UKGI00042011
UKGI00042011
Shareholder
Executive
HM Government
Post Office Limited (“POL”)
Quarterly Review
June 2013
RESTRICTED — POLICY & COMMERCIAL
UKGI00042011
UKGI00042011
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Quarterly Update - Summary
POL made significant
progress in 2011/12
in relation to both
“business-as-usual”
milestones and also
in relation to selected
strategic initiatives...
«these initiatives are
being monitored
closely by ShEx to
ensure that targets
are met and where
risks are identified,
mitigating actions
are taken.
.-.we have also
recently engaged
with POL in relation
to its new strategy
and funding deal.
This will remain our
focus through much
of the rest of the year
@ Shareholder
Executive
2012/13 Financial Performance
+ POL delivered a strong set of results for the year to March 2013 — this was a second year of consecutive revenue
growth after along term period of deciine. All key revenue lines were up year-on-year with the exception of
Government Services, despite this being identified in POL's strategy as a key growth driver for the business
+ Management's track record of cost control was also maintained, and combined with revenue growth operating profit was
£33m ahead of 201 1/12 (or £3m ahead given the £30m increase in the Network Subsidy) and £10m up on budget
Progress on Network Transformation Programme
+ This is a critical pillar of POL’s strategy which moved into implementation after a successful pilot which saw 270
branches convert to new models. By the end of the year 507 new models were open, delivering benefits to customer
experience (e.g. longer hours, shorter queues) but aiso to POL (e.g. changed sales incentives, reduced fixed costs)
+ POL's target of 1,250 conversion contract signatures was met (achieved 1,460 for the year) although the gap between
signatures and open branches continued to widen throughout the year. The profile of conversions also diverted from the
plan, with more onsite Main conversions taking place than had been expected
Progress on Crown Transformation Programme
+ Significant progress towards achieving breakeven was made during the year with the £46m loss seen in 2011/12
‘narrowing to a loss of £37m (which was c.£3m ahead of budget). Performance was driven by both strong revenue
growth and close and effective management of costs
+ The programme is being monitored closely and further progress is expected to be made during 2013/14 (e.g. through
POL's recently announced franchising plans, benefits of redundancies, benefits of increased automation)
Mutualisation
+ During the year POL brought together stakeholders to convene the POL Stakeholder Forum - this is a body set up to
develop a definition of the Public Benefit Purpose of a mutual POL and the first Phase of its work recently came to an
end. A public engagement exercise is taking place over the Summer to solicit a broad range of views on this work
+ Atthe same time some work has also been taking place on other workstreams (e.g. cultural change, finance) although
further progress depends on the outcome of the work of the POL Stakeholder Forum
New Strategic Plan and Funding
+ POL recently presented its proposed new strategic plan to ShEx, with a funding “ask” that covers the current SR and
potentially 2016/17 (subject to agreement with BIS Finance and HMT). Further information is provided on Pages 8 — 11
+ Our intial work has identified a number of key risks. The most erltical of these relate to Network Transformation
{and the stakeholder management strategy around this) and POCA. Others relate to revenue growth and costs
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2012/13 Full Year Financial Performance — Revenue by Activity
Revenue
performance marks
a second year of
growth after POL’s
2011/12 outturn...
...however Group
level performance
masks a number of
mix-effects, with
weaker than
expected
performance in
Government
Services and
Telephony being
offset by stronger
results in Financial
Services and Other
income...
Mail and Retail
remains a key
revenue driver
representing c.45%
sales
@ Shareholder
Executive
I=
Government Services 133.2 139.9 (4.8%) 135.7 (1.8%)
Telephony 45.0 457 (1.5%) 414 87%
(Other 407 33.8 20.4% 39.3 3.5%
+ In line with budget but masks a mix-effect where strong results in Parcetforce, Special Delivery and Retail and Lottery
‘were offset by lower than expected performance in International Priority and the Royal Mail fixed fee (due to delays in
launching a "dangerous goods" service)
+ The net position in stamps and labels was £0.4m up against budget, with 2” class £4.4m ahead and 1* class £4.0m
behind for the year. Much of this is believed to be due to the price increase in April 2012 and customer substitution
Financial Services
+ Overall strong performance, driven by personal financial services (due mainly to the Bol contract renegotiation), bill
Payments (due to stronger than expected volumes and pricing) and banking services (due to higher volumes)
+ Partially offset by weaker trading in travel (including Moneygram, bureau and travel insurance), ATMs (due to delayed
rollout of 550 new machines) and payment services (due to lower postal order volumes and gift voucher income)
Government Services
“+ Weak performance for the year due mainly to shortfalls in POCA income (driven by fewer accounts and low interest
Fates) and ID services (due to DVLA and UKBA volumes being behind target). Partially offset by higher volumes in other
motoring services and passports
‘Telephony and Other
+ Some softness in Telephony due to weak eTopup performance, offset by higher home phone, broadband and
honecard income. Resutts in Other mainly due to warehousing work with Royal Mail inked to the Olympics
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2012/13 Full Year Financial Performance — Income Statement
Operating profit was
‘materially up year
on year and was
also significantly
ahead of budget...
this result against
budget was driven
by strong revenue
performance and a
broad and effective
management of
costs, and was
achieved despite
higher than
expected spending
on Project Costs...
however much
growth year on year
was driven by the
£30m increase in
the Network
‘Subsidy Payment
@ Shareholder
Executive
YE Mar -£m
+ Operating proft outperformance to budget of £10m primarily driven by firm net income, and the contribution from lower
than expected costs - in particular in relation to staff costs (due to lower LTIP awards, unused central staff contingency
‘and cost benefits from delays in the Bol contract renegotiation), non-staff costs (due to lower legal, IT and consumables
‘spending) and agents costs
+ Offset by higher than expected spending on Project One Off Costs related to a wide range of strategic initiatives
‘Note: Holding Network Subsidy flat operating proft was only c.£3m higher than 2011/12 (growth of c.5%)
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2013/14 Budget — Revenue by Activity
The momentum
achieved through
top line growth in
2011/12 and 2012/13
is maintained into
2013/14 however
this is mainly
focused on
recovering revenue
lost from contract
losses and recent
renegotiations...
..Management
believe these
targets are
ambitious but that
they seta strong
platform for future
growth...
this is important
due to the reliance
of the new strategy
on revenue
performance
@ Shareholder
Executive
E m
Malis & Retail 4146 404.0 2.6%
Financial Services 274 2796 (0.8%)
Govemment Services 1156 1932 (13.2%)
Telephony 50.7 450 12.7%
Other air 407 2.5%
POL Net income 900.0 902.4 (0.3%)
+ After returning to growth in 2011/12 and continuing its top line expansion in 2012/13 POL's revenue is expected to be
broadly fat in 2013/14
(© Marks a significant commercial turning point as c.£50m revenue is expected to be lost due to contract losses (¢.9.
NS&I and DWP exceptions), recent renewals and renegotiations (e.g. DVLA, Santander) and increased
Competitive pressures in mature or substitutable markets (e.g. bill payments, POCA)
However these declines should be offset by grow in a number of areas including in traditional mails activities
(e.g, new Royal Mail products), in financial services through continued momentum following the 2012 Bot
renegotiation (e.g. mortgages, savings and insurance) and in telephony (e.g. due to improved terms with the new
Fujitsu contract)
+ No significant growth is assumed to be generated from new product launches ~ many of these will be piloted during the
year but are only expected to contribute to the top line in 2014/15 and beyond
© These include the proposed nationwide launch of POL's current account proposition, the rollout of a "Click and
Collect" offer in packets and parcels together with Royal Mail and a pre-paid mobile service
+ Management believe that these revenue targets are ambitious. If POL is able to meet these — in addition to delivering on
certain strategic intiatives that are linked to income, but which do not contribute to the top line this year — twill establish
a platform on which it can build in the future
© This willbe critical to the success of POL's new strategy which relies on the business delivering significant and
broad-based growth across each key revenue channel
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2013/14 Budget — Income Statement
Operating profit is
expected to grow by
almost £8m despite a
£10m reduction in
the Network Subsidy
Payment...
...Strong cost
nce is
expected to be the
driving force behind
this, with efficiencies
expected in staff
costs, interbusiness
and overhead costs
and Project Costs...
at the same time a
number of
investments will be
focused on future
growth and are
expected to deliver
only limited in-year
benefits
@ Shareholder
Executive
YE Mar -£m
Cs Looe
+ Growth in operating proft of c.£8m (or o.£18m taking into account the £10m reduction in the Network Subsidy Payment)
<iven by effective cost management more than offsetting a slight dectine in revenue
+ Ona business-as-usual basis this is primarily due to reductions in staff costs (due to Crown Transformation and other
back office efficiencies) and interbusiness and overhead allocations, which are partially offset by non-staff costs (due to
inereased telephony costs and planned spending on 3" party contracts) and agents costs
+ Reduced spending on Project Costs also has a major impact, despite many strategic initiatives remaining "ive" through
the period (e.g. certain costs, such as those related to Crown redundancies, were incurred up front in 2012/13 although
the programme is ongoing). Benefts from these wil continue to accrue to POL during 2013/14 and beyond
Note: Most costs related to the Network Transformation Programme (e.g. agents’ compensation) fall below the line
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Large portion of YTD
underperformance to
budget due to budget
phasing issues which
are being addressed...
...n trading, strong
results in Travel,
Passports, Retail and
Homephone were offset
by weakness in Labels,
International Mail,
Lottery and ATMs...
partially offset by
good non-POOC
outturn (e.g. lower
agents’ and non-staff
..-we are monitoring
early year trends
closely although we
have received comfort
from management that
these are not thought
to signal wider
commercial issues
@ Shareholder
Executive
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RESTRICTED — POLICY & COMMERCIAL
I 2013/14 to 2019/20 Strategic Plan —- Takeaways and Timing
+ In April 2013 POL presented a draft of its new strategy to BIS
© Covers the period from 2013/14 to 2019/20 (1. updates the last 3 years of the existing plan, and extends it by a further 3 years to 2019/20)
© Management believe that this extension takes the business to a “steady state" of commercial and financial sustainability, supporting both POL's
long term viabilty and its mutualisation objectives
© ShEx has appointed KPMG to work on dlligencing the plan. A Phase I report has recently been provided with a final due dligence report due
towards the end of June (aligned to the timing of the SR process)
+ The plan builds on POL's existing strategy, and continues to rely on transformation of the network, revenue growth and cost control
(© The objectives of the Network Transformation Programme are broadly the same but POL have requested BIS's support in changing certain aspects
of this (e.g. moving from a voluntary to a scheduled strategy). This is the most important element of the plan, and the biggest risk / challenge
© Top line performance remains important and POL are expecting to deliver a broad base of growth across both existing and new services. There is
‘a high degree of risk in a number of these areas where visiblity is limited. KPMG and ShEx are looking at these areas closely
(© Costs remain important both in relation to driving profit growth and in achieving the Crown Transformation Programme's objectives. Risks increase
towards the back end of the plan but early years are not without challenge
+ Discussions with BIS Finance and HMT in relation to POL’s funding request for 2015/16 (as part of the current SR process) are ongoing
© To allow management to operate POL in a commercial fashion, and due to the efficiencies in seeking a longer funding package (e.g. no need to
repeat a State Aid approval process), we are seeking a 2 year funding deal. Informally this looks as though it should be achievable
« The key risks to agreeing the pian (and its execution) relate to POL's stakeholder landscape — and in particular the NFSP’s continued support
for the Network Transformation Programme — and POCA
© Expect the NFSP to interpret a move from a voluntary to a scheduled NTP as a move to mandating subpostmaster conversions; there is significant
political risk around their reaction to this. There is an emerging dialogue between the Minister, POL and the NFSP on these and other issues
© POCA sa crtical contract to POL, not just for the income it generates but also due to the footfall it brings to the network. POL have assumed this,
contract willbe renewed, which we understand conflicts with DWP’s thinking. Work is ongoing to understand this risk in more detail
+ Management and ShEx remain confident that this Is the right strategy
(© Meets HMG's objectives for the Post Ofice and its network, and establishes a platform on which POL might be able to grow its number of outlets,
© Avoids “locking in” an unsustainable business that requires high levels of funding in the long term
© Identifies those "Community" branches that will continue to need support — this increases the VIM profle of HMG's support for POL
© Strengthens POL's competitive positioning making it fit-for-purpose in fast moving and competitive markets
@ Shareholder
Executive
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2013/14 to 2019/20 Strategic Plan — Financial Summary
POL’s new strategy is a
continuation of the
existing plan, and
builds on the
successes seen over
the past few years...
«dt is however highly
ambitious and
requires management
to deliver growth in
existing and new
services in all
channels...
«that said, there is a
greater relative degree
of comfort in the
period up to 2016/17.
This is the period for
which we are seeking
funding as part of the
current SR process
Pres tenpi
@ Shareholder
Executive
+ POL's revenue strategy for the period to 2019/20 is ambitious, with growth expected across all channels in both existing
‘and new products:
© Key drivers ofthis grow include: the rollout of a collections and returns offering in Mails & Retail; the launch of
successful Identity and Assisted Digital offerings in Government Services; the transformation of POL's Insurance
business and growth in Savings and Investments and Payment and Banking Services in Financial Services; and
‘the launch of a Mobile product and Homeservices proposition (e.g. utities) in Telephony and Homeservices
+ Assumptions have also been taken in relation to certain existing revenue streams. These assumptions, including those
‘elated to the renewal of POCA, are also key risk areas in the plan
+ The successful delivery of the Network Transformation and Crown Transformation Programmes are key facilis for
this revenue growth. Ifthese are not delivered successfully, management's abilty to deliver the plan will be at risk
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2013/14 to 2019/20 Strategic Plan — Financial Summary (conta)
POL's strategic plan is
extremely ambitious,
and requires
management to
cost base and certain
key “facilitating”
strategic initiatives...
nif targets can be met
it will take POL a
significant way
towards financial
‘sustainability,
‘supporting progress
towards:
‘mutualistion, making
the post office
‘network more
sustainable in the
Jong term and
reducing the funding
“ask” from HI
[Pres tenpi
@ Shareholder
Executive
+ Management's approach to costs is as ambitious as its revenue strategy, and requires tight control across all key
categories. The cost model has been prepared in less detal than the revenue model which raises risks in the plan, and
uestions in relation to whether POL is investing sufficient margin to support revenue growth targets
© To deliver these targets management will need to extract efficiencies across the business. This includes reductions
in Staff and Non-Staff costs (e.g. management have putin place a “strategic” challenge to reduce Central Costs by
25% over the period) and maintaining Supply Chain costs at 2013/14 levels,
+ Revenue and cost performance is expected to drive strong growth in EBITOAS, with POL planning to reach breakeven
in 2015/16 on a run-rate basis. This increased level of proftabilty means POL's funding requirement from HMG is
expected to fall, reaching a potential steady state funding need of £50m per year in 2019/20
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2013/14 to 2019/20 — flan Financia — Financial Summary (cont'd)
As expected POL will
continue to need
funding from HMG
for the foreseeable
future...
-however the
investments that
have been made to
date, and those
‘Supported under the
current funding deal,
are expected to bring
significant financial
benefits...
..this means POL’s
“ask” to HMG will fall
considerably over
the coming years
and is expected to
reach a steady state
in 2019/20
[1 Preosed tepid
@ Shareholder
Executive
00
Network Subsidy Payment 1300 800 I 700 600
Other Government Funding 2150 1700 I 800 800 0.0 00 0.0
Total Funding 415, 330.0 I 2100 1600 I 700 600 50.0
Existing Funding existing funding current funding ask possible future funding profile
+ Remaining funding available under current deal to support business transformation initiatives (e.g. frst phase of the
Network Transformation Programme, Crown Transformation Programme breakeven, other key initiatives)
+ Carried over c.£100m “unspent” funds from 2012/13 into current year, mainly due to the profile of Network
‘Transformation conversions and the sequencing of other key strategic intiatives
Current Funding Ask
+ Seeking two year funding extension to 2016/17 totalling £370m in order to support completion of the Network
‘Transformation Programme and other investments to drive long term commercialty and sustainability of POL
+ In line with indicative funding “ask’ presented to HMT as part ofthe funding deal agreed in 2010. Note that the 2015/16
numbers are £50m lower than the £260m “bid” that has been made as part of the current SR process
Possible Future Funding Profile
+ Assuming POL can deliver its strategy successfully through 2013/14 ~ 2016/17 management expect the need for “Other
Government Funding’ to drop away, and for the Network Subsidy Payment "ask" to fall considerably
+ This is broadly in line with the long term indications provided to HMT as part ofthe funding deal agreed in 2010
+ By 2019/20 it should be possible to target funding on only the loss making portion of the network this establishes a
platform for a new and more transparent type of relationship with HMG (e.g. contractual). In turn this is expected to
‘Support a funding framework for a mutual POL and more “commercial” interactions between POL and HMG
{Primary Narrative: The investments that HMG has been making in POL are expected to achieve significant financial benefits
{which wil reduce its reliance on further HMG support. Funding today will set POL up well for the future, allowing management I
{to continue to reduce the funding “ask” required to support the business and past office network in the lang term
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I 2013/14 to 2019/20 Strategic Plan — Risk Assessment
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Executive
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I Traffic Light Analysis
Current I Comments
@ Shareholder
Executive
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