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@® Shareholder
Executive
HM Government
Post Office Limited (“POL”)
Annual Review
December 2012
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Contents
UKGI00017385
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Shareholder
Executive
HM Gow
@ Executive Summary
@ Business Overview
© Long Term Strategy
@ Business Plan
@ Valuation
Cs) Board and Management
@ Key Stakeholders
6 Shareholder Executive Role
@ Traffic Light Analysis
(a) Appendix
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1 Executive Summary
Shareholder
Executive
HM Government
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Executive Summary
While the profile of POL
today is broadly
Similar to how it
looked in November
2011, significant
progress has been
made in a number of
areas...
.. the business is now
independent from
Royal Mail and
management have
Started to mobilise a
number of key areas
of strategic
development...
..at the same time
however, the risk
profile of POL has
changed - both in
terms of its strategy
and its viability as a
standalone business
Shareholder
Executive
HM Government
* Since the last annual review in November 2011 considerable progress has been made at POL
the business is now independent following its separation from Royal Mail in April 2012
a board has been put together to support POL’s development, Chaired by Alice Perkins
a number of POL’s core strategic initiatives have started to mobilise, marking the beginning of a period of change
Government responded to the mutualisation consultation and is supporting POL in the stakeholder forum process
important contracts — including with Royal Mail and DVLA — have been renewed making POL a more viable business
the relationship with the Bank of Ireland has been restructured to drive growth in personal financial services
financial performance has been strong, with an outperformance of budget in 2011/12 and strong trading YTD in 2012/13
= However concerns are starting to emerge in relation to some areas of POL’s strategy. This focuses risk to the outer
years of POL’s plan, when the financial benefits from these initiatives are expected to start to be delivered
Network Transformation: Some slipping against targets, although management still expect to meet near term conversion
objectives and have a focused plan in place to address weaknesses in implementation
Crown Transformation: A detailed workplan has only recently been put together, with delivery expected to commence
shortly. There is significant implementation and timing risk around this strategy
Revenue Growth: POL will miss new revenue targets in the short term — however it is not clear for how long such shortfalls
can be made up by strong performances elsewhere in the business
Mutualisation: Progress is starting to be made, albeit more slowly than some stakeholders had hoped. Stakeholders are
however engaged with the process and further developments are expected to be made in the coming months
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Executive Summary (cont'd)
POL’s risk profile is
compounded by
the uncertainty
surrounding its
future plan (e.g.
how the business
has been trading
vs. how the plan
envisages it
trading)...
combined with
changes that have
been made to the
sequencing of
POL’s strategy, it
is extremely
difficult to form a
meaningful view
around trends and
valuation
Shareholder
Executive
HM Government
* Actual trading has started to diverge from the profile of trading envisaged by the plan, meaning forecasts for 2013/14
and 2014/15 are becoming less relevant as a guide to POL’s future
* The financial information and commentary presented in this document should therefore be interpreted in this context
— combined with a negative cash generation profile, also means that a valuation of POL is difficult
* In addition to facing a number of strategic challenges, there are some questions around the capability of management
— the team is strong and knows the business / market well, however they need time to demonstrate their ability to deliver the
strategy successfully (e.g. have experience with the “old” POL, not a transforming growth business)
* POL has had a good year, however its track record of successes is no indicator of future performance
— the business is approaching a challenging period but mixed signals (e.g. slippage on some initiatives, progress elsewhere)
and the fact that some initiatives have not been mobilised yet mean that it is too early to see whether POL is capable of
transformation and delivering the benefits of the strategy
«= The ShEx POL team works closely with POL management at many levels. We monitor performance of the business
closely and challenge progress against the strategy in a structured way
EY FOCUS FOR 2013
1.) Develop revised plan and funding proposal for the next spending review
2.) Push through Network Transformation, Crown Transformation and Revenue Growth (incl. Government Services)
3.) Progress POL's mutualisation process
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2 Business Overview
Shareholder
Executive
HM Government
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2) Business Overview
Post Office Limited
11/12A Net Income” £865.3m, 11/12A Operating Profit £61.3m (7.1% margin), 11/12A Headcount 7,798
POL operates the #1
retail footprint in
the UK, managing a
network of c.11,800
branches and
delivering a range
of around 170
services across a
number of markets
including Mails and
Retail, Financial
Mail and Retail Financial Services Government Services ei I
total sales ex. NSP)
11/12A Sales: £387.5m (44.8%
11/12A Sales: £261.5m (30.2%
total sales ex. NSP)
11/12A Sales: £135.7m (15.7%
total sales ex. NSP)
11/12A Sales: £80.7m (9.3%
total sales ex. NSP)
* Provision of stamps,
labels, international mail,
special delivery and
parcel services on behalf
of Royal Mail
= Broad range of financial
services including bill
payments, SME banking
services (e.g. deposits
and withdrawals), retail
* BPO offering focused on
Government as a
customer. Services
include POCA (e.g.
benefits exception for
* Retail home phone and
broadband services
provider with 480k
subscribers (130k of
which are double-play)
Services, * Also active in in-branch banking services for UK claimants opting not to (51 per cent. divisional
Government and online retail with high-street banks, ATMs, use a bank account), total sales)
Services and stationary, collectibles foreign exchange, ; passport check-and-send, = Also provides a small
Telephony... (e.g. stamps, Royal Mint insurance and savings DVLA driving licence range of miscellaneous
products renewals, and a range of
identity services
services (e.g. cash-transit
and warehousing)
coins) and lottery (in-
branch only)
The Network
...the business has
been 100 per cent.
owned by Royal
Mail Holdings plc, * POL’s network of c.11,800 branches is distributed across an owned estate of 373 “Crowns”, 7,450 privately owned branches
the parent group of operated by subpostmasters, c.3,000 branches operated by multiple retailers and symbol groups and c.1,000 “Outreach” post
Royal Mail Group Offices (i.e. limited hours service in remote locations where a permanent branch is not viable)
Limited since April * Of the c.3,000 branches owned by retail partners, 270 are managed by The Co-operative Group (530 by co-operative groups
2012 more generally), 420 by Martin McColl’s and 210 by OneStop (owned by Tesco). c.80 ex-Crown branches are operated by WH
Smith under a franchise agreement
(1) References to Net Income relate to revenue less cost of goods sold. This is used by POL as a proxy for revenue and ensures a greater degree of
comparability between different activities (e.g. Mails where CoGS are c.1 per cent. gross revenue and Telephony they are >70 per cent.)
Note: EBITDA is not a relevant financial KPI due to POL's capital expenditure being impaired in the period during which itis incurred. Therefore neither
impairment nor depreciation charges are representative of an underlying or normalised “business as usual” expense.
Shareholder
Executive
HM Government
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Market Overview and Competitive Positioning
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POL has a strong
trusted brand
across a wide
range of markets,
which is
increasingly a
crucial
differentiator for
the business...
..-however there are
gaps in customer
knowledge about
POL’s broader
offering which
management are
seeking to
address, while at
the same time
Post Office Limited
Mail and Retail
lee eh:
Selected Key Competitors
collect#
~=myHermes
Ryman
Pee]
Selected Key Competitors
& Lloyds TsB
Pe
Selected Key Competitors
Selected Key Competitors
*~)
BT
TalkTalk —), e
* Clear leader in retail mails
although this is widely seen
as a declining market
Also strong in higher growth
packets and parcels, where
competition is stronger
Currently lack a collect and
returns offer which is a key
growth driver for the
competition (e.g. Collect+).
POL / RM are developing a
= Competitive offer in
almost all segments
where POL is active
Brand equity is also a key
differentiator in many
areas — especially when
POL competes against
high-street banks
Offer currently lacks a
transactional account
which is seen as a
* High level of competition
in low value-add
transactional services
(e.g. payment processing)
Less competition in more
complex areas where
POL can leverage its
footprint, relationships
with Govt. and its branch
/ staff security profile
Relevant competitive
= Competitive price driven
market, with a large
number of players
= Most peers are able to
provide a broader offer
than POL (e.g. triple- or
quad-play), however POL,
will be launching a mobile
proposition in 2013. Also
potential for IPTV launch
Subscriber base is seen
they fight competing product set for weakness. In landscape is also evolving to be both low-churn but
stiffening launch in 2013 development with a as POL / its peers seek also low-spending / price
was * Strategy to transform the tentative launch date in partners, expand in new conscious. Risk around
competition estate and customer Q1 2013/14 markets and meet new ability to up-sell / cross-
experience through Network = Recent restructuring of challengers in existing sell
and Crown Transformation Bol relationship should be markets
initiatives catalyst for change
Shareholder
Executive
HM Government
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3 Long Term Strategy
Shareholder
Executive
HM Government
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Long Term Strategy — Introduction
The financial plan
developed in 2010
remains the one
against which
management monitor
the business’s
performance...
...on the basis of this
plan POL was able to
secure a £1.34bn
funding package and
access to a £1.15bn
WCF...
... while the current plan
seeks to make POL
more sustainable and
more viable, it is still
likely to require
funding through the
next spending round
Shareholder
Executive
HM Government
« POL’s strategy was developed in 2010, prior to POL’s separation from Royal Mail, to cover the period 2011/12 — 2014/15
— centred around three pillars — Network Transformation, Crown Transformation and Revenue Growth. Each of these was
expected to contribute to the transformation of POL into a viable standalone business
« The strategy is closely aligned to Government’s policy objectives for the post office network
— maintain a minimum network size of 11,500 post office branches, with no network closure programme
fl
ensure that 6 clearly defined “access criteria” are met
i
ensure that 5 clearly defined types of services are available across the network (e.g. benefits, bill payments and postal services)
— reduce Government's subsidy for the network, from the current level of c.£210 million
= Government also has two policy priorities linked to POL as a commercial entity. These are:
— to support and monitor the implementation of POL’s strategy
— to work with management and stakeholders to explore options for mutualising POL
« To support the strategy a new funding agreement was put in place, totalling £1.34bn over the plan period (State Aid approval
was received in March 2012). Government also provides a £1.15bn WCF - this is not subject to State Aid
Mar YE (£m) 2011/12 2012/13 2013/14 2014/15
Network Subsidy Payment 180.0 210.0 200.0 160.0 750.0
Other Government Funding 0.0 200.0 215.0 170.0 585.0
Total Government Funding 180.0 410.0 415.0 330.0 1,335.0
= Assuming policy objectives remain unchanged, Government will need to continue to fund POL during its next strategic
planning period
— on the basis that management can deliver the current strategy the annual funding requirement will be materially lower (both as a
subsidy, and as a payment to fund the strategy’s implementation)
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Long Term Strategy — Financial Summary
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POL’s headline
financials have not
changed
significantly from
the expectations
laid out in the 2010
plan...
.. however the
makeup of POL —
in terms of its
sales and cost mix
- is different...
...a disconnect has
therefore emerged
between the
targets laid out in
the plan and the
relevance of the
trading that
supports those
targets
Shareholder
Executive
HM Government
Mail and Retail 365.7 374.2 3723 374.2 0.8%
Financial Services 236.7 235.3 229.7 219.0 (2.6%)
Government Services 137.8 141.8 157.0 197.0 12.7%
Telephony and Other 96.7 112.0 125.4 135.8 12.0%
Net Income (ex. NSP) 836.9 863.3 884.1 926.0 3.4%
% growth na. 3.2% 24% 4.7% na.
Network Subsidy Payment 180.0 210.0 200.0 160.0 (3.9%)
Net Income (in. NSP) 1,016.9 4,073.3 1,084.1 4,086.0 2.2%
% growth na. 5.5% 1.0% 0.2% na.
Total Costs (1,022.1) (1,028.7) (1,019.7) (1,025.9) 0.1%
% Net Income (ex. NSP) (122.1%) (118.8%) (115.3%) (110.8%) (3.2%)
JV Income 36.0 37.0 38.0 39.0 27%
Operating Profit 30.8 84.6 102.4 99.1 47.6%
% margin 3.7% 9.8% 11.6% 10.7% 42.7%
Free Cashflow (37.4) (185.0) 14.0 (28.9) (8.0%)
* POL’s long term strategy was not prepared from the bottom-up, meaning there is no significant detail behind any targets
in the plan. One-year budgets are however prepared from the bottom-up, during an October - March budgeting process
— management remain focused on net income and operating profit targets but have not presented a revised plan to the Board
— they acknowledge that many of the commercials supporting the numbers in the original plan are no longer relevant
- although most strategic initiatives have remained, many had not been fully worked-through in 2010 (i.e. no workplans
existed)
* This makes it difficult to monitor POL’s financial plan or the delivery of its strategic initiatives
— detail on financials are only available in-year. Furthermore POL’s budget is prepared in a different way to its plan, meaning
bridges are often needed to compare actual performance with targets for certain initiatives (e.g. “new income growth)
— strategic initiative workplans are sometimes “retrofitted” to the 2010 plan, to match top-down targets with bottom-up detail
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Long Term Strategy — Network Transformation
The NTP will see a
widespread
restructuring of POL’s
estate, changing how
customers interact
with branches and
how POL interacts
with its network...
...-POL has experience of
delivering large
transformation
programmes, however
the scale of the NTP is
unprecedented...
... if successful, POL will
look very different. It
will also go a long way
to improving POL’s
financial profile,
making it more
sustainable in the long
term
Shareholder
Executive
HM Government
* POL’s Network Transformation Programme (“NTP”) aims to transform the non-Crown estate (c.11,425 branches), making
the in-branch experience more attractive for customers while at the same time improving the flexibility of POL’s cost
base
* The first phase — which runs to March 2015 — will see conversion of 6,000 branches to new format models (4,000 “Mains”
and 2,000 “Locals”)
— gives customers refreshed branches with longer opening hours. Mains will continue to offer the full range of post office
services, while Locals will offer 95 per cent. of services (by volume)
= introduces new subpostmaster contracts that move agents away from “Core Tier’, or fixed payments, towards a greater
emphasis on variable pay (i.e. remuneration driven by transaction volumes)
“MAIN” MODEL
“LOCAL” MODEL
Mostly town centres, processing >1,200
transactions p/w
Mostly urban fringe and rural, processing <1,200
Typical Branch transactions p/w
POL Services Offer Full range of POL services 95% POL services by transaction volume
Primary counter separate from retail with
subsidiary counter integrated
4,000 by March 2015
Up to £45,000
POL Positioning in Branch Fully integrated into retail
2,000 by March 2015.
Up to £10,000
# targeted conversions
POL Investment in Branch
* The NTP is voluntary, and therefore requires subpostmaster engagement (or for subpostmasters to sell their branches
to new operators more willing to engage) for it to be implemented successfully
— support from the NFSP has been key to develop the strategy, run the pilot, and launch the broader implementation
« A large share of the 6,000 branches are expected to relocate
— the economics of the new models are better when part of a retailer (e.g. a convenience store) vs. standalone post office
* The second phase of the NTP is expected to commence in March 2015
— should see the conversion of a large share of the remaining 5,500 branches. The structure of this phase is yet to be
determined, however it will require further funding from Government
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Long Term Strategy — Network Transformation (conta)
AO 4
bh} @ 14
VWOV
Status: RED
POL is currently under-
target and has been
slipping further behind
as weeks progress
Management are taking
actions however many
issues could have
been identified earlier
Not yet clear whether
these actions will
improve performance
High level of risk that
2012/13 and future
targets are missed
Shareholder
Executive
HM Government
* POL is currently behind on the delivery of the NTP
— had planned to have converted 370 branches by the end of September 2012/13 but only reached 270
— weekly conversions are below the SOpw target meaning the shortfall is increasing month-on-month (avg. of Spw in October)
« The programme is facing two key challenges — one from the NFSP and one from subpostmasters directly
— the NFSP signed off on a new subpostmaster contract in August 2012, and has supported the NTP since November 2010.
However locally (e.g. among area reps) and among the NFSP’s executive board there is less consistency in support
— volunteers have also been slow to move through the pipeline (e.g. delays to business planning, ongoing economic
uncertainty, expect more Government Services work to arrive, Know option is open for 3 years)
= POL have responded to these with a “5 Point Plan” which management expect will bring the NTP back on track. With
these measures they believe that the 1,200 conversion target for 2012/13 is still deliverable (on a contract signed basis)
— (i) send NTP advocates into the field to talk through their experiences with subpostmasters
= (ii) strengthen local communication channels with subpostmasters through POL’s network of area sales managers
— (ili) speed up the implementation of new remuneration structures for Financial Services and Telephony sales
— (iv) develop clearer messaging around Government funding for NTP
— (Vv) work with subpostmasters around the selective flexibility of contracts (e.g. opening hours)
* The NFSP is also seeking to negotiate enhanced financial and contractual terms for subpostmasters
— there is a risk that they might withdraw support for the NTP if their objectives are not met
* POL is continuing to work with a number of multiple retailers (not NSFP members) who want to engage with the NTP
Monthly meetings have been set up to monitor the NTP and POL also provide ShEx with weekly updates on shorter-term
developments - management are open and present “warts and all” views. It is critical for ShEx to maintain close and
frequent interactions. Jo Swinson has a keen interest to be kept up to date on progress.
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Long Term Strategy — Crown Transformation
POL’s Crown estate
faces a number of
legacy costs related
to property leases
and employee pay
that contribute to a
recurring loss of
c.£50 million per
year...
.. achieving breakeven
will be a major step
in making POL a
more sustainable
and viable business.
It should also
Support stronger
relationships with a
number of
stakeholders hostile
to the Crowns
Shareholder
Executive
HM Government
* POL’s strategy to restructure the Crown estate targets reaching operating profit breakeven by March 2015
understood to have been loss-making for a considerable period of time, and in 2010/11 made an operating loss of £51m
current plan differs in some areas to the 2010 strategy. The original plan had to be “re-cut” due to complications linked to
TUPE’ing of Crown employees to potential franchise partners and the impact of wider Royal Mail pay settlements
« The new strategy is focused on four pillars: (i) people and productivity benefits (e.g. redundancy and automation); (ii)
income benefits; (iii) property benefits; and (iv) other benefits (e.g. franchising)
management believe that this new strategy - in place since Summer 2012 - is more closely aligned to POL’s growth profile
Variable Net Income 87.1 914 98.5 102.8 105.1
Fixed Net Income 44.5 48.7 445 43.1 418
Retention Income 6.0 44 5.1 68 8.9
Net Income 137.6 144.2 148.1 152.8 155.8
% growth na. 4.8% 2.7% 3.1% 2.0%
Staff Costs (118.0) (119.2) (117.5) (106.7) (96.7)
% staff cost to income ratio (85.7%) (82.7%) (79.3%) (69.8%) (62.1%)
Property Costs (39.0) (41.8) (39.0) (35.3) (30.1)
% property cost to income ratio (28.4%) (29.0%) (26.3%) (23.1%) (19.3%)
Non-Staff Costs (4.0) (3.2) (3.6) (3.4) (3.3)
Infrastructure Costs (23.0) (23.1) (24.4) (23.6) (22.7)
Allocated Costs (12.4) (12.4) (13.7) (13.3) (12.1)
Total Costs (196.4) (199.7) (198.2) (182.2) (164.9)
% net income (142.7%) (138.5%) (133.8%) (119.3%) (105.9%)
POL Crown Operating Profit (58.8) (65.5) (50.1) (29.5) (9.1)
% margin (42.7%) (38.5%) (33.8%) (19.3%) (5.9%)
Financial Services JV Income 8.2 9.2 9.8 9.5 9.4
Group Crown Operating Profit (50.7) (46.4) (40.3) (20.0) 0.0
% margin 4A(36.8%) (32.2%) (27.2%) (13.1%) 0.0%
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Long Term Strategy — Crown Transformation (contd)
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The strategy is
complex given the
need for POL’s
Network and
Commercial teams
to work together...
..performance in
other areas of the
business could also
impact the Crowns
given the way in
which costs are
allocated across
the business (e.g.
the stronger is
performance
elsewhere, the
fewer costs would
be allocated to the
Crowns, and vice-
versa)
Shareholder
Executive
HM Government
= The highest risk areas of the plan are seen to be employee-linked cost savings and income growth — together these
account for 70 per cent. of the targeted savings
— employee savings require POL to achieve high levels of utilisation across its “Post & Go” machines (many in locations
which are untested) and to manage employee restructuring initiatives while maintaining constructive dialogue with the CWU
— income growth requires the Crown estate to work closely with other areas of POL (e.g. Government Services, Financial
Services) to deliver new revenues at low-incremental cost
Staff Savings from Automation
Hours and M'ment Structure : . 53 25 : 78
“Post & Go" Deployments : - 03 : : 03
Raising of Bonus Threshold : : 2 : 07 07
People and Productivity Benefit 0.0 0.0 5.6 6.5 5.6 (17.7 <t-—_
Government Services Income : : 3.0 60 : 90
Financial Services Income Q : 35 25 5.0 11.0
Telephony : : 06 0.4 0.2 12 70%
SME : : 05 05 20 3.0 total
savings
All Other : : 0.0 04 06 1.0
“Income Decline” : : (2.0) (2.0) (2.0) (6.0)
Income Benefit 0.0 0.0 56 78 58 C192 \q——_
Hosting and Relocations : : 05 14 26 :
Property Benefit 0.0 0.0 05 1A 26 C42_
Retentions and Renewals : : 13 1.9 23 55
Divestments / Franchising : - . 3.0 3.0 C10
Other Benefit 0.0 0.0 13 49 53 15
P&L Benefit 0.0 0.0 13.0 20.3 19.3 52.6 possible
Other Business Wide Impacts . 43 (6.9) : 07 (1.9) upside
Net P&L Benefit 0.0 43 64 20.3 20.0 60.7
A
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Long Term Strategy — Crown Transformation (contd)
NGO’
A} @ 14
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Status: All
Management are
confident of achieving
breakeven target by
March 2015
Positive outlook
around the initiatives
that have commenced
Remaining strategy
still in planning phase
but detailed
development work has
been completed
Significant
implementation and
delivery risk remains
Shareholder
Executive
HM Government
= Of the initiatives that make up the Crown Transformation strategy only the “people and productivity benefit” workstream
has commenced
— the strategy received sign-off in the Summer, and voluntary redundancy is one element that has not changed materially from
the original plan
" Offer letters have recently been sent out to volunteers, and management are confident that the oversubscribed programme
will be c.£1m over-budget on recurring savings and c.£1m under-budget on one-off implementation costs
~— gives confidence that targets will be met for the next tranche of voluntary redundancies (linked to automation)
= POL recently completed a bottom-up property review of the Crown estate which has allowed management to put together
detailed workplans on a number of other initiatives
— franchising of c.60 locations which are expected to deliver savings ahead of budget. POL will be initiating dialogue with
potential commercial partners shortly and expect to have this workstream complete towards the end of 2014
— plan to merge, relocate or “host” a small number of branches. Some of these activities are well developed and discussions
with other stakeholders are expected to commence shortly. This is also set to complete towards the end of 2014
~— branches to be retained have been identified, allowing POL to plan refurbishments. This will support Financial Services and
Government Services income growth, while at the same time enhancing the broader in-branch customer experience
= However significant risk remains
— need to maintain positive engagement with key stakeholders (e.g. CWU) throughout the process
~— high level of reliance on other areas of POL in order to support income growth targets (e.g. Financial Services)
— expected benefits / cost-to-deliver may change as commercial discussions develop (e.g. benefits of franchising and “hosting”)
— need to ensure franchised branches are profitable to POL (e.g. that losses are not being transferred to a different team)
Quarterly meetings have been set up to monitor Crown Transformation, and there is regular dialogue with key members of
network management, the Crown Transformation team and other management with an interest in the Crowns (e.g. IT). Jo
Swinson also has a keen interest in the programme and has asked to be kept up to date on a regular basis.
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3] Long Term Strategy — Revenue Growth
« POL’s revenue growth plan is ambitious, requiring significant new income to be delivered in two main areas:
Divisional revenue
growth targets — £100m from Government Services, linked to positioning POL as a physical channel for services that require a face-to-face
mask complex mix touch-point (e.g. ID and verification, assisted digital and data re-use / “Tell us Once” data management)
effects within each — £30m from Other (incl. Innovation), including from 4G hosting, telephony, online mails and payment solutions
category... = New growth is critical for POL to expand its top line, since revenues in a number of existing areas are expected to
. decline
...while some
divisional growth - Mails: Declines in business and social mail, compounded by additional softness driven by a weak macroeconomic climate
targets may not — Government Services: Migration of transactions away from face-to-face delivery (e.g. online, or onto direct-payment
seem ambitious, models), and increasing competition for certain types of contract / service (e.g. revenue services)
revenue losses - Financial Services: Competitive pressures in bill-payments and an increased migration of payment solutions to other
within a division
(Te POL Revenue Growth 2011/12 — 201
significant new
£m
revenues are 1060 £30m new revenue by 2014/15
required to meet £100m new revenue by 2014/15
expectations... 4,000 8844 926.0 3.4%
... this is particularly 750
relevant in
Government 500
Services and Other
(incl. Innovation) 250 0.8%
0
2012F 2013F 2014F 2015F
Mails and Retail m Financial Services m Government Services Other (incl. Innovation)
Shareholder
Executive
HM Government 1 7
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Long Term Strategy — Revenue Growth (conta)
AO 4
bh} @ 14
VWOV
Status: RED
Management are
confident of achieving
headline revenue
targets
But the mix that makes
up these will differ to
the original forecasts
“New” revenue targets
in Govt. Services and
Innovation remain
valid
POL will not meet
these in the near term,
however longer term
objectives may still be
achievable
Shareholder
Executive
HM Government
«= Management remain focused on headline revenue and operating profit targets, and as such no revised plan has been put
to the Board
— management do acknowledge that the actual business is different to the one supporting the plan, and they expect the sales
mix to change (e.g. more Mails and Retail and Financial Services, and less Government Services)
— “new” revenue targets in Government Services and Innovation remain relevant. It should also be noted that Financial
Services is now key growth area, whereas in 2010 it was seen as an area of managed decline
= POL management are not as focused on “new” revenues as the plan would suggest
— in Government Services management is focused on total revenue and not “new” revenue (e.g. mixing defended revenue
with new revenue). ShEx is pushing back on this and believes POL needs to develop the relationships / skillsets to win work
— product launches are expected, however there is no structured bottom-up plan that supports Innovation targets
* POL will miss 2012/13 targets for “new” Government Services revenue, and future targets also look highly uncertain. For
the current period, POL is expected to achieve £8m truly “new” revenues against a target of £25m
— management have restructured the business development function, which now appears more focused in its approach to
winning work. However there is still a mismatch between revenue targets for 2014/15 and the pipeline
~ the recent DVLA win is a positive step. While it is expected to reduce the amount of revenue POL earns from DVLA ona
like-for-like basis, its framework structure (and the contract's high-profile nature) should position POL well with OGDs
— “new” revenue targets for 2013/14 and 2014/15 (€50m and £100m respectively) remain extremely challenging. ShEx is
active in its support and challenge of management and POL is monitored extremely closely
— there is upside risk in some areas (e.g. extension of IPS check-and-send which had not been included in the plan) however
this is not something management can rely on going forward to support (or drive) performance
* POL will also miss the 2012/13 target for Innovation revenue, although future targets may still be met
— there has recently been an increase in the number of launches expected to come to market in 2013/14 (e.g. collect and
returns, mobile telephony and personal financial services (e.g. transactional accounts))
Active support is provided to support Government Services and Financial Services growth ambitions (e.g. facilitating
dialogue, providing direct support where possible). There is also close monitoring of both financials and key commercial
areas on a monthly basis, with ad hoc monitoring in other areas.
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3] Long Term Strategy — Mutualisation
« Establishing the opportunity for POL to be mutualised was one of the commitments outlined in the “Securing the Post
With a history that - ” . .
Office Network in the Digital Age” report, published by BIS in November 2010
stretches back >350
years and a turnover
of almost £1bn, the
mutualisation of
POL will be the
largest and most
complex transaction
of its type ever
— the Postal Services Act 2011 put in place the legislation that made such a transfer of ownership possible, and between
December 2011 and July 2012 Government ran and responded to a public consultation on POL’s mutualisation
« In its response to the public consultation, Government made it clear that it wants “clear progress to have been made
towards mutualisation of POL by the end of this parliament”. However it also identified four key targets that will need to
be met before POL can be mutualised
— (i) a mutual needs to be both financially and commercially sustainable, minimising the need for Government intervention in
the event of financial distress
— (ii) the right culture needs to be developed, encouraging stakeholder engagement and marking a move away from the
undertaken
. established “top-down” style of management
anywhere in the . . . -
world. — (iii) POL’s strategic plan needs to be delivered successfully — playing a role in making POL sustainable and viable
(iv) Government must endorse a mutualisation (which represents VfM), and Parliament must vote for an ownership transfer
in 2010, and given 5 i
“Post Office: Made I securing the Post I options for a Mutual
the stated need to I Office Network inthe I °F!
“Building a Mutual
Postal Services POL Stakeholder
Mutual” i a a Post Office” Post Office” CREE
engage stakeholders ‘Mutuo ie Pletal ae I Co-Operatives UK oa Public Consultation Form (Fee)
in a bottom-up + Published as part of: + Policy statement to + Commissioned by + Legislation to allow + Emphasises need to I + First meeting held in
process, momentum a series of I set out plans for I BIS to explore forthe transfer of I developa suitable I —_mid-Oct with monthly
documents on transformation of I options for POL's POL's ownership to culture and ensure sessions lined up
is slowly being mutuals in the Public I = POL I mutualisation a mutual financial stability thereafter
established Sector + Announced + “Logical solution” for i + Must act for the i + Not prescriptive * Looking to define
+ Identified need to commissioning of Co- ownership to include public benefitand I — around structure but public benefit
define / protect Operatives UK report I producers, have members with outlines next steps purpose, and
public benefit, and to and plans for public I consumers and an interest in the use (e.g. successful encourage new ways
capture the interests I consultation I communities, butnot I by the public ofsuch I delivery of strategy. of working with
of a diverse range of I HMG (contractual services stakeholder forum stakeholders
stakeholders relationship only) and engagement) + Set-up of Customer
and Producer
working groups
Shareholder
Executive
HM Government
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Long Term Strategy — Mutualisation (conta)
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N
N
‘
Status: /
4
4
v
R
Implementation slow to
start following the
consultation response
Momentum is now
building around the
PSF which is a catalyst
for other workstreams
But the process is still
in its early stages, with
visibility limited over
structure and timing
Success relies on POL
delivering key strategic
and other initiatives
ShEx will engage with
Government more
broadly in 2013 on the
work of the PSF
Shareholder
Executive
HM Government
= Meetings of the PSF have been held in October and November, with a third session due to take place soon
— setup to define the public benefit purpose of a mutual POL. This definition will be critical in helping to shape what a
mutualisation process (and a mutual POL) will look like
- all key stakeholders participated despite initial challenges (e.g. NFSP wanting representation with 2 seats instead of 1)
« First meeting focused on broad themes and objectives of the forum, with the second session hosting presentations from
mutualisation advocates and discussing preliminary workplans of the PSF “Working Groups”
— these are groups commissioned by the PSF to look in detail at Customer and Producer perspectives, and will engage with a
broad collection of stakeholders. Each will report back to the PSF to inform its work
o Consumer Group: Chaired by Mike O'Connor, the CEO of Consumer Focus. Met for the first time on 3 December
o Producer Group: Co-chaired by Mervyn Jones (NFSP Commercial Director) and Andy Furey (CWU Assistant
Secretary). Workplans have been discussed but no meetings have taken place
« Other workstreams (e.g. Finance, Governance and Culture) have been mobilised and some work has commenced
— expect to ramp-up activities once the work of the PSF has moved forward and the expected form of a POL mutual has
started to develop. Current preparatory and desk-based activities underway (e.g. Rothschild work)
«= It is expected that the PSF will make a recommendation to Government in Q1 / Q2 2013 as to the proposed definition of
the public benefit purpose of a mutual POL
— this will be tested with Parliamentarians, HMT customers, staff, subpostmasters and other stakeholders
— likely to be finalised in Q3 2013, following which further work on governance structure / financial viability will begin
— transfer of ownership to a mutual model, and the Parliamentary process approving it, is likely to occur next Parliament
— public report detailing remaining steps to mutualisation is an option for late 2014 / early 2015
« In the mean time it is important for POL to encourage the right type of engagement with its stakeholders (e.g. consensus
building and collaboration). Any hostile or confrontational negotiations pose a risk to a mutualisation / process
timetable
ShEx sits on the PSF and each of the “Working Groups”. We also have a regular dialogue with the POL team leading day-
to-day mutualisation activities and will be actively supporting them to shape what the process looks like, its speed and
direction. It is critical for us to be closely involved throughout, to ensure POL and Government are aligned.
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Long Term Strategy — Other Key Strategic Initiatives
The core pillars of
POL’s long term
strategy are
supported by a
number of parallel
initiatives...
... these seek to improve
customers’
perception of POL as
a place to transact
and also deliver a
number of
improvements to the
business’s
infrastructure to
make it more
sustainable and
efficient
Shareholder
Executive
HM Government
Initiative Commentary
IT Transformation
Mails Collections and
Returns
Independence and
Separation
Brand and
Communications
Finance
Transformation
= Group of initiatives that improve both the front-office and back-office capabilities of POL
— @.g. systems integration, payment channels, new customer relationship management system,
improvements to the “Horizon” backbone
= Sequenced to align with other POL strategic initiatives (e.g. Network Transformation)
= New service developed with Royal Mail to compete with Collect+’s (Yodel / PayPoint JV) and
myHermes’ proposition, to handle parcel collections and drop-offs through post offices
— work in progress and not expected to launch before 2Q in calendar 2013
— focus on landing commercial terms, and ensuring post offices can offer secure handling
= Range of initiatives to support POL following its separation from Royal Mail
— notice served on IT and Finance transitional services agreement with 2-year fuse now lit; notice
on relevant estates agreements expected to be given in December
= Strengthening activities being rolled-out cautiously, with under-spend a key driver of current
year-to-date cost outperformance compared to budget
= New Communications Director in place to lead a new communications and marketing strategy.
Focused on internal and external engagement
— new advertising campaign commenced in October to “reconnect” with POL’s customers.
Expected to develop over the next 18 months to educate customers on specific product lines
* Separate workstream from IT Transformation, and focused on the implementation of more
robust financial reporting systems and management information reporting
— expect to launch procurement process in the coming months with new systems in place by the
end of the plan. Will enable far more detailed management information drill-down
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Long Term Strategy — New Strategic Plan
POL’s next strategic
plan is already in
development, more
than two years
before the current
plan ends...
.../mportant in order to
secure Government
support for the
strategy / funding
and State Aid
approval...
...expect the core of
the new plan to
remain steady (e.g.
Network
Transformation,
Revenue Growth)
but also for it to
build on the
foundation created
by the 2011/12 -
2014/15 initiatives
Shareholder
Executive
HM Government
« POL has recently started the initial planning phase of a new strategic plan to cover the period after 2014/15
— workstream led by POL’s new Strategy Director Sue Barton, with support from across the business
— draft to be presented to BIS in March 2013, to ensure that a new funding agreement can be legally secured by March 2015
— active dialogue with ShEx to understand lessons learned from the last process (e.g. top-down vs. bottom-up planning)
- Government funding will still be required, to support non-commercial branches and to ensure the strategy is delivered
* To support its financial plan (and in particular the work required to build a case around Government funding), POL has
been asked by BIS to consider a number of different “counterfactual” scenarios. These include:
— (i) continuation of current strategic plan with status quo funding support;
ii) continuation of current strategic plan with status quo funding support, over a longer timeframe;
iii) continuation of current strategy with “Stay as You Are” (e.g. lower or “maintenance”) funding support;
iv) continuation of current strategy with partial discretion over network and with funding support;
vi) absolute strategic discretion with no funding support; and
(
(
(
— (v) absolute strategic discretion with funding support;
(
(
vii) continuation of current strategic plan with status quo funding support and Scottish independence
= Some work has already been completed by POL in relation to Scottish independence
- ¢.12 per cent. of the estate is located in Scotland, including c.7 per cent. of Crowns and c.14 per cent. of UK rural branches
— c.8 per cent. of POL’s variable income is generated in Scotland, excluding all fixed income and subsidy payments
« However a detailed analysis of its impact is made complicated by uncertainty surrounding key elements of execution /
implementation — including both in relation to postal services policy and the commercial environment
= access criteria and approach to funding
— policy around the post office network and post office products
— retention of a single POL vs. separation into “POL UK” and “POL Scotland”
— impact on clients (e.g. DWP, DfT, utilities etc.) and key stakeholders (e.g. CWU, NFSP)
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4 Operating Performance
Shareholder
Executive
HM Government
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4) Operating Performance — Actual Performance vs. Budget
RG OES RAC ORS BE a
Mails and Retail a 9 370.4 (7.5) ae 8 en = 14.8 ieee 9 193.2
Financial Services 266.2 261.4 (4.8) 249.6 261.5 11.9 130.1 137.7 o
Government Services 130.7 128.7 (1.9) 138.5 135.7 (2.9) 70.0 68.9 (1.0)
Telephony 55.2 44.2 (11.0) 46.5 414 (61) 22.5 228 0.3
Other 41.0 43.1 24 38.0 30.3 1.3 14.2 20.3 64
POL Net Income 871.0 847.8 (23.2) 845.3 865.3 20.1 432.6 442.9 10.3
Memo: Net Income (incl. NSP) 1,021.0 997.8 (23.2) 1,025.3 1,045.3 20.1 535.6 546.0 10.3
Staff Costs (249.9) (252.8) (2.9) (247.9) (251.3) (3.4) (134.7) (126.7) 79
Agents Costs (474.3) (474.9) (0.6) (478.3) (482.9) (4.6) (236.1) (236.1) 1.0
Non-Staff Costs (259.3) (227.8) 31.5 (159.7) (149.2) 10.6 (78.4) (748) 36
Interbusiness Expenditure na. na. nm. (91.8) (84.9) 68 (40.7) (40.7) (0.0)
Depreciation na. na. nm. (07) (0.4) 0.3 (0.4) (0.5) (0.1)
Group Overhead Allocations (20.8) (16.7) 44 (20.4) (19.6) 0.8 (87) (73) 1.4
POL Op. Profit (133.3) (124.4) 89 (163.5) (123.0) 30.6 (66.4) (42.2) 24.2
% margin (15.3%) (14.7%) 0.6% (18.2%) (14.2%) 3.9% (15.3%) (9.5%) 5.8%
Financial Services JVs 33.3 25.3 (8.0) 28.0 30.8 28 23.2 21.8 (1.4)
Group Op. Profit (pre-POOC) (100.0) (99.1) 09 (125.5) (92.2) 33.3 (43.2) (20.3) 22.9
% margin (11.5%) (11.7%) (0.2%) (14.8%) (10.7%) 4.2% (10.0%) (4.6%) 5.4%
Project One Off Costs (20.0) (15.3) AT (18.2) (26.5) (8.3) (12.1) (21.6) (9.5)
Group Op. Profit (post-POOC) (120.0) (114.4) 56 (143.7) (118.7) 25.0 (65.3) (42.0) 13.3
% margin (13.8%) (13.5%) 0.3% (17.0%) (13.7%) 3.3% (12.8%) (9.5%) 3.3%
Network Subsidy Payment 150.0 150.0 0.0 180.0 180.0 0.0 103.0 103.0 0.0
Group Op. Profit (post-NSP) 30.0 36.6 66 36.3 613 26.0 477 61.4 13.3
% margin 3.4% 4.2% 0.8% 4.3% 7.1% 2.8% 11.0% 13.8% 2.8%
* POL has consistently outperformed its budget at operating profit level for the past two financial years, and also looks set to beat budget this year
— strong cost performance has been a consistent theme, with Non-Staff Costs and Overhead Allocations coming in under budget in each of the past two years.
This looks set to continue in the current year, with Staff Costs also likely to come in under budget at full year due largely to lower spending in “strengthening”
~— onthe revenue side, performances in 2011/12 and YTD have been strong after weakness in 2010/11, and in particular Mails and Retail has performed well.
This provides some support to the view that Mails and Retail expectations laid out in the plan may have been conservative, with risk focused on the upside
Shareholder
Executive oa
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4) Operating Performance — 2012/13 Budget Reforecast
Mbvelem
udget Ta2Rcast I : i
YTD vs. Bud. FY vs, Bud.
Mails and Retail 403.8 406.3 25 0.6% 6.3 (3.7)
Financial Services 274.7 276.7 2.0 0.7% (1.4) 3.3
Government Services 139.9 135.7 (4.2) (3.0%) (1.0) (3.2)
Telephony 457 45.2 (0.5) I (10%) (0.8)
Other 33.8 34.8 1.0 y 3.0% (5.1)
POL Net Income 897.9 898.7 (0.8 > 0.1% (9.5)
Memo: Net Income (incl. NSP) 1,107.9 1,108.7 08 0.1% (9.5)
Staff Costs (268.9) (263.8) 51 (1.9%) (2.8)
Agents Costs (482.8) (483.5) (0.7) 0.2% (1.8)
Non-Staff Costs (166.2) (163.6) 25 (1.5%) (1.1)
Interbusiness Expenditure (83.3) (83.3) (0.0) 0.1% (0.0)
Depreciation (0.8) (0.8) 0.0 (0.5%) 01
Group Overhead allocations (16.8) (14.6) 22 (13.2%) 08
POL Op. Profit (120.9) (111.0) 9.9 (8.2%) (14.3)
% margin (13.5%) (12.4%) 1.1% (8.3%) nm.
Financial Services JVs 32.6 31.2 (1.5) (4.5%) (0.1)
Group Op. Profit (pre-NSP) (88.3) (79.8) 84 (9.6%) (14.4)
% margin (9.8%) (8.9%) 0.9% (9.6%) nm.
Project One Off Costs (37.7) (39.8) (2.1) 5.6% 7.4
Group Op. Profit (post-POOC) (126.0) (119.6) 63 (6.0%) (7.0)
% margin (14.0%) (13.3%) 0.7% (6.1%) Rae nm.
Network Subsidy Payment 210.0 210.0 0.0 ¥. 0.0% 0.0 0.0
Group Op. Profit (post-NSP) 84,0 90.4 Ces) 7.5% C13.3,) (7.0)
% margin 9.4% 10.1% 0.7% 74% nm. Am.
* At the end of September POL provided an updated forecast for the full year, reflecting POL’s trading performance during the first 6 months of 2012/13
— at the half year net income was £10m ahead of budget, but most of these gains are expected to be lost in H2 with the reforecast estimating only £1m
outperformance at the full year. Of POL’s 4 main activities only Financial Services is expected to deliver a stronger performance in H2 than H1
~— the operating profit reforecast is £6m higher for the full year than Budget, driven mainly by a strong operating cost performance. In particular Staff Costs and
Non-Staff Costs are expected to remain ahead of Budget - but with H2 losing some of the gains seen in H1
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4) Operating Performance — Income Statement
Mar YE (£m) 10/114, 11/12A 12/13B 13/14F 14/15F CAGR
POL Net Income 847.8 865.3 897.9 884.1 926.0 2.2%
% growth na. 21% 3.8% (1.5%) 4.7% na.
Agents Pay (474.9) (482.9) (482.8) (625.4) (560.2) 4.2%
Staff Costs (252.8) (251.3) (268.9) (193.7) (169.1) (9.6%)
Central and Supporting Costs (244.5) (254.1) (267.1) (278.5) (273.9) 2.9%
POL Op. Profit (124.4) (123.0) (120.9) (113.8) (77.2) (11.2%)
% margin (14.7%) (14.2%) (13.5%) (12.8%) (8.3%) (13.2%)
Financial Services JVs 25.3 30.8 326 38.0 39.0 11.4%
Group Op. Profit (pre-NSP) (99.1) (92.2) (88.3) (75.5) (38.2) (21.2%)
% margin (11.7%) (10.7%) (9.8%) (8.5%) (4.1%) (22.9%)
Project One Off Costs (15.3) (26.5) (37.7) (22.1) (22.7) 10.4%
Group Op. Profit (post-POOC) (114.4) (118.7) (126.0) (97.6) (60.9) (14.6%)
% margin (13.5%) (13.7%) (14.0%) (11.0%) (6.6%) (16.5%)
Network Subsidy Payment 150.0 180.0 210.0 200.0 160.0 1.6%
Group Op. Profit (post-NSP) 35.6 61.3 84.0 102.4 99.1 29.2%
% margin 4.2% 7.1% 9.4% 11.6% 10.7% 1,309.0%
* Net income is expected to be broadly flat across the plan period, although this masks significant mix effects across POL
~- although POL’s actual trading has diverged considerably from the plan, and despite management's strategy changing in a number of areas, targets for key
“headlines” (e.g. group net income, operating profit) remain the same
« Absolute increase in net income of £78m is expected to be partially offset by increases in costs, which rise by £47m by 2014/15
~ cost performance measured as a percentage of net income is driven by Staff Costs which fall from c.30 per cent. net income to c.18 per cent. net income
between 2010/11 and 2014/15. Other key cost lines as a percentage of net income are flat (see page 33 for further commentary)
— management have indicated that cost estimates do not reflect their expectations, and that they may be changed when the plan is revisited at year-end
* Financial Services JVs have improved however following the Bank of Ireland renegotiation, estimates for 2013/14 and 2014/15 are no longer relevant
* Project costs have also been rising, as POL starts to mobilise an increasing number of strategic initiatives
— management have indicated that their expectations for total spend are now lower, and combined with movements in phasing, forecasts may change
« Group operating profit performance has been strong and by 2012/13 both margins and absolute profits are expected to have more than doubled
~ but a large proportion of this growth is expected to be delivered by increases in the NSP, which rises £30m to £210m between 2010/11 and 2012/13
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4) Operating Performance — Mails and Retail Revenue
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Mar YE (£m) 10/11A 111120 12/13B 13/14F 141 5F [igagaa II
Mail 331.8 345.3 361.3 336.4 338.0 0.5%
Retail and Lottery 38.6 42.2 425 36.9 36.2 (1.6%)
Total Mails and Retail 370.4 387.5 403.8 372.3 374.2 0.3%
% growth na 4.6% 4.2% ~. (7.8%) 0.5% na
% group revenue 43.7% 44.8% C4. a € 42.1% > 40.4% (1.9%)
= Over the past two years a material disconnect has emerged between POL’s trading in Mails and Retail and the underlying strategic plan
had been expected to account for a decreasing share of total POL net income, but instead its share has increased (from c.44 per cent. to c.45 per cent.)
unless other activities outperform the plan in the coming two years, it is unlikely that Mails’ and Retail’s share of sales will decrease significantly. This means
that POL will not be able to reduce its risk profile away from Mails as a market, and Royal Mail as a client as quickly as planned
Mails
* Against a challenging economic backdrop and a continuing period of structural change, Mails revenues have been more resilient than expected in POL’
strategic plan
— by the end of 2012/13 net income is expected to be c.£25m higher than target, driven by growth in mail activities and a robust performance across Special
Delivery and Parcelforce
expectations for 2013/14 and 2014/15 look bearish given these recent developments, however headline concerns around structural challenges to
“conventional” mails activities do remain relevant and the market environment / pricing is still challenging
* Some of the key initiatives outlined by management in 2010 are still valid however limited detail was provided when the original plan was put together
these initiatives (e.g. revenue generating improvements to existing mails capabilities, and new product launches) are expected to go ahead however their
impact on POL’s financial performance is unclear
Retail
* Performance in Retail has also been ahead of plan, driven by continued strength in Lottery sales (which with net income of £35m - £40m accounts for
c.90 per cent. total revenue)
and 2014/15 also look conservative given recent underlying trading activity
Shareholder
Executive
HM Government
's
while net income in 2012/13 benefitted from a c.£2.5m Olympics and Jubilee boost (e.g. themed stamps and Royal Mint collectibles), expectations for 2013/14
27
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4) Operating Performance — Financial Services Revenue
Mar YE (£m) 10/11A 11/120 12/13B 13/14F 14/1 5F CAGR
Other Financial Services 178.1 186.1 201.4 144.5 139.2 (6.0%)
Banking Services 61.6 58.7 60.1 72.4 69.4 3.1%
National Savings 218 16.6 13.2 13.1 10.4 (16.8%)
Total Financial Services 261.4 261.5 274.7 229.7 219.0 (4.3%)
% growth na 0.0% 5.1% (16.4%) (4.7%) na
% group revenue 30,8% 30.2% 30.6% 26.0% 23.7% (6.4%)
* Forecasts for 2013/14 and 2014/15 are no longer considered to be relevant, both at a divisional level and when one looks at individual activities within
Financial Services
— the plan had been focused around managed decline, whereas today the business is seen as one of POL’s key growth drivers. Therefore the strategy underlying
the plan is starkly different to management's strategy today
— performance in 2011/12 and 2012/13 has diverged materially from the targets outlined in the plan both on sales-mix and on the aggregate top line (e.g.
2012/13B is £40m higher than 2012/13F in the plan)
= The core of the old strategy was formed around:
— the expected franchising of c.170 Crown branches which would no longer have been able to sell financial services products as effectively. POL’s current
franchising plans now cover less than half this number of branches meaning POL has retained a stronger and broader route-to-market
— management not focusing on Financial Services as a growth area, given the competitive nature of the market. POL has experienced a “flight to quality” in
recent years, and is a very well regarded and competitive brand in the market. Together these provide it with a strong growth platform
— adecline in traditional banking services due to increased competition, shifts to eBanking and lower NS&I activity which was partially offset by growth in travel
services and personal financial services. These are the only parts of the strategy that are still relevant today
* POL’s recent restructuring of its Bank of Ireland relationship means that performance will diverge even more materially from plan in the coming years
— provides a c.£15m revenue upside from next year and more attractive commercial terms
* POL’s strategy today is increasingly focused on leveraging the benefits of the Bank of Ireland renegotiation, in addition to launching a number of
personal financial services (e.g. transaction accounts, pre-pay cards) and services for SMEs
~ also seeking to explore the overlap with Government Services, such as in relation to the opportunity presented by Universal Credit
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4) Operating Performance — Government Services Revenue
Mar YE (£m) 10/114 11/12 12/13B 13/14F 1415F CAGR
POCA 70.2 70.2 69.3 62.0 56.0 (5.5%)
Other Existing Services 58.6 65.5 45.6 45.0 41.0 (8.5%)
New Services 0.0 0.0 250 4 50.0 100.0 na.
Total Government Services 128.7 135.7 139.9 157.0 197.0 11.2%
% growth na. 5.4% 3.1% 12.2% 25.5% n.a.
% group revenue 15.2% 15.7% 15.6% 17.8% 21.3% 8.8%
* Trading in Government Services is broadly in line with POL’s strategic plan Expec
— however there is a risk that as expected “new” revenue growth ramps up in 2012/14 and 2014/15, trading could start to diverge from the plan
POCA
* Trading in 2011/12 was c.£1m ahead of plan at net income level, with 2012/13 outturn expected to be c.£2m ahead
- outperformance mainly due to the profile of the user-base which has had more recipients and higher interest bearing deposits. This has been partially offset by
LIBOR which has been below management's expectations (and is expected to remain so, thereby impacting performance going forward)
* Still pressure on net income from: (i) age-driven attrition of recipients; and (ii) ongoing uncertainty around the potential impact of Universal Credit
~— material near-term revenue drop is fairly unlikely, suggesting that the plan’s targets for 2013/14 and 2014/15 may be conservative
Other Existing Services and New Services
= POL underperformed the plan in Other Existing Services in 2011/12 and combined with the £25m of “new” revenues budgeted for 2012/13, this
underperformance is expected to continue in the current year
— lower volumes in existing activities (e.g. AEl and DVLA) and a fewer contract wins (7 new wins this year expected to deliver in-year revenues of £8m)
* There is a high level of uncertainty around the net income forecasts for 2013/14 and 2014/15
~ risk around ability to protect existing services and deliver new contract wins
~ also challenging to differentiate between “existing” and “new” revenues (e.g. new contract with existing client, contract extensions, frameworks)
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4) Operating Performance — Other Revenue
44.2 414 45.7 65.0 65.6
Telephony 10.4%
Other and Innovation 43.1 39.3 33.8 60.1 70.2 13.0%
Total Other 87.3 80.7 79.5 125.1 135.8 11.7%
% growth na. (7.6%) (1.5%) 57.4% 8.6% na.
% group revenue 10.3% 9.3% 8.9% 14.1% 14.7% 9.2%
* POL’s Other Revenue activities significantly underperformed the plan in 2011/12, with the level of underperformance forecast to increase in the current
year from a shortfall of c.£16m to a shortfall of c.£33m
— split broadly equally between “Telephony” (c.£17m short in 2012/13) and “Other and Innovation” (c.£16m short in 2012/13)
Telephony
* Ongoing underperformance of the plan, driven by difficult pricing, fewer subscribers and less new product launches
— subscribers have been broadly flat at c.480k, and planned tariff increases have been hard to stick. Broadband growth has also been challenging
~ performance is expected to improve in 2013/14 and 2014/15 but results are likely to remain below target
Note: Management have previously considered a sale of POL’s Telephony activities, with valuation expectations of c.£30m. This is no longer part of the strategy
Other and Innovation
* Core of the strategy is driven by what Deloitte see as “speculative” growth in “Innovation”. This is expected to account for £30m net income by 2014/15
— difficult to track performance as this income line was not specified in detail in POL’s plan. Furthermore, since some new services will fall within existing
activities (e.g. Financial Services or Telephony) it will be difficult to separate performance against these targets with performance elsewhere in the business
~ however with a current year target of £10m net income and no “new” or “innovative” products having been launched by POL over the last 18 months, this
strategy is underperforming. Future performance also remains highly uncertain
* Some new launches are expected in calendar year 2013 (e.g. collections and returns in Mails, SIM-only and pre-pay mobiles in Telephony and new
personal financial services in Financial Services) and these should drive net income. However all of these earnings will be recognised outside of “Other
Revenue”
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4) Operating Performance — Contribution Analysis
= POL does not look at activity level profitability as a management tool to monitor or incentivise performance across the business. From a day-to-day
management perspective:
— the Commercial teams are incentivised to deliver Product Contribution (i.e. Net Income less variable agents’ pay and Direct Product Costs); and
— the Network team is incentivised to deliver the branch network efficiently and at lowest cost
= Product Contribution is the lowest level in the P&L where management have comfort that performance is reflected fairly. Below this are the fixed costs of
POL’s network — costs that need allocating in order to derive divisional profitability
— some allocations such as Direct Branch Costs (c.£385m in 2011/12) can be made “intelligently”, however management are still cautious about this contributing
to a meaningful profit number
— other allocations, such as for POL’s Horizon system (c.£55m in 2011/12) or the Network Subsidy Payment, are far more difficult given the assumptions that
need to be made (e.g. split of revenue, transaction volume data)
— any allocation based analysis is also made difficult by the change to the allocation methodology made between 2010/11 and 2011/12
= Management acknowledge these limitations and are currently developing systems that will allow them to measure profitability in a more accurate (and
“local”) way
— this includes looking at both activity-level and channel-level (e.g. Crowns, online, subpostmaster branches) profitability
= Such a platform is also critical for the payment of future subsidy, since this type of look-through would enable Government to target payments more
effectively on loss making activities or branches
Aggregate Aggregate Other Costs,
Product Product Branch Channel Subsidy and Operating
Net Income Costs Contribution Costs Contribution JV Income Profit
PCR sf I (£388.2m) (£385.3m) } sora fo (£30.5m) I ==
not allocated ‘intelligent’ simplified
allocation allocation
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Mails and Retail (Mar YE £m) 10/110 11/120
Financial Services (Mar YE £m) 10/110 11120
Variable Income 266.0 286.9 7.9% Variable Income 1.5%
Fixed Income 107.9 104.7 (3.0%) Fixed Income (4.3%)
CoGS (3.5) (4.1) 16.7% CoGS 362.2%
Net Income 370.4 387.5 4.6% Net Income 0.0%
Agents Variable Pay (164.9) (176.0) 6.7% Agents Variable Pay (6.1%)
Direct Product Costs (3.7) (14.8) 294.8% Direct Product Costs 180.8%
Product Contribution 201.8 196.8 (2.5%) Product Contribution (7.2%)
% margin 54.5% 50.8% (856.9%) % margin NM.
Direct Branch Costs (153.8) (0.4%) Direct Branch Costs (5.8%)
Channel Contribution 43.0 (9.2%) Channel Contribution (39.3%)
% margin 11.1% (13.2%) % margin (36.5%)
Infrastructure Costs (84.3) 46.1% Infrastructure Costs (11.0%)
Unattributable Costs (40.0) 30.8% Unattributable Costs 16.6%
Remaining Allocations 88.9 37.7% Remaining Allocations 198.8%
Divisional Op. Profit 77 (67.4%) Divisional Op. Profit (88.8%)
% margin 2.0% (68.9%) % margin (88.3%)
Variable Income 144.1 145.6 1.1% Variable Income 89.2%
Fixed Income 15.4 18.2 17.8% Fixed Income (19.8%)
CoGS (30.8) (28.2) (8.4%) CoGS (11.2%)
Net Income 128.7 135.7 5.4% Net Income (6.4%)
Agents Variable Pay (47.2) (44.6) (6.5%) Agents Variable Pay (19.6%)
Direct Product Costs (8.3) (6.4) 21.4% Direct Product Costs 2.8%
Product Contribution 76.2 84.6 11.0% Product Contribution (16.4%)
% margin 59.2% 624% (14,109.7%) % margin (291.5%)
Direct Branch Costs (62.8) 1.1% Direct Branch Costs (60.5%)
Channel Contribution 21.8 54.7% Channel Contribution 198.2%
% margin 16.1% 46.7% % margin 218.5%
Infrastructure Costs (34.6) (4.6%) Infrastructure Costs (69.4%)
Unattributable Costs (14.0) 30.8% Unattributable Costs (31.1%)
NSP Allocation 31.0 23.6% Remaining Allocations (55.7%)
Divisional Op. Profit 4.2 (154.5%) Divisional Op. Profit (259.9%)
% margin 3.1% (151.7%) % margin (270.8%)
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4) Operating Performance — Cost Analysis
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Fixed Agents Pay (147.0) (155.9) (137.9) (118.6) (78.4) (14.5%)
Variable Agents Pay (328.0) (326.9) (344.9) (409.8) (481.8) 10.1%
Total Agents Pay (474.9) (482.9) (482.8) (625.4) (860.2) 4.2%
% fixed
30.9% 52.3%
(18.0%)
28.6% 22.0% 14.0%
% net income (66.0%) (65.8%) (63.8%) (69.4%) (60.5%) 1.9%
Staff Costs (252.8) (251.3) (268.9) (193.7) (169.1) (9.6%)
% net income (29.8%) (29.0%) (29.9%) (21.9%) (18.3%) (11.5%)
Non-Staff Costs (244.5) (254.1) (267.1) (278.5) (273.9) 2.9%
% net income (28.8%) (29.4%) (29.7%) (31.5%) (29.6%) 0.6%
Total Costs (972.2) (988.3) (1,018.8) (997.6) (1,003.2) 0.8%
% net income (114.7%) (114.2%) (113.5%) (112.8%) (108.3%) (1.4%)
Project Costs (15.3) (26.5) (7.7) (22.1) (22.7) 10.4%
% net income (1.8%) (3.1%) (4.2%) (2.5%) (2.5%) 8.0%
= The key change to POL’s cost profile between 2010/11 and 2014/15 is the shift in Agents Pay between fixed and variable remuneration
~ this was one of the main motivations behind the NTP. The cost of compensating Agents for lost income are classed as exceptionals
~ when the plan was put together the details of this strategy had not been finalised. Therefore while the split between fixed and variable still has the support of
management the absolute amount of Agents Pay does not. Current expectations are for lower total Agents Pay offset by higher Staff Costs
the shift is driven by the rate of network transformation. Changes to the sequencing — and to an extent also the structure — of the NTP will impact this
Note: The ratio increased in 2011/12 due to the effects of the VAT increase and a one-off pay award
«= A number of other initiatives are driving cost movements elsewhere in the business. This includes driving efficiencies such as Crown Transformation and
changes being made to the Supply Chain (e.g. single person vehicles)
there has also been a conscious decision to increase cost (e.g. invest margin) in some areas, such as with POL’s new communications strategy
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4) Operating Performance — Balance Sheet
Assets 108.3 100.8 108.4 168.0 181.0 I 13.7%
Working Capital (222.5) (185.3) (121.3) (139.0) (134.0) I (11.9%)
Pension Surplus / (Deficit) (316.3) (205.8) (199.6) (501.0) (475.0) I 10.7%
Client Balances (156.1) (193.9) (267.0) (175.0) (183.0) I 4.1%
Network Cash 704.6 759.2 eer 693.0 (0.4%)
Cash Equivalent investments 787 61.6 120.0 50.0 50.0 (10.7%)
Net Trading Funds (375.0) (377.0) (533.6) (589.0) (618.0) 13.3%
Net Assets / (Liabilities) (178.3) (40.4) 13.6 (484.0) (486.0) 28.5%
Reserves 1783 40.4 (13.6) 484.0 486.0 28.5%
* Since 2010/11 POL has driven significant improvements in its working capital profile, generating c.£100m cash through more effective management of
non Network Cash funds
- debtors balance (incl. Homephone) has been broadly flat with improvements mainly being driven by increased Client Balances (incl. Santander, Bank of
Ireland, DVLA, NS&l, utilities) and Trade Creditors (incl. salaries and agents’ pay)
~- forecasts for 2013/14 and 2014/15 are likely to change during management's budgeting process at the end of 2012/13
= Network Cash has however been increasing and is budgeted to be c.£220m higher than the planned target for 2012/13
~— >80 per cent. cash held in the retail network and cash centres, and reflects stronger performance in Government Services and Financial Services than had
been expected by the plan (e.g. POCA, banking services)
~ expectations for 2013/14 and 2014/15 are also likely to change as the 2013/14 budgeting process develops
* Following the approval of its pensions deal earlier in 2012, Royal Mail undertook a revaluation of its pension scheme
- POL is allocated a c.7 per cent. share of Royal Mail's surplus / (deficit) and this exercise has led to a material strengthening of its position, from a c.£199m
deficit to a.c.£52m surplus
* POL’s balance sheet was expected to be solvent at year end 2012/13 prior to this pensions adjustment
~ based on an in-year snapshot (as at September 2012) this has improved POL’s financial position further (i.e. positive net assets of >£240m)
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4) Operating Performance — Cashflow Statement
Operating Profit 35.6 61.3 84.0 102.4 99.1 29.2%
Working Capital 72 (29.2) (120.9) 53.5 127 15.1%
Capital Expenditure (37.2) (30.5) (132.7) (126.5) (125.4) 35.5%
Reserves, Provisions and Excep. (16.7) (17.4) (112.4) (181.5) (137.4) 69.3%
Other Cash Movement 0.0 0.0 0.0 0.0 0.0 na.
Operating Cash Flow (11.1) (18.8) (282.0) (182.0) (181.0) 91.9%
Colleague Share (7.3) (9.7) 0.0 (13.0) (13.0) 15.5%
Undis. JV Profit / Pension Creditor (10.5) 61 (5.8) (21.0) (19.0) 16.0%
FCF (pre-Interest and Tax) (28.9) (19.4) (287.8) (186.0) (183.0) 58.6%
Interest (6.8) (6.1) (8.0) (15.0) (16.0) 23.9%
Tax 20.2 10.4 10.4 0.0 0.0 (100.0%)
Free Cash Flow (pre-Funding) (15.5) (15.1) (285.4) (201.0) (199.0) 89.2%
Other Government Funding 0.0 0.0 200.0 215.0 170.0 na.
Free Cash Flow (post-Funding) (15.5) (15.1) (85.4) 14.0 (28.9) 16.8%
* POL has burned cash in each of the last two years (on a pre- and post-funding basis) and with a number of its key strategies now entering a costly
implementation phases this is expected to increase in 2012/13
~— these are a primary driver behind the cashflow and changes to their timing (e.g. in particular the NTP) have a material impact on POL’s cash generation
* At the time that POL’s plan received sign-off, management had not finalised certain key elements of the NTP. This means that the current expected
timeline (and its financial / cash impact) is not aligned to the plan
— expect more “cheaper” on-site conversions to be opened in the first years of the plan, with more “expensive” off-site conversions taking place later.
Management had previously expected these to be evenly distributed across the planning period meaning investment is now likely to be back-ended
« There have been a number of other changes which impact POL’s cashflow. These include: (i) the end of Colleague Share, saving c.£13m cash pa; (ii) the
pension settlement, saving c.£20m cash pa; POL’s sale of tax-losses, generating c.£10m cash pa; and (iv) extension of certain client settlement terms
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4) Operating Performance — Capex Profile
Network Development Costs 445 704 I
Channel Supporting Strategy . . 472 184 oo I na.
Crowns : : 46 0.0 91 na.
“Need to Do” Technology : : 112 I 25.4 25.1 na
Replacement Capex : : 51 I 15.4 56.1 na
Other : : 202 I 0.0 0.0 na.
Total Capex 414 36.2 192.7 126.5 128.4 31.8%
% of revenue 49% 4.2% 14.8% 14.3% 13.5% 28.9%
Memo: Cashflow Capex 37.2 30.5 132.7 126.5 126.4 35.5%
* POL’s capex investment profile is budgeted to ratchet-up in 2012/13 from c.£36m to c.£133m as the number of strategi ives — both core (e.g.
Network and Crown Transformation) and supporting (e.g. supply chain and IT transformation) — move into implementation phase
~ capex is expected to remain at a similar level in both 2013/14 and 2014/15 as the delivery of POL’s plan continues
~— all investments require a business case to be put together, with a 12 per cent. programme hurdle rate
~— the “mix” changes each year (e.g. network development and technology ramp-up in 2013/14, channel supporting strategy drops-off post 2012/13)
= Management's recent reforecast for 2012/13 points to a material change in the outlook for this year
— expect capex to be c.£20m lower at the full year due to reduced supply chain and network transformation spend, partially offset by increases in the Government
Services and Financial Services transformation budgets
* Due to the changes being made to the NTP it is also likely that forecasts for 2013/14 and 2014/15 will change during POL’s year-end budgeting process
— management are targeting the same number of conversions in each year, however the mix between on-site and off-site conversions is expected to change
materially. With more off-site work taking place at the back-end of the plan, spending will adjust accordingly
Sh areho I d er Note: Difference between Total Capex and Cashflow Capex in actuals due to impact of capex creditors and PP&E disposals
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4) Operating Performance — Restructuring Changes
Separation from Royal Mail
= On 2 April 2012 POL became an independent business, moving from being a subsidiary of Royal Mail Group Limited to being a wholly owned subsidiary of
Royal Mail Holdings plc (Royal Mail Group Limited’s parent company)
« Transitional service agreements (“TSAs”) were put in place to support this separation, with POL also needing to resource itself in a number of areas to
operate effectively as a standalone business
— a 2-year notice has recently been served under selected systems focused TSAs, and notice is expected to be served under certain property related TSAs before the
end of 2012. Other property agreements are open ended
— management have also been actively recruiting to ensure they have the capabilities necessary to operate on a standalone basis. YTD POL has under-spent in this
area, which has been a key factor behind its strong cost performance for Q1 and Q2
Strategy Development and Strategic Management Board
« In 2012 POL recruited Sue Barton as Strategy Director, who brought with her a wealth of experience gained most recently as head of Accenture’s global
Postal Services strategy consulting unit
— Sue is currently working on the development of POL’s new strategic plan, and ShEx have been in close contact in these early stages to ensure that what is
prepared is aligned with our expectations (and learns lessons from the 2010 process)
« A Strategic Management Board has also been put in place to provide umbrella oversight to the full range of strategic initiatives ongoing across POL
— this is focused on ensuring that a consistent approach can be achieved across the business (e.g. planning, implementation, monitoring, responsibility and
governance)
Financial Services - Project Eagle
= Project Eagle, which completed earlier in 2012, has led to the collapsing of the POL and Bank of Ireland “Post Office Financial Services” JV into a bilateral
commercial agreement
— makes favourable changes the commission structure faced by POL in relation to the sale of personal financial services
— POL is required to investment in its selling capabilities, while Bank of Ireland is required to invest in its marketing budget
= POL will incur c.£40m exceptional charges in the current financial year due to write-downs linked to the transaction
— ¢.£30m is non-cash and c.£10m is cash
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4) Operating Performance — Opportunities
pportun!
Performance in
Existing Activities
Financial Services
Retail Services
Bank of Ireland
Contract
Renegotiation
Commentary
= There is upside risk to POL’s revenues in certain areas where management
have taken a conservative view in relation to growth (e.g. Mails, Financial
Services)
= POL has recently secured a contract with HSBC to deliver counter deposit and
withdrawal services, which means that it now delivers this service for 95 per
cent. of UK bank accounts. POL is working on securing a similar contract with
Santander - the last remaining retail bank in the UK not to give its customers
access to this service. Such a win would deliver incremental revenues,
increase the “stickiness” of POL’s other contracts in this segment. It would also
improve POL's brand positioning
POL's renegotiation of its relationship with the Bank of Ireland was not
included in the original strategic plan. This initiative, which was announced in
2012/13, is expected to deliver c.£15 million revenue upside to POL with only
limited incremental costs. It also changes the remuneration structure of certain
personal financial services meaning that POL has a greater incentive to invest
in growth
urrent Performance
= Some of these upsides have started to emerge (e.g. conventional
mails activities, certain established Government Services). It is
important that any such outperformance is seen as such, and is
not used to catch-up underperformance elsewhere in POL's
strategy (e.g. established vs. new revenue in Government
Services)
» The HSBC contract, which is expected to “go live” in Spring 2013,
has increased the pressure on Santander to award similar work to
POL. Government is providing support to POL in its efforts to win
this contract
= The revenue upside related to the renegotiation will be reflected in
POL's budget for the 2013/14 financial year
« Furthermore, POL is also investing in its in-branch capabilities to
ensure that its financial specialists are trained and have strong
systems and infrastructure to support their work
« These workstreams are being monitored closely, with benefits
expected to start to accrue during 2013/14
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4) Operating Performance — Threats
Risk Commentary Mi
= ShEx is working with POL to ensure there is discipline in their
monitoring of the NTP, and we also have regular meetings to
assess recent performance and the pipeline, monitor trends and
anticipate risks
» There is also a constructive dialogue established between ShEx
and the NFSP
= The NTP is voluntary, and relies heavily on subpostmaster engagement and
NFSP support. POL’s broader relationship with the NFSP could impact this, as
Network could any perceived problems in the early implementation stages of the NTP
Transformation
= Given the ambitious scale and timeframe, management may also be unable to
meet targets (e.g. # openings, costs, financial benefits)
= The Crown strategy is ambitious, and its success is influenced by both the
Network team and POL’s commercial teams (e.g. and the need for them to
Crown deliver revenue growth) working together
* Quarterly reviews have been set up to challenge management and
to ensure the plan is on track. Jo Swinson has also taken a keen
‘ interest and is meeting with management / being kept up to date
Transformation _« The strategy also assumes that no consolidated pay deal is reached with the
: * There is also a constructive dialogue established between ShEx
CWU, since any such agreement would have a material impact on economics a
of the strategy ange CWE
= POL’s growth plan in Government Services, Telephony and Innovation is = ShEx actively supports POL with its Government Services
ambitious, and the ability of POL’s management to meet such targets is ambitions (both Central and Local), including working to raise
Revenue unproven POL's profile across Government
Growth = There is also a lack of detail in POL’s strategic plan, making it difficult to track = The team also have a structured approach to monitoring
performance / monitor outlook closely. This increases the risk profile of the performance which includes challenging management on outlook
targets and performance on a regular basis
= Many of POL’s markets are facing structural decline or increasing competition
and in a number of areas POL’s sales concentration is also high. There is
Revenue therefore a risk that revenues or margin could be lost at a faster pace than
Attrition forecasted in the plan if key contracts are not renewed
= ShEx is working with management to ensure that POL’s
commercial teams are responding to these challenges (e.g
i : : : . monitoring trends, developing new products).
= There is also some risk that the way in which POL’s services are delivered
changes (e.g. to online), making POL’s in-branch offer redundant
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5 Valuation
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ts ) Valuation - Summary
« POL is loss making and generates negative cashflow prior to receiving Government subsidy and additional Government funding
— expected to burn £189m cash in 2014/15, and £22m in the final year of the extended plan in 2016/17 (on an ex. subsidy basis only)
~ without any Government funding (i.e. ex. subsidy and ex. additional funding) cashflow is forecast to be £359m negative in 2014/15 and £102m negative in 2016/17
« This makes it difficult to construct a meaningful valuation of POL
- aDCF requires a large number of assumptions around the development of POL’s future cashflow
~ acomparables approach is not possible with negative earnings, and is further complicated by a lack of relevant peers
«The DCF analysis on the following pages presents two scenarios
~ (i) Current Strategy with No Funding: POL is assumed to generate significant negative cashflows during the implementation phase of the strategy but once
complete, the cashflow trajectory strengthens quickly and continues to grow strongly throughout the forecast period
~ (ii) No Spending on Transformation: POL is assumed to spend none of the funding otherwise provided by Government on strategic transformation (vs. £545m in
the scenario above) resulting in slower growth in cashflow and a lower steady state level of free cashflow, but less negative cashflow in earlier years
= The values presented by this analysis should be viewed with a significant degree of caution given the assumptions that have had to be made. In particular it
should be noted that:
— POL may find it difficult to fund itself without Government support (e.g. strategy related capex and working capital). Cost of capital is also therefore difficult to
assess
~ ona standalone basis and with no funding / policy influence POL would not operate a network of 11,500 branches (e.g. it would close non-commercial locations)
= As such the analysis is highly indicative, and is based on the following key assumptions:
i
(i) cashflow forecasts for the period to 2016/17 are taken from the extended POL financial plan
~ (ii) incremental “Growth Cash” is assumed to be generated each year, cumulatively and on a net basis, out to 2026/27
fl
(iii) the terminal value is calculated in 2026/27, based on a simple perpetuity growth methodology
— (iv) an indicative WACC of 10 per cent. is used with a terminal growth rate of 2 per cent.
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ts} DCF Valuation — Scenario I
2013/14 «= 2014/15 = 2015/1 2016/17 +=©2017/18 + 2018/19 2019/20 2020/21 2021/22 2022/23 2023/24 2024/25 2025/26 2026/27
Operating Profit (98.0) (61.0) 0.0 57.0 - - - - - - - - . -
FCF 140 (289) 286 57.9 - - - - - - - - - :
less Network Subsidy (200.0) (160.0) (130.0) (80.0) - : - - - - - - - :
less Other Government Funding (215.0) (170.0) (80.0) _—(80.0) - : - - - - - - - :
FCF (ex. Funding) (401.0) (358.9) (181.5) (102.1) (67-1) (32.1) 2.9 37.9 72.9 107.9 142.9 177.9 .212.9 247.9
discount rate 91% 83% 75% 68% 62% 56% 51% 47% 42% 39% 35% 32% 29% 26%
PV of FCF (ex. Funding) (364.5) (41.7) (18.1) 15 177 416 50.1 56.7
Net Present Value of 10 year “Cash Net Present Value of terminal
7.2m, Growth” forecast: £265.6m value: £832.3m
I l
minal Growth Rate
0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0%
15.0 - - - - - - -
20.0 - - - - 2 : . 7.1m,
Annual +
Growth 25.0 - - - - - - - £265.5m
Cash +
2017/18 to 30.0 - - - - Z 1.5 66.1 £832.3m
ease 35.0 51.2 89.0 131.0 177.9 230.7 290.6 358.9 in
x i . K " . . r £230.7m
40.0 282.0 327.4 377.9 434.3 497.8 569.7 651.8
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ts} DCF Valuation — Scenario II
2013/14 «= 2014/15 = 2015/1 2016/17 +=©2017/18 + 2018/19 2019/20 2020/21 2021/22 2022/23 2023/24 2024/25 2025/26 2026/27
Operating Profit (98.0) (61.0) 0.0 57.0 - - - - - - - - -
FCF 14.4 (289) 28.6 57.9 - - - - - - - - - :
less Network Subsidy (200.0) (160.0) (130.0) (80.0) - : - - - - - - - :
less Other Government Funding - - - - : - - - - - - - - :
FCF (ex. Funding) (186.0) (188.9) (101.5) (22.1) (7.1) 79 22.9 37.9 52.9 67.9 829 97.9 1129 127.9
discount rate 91% 83% 75% 68% 62% 56% 51% 47% 42% 39% 35% 32% 29% 26%
PV of FCF (ex. Funding)
(169.1) (156.1) (76.2)
31.2 327 aa
Net Present Value of 10 year “Cash Net Present Value of terminal
Growth” forecast: £204.7m value: £429.4m
l
minal Growth Rate
0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0%
5.0 - - - - - - -
(£416.
Annual +
Growth 10.0 - - - - : - - £204.7m
Cash +
2017/18 to 12.6 96 25.3 42.7 62.2 84.4 108.9 137.3 £429.4m
ease 15.0 125.0 144.5 166.2 190.4 217.6 248.5 283.8 ,
zx . . 5. F . . E £217.6m
17.6 240.4 263.7 289.6 318.6 351.1 388.1 430.2
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6 Board and Management
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Board and Management - Summary
POL has a complete
and independent
Board for the first
time in its
history...
...Non-Executives
bring together a
wealth of
experience for
POL to draw on, to
support the
delivery of POL’s
strategic plan...
...CEO and CFO
remuneration
requires Board
approval, and both
also participate in
a STIP/LTIP
bonus scheme
Shareholder
Executive
HM Government
Separation
+ On its separation from Royal Mail in April 2012, POL’s employees were transferred to the business under TUPE. This included
POL’s Executive Directors
~ since separation POL has been building a new board — this is now complete and is comprised of 2 Executive Directors and 5 Non-
Executive Directors (including Alice Perkins, POL’s Chair)
+ POL’s newly established RemCo met for the first time in October 2012
— currently reviewing the existing remuneration framework to ensure that incentives are properly aligned to targets laid out in the
strategic plan and Government's ambitions for mutualising POL
~ have proposed to keep remuneration structures the same in 2012/13 as they were in 2011/12
~ only the remuneration of Paula Vennells (CEO) and Chris Day (CFO) require Board approval
Board and Management
+ The Board has a mix of backgrounds, and provides active support to senior management across a number of key areas of the
business (e.g. retail competencies, financial services knowledge, mutualisation and pensions). Susannah Storey represents
Government as a Non-Executive Director
~ management have indicated that there has been an increased level of scrutiny and challenge in recent months, in relation to
financial results and commercial performance
+ Quality of management team is ABER in POL’s traffic light assessment
— more time needed to develop a firm view on the team’s ability to deliver Network / Crown Transformation, and Revenue Growth
despite the track record of some recent hires, private sector experience among many senior managers is limited
— departure of HR Director has seen her responsibilities split across existing management; this is being monitored closely
— succession plan for top roles is being developed by CEO, Paula Vennells
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Remuneration — 2011/12 Actuals
Remuneration
framework for
POL’s CEO and
CFO requires
approval from the
Secretary of
State and the
Chief Secretary
to the Treasury...
..they are also able
to provide
comments to
POL’s RemCo in
relation to actual
payouts...
...payouts for
2011/12 were
broadly in line
with expectations
Shareholder
Executive
HM Government
HMG / ShEx Role in Remuneration
+ The Secretary of State for Business and the Chief Secretary to the Treasury approve the remuneration packages for
POL’s CEO and CFO
~ in the case of the STIP / LTIP the framework received approval, not actual payouts
— however the Secretary of State can provide written comments to POL’s RemCo, on POL’s / individual’s performances
2011/12 Remuneration Summary
+ Remuneration in 2011/12 was determined by Royal Mail’s RemCo, since POL only became an independent business after
the end of the financial year
~ there was no press coverage or adverse public reaction related to the handling of these payouts
+ Base salary of £250k and + £172,750 (69 per cent. of base) paid in + No payout relating to 2011/12
benefits of £30k June 2012 + However if targets set in 2010 are met
+ Based on “Post Office Scorecard” (80 per payout will be received in 2012/13
cent. of total) and personal objectives (20
per cent. of total)
CFO + Base salary of £215k and +
benefits of £64k
£54,547 (38 per cent. of pro-rated base) +
paid in June 2012 .
+ Underlying bonus based on “Post Office
Scorecard” and “Royal Mail Scorecard”,
with a “personal multiplier” triggered by
personal development rating. 2011/12
multiplier of 1.0x
No payout relating to 2011/12
However if targets set in 2010 (pro-
rated) are met payout will be received
in 2012/13
Note: Chris Day's Salary and bonus have been pro-rated to reflect his 1 August 2011 joining date. Paula Vennells was employed by Royal Mail for the full
2011/12 period.
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Remuneration — 2012/13 Forward Look
POL requested a number
of changes to be
made to the CEO and
CFO remuneration
structures in
2012/13...
... these were mostly
turned down,
although we have
ensured that
management's targets
are aligned to POL
Priorities (following
the separation of POL
from Royal Mail)...
..-POL’s RemCo will
however be
presenting its
proposals for 2013/14
executive
remuneration to BIS in
early 2013
Shareholder
Executive
HM Government
2012/13 Remuneration Framework
+ For the 2012/13 financial year POL requested changes to be made to the 2011/12 remuneration frameworks for the CEO
and CFO
~ these amendments, which would have resulted in increased payouts, were rejected by BIS
- base salaries and the bonus framework will now remain the same for 2012/13 (apart from some changes to targets, to ensure
that they are aligned to POL’s strategic and commercial priorities)
— still requires Ministerial approval, and the proposals were most recently put to the SROC on 21 November
+ This structure is expected to be an interim / transitional measure
~ enables the RemCo to review remuneration and proposals for post-2012/13 are expected in the New Year
co sTiP LTP
CEO .
CFO :
Based on “Post Office :
Scorecard” (80 per cent. of total)
and personal objectives (20 per
cent. of total)
Underlying bonus based on
“Post Office Scorecard”, with a
“personal multiplier” triggered by
personal development rating
Entitled to maintain current
framework for 2012/13 under
the terms of the TUPE
Gateway structure that requires two primary conditions to be met before payouts -
based on a third condition - are triggered. Payments would be made at the end of
2014/15,
— Condition I: Gateway target that ensures POL maintains a network of at
least 11,500 post offices that also meet access criteria
— Condition Il: Gateway target that POL meets a certain number of
cumulative Network Transformation conversions. Sliding payout scale
from lower threshold
— Condition Il: Trigger target linked to POL's financial performance at
operating profit level. Sliding payout scale from lower threshold
Note: STIP frameworks differ since Paula Vennells was part of the Royal Mail STIP (as a member of the Royal Mail Holdings plc Board) and Chris Day was
not. Chris Day's structure is aligned to the framework in place for POL senior management
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ts) Remuneration — Actuals and Forward Look
2011/12 ACTUALS
Short Term In Lieu Total
Salary Incentive Benefits Pension 2012 Bonus as % of
(A) (B) (c) (D) (A)+(B)+(C)+(D) Max Bonus
£250k (9 per cent. 87 per cent. of
ceo increase on 2010/11) Elrek £10k Fa0k EaGek £200k maximum
cro £143k £55k £6k £36k £240k EO be rk of
£64k maximum
2012/13 FRAMEWORK
% Increase Max STIP as % of Max STIP Increase Max LTIP as % of
Salary on 2011/12 Max STIP Base Salary on 2011/12 Base Salary
98 per cent.
(payout to be
CEO £250k 0 per cent. £200k 80 per cent. 0 per cent. made in 2012
under current
LTIP cycle)
CFO £194k 90 per cent.
£215k 0 per cent. (or £97k with (or 45 per cent. with 0 per cent. na.
max 2.0x multiplier) max 2.0x multiplier)
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ts) Remuneration — CEO STIP Targets for 2012/13
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POST OFFICE SCORECARD WEIGHTING
Target
GROWTH
Total Revenue incl. NSP (£m)
Operating Profit (£m)
CUSTOMER
Queue Time (% < 5 mins; top 1,000k branches)
Call Centres 3D
MODERNISATION
Crown Loss (£m)
NTP Conversions (# mains and locals)
Total
25.0%
25.0%
12.5%
12.5%
12.5%
12.5%
100.0%
% SALARY PERFORMANCE METRICS
eshold Stretch Target Threshold
9.6% 4.8% 16.0% 1,016 1,001
9.6% 4.8% 16.0% 84.0 84.0
4.8% 24% 8.0% 78.9% 77.5%
48% 2.4% 8.0% 100.0% 95.0%
4.8% 24% 8.0% (40.0) (42.0)
4.8% 2.4% 8.0% 1,200 960
38.4% = ( 19.2%) ( 64.0%
Stretch
YTD
(6m to Sept.)
1,046 1,109 (feast)
92.4 92.1 (feast)
82.8% 78.9%
110.0% 103.3%
(36.0) (16.6)
1,345 269
PERSONAL OBJECTIVES WEIGHTING
/ Target
% SALARY
Threshold
Stretch
Maximise the SLT Talent Pool 33.3% 3.2% 1.6% 5.3%
Leading the Future Strategy of POL 33.3% 3.2% 1.6% 5.3%
Upping POL’s Commercial Edge and Pace 33.3% 3.2% 1.6% 5.3%
Total 100.0% I 9.6% (48% ) & 16.0% )
Threshold bonus of 24 per Stretch bonus of 80 per
cent. base salary cent. base salary
Shareholder
. Note: Sliding scale between Threshold and Target and Target and Stretch
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ts) Remuneration — CFO STIP Targets for 2012/13
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% SALARY PERFORMANCE METRICS YTD
POST OFFICE SCORECARD WEIGHTING
Target Threshold Stretch Target Threshold ‘6m to Sepi
GROWTH
Total Revenue incl. NSP (£m) 25.0% 7.5% 3.8% 11.3% 1,016 1,001 1,109 (fcast)
Operating Profit (£m) 25.0% 7.5% 3.8% 11.3% 84.0 84.0 92.1 (fcast)
CUSTOMER
Queue Time (% < 5 mins; top 1,000k branches) 12.5% 3.8% 1.9% 5.6% 78.9% 77.5% 78.9%
Call Centres 3D 12.5% 3.8% 1.9% 5.6% 100.0% 95.0% 103.3%
MODERNISATION
Crown Loss (£m) 12.5% 3.8% 1.9% 5.6% (40.0) (42.0) (16.6)
NTP Conversions (# mains and locals) 12.5% 3.8% cad 9% 5.6% 1,200 960 269
Total 100.0% _ 30.0% 15.0%
* Performance multiplier based on appraisal score from March / April review, EXAMPLE PERSONAL OBJECTIVES
which is then ratified by a peer comparison assessment. Multipliers are:
- rating of 1 = multiplier of 0.0x Broaden/deepen Board contribution
~_ Fating of 2 = multiplier of 0.5x Implement FTSE 100 standard of controls and reporting
- rating of 3 = multiplier of 1.0x
— tating of 4 = multiplier of 1.5x Meet the finance challenge to ensure NTP is supported
— rating of 5 = multiplier of 2.0x Deputise for Chief Executive as required
+ Maximum payout is therefore Stretch (i.e. 45 per cent. base salary) with a 5 Lead the transformation of the finance function
appraisal score (i.e. 2.0x multiplier) giving 90 per cent. of base salary
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ts) Remuneration — LTIP Targets for 2012/13
LTIP awards made this year will pay out in 2015. Metrics relate to network coverage, Network Transformation conversions and operating profit
~- CEO can receive up to 98 per cent. at stretch, CFO can receive up to 49 per cent. at stretch
Operating Profit Performance for the % Payout if 6,000 (Target) or More % Award Payout if 4,800 (Threshold) % Award Payout if < 4,800 Contract
Financial Year 2014/15 Contract Conversions are CompletedI Contract Conversions are Completed Conversions are Completed
Less than £69.3m
(70 per cent. of £99m) 0 per cent. of award will pay out 0 per cent. of award will pay out 0 per cent.
£69.3m 70 per cent. of award will pay out (CEO = 35 per cent. of award will pay out (CEO = Oper cet
(70 per cent. of £99m) £122.5k; CFO = £52.7k) £61.3k; CFO = £26.3k)
70 — 100 per cent. of award will pay out 35 — 50 per cent. of award will pay out
£69.3m - £99m calculated on a straight line sliding scale calculated on a straight line sliding scale
(70 — 100 per cent. of £99m) (CEO = £122.5k to £175k; CFO = £52.7k (CEO = £61.3k to £87.5k; CFO = £26.3k oe oe
to £75.3k) to £37.6k)
£99m 100 per cent. of award will pay out (CEO 50 per cent. of award will pay out (CEO = Dpercent
(100 per cent. of £99m) = £175k; CFO = £75.3k) £87.5k; CFO = £37.6k) pe <
100 - 140 per cent. of award will pay out 50 to 70 per cent. of award will pay out
£99m -£118m calculated on a straight line sliding scale __ calculated on a straight line sliding scale Groap sant
(100 — 120 per cent. of £99m) (CEO = £175k to £245k; CFO = £75.3k to (CEO = £87.5k - £122.5k; CFO = £37.6k - Pe ‘
£105.4k) £52.7k)
More than £118m 140 per cent. of award will pay out(CEO 70 per cent. of award will pay out (CEO = Dbereent
(120 per cent. of £99m) = £245k; CFO = £105.4k) £122.5k; CFO = £52.7k) pe
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[ Key Stakeholders
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Stakeholder
HMT
Cabinet Office
DwpP
DfT (DVLA)
Home Office (IPS,
UKBA)
Stakeholder Interest
+ HMG shareholding and lender
to the business
+ Long term subsidy, and other
capital requirements
+ Accounting / budget impact of
business performance
+ POL procurement strategy and
role in providing transactions
to support online services
+ New commercial models team
and mutualisation
+ Contractual relationship as a
client — e.g. POCA
+ Contractual relationship as a
client — e.g. driving licence
renewals
+ Contractual relationship as a
client — e.g. passport “check
and send”
Assessment of Relationship
with ShEx
+ Strong ShEx working
relationship with key HMT
team
* Strong ShEx working
relationship with key CO team
+ Strong working relationship
with POL and ShEx
* Strong working relationship
with POL and ShEx
+ Some working relationship in
place with POL and ShEx but
others could be improved
Key Current Issues
Planning around POL’s next
strategy and funding requirement
Keen to understand financial
benefits of NTP.
Executive pay
VfM case on mutualisation
Interest in POL’s mutualisation
process
POL's position in providing face-
to-face transactions in light of
digital delivery and OPS White
paper
Possible assisted digital
framework
POL's role in delivering Universal
Credit, the impact of this on
POCA
POL has now won the DVLA
framework tender — now need to
work with DVLA and POL to
leverage the contract.
Direction on data collection for
online passports unclear - key
projected revenues for POL and
likely first target for DVLA
framework
Strategy to Obtain Support /
Overcome Barriers
Maintaining frequent and close
dialogue
Continue to identify and target key
contacts, coordinating with POL
where required
Maintain close dialogue and
coordinate with POL where
required
Maintain close dialogue and
coordinate with POL where
required
Expand contacts with key senior
Officials, coordinating with POL
where required
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7) I Other External Stakeholders
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Stakeholder Stakeholder Interest
NFSP.
CWU/Unite .
Consumer Focus .
Competitors *
European «
Commission
Network Transformation
Mutualisation
Government Services
Subpostmaster pay
Mutualisation
Network Transformation
Government Services
Network Transformation
Government Services
State Aid
Government Services
State Aid
Assessment of Rela’
with ShEx
Close and constructive. NFSP
supported the Postal Services
Act, and have voiced support
for Network Transformation
and mutualisation.
Constructive dialogue on
mutualisation despite ongoing
scepticism in relation to
POL’s financial sustainability
Improving following a slew of
negative (and skewed) media
pieces about the Local model
Healthy engagement
Good and open
Engagement with mutualisation
process
Ensuring new Gov't services
contracts are won
Seeking representation on the
POL Board
Engagement with mutualisation
process
Concerns about network
transformation
Ongoing pensions discussions
with Royal Mail
Implementing the recently agreed
Code of Practice for on and off
site conversions under Network
Transformation — subject to
review in Dec 2012
Current dialogue with PayPoint
through the European
Commission in relation to State
Aid approval
PayPoint concern on POL’s State
Aid approval
ship I Key current Issues Hate fo Duell Siena
Maintain dialogue at official and
Ministerial level to ensure
continued support
Encourage engagement with POL.
and other stakeholders through
mutualisation
Encourage engagement with POL.
and other stakeholders through
mutualisation
Careful comms. around Network
Transformation
Build on improving relationship
with Mike O'Conner (CEO), who is
heading up one of the Stakeholder
Forum working groups
Maintain dialogue at official level
and keep PayPoint’s presence as a
bill payment provider, relative to
POL, under review
Maintain dialogue ahead of future
State Aid requests
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Shareholder Executive
Role
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HM Government
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a) I Shareholder Executive role
= ShEx has a dual-role with POL, representing Government as a responsible shareholder and acting as a voice within Government (e.g. guidance on political
and commercial issues)
— active relationships and frequent dialogue is maintained across multiple tiers of executive and senior management
— also engage with key stakeholders including unions and customer groups
— strong relationship maintained with HMT team (e.g. James Perry, Conrad Smewing)
— work with selected advisers where applicable (e.g. Freshfields on legal and Deloitte on finance)
= The POL team is fully resourced and since the last Annual Review Tim McInnes, a Grade 6 FTA has been appointed. Jai Nathan also joined the team in
September as a Fast Streamer to replace Katie Wake
— Jane Hoy will be moving on in December and a search for a replacement is underway
ee ee
Director Roger Lowe Head of SnEx RMPS Team
Executive Director Will Gibson (90%) Head of RMPS POL Team
Assistant Director Mike Whitehead (100%) Network and Stakeholder Engagement
Jane Hoy (80%) Government and Financial Services Support
Tim McInnes (80%) Financial Monitoring, Mutualisation
HEO Peter Batten (100%) Network and Stakeholder Engagement
Fast Streamer Jai Nathan (80%) Mutualisation, Government and Financial Services
= Actions raised in the November 2011 annual review and subsequent quarterly reviews have also been addressed
— additional financial information, and details on POL’s management incentive plan and remuneration more broadly have been included in this report
— KPI dashboards and reporting packs have been developed with POL to support POL level and strategic-initiative level monitoring. Further information on these
have been included in the appendix
— the POL team presented to ExCo on POL’s mutualisation, ahead of the first meeting of the Stakeholder Forum. Our interactions with the broader mutualisation
process are proceeding along the lines discussed with ExCo
— it was suggested that ShEx facilitates a meeting between POL and the VOA in relation to the Crown estate. These contact details have been shared with the POL
Network team
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O Traffic Light Analysis
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eG Traffic Light Analysis
= There is a good and constructive relationship with the new Chair, and a strong relationship with the CEO who has
Shareholder demonstrated her clear commitment to POL's strategic plan. The new NEDs are challenging management, and this has
Relationship been further improved by the recent appointment of Tim Franklin (who brings with him financial services and mutual
experience).
Implementation of = Generally strong application of a shareholder model, with appropriate monitoring structures in place — this includes
Shareholder Model frequent dialogue with management. However, policy and shareholder roles are combined.
POL's management team have a strong track record of defending revenues and managing costs. However, in order to
meet the business plan targets, they will need to deliver a transformational strategy, at scale, which also includes
generating considerable new revenues. It is not clear yet whether they have the right skillsets / capabilities to achieve
this.
ShEx are working closely with management to monitor the performance of the business, and provide support where
appropriate / possible. Also, a succession plan is currently being developed by Paula Vennells for areas of POL where
there is no clear replacement for senior management.
HMG requires that POL maintains a network of 11,500 outlets - significantly in excess of what it would maintain on a
commercial basis - which means that the business has to rely on Government subsidy. Without this external funding, and
in its current form, POL would not be a going concern.
POL's strategy is credible but extremely ambitious, both in terms of its scale (e.g. NTP and Crown Transformation) and
focus (€.g. growth in new revenues). Also, management's approach to some initiatives has not been stable — due to
implementation (e.g. NTP) or delivery environment (e.g. Crown Transformation) issues. However ShEx is monitoring the
business closely, and also works with management to ensure that it has the best possible chance of succeeding.
Quality of
Management Team &
Board
Strategy
The obligations placed on POL by HMG mean that the business is loss making at a net profit level (it is also loss making
at an operating profit level, pre-subsidy). As a result it is not considered to be a going concern.
POL's financial performance is monitored closely by ShEx on a monthly basis, and sessions are held with divisional
management (both revenue and cost) to understand current trading and near term outlook in more detail.
Financial Performance
POL has a business plan in place, and it is funded to deliver this strategy. However POL is only a going concern due to
Government subsidy, and makes losses which means it is unable to pay dividends (both today, and likely in the medium
term also). ShEx monitors the business closely to ensure that it is meeting its targets and that any issues are identified
and addressed early on.
Balance Sheet and
Risk
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Executive
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Summary Split of Costs — 2012/13B
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Executive
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Staff Costs (Mar YE - £m)
Central (inc MD's office) (14.5)
Commercial (65)
Communications (1.9)
Human Resources (6.2)
HR - Centrally Held Bonus Payments (17.7)
Financial Services (4.7)
Finance (10.0)
Network (189.3)
Supply Chain (55.8)
Crowns (115.9)
Other Network (17.7)
Legal (6.6)
Programme costs 0.0
Strategy (13.6)
C&IS / Managed Services (12.4)
Strategy / Programme office (1.1)
POL Staff Costs (268.9)
Non-Staff Costs (Mar YE - £m)
Computers & Telephones (84.1)
‘Other Operating Costs (17.4)
Consultancy, Marketing & Legal (18.5)
Skills Group External Contractors (1.4)
Remainder (17.0)
Finance (16.3)
Property Facilities (7.3)
Property Maintenance (6.2)
Vehicles (2.3)
‘Compensation (1.0)
Collection, Delivery & Conveyance (0.6)
Staff & Agent Related & Consum. (13.4)
Skills Group Off-Charges 44
Remainder (17.8)
Inter-business (83.3)
Depreciation (0.8)
Group Overhead Allocations (16.8)
POL Non Staff Costs (267.1)
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i ) Summary Split of Investment Budget — 2012/13B
0.0
FOoG 3.8 48 Mails 18
IT Delivery 16 22.4 Telephony 0.0 1.0
IT Transformation 5.4 0.0 Customer Engagement 2.0 nm. I
Independence & Separation 44 05 Digital 0.0 09
Mails 49 0.0 Commercial Total 3.8 19
Telephony 6.6 00 Legal & Compliance 0.2 nm.
Customer Engagement 75 nm. Security 0.2 nm.
Digital 0.0 18 Mandatory IT 1.9 11.2
Financial Services 23 0.0 Financial Services 25 0.5 I
Network Transformation nm. 445 PO Story 3.2 09
Crown Transformation nm. 46 Centrally Held 28 37
Transformation Total 36.1 78.5 Non-Transformation Total 10.8 16.4 '
Network 08 0.0 Total 52.6 132.7 I
Property 1.0 54 “Over Programmed” (14.9) nm.
Supply Chain 04 30.9 Budget 377 432.7
Network Total 19 36.0
IT Transformation 0.0
Financial Services 3.0
Network Transformation 96.3
Crown Transformation 9.1
Exceptionals Total 108.4
Shareholder
Executive
61
HM Government
UKGI00017385
UKG100017385
RESTRICTED — POLICY & COMMERCIAL
@ I POL / ShEx Update Snapshot — Primary KPI Dashboard
Business Scorecard
September 2012
Key Performance Indicators Current Month Year to Date Full Year 2011-12
Act Target Var Act Target Var Prior YearI F'cast Target Var Outturn
Growth
Total Revenue (excluding NSP) £m (Bonus) 778 74.7 501.1 490.8 484.9 1,023.4 1,015.8 76 979.7
Total Net Income (excl NSP) £m 69.1 65.6 442.9 432.6 428.5 903.8 897.9 5.9 865.3
Operating profit £m (Bonus) 15.8 47 61.0 47.7 55.5 84.0 84.0 (0.0) 61.3
Free cashflow £m 75.9 26.8 311.6 270.3 49.1 (85.3) (85.3) 0.0 (15.0)
Collections & Returns ability to serve RM (Milestones) 0 0 1 2 N/A 8 8 0 N/A
FOoG bid wins (value won) (Rev £m) 0.3 0.6 2.8 3.8 N/A 10.7 41.7 (4.0) N/A
Customer
Customer Satisfaction 88.0% 88.0% 86.0% 88.0% 86.8% 88.0% 88.0% 0.0% 86.9%
(Queue time % <5 minutes - Top 1k branches (Bonus) 83.7% 81.4% 78.9% 78.9% 77.1% 78.9% 78.9% 0.0% 77.8%
IWelcome & Farewell - (mystery shopped) - Top 1k branches I 85.9% 85.9% 83.9% 85.9% 80.0% 85.9% 85.9% 0.0% 81.5%
Call Centres 3D (Bonus) 105.9% 100.0% 103.3% 100.0% 102.7% I 100.0% 100.0% 0.0% 105.5%
Retail Standards (actual) - Top 1k branches 84.6% 84.9% 85.3% 84.9% 83.4% 84.9% 84.9% 0.0% 84.1%
Horizon availability 99.8% 99.6% 99.8% 99.6% 99.8% 99.6% 99.6% 0.0% 99.5%
Branch - Compliance (new basket) 99.2% 95.0% 98.1% 95.0% N/A 95.0% 95.0% 0.0% N/A
Modernisation
Crown Profit (Loss) £m (Bonus) (1.9) (3.2) (16.6) (20.2) N/A (40.3) (40.3) 0.0 (46.4)
Engagement Index % (Once a year) 64% 65% 64% 65% 58% 65% 65% 0% 64%
Network Conversions (Mains & Locals) (Bonus) 26 72 269 322 N/A 1200 1200 0 184
IT Transformation (Milestones) ie) 0 8 8 N/A 12 12 0 NIA
Bonus worthy metrics
Shareholder
Executive
HM Government
62
UKGI00017385
UKG100017385
RESTRICTED — POLICY & COMMERCIAL
@ I POL / ShEx Update Snapshot — FOoG Update
I Pipeline Performance ) FOoG Programme Summary
Shareholder
Executive
HM Gow
63
UKG1I00017385
UKG100017385
RESTRICTED — POLICY & COMMERCIAL
@ POL / ShEx Update Snapshot — FOoG Pipeline
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Agency Govt I FOS extensions - Overseas Biomettic Visas UKBA
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lAgency Govt __I IPS online passports applications (AE!) IPS
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Shareholder
Executive
HM Government
RESTRICTED — POLICY & COMMERCIAL
@ POL / ShEx Update Snapshot — Crown Transformation
UKGI00017385
UKG100017385
Journey to profit
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part of the Post Office network - offering customer
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Post Office® COMMERCIALLY SENSITIVE - IN CONFIDENCE
Shareholder
Executive
HM Government
UKG1I00017385
UKG100017385
RESTRICTED — POLICY & COMMERCIAL
@ Selected KPI Dashboards — Network Transformation
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alia PRE a eR ARCA
Cambourne CB23 6X Local Off-site 12/01/2009 I England Rural 48.5 [South Cambridgeshire u
1? (Ash GU126LR__ ILocal On-site 28/11/2011 [England Urban 112 [Surrey Heath q
18 I Bramley RG26 5AQ___ILocal On-site 07/11/2011 [England Rural 105 [North East Hampshire Ay
19 IBromharn MK43 8LD__ILocal On-site 03/08/2012 [England Rural 112 _INorth East Bedfordshire E}
20 [Boxgrove GU1 2PF Local On-site 24/08/2012 _IEngland Urban 105 [Guildford
21 [Giffard Park MK145QD [Local On-site 30/01/2012 [England Uroan’ 142 [Milton Keynes North cl
22 [East Preston BN161HB [Local On-site 14/09/2012 [England Urban’ 105 [Worthing West Ej
23 IHawkenbury ITN2 SAW Local On-site 1210/2012 IEngland Urban 112 [Tunbridge Wells q
24 [Adeyfield HP2 4EP_ Main On-site 19/03/2012 IEngland Urban 58 [Hemel Hempstead Fy
25 [Kingswood WWD25 OEL__ILocal On-site 05/10/2012 IEngland Urban 119 (Watford iH}
26 [Maple Cross WWD3 GRP Local On-site 411411420114 [England Rural 112 [South West Hertfordshire q
2? IHorsted ME1 2TG. Local On-site 28/09/2012 [England Urban 112 [Rochester and Strood Gi
28 [The Pond WD17 1NA [Main On-site 29/03/2012 _IEngland Urban 82 Watford Gil
29 (Broadbridge Heath RH12 3LW__ILocal On-site 21/09/2012 IEnaland
[Horsham
Shareholder
Executive
HM Government
66