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Board Meeting
MINUTES OF A MEETING OF THE BOARD OF DIRECTORS OF POST OFFICE LIMITED HELD
ON MONDAY 29TH JANUARY 2018 AT 20 FINSBURY SREET, LONDON EC2Y 9AQ AT
12.15PM
Present: Tim Parker Chairman (TP)
Richard Callard Non-Executive Director (RC)
Tim Franklin Non-Executive Director (TF)
Ken McCall Senior Independent Director (KM)
Carla Stent Non-Executive Director (CS)
Virginia Holmes Non-Executive Director (VH)
Paula Vennells Group Chief Executive (CEO)
Alisdair Cameron Chief Financial and Operations Officer (CFOO)
In Attendance: Jane MacLeod General Counsel & Company Secretary (JM)
Marla Balicao Minute Secretary (MB)
Tom Cooper UKGI Observer (TC)
Debbie Smith Chief Executive, Retail (DS) (items 5,6,7 & 8)
Cathy Mayor Finance Director, Retail (item 5 & 7)
Martin Kirke Group HR Director (MK) (item 6)
Julie Thomas DMB Programme Director (item 6 & 8)
Tom Wechsler Programme Manager Mediation Scheme (TW) (item 7)
Andrew Goddard Head of Payment Services (AG) (item 7)
Rob Houghton Group Chief Information Officer (RH) (item 9)
Apologies: None
ACTION
1. INTRODUCTION, CONFLICTS OF INTEREST, MINUTES OF THE PREVIOUS
BOARD MEETING INCLUDING STATUS REPORT
1.1. A quorum being present, the Chairman opened the meeting.
1.2. The Directors declared that they had no conflicts of interest in the matters to be
considered at the meeting in accordance with the requirements of section 177 of the
Companies Act 2006 and the Company's Articles of Association.
1.3 Minutes of the meeting of the Board held on 23" November 2017 were APPROVED
and AUTHORISED for signature by the Chairman.
1.4 The actions status report was NOTED as accurate.
2. CEO's REPORT
2.1 The Board NOTED the CEO report. In response to questions, the CEO made the
following additional points:
2.2 The CEO:
(a) noted the strong retail trading performance over Christmas, which would be
_covered in more detail in the report from the CE, Retail later in the meeting.
° IRRELEVANT I
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3.1
3.2
(c)
(4)
(f)
(g)
(h)
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reported that the payroll module of Success Factors “5 (°SF") had gone live on
8th January with only a minor issues, and congratulated Martin Kirke and his
team for their work delivering to that timetable. Overall feedback has been
positive.
advised that she had met Stephen Jones, CEO UK Finance in December in
relation to the Banking Framework. A further update would be brought to
the Board in May on the further development of the Banking
Framework.
noted I that the 1300 event w was Staking place the next day with three main areas
of discussion around IT Strategy, wider digitisation and people change, with a
focus on strategy and key priorities.
informed the Board that due to Prime Minister’s reshuffle, there is a new Postal
Minister - Andrew Griffith MP. This is still to be confirmed officially and PV is
still to meet him.
reported that Martin Kirke, Group HR Director has announced his intention to
retire later in the year and a search for his replacement has started. Debbie
Smith joined as Chief Executive, Retail on 8th January.
The Chairman questioned whether Post Office would seek compensation from
Gemalto in relation to the disruption to our AEI services in December. PV responded
that contractual compensation had been discussed and that this had been reported
at the ARC earlier in the day.
FINANCIAL PERFORMANCE REPORT
The CFOO presented the P9 financial performance report covering December 2017.
The Board NOTED the financial performance report and in discussion the CFOO made
the following points:
(a)
(b)
(c)
There had been strong Christmas trading however he noted that this only
added an extra £600k to EBITDAS reinforcing that mails are a low margin
business.
EBITDAS for P9 was £6.8m, giving us a £1.7m upside against forecast, but
£1.5m adverse to budget, driven by strong mails trading, interest rate rises
supporting POCA performance and accelerated IT costs savings, offset by
additional agents pay.
Balance sheet headroom in P9 was £127m which was £129m worse than P8&
due to Christmas trading, but £36m better than forecast.
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3.3
3.4
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(d) POMS trading performance was behind by £(0.5)m predominately due to profit
share not being met.
(e) ATM performance is being watched as availability has fallen: 420 ATMs have
been experiencing issues resulting in 65% availability. This is partly due to the
introduction of new £10 notes. Both Bol and Post Office are reviewing
performance and seeking to understand the impact of the new interchange fee
structures. AC noted that ATMs would be part of the cash strategy
which would be coming to back to the Board in May. The Board
requested that this review also consider whether there was value in
talking to manufacturers, and review the location strategy.
The CFOO noted that the Scorecard was showing positive outcomes (slide 3 in the
Performance paper), and the following were discussed:
(a) Number of branches and ‘trapped Postmasters’ and PV responded that this,
together with the ‘white space’ strategy would be coming back to
Board as part of the review of the retail strategy.
(b) Branch technology conversions are progressing however there is a need to exit
from BT and onto Verizon and this is affecting the shape of the delivery.
(c) Health & safety performance in Supply Chain was starting to cause concern.
There are no significant trends or particular issues requiring specific
intervention but rather a higher incidence of not taking care, especially on our
premises. This will be addressed through activities seeking to engage peoples’
hearts as well as their minds.
Other matters flagged by the P9 report included:
(a) Forecast EBITDAS for the year was still expected to be c£33 million, however
there were a number of issues that would need to be managed to achieve this
outcome.
(b) Project costs were much closer to forecast than they had been, apart from
changes in the timing of DMB announcements.
(c) There is still ongoing work to reduce network cash levels back to the pre-
Christmas levels, and branch cash are being managed more proactively.
KM queried the relationship between reductions in staff costs as franchising was
rolled out, and increases in agents pay, and queried whether costs were reducing at
the expected level? The CFOO noted that there were a number of factors affecting
agents’ pay including simplification and product mix. On staff and non staff costs,
the next step change required the deployment of new technology and this could not
be introduced scalably until the underlying systems programmes such as Back office
Transformation are complete. He expected costs to be broadly flat in 2018/19, falling
in 2019/20 and achieving more significant savings in 2020/21.
ANNUAL BUDGET 2018/19
The CFOO presented the Annual Budget for 2018/19 as set out in the paper which
was NOTED by the Board. The CFOO highlighted the following:
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Ds/
DS
4.2
4.3
(a)
(b)
(c)
(d)
(e)
(f)
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The focus of the paper was on EBITDAS. The GE had reviewed progress
during December and January and detailed budget reviews would start the
following week.
The CFOO noted that in October, the Board had approved an EBITDAS target
of £40m for 2018/19. The impact of accounting changes including the
exclusion of the costs of the Group Litigation meant that £47m would be
consistent with the 3 year plan and was recommended. This represented
significant growth given that there was no profit share from the Bank of
Ireland (c£11 million), a significant Ofcom pricing challenge (c.£15 million
gross impact) and growth in marketing of c. £15m. The CFOO noted that the
gap still to close against the 2018/19 target was £12 million.
The Board discussed the EBITDAS target and indicated that £47m now felt
conservative and the target should be at least £50m. It was noted that the
FS&T revenue lines were disappointing. The CFOO noted that savings
products were still being impacted by low interest rates, and POMS had been
struggling due to changes within Post Office relating to the withdrawal of
mortgage and financial specialists, and the delay in roll out of marketing
plans, as a result of which the ‘hockey stick’ uptick had been delayed. The
CEO noted that a new marketing director has been appointed for POMS which
should start to see a difference and she noted the new advertising campaign
which had just been launched.
The Board commented that the portfolio should be reviewed to ensure that
Post Office could compete effectively in the financial services market, and
consideration should be given to focussing efforts in those areas where the
Post Office brand would allow us to compete most effectively. The Board
challenged whether the balance was right between short and longer term
objectives, and whether management were sufficiently ambitious for the
POMS business. The CEO undertook to come back to the Board to
update on the POMS acquisition strategy, and the Chairman noted it
would be helpful to get some wider background briefings from
insurance experts.
TP noted that he would like a target figure of at least £50 million for 2018/19,
that the Board needed to understand how the growth fund would contribute
to this, and there should be some contingency in the plans. He noted that he
was encouraged by initiatives however those projects that underpin the plan
- and deliver longer term benefits, will be key.
The Board then discussed how other initiatives such as Panther, New Call
acquisition and Identity would contribute to the overall strategy. The CEO
noted that the strategy for the retail business was being reviewed by
the new Chief Executive, Retail who had only recently joined and
would be covered at the Board away day in June, however an update
would be provided at the March board.
The CFOO noted that proposals would be brought to the Remco at its meeting the
following week, for the STIP and LTIP measures. He noted that management's view
was that the measures for the two incentive schemes should be different, and that
following discussion at Remco, the recommended measures would be brought back
to the Board in March. He noted that the GE had debated supplementing a retained
EBITDAS with two critical pieces of delivery: (i) the replacement of legacy and
Strictly Confidential
PV
DS
Si
5,2
a
5.4
6.2
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outdated infrastructure including POLSAP, HRSAP and HNGx; and (ii) the delivery of
customer hub functionality with products available for customers in Travel and
Identity.
CE PERFORMANCE REPORT — RETAIL SBU
The Chairman welcomed Debbie Smith, the new Chief Executive, Retail and Cathy
Mayor and the Board NOTED the paper.
DS noted that she had attended the recent opening of the first 24 hour branch in
New Oxford Street.
CM reported on the following:
a) Christmas trading had been strong with increased customer sessions and trading
as compared with the previous year, although these had come through later in
the trading period, and reflected structural changes in the market.
b) Customer services levels had improved year on year, including customer effort
scores and wait time acceptability. The no queues at Christmas initiative had
brought wait times down by an average of 2 minutes, an improvement by 4%.
c) Mails performance was underpinned by continued growth in home shopping
returns and local collect which help offset ongoing decline in stamps.
d) Overall, the trading trends are positive and the current forecast is that Retail will
end the year £7m ahead of EBITDAS budget.
e) The Board brought up the discussion of Agents pay and it was agreed DS would
be looking into this and come back to the Board in June with a strategy.
The Board NOTED that transaction simplification was a key enabler for much of the
network and was materially important to the larger multiples. DS commented that
being able to convince retailers of the footfall benefits that Post Office could deliver
through the Banking Services Framework, click and collect, etc, was key to
leveraging the Post Office brand. Further work remained to be done on quantifying
the DPC of the various products - presently many of the central costs are not well
understood and therefore are not taken into account which may mean that products
look more profitable than they actually are.
DMB STRATEGY
The Chairman welcomed Julie Thomas and Martin Kirke to the meeting.
The following points were highlighted to the Board:
a) DS introduced the paper and noted that it was clear that DMB’s are not meeting
customers’ needs due to the restrictions on opening hours, and are not profitable
due in part to the significant central costs required to support them. Work is
ongoing to consider options to reduce costs including property options, reviewing
employment terms. franchising options etc; nevertheless exiting DMBs becomes
progressively more expensive due to the related central costs.
b) JT reported that the proposed revised franchising programme has been designed
to enable the franchise of all 227 DMB’s and staff over a three year period,
however at this point approval was only being sought for the first phase of the
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7A
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roll out. JT explained the model worked in two stages: (i) temporary operators
would be approached to operate a franchised DMB in the same premises, with
flexible lease terms. This should enable immediate staff cost savings while the
recruitment of the long-term operator and branch location is progressed in
parallel.
c) While there are currently 3 well established organisations who each can manage
approximately 30 branches on a temporary basis at any time, it is proposed that
a compliant procurement process should be undertaken for operators of
temporary branches across the network. The proposition should be attractive for
temporary operators as it is low risk and involves minimal investment.
d) The Chairman queried the impact on employees and whether union consultation
would be required? JT noted that under the current structures, it can take up
to six months to complete a franchise and that employees are often keen to
leave but are prevented from doing so because of the local consultation
processes. She advised that the plan was to start the staff consultation process
by telling staff about new Branches being advertised in the area and the strategy
of replacement of DMB’s over the next three years.
e) The Board queried the impact of the proposal on the underlying costs of the
business and JT replied that the benefits step down over time as set out in the
table on page 5 of the paper.
The Board was supportive in principal of the revised strategy however approval
was only sought for a one year roll out following which the strategy would be re-
assessed. APPROVAL was given on this basis including drawdown of the first
year of funding of £23.1m for 2018/19 which would allow the roll out of the
Franchise Programme to 56 branches.
PROJECT PANTHER
The Chairman welcomed Tom Wechsler and Andrew Goddard to the meeting.
DS summarised the benefits of Project Panther and TW and AG took the Board
through the progress of negotiations to date. The Board raised a number of questions
about Payzone and the proposed transaction, and in the course of addressing those
questions the following points were made:
a) the biggest hurdle would be CMA approval as the effect of the transaction would
be to reduce the market to 2 participants and to increase Post Office’s market
share. Additionally Paypoint would be incentivised to challenge the transaction.
The deal team were working with legal advisers to prepare for these issues.
b) Significant due diligence had been undertaken on the Payzone technology and
added security costs on implementation had been factored into the business
case. There was also potential value add from their technology and an
opportunity cost on building on their technology.
c) State Aid challenges had been considered, however analysis confirms that there
are sufficient financial resources independent of State funding that should enable
any challenge to be successfully rejected.
d) Significant additional value to Post Office has been identified resulting from the
transaction - included avoided cost, which would provide ‘upside’ over and
above the actual assets being acquired, and this supports management’s
Strictly Confidential
7.3
7.4
8.2
8.3
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valuation of the business.
e) The model assumed a 12% cost of capital and a 3 year RoI which were the
standard Post Office investment metrics.
The Board discussed the implications of the proposed transaction and were in
agreement that this was a good opportunity for Post Office and that management
should be authorised to proceed to the next stage including entry into non-binding
Heads of Terms. Management were however requested to review the
language in the Heads of Terms regarding conditions to the CMA clearance.
It was proposed that a further update on progress should be provided to the Board
later in February which would, seek to confirm the valuation, satisfy outstanding
questions and recommend that we proceed to signing Heads of Terms. This could
be supported by a Board call if considered appropriate.
It was RESOLVED that the Board authorised management to progress Project
Panther in line with recommendations set out in the Board paper. It was further
agreed that once valuation had been confirmed and outstanding questions resolved
then a further Board meeting be called in February to sign Heads of Terms.
EUM
The Chairman welcomed Julie Thomas back to the meeting to present the business
case for EUM paper.
Debbie Smith introduced the paper which was noted by the Board.
a) JT explained that since the Board approved the initial EUM business case of
£7.8m in January 2017, it had become clear that a key design assumption that
all training could be delivered through Success Factors could not be delivered
and the current Horizon system does not support web-enabled training.
b) This updated Business Case requests £2.53m of additional funding to deliver:
new IT developments needed to ensure EUM will work for agents using the
current Horizon system.
c) Approval of funding will allow the programme to rollout to the entire network of
c11,600 branches by November 2018 with a workable design, allowing us to be
fully compliant with all relevant sales-related regulation and contractual
requirements.
d) To the extent possible, EUM had been designed to ensure compatibility with
HNGT.
e) Data collection regarding postmasters and their assistants was taking longer
than expected, however those branches which were critical for POMS sales were
being prioritised and it was still expected that the target of July 2018 which
POMS were relying on, would be achieved.
The Board noted their concerns over the delay in the roll out of this programme, and
queried what could be done to accelerate delivery to ensure delivery for POMS by
the July target date? The Board also commented that management needed to review
the project and understand what could have been done differently.
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AG
8.4
9.2
9.3
9.4
10.
10.1
11.
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It was RESOLVED to approve the revised scope and business case including the
further funding of £2.53m, including an immediate draw down of £1.3m. The
Drawdown of the balance £1.23m in due course should be brought to the Investment
Committee.
BACK OFFICE TRANSFORMATION
The Chairman welcomed Rob Houghton to the meeting and the CFOO presented the
replacement Back Office Transformation business case.
a) The CFOO gave an update on the progress of Back Office Transformation since
the last update in September and explained the proposed changes to the
Business Case with a request for a further drawdown of funds that will allow the
programme to complete Phase 1.
b) Phase 1 remains focused on ensuring we exit from POLSAP by June 2018,
delivering as much transformation as possible. In the next 2 months deliveries
include: Agent Remuneration process transformation & data migration from
HRSAP to CFS, and Cash Processing functionality migrated from POLSAP to
Transtrack for Belfast cash centre (soft launch).
c) It was noted that while costs have increased slightly by £0.3m to an expected
total of £21.2 million, the annualised IT benefits have reduced by £0.8m to
£3.1m as set out in the Board paper
d) RH noted that Credence had now transitioned and that this creates further
capacity in the Fujitsu environment, which of itself, decreases the risk.
The Board queried whether the CIO had now addressed the resourcing challenges in
his team, and whether he was confident in the capability and capacity of that team
to deliver the necessary changes required? RH advised that the Chief technology
Officer had been the last key role to fill however there now remained a challenge to
recruit the necessary IT architecture skills, although this was underway, with a much
better operational team in house now in place.
It was RESOLVED that the Board approve the revised business case and additional
£5m drawdown of budgeted spend to enable the completion of Phase 1, noting the
reduction in IT cost benefits.
BOARD COMMITTEE CHAIR UPDATES (VERBAL)
ARC
CS as Chair of the ARC noted that all directors other than VH had attended the ARC
which had been held that morning, and accordingly agreed to provide a separate
brief to VH.
ITEMS FOR NOTING
Sealings
It was RESOLVED that the affixing of the Common Seal of the Company to
documents numbered 1604 to 1636 inclusive in the seal register was confirmed.
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11.3 Conflicts of Interest
The Board NOTED that the Company secretary would circulate details currently JM
held about other directorships and conflicts and that these would be updated and
presented to the March board.
11.4 Meeting Dates and Forwards Agenda
The Board NOTED the future meeting dates and January’s agenda.
12.2 IT WAS RESOLVED THAT:
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1) The terms of and the entry by the Company into the Amended and Restated
Facilities Agreement with RBS and Nat West (‘ARA’) and the other 2018 Ring-
fencing Documents, and all other documents which are required to be entered
into by the Company from time to time in connection with or pursuant to any of
the foregoing (the “Ancillary Documents”), be and are hereby approved;
2) The CEO or CFOO be and is hereby authorised for and on behalf of the Company
and in its name to agree such amendments (whether additions, deletions or
other changes) to the ARA and the other Ring-fencing Documents and the
Ancillary Documents as they shall deem appropriate subject to them being
satisfied that the credit standing of any new legal entity counterparty is equal to
or better than the existing legal entity (and whether such amendments are
agreed before such documents have been entered into or are agreed after such
documents have been entered into and are effected by entering into new
documents or otherwise);
3) The CEO or CFOO be and is hereby authorised for and on behalf of the Company
and in its name to execute and enter into (and in the case of any deed, to
execute and deliver) the ARA and the other Ring-fencing Documents and the
Ancillary Documents (including any and all amendments as detailed in the
preceding paragraph);
4) The CEO or CFOO be and is hereby authorised for and on behalf of the Company
and in its name to do all such acts and things as may be required in connection
with the ARA and the other Ring-fencing Documents and the Ancillary
Documents (and any such amendments thereto) and to carry into effect the
purposes of the resolutions passed at this meeting, and to give or execute any
notices, communications and other documents on behalf of the Company in
connection therewith;
5) The CEO or CFOO be and is hereby authorised for and on behalf of the Company
and in its name to approve and execute other documentation with any other UK
regulated bank which is of a similar nature and has a similar effect as the ARA
and the other Ring-fencing Documents and the Ancillary Documents, and to
which the Company and such other UK regulated bank (being one of the
Company’s bankers) is a party subject to the CFOO being satisfied that the credit
standing of any new legal entity counterparty is equal to or better than the
existing legal entity, and the terms of these resolutions shall be deemed to apply
equally to such other documentation as if passed specifically in respect of
thereof.
12.3 Postmaster Litigation Update
JM provided the Board with a verbal update on the Postmaster Litigation noting that
there was a procedural hearing scheduled for Friday 2 February. At that hearing the
Court would be requested to determine the scope of disclosure required to be given
by Post Office to support the trial in November 2018.
The Board NOTED the update and RESOLVED to establish a sub-committee for the
purposes of monitoring the development in and strategy for the litigation. The
members of that sub-committee would be the Chairman, Ken McCall and Tom Cooper
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(once appointed as a director). JM was requested to provide the committee
members with details of the key dates mandated by the Court so that JM
appropriate time could be scheduled for the sub-committee to be briefed.
12.4 There being no further business the Chairman declared the meeting closed at
16:00pm.
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