEE
2012 2011
Total Total
Level Classification £m £m
Financial assets
Cash at bank, in hand or in Post Office Limited network 930 804
Cash equivalent investments 363 297
— Money market funds Loans and receivables 314 442
— Short-term deposits - local government Loans and receivables _ 29
— Short-term deposits - bank Loans and receivables 49 126
Cash and cash equivalents 1,293 1,101
Financial assets - investments (current) 31 1
— Short-term deposits - Government/local government Loans and receivables il 1
— Short-term deposits - Bank Loans and receivables 30 -
Financial assets -investments (non-current) ~ Bank deposits Loans and receivables 2 44
Financial assets - pension escrow investments (non-current) 4 1,383 4,161
— Cash at bank il E}
— Treasury bills 1 Available for sale 302 242
~ Gilt edged securities (conventional) 1 Available for sale 166 143
— Gilt edged securities (index linked) 1 Available for sale 914 773
Derivative assets - current 2 9 36
= non-current 2 2 6
Total financial assets 2,718 2,349
Financial liabilities
Financial liabilities - loans and borrowings (current) (377) (375)
[= BIS loans to Post Office Limited ‘Amortised cost (377) (375)
Obligations under finance leases (current) Amortised cost (90) (65)
Financial liabilities - loans and borrowings (non-current) (1,522) (1,478)
— BIS loans to Royal Mail Group Ltd Amortised cost (1,522) (1,477)
— Miscellaneous loans in subsidiaries (non-current) Amortised cost = (a)
Obligations under finance leases (non-current) Amortised cost (237) (193)
Derivative liabilities - current 2 (4) (8)
Derivative liabilities - non-current 2 (a) =
Total financial liabilities (2,234) (2,414)
Net total financial assets 487 235
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Notes to the Consolidated
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(continued)
15. Financial assets and liabilities - additional analysis (continued)
There are no financial assets or liabilities designated at fair value through the income statement on initial recognition.
The criteria for codification of ‘Level’ in the table on the previous page is described in the accounting policy ‘Fair value measurement of
financial instruments’ on page 139.
The financial assets - investments (non-current) - bank deposits of Enil (2011 £44m) and Enil (2011 £1m) of the cash equivalent
investments are pledged as collateral to a counterparty bank which has provided a letter of credit in support of a lease payable obligation
These investments are held in USS.
Derivative assets £9m current, £2m non-current (2011 £36m current, £6m non-current) and liabilities €4m current, £1m non-current
(2011 £3m current, £nil non-current) are valued at fair value. Effective changes in the fair value of derivatives, which are part of a
designated cash flow hedge under IAS 39, are deferred into equity. All other changes in derivative fair value are taken straight to the income
statement.
None of the financial assets listed in the table on the previous page are either past due or considered to be impaired.
The net total financial assets are held in various different currencies as summarised in the table below. The majority of these financial assets
are held within cash at bank, in hand or in the Post Office Limited network.
eel
Sterling USS Euro Other Total
£m £m £m £m £m
Net total financial assets 2012 275 22 146 4h 487
Net total financial assets 2011 14 82 110 29 235
Interest rate risk
Interest on financial instruments classified as floating rate is repriced at intervals of less than one year. Interest on financial instruments
classified as fixed rate is fixed until the maturity of the instrument.
The tables below set out the carrying amount by maturity of the Group's financial instruments that are exposed to interest rate risk. The
pension escrow investments mature between 1 day and 44 years but have been disclosed as maturing in greater than 5 years as the
investments have been provided as security to the Royal Mail Pension Plan in support of the 38 year deficit recovery period from March
2009 (see note 3 for further information regarding these investments). The floating rate BIS loans to Royal Mail Group Ltd mature in 2014
and interest rates on these loans are set for periods between 7 days and 6 months as selected by the Group.
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15. Financial assets and liabilities - additional analysis (continued)
Financial year ended 25 March 2012
Within 1-2 2-5 More than
year years years 5 years Total
£m £m £m £m £m
Fixed rate
Cash at bank 42 28 = = = 28
Cash equivalent investments:
~ Short-term deposits - bank 07 30 - - = 30
Financial assets - investments (current)
~ Short-term deposits - Government/local
government ua 1 - - - a
- Short-term deposits - Bank 24 30 - - - 30
Financial assets - pension escrow investments (non-
current
~ Gilt edged securities (conventional) 48 - - - 166 166
BIS loans to Post Office Limited 08 (377) = = a (377)
BIS loans to Royal Mail Group Ltd 87 = = = (922) (922)
Obligations under finance leases 3.9 (90) (55) (145) (37) (327)
Total (378) (55) (145) (793) (4,371)
Floating rate
Cash at bank 05 127 - - - 127
Cash equivalent investments:
- Money market funds os 314 - - - 314
- Short-term deposits - bank 08 19 - - = 19
Financial assets - pension escrow investments (non-
current)
~ Cash at bank 04 - - - 1 1
- Treasury bills 04 - - - 302 302
~ Gilt edged securities (index linked) 4.3 = = = 914 914
BIS loans to Royal Mail Group Ltd 22 = (600) = = (600)
Total 460 (600) - 1,217 1,077
Non-interest bearing
Cash at bank, in hand or in Post Office Limited network 7715 I = = 775
Derivative assets o 2 - - 1
Derivative liabilities (4) (a) = = (5)
Total 780 1 = = 781
Net total financial assets/(liabilities) 862 (654) (445) 424 487
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15. Financial assets and liabilities - additional analysis (continued)
Financial year ended 27 March 2011
Gee
‘Average More
effective Within 1-2 25 than
interest rate 1 year years years 5 years Total
a £m £m £m £m £m
Fixed rate
Cash at bank 3.9 12 - - - 12
Cash equivalent investments
= Short-term deposits local govemment 06 29 = - = 29
~ Short-term deposits - bank 08 92 = - = 92
Financial assets - investments (current)
- Short-term deposits - Government/local government 77 1 - - - 1
Financial assets - investments (non-current)
~ Bank deposits 04 - 5 24 15 44
Financial assets - pension escrow investments (non-
current)
~ Gilt edged securities (conventional) 48 = = = 143 143
BIS loans to Post Office Limited os (375) = - = (375)
BIS loans to Royal Mail Group Ltd 84 = = = (877) (877)
Obligations under finance leases 46 (65) (50) (109) (34) (258)
Miscellaneous loans in subsidiaries 45 = = (a) = (a)
Total (306) (45) (86) (753) (1,190)
Floating rate
Cash at bank 08 87 = ad > 87
Cash equivalent investments:
~ Money market funds O7 142 - - = 142
~ Short-term deposits - bank os 34 - - - 34
Financial assets - pension escrow investments
(non-current)
~ Cash at bank 04 a = = 3 3
- Treasury bills os - - - 242 242
- Gilt edged securities (index linked) AT - - - 773 773
BIS loans to Royal Mail Group Ltd 3.0 = a (600) = (600)
263 = (600) 1,018 681
Non-interest bearing
Cash at bank, in hand or in Post Office Limited network 705 7" ~ = 705
Derivative assets 36 6 = = 42
Derivative liabilities (3) = - = (3)
Total 738 6 - = Th
Net total financial assets/(liabilities) 695 (39) (686) 265 235
114 Royal Mail Holdings ple
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Notes to the Consolidated
financial statements
(continued)
16. Hedging programmes
The purpose of the Group's hedging programmes is to mitigate volatility in commodity prices and foreign exchange rates. As explained in
note 10, interest rate risk is managed using an appropriate mix of fixed and variable rate financial instruments. There are no significant
concentrations of credit risk. Accounting rules require the Company to choose whether to designate cash flow hedge programmes or not.
(subject to various tests). The impact of not designating a cash flow hedge programme is that all gains or losses on the derivatives in the
programme have to be taken immediately to the income statement and cannot be deferred into equity. The Group had the following
designated cash flow hedge programmes during the current and previous year:
Hedging Activities
i) The diesel fuel hedge programme uses forward commodity price swaps in USS or Sterling and forward currency purchase contracts to
hedge the exposure arising from commodity price and USS/Sterling exchange rates for forecast diesel fuel purchases.
ii) The air conveyance hedge programme uses USS forward currency purchase contracts to hedge the exposure arising from US$/Sterling
exchange rates for forecast air conveyance purchases.
iii) Three capital programmes use Euro forward currency purchase contracts to hedge the exposure arising from Sterling/Euro exchange
rates for contracted capital expenditure on automation projects.
iv) The electricity hedge programme uses forward commodity price swaps to hedge the exposure arising from electricity prices.
v) The gas hedge programme uses forward commodity price swaps to hedge the exposure arising from gas prices.
In addition, minor changes were made to the jet fuel hedge programme to allow it to be designated as a cash flow hedge prospectively from
December 2011. The programme uses forward commodity price swaps and forward currency purchase contracts to hedge the exposure
arising from commodity price and US$/Sterling exchange rates for forecast jet fuel usage.
‘The Group had undesignated cash flow hedge programmes for the Post Office Limited Bureau de Change balances, the UKPIL overseas
postal operator liabilities and the transactional exposure created by inter-company loans with GLS. The derivative balances of these
programmes are not material.
Commodity price hedging
The Group's normal operating activities result in the consumption of fuel (both diesel and jet), electricity and gas. The prices of these
commodities can be volatile so the Group enters into price swap contracts to lock future purchases (at an agreed volume) into a known price.
For diesel and jet these price swaps are sometimes entered into on the USS price for the commodity (based upon available market prices), in
which case the Group uses forward foreign currency contracts to lock into a combined sterling price for the commodity. The following table
shows the commodity, risk and the percentage of the expected consumption hedged.
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Notes to the Consolidated
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(continued)
16. Hedging programmes (continued)
Expected consumption hedged 2012
March March March
Year ending Year ending —Year ending
Commodity Risk 2013 2014 2015
Diesel fuel USS price and $/£ exchange rate movements 91% 51% o%
Jet fuel USS price and $/£ exchange rate movements 90% 66% -
Electricity £ price movement 83% 85% 20%
Gas £ price movement 78% 80% o%
Expected consumption hedged 2022
March March March
Year ending Year ending Year ending
2012 2013 2014
Diesel fuel USS price and S/E exchange rate movements 90% 29% =
Jet fuel USS price and S/£ exchange rate movements. 90% 30% -
Electricity £ price movement 76% 26% -
Gas £ price movement 88% 40% -
Foreign currency hedging for non-commodity items
As highlighted in note 10, the Group, where possible, nets exposure to foreign currency internally. This is possible because Post Office Limited
holds foreign currency cash balances, whilst UK Parcels, International & Letters (UKPIL) have net liabilities with respect to amounts owed
to foreign postal administrations, because the UK is a net exporter of mail to the rest of the world. The remaining net exposure is hedged
with external forward foreign currency contracts. The foreign currency cash balances, the foreign postal administration liabilities and
the derivatives are all revalued to current market prices at the balance sheet dates, meaning that no net gains or losses arise in the
income statement
UKPIL's obligations on automation projects are fully hedged, under the capital hedge programmes, for the remainder of the projects
(expected to be complete during 2012) using forward foreign currency contracts to fix the cost of the currency required to pay the supplier.
The hedge programme covering the UKPIL conveyance costs uses forward foreign currency contracts to fix the cost of the currency required
to pay air freight. The contracts in place at the year end covered 90% of the exposure for the year ending March 2013 (2011 90% of the
exposure for the year ending March 2012).
Derivative values
At any point in time, the derivative in these cash flow hedge programmes are either ‘in the money’ which means the hedged rates are better
than current market rates or ‘out of the money’ which means the hedged rates are worse than current market rates. The gains (in the
money) and losses (‘out of the money) as at the balance sheet date are deferred into equity (where the hedge is effective) and an associated
financial asset or financial liability is created in the balance sheet. The financial asset/liability is released when the derivative matures. The
amounts deferred into equity are released when the hedged transaction occurs. The following tables show the derivative contracts entered
into at 25 March 2012 and 27 March 2011 and the associated derivative assets and liabilities.
116 Royal Mail Holdings ple
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16. Hedging programmes (continued)
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Derivative Derivative
asset Derivative liability Derivative
non- asset non- liability
Average contracted current current current current
Commodity/ Nominal ‘commodity price/ fair value fair value fair value fair value
currency amount Maturity date exchange rate £m £m £m £m
2012
Diesel fuet Diesel fuel 191k tonnes Apr 12- Oct 14 US$963/tonne ah v =
Diesel fuel us$ $184m Apr 12 - Oct 14 US$1.58/£ - 1 - (4)
Diesel fuel Diesel fuel 32mlitres May 13—Jul14 £0.5/litre 1 = = =
Jet fuel Jet fuel 29ktonnes Apr 12 - Sep 13 US$1,017/tonne - at - -
Jet fuel Jet fuel $29m Apr 12 - Sep 13 US$1.58/£ - - -
Air conveyance uss $28m Mar 12 — Apr 13 US$1.60/£ - - -
Capital programmes Euro €21m Mar 12 — Jun 12 £0.84/€ - - - -
Electricity Electricity 695k MWH Apr 12 - Oct 14 £55/MWH = = (1) (2)
Gas Gas 40m therms Apr 12 - Oct 14 £0.70/therm - - = -
Cash flow hedges 2 9 (a) (3)
Other derivatives = = (1)
Total 2 9 (a) (4)
ET
Derivative Derivative
asset. Derivative liability Derivative
non= asset non- liability
Average contracted current current current ——_current
Commodity’ Nominal commodity price/ fair value fair value fair value fair value
curren amount Maturity date exchange rate £m &m £m m
2011
Diesel fuel Diesel fuel 148k tonnes Apr 11 - Jan 13 USS795/tonne 4 17 =
Diesel fuel USS $118m Apr 11 - Jan 13 USS1.57/E - - ~ (1)
Air conveyance USS. $25m Mar 11 — Apr 12 USS1.63/E - - -
Capital programmes Euro €67m Mar 11 - Apr 12 £0.85/€ = a =
Electricity Electricity 378k MWH = Apr 11 — Jan 13 £46/MWH 1 3 -
Gas Gas 24m therms Apr 11 — Apr 13 £0.56/therm - 3 - -
Cash flow hedges 5 25 = ()
Other derivatives 1 1 6 (2)
Total 6 36 = (3)
Other derivatives represent hedges by the Group of other foreign exchange and commodity price exposures, which are not designated under
IAS 39 (including the hedge of the Bureau de Change currency holdings within Post Office Limited, the hedge of the trading balance with
overseas postal operators and the hedge of inter-company loans with overseas subsidiaries).
Due to timing differences between the maturity of the derivative and the hedged transaction, there can be differences between derivative
balances (shown above) and the balance on the Hedging Reserve
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Other notes -
income statement
In simple terms:
The notes in this section explain other costs incurred by the Group in relation to:
other operating costs (e.g, pensions, depreciation and amortisation and operating lease charges) (note 17)
income tax charges (and related deferred tax assets/liabilities) (note 18)
finance income from investments and finance costs on loans and finance lease obligations (note 19)
17. Other operating costs 119
18. Income tax 120
19. Net finance costs: 122
118 Royal Mail Holdings ple
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17. Other operating costs
Operating profit before exceptional items is stated after charging the following other operating costs:
2012 2011
£m £m
Pensions charge (note 9) 419 458
Depreciation and amortisation
Depreciation of property, plant and equipment (note 20) 269 250
Amortisation of intangible assets (mainly software - note 22) 33 36
Total 302 286
Operating lease charges on property, plant and equipment 237 241
Costs of inventories expensed 178 160
Research and development expenditure during the year amounted to £nil (2011 £nil).
The following costs are relevant in understanding the extent of the Group's regulatory costs and statutory audit costs
Regulatory body costs
Postcomm, 6 10
Ofcom 2 7
Consumer Focus 3 3
Total Bey 13
2012 2011
Auditor's fees £000 £000
Audit of statutory financial statements 597 597
Other fees to auditor:
Statutory audits for subsidiaries 1,706 1,398
Other services (including regulatory audits) 669 471
Taxation services 78 55
Total 3,050 2,521
The Group paid £267,000 additional amounts in 2012 in respect of the 2011 audit (Enil in 2011 in respect of 2010 audit).
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Notes to the Consolidated
financial statements
(continued)
18. Income tax
The major components of the income tax charge for the years ended 25 March 2012 and 27 March 2011 are:
2012 2011
£m £m
Tax charged in the income statement
Current income tax:
Current UK income tax credit (43) (16)
Foreign tax 36 35
Adjustments in respect of UK current income tax of previous years. - (1)
Adjustments in respect of foreign current income tax of previous years 2 =
(5) 18
Deferred income tax:
Relating to origination and reversal of temporary differences 15 88
Income tax charge reported in the income statement 10 106
Tax charged to equity
Income tax related to items charged or credited directly to equity:
Deferred income tax charge related to actuarial movements in the pension deficit - -
Deferred income tax (credit)/charge related to movements in hedging reserve (8) 4
Current income tax charge for fair value adjustments on financial assets investments 31 5
Income tax charge reported in equity 23 9
Total taxation charge
Current income tax charge 26 23
Deferred income tax charge uv 92
Total income tax charge reported 33 115
A reconciliation between the tax charges and the product of accounting profit/{loss) multiplied by the UK rate of Corporation Tax for the years
ended 25 March 2012 and 27 March 2011 is as follows:
————————————====€#[===#=#€#[=====[—[—[—====—
2012 2011
£m £m
Profit/(loss) before taxation 263 (152)
At UK standard rate of Corporation Tax of 26% (2011 28%) 68 (43)
Overseas current tax rates (1) (3)
Tax under/(over) provided in prior years 2 (a)
Non-taxable income (8) (12)
Non-deductible expenses 15 15
Associates/joint venture profit after tax charge included in Group pre-tax profit (7) (8)
Net (decrease)/increase in tax charge resulting from derecognition/(recognition) of deferred tax assets (45) 192
Profit from asset disposals eligible for relief (48) (28)
Other 4 (6)
‘Tax charge in the income statement 10 106
Effective income tax rate 4h =
120 Royal Mail Holdings ple
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18. Income tax (continued)
Deferred tax relates to the following:
Balance sheet Income statement
2012 2011 2012 2011
£m £m £m £m
Liabilities
Accelerated capital allowances (a) (1) - -
Goodwill qualifying for tax allowances (a7) (9) (8) (5)
Gross deferred tax liabilities (18) (@o)
Assets
Deferred capital allowances = 9 (9) 8
Provisions and other 4 el 3 (29)
Pensions temporary differences = — - (2)
Losses available for offset against future taxable income 5 6 (4) (62)
Hedging derivatives temporary differences = (3) = 2
Gross deferred tax assets 8
Net deferred tax liability (9) @
Consolidated income statement (15) (88)
The Group has unrecognised deferred tax assets of £1,512m (2011 £2,017m), comprising £684m (2011 £1,218m) relating to the
retirement benefit obligation, £481m (2011 £452m) relating mainly to fixed asset timing differences, and £347m (2011 £347m) relating to
tax losses in subsidiaries that are available to offset against future taxable profits. The Group has capital losses carried forward, the tax effect
of which is €4m (2011 £15m) and temporary differences related to capital losses of £80m (2011 £91m). The Group has rolled over capital
gains of £62m (2011 £61m); no tax liability would be expected to crystallise should the assets into which the gains have been rolled be sold
at their residual value, as it is anticipated that a capital loss would arise.
Finance Act 2011 reduced the main rate of corporation tax to 25% with effect from 1 April 2012. The effect of this change on unrecognised
deferred tax is included in these accounts. In March 2012 the Chancellor of the Exchequer announced that the main rate of corporation tax
will be 24% for the year commencing 1 April 2012 and that there will be successive annual one percentage point reductions until the rate
reaches 22% with effect from 1 April 2014. However, in accordance with accounting standards the effect of these rate reductions on deferred
tax balances has not been reflected in these accounts due to the relevant legislation not having been substantively enacted at the balance
sheet date. A reduction to 22% would, based on losses and temporary differences at 25 March 2012, reduce the Group's unrecognised
deferred tax assets by £178m.
At 25 March 2012, there was no recognised or unrecognised deferred income tax liability (2011 £nil) for taxes that would be payable on the
unremitted earings of certain of the Group's subsidiaries, associates or joint venture, as the Group has no liability to additional taxation
should such amounts be remitted due to the availability of exemptions and other reliefs.
Royal Mail Holdings ple
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Notes to the Consolidated
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(continued)
19. Net finance costs
The following analysis excludes net pension interest,
OOOO
2012 2011
£m £m
Unwinding of discount relating to legacy share scheme - 7
Interest payable on financial liabilities carried at amortised cost 118 107
Finance costs 118 114
Interest received on available for sale financial assets (45) (60)
Interest received on loans and receivables financial assets (9) (9)
Finance income (54) (69)
Net finance costs (excluding net pensions interest) 64 45
The finance costs of £118m (2011 £114m) include £16m (2011 £13m) in respect of finance charges payable under finance lease contracts,
The finance income of £54m (2011 £69m) includes gains of Enil (2011 £6m) on available for sale financial assets which were released from
equity and recognised in the income statement for the year.
122 Royal Mail Holdings ple
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Other notes -
balance sheet
In simple terms:
The notes in this section provide additional information regarding certain assets and liabilities shown in the balance sheet, most notably:
© property, automation equipment and vehicles, which are recorded at their historic cost (what we paid for them) less: accumulated
depreciation (reflecting their usage within the business over their useful life - from 3 to 50 years); and impairments relating to under-
performance of assets in their objective of generating economic benefits (note 20)
@ goodwill, primarily relating to our overseas subsidiary, GLS (note 21)
* intangible assets, mainly software, which are recorded in much the same way as our physical assets such as property and vehicles, but
with shorter useful lives over which they are amortised (1 to 6 years) (note 22)
investments in joint venture and associates, which represent the Group's share of the net assets of these entities (note 23)
© amounts owed to and from related parties, which have been identified to include the Royal Mail Pension Plan (RMPP) and the Group's joint
venture and associate companies, and payments to key management personnel (note 28). Details of the Group's principal subsidiaries,
associates and joint venture are also provided
20. Property, plant and equipment 124
21. Goodwill 125
22. Intangible assets (mainly software) 126
23. Investment in joint venture and associates 127
24. Current trade and other receivables 128
25. Current trade and other payables 129
26. Issued share capital and reserves 129
27. Commitments: 130
28. Related party information 131
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20. Property, plant and equipment
Land and buildings
Long Short Plant and Motor Fixtures and
Freehold leasehold leasehold machinery vehicles equipment Total
£m £m £m £m £m £m £m
Cost
At 28 March 2011 1,592 277 693 1,182 472 1,008 5,224
Exchange rate movements (16) (1) - (8) (3) (5) (33)
Reclassification (32) 2 32 G S S S
Additions 132 a 30 114 29 40 347
Disposals (58) (1) (8) (60) (16) (6) (149)
Reclassification to non-current
assets held for sale (20) (4) 2 = = = (24)
At 25 March 2012 1,598 276 747 1,228 482 1,037 5,368
Depreciation and impairment
At 28 March 2011 863 169 470 722 258 910 3,392
Exchange rate movements (4) (1) - (5) (2) (4) (16)
Reclassification (9) S 9g - - - -
Depreciation (note 17) 47 6 45 82 54 35 269
Impairment (note 6) 4 = a = a} 4 20
Disposals (16) (4) (8) (60) (15) (6) (106)
Reclassification to non-current
assets held for sale (16) S 2 2 = 2 (16)
At 25 March 2012 869 173 517 739 296 949 3,543
Net book value
At 25 March 2012 729 103 230 489 186 88 1,825
At 28 March 2011 729 108 223 460 214 98 1,832
Depreciation rates are disclosed within accounting policies (page 137). No depreciation is provided on freehold land, which represents £202m
(2011 £190m) of the total cost of properties. The net book value of the Group's property, plant and equipment held under finance leases
amounts to £320m (2011 £262m) comprising £137m (2011 £152m) vehicles, £154m (2011 £88m) plant and machinery and £29m
(2011 £22m) land and buildings. The net book value of the Group's property, plant and equipment includes £173m (2011 £150m) in
respect of assets in the course of construction. The net book value of the Group's land and buildings includes £389m (2011 £383m) in
respect of building fit-out
The £347m (2011 £291m) additions include borrowing costs capitalised in relation to specific qualifying assets of £2m (2011 Eni.
Last year, on 24 March 2011 an agreement was implemented to substitute £102m pension escrow financial investments with mortgages
against certain property assets, Subsequently, during the year, one of the properties, Rathbone Place, was sold and the mortgage against
that property was replaced with cash in the pension escrow. The carrying value of the remaining property assets of £17m as at 25 March
2012 is included within the £729m freehold land and buildings total above. The fair value of these property assets, based on a residual cash
flow analysis*, exceeds their carrying value by £77m. During April 2012, after almost all of the pension liabilities and pension assets of the
Company's main pension plan, RMPP, were transferred to HM Government, these mortgages, pledged as security to the RMPP Trustee,
were released.
* Aresicual cash flow analysis determines a price that could be paid for the property given the expected ‘as if complete’ value of the proposed development anc the total cost of the proposed
evelopment allowing for market level profit margins and having due regard to the known characteristics of the property and the inherent risk involved in its development
124 Royal Mail Holdings ple
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20. Property, plant and equipment (continued)
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Land and buildings,
Long Short Plant and Motor Fixtures and
Freehold leasehold leasehold machinery vehicles equipment Total
£m £m £m £m £m £m £m
Cost
At 29 March 2010 1,719 267 601 1,143 460 964 5,154
Exchange rate movements (5) - - (2) () (4) (9)
Reclassification (75) (4) 79 (2) 3 (1) ~
Additions 74 19 a7 85 4h 52 291
Disposals (109) (5) (4) (42) (34) (6) (200)
Reclassification to non-current
assets held for sale (12) = - - = 7 (12)
At 27 March 2011 1,592 277 693 1,182 4712 1,008 5,224
Depreciation and impairment
At 29 March 2010 891 166 387 682 233 860 3,219
Exchange rate movements (a) - - (2) - (a) (4)
Reclassification (40) (3) 42 - iL - -
Depreciation (note 17) 44 7 38 74 BS 34 250
Impairment (note 6) 7 - 7 10 MH 23 41
Disposals (21) (a) (4) (42) (30) (6) (104)
Reclassification to non-current (10) - - = - = (10)
assets held for sale
At 27 March 2011 863 169 470 722 258 910 3,392
Net book value
At 27 March 2011 vee 108 223 460 214 98 1,832
At 29 March 2010 828 101 214 461 227 104 1,935
21. Goodwill
2012 2011
£m £m
Cost
At 28 March 2011 and 29 March 2010 628 636
Exchange rate movements (32) (11)
Acquisition of businesses 3 3
At 25 March 2012 and 27 March 2011 599 628
Impairment
At 28 March 2011 and 29 March 2010 431 439
Exchange rate movements (21) (8)
At 25 March 2012 and 27 March 2011 410 431
Net book value
At 25 March 2012 and 27 March 2011 189 197
At 28 March 2011 and 29 March 2010. 197 197
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Notes to the Consolidated
financial statements
(continued)
21. Goodwill (continued)
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Financial Statements
The carrying value of goodwill arising on business combinations of £189m (2011 £197m) at the balance sheet date, includes £187m (2011
£195m) relating to the General Logistics Systems (GLS) business segment. In line with the Group's accounting policy (see page 136), this
goodwill has been reviewed for impairment. An impairment loss is recognised for the amount by which the carrying value of an asset or cash
generating unit exceeds the recoverable amount. The recoverable amount is the higher of net realisable value and value in use. The carrying
value of GLS, excluding interest bearing and tax related assets and liabilities, is £446m (2011 £450m) at 25 March 2012 and the operating
profit before exceptional items is £128m (2011 £118m) for the year (note 4). The carrying value of GLS represents a multiple of 3.5 (2011
3.8) on operating profit before exceptional items. The net realisable value of GLS, for the purposes of the impairment review (ie. the ‘fair
value less costs to sell’), has been assessed with reference to earnings multiples for quoted entities in a similar sector. On this basis, the net
Tealisable value has been assessed to be in excess of the carrying value. The earnings multiples referenced would need to reduce by more
than 40% to reduce the net realisable value to below the carrying value.
22. Intangible assets
2012 2011
Master Master
franchise Customer franchise Customer
licences listings Software Total licences listings Software Total
£m £m Em £m £m £m £m £m
Cost
At 28 March 2011 and 29 March 2010 24 29 382 435 24 27 325 376
Additions = = 60 60 - - 73 73
Disposals = = (10) (10) - - (16) (16)
Acquisition of businesses = 2 = a bad 2 = 2
Exchange rate movements (1) (a) (a) (3) - - - -
At 25 March 2012 and 27 March 2011 23 30 431 484 24 29 382 435
Amortisation and impairment.
At 28 March 2011 and 29 March 2010 24 25 260 309 22 ae 233 277
Impairment (note 6) = = 20 20 . - 12 12
Amortisation (note 17) oe 2 31 33 2 3 Ea] 36
Disposals = = (10) (10) = = (16) (16)
Exchange rate movements () (4) (a) (3) s = = =
At 25 March 2012 and 27 March 2011 23 26 300 349 24 25 260 309
Net book value
At 25 March 2012 and 27 March 2011 - 4 131 135 - 4 122 126
At 28 March 2011 and 29 March 2010. = 4 122 126 2 5 92 99
The intangible assets above, none of which have been internally generated, have finite lives and are being written down on a straight-line basis.
126
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23. Investments in joint venture and associates
Joint venture
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During 2011-12 (and 2010-11), the Group's only joint venture investment was a 50% interest in First Rate Exchange Services Holdings
Limited, whose principal activity is the provision of Bureau de Change services in Post Office Limited
Associates
Details of the Group's 2011-12 and 2010-11 associate investments are provided on page 132. The reporting dates for these investments is
31 March 2012 except for Quadrant Catering Limited (30 September 2011) and G3 Worldwide Mail N.V. (Spring) (31 December 2011)
Estimates of the profits of Quadrant Catering Limited and G3 Worldwide Mail N.V. (Spring), from their reporting date to 25 March 2012 (and
27 March 2011 for the prior year), have been included to ensure that the reported share of profits of associates aligns with the Group's
financial year. There are no significant restrictions on the ability of associates to transfer funds to the Group in the form of cash dividends,
repayment of loans or advances
Share of post
At tax pre At
28 March dividend 25 March
2011 profit Impairment Disposal Dividend 2012
£m £m £m £m £m £m
Joint venture
Share of net assets 1f3 32 = ia (38) 66
Goodwill 1 = = = 1
Net investments 73 32 = = (38) 67
Associates
Share of net assets 32 (3) = (4) 25
Total net investments in joint
venture/associates 105 32 (3) = (42) 92
The £3m (2011 £2m) impairment relates to G3 Worldwide Mail N.V. (Spring)
see eee
‘Share of post
At tax pre At
29 March dividend 27 March
2010 profit Impairment Disposal Dividend 2011
£m £m £m £m £m £m
Joint venture
Share of net assets 74 28 ~ - (30) 72
Goodwill 1 a = = = 1
Net investments 75 28 = od (30) 73
Associates
Share of net assets 61 (20) (9) 32
Goodwill 11 (2) (9) = =
Net investments 72 (2) (29) (9) 32
Total net investments in joint
venture/associates 147 28 (2) (29) (39) 105
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Notes to the Consolidated
financial statements
(continued)
23. Investments in joint venture and associates (continued)
2012 2011
Joint Joint
venture Associates Total venture Associates Total
£m £m £m £m £m £m
Share of assets and liabilities:
Current assets 179 49 228 150 49 199
Non-current assets 4) 18 21 2 pal 23
Share of gross assets 182 67 249 152 70 222
Current liabilities (116) (42) (158) (80) G7) (117)
Non-current liabilities - - - = (1) (a)
Share of gross liabilities (416) (42) (158) (80) (38) (118)
Share of net assets 66 25 91 72 32 104
Share of revenue and profit:
Revenue 75 116 191 74 380 454
Profit after tax 32 : 32 28 bed 28
24. Current trade and other receivables
2012 2011
£m £m
Trade receivables 799 853
Prepayments and accrued income 313 124
1,112 977
Client receivables in the Post Office Limited network 138 158
Finance income 1 =
Total 1,251 1,135
Refer to note 25 for an explanation of Post Office Limited network balances.
Movements in the provision for bad and doubtful debts were as follows:
2012 2011
£m £m
At 28 March 2011 and 29 March 2010 26 32
Foreign exchange rate adjustment a -
Receivables provided for during the year 28 1
Release of provision (4) (6)
Utilisation of provision (40) (a1)
At 25 March 2012 and 27 March 2011 40 26
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24. Current trade and other receivables (continued)
The amount of trade receivables that were past due but not impaired are as follows:
2012 2011
£m £m
Past due not more than one month 63 64
Past due more than one month and not more than two months 15 14
Past due more than two months 34 29
Total past due but not impaired 112 107
Provided for or not yet overdue 727 7722
Provision for bad and doubtful debts (40) (26)
Total 799 853
25. Current trade and other payables
2012 2011
£m £m
‘Trade payables and accruals 1,247 1,179
‘Advance customer payments (for stamps held, not yet used by customers) 342 307
Social security 98 95
1,687 1,581
Client payables in the Post Office Limited network 332 314
Capital repayments 57 50
Other 9 16
Total 2,085 1,961
The Group, through Post Office Limited, receives and disburses cash on behalf of Government agencies and other clients to customers
through its Post Office branch network. Amounts owed to/from these parties are disclosed separately as client payables (as above) and
receivables (see note 24). The level of cash held and the related payables can vary significantly at each balance sheet date.
Capital payables represent liabilities outstanding in relation to the acquisition of property, plant and equipment and intangible assets.
26. Issued share capital and reserves
Authorised share capital
2012 2011
£ £
Ordinary shares of £1 each 100,000 100,000
Special Rights Redeemable Preference Share (Special Share) of £1 each 4 1
Total 100,001 100,001
Issued and called up share capital
2012 2011
£ £
Ordinary shares of £1 each 50,005 50,005
Special Rights Redeemable Preference Share (Special Share) of £1 each 1 1
Total 50,006 50,006
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Notes to the Consolidated
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(continued)
26. Issued share capital and reserves (continued)
The Special Share can be redeemed at any time by its holder (the Secretary of State for Business, Innovation and Skills), subject to such
redemption being compliant with the Companies Act 2006. The Company cannot redeem the Special Share without the prior consent of its
holder. No premium is payable on redemption
On distribution in a winding up of the Company, the holder of the Special Share is entitled to repayment of the capital paid up on the Special
Share in priority to any repayment of capital to any other member. The Special Share does not carry any rights to vote.
Under section 63(7) of the Postal Services Act 2000, for the purposes of the Companies Act 2006, certain shares issued shall be treated as if
their nominal value had been fully paid up.
Under sections 72 and 74 of the Postal Services Act 2000, the Secretary of State for Business, Innovation and Skills may issue directions to
the Company which, depending on the direction issued, could result in the recognition of a distribution
Reserves identified in the consolidated statement of changes in equity
Financial Assets Reserve
‘The Financial Assets Reserve is used to record fair value changes on available for sale financial assets.
Foreign Currency Translation Reserve
The Foreign Currency Translation Reserve is used to record the gains and losses arising from 29 March 2004 on translation of assets and
liabilities of subsidiaries denominated in currencies other than the reporting currency.
Hedging Reserve
‘The Hedging Reserve is used to record gains and losses arising from cash flow hedges since 28 March 2005.
Other Reserves
Other Reserves of £47m (2011 £47m) comprise £2m (2011 £2m) relating to First Rate Exchange Services Holdings Limited, a joint venture
entity, and £45m (2011 £45m) recognised on the formation of Midasgrange Limited, an associate company. The transaction to establish
Midasgrange Limited, involved the Bank of Ireland investing £100m in exchange for a 50% shareholding.
Dividends
The Directors do not recommend a dividend (2011 £nil dividend).
27. Commitments
Operating lease commitments
The Group is committed to the following future minimum lease payments under non-cancellable operating leases as at 25 March 2012 and
27 March 2011:
Land and buildings IT equipment Total
2012 2011 2012 2011 2012 2011
£m £m, £m £m, £m £m
Within one year 148 146 29 36 188 193
Between one and five years 458 456 16 19 492 488
Beyond five years 57852 - = 3 - 584521
Total 1,184 1,123 29 24 48 55 1,261 1,202
Existing leases for UK land and buildings have an average term of 13 years and any new leases entered into generally have a 15-year term
with a 10-year break clause or a 10-year or 20-year term without a break. Existing land and buildings leased overseas by the GLS
subsidiary have an average lease term of 9 years. Vehicle leases generally have a term of between 1 and 7 years, depending on the asset
class, with the average term being 4 years - the existing leases have an average term remaining of 2 years. The majority of the
IT commitments relate to a 10-year contract, part of which ceases in 14 months and part of which ceases in 6 years.
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27. Commitments (continued)
Finance lease commitments
2012 20a
Present value Present value
Minimum of minimum Minimum of minimum
lease payments lease payments lease payments _lease payments
£m £m £m £m
Within one year 402 90 76 65
Between one and five years 220 200 177 158
Beyond five years 131 37 131 35
Total minimum lease payments 453 327 384 258
Less amounts representing finance charges (126) - (126) =
Present value of minimum lease payments 327 327 258 258
‘The Group has finance lease contracts for vehicles, land and buildings and plant and equipment. The leases have no terms of renewal,
purchase options or escalation clauses and there are no restrictions concerning dividends, borrowings or additional leases. Vehicle leases
have a term of between 1 and 7 years, depending on the class of vehicle, with the average term being 4 years. Property leases have a term
of between 1 and 107 years with the average term being 46 years. The term of the plant and equipment leases range from 5 to 8 years
with the average being 5 years.
Capital commitments
The Group has commitments of £97m at 25 March 2012 (27 March 2011 £159m), which are contracted for but not provided for in the
financial statements.
28. Related party information
Related party transactions
During the year the Group entered into transactions with related parties. The transactions were in the ordinary course of business and
included administration and investment services recharged to the Group's pension plan by Royal Mail Pension Trustees Limited. The material
transactions entered into, and the balances outstanding at the financial year end were as follows
‘Amounts ‘Amounts
Purchases/ owed from related owed to related
Counter- Sales/recharges recharges from party including party including
party to related party related party outstanding loans outstanding loans
business
2012 2011 2012 2011 2012 2011 2012 2011
coyrant £m {m £m £m £m £m £m ém
Royal Mail Pension Plan (RMPP) Other 9 9 2 = S = S =
Quadrant Catering Limited UKPIL/
Post Office
Limited = = 35 34 2 = 3 i}
Camelot Group ple Post Office
Limited 2 10 = = = = = Ge
G3 Worldwide Mail N.V. (Spring) UKPIL - 7 6 6 4 a = 1
Midasgrange Limited Post Office
Limited 41 30 ah 3 12 10 1 -
First Rate Exchange Services Post Office
Holdings Limited Limited 31 30. 128 132 5 ed 8 1
With the exception of the investment in Camelot Group ple, disposed of in 2010-11, and the Royal Mail Pension Plan, the companies listed
above are either a joint venture or associate of the Group.
The sales to and purchases from related parties are made at normal market prices. Balances outstanding at the year end are unsecured,
interest free and settlement is made by cash.
The Group trades with numerous Government bodies on an arm's length basis. Transactions with these entities are not disclosed owing to
the significant volume of transactions that are conducted
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Notes to the Consolidated
financial statements
(continued)
28. Related party information (continued)
Key management compensation
2012 2011
£000 £000
Short-term employee benefits 3,920 2.855
Post-employment benefits 183 43
Other long-term benefits - e
Total compensation earned by key management 4,403 2.898
Key management comprises Executive and Non Executive Directors of the Royal Mail Holdings plc Board at 25 March 2012
HM Government is the Company's sole shareholder and accordingly the Directors have no interest in the shares of the Company.
The ultimate parent (the Company) and principal subsidiaries
Royal Mail Holdings plc is the ultimate parent company of the Group. The consolidated financial statements include the financial results of
Royal Mail Holdings plc and the principal subsidiaries listed below:
ae
‘S equity *% equity
interest interest
Company Principal activities Country of incorporation 2012 2011
Royal Mail Group Ltd Mails and parcels services United Kingdom 100 100
Post Office Limited Counter, retail and financial services United Kingdom 100 100
Royal Mail Investments Limited Holding company United Kingdom 100 100
General Logistics Systems B.V. Parcel services Netherlands 100 100
Royal Mail Estates Limited Property holdings United Kingdom 100 100
Romec Limited Facilities management United Kingdom 51 54
During the year Romec Limited disposed of its 99% shareholding in Romec Services Limited.
The legal structure of the Group is shown on p3.
Joint venture
The Group's 50% interest in First Rate Exchange Services Holdings Limited, a company incorporated in the United Kingdom, is held by Post
Office Limited. The company's principal activity is the provision of Bureau de Change services.
Associates
The following companies are the principal associates of the Group:
al
% EJ
ownership ‘ownership
Company Principal activities Country of incorporation 2012 2011
Quadrant Catering Limited Catering services United Kingdom 51 51
63 Worldwide Mail NV. (Spring) Mall services Netherlands 32.45 32.45
Midasgrange Limited Financial services United Kingdom 50 50
The majority of Board membership and voting power in Quadrant Catering Limited is held by the Group's business partner, hence it is not
a subsidiary.
Management control lies with the Bank of Ireland business partner in the operation of the Midasgrange Limited company and therefore the
company is not a joint venture.
The investment in Quadrant Catering Limited is held by Royal Mail Group Ltd, the investment in G3 Worldwide Mail NV. (Spring) is held by
Royal Mail Investments Limited and the investment in Midasgrange Limited is held by Post Office Limited.
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Basis of preparation and
significant accounting policies
In simple terms:
This section includes mandatory disclosures to explain:
¢ the financial statements have been prepared in accordance with the Companies Act 2006 and relevant International Financial Reporting
Standards (IFRS)
assets and liabilities are stated at historic cost, with only a few exceptions for items valued at fair value (amount at which an asset could be
exchanged between knowledgeable, willing parties in an arm's length transaction)
the policy for intra-group transactions eliminated on consolidation and the consolidation of wholly owned and part-owned subsidiaries,
including how the latter are impacted by the relevant entity's remaining minority shareholding (i.e. non-controlling interest)
significant accounting policies relevant to the Group, including new or revised policies and their financial impact
accounting areas which require management to make judgements, estimates and assumptions (e.g. deferred tax)
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Basis of preparation and significant accounting policies
The Group comprises Royal Mail Holdings plc (the Company) - which is wholly owned by HM Government - and its subsidiaries. The
Company is incorporated in the United Kingdom and the financial statements are produced in accordance with the Companies Act 2006 (the
Act) and applicable IFRSs. The UK is the Group's country of domicile.
The Group consolidated financial statements are presented in Sterling and all values are rounded to the nearest £m except where otherwise
indicated. These consolidated financial statements have been prepared on a historic cost basis, except for pension assets, derivative financial
instruments and available for sale financial assets, which have been measured at fair value.
Basis of consolidation
The consolidated financial statements comprise the financial statements of the Company and its subsidiary undertakings. The financial
statements of the major subsidiaries are prepared for the same reporting year as the Company, using consistent accounting policies.
All intra-group balances and transactions, including unrealised profits arising from intra-group transactions, have been eliminated in full
Transfer prices between business segments are set on a basis of charges reached through negotiation with the respective businesses.
Subsidiaries are consolidated from the date on which control is obtained by the Group and cease to be consolidated from the date on which
control is no longer held by the Group. Where the Group ceases to hold control of a subsidiary, the consolidated financial statements include
the results for the part of the reporting year during which the Group held control.
Non-controlling interest represents the portion of profit/loss, gains/losses and net assets relating to subsidiaries that are not attributable to
members of the Company. The non-controlling interest balance is presented within equity in the consolidated balance sheet, separately from
parent shareholder's equity.
Changes in accounting policy and disclosures
The accounting policies adopted are consistent with those of the previous financial year except as follows:
The following amended accounting standard, adopted by the Group with effect from 28 March 2011, will have no material impact on the
financial position or performance of the Group.
IAS 24 Related Party Disclosures
This revised standard provides an exemption from disclosure requirements for transactions between entities controlled, jointly controlled or
significantly influenced by the same government and between such entities and the government itself, unless they are individually or
collectively significant. The standard also amends the definition of a related party to remove some inconsistencies.
Improvements to IFRSs
In May 2010 the IASB issued its third omnibus of amendments to its standards, primarily with a view to removing inconsistencies and
clarifying wording. There are separate transitional provisions for each standard. The adoption of the following relevant 2010 amendments
resulted in changes to accounting policies, but they will have no material impact on the financial position or performance of the Group.
IFRS 3 Business Combinations: The measurement options for non-controlling interests resulting from a business combination have been
limited. Further, acquisition related costs are required to be expensed and not included in the purchase price and contingent consideration
should be recognised at fair value on the acquisition date
IFRS 7 Financial Instruments: Disclosures: The arnendment includes multiple clarifications related to the disclosure of financial
instruments.
IAS 27 Consolidated and Separate Financial Statements: Any future partial disposal of an equity interest in a subsidiary that does not
result in a loss of control will be accounted for as an equity transaction and will have no impact on goodwill, nor wil it give rise to any gain or
loss, Where there is loss of control of a subsidiary, any retained interest will have to be remeasured to fair value, which will impact the gain
or loss recognised on disposal
IAS 34 Interim Financial Statements: The amendment requires additional disclosure around significant changes to financial instruments
and contingent liabilities/assets.
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Basis of preparation and significant accounting policies (continued)
Key sources of estimation, uncertainty and accounting judgements
The preparation of the Group's consolidated financial statements requires management to make judgements, estimates and assumptions
that affect the reported amounts of assets and liabilities at the reporting date. However, uncertainty about these assumptions and estimates
could result in outcomes that require a material adjustment to the carrying amount of the asset or liability affected in future periods,
The key sources of uncertainty that have a significant risk of causing material adjustment to the carrying amounts of assets and liabilities
within the next financial year relate to the measurement of deferred tax and provisions.
Deferred tax
Assessment of the deferred tax asset requires an estimation of future profitability. Such estimation is inherently uncertain in a market subject
to various competitive pressures. Should estimates of future profitability change in future years, the amount of deferred tax recognised will
also change accordingly. The carrying values of the deferred tax assets and liabilities are included within note 18.
Provisions
Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an
outflow of resources will be required to settle the obligation, and a reliable estimate of the amount can be made. Due to the nature of
provisions, a significant part of their determination is based upon estimates and/or judgements concerning the future.
Restructuring provisions, including for redundancy and property costs, are derived based upon the most recent business plan for direct
expenditure where plans are sufficiently detailed and appropriate communication to those affected has been undertaken. This includes the
expected number of employees impacted, rate of compensation per employee, rental costs and expected period of properties remaining
vacant and dilapidation costs.
The industrial diseases claims provision is based on the best information available as at the year end, including independent expert advice.
Investments in joint venture and associates
The Group's investments in its joint venture and associates are accounted for under the equity method of accounting. Under the equity
method, the investment is carried in the balance sheet at cost plus post-acquisition changes in the Group's share of the net assets of the joint
venture/associates, less any impairment in value. The income statement reflects the Group's share of post tax profits from the joint venture/
associates.
Any goodwill arising on acquisition of an associate, representing the excess of the cost of the investment compared to the Group's share of
the net fair value of the identifiable assets, liabilities and contingent liabilities acquired, is included in the carrying amount and not amortised.
Revenue
Revenue reported in the income statement is net of value added tax and comprises Turnover and the Network Subsidy Payment. Turnover
principally relates to the rendering of services as follows
UK Parcels, International & Letters
‘Account revenue is derived from specific contracts and recognised when the delivery of an item is complete. Prepaid revenue mainly relating
to stamp and meter income is recognised when the sale is made, adjusted to reflect a value of stamp and meter credits held but not used by
the customer.
General Logistics Systems
Revenue is derived from specific contracts and is recognised at the time of delivery,
Post Office Limited
Revenue is recognised at the time that Government, financial, mails and telephony services are provided.
The Network Subsidy Payment is Government grant revenue recognised to match the related costs of providing the network of public post
offices that the Secretary of State for Business, Innovation and Skills considers appropriate and which would otherwise not be provided.
Distribution and conveyance
Distribution and conveyance costs relate to non-people costs incurred in transporting and delivering mail. These include conveyance by rail,
road, sea and air, together with costs incurred by international mail carriers and Parcelforce Worldwide delivery operators and GLS. These
costs are disclosed separately on the face of the income statement.
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Basis of preparation and significant accounting policies (continued)
Operating exceptional items
Operating exceptional items are items of income and expenditure arising from the operations of the business which, due to the nature of the
events giving rise to them, require separate presentation on the face of the income statement to allow a better understanding of financial
performance in the year, in comparison to prior years.
Legacy share scheme
This scheme (originally termed ‘ColleagueShare) introduced in 2007-08, is a five-year scheme spanning the accounting years from April
2007 to March 2012 and comprises both a ‘share’ plan and a related stakeholder dividend throughout the life of the scheme.
The costs of the scheme are included in the income statement as an exceptional item throughout the life of the scheme and corresponding
liabilities are included within payables or provisions as appropriate
Operating profit
Operating profit is the profit arising from the normal, recurring operations of the business and after charging operating exceptional items
defined above. It excludes the non-operating exceptional items for profit or loss on disposal of businesses and profit or loss on disposal of
property, plant and equipment. These items are not part of the normal recurring operations of the business but are material, so are
presented separately on the face of the income statement to allow a better understanding of financial performance in the year, in
comparison to prior years.
Goodwill
Business combinations on or after 29 March 2004 are accounted for under IFRS 3 Business Combinations using the purchase method. Any
excess of the cost of the business combination over the Group's interest in the net fair value of the identifiable assets, liabilities and
contingent liabilities at the date of acquisition is recognised in the balance sheet as goodwill and is not amortised
After initial recognition, goodwill is stated at cost less any accumulated impairment losses. Goodwill arising from business combinations is
reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired.
An impairment loss is recognised in the income statement for the amount by which the carrying value of the asset (or cash generating unit)
exceeds its recoverable amount, which is the higher of an asset's net realisable value and its value in use. For the purpose of such
impairment reviews, goodwill is allocated to the relevant cash generating units
Goodwill arising on the acquisition of equity accounted entities is included in the cost of those entities and therefore not reported in the
balance sheet as goodwill
Intangible assets
Intangible assets acquired as part of a business combination are capitalised separately from goodwill if the fair value can be measured
reliably on initial recognition. Intangible assets acquired separately or development costs that meet the criteria to be capitalised are initially
recognised at cost and are assessed to have either a finite or indefinite useful life. Those with a finite life are amortised over their useful life
and those with an indefinite life are reviewed for impairment annually or more frequently if events or changes in circumstances indicate that
the carrying value may be impaired. An impairment loss is recognised in the income statement for the amount by which the carrying value of
the asset exceeds its recoverable amount, which is the higher of an asset's net realisable value and its value in use.
Amortisation of intangible assets with finite lives is charged annually to the income statement on a straight-line basis as follows:
Customer listings 1 to 4 years
Software 1 to 6 years
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Basis of preparation and significant accounting policies (continued)
Property, plant and equipment
Property, plant and equipment is recognised at cost, including directly attributable costs in bringing the asset into working condition for its
intended use. Depreciation of property, plant and equipment is provided on a straight-line basis by reference to net book value and to the
remaining useful economic lives of assets and their estimated residual values. The useful lives and residual values are reviewed annually and
adjustments, where applicable, are made on a prospective basis. The lives assigned to major categories of property, plant and equipment are
eee
Land and buildings
Freehold land Not depreciated
Freehold buildings Up to 50 years
Leasehold buildings The shorter of the period of the lease, 50 years or the estimated remaining useful life
Plant and machinery 3-15 years
Motor vehicles and trailers 2-12 years
Fixtures and equipment 2-15 years
Non-current assets held for sale
Non-current assets classified as held for sale are measured at the lower of their carrying amount and fair value less costs to sell. Non-
current assets are classified as held for sale if their carrying amounts will be recovered principally through a sale transaction rather than
through continuing use. This condition is regarded as met only when the sale is highly probable and the asset is available for immediate sale
in its present condition. Management must be committed to the sale, which should be expected to qualify for recognition as a completed sale
within one year from the date of classification.
Impairment reviews
Unless otherwise disclosed in these accounting policies, assets are reviewed for impairment if events or changes in circumstances indicate
that the carrying value may be impaired. The Group assesses at each reporting date whether such indications exist. Where appropriate, an
impairment loss is recognised in the income statement for the amount by which the carrying value of the asset (or cash generating unit)
exceeds its recoverable amount, which is the higher of an asset's net realisable value and its value in use.
Leases
Finance leases, where substantially all the risks and rewards incidental to ownership of the leased item have passed to the Group, are
capitalised at the inception of the lease with a corresponding liability recognised for the fair value of the leased item or, if lower, at the
present value of the minimum lease payments. Lease payments are apportioned between the finance charges and capital element of the
lease liability to achieve a constant rate of interest on the remaining balance of the liability. Capitalised leased assets are depreciated over the
shorter of the estimated useful life of the asset and the lease term.
Leases where substantially all the risks and rewards of ownership of the asset are retained by the lessor, are classified as operating leases
and rentals are charged to the income statement over the lease term. The aggregate benefit of incentives are recognised as a reduction of
rental expense over the lease term on a straight-line basis
A leasehold land payment is an upfront payment to acquire a long-term leasehold interest in land. This payment is stated at cost and is
amortised on a straight-line basis over the period of the lease.
Trade receivables
Trade receivables are recognised and carried at original invoice amount less an allowance for any non-collectable amounts. An estimate for
doubtful debts is made when collection of the full amount is no longer probable. Bad debts are written off when identified.
Financial instruments
Financial assets within the scope of /AS 39 Financial Instruments: Recognition and Measurement are classified as; financial assets at fair
value through the income statement (held for trading); held to maturity investments, loans and receivables or available for sale financial
assets as appropriate. Financial liabilities within the scope of IAS 39 are classified as either financial liabilities at fair value through the income
statement or financial liabilities measured at amortised cost.
The Group determines the classification of its financial instruments at initial recognition and re-evaluates this designation at each financial
year end. When financial instruments are recognised initially, they are measured at fair value, being the transaction price plus, in the case of
financial instruments not at ‘air value through the income statement’, any directly attributable transactional costs.
The subsequent measurement of financial instruments depends on their classification as follows:
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Basis of preparation and significant accounting policies (continued)
Loans and receivables
Non-derivative financial assets with fixed or determinable payments that are not quoted on an active market, do not qualify as trading assets
and have not been designated as either ‘fair value through the income statement’ or available for sale, are carried at amortised cost using the
effective interest rate method if the time value of money is significant. Gains and losses are recognised in the income statement when the
loans and receivables are derecognised or impaired, as well as through the amortisation process.
Available for sale financial assets
‘Available for sale financial assets’ are non-derivative financial assets that are designated as such or are not classified in any of the three
preceding categories. After initial recognition, interest is taken to the income statement using the effective interest rate method and the
assets are measured at fair value with gains or losses being recognised as a separate component of equity until the investment is
derecognised, or until the investment is deemed to be impaired at which time the cumulative gain or loss previously reported in equity is
included in the income statement.
Financial liabilities at fair value through the income statement (held for trading)
Derivatives liabilities are classified as held for trading unless they are designated as hedging instruments. They are carried in the balance
sheet at fair value with gains or losses recognised in the income statement.
Financial liabilities measured at amortised cost
All non-derivative financial liabilities are classified as financial liabilities measured at amortised cost. Non-derivative financial liabilities are
initially recognised at the fair value of the consideration received, less directly attributable issue costs. After initial recognition, non-derivative
financial liabilities are subsequently measured at amortised cost using the effective interest method. Gains and losses are recognised in the
income statement when the liabilities are derecognised or impaired, as well as through the amortisation process.
Cash and cash equivalents
Cash and cash equivalents in the balance sheet comprise cash at bank and in hand and short-term deposits (cash equivalents) with an
original maturity date of three months or less. In addition, the Group uses Money Market funds as a readily available source of cash, and
these funds are also categorised as cash equivalents.
For the purpose of the statement of cash flows, cash and cash equivalents consist of cash and cash equivalents as defined above, net of bank
overdrafts
Cash equivalents are classified as loans and receivables financial instruments.
Financial assets - pension escrow investments
Financial assets - pension escrow investments comprise cash at bank, conventional gilt edged securities, index-linked gilt edged securities
and Treasury bills.
Conventional gilt edged securities, index-linked gilt edged securities and Treasury bills are classified as available for sale financial instruments
on the basis that they are quoted investments that are not held for trading and may be disposed of prior to maturity.
Financial assets - other investments
Financial assets - other investments comprise short-term deposits (other investments) with Government, local government or banks with an
original maturity of three months or more. Short-term deposits are classified as loans and receivables financial instruments.
Financial liabilities - interest-bearing loans and borrowings
All loans and borrowings are classified as financial liabilities measured at amortised cost.
Financial liabilities - obligations under finance leases
All obligations under finance leases are classified as financial liabilities measured at amortised cost.
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Basis of preparation and significant accounting policies (continued)
Derivative financial instruments
The Group uses derivative instruments such as foreign currency contracts in order to manage the risk profile of any underlying risk exposure
of the Group, in line with the Group's treasury management policies. Such derivative financial instruments are initially stated at fair value.
For the purpose of hedge accounting, hedges are classified as cash flow hedges where they hedge exposure to variability in cash flows that is
either attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction
In relation to cash flow hedges to hedge the foreign exchange or commodity price risk of firm commitments that meet the conditions for
hedge accounting, the portion of the gain or loss on the hedging instrument that is determined to relate to an effective hedge is recognised
directly in equity and the ineffective portion is recognised in the income statement.
When the hedged firm commitment results in the recognition of a non-financial asset or non-financial liability, then at the time the asset or
liability is recognised, the associated gains or losses that had previously been recognised in equity are included in the initial measurement of
the acquisition cost or other carrying amount of the asset or liability. For all other cash flow hedges, the gains or losses that are recognised in
equity are transferred to the income statement in the same year in which the hedged firm commitment affects the net profit/loss, for
example when the hedged transaction actually occurs.
For derivatives that do not qualify for hedge accounting, any gains or losses arising from changes in fair value are taken directly to the
income statement in the period.
Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or exercised, or no longer qualifies for hedge
accounting. At that point, any cumulative gain or loss on the hedging instrument recognised in equity is kept in equity until the forecast
transaction occurs. If a hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in equity is transferred
to the income statement for the year.
Fair value measurement of financial instruments
The fair value of quoted investments {including conventional gilt edged securities, index-linked gilt edged securities and Treasury bills) is
determined by reference to bid prices at the close of business on the balance sheet date. Hence the conventional gilt edged securities, index-
linked gilt edged securities and Treasury bills are within Level 1 of the fair value hierarchy as defined within IFRS 7
Where there is no active market, fair value is determined using valuation techniques. These include using recent arm's length market
transactions; reference to the current market value of another instrument which is substantially the same; and discounted cash flow analysis
and pricing models. Specifically, in the absence of quoted market prices, derivatives are valued by using quoted forward prices for the
underlying commodity/currency and discounted using quoted interest rates (both as at the close of business on the balance sheet date)
Hence derivative assets and liabilities are within Level 2 of the fair value hierarchy as defined within IFRS 7.
For the purposes of disclosing the fair value of investments held at amortised cost in the balance sheet, in the absence of quoted market
prices, fair values are calculated by discounting the future cash flows of the financial instrument using quoted equivalent interest rates as at
close of business on the balance sheet date.
Income tax and deferred tax
The charge for current taxation is based on the results for the year as adjusted for items that are non-assessable or disallowed. It is
calculated using rates that have been enacted or substantively enacted at the balance sheet date.
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Deferred income tax assets and liabilities are recognised for all taxable and deductible temporary differences and unused tax assets and
losses except
¢ initial recognition of goodwill;
the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects
neither the accounting profit nor taxable profit and loss;
© taxable temporary differences associated with investments in subsidiaries, associates and interest in joint ventures, where the timing of the
reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable
future; and
« deferred tax assets are recognised only to the extent that it is probable that taxable profit will be available against which they can be
utilised.
The carrying amount of deferred tax assets is reviewed at each balance sheet date and increased or reduced to the extent that it is probable
that sufficient taxable profit will be available to allow them to be utilised.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the tax asset is realised or the
liability is settled, based on tax rates (and tax laws) that have been substantively enacted at the balance sheet date. Deferred tax balances are
not discounted
Current and deferred tax is charged or credited directly to equity if it relates to items that are credited or charged directly to equity, otherwise
it is recognised in the income statement
Provisions
Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an
outflow of resources will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. If the effect
of the time value of money is material, provisions are determined by discounting the expected future cash flows at an appropriate pre-tax
rate
Pensions and other post-retirement benefits
The pension assets for the defined benefit plans are measured at fair value. Liabilities are measured on an actuarial basis using the projected
unit credit method and discounted at a rate equivalent to the current rate of return on a high quality corporate bond of equivalent currency
and term. The resulting defined benefit asset or liability is presented separately on the face of the balance sheet. Full actuarial valuations are
carried out at intervals not normally exceeding three years as determined by the Trustees and, with appropriate updates and accounting
adjustments at each balance sheet date, form the basis of the deficit disclosed. All members of defined benefit schemes are contracted out of
the eamings-related part of the State pension scheme.
For defined benefit schemes, the amounts charged to operating profit are the current service costs and any gains and losses arising from
settlements, curtailments and past service costs. The net difference between the interest costs and the expected return on plan assets is
recognised as net pension interest in the income statement. Actuarial gains and losses are recognised immediately in the statement of
comprehensive income. Any deferred tax movement associated with the actuarial gains and losses is also recognised in the statement of
comprehensive income.
For defined contribution plans, the Group's contributions are charged to operating profit within people costs in the period to which the
contributions relate. Overseas subsidiaries make separate arrangements for the provision of pensions and other post-retirement benefits.
Foreign currencies
The functional and presentational currency of Royal Mail Holdings plc is Sterling (£). The functional currency of the overseas subsidiaries in
Europe is mainly the Euro (€)
The assets and liabilities of foreign operations are translated at the rate of exchange ruling at the balance sheet date. The trading results of
foreign operations are translated at the average rates of exchange for the reporting period, being a reasonable approximation to the actual
transaction rate. The exchange rate differences arising on the translation, since the date of transition to IFRSs, are taken directly to the
Foreign Currency Translation Reserve in equity.
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Basis of preparation and significant accounting policies (continued)
Transactions in foreign currencies are initially recorded in the functional currency by applying the spot exchange rate ruling at the date of the
transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rate of exchange
ruling at the balance sheet date. Currently hedge accounting is not claimed for any monetary assets and liabilities. All differences are
therefore taken to the income statement, except for differences on monetary assets and liabilities that form part of the Group's net
investment in a foreign operation. These are taken directly to equity until the disposal of the net investment occurs, at which time they are
recognised in profit or loss.
Non-monetary items that are measured in terms of historic cost in a foreign currency are translated using the exchange rates as at the
dates of the initial transactions. Non-monetary items measured at fair value in foreign currency are translated using the exchange rates at
the date when the fair value is determined.
Contingent liabilities
Contingent liabilities are not disclosed if the possibility of losses occurring is considered to be remote.
Government grants
Government grants of a revenue nature are credited to the income statement and are shown separately to the expenditure to which they
relate
Government grants relating to assets are recognised as deferred income that is amortised over the useful fe of the relevant assets.
Segment information
The Group's operating segments are organised and managed separately according to the nature of the products and services provided, with
each segment representing a business unit that offers different products and serves largely different markets. Management monitors the
operating results of its business units separately for the purpose of making decisions about resource allocation and performance assessment.
Segment performance is evaluated based on operating profit/loss.
There is no aggregation of operating segments. The operating units that make up the four operating segments are detailed on page 90
The operating segments comprise operations in both the UK and other parts of Europe, the latter being relevant to the GLS business
segment. The UK operations include the remaining two operating segments plus the ‘Other’ segments.
Segment revenues have been attributed to the respective countries based on the location of the customer.
Transfer prices between the segments are set on a basis of charges reached through negotiation with the respective business units that form
part of the segments.
There are no differences in the measurement of the respective segments’ profit/loss and the consolidated financial statements prepared
under IFRSs
Accounting standards issued but not yet applied
The International Accounting Standards Board (IASB) has issued accounting standards relevant to the Group with an effective date for
accounting periods beginning after the commencement date of the period to which these financial statements relate. The Group has
considered the impact of these below:
International Accounting Standards (AS/IFRSe) ive date
as 1 Financial Statements Presentation (Amendment) 1 July 2012
IAS 19 Employee Benefits (Amendment) 1 January 2013
IFRS 9 Financial Instruments: Classification and Measurement 1 January 2013
IFRS 10 Consolidated Financial Statements 1 January 2013
IFRS 11 Joint Arrangements 1 January 2013
IFRS 12 Disclosure of Interests in Other Entities 1 January 2013
IFRS 13 Fair Value Measurement 1 January 2013
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IAS 1 Financial Statements Presentation (Amendment)
In June 2011, the IASB issued amendments to IAS 1 Financial Statement Presentation, which are intended to improve and align the
presentation of items of other comprehensive income (OCI). This amendment affects presentation only and therefore has no impact on the
Group's financial position or performance. The amendment becomes effective for the Group on 1 April 2013
1AS 19 Employee Benefits (Amendment)
In June 2011, the IASB issued amendments to IAS 19 Employee Benefits, which may result in changes to the net pension cost and may
require additional disclosures relating to pension assets. The impact of this amendment on the Group, effective from 1 April 2013, is
currently being assessed.
IFRS 9 Financial Instruments: Classification and Measurement.
IFRS 9 as issued reflects the first phase of the IASB’s work on the replacement of IAS 39 and applies to classification and measurement of
financial assets as defined in IAS 39. In subsequent phases, the IASB will address classification and measurement of financial liabilities, hedge
accounting and derecognition. The completion of this project is expected in 2011. The adoption of the first phase of IFRS 9, mandatory for
the Group commencing 1 April 2013, will have an effect on the classification and measurement of the Group's financial assets. The Group
will quantify the effect in conjunction with the other phases, when issued, to present a comprehensive picture.
IFRS 10 Consolidated Financial Statements
IFRS 10 builds on existing principles by identifying the concept of control as the determining factor in whether an entity should be included
within the consolidated financial statements of the parent company. The changes introduced by IFRS 10 will require management to exercise
significant judgement to determine which entities are controlled, and therefore are required to be consolidated by a parent, compared with
the requirements that were in IAS 27. The standard will be adopted with a commencement date of 1 April 2013 and is not expected to have
a significant impact on the financial position or performance of the Group.
IFRS 11 Joint Arrangements
IFRS 11 replaces /AS 31 Interests in Joint Ventures and provides for a more realistic reflection of joint arrangements by focusing on the
rights and obligations of the arrangement, rather than its legal form (as is currently the case). The standard addresses inconsistencies in the
reporting of joint arrangements by requiring a single method to account for interests in jointly controlled entities. The standard will be
adopted with a commencement date of 1 April 2013 and is not expected to have a significant impact on the financial position or performance
of the Group.
IFRS 12 Disclosures of Interests in Other Entities
IFRS 12 is a new and comprehensive standard on disclosure requirements for all forms on interests in other entities, including subsidiaries,
joint arrangements and unconsolidated structured entities. A number of new disclosures are required. One of the most significant changes
introduced by IFRS 12 is that an entity is now required to disclose the judgements made to determine whether it controls another entity. The
standard will be adopted with a commencement date of 1 April 2013 and is not expected to have a significant impact on the financial
position or performance of the Group.
IFRS 13 Fair Value Measurement
IFRS 13 establishes a single framework for measuring fair value where that is required by other standards. The standard applies to both
financial and non-financial items measured at fair value. The standard will be adopted with a commencement date of 1 April 2013 and is not
expected to have a significant impact on the financial position or performance of the Group.
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Group five-year summary
(Unaudited)
In simple terms:
This section includes:
a five-year history of key financial information (ie. income statement, cash flow statement and balance sheet) which is unaudited. A
summary of the number of employees at the end of each of the last five years has also been included. The remainder of the audited
financial statements focus on 2011-12 and the comparative year 2010-11.
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Group five-year summary (Unaudited)
ss... eee
Financial year ending March
2011
2010
2009
2008
Income statement £m £m £m £m £m
Turnover 9,352 9,006 9,199 9,410 9,238
Network Subsidy Payment for Post Office Limited 180 150 150 150 150
Revenue 9,532 9,156 9,349 9,560 9,388
Operating profit before exceptional items 442 246 404 321 162
Operating exceptional items ~ modernisation costs (234) (207) (224) (199) (644)
Operating profit/(loss) after modernisation costs before other operating 211 39 180 122 (482)
exceptional items
Operating exceptional items — other (93) (88) (67) 50 203
Non-operating exceptional items 183 109 5 n 58
Profit/(loss) before financing and taxation 301 60 118 183 (221)
Finance income and costs, including net pension interest (38) (212) (380) (134) 144
Profit/(loss) before tax 263 (152) (262) 49 (77)
Taxation _ (10) (106) (58) (278), 212
Profit/(loss) after tax 253 (258) (320) (229) 135
2012 2011 2010 2009 2008
Free cash flow* £m £m £m £m £m
EBITDA before pension costs slaleal 962 1,082 1,027 1,052
Working capital = (49) (83) (80) 140
Pension payments (467) (771) (867) (873) (870)
Modernisation investment in UKPIL (429) (377) (325) (427) (149)
Other exceptional items (59) (34) (59) (162) (74)
Other capital expenditure (183) (210) (321) (317) (274)
Other (dividends, tax, interest) (1) 26 4 (18) 28
Government grant = = = 152 313
Cash (outflow)/inflow before disposal of assets (8) (450) (559) (698) 166
Disposal of assets 242 237 14 20 71
Free cash inflow/outflow) 234 (213) (545) (678) 237
* A definition of Free cash flow is provided on page 94.
2012 2012 2010 2009 2008
Balance sheet £m £m £m Em £m
Net operating assets and investments in joint venture and associates 1177 1,160 1,190 942 389
Net debt (cash/cash equivalents less: loans/borrowings and finance lease obligations) (902) (965) (720) (80) 604
Other net (liabilities)/assets (5) 38 101 152 619
Net assets before pension deficit and pension escrow investments. 270 233 571 1,014 1,612
Pension deficit (2,922) (4,501) (8.041) (6.776) (2,923)
Pension escrow investments 1,383 1,161 1,189 1,106 1,070
Net liabilities (1,269) (3,107) (6,281) (4,656) (241)
People numbers - period end employees 2012 2011 2010 2009 2008
UK Parcels, International & Letters 151,156 155,181 160,291 167,396 172,113
Post Office Limited 7,798 7,782 8,209 8,760 9,163
UK wholly owned subsidiaries 158,954 162,963 168,500 176,156 181,276
UK partially owned subsidiaries 3,926 4,254 4,217 4,438 4,313
General Logistics Systems 13,362 13,167 12,885 13,059 13,135
Group total 176,242 180,384 185,602 193,653 198,724
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Directors’ and Auditor
responsibilities in relation
to the Group financial statements
In simple terms:
This section includes two mandatory statements signed by:
the Royal Mail Holdings plc Directors to confirm that they have followed all applicable law and regulations in preparing the Directors’
Report and financial statements
the external auditor, Emst & Young, to confirm that they have audited the financial staternents and expressed an opinion on these
statements in accordance with applicable law and International Standards on Auditing (UK and Ireland)
Ee eee
Statement of Directors’ responsibilities in relation to the consolidated financial statements 146
independent Auditor's Report to the members of Royal Mail Holdings plc 147
Royal Mail Holdings ple
‘Annual Report and Financial Statements 2011-12 145
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Statement of Directors’
responsibilities in relation to
the Group financial statements
The Directors are responsible for preparing the Directors’ Report and The Directors are responsible for keeping adequate accounting
the financial statements in accordance with applicable law and records that are sufficient to show and explain the Company's
regulations. Company law requires the Directors to prepare financial _ transactions and disclose with reasonable accuracy at any time the
statements for each financial year. Under that law the Directors have _ financial position of the Company and enable them to ensure that the
elected to prepare the Group financial statements in accordance with _ financial statements comply with the Companies Act 2006 and, as
International Financial Reporting Standards (IFRSs) as adopted by regards the Group financial statements, Article 4 of the IAS
the European Union. Under company law the Directors must not Regulation. They are also responsible for safeguarding the assets of
approve the financial statements unless they are satisfied that they the Company and hence for taking reasonable steps for the
give a true and fair view of the state of affairs of the Group and of I—_prevention and detection of fraud and other irregularities.
the profit or loss of the Group for that period. In preparing these
financial statements, the Directors are required to:
« select suitable accounting policies and then apply them
consistently;
make judgements and accounting estimates that are reasonable
and prudent;
state whether the applicable IFRSs as adopted by the European
Union have been followed, subject to any material departures
disclosed and explained by the financial statements; and GRO
prepare the financial statements on the going concern basis unless
it is inappropriate to presume that the Company will continue in
business.
Donald Brydon Alice Perkins
146 Royal Mail Holdings ple
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Financial Statements
Independent Auditor’s Report
to the members of
Royal Mail Holdings plc
We have audited the Group financial statements of Royal Mail
Holdings ple for the year ended 25 March 2012 which comprise the
Consolidated income statement, the Consolidated statement of
comprehensive income, the Consolidated statement of changes in
equity, the Consolidated balance sheet, the Consolidated statement of
cash flows and the related notes 1 to 28. The financial reporting
framework that has been applied in their preparation is applicable
law and International Financial Reporting Standards (IFRSs) as
adopted by the European Union
This report is made solely to the Company's members, as a body, in
accordance with Chapter 3 of Part 16 of the Companies Act 2006.
Our audit work has been undertaken so that we might state to the
Company's members those matters we are required to state to them
in an auditor's report and for no other purpose. To the fullest extent
permitted by law, we do not accept or assume responsibility to
anyone other than the Company and the Company's members as a
body, for our audit work, for this report, or for the opinions we have
formed.
Respective responsibilities of directors
and auditors
As explained more fully in the Directors’ Responsibilities Statement
set out on page 146 the Directors are responsible for the preparation
of the Group financial statements and for being satisfied that they
give a true and fair view. Our responsibility is to audit and express an
opinion on the Group financial statements in accordance with
applicable law and Intemational Standards on Auditing (UK and
Ireland). Those standards require us to comply with the Auditing
Practices Board's Ethical Standards for Auditors.
Scope of the audit of the financial
statements
An audit involves obtaining evidence about the amounts and
disclosures in the financial statements sufficient to give reasonable
assurance that the financial statements are free from material
misstatement, whether caused by fraud or error. This includes an
assessment of: whether the accounting policies are appropriate to
the Group's circumstances and have been consistently applied and
adequately disclosed; the reasonableness of significant accounting
estimates made by the Directors; and the overall presentation of the
financial statements. In addition, we read all the financial and non-
financial information in the Annual Report and Financial Statements
to identify material inconsistencies with the audited financial
statements. If we become aware of any apparent material
misstatements or inconsistencies we consider the implications for
our report.
Royal Mail Holdings ple
Annual Report and Financial Statements 2011-12
Opinion on financial statements
In our opinion the Group financial statements
give a true and fair view of the state of the Group's affairs as at
25 March 2012 and of its profit for the year then ended;
« have been properly prepared in accordance with IFRSs as adopted
by the European Union; and
« have been prepared in accordance with the requirements of the
Companies Act 2006
Opinion on other matter prescribed by the
Companies Act 2006
In our opinion the information given in the Directors’ Report for the
financial year for which the Group financial statements are prepared
is consistent with the Group financial statements.
Matters on which we are required to
report by exception
We have nothing to report in respect of the following matters where
the Companies Act 2006 requires us to report to you if, in our
opinion:
certain disclosures of Directors’ remuneration specified by law are
not made; or
we have not received all the information and explanations we
require for our audit.
Other matter
We have reported separately on the parent company financial
statements of Royal Mail Holdings plc for the year ended
25 March 2012
Enh Yous ue
Richard Wilson (Senior statutory auditor)
for and on behalf of Ernst & Young LLP,
Statutory Auditor
London
27 June 2012
147
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Financial Statements
Royal Mail Holdings plc -
parent Company financial
statements 2011-12
In simple terms:
This section includes mandatory financial statements for Royal Mail Holdings ple, the Group's holding (top) company, (the Company) which is
a non-trading entity. Key points to note are
the Company's financial statements are prepared under UK Generally Accepted Accounting Practice (UK GAAP), different to the Group
consolidated financial statements presented in preceding sections which are prepared under IFRS. In common with many other large
organisations, the Group still prepares its separate legal entity (or ‘solus) accounts under UK GAAP.
the Company has investments which at 25 March 2012 were held as security in support of the Group's pension deficit recovery period.
On 1 April 2012 these investments were released from escrow.
@ in addition to Royal Mail Group Ltd, Post Office Limited became a direct subsidiary investment of the Company on 1 April 2012
Parent Company balance sheet at 25 March 2012 and 27 March 2011 149
Notes to the parent Company financial statements 150
Statement of Directors responsibilities in relation to the parent Company financial statements 153
independent Auditor's Report to the members of the parent Company, Royal Mail Holdings plc 154
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Parent Company
financial statements
The majority of the Annual Report and Financial Statements relates to the Royal Mail Holdings plc Group consolidated accounts, which
comprise the aggregation of all the Group's trading entities (subsidiaries, joint venture and associated undertakings). This mandatory section
reports the individual balance sheet of the top holding company, Royal Mail Holdings plc (the Company). For the duration of 2011-12 the
Company had one direct subsidiary investment, a 100% holding in Royal Mail Group Ltd and held a majority of the pension escrow
investments at the balance sheet date, which are summarised in note 5. On 1 April 2012, after the balance sheet date, the Group’s 100%
investment in the Post Office Limited subsidiary was transferred from under the ownership of Royal Mail Group Ltd to the Company at £nil
value, being its cost less cumulative impairment. Also, on this date, the Directors of the Company except for Paula Vennells, Chief Executive
Officer of Post Office Limited and Donald Brydon (Chairman), became Directors of Royal Mail Group Ltd. Alice Perkins was also appointed to
the Royal Mail Holdings plc Board on 1 April 2012
Parent Company balance sheet at 25 March 2012 and 27 March 2011
2012 2011
Notes £m £m
Fixed assets
Investments in subsidiaries 4 = ~
Investments in pension escrow ] 1,234 1,074
Total net assets 1,234 1,074
Capital and reserves
Share capital 8 = =
Share premium 9 430 430
Reserves 9 14 56
Profit and loss account g 660 588
Shareholder’s funds 1,234 1,074
The financial statements on pages 149 to 152 were approved by the Board of Directors on 27 June 2012 and signed on its behalf by:
GRO
Donald Brydon Alice Perkins
Irn apr ane Frvcl Steves 211-12 149
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Notes to the parent Company
financial statements
1. Parent Company accounting policies
The following accounting policies apply.
Financial year
The financial year ends on the last Sunday in March and,
accordingly, these financial statements are made up to the year
ended 25 March 2012 (2011 year ended 27 March),
Basis of preparation
The financial statements of the parent Company, Royal Mail
Holdings plc (the Company) were authorised for issue by the
Board on 27 June 2012
The financial staternents on pages 149 to 152 have been
prepared in accordance with applicable UK Accounting Standards
and law, including the requirements of the Companies Act 2006.
Unless otherwise stated in the accounting policies below, the
financial statements have been prepared under the historic cost
accounting convention.
In making an assessment on the Company's ability to continue as
a going concern, the Directors have considered the respective
going concern assessments made by the Directors of the Royal
Mail Group Ltd and Post Office Limited subsidiary companies
(see note 2 on page 89). In reviewing these assessments, the
Directors have also taken account of the fact that the Company
acts as guarantor for the Royal Mail Group Ltd £900m senior
debt facility and £500m other loans facility (see notes 13 and 15
of the Group financial statements for further details). After careful
consideration of all available information, the Directors are of the
view that it is appropriate that these financial statements have
been prepared on a going concern basis.
The Company has not presented its own profit and loss account,
as permitted by section 408 of the Companies Act 2006
However, the results of the Company for the year are disclosed in
notes 6 and 9 to the financial statements
The Company has taken advantage of paragraph 2D of ARS 29
(FRS 7) Financial Instruments: Disclosures and has not disclosed
information required by that standard, as the Group's
consolidated financial statements in which the Company is
included, provide equivalent disclosures for the Group under
IFRS 7.
No new UK Accounting Standards, which affect the presentation
of these financial statements, have been issued
Impairment reviews
Unless otherwise disclosed in these accounting policies, fixed
assets are reviewed for impairment if events or changes in
circumstances indicate that the carrying value may be impaired.
The Company assesses at each reporting date whether such
indications exist. Where appropriate, an impairment loss is
recognised in the profit and loss account for the amount by which
the carrying value of the asset (or cash generating unit) exceeds
its recoverable amount, which is the higher of an asset's net
realisable value and its value in use.
Investments in subsidiaries
Investments in subsidiaries within the Company's financial
statements are stated at cost less any accumulated impairment
losses. The opening and closing carrying value relates solely to
the Company's investment in Royal Mail Group Ltd, a 100%
subsidiary of the Company.
Investments in pension escrow
Investments in pension escrow are financial assets within the
scope of FRS 26 Financial Instruments: Recognition and
Measurement.
The investments are a combination of short-term deposits and
long-term investments which mature between 1 day and 44
years but have been included within fixed assets as the
investments have been provided as security to the Royal Mail
Pension Plan Trustee in support of the 38 year deficit recovery in
2009 as part of the last formal triennial valuation
The investments comprise bank balances, Treasury bills and gilt
edged securities.
Treasury bills, index-linked gilt edged securities and conventional
gilt edged securities are classified as available for sale financial
instruments on the basis that they are quoted investments that
are not held for trading and may be disposed of prior to maturity.
The investments are initially recognised at fair value, being the
purchase price. After initial recognition, interest is included in the
reported profit/(loss) for the year, using the effective interest rate
method and the assets are measured at fair value with gains or
losses being recognised in the Financial Assets Reserve until the
investment is derecognised.
Contingent liabilities
Contingent liabilities are not disclosed if the possibility of losses
occurring is considered to be remote.
2. Directors’ emoluments
The Directors of the Company are not paid fees by the Company
for their services as Directors of the Company. The Directors of
the Company are paid fees by other companies of the Group.
These emoluments are disclosed in the Group financial
statements.
3. Auditor’s remuneration
The auditor of the Company is not paid fees by the Company. The
auditor of the Company is paid fees by the other companies of
the Group. This remuneration is disclosed in the Group financial
statements (note 17).
150 Royal Mail Holdings ple
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4. Investments in subsidiaries
Cost Impairment 2012 2011
£m £m £m £m
At 28 March 2011 and 29 March 2010 4,160 (4.160) = 3,784
Impairment charge = - = (3.784)
‘At 25 March 2012 and 27 March 2011 4,160 (4,160) = =
In 2010-11, in accordance with FRS 11 ‘Impairment of Fixed Assets and Goodwill’, the carrying value of the Company's investment in Royal
Mail Group Ltd was compared to its recoverable amount, represented by its value in use to the Company. The value in use was derived from
discounted cash flow projections from its formally approved strategic plan using the Company's pre-tax Weighted Average Cost of Capital
(WACC). The comparison of the carrying value of the Company's investment in Royal Mail Group Ltd to its recoverable amount resulted in an
impairment charge of £3,784m. The main driver for this zero valuation was the continuing impact of the large pension deficit.
At 25 March 2012, the impairment of the Company's investment in Royal Mail Group Ltd remains. Whilst the pension deficit in the RMPP
was removed on 1 April 2012, the cash flows of Royal Mail Group Ltd, before one-off disposal proceeds, remain negative and it has yet to
establish a track record of sustainable free cash flow generation.
On 4 April 2012, after the balance sheet date, Post Office Limited became an additional direct subsidiary of the Company (note 11 refers),
5. Investments in pension escrow
2012 2011
Average Average
effective effective
rate 2012 rate 2011
% £m a £m
Cash at bank 04 a 04 3
‘Treasury bills 04 257 DS 242
Gilt edged securities (index linked) 43 835 47 707
Gilt edged securities (conventional) 48 141° 48 122
Total 1,234 1,074
These pension escrow investments are discussed further in the Group financial statements (note 11).
6. Profit and loss account
The Company is a non-trading company. The profit for the period relates to income from the investments in pension escrow of £41m (2011
£46m) and a tax credit of £31m (2011 £5m credit). The investment in Royal Mail Group Ltd was impaired by £3,784m in 2011.
7. Taxation
A tax charge of £311m (2011 £5m charge) has been taken to the Financial Assets Reserve, reflecting the tax liability on the fair value changes
on available for sale financial assets. A tax credit of £31m (2011 £5m credit) has been taken to the profit and loss account, reflecting the
sheltering of that tax liability by losses of other Group companies.
8. Share capital
Details of the share capital are disclosed in the Group financial statements (note 26).
Royal Mail Holdings ple 151
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9. Shareholder’s funds
Profit and Financial
Share loss Assets 2012 2011
premium account Reserve Total Total
£m £m £m £m £m
At 28 March 2011 and 29 March 2010 430 588 56 1,074 4,795
Profit/(loss) for the year - 72 = 72 (3,733)
Taxation on items taken directly to reserves - - (31) (34) (5)
Gains on financial asset investments = = 119 119 17
At 25 March 2012 and 27 March 2011 430 660 144 1,234 1,074
Financial Assets Reserve
The Financial Assets Reserve is used to record fair value changes on available for sale financial assets.
10. Charges
Details of charges registered over the assets of the Company are contained in the Group financial statements (notes 13 and 15).
11. Post balance sheet events
On 1 April 2012 Post Office Limited became a directly owned subsidiary of Royal Mail Holdings plc, having previously been a directly owned
subsidiary of Royal Mail Group Ltd. At that date the majority of Royal Mail Holdings plc Directors became Directors of Royal Mail Group Ltd
Alice Perkins and Donald Brydon are the only Directors of Royal Mail Holdings plc at 1 April 2012
Royal Mail Holdings plc continues to hold £1.2bn of investments, which were previously held in pension escrow up to 1 April 2012, and
which will not be transferred to Royal Mail Group Ltd or Post Office Limited.
152 Royal Mail Holdings ple
‘Annual Report and Financial Statements 2011-12
Statement of Directors’
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responsibilities in relation to the
parent Company financial statements
The Directors are responsible for preparing the Directors’ Report
and the financial statements in accordance with applicable law
and regulations.
Company law requires the Directors to prepare financial
statements for each financial year. Under that law the Directors
have elected to prepare the financial statements in accordance
with United Kingdom Generally Accepted Accounting Practice
(United Kingdom Accounting Standards and applicable law).
Under company law the Directors must not approve the financial
statements unless they are satisfied that they give a true and fair
view of the state of affairs of the company and of the profit or
loss of the company for that period. In preparing these financial
statements, the Directors are required to:
select suitable accounting policies and then apply them
consistently;
make judgements and accounting estimates that are
reasonable and prudent;
state whether applicable UK Accounting Standards have been
followed, subject to any material departures disclosed and
explained in the financial statements; and
prepare the financial statements on the going concen basis
unless it is inappropriate to presume that the Company will
continue in business.
Royal Mail Holdings ple
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Company's
transactions and disclose with reasonable accuracy at any time
the financial position of the Company and enable them to ensure
that the financial statements comply with the Companies Act
2006. They are also responsible for safeguarding the assets of
the Company and hence for taking reasonable steps for the
prevention and detection of fraud and other irregularities.
The Directors are not required under UK law to prepare a
Remuneration Committee Report but, in accordance with the
principles of good corporate governance, as outlined in the
Combined Code, have chosen to do so. This Report has been
prepared by the Remuneration Committee as if the Company
was required to comply with both Schedule 8 to The Large and
Medium-sized Companies and Groups (Accounts and Reports)
Regulations 2008 of the United Kingdom and relevant Listing
Rules of the Financial Services Authority and has been approved
by the Board. The only exception is that a performance graph has
not been included, since the Company is not quoted
GRO
Donald Brydon Alice Perkins
‘Annual Report and Financial Statements 2011-12 153
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Financial Statements
Independent Auditor’s Report
to the members of the parent
Company, Royal Mail Holdings plc
We have audited the parent Company financial statements of
Royal Mail Holdings plc for the year ended 25 March 2012 which
comprise balance sheet and the related notes 1 to 11. The
financial reporting framework that has been applied in their
preparation is applicable law and United Kingdom Accounting
Standards (United Kingdom Generally Accepted Accounting
Practice).
This report is made solely to the Company's members, as a body,
in accordance with Chapter 3 of Part 16 of the Companies Act
2006. Our audit work has been undertaken so that we might
state to the Company's members those matters we are required
to state to them in an auditor's report and for no other purpose.
To the fullest extent permitted by law, we do not accept or
assume responsibility to anyone other than the Company and the
Company's members as a body, for our audit work, for this
report, or for the opinions we have formed.
Respective responsibilities of Directors
and auditors
As explained more fully in the Directors’ Responsibilities
Statement set out on page 153, the Directors are responsible for
the preparation of the parent Company financial statements and
for being satisfied that they give a true and fair view. The
Directors are also responsible for the preparation of the Directors’
Remuneration Report, which they have chosen to prepare as if
the Company was required to comply with relevant requirements
of both the UK Companies Act 2006 (and Regulations
thereunder) and the Listing Rules of the Financial Services
Authority. The only exception is that a performance graph has not
been included, since the Company is not quoted. Our
responsibility is to audit and express an opinion on the parent
Company financial statements in accordance with applicable law
and International Standards on Auditing (UK and Ireland). Those
standards require us to comply with the Auditing Practices
Board's Ethical Standards for Auditors. In addition, the Company
has also instructed us to review whether the section of the
Directors’ Remuneration Report that has been described as
audited has been properly prepared in accordance with the basis.
of the preparation described therein.
Scope of the audit of the financial
statements
An audit involves obtaining evidence about the amounts and
disclosures in the financial statements sufficient to give
reasonable assurance that the financial statements are free from
material misstatement, whether caused by fraud or error. This
includes an assessment of: whether the accounting policies are
appropriate to the parent Company's circumstances and have
been consistently applied and adequately disclosed; the
reasonableness of significant accounting estimates made by the
Directors; and the overall presentation of the financial
statements. In addition, we read all the financial and non-
financial information in the Annual Report and Financial
Statements to identify material inconsistencies with the audited
financial statements. If we become aware of any apparent
material misstatements or inconsistencies we consider the
implications for our report.
Opinion on financial statements
In our opinion the parent Company financial statements:
* give a true and fair view of the state of the Company's affairs
as at 25 March 2012;
* have been properly prepared in accordance with United
Kingdom Generally Accepted Accounting Practice; and
have been prepared in accordance with the requirements of
the Companies Act 2006.
Opinion on other matters prescribed by
the Companies Act 2006
In our opinion:
« the part of the Directors’ Remuneration Report that has been
described as audited has been properly prepared in accordance
with the basis of preparation as described therein; and
the information given in the Directors’ Report for the financial
year for which the financial statements are prepared is
consistent with the parent Company financial statements.
Matters on which we are required to
report by exception
We have nothing to report in respect of the following matters
where the Companies Act 2006 requires us to report to you if, in
our opinion:
adequate accounting records have not been kept by the parent
Company, or returns adequate for our audit have not been
received from branches not visited by us; or
the parent Company financial statements and the part of the
Directors’ Remuneration Report to be audited are not in
agreement with the accounting records and returns; or
certain disclosures of Directors’ remuneration specified by law
are not made; or
we have not received all the information and explanations we
require for our audit.
Other matter
We have reported separately on the Group financial statements
of Royal Mail Holdings plc for the year ended 25 March 2012
Enrbae Youg Uh
Richard Wilson (Senior statutory auditor)
for and on behalf of Ernst & Young LLP,
Statutory Auditor
London
27 June 2012
154 Royal Mail Holdings ple
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Pro-forma 2011-12 financial
statements for Royal Mail Group excluding
Post Office Limited (unaudited)
In simple terms:
« In view of the possibility of Post Office Limited formally separating from the remainder of the Group at a future date, this section provides
an indication of how the Group's consolidated primary financial statements would look if Post Office Limited was not part of the Group
These statements are not mandatory and have not been audited
Introduction 156
Royal Mail Group excluding Post Office Limited five-year summary (unaudited) 156
Summary of financial results (unaudited) 157
Consolidated income statement ™ (unaudited) 158
Consolidated balance sheet (unaudited) 159
Consolidated statement of cash flows (unaudited) 160
* For the year ended 25 March 2012 and 27 March 2011
2 at 25 March 2012 and 27 March 2011
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Royal Mail Group excluding
Post Office Limited
Introduction
These pro-forma 2011-12 financial statements for Royal Mail Group excluding Post Office Limited (RMG ex POL’) are unaudited and have
been included for indicative purposes only, on the basis that Post Office Limited is expected to be formally separated from the rest of the
Group at a future date
Royal Mail Group excluding Post Office Limited five-year summary (unaudited)
2012 2011 2010 2009 2008
Income statement £m £m £m £m £m
External revenue 8,731 8,380 8,511 8,652 8477
Inter-company revenue from Post Office Limited <5} 35 36 43 44
Revenue 8,764 8,415 8,547 8,695 8521
Operating profit before exceptional items 381 210 332 280 196
Operating exceptional items ~ modernisation costs (229) (a92) (185) (179) (362)
Operating profit/(loss) after modernisation costs before other 152 18 147 101 (166)
operating exceptional items
Operating exceptional items - other (57) (48) (180) (26) (10)
Operating profit/(loss) 95 (30) (33) 75 (176)
Non-operating exceptional items 182 104 186 E) 53
Profit/(loss) before financing and taxation 277° Th 153 78 (123)
Net finance (costs)/income including net pensions interest (34) (192) (352) (120) 155
Profit/(loss) before tax 243 (118) (199) (42) 32
Taxation (charge)/credit (20) (118) (77) (297) 184
Profit/(loss) after tax 223 (236) (276) (339) 216
2012 2011 2010 2009 2008
Free cash flow#t £m £m £m &m £m
EBITDA before pension costs 1,076 925 1,011 991 1,081
Working capital (19) (58) 31 63 (76)
Pension payments (440) (724) (811) (809) (801)
Modernisation investment in UKPIL (429) (377) (325) (427) (149)
Other exceptional items (37) (7) (8) - -
Other capital expenditure (150) (176) (234) (237) (183)
Other (dividends, tax, interest) (46) (13) (29) (68) (aa)
Cash outflow before disposal of assets (45) (430) (365) (487) (139)
Disposal of assets 240 230 10 pal 65
Free cash inflow/(outflow) 195 (200) (355) (476) (74)
# A definition of Free cash flow is given on page 161.
2012 2011 2010 2009 2008
Balance sheet £m £m £m £m £m
Net operating assets and investments in associates 1,444 1,416 1,438 1,335 1,074
Net debt (cast/cash equivalents less: loans/borrowings and
finance lease obligations) (1,335) (1.359) (1,135) (685) (201)
Other net (liabilities)/assets (5) 38 100 149 619
Net assets before pension deficit and pension escrow investments 104 5 403 799 1,492
Pension deficit (2,716) (4,185) (7,477) (6.301) (2,718)
Pension escrow investments 1,383 1,161 1,189 1,106 1,070
Net liabilities (4,229) (2,929) (5,885) (4,396) (156)
156 Royal Mail Holdings ple
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Royal Mail Group excluding
Post Office Limited Summary
of financial results (unaudited)
Profit and loss summat
external revenue increased by £349m, from £8,415m in 2011 to
£8,764m in 2012 as the impact of price increases more than
offset core traditional volumes decline in UKPIL;
2012 2011
£m m
External revenue 8,764 8,415
Operating costs (8,384) (8.208)
Modernisation costs (229) (192)
Share of profits from associates 1 E
Operating profit after
operating costs increases are lower than inflation and comprise a
reduction in people costs, offset by expected increases in non
people costs;
modernisation costs in 2011 included a £101m credit relating to
the legacy share scheme. Underlying costs have reduced mainly
modernisation costs 152 18
Other net exceptional items 125 56 due to lower redundancy costs:
Profit before financing and taiation a7 77, * other net exceptional items of £125m mainly comprise profit on
Net finance costs and net pension interest (34) (192) tisposal of property of £156m;
Taxation cfiarae (20) (11g) * net finance costs of £34m have reduced by £158m, mainly due to
Profiillcss) for the financial year 333 (236) __@Mon-cash pension interest credit in 2012, driven by changes in
long-term pension assumptions; and
taxation charge of £20m mainly relates to GLS profits, compared
with 2011 which included £79m relating to the write-down of UK
deferred tax assets.
Free cash flow summary
_ ia « EBITDA before pension costs of £1,076m is £151m higher than
EBITDA before pension coats Tove Joe __last year due to improved trading performance;
Working capital (19) (58) * RMG ex POL is no longer required to make pension deficit
Ongoing/other pension payments* (440) (453) Payments into the main pension scheme (2011 £272m payment)
Pension deficit payments for RMPP _ (272) Significant ongoing/other pension cash costs of £440m remain;
Modernisation investment in UKPIL (429) (377) © modernisation investment continues, but focus now changing from
Other capital expenditure and other processing units to delivery and collections; and
exceptional costs (187) (182) © before property and business disposals RMG ex POL consumed
Other (dividends, tax, interest) (46) (13) cash, but at a lower level than last year
Cash outflow before disposal of assets (45) (430)
Disposal of property and non-core
businesses 240 230
Free cash inflow/(outflow) 195 (200)
* Includes pension payments relating to redundancy of £36m (2011 £29m), of which £36m
(2011 £29m) relates to modernisation
Balance sheet summary
2012 2011
£m £m
Net operating assets and investments
in associates 1,444 1,416
Net debt (cash/loans/finance leases) (4,335) (1,359)
Other net liabilities (taxation, derivatives) (5) 38
Net assets before pension deficit and
pension escrow investments 104 95
Pension deficit (2,716) (4,185)
Pension escrow investments:
in Royal Mail Holdings plc 1,234 1,074
in Royal Mail Group Ltd 149 87
Net liabilities (1,229) (2,929)
net debt has decreased by £24m mainly due to cash generation,
partly offset by an increase in finance leased assets and non cash
interest;
the accounting pension deficit decreased from £4.2bn in 2011 to
£2.7bn in 2012, mainly due to a net £4bn improvement in the
market value of pension assets - primarily investments in bonds;
pension escrow investments increased by £222m, mainly as a
result of increased gilt investment values and interest accrued;
Royal Mail Holdings ple
Annual Report and Financial Statements 2011-12
on J April 2012 almost all of the pension liabilities and pension
assets of the RMPP, built up until 31 March 2012, were
transferred to HM Government. This arrangement left the RMPP
fully funded on an actuarial basis in respect of historic liabilities at
that date;
after the balance sheet date, £149m of pension escrow
investments held by Royal Mail Group Ltd were made available to
that company; and
Royal Mail Holdings plc continues to hold £1.2bn of investments
which previously were held in pension escrow and which will not
be transferred to Royal Mail Group Ltd or Post Office Limited.
157
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Financial Statements
Royal Mail Group excluding
Post Office Limited Consolidated
income statement
for the year ended 25 March 2012 and 27 March 2011 (unaudited)
2012 2011
£m £m
Continuing operations
Revenue 8,764 8,415
People costs (4,920) (4,986)
Distribution and conveyance costs (1,755) (1,616)
Other operating costs (1,709) (1,606)
Share of post tax profit from associates i 3
Operating profit before exceptional items 381 210
Modernisation costs - operating exceptional items (229) (192)
Operating profit after modernisation costs before other operating exceptional items 152 18
Other operating exceptional items (57) (48)
Operating profit/(loss) 5 (30)
Profit on disposal of property, plant and equipment 156 60
Profit on disposal of businesses 26 44
Profit before financing and taxation 277 74
Finance costs (411) (106)
Finance income 53 69
Net pension interest 24 (155)
Profit/(loss) before taxation 243 (118)
Taxation charge — (20) (118)
Profit/(loss) for the financial year from continuing operations 223 (236)
Profit/(loss) attributable to
Equity holder of the parent company 222 (237)
Non-controlling interest 4 1
158 Royal Mail Holdings ple
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Royal Mail Group excluding
Post Office Limited Consolidated
balance sheet
at 25 March 2012 and 27 March 2011 (unaudited)
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Financial Statements
2012 2011
£m £m
Non-current assets
Property, plant and equipment 1,814 1,820
Leasehold land payment 3 3
Goodwill 189 197
Intangible assets (mainly software) 135 126
Investments in associates 3 9
Financial assets — pension escrow investments 1,383 1,161
— bank deposits < 44
— derivatives 2 6
Deferred tax assets Cl 8
3,538 3,374
Non-current assets held for sale 4 4
Current assets
Inventories 32 33
‘Trade and other receivables 1,036 906
Financial assets — derivatives 9 36
— short-term deposits 31 1
Cash and cash equivalents 473 319
1,581 1,295
Total assets 5,123 4,673
Current liabilities
Trade and other payables (1,512) (1,394)
Financial liabilities — obligations under finance leases (86) (61)
— derivatives (4) (3)
Income tax payable (9) (6)
Provisions (132) (167)
(4,743) (1.631)
Non-current liabilities
Financial liabilities — interest bearing loans and borrowings (1,522) (1,478)
— obligations under finance leases (231) (184)
— derivatives (4) -
Provisions (85) (85)
Retirement benefit obligation - pension deficit (2,716) (4,185)
Other payables (36) (29)
Deferred tax liabilities (18) (10)
(4,609) (6.971)
Total liabilities (6,352) (7,602)
Net liabilities (4,229) (2,929)
Equity
Share capital = =
Share premium 430 430
Retained earnings (1,913) (3,580)
Reserves 254 213
Equity attributable to equity holder of parent company (4,229) (2.937)
Non-controlling interest - 8
Total equity (1,229) (2,929)
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Royal Mail Group excluding
Post Office Limited Consolidated
statement of cash flows
for the year ended 25 March 2012 and 27 March 2011 (unaudited)
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2012 2011
£m £m
Cash flow from operating activities
Operating profit before exceptional items 381 210
Adjustment for:
Pension operating costs 395 432
Depreciation and amortisation 301 286
Share of post tax profit from associates (1) _(3)
EBITDA before pension costs 1,076 925
Working capital movements: (19) (58)
Decrease/(increase) in inventories a] @)
Increase in receivables (148) (21)
Increase/(decrease) in payables 116 (25)
Net increase in derivative assets (6) (12)
Increase in non-exceptional provisions 18 1
Pension operating costs paid (404) (695)
Cash payments in respect of operating exceptional items (317) (247)
Modernisation:
Legacy share scheme/Business Transformation (60) (95)
Redundancy (129) (109)
Redundancy related pension costs (36) (29)
One-off projects (55) (8)
Other = (1)
Non-modernisation (37) (5)
Cash inflow/(outflow) from operations 336 (75)
Income tax paid (35) (36)
Net cash inflow/(outflow) from operating activities 301 (111)
Cash flows from investing activities
Dividends received from associates 4 9
Finance income received 53 68
Proceeds from sale of property, plant and equipment 203 157
Proceeds from disposal of businesses 37 73
Purchase of property, plant and equipment (including modernisation investment in UKPIL) (287) (270)
Acquisition of businesses (2) (2)
Purchase of intangible assets (software) (45) (70)
Payment of deferred consideration in respect of prior years’ acquisitions (1) -
Net (purchase)/sale of financial assets investments (non-current) (45) 42
Net purchase of financial assets investments (current) (30) -
Net cash (outflow)/inflow from investing activities (113) 7
Net cash inflow/(outflow) before financing activities 188 (104)
Cash flows from financing activities
Finance costs paid (68) (54)
Payment of capital element of obligations under finance lease contracts (49) (62)
Cash received on sale and leasebacks 88 115
New loans - 300
Repayment of borrowings (1) (42)
Net cash (outflow)/inflow from financing activities (30) 257
Net increase in cash and cash equivalents. 158 153
Effect of exchange rates on cash and cash equivalents (4) (2)
Cash and cash equivalents at the beginning of the period 319 168
Cash and cash equivalents at the end of the period 473 319
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Royal Mail Group excluding
Post Office Limited Consolidated
statement of cash flows
for the year ended 25 March 2012 and 27 March 2011 (unaudited) (continued)
Free cash flow
Free cash flow in RMG ex POL is defined as the net cash inflow/(outflow) before financing activities (except finance costs paid), less the net
cash purchase/sale of financial asset investments (current and non-current),
Free cash flow is not a measure defined under IFRS but is a key indicator used by management to assess performance
A reconciliation of ‘net cash inflow/(outflow) before financing activities’ in the RMG ex POL consolidated statement of cash flows to Free cash
inflow/outflow) is shown below.
2012 2011
£m £m
Net cash inflow/(outflow) before financing activities 188 (104)
Net purchase/(sale) of financial asset investments (non-current) 45 (42)
Net purchase of financial asset investments (current) 30 a
Finance costs paid (68) (54)
Free cash inflow/(outflow) 195 (200)
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Forward looking statements
This document contains statements concerning the Group's business, financial condition, results of operations and certain of the Group's
plans, objectives, assumptions, projections, expectations or beliefs with respect to these items.
The Company cautions that any forward looking statements in this document may and often do vary from actual results and the differences
between these statements and actual results can be material. Accordingly, readers are cautioned not to place undue reliance on forward
looking statements. The Company undertakes no obligation to release publicly the result of any revisions to these forward looking statements.
that may be made to reflect events or circumstances after the date of this document, including, without limitation, changes in the Group's
strategy, or to reflect the occurrence of unanticipated events.
By their nature, forward looking statements involve risk and uncertainty because they relate to events and depend on circumstances that will
occur in the future. Such forward looking statements should, therefore, be considered in light of various important factors that could cause
actual results and developments to differ materially from those expressed or implied by these forward looking statements. These factors
include, among other things: the impact of competitive products and pricing; the occurrence of major operational problems; the loss of major
customers; limitations imposed by the Group's indebtedness; undertakings and guarantees relating to pension funds; contingent liabilities;
risks of litigation and risks associated with the Group's overseas operations.
162 Royal Mail Holdings ple
‘Annual Report and Financial Statements 2011-12
Corporate information
Registered Office and Group Head Office
Royal Mail Holdings ple
100 Victoria Embankment
LONDON
EC4Y OHO
Telephone: 020 7250 2888
Registered No: 4074919
Royal Mail, the Cruciform, the colour red, Parcelforce Worldwide and the Parcelforce Worldwide
logo are registered trademarks of Royal Mail Group Ltd. Post Office and the Post Office symbol
are registered trademarks of Post Office Limited. Group Annual Report and Financial
Statements 2012 © Royal Mail Group Ltd 2012. All Rights Reserved.
Corporate website
Additional corporate and other information can be accessed on the following website
www.royalmailgroup.com. Information made available on the website is not intended to be,
and should not be regarded as being, part of the Financial Statements
The maintenance and integrity of the Group's websites is the responsibility of the Directors;
the work carried out by the auditor does not involve consideration of these matters and,
accordingly, the auditor accepts no responsibility for any changes that may have occurred
to the financial statements since they were initially presented on the website.
Auditor Actuary
Ernst & Young LLP Towers Watson Limited
1 More London Place Watson House
LONDON London Road
SE1 2AF REIGATE
Surrey
RH2 9PQ
Regulator (Ofcom) Consumer body
Riverside House Consumer Focus
2a Southwark Bridge Road Fleetbank House
LONDON Salisbury Square
SE1 9HA LONDON
ECAY 8JX
Royal Mail Holdings ple
‘Anmual Report and Financial Statements 2011-12
Other Information
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Royal Mail, the cruciform, the colour red, the Parcelforce Worldwide logo and all words or logos marked with the ©
symbol are registered trade marks, and all words or logos marked with the ™ symbol are trade marks, of Royal Mail
Group Limited. The GLS arrow logo is the registered trade mark of General Logistics Systems Germany GmbH & Co. OHG
The Post Office logo is the registered trade mark of Post Office Limited, Annual Report 2011-12 © Royal Mail Group
Limited 2012. All rights reserved