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Report and Accounts
Year Ended 28 March 2004
I I MATOOKVTCE aso
COMPANIES HOUSE 09/06/04
COMPANIES HOUSE oamnere
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Royal Mail Holdings plc
Report and Accounts
Year Ended 28 March 2004
Contents Page
Chairman's Statement 2
Joint Deputy Chairman's and Chief Executives’ Statement 4
‘Annual Review 2003-04 8
Operating and Financial Review 9
Royal Mail Holdings ple Board 7
Directors’ Report 9
Corporate Governance 24
Internal Control 2
Directors’ Remuneration Report 24
Statement of Directors’ responsibilities in respect of the accounts 0
independent Auditors' Report to the members of Royal Mail Holdings plc 3
Accounting policies 32
Group profit and loss acount %
Group statement of total recognised gains and losses 6
Reconciliation of movements in Group shareholders’ funds 6
Balance sheets a
Group cash flow statement 38
Notes to the cash flow statement 3a
Notes to the accounts 40
Five-year summary Ly
Glossary of terms 62
Corporate information 64
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Chairman’s Statement
‘We've come a fong way ~ but there's still much work to be done.”
2003-04 was a tough year for Royal Mail but it was also a year of solid
achievement. For the first time in four years, the Group made a profit from its
~ £220m ~ which was an improvement of more than 200% on the
£197m loss from operations a year earlier. That's real progress, driven mainly by a
mix of market growth, cost efficiencies, the impact of the increases in postage.
Prices in May 2003 and the increases in banking revenues. Overall, the Group’
made a pre-tax profit of £105m, compared to a loss of £611m a year earlier, when
there were heavy exceptional costs.
Our top priority now is to improve the quality of service fo our customers. That
means urgently tackling those areas where we know mail is being delayed and
completing as quickly as possible much-needed operational changes in our letter
business. These changes are crucial to defiver and sustain a high quality of service
in the longer-term and the efficiency savings to achieve our financial target for
2004-05 of a £400m profit on our day-to-day operations.
This level of profit will not be an easy target to hit, as Royal Mail letters will have an additional cost of £340m in this current year to fund the
14.5% pay increase for postmen and women and other businesses need to fund their own pay awards, We are very determined, however, to
achieve our financial goal, as it will trigger a Share in Success payment of at least £800 to our people. We very much want to make this payment.
t's achievable - but it rests on completing the essential operational changes that will deliver productivity savings through more efficient working.
Making 2 £220m profit from operations, when Royal Mail was losing well over £1m every working day two years earlier, was not our only success
in 2003-04, far from it. There was real progress in the way we operate. We are well on the way towards introducing a single daily mail delivery, a
huge change. Significant progress has been made towards completing a new distribution network for the letters business ~ the biggest change
Royal Mail has ever undertaken to its transport operation. Efficiency improvements are also being introduced in mail centres.
The strike in our letters business in the autumn of 2003, in the London area, was a setback. It cost Royal Mail £25m and, much worse, it hit
quality of service and irreparably undermined the effort to hit the quality targets set by Postcomm. We had shown in the summer of 2003 that we
are capable of wort las quality of serve when we hil some ofthe highest levels of customer service since the curent measuring system was
introduced 15 years ago.
We are working hard to improve quality of service as rapidly as possible. As competion intensifies and business customers find more ceive,
Royal Mail must ensure its customers choose us, not because there is no alternative but because we offer them unbeatable service at value-for-
money prices, and they trust us consistently to deliver win-win solutions to meet their needs.
However, the unprecedented level of major change across our entire letters business — in deliveries, transport and mail centres ~ is inevitably
hitting customer quality of service. We apologise to our customers for any adverse impact on our service, but these are key operational changes
that we must make to improve Royal Mails competitive edge. We have to go through this period of vital change to improve quality of service, not
just now, but in the fong-term.
The overall changes we are making span the entire range of our business — letters, the Post Office network, parcels and logistics. For most
businesses, successfully implementing one of our programmes would be a hard task. Making real headway in all of them underlines the scale
‘and scope of the work Royal Mail is doing to achieve the biggest tumaround in UK industry.
‘The Post Office network is expanding its range of financial services, following the joint venture agreement it signed with the Bank of Ireland.
Parcelforce Worldwide reduced its operating losses, and has now embarked on the final phase of its restructuring with the alm of delivering a
‘break-even profit fram operations in the third year of the Renewal Plan.
The year saw the first agreement reached with another mail company for access to Royal Mail's sorting and delivery network. There are now
three such agreements. They allow Royal Mail to eam a commercial retum on the service it provides for other operators, while preventing the sort
of cream-skimming which would damage our ability to continue providing the one-price-goes-anywhere universal service to the UK's 27 million
addresses. it's right that customers have more choice, and access deals also offer the potential for market growth. One thing is certain — Royal
Mal will fight vigorously for every letter in the market.
‘Companies with highly motivated people deliver high quality service. That's why I believe the agreement on the pay package, which is giving
postmen and women basic pensionable pay of £300 a week, will deliver benefits to our customers - as better pay will play a significant role In our
efforts fo make Royal Mail a great place in which to work. We've made modest progress here, with 57% of our people saying they enjoy working
for the Company. This is stil far short of the 75% minimum level we want fo achieve but i's further sign that things are getting better in Royal
Mail, not worse, as was the case for too meny years.
Last year, we set up a confidential helpline staffed round the clock by professional, independent counsellors, who can give help and support to
any of our people who make contact because they are concéred about bullying and harassment. There were just under 4,000 cals in the year to
the telephone heipline, a totally unacceptable number, but we are determined to confront this issue and eliminate all forms of bullying and
harassment.
We remain committed to ensuring the pension plan meets all its funding obligations. This has resulted in an additional payment of £132m into the
plan to fund the deficit, on top of an increase in regular contributions of some £140m.
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Chairman's Statement (continued)
Royal Mail is already a very different company to the one that embarked on the Renewal Plan two years ago. We've come a long way and we're
within sight of our goals. But we can't afford any let-up and it wil be essential in this current year that we finish laying the foundations, not just to
be profitable in a year’s time, but to be able fo eam and sustain profits in the years that follow. Our people are the crucial point of difference
between Royal Mail and the competition, Recognising this stength and using itis the way in which we will realise our full potential, We can be the
best postal business in the world and Royal Mails people wil give us our distinctive edge.
Allan Leighton
Chairman
26 May 2004
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Joint Deputy Chairman's and Chief Executives’ Statement
‘We've been successful in the past year in terms of growing our revenue and improving efficiency and our financial results reflect this progress.
But we have to keep the momentum going — there's still much tough work to complete across our business if we're to provide our customers with
a consistently high quality of service in the face of competition entering our markets, and deliver the Renewal Plan. Improving quality of service to
‘our customers is Royal Mail's number one priority.
Akey efficiency improvement in the last few months of 2003-04 has been the introduction, finally, of Single Daily Delivery. The change has been
introduced successfully into 900 of the 1,400 main delivery offices and we are working hard to successfully complete the implementation in a
further 200 offices with completion ofthe change in all our offices belng a vital goal in 2004-05. Efficiency improvements are also being introduced
in the offices which sort and handle the mail wth changes already made in 31 out of 72 mail centres, and in 45 of the 100 distribution hubs.
Also vital to our business is the transformation of our transport network. We are establishing a simple system for an efficient mails business,
involving a reduction in the number of daily vehicle journeys from 9,000 to some 2,900 through the more efficient use of road transport and a hub-
and-spoke operation. A new road and air network was launched in January this year and the changes we are making include: closing seven of the
416 regional distribution centres, opening a new National Distribution Centre at Daventry and reducing nightly air services, with the intention of ‘
‘unning 24 services from 20 airports by the end of this year, based on large aircraft with mail transported in containers. The last Travelling Post
Offices ran in January and the one remaining rail mail freight service is expected to end in May.
In February 2004, we signed a deal covering pay, London weighting and changes to the business (including the introduction of single daily
deliveries). This 14.5% pay package is giving every postman and woman basic pensionable pay of £300 a week — a key milestone for our
frontline people. Royal Mails a people business and we know that pay has been an important issue, so we are pleased we've reached this
landmark agreement.
However, the pay agreement was reached following the worst period of industrial action since 1996 despite the majority of our people voting
against strike action in a nationwide ballot. During the year, there were just over 85,000 days lost to strikes — the bulk in October and early
November, when more than 80,000 days were lost in the dispute over London weighting, even though many of our people in London continued to
work. This cost us some £25m and had a major impact on our quality of service, so almost everybody lost - our people, our business and, most
importantly, our customers.
The cumulative effect ofthe essential operational changes we are making — in deliveries, in the transport network and in our mail centres - has,
unavoidably, led to a reduction in quality of service in the latter half of the year. We apologise to customers who will continue to see adverse
effects while we complete these key operational changes in our letters business. The magnitude of the changes we are making over a period of
just some six months amounts to the biggest restructuring of any company in the UK. It's notable that until September 2003, we were exceeding
some of our targets and the First Class level of service was the best for 15 years.
However, in the latter half ofthe year, as the impact ofthe auturnn industrial action took its toll, we failed every single operational target set by
Postcomm in our licence. Not only does this undermine customer confidence, it exposes us to the risk of being fined by Postcomm and paying
compensation to bulk mailers and retail customers. Last year the Regulator fined us £7.5m for failing to meet the targets fortwo First Class
business mail services. In the light of our recent poor quality of service performance, the prospect of fines, that will not benefit our customers or
the Company, only underlines how vita its for us to complete the operational changes that will bring efficiency savings and better services to
customers.
‘After many months of discussion, Royal Mail agreed with Postomm a three-year price control, allowing a modest ‘p rise in basic First and
Second Class postage in May 2003, the first rises in basic postage for three years. Over the past year, letter mail volumes have inoreased by
41.6%, whilst mail prices have increased by approximately 3% in the fist year of the price control. This tariff increase generated some £200m, but
the RPI ~1% formula applying in the coming year will see Royal Mai's basket of prices falling in real terms, underlying the need to make further
efficiencies and cost savings in the year ahead, particularly because we need to find £340m more to fund the 14.5% pay increase for frontine
people within the letters business.
ur estimate has been that some 30,000 jobs in the Group would be made redundant over the course of the three-year Renewal Plan, with some
further jobs going through outsourcing and natural tumover. By the end of March 2004, some 27,100 people had left the Group — through a
combination of voluntary redundancy (10,900), natural tumiover (8,000) and outsourcing (8,200). A further 5,000, who have accepted voluntary
redundancy, are working their notice period, many of whom will eave the business by September 2004. By this date, therefore, 32,100 people will
have left Royal Mail through voluntary redundancy, natural turnover or outsourcing.
ur outsourcing contracts cover a range of non-core services including IT support, employee health services, buildings maintenance and cleaning
services, and the management of the company car fleet. Of course, the jobs of people working in these roles continue with the suppliers of these
services.
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Joint Deputy Chairman's and Chief Executives’ Statement (continued)
Parcelforce Worldwide continues to strengthen its position in the express-only, guaranteed delivery market for its 17,000 business customers. It
has halved its number of depots to around 50, and its high 98% quality of service on its core product is among the best compared to its 4,000
fivals. It has cut its losses by almost £100m compared to the previous year — thanks to the efforts everyone in the business have made to make
efficiency savings but itis stil losing money - £102m over this financial year. Itis vital it completes its restructuring plans to hit its goal of breaking
‘even in this current financial year.
Our European parcels business, GLS, had a very good year, increasing its revenue by £32m (4%) to £818m, and more than doubling its profit
from operations of £11m in the previous year to £25m in 2003-04. GLS is now delivering one milion parcels a day on average in 30 countries,
and it is a formidable player in its markets.
Post Office Limited also cut its operating losses over the year ~ to £102m. The result, however, does not include the financing of the rural Post
Office branches through the Rural Network Reserve. A total of 1,278 branches closed in the same period, but Post Office Limited still faces a
considerable challenge to replace its traditional benefit payment business, which is being lost because of the Department for Work and Pensions’
programme to switch to the direct payment of benefits into customers’ bank accounts.
‘A combination of new services, coupled with a plan to manage a significant reduction in the number of urban Post Office branches, is helping the
network to drive forward financially and to create a vibrant business forthe future. Over 21 million customers can now withdraw cash from their
current accounts at Post Office branches with just their bank card and personal identification number, as can the basic bank account customers of
17 banks and building societies. More than two milion customers have opened a Post Office Card Account since its launch in Apri last year.
During the year, the Post Office finalised an agreement with the Government to utilise £450m of Royal Mail Group pl's reserves to finance the
rural network over the three years to March 2006. The joint venture signed in March 2004 with the Bank of lreland provides a £100m investment
for the development of a broader range of financial services. Personal loans are now available, by phone or through the web, to the 29 milion
customers who visit the 16,000-strong branch network every week. More new financial services will be launched in the coming financial year,
including motor insurance, a range of savings accounts and a credit card
The financial problem of having too many urban branches chasing too little business is being addressed through the managed closure of up to
3,000 Post Office branches in towns and cities. The Government has sanctioned £210m of funding from existing financial resources - £180m to
‘compensate outgoing subpostmasters for their investment in the business and £30m for investing in the branches that remain, More than 1,000
urban Post Office branches have already closed and consultations on the proposed closure of mast of the remainder are underway with
Postwatch, local communities, local authorities and MPs. Meanwhile, the Post Office has become one of the leading players in travel financial
services — number one in providing foreign currency and the largest independent provider of travel insurance.
‘As we enter the final year of the Renewal Plan, we still face a significant number of challenges. Only by further reductions in costs, improving
efficiency, consistently delivering a first class service to customers and making Royal Mail a truly great place to work for our people, will we be on
a sound footing forthe future.
Elmar Toime AS Crozier
Executive Deputy Chairman Chief Executive
Royal Mail Holdings plc Royal Mail Group pic Post Office Limited
26 May 2004 26 May 2004 26 May 2004
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Annual Review 2003-04
Reaching more people than anyone else
Foundation for the future
Royal Mails unique in reaching everyone in the UK every working day for prices that are amongst the cheapest in Europe. Every working day we
collect, process and defiver around 82 million items to 27 million addresses; each week we serve 29 million customers through our network of
16,000 Post Office branches and deliver some 40 million express parcels every year. But we need fo change and modemise operations to
improve service to customers and keep ahead of the competition in the letters business.
During the second year of our three-year Renewal Plan, there has been a huge effort to complete the implementation of operational changes
within the mails business. There's still a fot of hard work to be done, but progress is being made. Out of 1,400 main delivery offices, more than
900 have successfully implemented a single daily delivery of mail, or have reached an agreement at local level on doing so, and now millions of
customers receive letters through a single daily delivery. Our people are now benefiting from an increase in basic pay and a five-day working
week. We are also committed to improving working practices in our 72 mail centres and 100 distribution hubs across the UK, so that all of them
adopt a best practice standard for productivity and efficiency.
Over the past year, we have continued to improve our UK-wide transport network. We are aiming to create a new network that will be more
robust, flexible and reliable than before, capable of delivering a better quality of service to customers and cost savings to Royal Mail. A key
component of the new network has been the opening of the £40m National Distribution Centre in Daventry, and the use of larger et aircraft to
transport more mail from 20 airports. By using fewer, larger vehicles and aircraft, the new integrated road and air network reduces the impact on
the environment of Royal Mails distribution operation by 30%.
As patt of the Transport Review, we have revised our use of rail for transporting mail — a decision driven by economic considerations. Whilst the
use of rail has not been ruled out for the future, it needs to be commercially beneficial in terms of quality of service and price - our customers
cannot subsidise rail operators. This resulted in us reducing train services from 68 to just one, including ceasing the use of Travelling Post Offices
(TPOs). in service since 1838, TPO use was at its peak in the early 1900s when rail was the most reliable way of sending mail long distances.
Although the TPOs were great in their time and did an excellent job, they were a Victorian answer to a Victorian problem of moving mail around
the country in the pre-motorway and pre-air era. However, the world has moved on and, like mail coaches before them, TPOs are now a proud
part of Royal Mail's history, not its future.
Service to customers
{n the first haif of the year, our First and Second Class services showed their strongest ever performance, with both ahead of targets. However,
whilst our people have been doing an outstanding job in implementing changes across the business that will provide the foundation for
consistently good service, the scale and pace of those changes had an impact on quality of service in the second half of the year. Inevitably,
making these changes is causing turbulence. We regret any reduction in customer service caused by these necessary changes but we are putting
in place a long-term sustainable network (0 provide a better service than ever before. We also felt the impact of strike action in the autumn, which
disrupted mail across the country even though the majority of postmen and women continued to work normally. With Postwatch's endorsement
we agreed that it was a good idea to donate £1m to London's bid for the Olympic Games in 2012, to say sorry to our customers for the disruption
this strike action caused.
Whilst our aim is to ensure customers get the service they expect from Royal Mail, in handling around 82 milion items a day, sometimes things
go wrong. If they do, we want to compensate customers quickly and fairly. Royal Mail has introduced new compensation arrangements for
customers whose mail is delayed. We offer better protection for customers in the UK than almost anywhere else, and are one of the very few
postal services to pay compensation for delay.
New compensation schemes were introduced where individual customers can claim a book of 12 First Class stamps, for First Chass letters that
arrive more than four working days after posting, and also for Second Class letters that arrive more than six working days after posting. Business
customers can get a percentage refund on their postage bils if Royal Mail does not meet regulatory performance targets.
We have set up a comprehensive range of processes to monitor the Group's performance on health and safety issues, as well as care of the
environment. In September, we published our frst external Health, Safety and Environmental Report as part of our commitment to transparent
reporting in these areas. This report was recognised as the Best First Time Environmental Report at the Association of Chartered Certified
‘Accountants’ (ACCA) UK Awards for Sustainability Reporting in 2003. A copy of the report can be found on our website. It highlights how we have
invested in improved health service support for employees, revised approaches to safely management that have yielded significant improvements
in many parts of the business and cut carton dioxide emissions by 6% since 2001-02. We have also reduced our use of energy by 8% and have
begun using renewable energy for the fit time. We will be producing our first full Corporate Social Responsibility (CSR) Report in September
2004.
‘With us it's personal’
In the second year of our three-year Renewal Plan, the focus has been on our core businesses and improving our service to customers. This has
seen us undelining the unique benefits of using Royal Mail services through our ‘get personal’ advertising campaign. This features a number of
Royal Mail people demonstrating how our people go the extra mile every day to deliver around 82 million items of mail to 27 million addresses
across the UK.
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Annual Review 2003-04 (continued)
In September, Royal Mail launched its Special Delivery 9am service - a direct challenge to the courier market. This guarantees next working day
delivery to most UK destinations by 9am, or customers get their money back. It costs as little as £6.95 to anywhere in the UK. It is challenging the
market and offering customers a better deal.
Doing business online is not stamping out stamps. In January, Royal Mail launched the UK's first digital stamp with a new online postage
purchasing system called 'SmartStamp’. Aimed at businesses, customers can create SmartStamps on their desktop computer, buy them over the
Intemet and print them directly onto envelopes from a normal printer at any time of the day or night. SmartStamps can be printed for most UK and
intemational mail, and can be posted directly into post boxes or taken to a Post Office branch in the usual way.
‘Small businesses can add their own logo designs and print them directly on to an envelope or label in the office. The ability to personalise the
Jogo gives small businesses the opportunity to differentiate themselves from competitors and achieve a professional brand appearance more
‘commonly associated with larger companies.
Celebrations through stamps
For customers who want to continue using traditional stamps, our 2003 stamp programme was packed with anniversaries and celebrations,
including two Royal occasions, both in June. Fifty years on, Royal Mail issued ten stamps to mark the Coronation of Her Majesty The Queen. On
17 June 2003, the Queen's grandson, Prince Wiliam, celebrated his 21% birthday, the fist time Royal Mail has marked a ‘coming of age’ with a
stamp issue.
In November 2003, as England celebrated winning the Rugby World Cup with a 20-17 victory over Australia, Royal Mail set to work designing four
commemorative stamps, which went on sale in December. Hugely popular with the public and collectors alike, the Rugby World Cup set
Comprised two First Class and two 68p stamps - the later being the 20g air4etter rate to Australia.
Christmas greetings by mail
Last Christmas saw another bumper postbag for Royal Mail, with average daly postings up from 82 milion to over 136 milion on peak days.
Total festive mail volumes reached 2.1 billion, including a huge growth in Intemet shopping with Royal Mail delivering more than 40 milion items
bought ontine, double the quantity we handled last year.
Royal Mail delivered its biggest ever e-Christmas, as online shoppers broke all records by spending £3.34bn on gifts and presents ordered over
the interiet. The popularity of text messaging and e-mail has done nothing to halt the sending of Christmas cards - in the UK we sent and
received some 700 milion Christmas cards posted at home and abroad.
And sending a Christmas wist-ist to Santa Claus was as popular as ever. Royal Mail helped Santa by delivering replies to more than 750,000
children who wrote to him last Christmas.
Young Letter-Writers
Royal Mail's Young Letter-Writers Competition has attracted over four million entries since it began 26 years ago, making it the biggest letter-
writing competition of its kind in the UK. This year the competition challenged the nation's young letter-writers to ‘Write to Their First Class Hero.
Primary school children throughout the UK are invited to enter the competition, in three categories: ages 7-8, 9-11, and Special Achievement - for
children who overcome exceptional difficulties in order to write their letter.
Postal Heritage Trust
The Postal Heritage Trust was set up in 2003, to protect over 300 years of Royal Mail history, with Tony Conder appointed as the first Chief
Executive. Building on the history and reputation established through the centuries is a key part of Royal Mail's Renewal Plan to retum the
‘business to profitability. The vast historic collection dates back to the 17 century, and by establishing a charitable trust, and appointing an
independent management board, its future is secure for new generations. The Postal Heritage Trust will be established as an entity separate from
Royal Mail during 2004.
Strengthening our reputation in express
Investing in the customer experience
Parcelforce Worldwide continues to work to establish itself as one of the UK's leading providers of global express, time-guaranteed delivery
services. The past year has seen the business consistently deliver a quality of service of 98%, a standard that is one of the best, ifnot the best, in
the industry. This has been recognised by our customers, from small businesses to major retailers, with contract wins to provide services for well-
known brands such as the famous London department store, Harrods, and DVD retailer, Play.com. We have also invested in new technology to
improve the all-round collection and delivery experience. New web-trading services enable our customers to order collections and print labels
online, access information on the delivery of their item more quickly, as well as arrange redeliveries. We have also added 24-hour voice
recognition to our portfolio of customer service options, meaning customers can access our services any time of the day or night, seven days a
week.
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Annual Review 2003-04 (continued)
The transformation of the business into an express, ime-quaranteed delivery service provider only, has enabled Parcelforce Worldwide to reduce
its losses by 48% in the financial year. However, the profit challenge remains, and further restructuring will take place in the coming year to bring
down costs, while maintaining a high quality of service to customers.
For the 11 year, we recognised small business excellence through the Parcelforce Worldwide Small Business Awards. Endorsed by the
Federation of Smat! Businesses, the winner was Croft Engineering Services, which beat off competition from 4,500 entrants. The company,
based in Warrington, was also recognised for its export achievements.
New solutions for UK businesses
Adding logistics expertise
Royal Mail has continued to provide tailored logistics solutions, utilising its warehousing and fulfilment services, to meet the specific needs of
major UK businesses. We have developed a strong track record in handling returned goods for major retailers, and reinforced our position by
winning @ major contract with television channel, Auctionworld.tv. And we have moved a step ahead of the competition, with an innovative
solution to give retailers a better return on unwanted goods. Using Intemet-based auctions, we handle the whole process of selling the items -
from assessing the condition of the goods through to defivery to the buyer and follow-up customer service. Through this channel, which has
proved popular in the past year, items fetch up to five times the value they would get through other disposal channels.
Investing in our retail network
Changes and challenges
Over the past year, the Post Office has continued to inves in is branch network, introducing new products and forming partnerships with other
organisations to improve services fo customers. From April 2003, Past Office customers have been able to access current accounts (of selected
banks), basic bank accounts and the Post Office Card Account at branches, in many cases just using their bank card and personal identification
‘rumber. This has seen the Post Office establish itself as a Key provider of banking services through its extensive branch network, especialy in
tural areas, as 60% of vilages have a Post Office branch but only 9% have a bank branch. The Post Office Carry on Collecting Roadshow visited
‘some 160 shopping centres, high streets and seaside locations throughout the spring and summer to raise awareness of Post Office banking
services, and let customers know how they can continue fo collet their benefits in cash at Post Office branches as the Goverment moves closer
towards paying all benefits directly into customer accounts by 2006.
Customers are also now able to pay for many Post Office products and services using a debit card, as well as cash or cheques.
Building a sustainable urban network
The restructure of the urban Post Office branch network has gathered pace with the planned closure of up to 3,000 urban branches expected to
be complete by the end of the year. Consultations are now being carried out on an area-by-area basis, so that customers and subpostmasters get
a realistic picture of future Post Office services in every town and city. This also helps reduce the uncertainty facing subpostmasters so they can
concentrate on building sustainable businesses. The consultation process, agreed by Postwatch, was extended to give everyone affected by a
potential closure a better chance to make their views known. MPs are now given earlier notification of closure proposals, and local authorities are
able to contribute further planning and regeneration information to the programme's planning process, in addition to the information we already
obtain. As a sustainable urban network takes shape, we are determined that over 95% of our urban customers nationally will remain within a mile
of a Post Office branch,
Safeguarding rural Post Office branches
In May 2003, the Government received approval from the European Commission for a £450m, three-year funding package to support Post Office
branches in rural areas. This money, which is drawn from Royal Mail's existing financial resources, enables the Post Office to continue to provide
customers with face-to-face access to its services, and recognises the important social role that Post Office branches play in everyday if,
particularly in rural communities.
The Post Office remains committed to preventing avoidable closures of rural Post Office branches and the rate of closures has slowed in recent
years. This reflects the work of our dedicated team of rural transfer advisors, who actively seek solutions to potential rural branch closures. This
has seen branches in pubs, churches, village halls, butchers, pharmacists, a police station and even a fish and chip shop. These increasingly
offer a wider range of Post Office products ~ in February, the vehicle licensing service was extended to almost 600 additional Post Office
branches, many in rural areas. The Post Office now offers electronic mobile phone top-ups, supplementing the top-up vouchers that continue to
be offered at branches, giving customers in rural and urban locations the convenience of crediting their phones at their local Post Office branch.
For the little things that make the big things happen
The Post Office has consolidated its position as a key provider of travel services, capturing a 20% share of the foreign currency exchange market
with sales of £2bn from nearly 9 milion transactions per year. The Post Office is also now the fifth largest provider of travel insurance, with an 8%
share of the market. We also plan to build on the trust and convenience that customers associate with the Post Office, to move into the financial
services products market with the launch of a personal loan — the first of a portfolio of products from the Bank of Ireland and Post Office Limited
joint venture. Other products in the pipetine will be motor insurance, savings accounts, a credit card and mortgages, and these are expected to be
taunched over the next two years. With a range of new products, investment in branches and building on agreements with existing partners, as its
new advertising campaign maintains, the Post Office realy is forthe litle things that make the big things happen.
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Operating and Financial Review
Introduction
This year is the second year of the Group's three-year Renewal Plan, which sets out to fundamentally restructure our operations and create a
profitable and sustainable business that can confidently face the imminent challenge of new competition within our core market.
‘Year two has delivered a significant improvement to profitability and
cashflow, which have been restored. Efficiencies have continued to be
introduced and costs are under tight control. However, retums are still
uncommercial and Parcelforce Worldwide and Post Office Limited are
both loss making and consuming large amounts of cash. Uniess the
cost base is further reduced, future results will quickly slip back into
tosses. {tis our imperative to continue to deliver operational efficiency
programmes and to reduce expenditure in all areas of the business.
This will allow us to face up to new competitors and afford to pay the
recent pay agreement, whereby wages within the letters business will
increase by 14.5%, which will cost an additional £340m on an annual
basis, These programmes, including Single Daily Delivery, Mail Centre
Efficiency and Automation programmes and initiatives, Parcelforce
Worldwide overhead and infrastructure cost reduction, and managerial
overhead reductions, are estimated to cost some £550m of cash to
finalise. We expect most of this spend to take place in the next financial
year.
A maior focus is placed on extemal turnover and profits from operations, which best reflect underlying performance at both Group and business,
unit level. This year, the Group recorded £220m of profit from operations, a very significant improvement on the losses reported for the last three
years. This is still lower than the £259m achieved in 1998-99, and considerably less than the £387m recorded in 1997-98, when profits from
operations reached their peak. The major contributor to this result is the Royal Mail letters business, which contributed 76% of external tumover
and £25m of profit from operations. General Logistics Systems, our European parcels business, also contributed to profitability by more than
doubiing its profits from operations from £11m to £25m. Parcelforce Worldwide and Post Office Limited both recorded losses from operations of
£102m, although these are almost half of the losses recorded last year by each of these businesses.
Royal Mall Holdings plc and the Royal Mall group of companies
The Royal Mail group of companies comprises Royal Mail Holdings plo (the Company) - which is wholly owned by HM Government - and its
‘subsidiaries. The Company is incorporated under the Companies Act 1985 (the Act) and the accounts are produced in accordance with the Act
‘and applicable UK accounting standards.
‘The accounts are drawn up for the 52-week period ended 28 March 2004 (2003 52 weeks ended 30 March 2003) and have been prepared on a
going concem basis.
Financlat highlights
Summary of results 2004 2003 External turnover
fm £m Extemmal tumover has increased by £334m (4%) to £8,633m, driven
mainly by tai increases of some £200m and 1.6% volume grow in
Extemal tumover 8,633 8,299 the Royal Mail UK letters business, partially offset by customers trading
down to lower priced products. Post Office Limited reported an increase
Profitiices from operations zo (187) oF£78m (9%) as a result of increases in banking revenue, wtilst
Exceptional tems Ni (605) retaining much of the Department for Work and Pensions related
income. Parcel revenue within General Logistics Systems in Europe
Net interest receivable w 35 grew by £32m (4%) - largely as a result of volume increases in
; Germany and higher parcel yields in France. These inoreases are partly
Profit(loss) before taxation 405 (611) offset by a decline in Parcelforoe Worldwide income of £51m (17%),
Taxation (ché ‘it 52 driven by its downsizing and strategy of focusing on ‘next day’ services,
aston (charsIred se and £12m (2%) relating tothe Royal Mail's international eters
Profi(loss) after taxation 7_____ (659) operation, as a result of lower cross-border volumes.
Net cash outflow (222) (486)
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Operating and Financial Review (continued)
Profit/(loss) from operations
Summary 2004 2003 Prof rom operations of £220m reprsents a 417m
8. tumaround against the comparable loss in 2003 of
Group operating profit before exceptional items 5 49 £197m. This is mainly a result of market growth, price
Add charge/(benefit) in respect of pensions increases, cost efficiencies and increases in banking
deficit/(surplus) 132 (246) revenues. The reconciliation to Group operating profit in
‘Add share of profits in associates and joint the profit and loss account is shown in the adjacent
ventures 7 30 table.
Profit(loss) from operations 220 (197)
Margin from operations
Margin from operations (profit from operations expressed as a percentage of external turnover) of 2.5% improved considerably over the negative
retum of 2.4% from the corresponding period last year but is stil way below a commercial return, and much lower than in the 1990s when
margins of nearly 6% were generated (5.7% in both 1996-97 and 1997-98)
Exceptional items
Net exceptional items were zero and comprise £64m of operating exceptional costs (2003 £697m) offset by £64m of non-operating exceptional
profit (2003 £2m). The £64m of operating exceptional costs comprises impairment of fixed assets of £41m (2003 £97m) and a further £23m
restructuring costs (2003 £600m), including an increase in the provision for surplus properties of £17m (2003 £18m) associated with the core
Programmes underpinning the Renewal Plan.
The £64m of non-operating exceptional profit comprises £67m of profit associated with the sale of properties (2003 £24m), Enil for the impaiment
‘of goodwill in associates (2003 £24m) and £3m (2003 £2m) of losses relating to business disposals for this year (2003 £2m profits), primarily the
‘outsourcing of IT operations and the associated disposal of CSC Business Systems Limited (formerly RM Business Systems Limited),
Net interest receivable
Net interest received during the year reduced from £35m in the prior year to £17m. This was due to lower interest rates received on the Group's
cash and current asset investments, compounded by a reduction in average net investment balances, which were used fo fund Post Office
Limited's working capital and the cost ofthe rural network
Taxation
The accounts include a current tax charge of £12m (2003 a credit of £4m) and a deferred tax charge of £86m (2003 a credit of £48m) for the year.
‘The tax charge for 2004 represents an effective tax rate of 93% on the Group's profit before tax, compared to a 9% credit on its loss before tax for
2003. The high effective tax rate is mainly due to the tax on disposal of assets and the unrelieved losses in Post Office Limited.
Cash flow and capital expenditure
Net cash outflow of £222m was significantly better than last
Summary of cash flows 2004 2003 years outflow of £486m. This is mainly due to the increase in
£m £M__ profit from operations and the flow through benefit of the pension
Net cash outfiow from operating activities (241) (383) prepayment for regular and deficit contributions of £400m made
Dividends received from joint ventures and in March 2003, offset by outflows relating to Post Office
associates a 7 Ue wong capa cash and payments rating fone
, m . expenditure to support delivery of the Group-wide Renewal Plan,
Capital expenditure and disposals (56) (158) increases in dividends reosived from joint ventures and
Tax and interest F) 51 associates to £21m (2003 £7m) are the result of dividends
Business acquisitions and disposals 25 (2). received mainly from Quadrant £7m (2003 £3m), Camelot £7m
(2003 £4m) and the Bureau de Change business £5m (2003
Net cash outflow (222) (486) So no
Capital expenditure, net of disposals of £56m (2003 £159m) comprises £158m (2003 £221m) of expenditure for projects, including the
intemational mail centre near Heathrow and further spend on mails automation, offset by inflows of £102m (2003 £62m), mainly relating to
surplus property disposals. Tax and interest inflows in the year of £29m (2003 £51m) are the result of less interest income and the recovery of
£12m of tax (2003 £17m). Business acquisitions and disposals resulting in a £26m inflow (2003 £2m outflow) arise primarily from the disposal of
CSC Business Systems Limited (£29m), offset by minor acquisition spend to buy the Italian subsidiary of our European parcels business, GLS.
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Operating and Financial Review (continued)
Business acquisitions and disposals
In June 2003, the Group disposed of its IT operation for £29m of cash, resulting in an exceptional charge of £3m.
In March 2004, the Group signed a joint venture agreement with the Bank of Ireland to sell Post Office branded financial service products, such as
personal loans, motor insurance, a credit card and savings accounts. This arrangement will initially run for ten years. As part of the transaction,
the Bank of freland invested £100m to enable the establishment of the joint venture and to provide the core infrastructure and start-up costs.
‘Other minor acquisitions were made for £4m to support the development of our European parcels business in Italy.
Pensions
Pension scheme overview
Royal Mail operates the 5® largest UK occupational pension scheme, with asset values of some £12bn at March 2003, the date of the most
recent triennial actuarial valuation, a fall of some £5bn since the previous valuation in March 2000. A recovery in the scheme's asset values o
£15. 1bn at March 2004 is offset by an equivalent increase in the scheme's liabliies, as assessed by the actuaries. The scheme has 180,000
members and 250,000 pensioners. Due tots size, even minor changes to assumptions used to calculate pension costs and liabilities, and the
mere fact that asset values are dependent on the UK equity markets, mean that there can be large volality in the pension costs recorded in the
profi and loss account.
Pension charges in the profit and loss account
Summary of pension charges 2004 2003-~—_‘The Group continues to account for pension costs under SSAP 24
£m £m Accounting for pension costs. The 2004 charges/deficits are based on the
recent full iennial valuation as at March 2003, whilst the 2003,
Regular pension costs 243-311 comparatives are based on the March 2000 triennial valuation.
Pension deficit(surplus) adjustment 132 (246). The latest valuation highlights a movement from a surplus to a
‘ substantial deficit due principally to increased life expectancy of
Exceptional redundancy costs 54__200 employees, compounded by lower discount rates which increase the
Total charge included in profit(loss) Feabiltes of the Plan
before taxation 429 265 .
Regular pension costs, which are included within profit from operations, of £243m (2003 £311m) have decreased due to lower pensionable
payroll costs and changes in underlying assumptions. The pension deficit net cost of £132m consists of £188m in respect of recognising the
accounting deficit over 12 years — the average remaining service lives of employees — offset by notional interest on the pension asset of £56m.
This compares to a surplus in 2003 of £246m (including £45m notional interest credit) based upon the March 2000 triennial valuation. Charges
relating to redundancy provisions of £54m (2003 £200m) relate to pension costs associated with implementing the Group-wide Renewal Plan.
Pension cash funding
‘Summary of pension cash flows 2004 2003 -—-‘The caloulations to determine the funding of the pension schemes do not
£m____£m__tely on the same assumptions that are used to generate the SSAP 24
charge to the profit and loss account. More prudent actuarial assumptions
Regular pension contributions 6 184 are used by the Trustees and independent Plan actuary, and using the
latest valuation this has confirmed a cash funding shortfall of £2.5pn, which
Funding of pension deficit 45 54 requires an inital cash contribution of £132m, substantially higher than the
Payments relating to redundancy 494 38. £100m anticipated at the time of publishing last year’s accounts. Cash flows
relating fo pensions are highlighted inthe adjacent table. This year's cash
Prepayments for next year 125 400 __fiows are positively impacted by £275m due to the timing of pension
Netcash payments seo 676 payments.
‘Accounting standards
The accounting standard, FRS 17 Retirement benefits, introduces radical changes to accounting for pensions and similar benefits in the UK.
Royal Mail is complying with the transitional arrangements as modified by the Accounting Standards Board in November 2002. The balance sheet
and profit and loss impacts are disclosed in note 19 to the accounts. This is further complicated because the Group plans to adopt international
Financial Reporting Standards (for pensions accounting these are expected to be similar to FRS 17), which means thal the FRS 17 disclosures
will continue to be made next year, with March 2006 being the first year in which all pension costs and related information will be reported in
accordance with the intemational standards.
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Operating and Financial Review (continued)
Treasury management.
The Group operates a central Treasury function that manages some £1bn of current asset investments, £600m of borrowings and £1bn of cash,
in accordance with investment restrictions set by the Government. It also acts as internal banker for the Group's business units. The Group
finances its operations largely through retained profits and borrowings.
Group Treasury derives its authority from the Royal Mail Holdings plc Board, and provides monthly monitoring reports for their review. The
Treasury function only has the authority to undertake financial transactions relating to the management of the undertying business risks, it does
not engage in speculative transactions and does not operate as a profit centre. All strategies are risk averse, and the treasury policy has
remained unchanged during the year. The principal financial instruments are deposits, gilts and long and short-term borrowings.
‘During the year the Group entered into the following financing arrangements for the future funding of Post Office Limited:
: in October 2003, the Group signed a committed borrowing facility between the DTI and Post Office Limited for £1,150m. This financing
is intended to replace the pre-funding provided by the Department for Work and Pensions for benefit payments prior to the introduction
cf Automatic Credit Transfer for claimant payments. The facility is in the form of short and long-term bonds; and
: the Framework Agreement entered into last year between Post Office Limited, Royal Mail and the DTI, granted Post Office Limited a
further borrowing facility of £250m for a maximum of 28 days from Royal Mail surpluses.
The terms of the Government borrowing facility and the associated Framework Agreement impose strict constraints on the separation of cash
funds within the Royal Mail Group and the purposes (o which they can be used.
The principal treasury risks arising from the Group's activites are currency, counterparty, commodity (fuel) and liquidity risk. These are managed
as follows:
= the Group is exposed to foreign currency risk due to Royal Mail International's obligation to pay overseas postal operators for carrying UK
mail abroad, and the balances held to operate the Bureau de Change services within Post Office Limited. These risks are mitigated by a.
hedging programme managed by Group Treasury. Where possible, exposures are netted intemally and any remaining exposure is hedged
using a combination of extemal spot and forward contracts. All other significant liabilities are hedged when they become contractual;
- the Group's obligation to pay overseas postal operators is denominated in Special Drawing Rights (SDRs) - a basket currency comprising
of USD, JPY, Sterling and euro. The Group has a policy of matching receipts and payments for individual currencies. The policy is that
80% of the forecast exposure is hedged. Group Treasury operate a rolling 18-month programme, which is subsequently reviewed on a
quarterly basis. Major currency holdings for the Bureau de Change business are hedged along with minor currencies showing @ correlated
movement. The Group does not hedge the translation exposure created by the net assets of its overseas subsidiaries;
+ the Group is exposed to fuel risk since it operates one of the largest vehicle fleets in Europe and consumes over 150 million litres of fuel
per year,
‘the Group's fuel risk management strategy aims to reduce uncertainty created by the movements in the oil market. The strategy operates
within the parameters set by the Board. The fuel procurement programme allows for the use of over-the-counter derivative products to
manage both the commodity and foreign exchange elements of the exposure;
counterparty risk is managed by limiting aggregate exposure to any individual counterparty. These exposures are reviewed regularly and
adjusted as appropriate; and
= the committed borrowing facilities relating to Post Office Limited and Royal Mail Group pl, along with net cash investments held on the
balance sheet, ensure that the Group can finance its operations into the foreseeable future.
Regulation
The Postal Services Commission (Postcomm) was created as the independent Regulator for the UK postal industry in 2000. Subsequently, Royal
Mail was granted its first licence, which required it fo provide a universal postal service al affordable prices. Currently, several other companies
have also been granted licences.
In March 2003, Royal Mail accepted Postcomm’s proposals for a second price control over a three-year period starting 1 April 2003, This allowed
Royal Mail to increase its prices by approximately 3% on 8 May 2003, followed by a conventional RPI-1% approach in the second and third
years.
In May 2003 Postcomm published its proposal for downstream access prices and on 20 August 2003 Royal Mail submitted its response to the
‘access consultation. In February 2004, Royal Mail agreed terms with Business Post Group plc to provide access to its delivery network and
consequently Business Post withdrew its application to Postcomm for a determination on access. In April 2004, Royal Mail also agreed access
terms with TPG N.V. and Deutsche Post A.G.
In April 2004, Postcomm commenced a consultation process for size based pricing. Royal Mail believes size based pricing is much more cost
reflective than the current weight based pricing structure and will be responding accordingly
Royal Mail has recently started planning for its next price control, which is due to commence in April 2006, and Postcomm has already issued its
business planning questionnaire. The outcome of the next price control will determine the ultimate success or failure of liberalising the postal
sector and Royal Mail believes Posteomm must build enough pricing flexibility within the next contro, particularly around size, channel and zonal
pricing, to facilitate the introduction of fair and efficient competition rather than allowing entrants to capitalise on areas where Royal Mais prices
are currently misaligned.
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Royal Mail Holdings pic
‘Operating and Financial Review (continued)
People
Management of our people and their costs remains a key comerstone of the three-year Renewal Plan, and success or failure in this area will
determine whether the Group can remain a profitable and sustainable business into the foreseeable future. The chart below highlights the
feduction in headcount since April 2002 by the UK businesses.
‘During the year, headcount reduced by 10,500 due to, the outsourcing of 1,700 people, net leavers of 3,400 and 5,400 from the voluntary
redundancy schemes relating mainly to the following programmes:
- Single Daily Delivery within Royal Mail Letters;
- Mail Centre Review within Royal Mail Letters;
- Transport Review within Royal Mail Logistics and Royal Mail Letters;
= Continuation of the Apollo project within Parcelforce Worldwide; and
- Managerial voluntary headcount reduction programme within the Group Centre and other overhead areas of our businesses.
At the end of the year, 5,000 people remained in the business who have accepted voluntary redundancy, 2,203 of whom had left by the end of
April 2004, and most of the remainder will leave by September 2004.
Special reserves
‘During the period, £1,121m of the Mails Reserve has been utilised for the provision of financial assistance to Post Office Limited, including £450m
to set up the Rural Network Reserve and £671m to cover the write-off of Post Office Limited's intercompany debt to Royal Mail Group pic. £146m
of the Rural Network Reserve has been used by Post Office Limited, representing the financing required during the year to maintain the rural
network of post offices.
Intemational Financial Reporting Standards (IFRS)
The Group plans to adopt and implement (FRS for the year ending March 2006, in fine with requirements announced in June 2002 by the Council
of the European Union, which are mandatory for ail listed companies. The Company has established a project team to manage the convergence
to IFRS and this team is working closely with our auditors.
At the date ofthis report, the Group has made good progress on converting fo IFRS. Whilst the Group has commenced an exercise to understand
the differences between Intemational Accounting Standards (IASVIFRS and the Group's current policies, the conversion project is and will
‘continue fo be ongoing. A number of revised standards were issued by the Intemational Accounting Standards Board (ASB) in December 2003
‘and March 2004. The IASB has confirmed that only standards issued and in place by March 2004 will apply for adoption forthe year ending in
‘March 2008. However, the IASB will continue to issue further new standards during 2004, 2006 and beyond, for which the Group will consider
early adoption on a case-by-case basis. n addition, the Intemational Financial Reporting interpretations Committee is expected to continue to
issue interpretations, which will apply tothe standards that are mandatory for listed companies for March 2006.
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Operating and Financial Review (continued)
‘Segmental analysis - turnover and profitability
The segmental analysis in note 4 to the accounts analyses the operating profil(loss) in accordance with SSAP 25 - Segmental reporting. The
analysis below sets out trading results, which focus on:
- operational business units rather than the statutory segments; and
- extemal tumover and proft from operations (the latter excluding the charge/benefit in respect of pensions defici/surplus but including
share of profits from joint ventures/associates and the charging of intemal interest for centrally managed funding resources),
Furthermore, comparatives have been restated to reflect the changes in organisational structures that took place during the year. The segmental
~analysis in note 1 to the accounts has two principal segments: () Mails and Parcels covering Royal Mail, Parcelforce Worldwide, and Generel
Logistics Systems and (i) Post Office Limited.
Group external tumover of £8,633 (2003 £8,209m) and profit from operations of £220m (2003 £197m loss) is made up as follows:
___ External tumover. Profit(loss) from operations
Business unit performance 2004 2003 2004 2003
£m £m £m £m
Royal Mail 6,589 6,290 253 20
Post Office Limited 977 899 (102) (198)
General Logistics Systems 818 786 Pay 1
Parcetforce Worldwide 245 296 (102) (198)
Other Businesses 4 2 146 168
Group 8,633 8,299 220 (197)
A further analysis of results, on a unit-by-unit basis, is shown below:
Royal Mail 2004 2003.-~—_External tumover rose by £299m (5%) to £6,589m, £311m of which relates to
im £m an increase in the UK letters business as a result of price increases on 8 May
2003, and an increase in volumes of 1.6%, offset by an adverse shift towards
External tumover 6,589 6,290 lower priced products. The price increases of approximately £200m (3%)
across most products are the result of Royal Mail accepting a new price
control regime which was agreed by Postcomm. The growth in volume from
23.1 billion to over 23.5 billion items is driven by the Mailsort, Door-to-Door,
Presstream and Cleanmail product range. Tumover of the intemational letters operation declined by £12m (2%), due to lower volumes as a result
of both higher prices and further impacts due to electronic substitution, particularly on cross-border social mail,
Profit from operations __ mo
The increase in profit from operations of £233m is mainly driven by the turnover growth highlighted above and cost savings resulting from tight
Cost control, rather than from the productivity savings required to fund the cost of increasing basic weekly pay to £300 per week. Costs would
have been lower if savings relating to key productivity programmes were delivered as planned but these were delayed to the last quarter of the
year because of difficulties in gaining union agreement, which culminated in a series of official and unofficial stikes. A direct result of the strike
action was @ reduction of revenue and increases in costs, which had the combined impact of reducing profitability by some £25m.
In December 2003, union agreement on the key productivity programmes was reached, which allowed the essential changes in working practices
at both delivery office and mail centres to be implemented. It's anticipated that these pragrammas will naw be completed by September 2004,
These productivity savings will help fund the increase in annual salary costs of some £340m and provide a platform to allow Royal Mail to
effectively compete with competitors in the future.
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Operating and Financial Review (continued)
Post Office Limited 2004 2003 Post Office Limited is responsible for 15,961 retail outlets, of which 560 are
£m £m directly owned. Since March 2003, 1,101 urban Post Offices have been
closed as part of the Urban Reinvention Programme.
External tumover increased by £78m (9%) to £977m, primarily due to an
‘Loss from operations (102)__(198)___increase in banking revenue. In addition, new products, such as e-top-ups,
allowing customers to top-up their mobile phone credit over the counter, have
been successfully introduced and further growth has been registered for existing products, such as the Bureau de Change business, which is now
the largest provider in the UK.
Loss from operations improved by £96m (48%) to £102m, primarily driven through cast control and headcount reductions, better product
proftebilty and network restructuring. Savings have been made in staff and agents’ costs through the efficiency programme and Network
Reinvention strategy. During the second half-year, a new marketing strategy spearheaded by the ‘Anis’ commercials on both radio and television,
contributed to the increase in revenue.
In March 2004, a joint venture agreement with the Bank of Ireland was signed, which further demonstrates Post Office Limited's commitment to
growing revenues and margins by utilising its network and brand to sell financial secvices.
External tumover 977 899
General Logistics Systems 2004 —-2003-»—_External tumover increased by £32m (4%) compared with the prior year but
£m £m__ included a £13m reduction as a result of the weakening of the euro. The
underlying growth of £45m (6%) resulted from strong growth in core parcel
Extemat turnover 818 786. volumes particularly in Central Europe. Profit from operations more than
' doubled from £11m to £25m reflecting tight cost control and improvements in
Profit from operations c=] 1 underlying profitability.
Extemal tumover decreased by £51m (17%) to £245m as the full year impact
Parcelforce Worldwide aad mes of last year’s decision to exit standard products and terminate contracts with
inadequate yields has flowed through. However the progress planned for
Extemal turnover 245 296 __reducing costs, particularly in the South East, and increasing the number of
owner drivers has not been achieved and the cost base is stil foo high by
Loss from operations (102) (198) some £100m when compared against competitive benchmarks. However,
underying income performance and average yields have improved against a
‘elatively weak parcels market
The operational restructuring continued with focus upon improving efficiency and reducing costs within the restructured network. The decrease in
tumover was mote than offset by reductions in costs, mainly due to the impact of last year’s restructuring and downsizing flowing through into this
year's results. AS a result, the loss from operations was reduced by £96m (48%) to£102m. The major focus of the business next year is to
Teduce further its cost base and to increase the fevel of owner drivers to deliver the required cost flexibility to compete profitably and effectively.
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Operating and Financial Review (continued)
Other businesses rad a" Other Group businesses principally comprise intemal interest income of
m __£434m (2003 £162m) and £15m (2003 £10m) share of profits of centrally
External turnover 4 2 held associates and is joint venture Romec. The increase of £5m in share
of profits mainly relates to Romec.
Profit rom operations 145168
Way forward
This year’s results represent a key stage in our Renewal Plan in that they show a turnaround in the financial fortunes of the Group as a whole,
from a loss making and cash consuming business to one that is now profitable forthe firs ime in four years. Particularly successful has been the
performance of our European ground-based parcel business, which delivered profits of £55m at the EBITDA level and a margin of 7%. Our
challenge next year is to address our two major loss making businesses ~ Parcelforce Worldwide and Post Ofice Limited, although both have
halved their losses over the year to some £100m, Parcelforce Worldwide needs to reduce its cost base significantly if itis to break even at an
‘operating level and Post Office Limited needs to drive up income, particulary from its new products and financial services joint venture withthe
Bank of Ireland, if itis to achieve its ambition of becoming cash generative over the next two years. The letters operation has two major
challenges to deliver - to complete its strategic ficiency programmes in order to deliver sufficient savings to help fund the cost of £340m for the
£300 per week wage package and the growing pensions burden, and to recover its quality of service to acceptable levels to meet its licence
‘commitment to deliver the quality of service our customers expect and to avoid the substantial financial costs and penalties of failure. The Group
thas made good progress but there is still a way to go before we are generating sustainable profits, at acceptable levels of margin, and healthy
cash flows
Marisa Cassoni
Group Finance Director
26 May 2004
16
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Royal Mail Holdings pic
Royal Mail Holdings plc Board
Non Executive Directors
Lei {CHAIR
Allan (51) joined the Board in April 2001 as a Non Executive Director, becoming Chairman in March 2002. He began his career with Mars
Confectionery and moved to Pedigree Petfoods as Sales Director. In 1992 he became Group Marketing Director of Asda Stores Limited, and
Chief Executive in 1996, becoming President and CEO of Wal-Mart Europe when Wal-Mart bought Asda in 1999. He left in 2000 and is currently
Chairman of BHS Limited, and Lastminute.com ple, Non Executive Chairman of Cannons Health Club Investments Limited, Non Executive
Director of Dyson Limited, BskyB, Selfridges Holdings Limited, and Business in the Community. He is also a Director of Post Office Limited, and a
member of the Nomination Committee.
D Fi
David (55) joined the Board on 1 January 2003. He was a member of the Mars Inc Operating Board from 1994 to 2001, and Joint President of
Masterfoods Europe. He has also been President of Snackfoods Europe, and held European Vice-President positions in marketing and
personnel. He is Chairman of United Biscuits Group (Investments) Limited, Chairman of Christian Salvesen and Tate & Lyle PLC. David is
Chairman of the Remuneration Committee, and a member of the Nomination Committee.
Ri HANDOVER,
Richard (58) is Chairman of WH Smith plc. He is also Chairman of the Adult Learning Inspectorate and Business in the Community Education
Leadership, and is a Non Executive Director of the Nationwide Building Society. Richard was appointed to the Board on 1 January 2003. He is
Chairman of the Nomination Committee, and a member of the Remuneration Committee.
SIRMICHAE! HODGKINSON.
Mike (60) was Chief Executive of BAA pic until retiring in June 2003. He is Board Member and Chairman of the Finance Commitee of Transport
for London, a Non Executive Director of FKI plc and the Non Executive Chairman of First Choice Holidays plc. Mike was appointed to the Board
on 1 January 2003. He is the Senior Independent Director, and a member of the Remuneration Committee. In May 2003, he was appointed
‘Chairman of Post Office Limited and he is also Chair of the Corporate and Social Responsibility Governance Committee.
iL.
John (56) has been Group Chief Executive and Deputy Chairman of the Unipart Group of companies since 1987. He was formerly a Director of
the Court of the Bank of England, and a Non Executive Director of Charter plc. He is also Vice-President of the Society of Motor Manufacturers
and Traders, and a Director of the SMMT industry Forum, Business in the Community, and Vestcave Limited. John was appointed to the Board
‘on 1 January 2003, and is a member of the Audit and Risk Committee.
Re TH i
Rosemary (52) is Group Finance Director of Bradford & Bingley plc. She joined the Board in October 1998 and left on 25 March 2006 at the end I
of her appointed term as Non Executive Director. She was Chair ofthe Audit and Risk Committee, and a member of the Remuneration
Committee. Rosemary is also @ member of the Financial Reporting Council, Financial Reporting Review Panel and The Hundred Group's main
and technical commitiees.
Bopwiciey.
Bob (43) is Chairman of Ment Lynch's European Corporate Banking Business, and a Trustee of the children’s mobility charity, Whizz-Kidz, Bob
joined the Board on 1 April 2003, and is a member of the Audit and Risk Committee and became its Chairman following the departure of
Rosemary Thome in March 2004.
Executive Directors
ELMAR TOIME (EXECUTIVE DEPUTY CHAIRMAN)
Elmar (56) joined the Company on 1 March 2003, having been Chief Executive of New Zealand Post since 1993. Prior to that he held senior
appointments in New Zealand Post in Business Planning, Marketing and Retail Operations. In 2002 he established Kiwibank, a new, ful-service
retail bark, as a wholly owned subsidiary of New Zealand Post. Elmar remains a Non Executive Director of Sky City Entertainment Group in New
Zealand. He is a Director of Post Office Limited, a member of the Corporate and Social Responsibility Governance Committee, Chair of the GLS
‘Supervisory Board and Chair of the Management Board.
MARISA CASON! (GROUP FINANCE DIRECTOR)
Marisa (62) joined the organisation in February 2001 from Britannic Assurance plo, where she had been Group Finance Director from 1998. Prior
to that she had been Finance Director of the Prudential's UK Division since 1984. She became a Non Executive Director of Sevem Trent plc in
September 2001. She is also a member of the Management Board, and Chair of the Pensions Committee, Chair of the Risk Management
Committee, a Trustee of the Royal Mail Pension Plan, and a member of the GLS Supervisory Board.
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Royal Mail Holdings ple Board (continued)
DIRE ROYAI
Jerry (52) joined the organisation in 1973 and held senior positions in Personnel and Industial Relations, line management and Strategic and
Commercial Planning. He was appointed to the Board in 1996 as Group Managing Director Strategy and Business Development. He became
Group Managing Director of Mail Services in September 2001. He also held positions as a shareholder-nominated Director of Camelot, and
Chairman of the Govemors of Kingston University. Jey left the Company on 14 November 2003.
CROZIE F EXE AL MAI PLC
‘Adam (40) joined the Company on 1 February 2003, having previously been Chief Executive of the Football Association since 2000. Before then
he had held a number of senior roles at Saatchi and Saatchi Advertising, including that of Joint Chief Executive from 1995. He is also a member
of the Management Board.
TONY MeCARTHY (GROUP DIRECTOR, PEOPLE SAT
Tony (48) joined the Company on 6 January 2003, having previously been Group Human Resources Director of BAE Systems, where he had
worked in a variety of HR roles since 1978. He is also a member of the Management Board, the Pensions Committee and the Corporate and
Social Responsibility Governance Committee.
DAVIO MILLS (CHIEF EXECUTIVE, POST OFFICE LIMITED)
David (60) joined the organisation as an Executive Director and Chief Executive of Post Office Limited on 15 April 2002. He began his career with
Midland Bank (now HSBC Bank pic) in 1962, where he conceived and established First Direct. In December 1999, he was appointed General
Manager, Personal Banking. He is currently Chairman of Post Office Financial Services, and the Employers’ Forum on Disability, a Director of
Camelot, and a Trustee of the Royal Association for Disability and Rehabilitation (RADAR). He is also a member of the Management Board.
NAN JANS (COMPANY TA
Jonathan (52) joined the organisation directly from university in 1974, Before his appointment as Company Secretary in 1999, he held a wide
‘ange of management positions throughout the Group, latterly as Network Director in Post Office Limited. He is also a member of the
Management Board and Pensions Committee, Secretary to the Audit and Risk, Remuneration and Nomination Committees.
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Directors’ Report
The Directors present the Group Accounts for Royal Mail Holdings pic. These accounts relate to the 52 weeks ended 28 March 2004 (2003 52
weeks ended 30 March 2003),
Principal activities
The Group provides a nationwide and intemational distribution service, principally of mails and parcels. The Group also provides access to a wide
Tange of financial and retail services through its network of Post Office branches across the United Kingdom (UK).
Review of the business and future developments
A review of the Group's business and future developments is presented in the Chairman's Statement, Joint Deputy Chairman's and Chief
Executives’ Statement, Annual Review and the Operating and Financial Review.
Results and dividends
The profit on ordinary activities before taxation amounted to £105m (2003 £61 1m lass). After taxation, the profit was £7m (2003 £559m loss). The
Directors do not recommend a dividend (2003 nil dividend).
Political and charitable contributions
During the year the Group made charitable contributions of £0.6m. No political contributions were made.
Policy on the payment of suppliers
The policy ofthe Company and its principal operating subsidiaries isto use their purchasing power fay. Payment terms are agreed in advance
for all major contracts. For lower value transactions, the standard payment terms included on the purchase order apply itis Company policy to
make payments within 45 days of receiving a valid invoice. The Company and its principal operating subsidiaries in the UK have sought to comply
with the DT!'s Better Payment Practice Code, Copies ofthis can be obtained from the DTI. As the Company is a non-operating company, the
creditor days are zero. The creditor days of the operating subsidiaries can be found in their accounts.
Land and buildings
In the opinion ofthe Directors, the aggregate market value of the Group's land and buildings exceeds the net book value, based upon a historic
cost accounting policy, of £1,162m by significant margin
Directors and their interests
The Directors of the Company and details of changes during the year are given on page 26. The Secretary of State appoints the Chairman; al
other Directors are appointed by the Company with the Secretary of State's consent.
HM Government s the Company's sole shareholder and accordingly, the Directors have no interest in shares of the Company. The Directors
biographical details are included on pages 17 and 18.
People
Royal Mail Group employs around 200,000 people. Our people are our strategic strength and competitive advantage.
The Group's policy is to encourage effective communication and consultation between employees and management, particulary on matters
relating to strategy, financial and economic factors that may influence the Group's performance. This is achieved through the use of an extensive
range of communication channels, including magazines, briefings, open forums and an intranet website. Employees have various bonus
schemes, significant elements of which are based on business-related targets.
We actively encourage continuous training and skill development for all employees to ensure achievement of corporate and individual objectives
Management development and training programmes have been designed to attract and retain the best people. The Group hes worked with the
Unions to introduce several innovative working practices to improve efficiency
‘An Equal Opportunities policy is maintained in all respects including disability, age, religion, colour, sex, nationality, ethnic origin, sexual
orientation, race, creed and marital status.
In 2002, our Chairman created a programme to make Royal Mail Group a ‘Great Place to Work’ and made ita priority for everyone across the
business. This was emphasised by the appointment of a Director People & Organisational Development to the Holdings and Management Boards
and has been followed by the transformation of the People & Organisational Development function to ensure people considerations will be at the
heart ofall major business decisions.
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Royal Mail Holdings plc
Directors' Report (continued)
ur people strategy will ensure we realise our potential as an organisation through the strength of our people by developing a high-performing,
sustainable culture where everyone feels involved and valued. It focuses on seven key areas:
defining, recruiting and developing the core capabilities we need to thrive in a competitive, deregulated market;
- developing a high-performance culture in which everyone understands their contribution and is motivated to achieve their full potential;
- creating interesting, meaningful jobs with more flexible working patterns;
building a fluid, innovative and adaptive organisation to improve our response to environmental and market changes;
. identifying and developing in alt our people a set of core behaviours that determine how we treat each other, our customers and our
shareholders;
recruiting, attracting and developing the leadership and management capability we need to deliver our goals; and
‘enhancing our ability to attract and retain the talent required to compete successfully.
Our intention is to underpin our people strategy with a measurement system that will objectively demonstrate the value of our people and their
contribution to the success of our business.
Currently, our key mechanism for monitoring our progress towards becoming a ‘Great Place to Work’ is the Employee Opinion Survey, launched
in January 2003. This is administered annually, on a rolling basis, across all employees. Comments from this survey have resulted in significant
improvements at a local level across our business.
Corporate Social Responsibility
Royal Mail is committed to carrying out its activities in a socially responsibfe manner in respect ofthe environment, employees, customers and
local communities. A Corporate and Social Responsibility (CSR) Governance Committee has been established which reports to the Board. It
publishes an annual report ofits activities and last year’s report won the Association of Certified Chartered Accountants’ Best First Time
Environmental Report Award, a significant recognition of progress in this area. Further details of our CSR govemance structure and activities will
be available in our 2004 CSR Report, due to be published in September 2004
Disabled employees
The Group's policy is to give full consideration to applications for employment from disabled persons. Employees who become disabled whilst
employed receive full support through the provision of training and special equipment to facilitate continued employment where practicable. The
Group provides training, career development and promotion to disabled employees wherever appropriate.
Going concern
After analysis of the financial resources available and cash flow projections for the Group, the Directors consider that it is appropriate to prepare
the financial statements on a going concern basis.
Auditors
A resolution to reappoint Ernst & Young LLP as auditors will be put fo the Annual General Meeting.
By Order of the Board
Jonathan Evans
Secretary
26 May 2004
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Corporate Governance
‘Statement by the Directors on compliance with the Combined Code
The Company recognises the importance and is committed to high standards of Corporate Governance. The Directors confirm that for the year
ended 28 March 2004 and up to the date of approval of these accounts, the Company has fully complied with the provisions of the Combined
Code (the Code), as issued by the UK Listing Authority in June 1998, in so far as they are appropriate to a public company with a single
shareholder with the exception of the membership of the Audit and Risk Committee. This arose following the resignation of Rosemary Thome on
the 25 March 2004, which resulted in the composition of this Committee falling below the recommended level of three Non Executive members.
The Company is currently seeking to fil the vacancy created by recruiting a candidate with refevant experience.
The new Combined Code, arising out of the Higgs Review of the Role and Effectiveness of Non Executive Directors, and a review of Audit
Committees led by Sir Robert Smith, came into effect during 2003 for reporting periods beginning on or after 1 November 2003. The Directors will
be reporting on compliance with the new Code in the Annual Report and Accounts published in 2005, However, as evidenced below, the
Company is already largely compliant with these requirements,
The Secretary of State also approves the remuneration of both Executive and Non Executive Directors, including all incentive plans.
The Board
The Board is responsible for setting the objectives and strategy of the Group and for monitoring performance. The Board currently comprises a
parttime Non Executive Chairman, five Executive Directors and six Non Executive Directors. The biographies of each ofthe Directors setting out
their current roles, commitments and previous experience are on pages 17 and 18. The Board usually meets monthly, and has defined those
matters that are reserved exclusively fr its consideration. During the financial year, the Board met {1 times. Individual Director attendance was:
Allan Leighton (11), Elmar Toime (11), Adam Crozier (11), Tony McCarthy (11), Marisa Cassoni (11), David Mills (10), Richard Handover (8),
David Fish (10), Mike Hodgkinson (11), Rosemary Thome (6), John Neil (11) and Bob Wigley (9 out of 10). For each scheduled meeting of the
Board, the Company Secretary, on behalf of the Chairman, collates and circulates the papers, aiming to allow sufficient time forthe Directors to
review the information provided. The Board is confident that all its members have the knowledge, talent and experience to perform the functions
required of a Director of the business, There is currently a Non Executive Director vacancy, which the Company is seeking to fil. Executive
Directors have roling 12-month contracts and Non Executive Directors are generally appointed for a three-year term.
The Board considers that each of the six Non Executive Directors is independent. This means that in the view of the Board, they have no links to
the Executive Directors and other managers, and no business or other relationship with the Company that could interfere with their judgement.
Performance evaluation of the Board, its committees and individual Directors takes place on an annual basis.
There is a clear division of responsibilities between the Chairman, the Executive Deputy Chairman and Chief Executives.
Directors may take independent professional advice in the furtherance of their duties, at the Group's expense. All Directors have access to the
advice and services of the Company Secretary, the appointment and removal of whom is a matter for the Board as a whole.
(On appointment, the Directors take part in an induction programme where they receive information about the Royal Mail Group, the role of the
Board and matters reserved for its decision, the terms of reference and membership of the principal Board committees, the Company's Corporate
Governance arrangements and the latest financial information about the Group. This is supplemented by visits to key business locations. The
‘Company engages in two-way communication with the Shareholder to discuss information on its strategy, performance and policies. The Board
receives feedback on these meetings from the Directors attending the meeting.
Outside appointments
The Remuneration Committee betieves that there are significant benefits to both the Company and the individual from Executive Directors
accepting Non Executive Directorships of companies outside of the Group, and for which the Director may retain the fees.
The following committees deal with specific aspects of the Group's Governance:
Audit and Risk Committee
The Audit and Risk Committee consists of Non Executive Directors. The Committee met four times during the year. Its membership and individual
attendance was: Rosemary Thorne (Chair) (4), John Neill (3) and Bob Wigley (4), who replaced Allan Leighton on 1 April 2003 and assumed
Chairmanship of the Committee in succession to Rosemary Thorne. The Committee, whichis assisted by the Risk Management Committee,
provides a forum for reporting by both internal and extemal auditors and is responsible for a wide range of matters including
~ monitoring the effectiveness of intemal contol;
= reviewing the half year and annual accounts before theit submission to the Board;
— advising the Board on the appointment of external aucitors and on their remuneration both for audit and non-audit work;
— discussing the nature, scope and cutcomes of the audit with extemal auditors;
~ keeping under review the independence and objectivity of the external and intemal auditors, and
agreement of the Internal Audit Plan,
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Corporate Governance (continued)
Management Board
The Executive Deputy Chairman, Elmar Toime, chairs the Management Board, which comprises alt Executive Directors of Royal Mail Holdings
‘plc and Royal Mail Group ple and certain other Senior Executives ofthe Group, The Management Board develops and monitors deployment of
the Group's strategy, annual operating plans and budgets for Board approval. t reviews operational activities, and sets polices where these are
not reserved tothe Board, The Holdings Board has delegated authority to the Investment Committees of the Management Board and Post Office
Limited to make investment decisions of up to £10m.
The members of the Management Board are
Elmar Toime, Executive Deputy Chairman " ‘Adam Crozier, Chief Executive Royal Mail Group pic
Paul Bateson, Managing Director Logistics David Burden, Chief Information Officer
Marisa Cassoni, Group Finance Director Mary Fagan, Group Corporate and Government Affairs Director
Vanessa Leeson, Managing Director Parcelforce Worldwide Tony McCarthy, Group Director People & Organisational Development
David Mills, Chief Executive Post Oifice Limited Paul Rich, Deputy Managing Director and Marketing Director UK, Royal Mail
Jonathan Evans, Company Secretary
Pensions Committee
The Pensions Committee is chaired by Marisa Cassoni. The other members are Tony McCarthy and Jonathan Evans. The Committee is
responsible for reviewing funding, benefits, scheme structure and strategic developments impacting on the Group's occupational pension
schemes. The Committee represents the Group in discussions with the Trustees of the Group's occupational pension schemes
Remuneration Committee
The Remuneration Committee reviews the Company's policy on Executive Directors’ remuneration for approval by the Board and the Secretary of
State. The Committee consists of Non Executive Directors and it met five times during the year. The membership and individual attendance was;
David Fish (Chairman) (6), Rosemary Thome (1), Mike Hodgkinson (4) and Richard Handover (4)
Nomination Committee
The Nomination Committee has the overall role of leading the process both for appointments to the Board of the Company, and for appointments
to subsidiary boards. The Committee advises the Board on succession planning for the positions of Chairman, Deputy Chairman, Chief Executive
and all other Board appointments and other senior appointments. Some appointments will be subject to the consent of the Special Shareholder,
as provided in the Articles. The Committee consists of Non Executive Directors and it met four times during the year. Its membership and
individual attendance was Richard Handover (Chairman) (4), Allan Leighton (3) and David Fish (4).
Corporate and Social Responsibility Governance Committee
The Corporate and Social Responsibility Govemiance Committee has been established reporting to the Board. Chaired by Sir Michael
Hodgkinson, the Committee acts on behalf of the Management Board to identify Corporate and Social Responsibility issues with Group-wide
impact and makes recommendations on minimum Corporate and Social Responsibilties standards and policies. The other members of the
Committee include Elmar Toime, Tony McCarthy, the Head of CSR, Heads of Environment, Health and Safety and other Senior Executives from
across the Group.
Internal Control
The Directors are responsible for the Group's system of internal contsol and risk management, as welt asthe timely review of its effectiveness.
The system is designed to manage rather than eliminate the risk of failure to achieve business objectives and can only provide reasonable but not
absolute assurance against material misstatement or oss.
The Group's approach to internal control is based on the underlying principle of ine management accountability for control and risk management
There is an ongoing process for identifying, evaluating and managing the significant risks faced by the Group in accordance with the guidance
detailed by the Turnbull Committee as part of the Code, including financial, operational and reputational isks. The Board reqularly reviews this
process. The process has been in place throughout the year and up to the date of approval of these accounts.
The Board has reviewed the effectiveness of the system of risk management and internal control. The key elements include a review of Internat
Audit Reports, regular confirmations from local management and communications from the Chair of the Audit and Risk Committee on the
outcome of Audit and Risk Committee Meetings.
The key processes of internal control and risk management include the following
Management structure
The business units have authority to manage within the limits set by the Board and within the scope of reserved powers. The Code of Business
Standards sets the principles of professionalism and integrity for our people.
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Internal Contro} (continued)
Identification and evaluation of business risks
The Directors have overall responsibilty for overseeing the process for identifying and managing risks. A process of intemal control seff-
assessment encompasses all areas of the Group. The process defines significant risks and the controls in place to manage them, and requires
‘each business unit Managing Director to undertake a formal assessment of the effectiveness of the control processes on @ quarterly basis. The
Management Board reviews the Company's key risks and ensures that mitigating actions are taken.
The Internal Audit and Risk Management function regularly reviews the management of the Group's risks. The function also undertakes reguiar
reviews of the most significant areas of risk and ensures that key controls remain in place, and reports its findings to the Audit and Risk
Committee.
\nformation and financial reporting system
‘The Group's planning, financial and reporting procedures include the review and approval of annual budgets by the Board. Performance is
monitored monthly by reference to key performance indicators, updated forecasts and information on the key risk areas. The Group operates a
‘business-wide risk management framework to support operational management in the assessment and mitigation of risk.
Audit and Risk Committee
The Committee reports to the Board and meets as a minimum on a quarterly basis to monitor and review the effectiveness of the control
‘environment. The Committee reviews the scope of work, authority and resources of the Internal Audit and Risk Management function.
Risk Management Committee
This is a sub-committee of the Audit and Risk Committee. It sets the framework for risk management within the Group and ensures integration
with strategic planning. It also facilitates regular reporting of key risks and the actions to manage the risks to a desired level. The members. ofthis
committee include Marisa Cassoni, the Head of Treasury, the Head of intemal Audit, the Head of CSR and other Senior Executives from across
the Group.
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Directors’ Remuneration Report
Information not subject to audit
This report provides the information required by the Directors’ Remuneration Report Regulations 2002 (the Regulations). The Company confirms
that throughout the year it has complied with the principles in Seofion 4 of the Combined Code on Corporate Govemance (the Code).
The Royal Mail Group is committed to achieving demanding improvements in its performance and is undergoing extensive changes to ensure
that the public are offered high quality and cost-effective services. The Board believes that an effective remuneration strategy is essential to
support these objectives by ensuring that the Group has people of the right calibre and skis, Incentives, which create an identity of interest
between employees and the Shareholder, form a vital part of tis.
The Remuneration Committee
The Board retains overall accountability for the framework and costs of executive remuneration and the material terms of the service contracts
offered to all Executive Directors, which require the consent of the Secretary of State. The Remuneration Committee's role is to develop the
remuneration policy for Executive Directors and their immediate reports and specifically, to make recommendations on their salary, benefits,
bonuses, pensions and other terms and conditions of employment. The Committee also recommends appropriate compensation on the cessation
‘of employment.
The Remuneration Committee is made up wholly of independent Non Executive Directors. Its membership is described on page 22. The
Executive Deputy Chairman, Elmar Toime, the Chief Executive of Royal Mail Group plc, Adam Crozier and the Director People & Organisational
Development, Tony McCarthy, may attend these meetings by invitation but are not present at the discussion of their own remuneration.
The Committee met on five occasions in 2003-04 and details of members’ attendance is set out on page 22.
Advice to the Remuneration Committee
The Committee may call for information and advice from inside and outside the Group. It takes advice from those independent, professional
organisations that are best able to assist its consideration of the particular topics under discussion.
During 2003-04, advice on the performance of key executives was given by the Chairman, Executive Deputy Chairman and the Chief Executive.
Extemal professional advice was given by Mercer, the Hay Group and Watson Wyatt. Internal support is primarily provided by the Director People
& Organisational Development, Tony McCarthy, advised by Emst & Young LLP, and from the Company Secretary, Jonathan Evans, Other advice
has been provided by specialists from People & Organisational Development and Finance.
During the year Watson Wyatt also advised the Company on pension and actuarial matters and Emst & Young LLP, the Group extemal auditors,
‘on taxation and regulation matters.
Remuneration policy
The Company's policy on Directors’ remuneration is that
= the overall remuneration package should be sufficiently competitive to attract and retain executives of the necessary quaiiy in a complex
business and a competitive market place, and who will deliver success for the Shareholder and high levels of customer service, safety and
environmental performance;
- a significant proportion of the remuneration package should be dependent on performance in both the short and the long-term; and
- the system of remuneration should establish an identity of interest between Senior Executives and the Shareholder.
The policy for Senior Executives takes into account pay and employment conditions elsewhere in the Group.
‘The Commitee regularly reviews the structure of the package and its competitiveness against appropriate marketplaces. The Committee aims to
ensure that the package is proportionate and effective, and that itis developed in accordance with acoepted best practice. During 2003-04, as
part of its regular review, the Committee has reviewed the current base pay and annual and long-term incentive arrangements.
The main components of remuneration
‘The main components for Executive Directors are: basic salary, an annual performance-tetated bonus, a Long-Term Incentive Plan, pension and
other benefits. The Committee believes that there should be a continuing emphasis on those elements of remuneration that are performance-
related.
Base salaries
The Committee believes that base salaries should be set at levels that are sufficient to recruit and retain high calibre executives. In making its
judgement, the Committee is informed by a variety of data aimed at making a fair comparison with enterprises ofa similar size and complexity to
Royal Mail, This data is provided by independent consultancies. Increases are recommended where the Committee believes that it is necessary
to reflect performance, increased individual responsibilities and market levels. No awards are made unless performance warrants it.
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Directors’ Remuneration Report (continued)
Performance-related, personal annual bonus
The Chairman and Executive Directors may eam a performance-related bonus for achievement of financial and customer targets. These bonuses
are based on targets set each year in line with the Renewal Plan and agreed with the Shareholder.
The maximum annual bonus for all Executive Directors, except the Executive Deputy Chairman and Chief Executive of Royal Mail Group plc, is
40% of basic pay. The Executive Deputy Chairman and Chief Executive of Royal Mail Group plc can achieve a maximum of 75%; the Non
Executive Chaimman may eam an annual performance-related bonus of £180,000. 80% of potential bonus eamings relate to financial
performance and 20% to the achievement of customer service targets. The Chief Executive of Post Office Limited can achieve a maximum of
40% of basic pay based upon achievement of targets of Post Office Limited (80%) and Group (20%). As a result of these bonus opportunities, all
Executive Directors have a substantial proportion of their annual remuneration at risk. For those with a 40% opportunity, 28% of their combined
base salary and bonus is at risk. in the case of the Executive Deputy Chairman and the Chief Executive of Royal Mail Group plc, the percentage
at risk exceeds 40%.
Long-Term Incentive Plan
The Company operates a Long-Term Incentive Plan (LTIP) fr the Executive Directors and certain other senior employees, which has been
approved by the Secretary of State for Trade and Industry. The objectives of the LTIP are to incentivise the delivery of the long-term business
goals of the Group and to reward success in achieving or exceeding these goals over a three-year period.
The LTIP consists of Annual Company Performance Awards and Bonus Awards, both of which are made at the discretion of the Remuneration
Committee. Annual Performance Awards will accrue on a sliding scale above a threshold level of financial performance of the Group, in line with
the Renewal Plan targets for profit from operations, and subject to satisfactory personal performance. The Renewal Plan operating targets have
been agreed with the Shareholder and are based on moving the Group from a level of loss from operations in 2001-02 to a targeted profit in 2004-
05.
Individual senior managers are eligible for annual awards of up to 37.5% of their basic salary ifthe Group achieves 120% ofthe agreed target.
For performance levels between 87.5% and 120% ofthe agreed targets, awards are made on a sliding scale in 5% steps. The award for on-target
performance is 25% of basic salary and no award is made for performance below 87.5% of the agreed target. The Bonus Award element of the
scheme allows the Remuneration Committee to award into the LTIP up to 50% of their performance-rlated personal annual bonus, taking into
account individual preferences.
At the end of the three-year period, the value of these annual accrued awards, together with any deferred bonus element wil be paid out in cash
and enhanced by up to 33% ifthe cumulative target over the three-year period is met. The maximum enhancement is 100% ifthe cumulative
target over the three years is exceeded by 178%. The Remuneration Committee may, i itis appropriate forthe retention of key senior managers,
permit a further period of deferral with enhancement beyond the proposed three-year period. All awards under the LTIP are subject to payments
being made under the Share in Success scheme to all our people. If no payments are made to our people under this scheme, no Annual
Performance Awards will be paid and there will be no enhancement to Bonus Awards. The Share in Success scheme is designed to pay £800 to
all our qualifying people for achieving on-target profits for the financial year ending March 2005 and up to £1,200 if stretch targets are achieved
Benefits
Benefits include the provision of company cars, health insurance, relocation expenses, plus the cash-equivalent of any benefits not taken.
Pensions
The Group has a lability to pay pensions in respect of Directors’ services and for some Executive Directors makes contributions to pension
schemes for this purpose. The Company has set up a retirement pension arrangement, which will provide benefits to Directors whose
contibutions to the Company scheme are restricted by the Inland Revenue earings cap.
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Directors’ Remuneration Report (continued)
Service contracts
The Committee's policy is that Executive Directors appointed to the Board are offered notice periods of one year. The Committee has a defined
policy on compensation and mitigation, to be applied in the event of a UK Director's contract being prematurely terminated. In such circumstances
steps would be taken to ensure that poor performance is not rewarded.
The rolling service contracts and letters of appointment of the Directors include the following terms:
Expiry date of
current service Unexpired term
Date of contract contract (months)
Chairman (Non Executive)
Allan Leighton (appointed Chairman on 25 March 25 March 2002 25 March 2005 12
2002. Initially appointed as Non Executive Director
on 2 April 2001.)
Executive Directors
Elmar Toime 1 March 2003, @ 12
‘Adam Crozier 1 February 2003 @ 2
Marisa Cassoni 1 February 2001 @ 12
Tony McCarthy 6 January 2003 0) 12
David Mills 415 April 2002 @ 2
The Non Executive Directors do not have service contracts. The dates of the current Non Executive Director appointments are as follows:
Non Executive Directors
Sir Mike Hodgkinson 4 January 2003 31 December 2005 2
David Fish 1 January 2003 31 December 2005 2
Richard Handover 1 January 2003 31 December 2005 2
John Neill 4 January 2003 31 December 2005 2
Rosemary Thorne 26 March 2002 (initial 25 March 2004 -
appointment 6 October 1998
for 3 years plus one year
extensions)
Bob Wigley 4 April 2003, 34 March 2006 24
(i) All Executive Directors have a contracted 12-month notice period from the Company; the Director may give six-months notice. The standard
term for compensation for loss of office is a maximum payment of 12-months basic salary. The Company is committed for the full three-year term
for Non Executive Directors, including the Chairman.
Non Executive Directors
The fees paid to the Non Executive Directors are determined by the Board and approved by the Shareholder. Independent market surveys are
consulted in determining them. Fees may comprise a basic fee for Board membership and, as appropriate, additional fees for the membership or
chairmanship of the Audit and Risk, Remuneration and Nomination Committees. Details of the fees are given on page 27.
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Directors’ Remuneration Report (continued)
Audited information
Directors’ remuneration, excluding pensions, was as follows:
Total nvr
conpnaion
Basic salary Performance- Awards: for loss of
dil flosdbonn des eae as
Chairman (Non Executive)
Allan Leighton’ 20,000 - - - - 20,000 186,795
Executive
Elmar Toime? 500,000 150,000 (150,000) 36,250 - 536,250 59,076
Adam Crozier 500,000 300,000 (150,000) 14,224 - 664,224 114,152
Marisa Cassoni 321,250 105,600 (52,800) 21,491 : 395,541 362,839
Jerry Cope 2 150,000 55,000 - 35,707 277,343 518,050 240,116
Tony McCarthy 300,000 96,000 (48,000) 36,258 - 384,258 211,949
David Mills 288,750 105,600 (52,800) 24,339 - 342,889 299,498
John Roberts * - a - - - . 503,744
Non Executive
Sir Michael Hodgkinson 65,987 - - : - 65,987 7615
David Fish 34,000 . . - - 34,000 8,056
Richard Handover 34,000 - - - - 34,000 7,807
John Loyd # - - - : - : 21,069
John Neill 31,500 - - - - 31,500 7615
Miles Templeman 4 - - - - : . 25,255
Rosemary Thome 33,935 - : - - 33,935 26,500
Bob Wigley 31,560 - . : - 31,560 -
Total 2004 2,290,982 842,200 (453,600) 465,269 277,343 3,092,194 -
Total 2003 1,318,724 619,848 (157,631) 182,037 119,108 - 2,082,086,
‘Allan Leighton has voluntarily decided to defer his entire perormance-related bonus entitlement of £144,000 into 2004-05. This will only be paid
ifthe four key quality of service targets (1# Class, 24 Class, Mailsort 2 and Mailsort 3) are achieved in the final quarter of 2004-05. This effectively
Converts any bonus entitlement in 2003-04 which related to profit achievement, into a quality of service bonus for next year.
7€imar Toime has voluntarily decided to defer half his £300,000 performance-related bonus entitlement amounting to £150,000. This will only be
paid ifthe four key quality of service targets (1 Class, 2» Class, Mailsort 2 and Mailsort 3) are achieved inthe final quarter of 2004-05. This
effectively converts any bonus entitlement in 2003-04 which relates to profit achievement, into a quality of service bonus for next year.
3Jemy Cope left the Company on 14 November 2003 and he retained his benefits (car and private medical insurance) until March 2004. He also
received the benefit of outplacement and legal services amounting to £29,500.
4 John Roberts relired on 31 December 2002, and the contracts of John Lioyd and Miles Templeman expired on 25 March 2003.
No fees (2003 Enil) were paid to third parties in respect of services provided by Directors.
The figures in the table represent emoluments eamed and receivable as Directors during the financial year, whenever paid. Such emoluments are
normally paid in the same financial year with the exception of the annual, performance-related bonus, which is paid in the year following that in
Which itis eared, (with the exception of the performance-elated bonus for Jerry Cope, which was paid during 2003-04). Prior year amounts have
been restated to remove the element ofthe performance-related bonus deferred into the Long-Term Incentive Plan.
(On 7 Apfil 2004, the Secretary of State for Trade and Industry, as Special Shareholder, approved the following basic salary/fee increases:
: Marisa Cassoni’s salary increased to £330,000 per annum with effect from 1 July 2003; and
- David Mills’ salary increased to £275,000 per annum with effect from 1 July 2003.
Annual performance-related bonuses for 2003-04
As agreed with the Secretary of State for Trade and industry, the Remuneration Committee has the role of authorising the annual performance-
related bonuses for the Chairman and the Executive Directors.
The details of the scheme are outlined on page 25. For 2003-04, the Remuneration Committee concluded that the financial targets set for the
Group had been met, triggering payment of 80% of maximum bonus potential Whilst some customers service measures within parts ofthe
Group had been met, for which an element of bonus would have been warranted under the terms of the scheme, the Directors have
recommended and the Remuneration Committee have agreed to waive any award for customer service for the year. For David Mills, the portion
cof his potential bonus relating to the customer service performance of Post Office Limited has been awarded as the target was fully achieved
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Directors’ Remuneration Report (continued)
Annual Performance and Bonus Awards held under the Long-Term Incentive Plan at 28 March 2004
Awards held LTIP awards during Awards held
at 30 March 2003 2003-04 at 28 March 2004
£ £ a £
Elmar Toime Nil 201,860 201,860
Adam Crozier Nil 216,219 216,219
Marisa Cassoni Nil 164,846 164,846
Jerry Cope Nit Nil Nil
Tony McCarthy Nil 125,544 125,544
David Mills Nil 144,037 141,037,
‘The amounts awarded into the Long-Term Incentive Plan in 2003-04 include the Annual Company Performance Award and the Bonus Award.
Neither the Annual Company Performance Award nor the enhancements will be paid if the target in 2004-05 is not achieved.
Non Executive Directors
The fees of the Chairman and the Non Executive Directors are agreed with the Secretary of State, and are currently £20,000 per annum and
£30,000 per annum respectively. Additional fees are paid to the Chairs (£2,500) and members (£1,500) of committees. Sir Michael Hodgkinson
receives additional fees of £37,500 for his position as Chairman of Post Office Limited.
Pensions
The Group normally offers its most senior people membership of the Royal Mail Senior Executive Pension Plan (RMSEPP). Details of the
RMSEPP are set out in note 19 to the accounts. The Pian is a funded, Inland Revenue-approved final salary occupational pension scheme. The
scheme provides for a two-thirds final pensionable salary at normal retirement age, subject to the necessary pensionable service and Inland
Revenue earings cap. Pensions in payment are increased annually in tine with Retail Prices Index (RPI), subject in some cases to a cap.
Pensions are also payable to dependants on the death ofthe member and a lump sum is payable if death in service occurs.
For Senior Executives whose membership of the RMSEPP is restricted by the eamings cap, pension provision is made by a combination of the
Company scheme and an appropriate Funded Unapproved Retirement Benefits Scheme (FURBS) or equivalent. Gross employer contribution
rates range between 25% and 55% of base pay above the earings cap. The Company has made provision for retirement pension arrangements
for Elmar Toime and Adam Crozier at a rate of 40% and at a rate of 55% for Marisa Cassoni. The increase in this provision made during the year
was £446,382 for the current year and a further £120,069 adjustment following finalisation of prior year pension arrangements. The total
provisionat the year end is £734,191 (2003 £167,740). The Company is also due to establish a reserve for the additional pension for Tony
McCarthy to provide the total retirement pension, including the pension from previous employer's pension scheme, of two-thirds of base pay at
normal retirement age. in addition, David Mills receives cash supplements of 24.2% of eamings below the pensions cap, and 40% of earnings
above, giving a total of £84,358 (2003 £80,754),
Disclosure of Directors’ pension transfer values is required under two separate requirements:
Stock Exchange Listings Rules: the requirements are the same as that disclosed in last year's accounts and are designed to place a
value on the increase in Directors’ accrued benefits during the period. The transfer value is calculated on the basis of actuarial advice
in accordance with Actuarial Guidance Note GN11 and excludes Directors’ contributions; and
- Directors’ Remuneration Report Regulations 2002: this is designed to assess the change in transfer values during the year, taking into
account movement in investment market conditions. Falls in market values may generate a negative movement in the transfer values.
The transfer values disclosed represent a potential liability of the pension plan rather than any remuneration due to the individual and cannot be
meaningfully aggregated with annual remuneration, as it is not money the individual is entitled to receive.
28
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Directors' Remuneration Report (continued)
The pension entitlements (under Stock Exchange Listing Rules) of the Directors at the year end were:
Transfer value* of
Increase in accrued increase before
Increase in accrued _ benefits during the inflation less
Accumulated accrued benefit benefits during the period (net of Directors’
Age at 28 March 2004 period* inflation)* contributions
£ £ £ £
Elmar Toime 56 3,553 3,278 3,270 44,346
‘Adam Crozier 40 48,596 3,282 3,267 13,279
Marisa Cassoni 52 111,165 3,628 617 6,797
Jerry Cope $2 119,186 33,241 33,244 344,342
Tony McCarthy 48 8.976 7,220 71” 48,989
David Mills 60. 3,223 1,685 1,621 23,274
* Excluding any increase arising from the transfer-in of pension entitlements accrued with previous employers.
Movement in
the period
‘Transfer value Plus transfers-in Transfer value less Directors’
Age = at 31 March 2003 received Subtotal at 28 March 2004 contributions
£ £ £ £ £
Elmar Toime 56 3,365, - 3,365 51,379 42,074
Adam Crozier 40 2.454 235,421 237,875 285,882 42,067
Marisa Cassoni $2 933,777 - 933,777 1,224,538 290,761
Jerry Cope 62 767,026 : 767,026 1,302,261 $35,235
Tony McCarthy 48 11,885 11,885 76,343 52,458
David Mills Ce 26,005 _ __ 26,005 58,085 26,140
Marisa Cassoni, Tony McCarthy and David Mills are also on a 1/60th basis due to the effect of retained benefits from previous employers. Ail
other Executive Directors are members of RMSEPP on a 1/30th basis.
By Order of the Board
Jonathan Evans
Secretary
26 May 2004
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Statement of Directors’ responsibilities in respect of the accounts
Company law requires the Directors to prepare aocounts for each financial year which give a true and fair view of the stale of affairs ofthe
Company and of the Group and of the profit or loss of the Group for that period.
In preparing those accounts Directors are required to:
— select suitable accounting policies and apply them consistently;
— make judgements and estimates that are reasonable and prudent; and
— _ stale whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the
accounts
Directors are responsible for ensuring that proper accounting records are Kept which disclose with reasonable accuracy, at any time, the financiat
position of the Company and of the Group, and which enable them to ensure that the accounts comply with the Companies Act 1985. Directors
are also responsible for ensuring that the assets of the Group are safeguarded and hence for taking reasonable steps for the prevention and
detection of fraud and other iregularities.
30
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Independent Auditors’ Report to the members of Royal Mail Holdings pic
‘We have audited the Group's financial statements for the year ended 28 March 2004, which comprise the Group profit and loss account, the
Group and Company balance sheets, the Group cash flow statement and associated notes, the Group statement of total recognised gains and
losses, the reconciliation of movements in Group shareholders’ funds, accounting policies and the related rotes 1 to 23. These financial
statements have been prepared on the basis of the accounting policies set out therein, We have also audited the information in the Directors’
Remuneration Report that is described as being audited.
This repor is made solely to the Company's members, as a body, in accordance with section 235 of the Companies Act 1985. Our audit work has
been undertaken so that we might state to the Company's members those matters we are required to state {o them in an Auditors’ Report and for
no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibilty to anyone other than the Company and the
Company's members as a body. for our audit work, for this repor, or for the opinions we have formed
Respective responsibilities of Directors and auditors
The Directors are responsible for preparing the accounts, including the financial statements, which are required to be prepared in accordance with
applicable United Kingdom law and accounting standards as set out in the statement of Directors’ responsibilities in respect of the accounts
Our responsibility is to audit the financial statements in accordance with relevant legal and regulatory requirements and United Kingdom Auditing
Standards.
We report to you our opinion as to whether the financial statements give a true and fair view and whether the financial statements have been
properly prepared in accordance with the Companies Act 1985. We also report to you if, in our opinion, the Directors’ Report is not consistent with
the financial statements, ifthe Company has not kept proper accounting records, if we have not received all the information and explanations we
require for our audit, oi information specified by law regarding Directors’ remuneration and transactions with the Group is not disclosed.
We read other information contained in the accounts and consider whether itis consistent withthe audited financial statements. This other
information comprises the Directors’ Report, Operating and Financial Review, Directors’ Remuneration Report and Corporate Governance
Statement, We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the
financial statements. Our responsibilities do not extend to any other information.
Basis of audit opinion
We conducted our audit in accordance with United Kingdom Auditing Standards issued by the Auditing Practices Board. An audit includes
examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of
the significant estimates and judgements made by the Directors in the preparation of the financial statements, and of whether the accounting
policies are appropriate to the Group's circumstances, consistently applied and adequately disclosed.
\We planned and performed our audit so as to obtain al the information and explanations, which we considered necessary in order to provide us
with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud
‘or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial
statements.
Opinion
In our opinion the financial statements give a true and far view of the state of affairs of the Company and of the Group as at 28 March 2004 and
of the profit of the Group for the year then ended, and the financial statements and the part ofthe remuneration report to be audited have been
properly prepared in accordance with the Companies Act 1985.
Lise Young dcr
Emst & Young LLP
Registered Auditor
London
26 May 2004
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Accounting policies
The following accounting policies apply throughout the Group:
Financial year
The financial year ends on the last Sunday in March and accordingly, these aocounts are made up to the 52 weeks ended 28 March 2004
(62 weeks ended 30 March 2003),
Basis of preparation
The accounts on pages 32 to 60 have been prepared in accordance with applicable accounting standards under the historic cost
accounting convention and the requirements of the Companies Act 1985, except for investments in Government gilt-edged securities as
described in the Current Asset Investments accounting policy.
Royal Mail Holdings plc (the Company) has not presented its own profit and loss account, as permitted by the Companies Act 1985 52303).
However, the resutts of the Company for the year are disclosed in note 16 to the accounts.
No new Financial Reporting Standards, which affect the presentation of these accounts, have been issued by the Accounting Standards Board.
These accounts have been prepared in accordance with the current accounting standard SSAP 24 Accounting for pension costs. The Group has
also adopted the transitional arrangements of the latest pensions accounting standard, FRS 17 Retirement benefits.
Royal Mail Group pc is exposed to the risk of being fined by its industry regulator and of being required to pay compensation to certain
customers, as a result of failing to meet operational targets set by the regulator in the Company's licence. The amount of such fines and
compensation will be determined by the regulator after further representations from the Company and no further information is being disclosed on
the grounds that it can be expected to prejudice the outcome of that process.
Basis of consolidation
‘The accounts consolidate the accounts of Royal Mail Holdings plc and its subsidiary undertakings.
Enlities, other than subsidiary undertakings, in which the Group has a participating interest and over whose operating and financial policies the
Group exercises a significant influence, are treated as associates or where the Group exercises joint contro, joint ventures.
The Group operates through business units that make use of each other's services in order to take advantage of Group synergies, having regard
to the mutual dependencies that exist. The interbusiness charges recognise these dependencies. The Board's policy is to maintain controls to.
ensure adherence to appropriate pricing principles.
Turnover
Turnover comprises revenue receivable directly from customers as adjusted for an assessment of prepaid stamps and meter sales stil in the
hands of the public, Turnover excludes VAT.
{tis not considered that there is a material difference between tumover by origin and destination.
Goodwill
Goodwill arising on acquisition, being the excess of the far value of consideration over the fair value of the separately identifiable net assets
acquired, is capitalised and amortised on a straight-line basis over its estimated useful economic life of 20 years. itis reviewed for impairment at
the end of the first full financial year following acquisition and thereafter, as appropriate. Further details on goodwill can be found in note 7 to the
‘accounts,
Tangible fixed assets
Tangible fixed assets are recognised at cost, including directly atibutable costs in bringing the asset into working condition fr its intended use.
Depreciation of tangible fixed assets is provided on a straight-ine basis by reference to original cost and to the remaining useful economic lives of
assets and their estimated residual values. The lives assigned to major categories of tangible fixed assets and remaining lives are:
‘Average remaining Range of asset
lives lives
Land and buildings:
freehold land not depreciated not depreciated
freehold buildings 44 years up 10 50 years
leasehold fand and buildings 9 years. the shorter ofthe period of the lease, 50 years or the estimated remaining useful life
Plant and machinery 5 years 3-15 years
Motor vehicles and trailers 3 years 1-12 years
Fixtures and equipment 2years 2-15 years
Impairment reviews of fixed assets are performed where there is an indication of impairment as defined by FRS 11 Impairment of fixed assets
‘and goodwill Further details on tangible fixed assets can be found in note 8 to the accounts.
Leasing and hire purchase
Assets acquited under finance leases or hire purchase agreements are capitalised and treated as tangible fixed assets. Depreciation is provided
accordingly and the capital element of future rentals is included within creditors. Interest on such contracts is charged to the profit and loss
‘account over the period of the contract and represents a charge that relates to the proportion ofthe capital repayments outstanding, All other
leases are regarded as operating leases and rentals are charged to the profit and loss account over the lease term.
32
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Accounting policies (continued)
Fixed asset investments.
Investments in subsidiaries, joint ventures and associates within the Company's accounts are stated at cost less provision for impairment and at
net asset value for internally formed companies.
Investments in joint ventures and associates are incorporated within the Group accounts using the gross equity method and the equity method of
accounting respectively, such that the Group's share of their profit and loss is included within the Group profit and loss account and the Group's
share of the net assets of each associate and joint venture is recorded in the Group balance sheet. Other fixed asset investments are stated at
cost less provision for impairment. Further details on fixed asset investments can be found in note 9 to the accounts.
Stocks
‘Stocks include uniforms, bicycles and stationery, and in the case of Counter Services also include retail stocks. All stocks are carried at the lower
of cost and net realisable value.
Current asset investments
Government gilt-edged securities, held as current assets, are stated at market value at the balance sheet date and the difference between cost
and market value is taken to the profit and loss account. The treatment is a departure from UK accounting rules, which stipulate that unrealised
profits be credited to a revaluation reserve, In the opinion of the Directors, the treatment adopted is necessary to present a true and fair view. The
accounting treatment adopted represents a fairer reflection of the investment return. All other current asset investments are treated according to
standard UK accounting rules. Other current asset investments mainly comprise short-term deposits with the National Loans Fund or Local
Authorities all of which are held at historic cost.
Further details on current asset investments can be found in note 11 to the accounts.
Deferred tax
Deferred tax is generally provided in full on timing differences at the balance sheet date, at rates expected to apply when the tax liability (or asset)
crystallises based on substantially enacted tax rates and law. Timing differences arise from the inclusion of items of income and expenditure in
taxation computations in periods different from those in which they are included in the accounts.
Deferred tax is not recognised in the following instances:
- _ ongains on disposal of fixed assets where, on the basis of available evidence, it is more likely than not that the taxable gain wil be rolled
‘over into replacement assets and charged to tax only when there is a commitment to dispose of those replacement assets;
= onunremitted eamings of subsidiaries and associates where there is no commitment to remit those eamings; and
- deferred tax assets are recognised only to the extent that the Directors consider that it is more likely than not that there will be suitable
taxable profits from which the future reversal ofthe underlying timing differences can be deducted.
Deferred tax assets and liabilities are not discounted. Further details of deferred tax can be found in notes 6 and 16 to the accounts,
Pensions and other post-retirement benefits
Membership of occupational pension schemes is open to most permanent UK employees of the Group. All members of defined benefit schemes
are contracted out of the eamings-related part of the State pension scheme, Overseas subsidiaries make separate arrangements fr the provision
of pensions and other post-retirement benefits.
The defined benefit schemes are financed on the basis that the combined current service contributions payable by the employees and employer
are sufficient to cover the cost ofthe benefits which are expected fo accrue in the future to members. The charge to the profit and loss account is
calculated so 2s to spread variations from regular cost and to amortse the surplus or deficit over the expected remaining service lives of the
employees. The assets of the schemes are held in separate trustee administered funds.
Valuations of the defined benefit schemes are carried out by independent professionally qualified actuaries at intervals not normally exceeding
three years, as determined by the Trustees. The accounting charge for pensions reflects best estimate assumptions as required by SSAP 24,
whereas the funding arrangements use a more cautious assumption for investment retums to assess the cash position of the Royal Mail Pension
Plan (RMPP), This results in the cash payments being higher than the accounts charge for the RMPP. The difference is dealt with through the
long-term pensions prepayment in the balance sheet. Further details on pensions and other retirement benefits can be found in note 19 o the
accounts.
Research and development
Expenditure on research and development is written off in the year itis incurred. Further details can be found in note 3 to the accounts.
Foreign currencies
Transactions in foreign currencies are recorded at the rate ruling atthe date of the transaction (or at the contracted rate if the transaction is
covered by a forward foreign currency contract). Monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of
exchange ruling atthe balance sheet date (or the appropriate forward contract rate). All differences are taken to the profit and loss account with
the exception of differences on foreign currency borrowings, which are used to finance or provide a hedge against foreign equity investments.
These are taken directly to reserves together withthe exchange difference on the carying amount of the related investments. Tax charges and
credits attributable to exchange differences on those borrowings are also dealt with in reserves. The accounts of overseas subsidiary
undertakings are translated at the rate of exchange ruling atthe balance sheet date and the differences arising from the translation of opening net
investments are taken to reserves.
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Royal Mail Holdings pic
Accounting policies (continued)
Financial instruments
The Group uses forward foreign currency contracts to reduce exposure to foreign exchange rates. The Group's policy is that its derivative
instruments qualify for hedge accounting when the following criteria are met
the instrument must be related to a foreign currency asset or liability that is probable and whose characteristics have been identified;
it must involve the same currency as the hedged item; and
= itmust reduce the risk of foreign currency movements on the Group's operations.
The contracted rates are used to record the hedged item. As a result, gains and losses are offset against the foreign exchange gains or losses on
the related financial assets and liabilities. Where the instrument is used to hedge a committed or probable future transaction, gains or losses are
‘not recognised until the transaction occurs.
In addition, over-the-counter derivative products are used to manage both the commodity and foreign exchange risks associated with the fuel
procurement policy. Further details on financial instruments can be found in note 18 to the accounts.
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Group profit and loss account
for the years ended 28 March 2004 and 30 March 2003
2004 2003
woo Re
‘Turover: Group and share of joint ventures’
tumover 8,768 : 8,768 8,378 : 8378
Less: share of joint ventures’ tumover (135) 2 (135) (79) ~ (79)
Turnover 1 8,633 : 8,633 8,299 : 8,299
Costs (8.582) 4) (8.646) (8,280) (697) (8977)
Staff costs 24 (4,888) (68) (4,956) (4,632) (564) (5,196)
Depreciation and amortisation 3 (195) - (195) (233) : (233)
Impairment wa . at) (41) . (97) (97)
Other operating charges 34 (3.499) 45 (3454) (3.415) (36) (3.451)
Group operating profiti(loss) 18 st 64) (13) 19 (697) (678)
Share of operating proftin joint ventures 2 : 2B 18 - 18
Share of operating proft in associates 4 : 4 12 : 12
‘Urnpairment of goodwill in associates 4 : : : : (24) (24)
Total operating profiti(loss): Group and share of
joint ventures and associates 88 (64) 4 49 (721) (672)
Net profit on disposal of tangible fixed assets 4 : 67 or : 4 4
(Loss)profit on disposal of subsidiary undertaking 4 : @ @ > 2 2
Profit(loss) on ordinary activities before interest 88 : 88 49 (695) (646)
Net interest receivable 5 id : w 35 : 35
Profiti(loss) on ordinary activities before taxation 105 - 105 84 (695) (611)
Taxation 6 (98) 52
Profitloss) retained for the financial year 16 ul (559)
35
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Group statement of total recognised gains and losses
for the years ended 28 March 2004 and 30 March 2003,
2004 2003
Note tm £m
Loss for the financial year excluding share of profit in joint ventures and
associates (30) (688)
‘Share of joint ventures’ proft forthe year B 8
Share of associates’ profit for the year 4 11
Profit(loss) for the financial year 7 (658)
Exchange differences on retranslation of net assets (i) 40
Unrealised gain on joint venture transaction 9 46 2
Total recognised gains/(losses) for the financial year 50 (517)
There is no statement of historical cost profits and losses as the accounts are produced under the historic cost accounting convention.
Reconciliation of movements in Group shareholders’ funds
2004 2003
Note £m £m
Opening shareholders’ funds 16 2,088 2,605
Total recognised gainsi/{losses) for the financial year (see above) 50 (617)
Closing shareholders’ funds 16 2,438 2,088
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Balance sheets
at 28 March 2004 and 30 March 2003
Group Company
2004 2003 2006 2003
Notes, £m £m £m £m
Fixed assets
Intangible assets 7 123 186
Tangible assets 8 1,550 1,648 - -
Investments: 9 138, 83 2146 2,180
Share of gross assets of int ventures 139 64 :
Share of gross liabilities of joint ventures (64) (64) ~
‘Share of net assets of joint ventures 1S 10 .
Investments in associates 6 62 -
Other investments 7 "1 2,146 2,180
Total fixed assets 4,811 4,887 2,146 2,180
Current assets
Stocks 2 8 :
Debtors - receivable within one year 10 4471 1,296 -
Debtors - receivable beyond one year 10 784 742 .
Investments "1 999 1,250 :
Cash at bank and in hand _ 1,049 1,060 * ~
4,035 4,354 :
Creditors - amounts falling due within
‘one year 2 (2.590) (2,566) :
Net current assets 41,445 1,785 _
Total assets less current liabilities 3,256 3,672 2,146 2,180
Creditors - amounts falling due after
more than one year 13 (643) (618) : :
Provisions for liabilities and charges 15 (575) (968) : 2
Net assets 2438 2,088 2,146 2.180
Capital and reserves
Called up share capital 7 : -
Profit and loss account 16 999 218 2,146 2,180
Malis Reserve 16 765 4,853
Rural Network Reserve: 16 314 - -
Other reserves. _ 16 _ 68 7 :
Shareholders’ funds 2,438 2,088 2,146 2.180
‘The accounts on pages 32 fo 60 were approved by the Board of Directors on 26 May 2004 and signed on its behalf by
37
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Group cash flow statement
for the years ended 28 March 2004 and 30 March 2003
2004 2003
Reconciliation of operating profit to net cash outflow from operating activities Notes £m £m
Group operating profit before exceptional items © st 19
Depreciation and amortisation 195 233
Changes in working capital and other non-cash items: 5 (396)
Decrease in stock 1 9
Deorease/(increase) in debtors 42 (573)
Increase in creditors 40 198
(DecreaseV/increase in client balances (287) 67
Decrease in provisions 174 (7
Cash payments in respect of operating exceptional items (b) (412) (239)
Net cash outflow from operating activities (241) (383)
Group cash flow statement
Net cash outflow from operating activities (241) (383)
Dividends received from joint ventures and associates 24 7_
Dividends received from joint ventures 6
Dividends received from associates iH 7
Retums on investments and servicing of finance 7 34
Interest received 82 69
Interest paid (35) (38)
Taxation
Corporation tax recovered 12 7
Capital expenditure and financial investment (56) (153)
Purchase of intangible fixed assets (2)
Purchase of tangible fixed assets (158) (221)
Purchase of fixed asset investments (5) - I
Sale of tangible fixed assets 100 58
Sale of fixed asset investments 9 4
Acquisitions and disposals 25 2)
Purchase of interest in joint ventures and associates 4)
Payment of deferred consideration in respect of prior years’ acquisitions ®
Disposal of subsidiary undertaking 29 7}
Cash outflow before use of liquid resources and financing (222) (486)
Management of liquid resources
Net movement in current asset investments _ (a) 254 550
Net cash inflow before financing 2 64
Financing (40) (64)
Repayment of finance teases and hire purchase agreements @ (32) 7)
New long-term loans (a) 83
Repayment of loans @) (8) 7)
(DecreaseVincrease in cash in the period (14) 3
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Group cash flow statement (continued)
for the years ended 28 March 2004 and 30 March 2003
Reconciliation of net cash flow to movement in net funds (see note (a))
2004 2003
£m £m
(DecreaseVincrease in cash in the period (tt) 3
Repayment of finance leases and hire purchase agreements 32 37
New long-term loans : (63)
Repayment of loans 8 7
Cash flow from management of liquid resources (nel movement in current asset investments) (251) (550)
Change in net funds resulting from cash flows (222) (486)
Exchange diferences : 1
Movement in net funds in the period (222) (485)
Opening net funds 4.873 2,158
Closing net funds: 1,451 1,673
Notes to the cash flow statement
(2) Analysis of net funds
At Other At
34 March non-cash (28 March
2008 Cash flows movements 2004
£m £m fm em
Cash at bank and in hand 1,060 ty : 41,049
Loans due beyond one year 615) 8 : (507)
Loans due within one year (53) - : 3)
Finance leases and hire purchase agreements due beyond one year 35) 32 1 @
Finance leases and hire purchase agreements due within one year (34) (i) (35)
Current asset investments 4,250 (251) 999
Total 4673 (222) : 1451
{b) Cash flows relating to operating exceptional items charged in both current and prior years
The net cash outflows relating to the above were as follows:
2004 2003
Net cash outflow relating to: £m fm
Current year exceptional items 3 29
Prior year exceptional tems 409 210
Total M2 239
The net cash outlow of £412m comprises the £328m in respect of exceptional provisions (as shown in note 15) and a further £63m relating to the settlement of
the prior year pensions redundancy liability, which was recorded within creditors.
(c) Group operating loss of £13m (2003 £678m loss) includes £64m of operating exceptional charges (2003 £697m charge) which have been added back to
derive a Group operating profit before exceptional items of £54m (2003 £19m),
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Notes to the accounts
4 Segmental information
The Group discloses its segmented results as required by SSAP 25 into the two classes of business: Mails and Parcels, and Counter Services. Inthe following
analyses, the costs of the Group's corporate activities have been allocated, which means that the results disclosed below may be different from the reported
results of each segment within their own statutory accounts
Analysis of tumover by cass of business 2004 2003
asrestted
fn fm
Tumover Turnover
Total between Eterral Tos between Enteral
tumover is___turnover semover tunover
Mal and Parcels ner 2) 7886 718 08) 7.400
Couns Services 4278 20) sm. 1366 (zen) 899
Tota 2986 32) 609 604 (205) 8209
-Anatysis of operating proftioes) by class of business 2006 2003
ssresaed
fon fm
Betore Before
Opecaonal Pensions exceptional Exceptional peratonal Pensions —excepfonal-«——Excaponal
sctivty etc items thems Total ctty sus ems ies Tod
Mais and Parcels mes (2) 1m «oy 1m 9) Eo 4 19 (298)
‘cout Services (1m ay 39) ey sy am 2 (198) (en (382)
Pensions adustment 132) 42 : : : 245 (245)
eoup operaing profess) st : st (4) 13) 19 a 19 foul (678)
Analysis of tumover and operating profiiions)by geographic area oF oxigin 204 209
——2perating pros) _ Dera profess) __
Before Aer Bele He
Extomat exceptional exceptional Extema —esceptonal —_excepbonat
tumover tome tans ‘eenover tens tems
fm én fn fm fm fn
United Kingdom 1798 2 ) 7481 2 7)
Rest of Wr (icp Europe) a8 Fa s 818 z
Tot 2.933 st 3) 8.209 19 (ore)
‘nays of nt assotulabities) by class of business 2004 2003
rested
en fn
ais and Paces sar 228
Courter Serioes 160 font
2007 2016
Share of nt ase oft vennes % 0
Share of et assets of associates . __ 8 @
Tota 2138 2008
Allnet assets other than £381m (2003 £404m) were located in the United Kingdom with the balance principally in Europe.
CComparatives have been restated to reflect the changes in organisational structures and the impact of fully allocating the ‘Other’ segment (2003: £26m operating loss) to
tundertying operational segments, The overall net impact of these two changes is to inorease the 2003 operating loss before and after exceptional items for Mails and
Parcels by £17m and Counter Services by £9m.
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2 Staff costs and numbers 2004 2003
£m £m
Wages and salaries 4,226 4,628
Social security costs 301 303
Pension costs (note 19) 429 265
Total 4956 5,196
Aloan to one officer totalling £2,113 (2003 - one officer £3,818) was outstanding at the end of the year.
Staff costs include £68m (£14m wages and salaries and £54m pension costs), which is included in operating exceptional items (2003 £564m,
£364m and £200m respectively).
Staff numbers, calculated on a headcount basis, were:
Period end employees ‘Average employees
2004 2003 2004 2003
UK Mails and Parcels 189,221 198,552 194,606 202,134
UK Counter Services 13,115, 14,260 13,590 14,568
‘UK total 202,336 212,812 208,196 216,702
Overseas 9,974 40,497 10,442 10,541
Group total 212,310 223,309 218,638 227,243
‘There were 13,575 subpostmasters at the end of the year (2003 14,567).
Details of Directors’ remuneration and pension entitlements are included in the Directors’ Remuneration Report.
3 Operating profit(loss) 2004 2003
£m £m
Group operating profitloss) is stated after charging:
Depreciation and amortisation: 195 233
Depreciation of owned tangible fixed assets 161 196
Depreciation of tangible fixed assets held under finance leases and hire purchase agreements 4 a
Amortisation of intangible fixed assets 40 40
Exceptional impairment write-down: “1 7
Tangible fixed assets 7 90
Intangible fixed assets 24 7
‘Subpostmasters’ costs 587 875
Research and development expenditure 3 5
Operating lease charges: 207 202
Land and buildings 119 113
Vehicles and equipment 88 89
Regulatory body costs: 47 16
Postcomm 7 6
Postwatch 40 10
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3 Operating profit/(loss) (continued)
Auditors’ remuneration 2004 2003
£000 £000
Audit of statutory accounts: 1,488 1,548
Audit of regulatory accounts 502 323
Further assurance services 35 1,037
‘Tax services: m5 658
Compliance services 493
Advisory services 22
Other services: 63
Financial information technology - Kid
Other services 63 298
Total auditors’ remuneration _ 3,143 3.901
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4 Exceptional items
Exceptional tems comprise operating exceptional items, which are recorded within the Group operating profi{loss), and non-operating exceptional
items, which are recorded below Group operating proft(loss) inthe profit and loss account. Both are further highlighted below:
2004 2003
£m £m
Operating exceptional items:
Impairment of tangible fixed assets (17) a
Impairment of goodwill relating to subsidiaries 4) (90)
Provision for onerous contracts relating to surplus properties (17) (18)
Provision for Renewal Plan restructuring 6) (882)
(#4) (697)
Non-operating exceptional items:
Impairment of goodwill relating to associates . {24)
Net profit on disposal of tangible fixed assets oT ray
{Loss)/profit on disposal of subsidiary undertaking _ 3) 2
Total A (695)
‘The £64m of operating exceptional costs comprises impairments of tangible and intangible fixed assets of £41m (2003 £97m), £17m of costs relating to
‘onerous contracts for surplus leasehold properties (2003 £ 18m) and £6m charges relating to the Group-wide Renewal Pian (2003 £582m). The 86m
charges comprise a £68m charge in respect of employee-related costs and a £62m release in provision in respect of other operating costs. Furthermore,
this £62m release and the £17m onerous property contracts costs above comprise the £45m shown separately as other operating charges in the profit
and loss account.
‘The £64m of non-operating exceptional profit (2003 £2m) comprises £67m profit arising from the sale of a number of properties (2003 £24m), Ent forthe
impairment of goodwill in associates (2003 £24m) and a £3m loss relating to business disposals (2003 £2m prof, inthis instance the outsourcing of IT
operations and the associated disposal of CSC Business Systems Limited (formerly RM Business Systems Limited).
The tax charge/(credit) on non-operating exceptional items were:
2004 2003
ém £m
Disposal of CSC Business Systems Limited 39 :
Disposal of tangible fixed assets 6) -
Total tax charge on non-operating exceptional items 33
‘5 Net interest receivable
2004 2003
&m £m
Interest payable on bank loans and overdrafts : 3)
Interest payable on other loans a (35) (29)
Total interest payable 35) (34)
Interest receivable on investments $2 69
Total net interest receivable 7 35
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6 Taxation
(a) Tax on profitiloss) on ordinary activities
The tax chargel(credit) is made up as follows:
2004 2003
Current tax £m £m
Amount receivable for surrender of lasses to associates and joint ventures in respect of consortium relief (10) (10)
Tax underi(over)-provided in previous years . 4 @
UK current tax ® (17)
Foreign current tax 6 2
Group current tax : (15)
‘Amount payable by joint ventures in respect of consortium relief 6 5
Amount payable by associates in respect of consortium relief 4 5
Share of joint ventures’ current tax payable 1 -
Share of associates’ current tax payable 1 1
Total current tax (see table below) 12 4)
Total deferred tax (note 15) 86 (48)
Total taxation 98 (52)
(b) Factors affecting the current tax charge/(credit)
The tax assessed for the year differs from the standard rate of corporation tax in the UK of 30% (2003 30%). The differences are explained below:
2004 2003
£m £m
Profil(loss) on ordinary activities before tax 105 (611)
Profi{toss) on ordinary activities multiplied by the standard rate of corporation tax in the UK of 30% (2003 30%) 2 (183)
Deferred relief for asset depreciation and impairment 2 52
Deferredi(accelerated) relief for pension contributions 58 (180)
Provisions not deductible until incurred (98) 88
Impairment and amortisation of goodwill 7 5
Losses and other reliefs not utiised 9 196
Usilisation of prior year losses a) -
Other 12 18
Total current tax (see table above) 12 4)
Pensions contributions qualify for tax refi in the year in which they are paid. Charges tothe profit and loss account in respect of pensions exceeded
contributions paid in the year.
(c) Factors that may affect future tax charges
‘The Group has unrecognised deferred tax assets of £144m (2003 £146m) relating to tax losses in subsidiaries that are available to offset against future
taxable profits of those companies. The Group has unrecognised deferred tax assets of £178m (2003 £158m) relating mainly to fixed asset timing
differences.
Deferred tax assets have not been recognised in respect of these items, as they have arisen in companies that are loss-making and the losses, in
particular, may not be used fo offset future taxable profits elsewhere in the Group. The unrecognised deferred tax assets will be recognised in future to
the extent that suitable taxable profits are expected to become available.
‘The Group has capital losses carried forward, the tax effect of which is approximately £12m (2003 £12m). These may be set-off in future years against
capital gains. The Group has rolled over capital gains, the effect of which totals £88m (2003 £75m). It is expected that gains on tangible fixed assets sold
in the year wil be fully rolled over in due course.
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7 Intangible fixed assets
Group
Goodwill Other Total
cost £m £m £m
At31 March 2003 482 19 501
Exchange movement ” . @)
Acquisition of business 4 : 4
At 28 March 2004 479 19 498
AMORTISATION
At31 March 2003 M3 2 345
Exchange movement (4) - (4)
Charge for the year 9g 4 10
Impairment 24 : 24
‘At28 March 2004 _ e742 _. 375
NET BOOK AMOUNT
At 28 March 2004 107 16 123
At31 March 2003 439 17 156
Other intangible fixed assets include the value of master franchise licences relating to parcel delivery in Italy.
8 Tangible fixed assets
Group Land and buildings
Long 3 Plant and Motor Fixtures and
Freehold leasehold leasehold machinery vehicles ‘equipment Total
cost £m im £m fm £m £m tm
At31 March 2003 1,557 232 422 666 246 856 3,979
Exchange movements - - - (1) . a) (2)
Reclassification (6) 13 (20) 18 - 6) :
Additions 12 1 76 50 13 13 165
Disposals (68) 2 (24) (40) (69) ” (197)
Disposal of business (17) : : : : (7) (94)
At28 March 2004 1,488 244 457 693 190 779 3851
ACCUMULATED DEPRECIATION
At31 March 2003 687 128 195, 336 176 809 2.331
Exchange movements . - ) - O) 2
Reclassification (11) 2 @ 12 - 6 -
Charge for the year 48 10 2 67 18 10 185
Impairment 4 - 7 . 4 2 7
Disposals (35) (1) (22) (39) (62) (6) (165)
Disposal of business (8) : : : (87) (65)
At 28 March 2004 685 4139 203 375 136, 763 2,301
NET BOOK AMOUNT
At28 March 2004 803 405 254 318 54 16 1,550
At34 March 2003 870 104 227 330 70 47 1,648
Depreciation rates are disclosed within the accounting policies. No depreciation is provided on freehold land, which represents £156m (2003 £151m) of
the total cost of freehold properties. The net book value of the Group's tangible fixed assets held under hire purchase contracts and finance leases
amounts to £86m (2003 £110m).
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9 Fixed asset investments
Group
Share of (lossy
profit
ALB retained by joint AL28
March ventures! March
2003 Additions Disposals Reclassification Amortisation associates 2004
tm fm £m tm. fm tm tm
Net investments in associates 62 _ : > : __3) (3) 56
Share of net assets in associates a - - (7) - 3) uM
Goodwill relating to associates 2 : = 7 (3) : 25
Net investment in joint ventures 10 50 - : a 15 75
‘Share of net assets in joint ventures 10 50 - (2) : 15 73
Goodwill relating to joint ventures - : : 2 5 : 2
Other investments {Local Authority deposits) i 5 (9) ~ ~ =
Total 83 58 (9) = Q) 12 138
In March 2004, the Group signed a joint venture agreement with the Bank of Ireland to seit Post Office branded financial service products such as.
‘personal loans, motor insurance, credit cards and savings accounts, This arrangement will initally run for ten years, As part of the transaction, the Bank
of lreland invested £100m to enable the establishment of the joint venture - Midasgrange Limited - and to provide the core infrastructure and start-up
costs. The Group's share of the investment, recorded as additions to net assets in joint ventures amounts to £50m. Other additions comprise £5m
relating to Local Authority deposits.
Details of principal joint ventures and associates are given in note 23.
Company 2006 2003
£m £m
At 31 March 2003 2,180 2,725
Change in net asset vaiue of subsidiary undertaking (4) (545)
‘At28 March 2004 2146 2,180
‘The fixed asset investment of the Company represents the net asset value of its investment in an internally formed subsidiary undertaking.
10 Debtors
2004 2003
&m £m
Receivable within one year:
Trade debtors 673 695
Pension prepayment 128 400
Other prepayments and accrued income 370 204
Total 4,171 4,296
2004 2003
. &m £m
Receivable beyond one year:
Pension prepayment m7 707
Other debtors 7 14 5
Total 784 712
The pension prepayment beyond one year relates to the cumulative excess of the amounts funded in the Group's defined benefit schemes over the
amounts charged to the consolidated profit and loss account. The amount within one year represents prepaid contributions.
Other long-term debtors mainly represent amounts payable from employees in respect ofthe home computing intiaive launched in Novernbes 2002,
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11 Current asset investments
2004 2003
£m £m
Government gitt-edged securities 134 253
‘Goverment short-term deposits (National Loans Fund} 583 913
Other deposits 285 84
Total 999 1,250
In accordance with the relevant accounting policy, current asset investments are stated af market value. The difference between cost and market value
taken fo the profit and loss account for these investments was a loss of £4m (2003 £1m).
‘The above investments include deposits of £549m, which are subject to a charge as security against the loans from the Department of Trade and
Industry (DTI). The balance of investments are restricted in their use to that permissible by the section 72 order, which created the Mails Reserve (note
16).
12 Creditors — amounts falling due within one year
2004 2008
£m £m
Loans (note 14) 3 83
Obligations under finance leases and hire purchase agreements (note 14) 35 4
Client services balances 767 1.054
Trade creditors and accruals 1,377 1,026
Advance customer payments 24 253
Corporation tax 10 12
Other taxation and social security 106 142
Other creditors 18 22
Total 2,590 2,566.
The Group, via its Post Office Limited subsidiary, receives and disburses cash on behalf of Govemment agencies and other clients to customers through
its Post Office branch network. Amounts owed to these parties are separately shown as client service balances above. The level of cash held and the
felated creditors can vary significantly at each balance sheet date.
13 Creditors - amounts falling due after more than one year
2004 2003
__ ém £m
Loans (nate 14) S07 515
Obligations under finance leases and hire purchase agreements (note 14) 2 5
Deferred consideration (note 14) 2
Pension oreditor : 68
Other 32
Total 543 618
Other long-term creditors represent £10m payable to the leasing company in respect of the home computing initiative launched in November 2003 and
£22m in respect of deferred income.
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14 Borrowings including loans, finance leases, hire purchase agreements and deferred consideration
ot ws
a Tas
na wane
Se _ oda aa
Pla tui tore agama erst Ta
rs = oS a fs
‘Amounts falling due in:
One year or less or on demand 53 KJ 88 53 Ky 87
More than one year 507 2 541 515 36 550,
More than one year but not more than two years 1 - 3 1 32 B
More than two years but not more than five years - i 1 5 1 6
More than five years 506, 4 507 509 2 511
Total 560 Eid 599 568 69 637,
Analysis of loans and facilities
Average Average
Further Total ‘maturity,
Loan facility facility range date
em £m £m. % Year
DTI loans to Royal Mail Group pic 500 1,044 1,544 58 2023
HM Treasury loans to Post Office Limited 50 1,100 4,150 44 2004
Committed facilities 550 2,144 2,694
Miscellaneous long-term bank loans taken out by overseas subsidiaries 40 : 40 3.36-7.35. 2009
Total 560 2444 2,704
‘At28 March 2004, the Group borrowing limit under section 115(6)(b) of the Postal Services Act 2000 was £5bn (2003 £5bn) subject to Government
agreement.
‘The Group has various borrowing facilities available to it. The undrawn committed facilities available at 28 March 2004, in respect of which all conditions
precedent had been met at that date, are as follows:
2004 2003
£m £m
Expiring in one year or fess, 500
Expiting in more than one year but not more than two years : 500
Expiring in more than two years 4,644 494
Total 2444 994
‘The undrawn amounts comprise multiple loan facilities amounting to £2,144m, of which £550m had been utilised at 28 March 2004. The £500m loan is
secured by way of a fixed and floating charge on various assets of the Group. The £50m loan is secured against cash and near cash items.
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15 Provisions for liabilities and charges
Charged
at Inthe Usiised Usiised at
4 March 2008 your non-cash eath = 2B March 2004
fm em fm m em
Mails and Parcels 865, 24 (159) (301) 423
Counter Services ci 9 (15) (35) »
Deferred tax 10 86. = - 96
Total 966. 149. (174) (336) 575
The Mails and Parcels provision includes amounts relating to redundancy and other non-redundancy items forthe following major change projects:
Single Daily Delivery, Mall Centre Efficiency Review, Transport Review, Parcelforce Workdwide restructuring and managetial overhead reduction. During
the year £14m was charged to exceptional tems and £ 10m to other operating costs. A further £29m was ullised to write-down fixed assets and £130
transferred to creditors due within one year, the latter representing amounts payable to employees who had an agreed leaving date under voluntary
redundancy but who remained in the business at the year end, together with a contractual lability now agreed to be seted in 2004-05, £360m ofthis
provision is expected to be utilised in 2004-05 and the remainder over the following two to three years, except for £46m relating to onerous property
contracts, which is expected to be utilised over a longer period.
Counter Services provisions include amounts relating to Network Reinvention and its share of the managerial overhead reduction. During the year £m
was charged to exceptional costs. A further £15m was transferred to creditors due within one year, representing amounts payable to employees who had
‘accepted voluntary redundancy but who remained in the business at the year end. £48m is expected to be ulilised in 2004-05 and the remainder in the
following year.
The cash ulilisation of £336m includes £329m of spend relating to exceptional rationalisation. Total cash spend in the year relating to exceptional
ratonalistion is shown in the cash flow statement
Included within provisions is £53m (2003 £40m) relating to onerous property contracts, all of which relate to Mails and Parcels.
The deferred tax provision comprises:
2004 2003
£m £m
Deferred capital allowances 2 43
Pension contributions timing differences (250) (338)
Provisions 98 197
Losses 3 88
Total (96) (10)
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16 Reserves
Group Distributable reserves
and joss 2004
‘secourt Mails, ‘Rural Network, Other ‘Total
o * a =
At31 March 2003 218 1,853 : 7 2,088
Profit for the financial year 7 . 7
Transfer of Mails Reserve 671 (1,121) 450 .
Transfer of Rural Network Reserve 146, . (146) - -
Transfer of interest income (40) 33 7
Unrealised gain on joint venture transaction . 46 46
Exchange differences 8) - _ @.
At 28 March 2004 999 765 31 63 2,138
‘The Mails Reserve was created in Royal Mail Group plc on 3 February 2003, following directions issued by the Secretary of State for Trade and Industry
under section 72 of the Postal Services Act 2000. The amounts allocated to the reserve are to be applied as if they were profits available for distribution
and they are to be principally used to provide financial assistance to Post Office Limited and security for loans to Royal Mail Group pic.
During the period, £1,121m of the Mails Reserve has been utilised for the provision of financial assistance to Post Office Limited, inciuding £450m to set
up the Rural Network Reserve to provide funding for the rural network of Post Offices for three years, and £671m to cover the write-off of Post Office
Limited's intercompany debt to Royal Mail Group pic. The Rural Network Reserve has been reduced by £146m, representing the financing required
during the period in maintaining the rural network of Post Offices.
The transfer of interest relates to income recorded in the profit and loss account, which has been eamed on the assets that support the Mails and Rural
Network Reserves.
‘The unrealised gain on the joint venture transaction relates to the joint venture agreement with the Bank of Ireland, which is fully explained in note 9.
Company Profit and ios 2004
at
a en
At31 March 2003 2,180 2,180
Loss for the year (34) (34)
At 28 March 2004 2.446 2,446
The loss dealt with in the accounts ofthe parent company was £34m (2003 £545m). The Company is a non-trading company and the loss for the
financial year represents the net asset value adjustment arising as a resut ofthe accounting policy on Fixed Asset Investments. This states that the
investments in intemally formed subsidiary undertakings are stated at net asset value. Accordingly, the Company's loss for the financial year is
eliminated in the Group Accounts and does not therefore form part of the Group results. Further details can be found in note 9.
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17 Share capital
Authorised 2004 2003
£ £
Ordinary shares of £1 each 100,000 100,000
Special Rights Redeemable Preference Share (Special Share) of £1 each 1 1
Total 400,001 100,001
Allotted and called up 2004 2003
£ £
Ordinary shares of £1 each 50,000 50,000
Special Rights Redeemable Preference Share (Special Share) of £1 each 1 1
Total 50,001 50,001
‘The Special Share can be redeemed at any time by its holder (the Special Shareholder). The Company cannot redeem the Special Share without the
prior consent of the Special Shareholder. No premium is payable on redemption. Subject fo, and in accordance with, the provisions of the Postal
‘Services Act 2000, the Special Shareholder can at any time require the Directors to declare and pay a dividend to the Special Shareholder or its
nominee.
On distribution in a winding up of the Company, the Special Shareholder is entitled to repayment of the capital paid up on the Special Share in priority to
any repayment of capital to any other member.
‘The Special Share does not cary any rights to vote.
In accordance with section 63(7) of the Postal Services Act 2000, for the purposes of the Companies Act 1985, the shares issued to the Special
‘Shareholder shall be treated as if their nominal value had been fully paid up.
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18 Derivatives and other financial instruments,
‘An explanation of the Group's treasury policy and controls is included in the Operating and Financial Review. The role of financial instruments in creating
‘or changing the risks the Group faces in its activi is also explained in that section
Financial assets and liabilities are a subset of the overall assets and labiiies ofthe Group and include balances which generally have interest rate
and/or foreign currency risks attached. FRS 13 Derivatives and other financial instruments, permits exclusion of items such as trade debtors, trade
creditors, prepayments and accruals, The assets and Kabiltes which fall under the defintion, along with ther fair values, are highlighted in (I) below:
(l) Fair value of financial assets/(liabilities)
Fair value is defined as the amount at which a financial instrument could be exchanged in an arm's length transaction between informed and willing
parties and is calculated by reference to market rates discounted fo current value. Where market rates are not avaliable, far values have been calculated
by discounting cash flows at prevaling rates transacted at year end exchange rates.
2004 2003
Gross Gross Net book Fair Gross Gross Net book Fair
asset, liabitity value value asset Viability value value
£m £m £m £m £m fm £m £m
Cash 1,049 + 4089 1,049 4,060 - 1060 1,060
Current asset investments (note 11) 999 :) 999 41,250 - 1250 1,250
Local Authority deposits (note 9) 1 : 1 7 1" - 1" 1
Borrowings {note 14) . (599) (599) (599) - (637) (637) (637)
Client services balances (note 12) -__qe7)__67)__—67) = (1,054) (1.054) (1.054)
Total 2,055 (1,366) 689 689 2321 (1691) 630630
Fair values for borrowings and deposits have been calculated by discounting at an appropriate rate.
The carrying value of gilts is £138m (2003 £263m), of which £131m (2003 £253m) is included in the current asset investment figures and £7m (2003
£10m) in the fixed asset investment figures. The Group portfolio of git holdings showed a loss of £4m (2003 £ 1m) during the financial year when
revalued,
(ii) Maturity profile of the Group's financial liabilities
The maturity profile of the Group's financial liabilities at 28 March 2004 is set out below:
2004 2003
Borrowings Client ‘Borrowings Giient
(note 14) balances Total (note 14) balances Total
__ fm fm stm fm ‘£m £m
‘One year or ess or on demand 88 187 855 ar 4,054 4.161
More than one year but not more than two years 3 : 3 33 : 33
‘More than two years but not more than five years 1 : 1 6 : 6
More than five years 507 _ : SOT $11 = $11
Total 599 167 1,366 637 4,054 4,691
(il) Maturity profile of the Group's undrawn committed borrowing facilities
Detalis of the Group's borrowings and undrawn committed borrowing facilities can be found in note 14,
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18 Derivatives and other financial instruments (continued)
(iv) Interest rate profile and foreign currency analysis
2004 2004
Financial liabilities Financial assets
Gross Gross Net
Sterling Euro Other total Sterling usD Euro Other total total
£m £m £m tm £m £m £m fm fm £m
Fixed rate (650) (8) . (558) 4,006 : . = 1,006 448
Floating rate . ) : 4) 2 51 : 53 49
Non-interest bearing (04) : a (804) 936 20 38 2 996 192
Total (1,354) (12) = (1,366) 4,942 2 89 22,055 689
2003 2003
Financial liabilities Financial assets
Gross Gross Net
Sterling Euro Other total Sterling usD Euro Other total total
£m £m £m £m £m £m £m £m £m £m
Fixed rate (650) (12) : (562) 1,261 - - = 1,261 699
Floating rate (40) (} - (46) : : 43 : 43 @)
Noninterest bearing (1,083) : = (1,083) 986 7 2 2 4,017 (66)
Total (1,673) (18) ~__(1,691) 2,247 7 65, 2 2.321 630
The fixed rate stering financial fables of £550m have a weighted average interest rate of 5.7% and an average time to maturity of 17 years (2003
5.67% and 18 years). The fixed rate sterling financial assets of £1,006m have a weighted average interest rate of 3.95% and an average time to maturity
of 20 days (2003 3.59% and 82 days)
The floating rate euro financial iabilties have a weighted average interest rate of euro LIBOR plus 2% and an average time to maturity of four years
(2003 euro LIBOR plus 2% and 5 years). The floating rate euro financial assets have a weighted average interest rate of bank rate minus 1% and an
average time to maturity of one day (2003 bank rate minus 1% and one day),
Of the £804m of non-interest-bearing financial liabilities, £767m is payable on demand and £37m has an average maturity date of 202 days. All the non-
interest-bearing financial assets are receivable on demand.
‘A one percentage increase in interest rates throughout the period would have increased profit before tax by £11m.
(¥) Derivative financial instruments held to manage currency and commodity price fluctuations
2003
Fair value
£m
Foreign currency transactions 185
Fuel derivatives: 16 18
Atthe balance sheet date, the Group held contracts to purchase foreign currency for £153m (2003 £185m) and £16m (2003 £18m) fuel contracts. No
carrying amounts are shown as all these items are held off balance sheet. The difference between the contracted forward rate and mark to market rate
was a loss of £4m (2003 £m) for currency contracts and a gain of £1.5m (2003 £1.4m) for fuel contracts.
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18 Derivatives and other financial instruments (continued)
(vi) Forward transactions
‘The Group had outstanding forward transactions to hedge foreign currencies and fuel purchases as follows:
In currency (millions) Sterling equivalents (millions)
2004 2003 2004 2003
Maturing within one year
Euro 38 80 % 55
JPY 745 1,781 4 9
USD 207 181 121 116
AUD 3 3 1 1
Maturing after one year
usd 1 - 1 -
Euro . 4 . 5
(vii) Gains and losses on transactional exposures
‘The table below shows the Group's currency transactional exposures that give rise to net currency gains and losses recognised in the profit and loss
account. These liabilities arise from the net payments due to overseas postal administrations for delivery of mail, and are denominated in Special
Drawing Rights (SDRs). This is a basket of currencies comprising US Dollar, euro, Japanese Yen and Sterling. Such exposures comprise the monetary
abilities of the Group that are not denominated in the functional currency of the operating unit involved.
‘This year 100% (2003 80%) ofthe exposure to pay overseas administrations was hedged; consequently there is no unhedged exposure (2003 21 milion
SDRs were unhedged)
2004 2003
Net foreign currency liabilities (SDRm) : 2
Sterling equivalent value (fm) - 49
‘At28 March 2004, the Group also held various open forward contracts that were taken out to hedge expected future foreign currency payments (as.
shown in note (vi) above).
(vill Gains and tosses on hedges
Foreign exchange exposures are hedged using curency deposits, currency borrowings, forward currency contracts and currency options.
Gains and losses on these instruments are not recognised until the hedged exposure itself is recognised. Unrecognised gains and losses on these
instruments used for hedging are not material
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19 Pensions
‘The Group operates pension schemes as detailed below:
Kame Etigibitity Type.
Royal Mail Pension Pian (RMPP) UK employees Defined benefit
Royal Mail Senior Executive Pension Plan (RMSEPP) UK Senior Executives Defined benefit
Royal Mail Retirement Savings Plan (RMRSP) UK employees Defined contribution
Various other small-scale schemes operated by overseas subsidiaries, Overseas subsidiary employees Defined contribution
‘The terms of the merger of the two former schemes - the Post Office Staff Superannuation Scheme (POSSS) and the Post Office Pension Scheme.
(POPS) - with effect from 1 April 2000, required them to be considered as separate sections of the RMPP whilst one section remained in surplus and
‘one remained in deficit. As both of these sections are now in deficit, this requirement falls away and the RMPP is now dealt with as a single plan with no
‘separate sections for overall funding and accounting requirements.
Pension charges in the profit and loss account
The Group continues to account for pension costs under SSAP 24 Accounting for pension costs, and a summary of pension charges, including those
relating to redundancy provisions, is shown below:
2004 2003
£m £m
Regular pension costs - defined benefit schemes 242 310
+ defined contribution schemes 1 1
Regular pension costs 243 att
‘Accounting deficit(surplus) and best estimate reduction 188 (201)
Notional interest on pension asset (56) (45)
Charges relating to redundancy provisions 54 200
Total net charge included in profitiloss) before tax (note 2) 429 265
Pension valuations
Valuations of the defined benefit schemes are carried out at intervals not normally exceeding three years as determined by the trustees. The latest
actuarial assessments of the RMPP and the RMSEPP were carried out as al 31 March 2003. These were performed using an assumed rate of inflation
of 2.5% for both schemes. Investment returns real were assumed to be 4.9% and 4.3% respectively. Pay increases real were assumed to be 1.5% and
3.0% respectively and pensions, both in payment and deferred, were assumed to increase at 2.5% for both schemes. The market value of assets al the
latest actuarial assessments was £11,954m for the RMPP and £86m for the RMSEPP. The asset cover of the benefits accrued to members after
allowing for future increases in eamings was 91% for the RMPP and 82% for the RMSEPP, both as at 31 March 2003. The next ful valuation of both the
RMPP and the RMSEPP is due to be caried out as at 31 March 2008. Key factors generating the move from surplus to deficit were investment market
experience over the three years ending 31 March 2003 of some £725m, demographic changes, including increased If expectancy of members, of
some £420m, and the higher assessed libilies of some £1,350m based upon a lower discount rate.
Accounting standards
‘These accounts have been produced in accordance with the current accounting standard SSAP 24. The latest pensions accounting standard, FRS 17
Retirement benefits, has been adopted by the Group in accordance with the transitional arrangements. This is further complicated because the Group
plans to adopt intemational financial reporting standards (these are expected to be similar to FRS 17), which means FRS 17 disclosures will continue to
be made next year, with the year to March 2006 being the first year in which all pension costs and related information are reported in accordance with
the international standards.
FRS 17 disclosures
The following FRS 17 disclosures relate to the RMPP and RMSEPP plans:
a) Assumptions
‘The major assumptions used by the actuary were:
At 28/03/2004 ‘At 30/03/2003, At 31/0302
% pa % pa Shpa
Rate of increase in salaries 4.10 3.55 3.80
Rate of increase in pensions 2.60 2.25 250
Discount rate 5.50 5.50 6.00
Inflation assumption 2.60 225 250
Expected average rate of retum on assets 7.50 7.90 710
55
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19 Pensions (continued)
b) Plan assets and expected rates of return
Royal Mail Holdings plc
The assets in the Plans and the expected rates of retum were:
At 28 March 2004
Market value at 28 March 2004
Long-term rate of retum
RMPP [RMSEPP ‘expected at 28 March 2004
£m £m Yepa
Equities 12,066 106 8.00
Bonds 4,754 2 4.80
Property 1,313 . 6.40
Other net assets (43) 6 3.60
Total market value of assets 15,090 124
Present value of Plan iabiliies (19,438) (156)
Deficit in scheme (4,348) (32)
Related deferred tax (lability asset" : :
Net pension liability (4,348) (32)
‘At30 March 2003
Market value at 30 March 2003
Long-term rate of retum
RMPP RMSEPP expected at 30 March 2003
£m £m %pa
Equities 9,650 56 8.50
Bonds 1,562 6 450
Property 1,240 : 6.50
Other assets (352) 25 4.25
Total market value of assets 12,100 87
Present value of Plan liabilities (16,752) (119)
Pension liability before deferred tax (4,852) 2)
Related deferred tax (fabiltyVasset* : :
Net pension liability __(4,852) (32)
‘At31 March 2002
Market value at 31 March 2002
Long-term rate of retum
RMPP RMSEPP expected at 31 March 2002
£m £m %pa
Equities 12,607 63 8.20
Bonds 1,706 7 5.30
Property 4,194 6.70
Other assets 106 7 4.50
Total market value of assets 15.613 7
Present value of Plan fabilties (15,331) (82)
Surplusi(defict) in scheme 282 (10)
Supplus restriction : :
Pension asset(tability) before deferred tax 282 (10)
Related deferred tax (abilty)asset* (85) 3
Net pension asseti(liabitity) 197 @
*No deferred tax is recognised in relation to the pension liabilities due to uncertainty regarding the existence of future tax liabilities against which
tax relief on pension costs might be offset
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419 Pensions (continued)
©) Components of defined benefit costs
‘An analysis of the separate components ofthe cost that would be reflected in the performance statements is 8s follows:
2004 2003
RMPP RWSEPP =Total. «= RMPP_-RMSEPP =Total
£m im £m £m fn £m
Analysis of amounts charged to operating profit:
Curent service cost 304 3 397 32 4 386
Total charge to operating profit 304 3 307 382 4 386
‘Analysis of other amounts (credited)/charged to profit and loss account:
Gain on settlements - . (18) - (18)
Loss on curtaiments” 7 6 % 105 4 19
Total net operating charge _ _ 4st 9 490 463 ee
“These costs have already bean recognised inthe Group primary statements on a SSAP 24 basis,
‘Analysis of amount chargedi{credited) to other finance income:
Interest on Pension Plan liabilities 908 6 15 5 5 910
Expected return on Pension Plan assets (950) 46) (956) (4,185) (6) (1.191)
Net credit to other finance income 1) - at) (280) {) (281)
Total profit and loss charge before deduction for tax 0 9 ug 109 7 206
‘Analysis of amounts recognised in statement of total recognised gains and losses (STRGL):
Difference between actual and expected relum on Plan assets (2,063) (16) (2,078) 4342 2B 4370
Experience loss/(gan) on Plan liabilities n 2 15 (22 5 Ch)
‘Loss on change in assumptions (nancial and demographic) 1,886, mM 1910 672 4 676
Actuarial (gainVloss recognised in STRGL. (104) 10 (4) ___ 4992 750%
4) Movement in (deficiYeurplus
Analysis ofthe movement n (defictVeurplus in the Plans during the period: 2004 2003
RMSEPP =Total. «=-RMPP_«RMSEPP Total
tm fm tm om £m £m
(Deficit)surplus in Pian at beginning of period (4652) 2) (4884) 22 (10) m2
‘Company contributions pad Co) 9 659 zt 32 279
Current service cost (394) e@ 97) (382) A) (386)
Settement gain : 8 18
Curtaliment loss 7) 6) @3) (108) (4) (119)
Other finance income a a 280 1 281
Actuarial gainioss) 108 (10) 94_(4.992) (3y__(5.029)
Deficit in Plan at end of period 14,348) 432) 14,380) (8.652) (32) (4,684)
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19 Pensions (continued)
¢) History of experience gains and losses
RMPP__RMSEPP____Total_—RMPP_RMSEPP. Total
(Galayloss between actual and expected return on Plan assets:
‘Amount (Em) (2,063) (16) 2079) 4342 2% 4370
Percentage of Plan assets at end of period 1T% 129% = 13.7% = 359% MH 35H
Experience lossi(gain) on Plan liabilities:
‘Amount (Em) a 2 75 (22) 5 (a7)
Percentage of Pian liabities at end of period 04% 1.3% 04% 01% 42% 0.1%
Total actuarial (gainyfloss recognised in STRGL:
‘Amount (£m) (104) 10 4982 7 5028
Percentage of Pan liabilities at end of period 05% 64% 04% 98% 3K 28.8%
{) Balance sheet presentation
at aunts om 7"
Net assets as stated in balance sheet 2,938 2.088
Pension prepayment recoverable beyond one year (SSAP 24) 70) (707)
Related deferred tax _ _ . - _ -
Net assets excluding pension asset 4,368 4381
FRS 17 pension liability (4,380) (4,684)
Net assets including ERS 17 pension liability 9,012) (3.303)
Reseen ‘m “in
Profi and loss reserve as stated in balance sheet 99 28
Pension prepayment recoverable beyond one year (SSAP 24) 0) (707)
Related deferred tax _
Profit and loss reserve excluding amounts relating to pension asset 229 (489)
FRS 17 pension iabilty 4380) (4684)
Profit and loss reserve including amounts relating to FRS 17 pension lability 4.151) (5173)
‘The fong-erm rates of future contributions expressed as a percentage of pay are 12.6% for the RMPP and 20.9% for the RMSEPP.
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20 Commitments
Capital commitments contracted for but not pravided in the accounts amount to £84m (2003 £138m).
The Group is committed to the following payments on operating leases during the next 12 months:
Landy bin
wie Ea a HS
a a a a
For leases which expire:
Within one year 10 9 16 4
Between one and five years. a 26 St 56
Beyond five years 89 86 1
Total 120 121 68 70
21 Contingent liabilities and guarantees
Royal Mail Group ple, a subsidiary of the Company, has guaranteed the performance ofa third partyin elation to lease payments payable over the 15-
year term of a lease entered into on 21 December 2000, and has given certain tax indemnnitis to the US lessor. Inthe opinion ofthe Directors, no loss
will result to the Group as a result of these guarantees.
AAs required by the Notes Sorting Facility rules, notes in transit to cash handling centres and those prooessed overnight, for which the Group has
received credit, are secured by gits deposited with the Bank of England. On default, the estimated maximum liability would be £131m.
Royal Mail Group ple, has given a guarantee to the Secretary of State for Works and Pensions, the Department for Social Development (Northem
Ineland) and the Commissioners of Inland Revenue, to underwrite the performance of Post Office Limited of its obligations under the Universal Banking
Contract (Post Office Card Account).
Royal Mail Group plc has also given a guarantee to Electronic Data Systems Limited to underwrite Post Office Limited's performance of its obligations
under the Universal Banking Contract (Post Orfice Card Account)
22 Related party transactions
‘During the year the Group entered into transactions with other related parties. The transactions were in the ordinary course of business and included
administration and investment services recharged to the Group's Pension Plan by Royal Mail Pensions Trustees Limited. The transactions entered into
and the balances outstanding at 28 March 2004 were as follows:
Amounts
Selentoraated —Parchasesfrom owed romreited owed tarelatad
party related party party party,
2004 2003 2004 2003 2004 203 2004 203
£m £m £m £m im £m £m £m
Royal Mail Pension Plan 2 42 . : 10 19 : -
Quadrant Catering Limited 1 - 40 4a 1 1
Camelot Group plc + 4 : - : . :
63 Worldwide Mall N.V. (rade name “Spring’) 5 § 0 22 ff 9 3 68
First Rate Travel Services Holdings Limited Group 19 7 - - - 2 -
Romec Limited 3 4 mT 1 - @ 2B
Companies listed above are joint ventures and associates of the Group with the exception of the Royal Mall Pension Plan,
David Mills, a Director, is a shareholder-nominated Director of Camelot Group pic, with whom the Group has a commercial relationship for the sale of
£750m (2003 £770m) lottery products per annum.
Bob Wigley, a Non Executive Director, is Chairman of Merill Lynch's European Corporate Banking Business, with whom the Royal Mail Pension Plan
has a commercial relationship to manage short-term investments to the value of £99m during the year.
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23 Principal subsidiary undertakings, joint ventures and associates
Country of incorporation Percentage holding %. Principal activites
‘Subsidiary undertakings.
Royal Mail Group pic UK 100 ‘Mails and parcels services
Post Office Limited UK 100 Counter and financial services
General Logistics Systems Intemational Holdings B.V.? Netherlands 400 Parcel services
‘Associates,
Camelot Group ple UK 20 Lottery operations
Quadrant Catering Limited? UK 5 Catering services
G3 Worldwide Mail N.V. (trade name ‘Spring’) Netherlands Pay Mail services
a nue
Romec Limited UK 51 Facilities management
First Rate Travel Services Holdings Limited UK 50 Bureau de Change
Midasgrange Limited UK 50. Financial services
‘This investment is held by the Company. All other investments are held by subsidiaries.
2 This is a non-trading holding company, which has investments in other operational companies that are based in Europe.
3The Group holds 51% ofthe share capital of Quadrant Catering Limited, However, the voting rights attached to the various classes of shares give the
ther investor operational control. Quadrant therefore treated as an associate in the Group Accounts,
All these principal subsidiaries, joint venture and associates have a 31 March year end date with the exception of Quadrant Catering Limited which has a
30 September year end date and G3 Worldwide Mail N.V. and Romec Limited which both have a 31 December year end date.
A full list of subsidiary undertakings, joint ventures and associates is available from the Company's Registered Office. All shareholdings are equity
shares.
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Five-year summary
Profit and foss account 2000 2001 2002 2003 2004
as restated
£m £m fm £m £m
External tumover 7522 8119 8,408 8,299 8,633
Profit(loss) from operations 150 (206) (318) (197) 220
Less share of operating (profitVioss of joint ventures and associates 4) : 1 (30) @7)
Add pensions benefit/(charge) in respect of pensions surplus/(deficit) 235 228 250 246 (132)
Group operating profil(loss) before exceptional items 381 2 (67) 19 51
Operating exceptional items. (658) (67) (1.149) (697) (64)
Group operating loss (275) (45) (1,186) (678) (13)
‘Share of operating profit of joint ventures and associates 4 - 4 Ki) v
Ienpairmant of goodwill in associates: 2 : (12) (24)
Total operating (loss)/profit (271) (45) (1,194) (672) 4
Non-operating exceptional items "1 20 14 26 64
(Loss)/proft before interest (260) (25) (1,180) (646) 88
Net interest receivable 89 106, 56 36 7
(Loss)/profit before tax (174) at (1,124) (611) 105
Taxation (96) (34) 179 52 (98),
(Loss)/profit after tax (267) a7 (945) (859) 7
Equity minority interests 3 2 5 : :
(Loss)/profit for the financial year (264) 49 (940) (559) 7
‘Transfer to dividend reserve. (154) (93) : :
{Loss)/profit retained (415) (44) (940) 4559) 7
Balance sheet 2000 2001 2002 2003 2004
as restated
£m £m £m £m £m
Intangible assets 270 421 146 156 123
Tangible fixed assets 2419 2,026 1,783 1,648 1,550
Fixed asset investments 6 60 4 83 138
Net current assets 1,723 2,008 1,987 1,785 1445
Creditors beyond one year and provisions (342) (977) (1,405) (1.584) (1,418)
Total assets less liabilities 4,096 3.538 2,605 2,088 2,138
Cash flow 2000 2001 2002 2003 2004
£m £m £m £m £m
‘Net cash flow from operating activities (68) 330 42 (383) (241)
Net cash outflow before use of liquid resources and financing (474) (124) (100) (486) (222)
Note
‘The restated figures for 2001 reflect the impact of the implementation of FRS 19 Deferred tax, and the change to the historic cost accounting convention.
Profit/(loss) from operations reflects the underlying performance of the Group as defined in the Operating and Financial Review.
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Glossary of terms
‘Accounting convention
The basis on which accounts are prepared.
Accounting Standards Board (ASB)
The Accounting Standards Board is responsible for producing accounting standards which are known as Financial Reporting Standards. The Group is
required to comply with Financial Reporting Standards when preparing accounts.
Capital expenditure
Expenditure on new, or additions to existing, fixed assets
Cash
Cash in hand and deposits repayable on demand (within 24 hours or one working day) with any financial institution.
Client services balances
Balances owed to or due from clients in respect of counter transactions carried out by Post Office Limited.
Counter Services
The services provided to customers by the network of Post Office branches.
Creditors
‘The amount owed to others for pay, goods and services.
Currency options
‘An option to buy or sell foreign currency.
Current assets
Cash or other assets readity convertible into cash.
Debtors
Mainly amounts owed by customers for services provided and pension prepayments.
Deferred taxation
‘The estimated future tax consequences of transactions and events recognised in the financial statements of the current and previous periods.
Department of Trade and industry (OT!)
The Department of Trade and Industry.
Financial Reporting Standard (FRS)
‘A Financial Reporting Standard issued by the Accounting Standards Board,
Finance lease
A lease that transfers substantially all the risks and rewards of ownership of an asset to the lessee.
Goodwill
The excess of consideration paid over net assets acquired.
Group
Comprises Royal Mall Holdings plc and its subsidiary undertakings.
Hedge
‘The use of financial assets and financial liabilities to manage risk.
Historic cost basis
‘The system of accounting where all current and capital expenditure is recorded at its cost at the time of purchase,
International Accounting Standards Board (IASB)
The intemational accounting regulatory body that produces Intemational Financial Reporting Standards, which the Group will have to comply with from
‘April 2005 onwards.
Liquid funds (cash flow)
Current asset investments that are readily convertible into known amounts of cash at, or close to, their carrying amount and can be disposed of without
curtailing business operations.
Nails reserve
A distributable reserve created under the Postal Services Act 2000 to provide funding.
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Glossary of terms (continued)
Nationa! Loans Fund (NLF)
National Loans Fund provides a source of funds for Government lending.
Operating lease
A lease other than a finance lease.
Operating profit
Represents the profit (before interest and non-operating exceptional items) on ordinary activities with the exception of where interest falls to be treated
within operating activities.
Postcomm
The postal industry regulator.
Postwatch
The body that represents the interest of the consumer.
Profit and loss account reserve
‘The profit and loss account reserve represents retained profits to the extent these have not been transferred to another designated reserve.
Provisions
Amounts set aside to meet known liabilities likely to be incurred or certain to be incurred but where the amount or timing are uncertain,
Rural Network Reserve
A reserve created to fund the rural network.
Statement of Standard Accounting Practice (SSAP)
Financial reporting standards developed originally by the Accounting Standards Committee (ASC) and adopted by the Accounting Standards Board
(ASB) in 1990.
Shareholder
The Company's shareholder is HM Government.
Special Share
One Special Rights Redeemable Preference Share of £1 in the capital of the Company.
Special Shareholder
‘The holder of the Special Share (i.e. The Secretary of State for the Department of Trade and industry).
Tangible fixed assets
Land and buildings, plant and vehicles purchased for use over a number of years.
Total recognised gains and losses
Total of ali gains and tosses — realised and unrealised — that are recognised in a period and are attributable to the shareholder.
Universal Service Obligation (USO)
The requirement o provide a universal postal service in the UK.
Value Added Tax (VAT)
‘An indirect tax on goods and services.
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Corporate information
Registered Office and Group Head Office
Royal Mail Holdings plc
148 Old Street
LONDON
ECIV9HQ
020 7250 2888
Registered No: 4074919
Corporate website
Additional corporate and other information can be accessed on the following website (www.royalmail. com). Information made available on
the website is not intended to be, and should not be regarded as being, part of the accounts.
The maintenance and integrity of the Group's websites is the responsibilty of the Directors; the work carried out by the auditors does not
involve consideration of these matters and accordingly, the auditors accept no responsibilty for any changes that may have occurred to
the financial statements since they were initially presented on the website.
Auditors
Emst & Young LLP
1 More London Place
LONDON
SE1 2AF
Actuaries
Watson Wyatt Worldwide
Watson House
London Road
Reigate
Surrey
RH29PQ
Solicitors
Slaughter and May
4 Bunhill Row
LONDON
ECtY 8YY
Regulator (Postcomm)
Postal Services Commission
Hercules House
6 Hercules Road
LONDON
SE17DB
Consumer Body
Postwatch
28 Grosvenor Gardens
LONDON
‘SWiW OTT
Financial Calendar
Regulatory Accounts July 2004
Interim Accounts 2004-05 November 2004
Preliminary results 2004-05 May 2005
64