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Royal Mail Holdings plc
Report and Accounts
Year ended 30 March 2008
A
A47 30/05/2008 361
COMPANIES HOUSE
FRIDAY
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Royal Mail Holdings plc
hon Mail Group is unique in reaching everyone in nea)
through its mails, Post Office and parcels businesses -
which directly employ over 181,000 people in the UK.
Every working day Royal Mail processes and delivers over
80 million items to 28 million addresses for prices that are
amongst the lowest in Europe; each week we serve over 24
million customers through our network of 13,852 Post
Office branches and each year our domestic and European
parcels businesses - General Logistics Systems and
Parcelforce Worldwide - handle some 390 million mm)
NS
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Royal Mail Holdings plc
Contents
Chairman and Chief Executives Staternent 4
Annual Review 2007-08 8
Operating and Financial Review 1 I
Royal Mail Holdings ptc Board 27 i
Directors Report 29 \
Corporate Governance 31 :
Internat controt 36 :
Directors Remuneration Report 37
Statement of Directors responsibilities in relation to the Group financial statements 44
Independent Auditors Report to the members of Royal Mail Holdings pic 45
Group income statement for the 53 weeks ended 30 March 2008 and 52 weeks ended 25 March 2007 46
Group statement of recognised income and expense for the 53 weeks ended 30 March 2008 and 52 weeks ended 25 March 200747
Group balance sheet at 30 March 2008 and 25 March 2007 48
Group cash flow statement for the 53 weeks ended 30 March 2008 and 52 weeks ended 25 March 2007 49
Notes to the Group accounts $1
1 Authonsation of financial statements and staternent of compliance with IFRSs 51
2 Accounting policies 51
3 Segment information 61
4 People formation 63
5 Operating costs 64
6 Auditors remuneration 64
7 Operating exceptional items 65
8 Net finance income (excluding net pensions interest) 65
9 Income tax 66
10 Property plant and equipment 68
11. Goodwall 69
12 Intangible assets 69
13 Business combinations 70
14 Investments in joint ventures and associates 1
15 Non-current assets held for sale R
16 Inventories 3
47 Current trade and other recewables 3 )
18 Cash and cash equivalents 1 1
19 Financial babtities 5
20 Provisions for liabilities and charges 7
21 Current trade and other payables 78
22 Non-current other payables i)
23 Finanaal risk management objectives and policies 8
24 Financial instruments be
25 Employee benefits - pensions 87
26 Share capital 90
27 Total equity 2
28 Commitments %
29 Related party transactions %
Group five-year summary (unaudited) 7
Parent Company accounts 98
Statement of Directors responsibilities in relation to the parent Company financial statements 8
Independent Auditors’ report to the members of the Company Royal Mail Holdings ple 99
Parent Company balance sheet 100
Notes to the parent Company accounts 101
Forward Looking Statements 103
Corporate Information 103
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Royal Mail Holdings pic
Chairman and Chief Executive's Statement
{t has been a year of tough challenges and achievements involving a groundbreaking agreement with our people allowing the
modernisation of Royal Mail to proceed and changes to the Pension Plan put in place The Group made an operating profit before
exceptionals of £162million which while down a third on the previous year was ahead of expectations and was against the backdrop of a
3 2% year on year decline in the overall UK mails market volumes and an increase in the proportion of mail carried by rival operators
Daunting challenges remain but the Group is now implementing plans to modernise the Letters business and ensure the Post Office
branch network has a sustainable future Royal Mails quality of service had been at or above target levels in the first quarter of 2007-08
but fell as a result of mdustrial action last summer and autumn Despite the effects of mdustrial action the large majority of mail was
back to being delivered at above target levels by the year end
Key elements of the year were:
+ Landmark agreements with our people on pay, pensions and modernisation, enabling Royal Mail to launch the second phase of I
modernisation of the Letters operations - through automation - using the investment provided by the Shareholder in the form of
commercial loans agreed in March 2007
* — Reform of the Pension Plan to help the Company continue meeting the huge cash cost - of over £800million in the year - of both i
‘ongoing and deficit contnbutions, while providing the best pension benefits Royal Matl can afford for its people
© The launch of new products and services for customers including Tracked™ which allows the movement of parcels and packets I
through the Royal Mail network to be tracked and Online Business Account which enables business customers to handle their
accounts electronically instead of by dockets More new services are planned as the Company strengthens further its focus on
customer service
© The first steps in the roll-out of new technology and equipment in delivery offices and mail centres ~ making the job better for our
people improving the business's efficiency and, above all providing the foundation and capability for new products and services for
customers
«The launch of more new services and products by the Post Office to bring in new revenue and customers and help support the
branch network
‘Strong revenue growth by Parcelforce Worldwide and GLS, the Group s UK and European parcels businesses, both of which operate
in highly competitive markets GLS is now by far the biggest contributor to Group profit
Financial Performance
The biggest change in performance across the Group was the move from profitability to loss by the Royal Mail Letters business which
made a £3milon operating loss on its £6 8biltion revenue - down on the previous year despite the annual price increase m April 2007
The fall in mail volumes continued downtrading by Royal Mail customers to lower priced products, and the increasing impact of
competition resulted in Group operating profit falling by almost a third from €233million to £162mulhon If the mpact of the Social
Network Payment (which supports loss-making Post Office branches) 1s taken out of the picture, Group operating profit in 2007-08 was
less than half the comparable figure in the previous year The huge cost of servicing the Pension Plan continues to bear heavily on the
Company and has again had a huge impact on the operating profit
External revenue Operating profit/(loss)*
2008 2007 2008 2007
Business unit performance £m £m £m —m
Royal Mail 6,830 6,857 (3) 136
General Logistics Systems 1,232 1082 116 115
Parcelforce Worldwide 379 337 8 7
Post Office Limited 911 868 (34) (408)
Other businesses 36 35 77 83
Group 9,388 9179 162 233
* Operating profit/loss) 1s before exceptional items For 2006-07 the results by business unit have been restated for the impact of the
new subsidiary Royal Mail Estates Limited - there ts no impact at Group level
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Chairman and Chief Executive's Statement (continued)
« — Group revenue rose by just over £200mullion. largely driven by increased sales by GLS and Parcelforce Worldwide but also because
the 2007-08 accounts include the full £150million Social Network Payment to support loss-making Post Office branches while in I
2006-07 only half of this payment, £75mullion was included as revenue
* — Revenue in Royal Mail Letters fell by £27million The overall mail market declined again and volumes handled by Royal Mail fell 3 2%
I - more than the 2 3% volume fall in the Letters business the previous year The average daily mail bag now contains 80 million
I letters it was 83 millon in 2006-07 so Royal Mail ts handling on average three million fewer letters a day i
* — Royal Mail regulated prices rose in April 2007 by around 5% on average However, there was continued downtrading in 2007-08 by
customers for example from First Class to Second, or from premium business mail services to less expensive ones This trend,
together with volume falls, meant that overall revenue in the Letters business declined for the second year running
* — The Universal Service made an estimated loss - for the first time - of around £100multion with the overall price controlled area of
the business making an estimated loss of around £200mullion
© Post Office Limited's revenue increased but when the additional impact in 2007-08 of the Social Network Payment 1s removed the
underlying trend was downwards There was less income overall from traditional business but this was partly offset by growth in
i sales of new products and services
‘* GLS grew its revenues through higher parcel volumes with particularly strong growth in Eastern Eurape as well as from the
acquisition of ABX Belgium There was also a beneficial impact in the accounts from the strengthening of the euro against Sterling
Profit fell by €1million however but this was again a strong performance by GLS as it operated in a difficult and highly competitive
market and had to make significant network changes ta deal with recently changed road speed laws in France
« Parcelforce Worldwide grew its revenue in a market where competitive pressures got even tougher, and also increased its profit and
maintained its operating margin Quality of service improved further to 96 5% for the year - an impressive performance in a crowded
marketplace
Pension Fund Reform
A series of changes to the Pension Plan began to take effect on 1 April 2008 after intensive talks with the unions and other employee
representatives that began a year earlier, and a formal consultation with every pension scheme member The length of time taken over
talks and consultation reflected the Company's determination to listen carefully to the representations it received and as a result a
number of significant amendments were made to the original proposals first tabled im the early summer of 2007 The changes to the
fund were agreed by the Pension Trustee nm March 2008 They encompass
The Plan closed to new members from 31 March 2008
All pensions and benefits earned before 1 April 2008 are still inked to final salary at the time of retirement
From 1 April 2008 defined benefits building up for employee members of the Plan are earned on a Career Salary basis
‘Anew defined contribution plan will be launched in April 2009
New recruits joining the Company from 31 March 2008 will be able to begin paying contributions to the new plan after they have
worked for the Company for a year
* Employees can continue to take their pension on reaching 60 but the normal retirement age will increase to 65 for benefits earned
from 1 April 2010
‘© From 4 April 2010 it will be possible to draw penston earned before the change to normal retirement age at 60 and continue
working while still contributing into the Pension Plan untit the maximum level of benefits has been reached
The action taken to reform the Pension Plan together with the establishment of a £billion escrow account for the sole benefit of the
Plan if needed has enabled the Group to have an achievable funding programme based on the last actuartal valuation of the deficit of
£3 4billion n March 2006 However our estimates indicate that the actuarial deficit has since increased significantly due to market
changes, further underlining how pensions remain a significant and volatile risk to the Group The continuing heavy cash calls on the
Company - more than £800mitlion in 2007-08 - to service the Plan and pay the deficit - demonstrates again how crucial tt 1s for the
Company to succeed in modernising the Letters business and provide a sustainable future for the Post Office network The Pension Plan
deficit fell in accounting terms from £5 Obillion to £2 9billion
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Chairman and Chief Executive's Statement (contmued)
Royal Mail - modernisation underway
The landmark agreement on pay, pensions and modernisation reached with the CWU in the autumn of 2007 has opened the door for the
roll-out of a far-reaching modernisation plan for Royal Mail on which its future hangs The technology we are now deploying is tried and
tested so we know it can be effective The task facing everyone in the Letters business 1s to make it work for Royal Mail and crucially our
customers
The work underway includes
‘+ The deployment of the first of a new range of sorting equipment to deat with “flats”, the Ad sized magazine, catalogues and
brochures which make up around one in six items of the typical daily mail bag
* Successful trials for hand-held keypads that allow postmen and women to record custorers’ confirmation of the delivery of packets,
and other mail such as Special Delivery - a huge improvement on the traditional paper-based method
« Contracts have been placed for a wide array of sorting equipment including upgrades for existing Integrated Mail Processors (IMPs),
and replacements for existing automated mail sorters By March 2008 the codemark printers that print machine-readable
instructions on mail to speed its sortation had all been replaced In addition, to date, 21 IMPs have been upgraded !
We have ordered 400 walk-sequencing machines the first of which will be detivered to the network this summer under a
deployment programme that will last around two years Trials have been successful both operationally and from the perspective of
delivery postmen and women who have been pleased at the machines capability in sorting mail down to the route they follow on a
round vastly reducing the need to sort the matl manually
The new technology will we are confident, improve efficiency and cut costs But we are very clear that one of the greatest benefits of
modernisation 1s the foundation it provides from which to launch new products and services for customers so meeting their needs and
expectations and improving Royal Mails competitive edge in a market where competition is rapidly mcreasing We will be launching
further new products and services this current year with the aim both of providing customers with innovative solutions while at the same
time making it easier for them to do business with Royal Mail
Our strategy for the Letters business is to implement programmes that will provide a more efficient operatian improve Royal Mails ability
to compete and crucially have products and services that both satisfy and excite customers large and small We are aiming at delivering
a hitherto unseen degree of flexibility and responsiveness by Royal Mail
Post Office Limited - creatmg a sustainable network
‘Among the most difficult challenges of the year has been the implementation of the Government's decision to close up to 2,500 Post
Office branches The closure of any branch 1s always difficult as every outlet is appreciated by its customers and subpostmasters are
rightly regarded as key members of the communities they serve
The Network Change programme, therefore, which ts reducing the size of the branch network in line with the funding provided from the
Shareholder 1s a mayor challenge for the busmess We are seeking to implement the programme as sensitively as possible, and create the
most accessible network within the customer access criteria determined by the Government There have been more than 75 000
responses to the programme by the end of March 2008, around the halfway mark, and the high level of feedback from customers shows
the attachment communities feel to their local branches despite the fact that some four million fewer people have been visiting a Post
Office branch each week compared to three years ago
That reduction has been spurred by a further decline in traditional products and services on offer in our branches or in the case of the TV
Licence the ending of the service altogether Card Account transactions went down in 2007-08 and more motorists renewed their car tax
online rather than at a Post Office counter
However, declines in traditional revenue were partly offset by income from new services we have introduced with new products launched
in 2007-08 We are now
Selling one in 50 of all car msurance policies in the UK
Issuing one in every 40 new credit cards in the UK,
Insuring one in every 200 homes in the UK, and
Handling savings from almost half a million savers
eee
The business s stretching goal remains - to create a network that has long-term sustainability We are investing in our Crown office
network to improve their attractiveness to customers, and have agreed a new remuneration package for subpostmasters giving them
greater rewards for achieving product sales, we are cutting our overheads and reducing back office costs for the computer system that
inks the network, and we will continue to develop new products and services
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Chairman and Chief Executive’s Statement (continued)
Many achievements - but many challenges remain
The Group began its journey of transformation in 2002 when change on the scate we have already achieved was regarded by many as
unthinkable and unachievable At that time, we were failing quality of service targets repeatedly, the Company was losing more than
£4mullion a day and without change, our chances of succeeding in a changing and opening market were non-existent
We ve demonstrated we can deliver consistent target-beating quality of service the Group is profitable and has the funding in place to
modernise strategies are underway to achieve a transformation of the Letters business and to create a sustainable Post Office network,
and we have a determination to succeed, spurred on by the hurdles we have already overcome i
Daunting challenges remain /
Our tender for the new contract for the Card Account handling benefit and pension payments for many of the most vulnerable
people in society from April 2010 is currently being considered in competition with other bids and it 1s vital for the future health of I
the Post Office network that we succeed in winning the work.
© Modernising Royal Mail to make it much more efficient while providing flexible and responsive products and services to our I
customers is a challenge in its own right but to meet it im a market where mail volumes are now falling and with heavy cash calls on
the business from its penston fund will be very stretching indeed
Online shopping has provided opportunities across our business but it has also created more competition at the delivery end I
affecting not just the Royal Mail Letters busmess but Parcelforce Worldwide and GLS
* The costs of funding the new technology that 1s now being rolled out to the Letters business will increasingly be felt as the i
Shareholder’s financing package comprises loans at commercial rates that do of course have to be repaid from our earnings
We are contributing to the independent review of the impact to date of competition on the UK postal service The key issue will be the
preservation of the one-price-goes-anywhere Universal Service which in 2007-08 1s estimated to have lost around £100million - the
first time there has been a loss in this vital bedrock of the postal service which Is a powerful benefit to the UK economy and every user of
the postal service The question begging an answer ts how to preserve and nurture the Universal Service when the only business with a
commitment to delivering st - Royal Mait Letters - 1 now loss-making The Letters business has traditionally relied on profit from business
mail - the only part of the market to face competition from other operators - to underpin the Universal Service, which is used by social
customers to send personal letters birthday cards and Christmas greetings, by businesses, large and small, and Government, both local
and central We are very clear that the answer, in part at least, has got to involve regulation reduced to a minimum so that Royal Mail has
the freedom to compete fully in both the postal and wider communications market - while having the right amount of protection for social
customers and small and medium sized businesses (SMEs) who are finding that other mail carriers have no interest in competing for their
letters and cards, when stamped mail loses on average 6p a letter
Our overall vision through this review 1s to achteve a high quality efficient and profitable Universal Service with a Price Control focused on
our social customers and SMEs and forming the backbone of an innovative fully competitive business mail market - provided by an
efficient transformed integrated and lightly regulated Royal Mail competing with a variety of rivals, bath wholesale and end-to-end
Central to achieving this vision is the need to continue to take and execute the often difficult decisions that will turn Royal Mait Group into
a world class postal services company
Allan Leighton Adam Crozier
Chairman Chief Executive
19 May 2008 19 May 2008
All references to operating profit/(loss} are before exceptional items.
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Annual Review 2007-08
This has been a year of huge significance for the future of the Company A groundbreaking deal was agreed on modernisation of the :
Letters business and reform of the Pension Plan New products and services were launched and the Company continued working to
reduce its environmental impact while investing in the health and wellbeing of its people There were also remarkable achievements by
individual employees who demonstrated again our people's dedication and service to the communtties in which they live and work The
difficult Network Change programme crucial to creating a sustainable Post Office got underway as we began to implement the '
Government decision to reduce the size of the branch network in line with the available funding !
Giving back to the community
Simon Illingworth was named Royal Mails “Postman of the Year” at the business’ 2008 1 Class People Awards Thousands of customers
put forward their postman or woman for an “unsung hero” accolade Simon had run more than 20 marathons to raise £7,000 for charity
and awareness of testicular cancer having been being diagnosed with the disease himself
More than 12.000 people across the Company took part in fundraising activities in 2007-08 while mdividuals themselves dipped into their
‘own pockets to support charities with 50 000 of our people - more than one in every four ~ making payroll donations directly from their
wages it means our people contributed at the rate of almost £300 every hour of every day and the large number of payrall donors
across the Group compares to just 4% of the overall working population who contribute to charities via payroll ging The Companys
encouragement for payroll giving and its people’s generosity were recognised with prizes and accolades at the Institute of Fundraising s
National Payroll Giving Awards in October 2007
A three year partnership - the first of its kind for Royal Mail - between the Company and Help the Hospices raised £2 million for the
chantty - double the target of £1 million More than 10000 employees took part in fundraising actities - a tremendous level of support -
and nearly 6 000 gave payroll donations
There were further improvements in attendance at Royal Mail last year with absence rates having fallen by more than 20% over the last
five years Initiatives in 2007-08 which had helped drive the improvement included campaigns focusing on health promotion such as
advice on diet and nutrition There were health fairs in a number of workplaces a health bus toured many of our offices and centres
while an internet facility was set up to provide health and lifestyle advice online
Royal Mail also began a four year partnership with Access ta Work and Jobcentre Plus, to encourage the employment of disabled people
to build on our existing efforts to welcome applications from all sections of the community and nurture diversity in our workforce
Working towards a better environment
The Company has set itself the goal of operating in a carbon neutral way by 2015 In 2007-08, the Letters business took delivery of 140
double-deck trailers each with the capacity to hold 50 per cent more mail than conventional trailers We are seeking, through these
trailers, to reduce carbon emissions by cutting road mileage annually by the equivalent of twice the circumference of the earth
The Company has also developed an ontine calculator so that any employee can easily calculate their environmental impact and make
donations to the Woodland Trust to allow the charity to plant trees to offset carbon emissions The online calculator has been gifted to the
Woodland Trust, which has called on other companies to fallow Royal Mail's tead
A further initiative in the Letters business has mvolved the provision of telemetry technology in around 8,000 vehicles with training in its
use for the drivers The equipment tracks the vehicles movernents fuel consumption speed and braking patterns so that the best routes
can be chosen in tandem with the best way of driving the vehicle, to minimise its carbon output Royal Mail 1s aiming to cut its fuel usage
by 25 million litres of diesel a year through use of the technology as well as reducing the number of vehicles it has on the road
Technology leads new product development
Despite the decline in overall mail volumes, Royal Mail saw further growth in its delivery of goods ordered online Christmas 2007 saw
Royal Mail deliver a record ¢ 120 million items which had been ordered online In July 2007 the business handled orders for 600,000
copies of JK Rowling s Harry Potter and the Deathly Hallows - a copy for one in every 43 hames in the UK
New technical developments also improved the service for online shoppers - Royal Mail's Tracked™ service allows customers to track the
progress of their order online while the Safeplace service was launched allowing shoppers to speaty a safe place at their address - for
example, a garden shed - where a package can be left safely if nobody is at home to take personal delery
Royal Mail also launched a number of initiatives designed to strengthen the effectiveness of direct mail as a key advertising and marketing
medium Sensational” maul allows companies to build on the visual impact of direct mail by incorporating other features that engage
senses other than eyesight For example a mailshot can include a relevant aroma or taste about a product or service to heighten the
impact when the mail 1s opened
A partnership with Sony DADC allows advertisers and marketers to include in their mailing a CD which is personalised for the recipient of
the mail The combination of traditional post with digital technology allows companies to communicate with a wide range of their
customers but in a personal tatlored way for each of them
As part of its mvestment in data services, Royal Mail has also launched a new source of expert advice on direct mail aimed at improving
the effectiveness of direct mail campaigns
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Annual Review 2007-08 (continued)
Celebrations through stamps
Royal Mail's Special Stamps issues in 2007-08 covered a diverse range of subjects The enthusiasm for Harry Potter was celebrated in a
set of stamps which featured illustrations from the series of books which have captured the imagination of children and many adults for a
decade
Another set of stamps with a literary theme paid tribute to lan Fleming s fictional secret agent James Bond. showcasing book jackets from
the novels including titles such as Dr No and Casino Royale
‘Amold Machin s iconic image of the Queen which has appeared on more than 175 billion stamps has been famously unchanged since its
introduction in 1967 A miniature sheet was issued in June 2007 to celebrate this timeless, masterwork of modern art and it included a
picture of Machin himself on one of the stamps '
Ten rare British birds featured on the first of a series of stamps showing how endangered UK species are benefiting from conservation
work The set featured the corncrake the white-tailed eagle and the avocet, the emblem of the Royal Society for the Preservation of
Birds The next issue available from May, will feature six of the best-loved Cathedrals in the UK
Building a new Post Office - “The People’s Post Office”
Just aver three years after launching its financial services partnership with the Bank of Ireland the Post Office has served its one millionth
customer - in May 2007 - and has continued to grow During the year the number of customers increased further by over one third,
making the Post Office one of the fastest growing financial service providers in the UK The achievement means that the Post Office
* sells one in 50 of all car insurance policies in the UK
* Issues one in every 40 credit cards in the UK.
© insures one in every 200 homes in the UK , and
has almost half a million savings customers I
The portfolio of financial services grew further in 2007-08 with the launch of a Post Office mortgage, which quickly established a I
Teputation as one of the best rates available in the housing market, while ather new services launched in 2007-08 included life cover for
the over 50s and PayQut, which enables payments to be made using barcoded letters or text messages, avoiding the need to issue ‘
cheques
The MoneyGram service, which customers can use to send cash swiftly and securely abroad was extended to every branch in the
network Growing numbers of people took out a Post Office insurance policy to cover their car van or home with the number of active
policies exceeding 600,000
The Post Office s commitment to providing free access to cash was underlined by the installation in December 2007 of the business’ one
thousandth fee-free ATM More cash machines are being added every week to the network of branches with the aim of making the Post
Office with its banking partner the Bank of Ireland one of the biggest providers of cash machines nationwide
A television advertising campaign featuring a number of celebrities inctuding Joan Collins and the boy band Westlife helped raise
awareness of the wide range of services available in “The People's Post Office ” These have included the launch of the broadband service
designed to appeal to a wide range of customers including older peopte who may not have been online before but are seeking the re-
assurance of the trusted Post Office brand as well as those customers who want to pay for the service m cash at a Post Office branch
rather than set up a standing order
The Post Office s Christmas Savings Club was launched in January 2008 to provide savers with a simple and safe way to save for the
festive season From February 2008, the Post Office offered a pet insurance scheme to its customers
Parcelforce Worldwide
Parcelforce Worldwide's impressive underlying growth in revenue and volume of over 10% outpaced the UK express parcels market in
2007-08, with a key driver behind the increase coming from high quality of service which improved on the previous year's performance i}
Quality over the Christmas period was excellent when processed volumes hit an all time record of 325,000 on 18 December 2007
The business also helped reduce its environmental impact with a carbon offsetting scheme allowing customers despatching goods online
to make a donation via the Woodland Trust With around 25% of online retail users using the scheme it demonstrates both the business's
commitment to reducing its carbon footprint as well as the appetite among customers to support effective environmental programmes
A comprehensive review of service was conducted during 2007-08, resulting in plans for additional service developments The business 1s
aiming to announce in the summer of 2008 the first two of a number of initiatives to drive further growth
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Annual Review 2007-08 (continued)
General Logistics Systems
Royal Mails European operation General Logistics Systems (GLS), continued to grow and develop its operations as the “Quality leader in
European parcels logistics” GLS provides reliable, high quality parcel services, logistics and express services throughout Europe
Through its own start-up companies acquisitions and its network partners GLS has created a strong European network providing
customers with services in 36 European states In August 2007, GLS Romania was established and a new franchise area was acquired in
Milan in October 2007 - increasing the number of GLS managed depots in Italy to 26 In March 2008, new global partnership
agreements were signed with MNG Cargo in Turkey and GATI in India
In addition to the investments in the physical network the continuing development of information technology remains an area of specific
focus GLS's European parcel shops where private or commercial customers can take parcels for delivery, increased by more than 1 000
to 6,362 outlets
GLS's network now comprises 32 central transhipment points and 655 depots, providing services through wholly owned and partner
companies in 36 European states A workforce of over 13 000 people and nearly 18 000 vehicles deliver 335 million parcels annually for
220 000 customers throughout Europe, generating £1,232m of revenue m the last year
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Operating and Financial Review
Introduction
Royal Mail Holdings pic (the Company) is a public limited company wholly owned by the UK Government It became a plc on 26 March
2001 The framework for change was the Postal Services Act 2000 that created a commercially focused company with a more strategic
relationship with the Government The Postal Services Act also established a new regulatory regime with an independent Regulator
Postcomm, and a reformed consumer body. Postwatch Royal Mail Holdings plc together with its subsidianes, associates and jomt ventures
comprise ‘the Group’
The Group has over 370 years experience of providing the public with postal services - through our trusted brands we reach everyone
every working day in mail, parcels and express services and through our Post Office branches
Our market place continues to change rapidly as a result of declining volumes and strengthening competition in the UK mails market since
its full liberalisation in January 2006 We are engaging with the Government review of the UK postal services market and progressing
transformation plans throughout the business Our vision for the future of the postal services market provides significant benefits for all
types of customers and competitors We continue to provide services to meet our challenges - from a range of Post Office financial services
including savings and insurance products to broadband electronic ‘stamps’ online shopping fulfilment and mait-related data tools such as
online electronic pricing news and product information to help companies improve their marketing performance
Our continued aim is to put the customer at the heart of everything we do by
being the UK's lowest cost operator delivering market leading quality of service,
be the most trusted provider of essential services to every person in the land
our unique reach to every address in the UK,
enhancing our trusted brands
becoming easier to do business with, and
maximising profitable revenue and volume by meeting customer needs through innovation and efficiency
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Performance Highlights !
In the following analysts all references to operating profit are before exceptional items
Financial Highlights Key Non-Financial Highlights
Summary of Results Key Performance
£m unless stated otherwi: 2008 2007
muniess ~~“ Area Indicators (KPIs) 2008_I 2007
External Revenue 9,388 9179
Customer 1* Class Stamp & Meter
Operating Profit 162 233 Service Quatity of Service BS2% 4 OE
Return on Sales* (3) 27%, 25% No of Complaints (milions) 246 1.41,
ColleagueShare costs (277 - Post Office Lited
Other exceptional tems (106) (125) Customer Satisfaction Index _ 998% 951%
Net exceptional items (383) (225) Great Place
(Loss)/profit before to Work Engagement index * 54% -
financing and taxation (224) 108
Employee Survey * (Gi
Net finance income 13 6 Place to Work) creat - 66%,
Net pensions interest 134 199 RIDOOR Aceidents/1000
(Loss)/profit before taxation __(77) 313 staff 269 261
Taxation credit/(charge) 212 (27) Sick Absence 4% 48%
Profit after taxation 135 286 Good
“before exceptional items Corporate
Citizen CO; Emissions/1000 tems*__18 0 187
Charitable Donations (Em) 18 12
*in Apni 2007 the Engagement Index based on the Have Your Say Employee
Survey replaced the Great Place to Work Employee Survey as a key non-financial
KPI
“represents preceding year
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Operating and Financial Review (continued)
Govermance
The EU Accounts Modernisation Directive (AMD) applies for all medium and large EU companies including listed companies and requires a
mandatory inclusion to the existing Directors’ Report to provide an enhanced review of a company's business
The Directive states that the review should provide a balanced and comprehensive analysis of the development, performance and position
of the company’s busmess including the principal risks and uncertainties facing the organisation The analysis should include both financial
and, where appropriate, non-financial KPIs relevant to the particular business including information relating to environmental and
employee matters It is recognised that to the extent that this information appears in the Operating and Financial Review (OFR) it 1s
mcorporated by reference into the Directors Report
Legal Structure
Royal Mail Holdings plc is directly owned by HM Government and 1s the ultimate parent company of the Group The Group primaniy
operates within the United Kingdom having a number of subsidiaries joint ventures, and associates, but also has presence in most,
European countries, mainly through General Logistics Systems BV Its basic legal structure 1s as follows
I__Royal Mail Holdings plc _I
Royal MailGroupLtd I --------------I Pension Schemes
i
[ { i
Post Office Royal Mail Investments Royal Mail i
Limited Limited Estates Limited
n
!
General Logistics
Systems B.V.
The Royal Mail and Parcelforce Worldwide business units mduded in Rayal Mai Group Ltd are not separate legal entities
Further detaits on the principal subsidiaries are provided in note 29 to the accounts
Our Operating Units
The Group 1s organised into four principal operating units
Royat Mail
Royal Mail processes and delivers over 80 million letters and packages to 28 million addresses every working day in line with its unique
Universal Service Obligation (USO) It 1s also responsible for designing and producing the UKs stamps and philatelic products
General Logistics Systems B.V. (GLS)
GLS 1s a pan-European company providing reliable, high quality parcel services, logistics and express services throughout Europe
Parcelforce Worldwide
Parcelforce Worldwide ts a leading provider of collection and delivery services for urgent packages and parcels within the UK and
throughout the world, providing bath business and private addresses with a range of timed delivery options
Post Office Limited
The Post Office's national network of branches 1s at the heart of communities across the country They provide a trusted access point for
everyday products, services and information in postal services, financial services, travel, banking, telephony, bill payments, Government
Information, retail and the secure transportation of cash Post Office Limited owns the Group's investments in Midasgrange Limited (50%
associate, financial services) and First Rate Exchange Services Holdings Limited (50% joint venture Bureau de Change services)
Other
Further details are provided under the operating unit facts and figures section
Our Pension Schemes
Royal Mail Group Ltd ts the sponsoring employer for the Royal Mail Pension Plan and Royal Mail Senior Executives Pension Plan (both
defined benefit schemes) and for the Royal Mail Retirement Savings Plan (a defined contribution scheme) Based on assets the Royal
Mail Pension Pian is the fourth largest pension scheme in the UK
The assets and liabilities of the defined benefit schemes, as measured under accounting standards, are reported as a net pension deficit in
the Group balance sheet The gross assets and liabilities and the net deficit are significantly larger than any of the Group's other assets
and abilities This results in the Group being one of the most exposed UK corporates to pension scheme volatility. particularly with
Tespect to Movements in equity values and bond rates.
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Royal Mail Holdings plc
Operating and Financial Review (continued)
Operating Unit Facts and Figures
Unit and% of I No.of I Region I Revenue* Facts and Figures Vision
Group External I Employees (€m)
Revenue Profit/(loss)*
{€m)
Margin (%)
Royal Mail 164,995 I UK I Revenue I © 115,400 pillar boxes, to be ‘demonstrably
£6830m I © 69 matlcentres the best and most
* 1.400 delivery offices trusted postal services,
Loss * 30,800 vehicles company in the world’
(€3m) * 29900 bicycles
72 8% of Group * Over 80 million items handled every
pcermal Margin working day
(004%) I © Deliver to 28 million addresses a day.
© 1st Class Retail Quality of Service -
85 2%, and
© 2nd Class Retail Quality of Service -
957%
Gis 13135 [Europe I Revenue I © 32 hubs to be the best
13.1% of Group £1,232m I © 655 depots, European 828 parcel
External # 17.800 vehicles logistics & express
Revenue Profit * 220,000 customers system with global
£114m I © Over 4 million parcels handled every I reach
working day
Margin I » 21 Subsidiaries, and
93% * Covers 36 states im Europe
Parcelforce 7% 46h UK [Revenue I © 2 hubs (1 national 1 mtemational) to be the UK's most
Worldwide £379m I © 47 depots, reliable high value
* 1,800 vehictes, express carrier
Profit * 207 000 parcels delivered every day
£8m 289,000 every day in December and
4 0% of Group © Parcelforce 24 Quality of Service -
External Margin 96 5% delivered on time and with
Revenue 214 electronic proof of delivery
Post Office 9.163 ux [I Revenue I © Equivalent 15p in every £1 transacted I ‘be at the heart of
Limited £911m in the UK is handled through the Post I customers thinking by
Office network becoming the most
97% of Group Loss © 13.852 branches mcluding 393 Crown I trusted provider of
External {€34m) Offices essential services to
Revenue © Over 30,000 customer facing positions I every person in the land’
Margin - including those employed by Post and focusing on ‘a
G70) Office Limited by subpostmasters successful commercial
and/or by franchisees business with a social
* Over 24 million customers making purpose - one that 1s
over 37 million visits a week, actively on the side of
conducting almost 63 milion customers’
transactions
* UK's leading supplier of foreign
currency, and
* 99 8% of customers satisfied with their
branch
* Revenue is for subsidiaries only profit/(loss) 1s before exceptional items
13
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Royal Mail Holdings plc
Operating and Financial Review (continued)
Unit and % No. of Region I Revenue* Facts and Figures
of Group I Employees (€m)
External
Profit/(toss)*I
Revenue (£m)
Margin (%)
Other 2,654 UK Revenue Including
in wholly £36m © Our Group Property unit - including Royal Mail Estates Limited
owned (100% subsidiary)
subsidiaries * PostCap Guernsey Limited - captive insurers (100% subsidiary),
04% of Profit « iRed Redefining Document Management Ltd - end to end
Group 4313 £77m document management operation (100% subsidiary)
paternal mm part © Romec Limited - facilities management operation (51%
owned subsidiary),
subsidiaries © NDC 2000 Limited - building engineering services operation (51%
subsidiary),
.
Quadrant Catering Limited - catering services (51% associate)
Cametot Group ple - UK National Lottery operator (20%
associate), and
Central shared services for the UK and corporate centre - not
a revenue or profit centre
“Revenue 1s for subsidiaries only profit{loss) « before exceptional tems
Funding
Royal Mail Group Ltd
Royal Mail Group Ltd made a loss in 2007-08, after bearing losses relating to stamped mail and carrying out its Universal Service
Obligation In addition it has been facing considerable cash requirements with respect to its proposed investment in plant and equipment
and funding its pension deficit at a time when the market has been opened up to full competition On 23 March 2007 a funding package
totalling £1 2bn up until 2016 was completed with Government
The European Commission 's continuing its investigation under the EC Treaty's rules on State Aid into a series of funding measures taken
by the United Kingdom Government in its capacity as Shareholder in favour of Royal Mail between 2001 and 2007, including the funding
agreement completed on 23 March 2007 In its response to the EC in relation to this investigation the United Kingdom Government has
stated that it believes that the measures being investigated by the EC were concluded on commercial terms
Post Office Limited
Following a consultation process on 17 May 2007 the Secretary of State for Trade and Industry (now Secretary of State for Business
Enterprise and Regulatory Reform) announced (\) a funding package for Post Office Limited up to March 2011, (u) a closure programme
Involving the compulsory compensated closure of up to 2,500 Post Office branches and (i) the imposition of certain access criteria
designed to ensure the continued maintenance of a national network of Post Office branches As part of the funding package the Group
recewved £313m during the year under the Industrial Development Act 1982, to compensate Post Office Limited for the other net costs of
providing certain specified “services of general economic interest” An additional £150m (2007 £75m) was paid to Post Office Limited
during the year to fund the maintenance of a rural network of post offices, which was recorded within revenue as a Social Network
Payment - in the prior year an additional £75m of such costs were borne by the Group from reserves
Both of the above payments made during 2007-08 were in accordance with approval received from the European Commission under
televant State Aid rules
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Royal Mail Holdings plc
Operating and Fimancial Review (continued) !
Group Financial Analysis
In the following analysis, all references to operating profit are before exceptional items The 2006-07 operating profit has been restated
for each UK operating business unit due to the impact of the new subsidiary Royal Mail Estates Limited, as explamed in note 3 There ts
no impact on the Group operating profit As 2007-08 1s a 53 week period and 2006-07 was a 52 week period where relevant revenue
and costs have been restated to make them more comparable
This year we report an operating profit of £162m compared to £233m for 2006-07, a fall of £71m (30 4%) dnven by the worsening
performance of Royal Mail Although Post Office Limited's position has improved, this 1s wholly attributable to the additional £75m from
Government for the Social Network Payment (SNP) compared to last year
Operating profit/(loss) by business unit - £m. Operating profit/{loss) growth/(dectine) by business unit - £m
162
7 233
116
7 Te a2
I o
8 2
(239) tb
@
(3) 34)
Royal tt General Parcttorce Postmen Other «Group
Logistics Wortgwige. Unted 2007 Roypi Mall” Ganeral Parclforca PoxtOmce Other 2008
Sys Logiedee Wotawide inited
syeame
External Revenue
Group external revenue increased by £209m (2 3%), from £9,179m to £9,388m driven by increases in GLS Post Office Limited
Parcelforce Worldwide and Other businesses offset by a decline in Royal Mail despite the impact of the additional week The 53" week
this year has increased Group revenue by £113m, therefore underlying revenue growth is 1 0%
Royal Mail revenue declined by £27m (0 44) even with an average price increase on regulated products in April 2007 of around 5%
Declining market volumes, increased losses to competition and customers continuing to downtrade to cheaper products have led to this
decline with the only growth area for revenue being Downstream Access, 1€ increasing competition
General Logistics Systems increased its revenue by £150m (13 9%) from £1,082m to £1 232m driven by volume growth in domestic and
export parcels ~ this includes the impact of acquisitions - and the strengthening of the euro Parcelforce Worldwide increased its revenue
by £42m (12 5%) from £337m to £379m, through higher volumes particularly im regional and international sales Post Office Limited
showed a revenue crease of £43m (5 OX) from £868m to £911m, although without the £150m (2007 £75m) SNP received from
Government, there was an underlying decline in revenue of £32m to £761m This reduction 1s due to the revenue decline in Government
and financial services exceeding the growth in revenue from the telephony products stream
Costs (excluding exceptional items)
Total costs of £9 273m have increased from £8 985m by £288m (3 2%) The additional week this year has increased Group costs by
£112m, therefore the underlying increase is 20%
Cost by type - % Cost growth by type - £m
‘Other People Costs 104 120 927
Operating 67%
bed 298 iy CI)
10%
Distribution
Conveyance
Costs
14% 007 Poop —Dieubuton & Otc Opersing 2008
Commpance Cents
‘cont
People casts of £6 209m represent 67% of the Groups cost base and have increased year on year by £64m (1 0%) - this includes the
impact of the 53 week The majority of front line staff received an increase of 5 4% on basic pay and weekday overtime from 1 October
2007 After adjusting for the impact of the additional week, people costs actually reduced year on year reflecting efficiencies delivered to
absorb the impact of the pay award
Distribution and conveyance costs of £1 341m, representing 14% of the Group's cost base, have increased by £104m (8 4%) This 1s driven
mainly by GLS (including acquisitions) and Parcelforce Worldwide and their associated costs of volume growth
Other operating costs of £1,723m representing 19% of the Group's cost base, have increased by £120m (7 5%) This includes increases in
depreciation and IT costs linked to the phased roll-out of our major capital investment programme as part of our transformation plans,
primarily within Royal Mail I
15
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Royal Mail Holdings plc
Operating and Fmancial Review (continued)
Pensions I
2008 2007 Pension costs (pre-exceptionals) have reduced by 2 9% from £722m '
Pension charges within operating profit £m €m to £701m The £21m reduction principally relates to past service
Within operating profit before costs of £16m included in 2007
exceptionals 701 722‘ The balance sheet pension deficit has decreased from £4,985m in
Within exceptionals (relating to March 2007 to £2.923m The decrease in the deficit of £2 062m
redundancy) 42 51 principally relates to an actuarial gain of £1,798m and net pensions.
Within operating profit 743773 __ interest of €131m
The actuarial gain arose due to changes in market conditions giving rise to an increase in the assumed real discount rate, although this
has been partly offset by a lower than expected return on the assets in line with general market returns This gain 1s recorded in the
statement of recognised income and expense
The net pensions interest reflects the long-term expected rate of return on the schemes’ assets less the unwinding of the discount on the
schemes’ liabilities Although trabilities are higher than assets the expected rate of return on these assets (biased toward equities) was '
substantially higher than the discount rate for abilities (high quality corporate bond rate) resulting in a net interest credit This interest 1s,
recorded in the income statement after (loss)/profit before financing and taxation
As part of the recent funding package the Group established €1bn of investments in escrow shortly before the 2007 year end as secunty
for the Royal Mail Pension Plan, in support of the 17 year deficit recovery period from 31 March 2006
Pension cash funding. Group 2008 2007 Regular pension contributions mcreased by 1 3% from £543m to
contributions £m £m €550m The regular rate of employer contributions for the Royal
Mail Pension Plan has remamed at 20 0% of pensionable pay,
Regular pension contributions 550 543 effective from the beginning of the previous year The regular rate
Funding of pension deficit 284 243.__-of employee contributions for the Royal Mail Pension Plan remains
unchanged at 6 0%
Pomc 3 7e08-09 reauls pension 36 74 Deficit recovery payments by the Group increased by £641m (16 9X)
contributions 50 _ principally arising as a result of the latest full actuarial valuation of
the Royal Mail Pension Plan The Group had been contnibuting an
Net cash payments 920 860___average of some £140m per year to fund the deficit in the Royal
Mail Pension Plan This increased significantly last year, and further
again this year to over £260m per annum for the remaining 16 years from the beginning of 2007-08 There have been no employee
defiett contnbutions
Share of Profits in Joint Ventures and Associates
The Group's share of profits in joint ventures and associates of £47m (2007 £39m) comprises profits from Post Office Limited s Bureau
de Change joint venture (First Rate Exchange Services Holdings Limited), Camelot Group plc associate - UK National Lottery operator
Quadrant Catering Limited our catering associate, Post Office Limited's financial services associate (Midasgrange Limited) and G3
Worldwide (Spring) NV our international mail distribution associate
Net Exceptional Items
Net exceptional items of £383m (2007 £125m) comprise operating exceptionals of £441m (2007 £243m) offset in part by profits from
property disposals of £58m (2007 £118m with £74m arising from the disposal of a property group) Operating exceptional costs include
£277m for ColleagueShare costs (2007 Enil) £165m for redundancy {2007 £180m), a £141m exceptional charge for subpostmasters’
compensation (2007 Enil), £97m for impairments (2007 £64m) £43m for Agency Network Change programme and WH Smith project
costs (2007 Enil) £10m exceptional property charges (2007 £1m credit) with other Group restructuring costs amounting to £21m (2007
£nil) This was offset in part by Government grant income of £313m (2007 Emil) received to compensate Post Office Limited for providing
certain specified ‘services of general economic interest”
ColleagueShare Scheme
On 17 May 2007 the Group introduced a phantom share scheme, ColleagueShares all associated costs for the year have been treated as
an operating exceptional item The value of ColleagueShares 1s based on a Group share plan valuation model which 1s updated regularly
This has generated a discounted charge to the income statement of £116m for 2007-08 Fully eligible employees have been allocated
408 notional shares in the Company with part time staff holding a proportion of this amount Further allocations will be made aver the
next two years ColleagueShares will be sold back to the Company by 2012 and each fully eligible employee has the opportunity to recewe
up to £3,700 from the sale of the phantom shares A related stakeholder dividend for the year totalling £164m represents a payment of
up to £800 to each eligible employee in recognition of meeting certain Group and business unit targets This 1s payable in 2008-09
Net Fiance Income
Net finance income of £13m (2007 £6m) compnises finance income of £84m (2007 £62m), offset by finance costs of £71m (2007
£€56m) The increase in finance income of £22m 1s mainly due to higher average investment volumes and higher average investment
rates The increase in finance costs of £15m is mainly due to higher commitment, arrangement and advisor fees on the Royal Mail Group
Ltd loan facilities from Government and higher average borrowing rates, partially offset by lower average borrowing volumes
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Royal Mail Holdings plc
Operating and Financial Review (continued)
Net pensions interest
Net pensions interest of £131m (2007 £199m), a non-cash item for the Group has decreased by £68m as a result of expected returns
‘on Plan assets increasing by less than the interest on Pian ltabilities as a result of the increase in the discount rate
Taxation
The taxation credit in the income statement of £212m comprises £25m current tax receivable with respect to UK operations, a £29m
current tax charge on overseas profits, a UK deferred tax credit of £226m and an overseas deferred tax charge of £10m A tax charge of
£18m was taken directly to equity Last year a taxation charge of £27m was recorded comprising £45m current tax charge with respect
to UK operations a £34m current tax charge an overseas profits a £59m UK deferred tax credit and a £10m overseas deferred tax
charge with a credit of £27m being taken directly to equity The tax credit reported in relation to the pre-tax loss 1s mainly due to the
increased amount of deferred tax asset recognised
Cash Flow
The following table is a summary of the Group cash flow statement
Cash inflow from operations 1s £483m (2007 £117m) which
‘Summary of cash flows 2008 2007
comprises:
£m £m
fore Int
Cash mlow from operators 183 7 © Earnings Before Interest Tax Depreciation and Amortisation
{EBITDA) inflows of £354m (2007 £392m),
Dividends from joint ventures and
associates 36 39
Property plant & equipment
intangibles purchases and disposal
proceeds (259) (173) Payments relating to exceptional items of £188m (2007 £192m),
(318) comprising restructuring costs of £152m (2007 £118m) and
pension top ups of £36m (2007 £74m),
Government grant income of £313m {2007 Enil) to compensate
Post Office Limited for providing certain specified “services of
general economic interest”
Acquisition and sale of financial assets (64)
Proceeds from issue of ordinary shares - 430
Share in Success payments of €nil (2007 £90m), and
Net drawdownv/trepayment) of Working capital inflows of €7m (2007 £7m)
borrowings and financing 33 (64)
Dividends received from joint ventures and associates of £36m (2007
£39m) are from First Rate Exchange Services Holdings Limited £24m.
Net cash inflow 209 35 (2007 £23m) Quadrant Catering Limited, £5m (2007 £10m) and
‘Tax interest and other (23) 4
Camelot Group plc, £7m (2007 £6m)
Property plant & equipment, intangibles purchases and disposal proceeds of £259m outflow (2007 £173m) comprises £330m (2007
£309m) of expenditure, including motor vehicles of £67m (2007 £75m), plant and equipment £108m {2007 £84m), £88m (2007 £85m)
for property improvements and the remaining £67m (2007 £65m) on software This analysis includes £36m (2007 €52m) in respect of
GLS projects The expenditure was offset by inflows of £74m (2007 £65m) mainly from surplus property disposals and Eni (2007 £71m)
relating to the sale of a property group
Acquisition and sale of financial assets of £61m outflow (2007 £318m) represents the net purchase of investments made by the Group
from cash and cash equivalent resources It principally relates to interest of £57m on the investments in escrow, provided as secuntty for
the Royal Mail Pension Plan The comparative figure for 2007 represents the investment of €11bn in escrow partially funded by the
Tealisation of other investments
During the prior year five ordinary shares im the Company were issued to the Secretary of State for Trade and Industry under section
63(4) of the Postal Services Act 2000 The consideration of £430m was used to fund ongoing cash and funding requirements for Post
Office Limited, including repayment of advances from Royal Mail Group Ltd
Net drawdown/(repayment) of borrowings and financing of £33m inflow (2007 £64m outflow) largely comprises £55m cash received
(2007 Enil) on sale and leasebacks offset by £20m (2007 £60m) net repayment of the Department of Business Enterprise and
Regulatory Reform (BERR) loans to Post Office Limited
Provisions
Provisions at the end of March 2008 were £411m (2007 €111m) The £300m net increase comprises new provisions relating to
ColteagueShares, restructuring and onerous property contracts of £478m offset by cash spend of £149m and transfers to short-term
pension creditors of £29m
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Royal Mail Holdings plc
Operating and Financial Review (contmued)
Group Strategy and Key Performance Indicators (KPIs)
Our success is measured by the four areas central to our operating units objectives These key strategies and objectives are
communicated widely across the Group embedded into its day-to-day activities and measured on a timely basis by appropriate KPls and
monitored by the Royal Mail Holdings plc Board and its sub Committees as highlighted below
Customer Great Place Profitability and Good Corporate
Service to Work Cash Flow Citizen
Our customers are at the This mitiatwe established Funding from Corporate Social
heart of everything we 1n 2003 works on the Government on Responsibility (CSR) is
do The key to winning basis that we can only commercial terms has doing the right thing
and keeping customers 1s move forward and been secured enabling for our people, our
to provide a consistently succeed as a business if the Group (excluding business and the
high quality of service we involve our people in Post Office Limited) to communities we
This has been the top making change happen support the capital operate in, as our
priority of everyone in the investment
business and 1s at the The initiative nas programme which * customers want to
heart of our strategy undergone 2 e rest to addresses the historic buy from companies
moving forward That ton aligned to our long underinvestment in that share their
means erm strategy and the Letters business values
ensure maximum
© delivering a high benefit to our people Post Office Limited * colleagues want to
quality of service and and Government have work for companies
mails integrity agreed a long-term that provide a
funding package which healthy and safe
‘* developing products ‘wall maintain a environment and
that mach the needs natal networkand I I whose values aton
put Post Office Limited 0 thewrs, and
‘© becoming easier to do on a sustainable * communities want
business with footing companies that
create the incomes,
Continuing to develop
the jobs and
more effiaent ways of contnibute to the
working will empower cohesion that builds
enna ma the neighbourhoods
where people want
marketplace, allowing to live and work
us to maintain
sustainable
profitability and cash
flow to eventually
generate a return for
our stakeholders
Customer People Financial Environmental
Quality of Service targets Employee Survey Turnover CQ2 Emissions/1000
items
Number of Complaints Health & Safety Operating profit* Social & Community I
Return on sales* I
RIDDORs (reportable
Customer Satisfaction accidents)/1000 staff Return On Total I
Index operating Assets® Charitable Donations
Sick Absence Operating cash flow
*before exceptional items
“as defined in the Directors Remuneration Report
With the exception of the Employee Survey, no change has been made to the sources of data or calculation methods used for the KPIs
above
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Royal Mail Holdings pic
Operating and Financial Review (continued)
Treasury Management
The Group operates a central Treasury function that manages £1 1bn of financial asset investments (substantially all of which are now.
held in escrow in favour of the pension fund trustees) and £1 4bn of cash and cash equivalent investments (including £933m cash in the
Post Office network funded mainly by a Government toan facility) in accordance with tnvestment restrictions set by the Government It
also manages £847m of financial liabilities and acts as internal banker for the Group's business units The Group finances its operations
largely through cash generated from its operations borrowings and grants
Group Treasury derwes its authontty from the Royal Mail Holdings plc Board, and provides quarterly monitoring reports for their review It
only has the authority to undertake financial transactions relating to the management of the underlying business risks it does not engage
in speculative transactions and does not operate as a profit centre All strategies are risk averse, and the treasury policy has remamed
substantially unchanged during the year The principal financial instruments are Treasury bills, Government gilt edged secuntties, deposits
and tong and short term borrowings
At the balance sheet date the Group Is financed from the following facilties provided by BERR
Average I
loan I
Facility Facility Uttlised maturity I
Borrower Purpose end date £m £m date
Royal Mail Group Ltd = Acquisition funding 2021-2025 500 500 2023
Royal Mail Group Ltd Capital Expenditure and Restructuring 2014 600 Nil E
Royal Mail Group Ltd General Purpose / Working Capital 2014 300 Nil - I
Royal Mail Group Ltd General Purpose / Working Capital * 300 Nit - '
Post Office Limited Network cash repayable on demand 2010* 1150 280 2008
*Expires on the later of 2016 and the release of the pension escrow investments This Royal Mail Group Ltd facility 1s subordinate to all
other creditors
On 18 April 2008, the facility was extended until March 2011
The terms of the Gavernment borrowing facility and the associated Framework Agreement impose strict constraints on the separatian of
cash funds within the Group and the purposes for which they can be used
The principal treasury risks arising from the Group s activities are currency, counterparty, commodity (fuel) and liquidity risk. These are
managed as follows
* the Group is exposed to foreign currency risk due to trading with overseas postal operators for carrying UK mail abroad and
delivering foreign origin mait in the UK revaluation of the currency balances held to operate the Bureau de Change services within
Post Office Limited and various sales and purchase contracts denominated in foreign currency Hedging programmes managed by
Group Treasury mitigate these risks Where possible exposures are netted internally and any remaining exposure 1s hedged using a
combination of externa! spot and forward contracts
* the Group's obligation to pay overseas postal operators 1s denominated in Special Drawing Rights (SDRs) ~ a basket currency
comprising of US Dollar (USS), Japanese Yen Sterling and euro The Group has a policy of matching receipts and payments for
individual currencies where possible and then hedging any material net exposure The policy is that up to 80% of the forecast net
exposure is hedged with agreement of the internal business unit Group Treasury operates a rolling 18-month programme which is
subsequently reviewed on a quarterly basis There has been no external hedge in place throughout the financial year 2007-08 due
to there being no material net exposure,
* Bureau de Change balances are grouped mto baskets of closely correlated currencies Each currency basket (e g USS or euro) is
then sold forward, up to 100% of the exposure, creating a lability to match the underlying asset,
© significant foreign currency risk arising from capital purchase contracts pnmarily in euro may be hedged up to 100% depending
upon the reliability of the forecast of the underlying cash flows
‘* the Group does not hedge the translation exposure created by the net assets of its overseas subsidiaries,
* the Group 1s exposed to fuel risk arising from operating one of the largest vehicle fleets in Europe and a jet fuel risk from the
purchasing of air freight services The Groups fuel risk management strategy aims to reduce uncertainty created by the movements
in the oll and foreign currency markets The strategy operates within the parameters set by the Board which allow the use of over-
the-counter derivative products to manage up to 100% of these exposures,
‘© the Group actively manages its liquidity risk through regular reviews of plan and budget projections against all available sources of
funding The projected headroom on these sources of financing 1s assessed regularly for adequacy, and
© counterparty risk is managed by limiting aggregate exposure to any individual counterparty based on their financial strength
These exposures are reviewed regularly and adjusted as appropriate
The policies for financial assets - mvestments and derivative financial mstruments - are shown in note 2
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Royal Mail Holdings plc
Operating and Fmancial Review (continued)
Business Environment
Regulation
Until the last few years Royal Mail had a monopoly status m the UK letters industry However in 2000 the Postal Services Act created an
independent postal Regulator ~ Postcomm - and allowed Royal Mail to have greater commercial freedom Postcomm regulates the prices
of nearly 90% of Royal Mail's letters business contrals the terms and conditions for nearly all its services sets the quality of service
targets and determines compensation arrangements
Post Office Limited 1s increasingly subject to regulation in financial services (Financial Services Authority) and in telephony (Ofcom) Post
Office Limited ts an appointed representative of the Governor and Company of the Bank of Ireland, which in turn is regulated directly by
both the Irish Financial Regulator and Financial Services Authority (FSA) for conduct in the UK
Its the Group's policy to be fully compliant with the regulatory framework in which we operate During 2007-08 we continued to
strengthen our compliance activities working in close liaison with our Regulators
Postcomm inter Rewew completed
™ corel «— L Jan 2008
Dec 2007 _I Government Remew of UK Pasta Industry announced
Posteemm cemmences ts Interim Rewew 2007
focusmg on cost reflective prang qb March
Postcomm commences is Strateye Revew of
2008 {he UK Postal Market. Pang n Proporton
Aug 2006 I} ys irocuces
Royal Mal witig to accept Postcormms provosal for
3 Pree Control 4 year duration mcluding pension May 2006
isk corner —I F
Jan 2006 ‘UK Postal Market opened up to fut!
FT artpetton
Royal Mal gets go ahead for mtroducton of Pang ‘Aug 2005
1 Proporven m August 2006 —_Te
Fab 2005 Postcomm announces acceeraten of
FJ FT eompertion ty 25 months to January 2008
Royal Mai agrees ground breaking Downstream Feb 2008
Access contract wath UK Mail ple
Royal Mall accepts Postcomm s propasal for 2% Pnce
March 2003 Central 3 year duration eluding new bulk mac
compensation scheme
Postcomm announces its decson on the
phased introduction of competition in the UK May 2002
market ~ an accelerated programme compared
ta the rest of Europe aiming for full completion
Royal Mail granted 15 year Lcence first two
by Ae 2007 March 2003 we veer Prce Corral
Postal Servees Act and creation of ¢$—I_ I July 2000
Pstcomm - independent regulator
Competition
The Group's business units now all operate in a competitive marketplace Parcelforce Worldwide and GLS have been operating in an open
market since their inception These units have demonstrated their ability to perform in a non-regulated and competitive environment,
which ts reflected in their annual results
Post Office Limited due to a reduction in income from benefit payments and a significant and contmumg decrease in Government use
has developed revenue streams from financial services products (including car and home insurance a ‘two-in-one credit card and range
of savings products) and its HomePhone and broadband services These products are in direct competition with services offered by banks,
msurance and telephony companies, as are many of the services it continues to offer eg bill payments, renewal of car tax discs and
travel services
Royal Mails operating environment has gradually been opened up to competition since February 2004 with the letters market fully
liberalised im January 2006 well in advance of the rest of Europe Competitors are now able to offer customers the opportunity of end-
to-end service for the collection, sorting and delivery of their mail
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Royal Mail Holdings plc
Operating and Financial Review (continued)
Mayor Regulatory Activity in 2007-08
{n November 2007 the Group responded to Postcomm’s Strategy Review “Emerging Themes” and believes that four key regulatory
principles need to be addressed which will result in a truly competitive industry whereby all stakeholders benefit
© Realign prices to underlying costs - to create transparency for business customers and to ensure that competition 1s sustamable
‘Some competitors in the UK are basing their entry strategies on unsustainable business models that target the historical cross-
subsidies in Royal Mails pricing structure but cross-subsidies are fundamentally incompatible with an effectively functioning
competitive market Royal Mail believes it should be allowed to remove these cross~subsidies, so that customers face the right pricing
signals and competitor models going forward are based on efficiency
* Anarrower range of unwersal service products - focused on the needs of all social customers and fully funded through stamp prices
‘Business customers tell us they do not need the protection that the Universal Service Obligation (USO) provides - Postcomm
describes many of these customers as “non-captive” and we agree given the ample choice they have across mail and other
communications providers The USO should therefore be refocused on stamped mail only, and prices should reflect the true costs of
this provision,
* Full retail deregulation of business products - the explosion in access competition representing 40% of bulk mail this year 1s
encouraging business customers to demand more commercial and innovative responses from Royal Mail However, Royal Mail 1s
prevented from responding rapidly by regulatory requirements such as an mvolved process for changing terms and conditions Royal
Mail envisages a near term future m which the intense competition in the business mail market replaces the need for regulation and
© Continued operational integration of the postal network - we have put in place measures to ensure that competitors and customers.
have access to our network on fair and reasonable terms Separation of the postal network would create confusion for customers
introduce complex and costly interfaces endanger quality of service and put at risk delivery of the transformation programme
In March 2007, Postcomm commenced an Interim Review Royat Mail has asked Postcomm to consider the following pricing proposals m
this review all of which are consistent with realigning prices to costs and entirely driven by the need to react to bath the volume erosion
and significant downtrading that has been evident for the last eighteen months
* — Reducing the headroom between Downstream Access (DSA) and the equivalent retail prices from a high level set to encourage
competition, to a level which reflects the underlying upstream costs because entry has been significantly higher than the Price
Control assumptions
* Allowing Royal Mail's retail business to price its non-USO bulk mail products by zone thereby making prices of cheap to deliver areas
lower by up to 5% and prices of expensive to deliver areas higher by up to 5% This does not change the price of the “one price goes
anywhere” stamp
Allowing Royal Mail to further rebalance its prices so that it has the flexibility it needs to keep up with the pace of change in the
postal sector, and
‘* Providing dispensation to Royal Mail with respect to bulk mail compensation and C factor adjustments if they are directly linked to.
service failures relating to industrial action over Royal Mails transformation plan
In January 2008, Postcomm confirmed the following decisions with respect to its Interim Review
Its rejection of a change to the headroom between DSA and equivalent retail prices
* Its rejection of Royal Mail's retail zonal application and
¢ Its agreement to increase the level of rebalancing
Royal Mail contnues to work with Postcomm on industrial action dispensation
In December 2007, BERR announced a review of the UK postal services market to examine the impacts of lberalisation of UK postal
services, trends in the future market development and the likely impact of this on Royal Mail alternative carriers and consumers Royal
Mail has submitted its first response to this review in March 2008 followed by its second response in May 2008
Corporate Social Responsibility
Corporate Social Responsibility (CSR) is a key component in supporting the business to be recognised as a responsible organisation that
seeks to optimise the beneficial impacts inherent in our business and reduce the negative impacts Through improving our CSR
Performance and ensuring it is integrated into the way we work, we can make ourselves more productive and competitive We are
working to reduce the number of accidents, reduce our production of COz and make our people healthier We recognise that the route to
achieving and sustatning our goals is through our people and our relationship with customers, business partners suppliers, communities
and other stakeholders
A more comprehensive overview of our CSR will be found in the annual Corporate Social Responsibility report to be published later in the
year
Pa
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Royal Mait Holdings plc
Operating and Financial Review (contmued)
Key Relationships
The Group has several key relationships that are critical to its day-to-day activities and its overall success
People - Our people are the lifeblood of the organisation and brands Without their continued support and dedication it will be impossible
to function on a day-to-day basis and embrace the change within our markets Training, diversity, flexible resourcing and making the
business a great place to work are some of the ways we continue to improve this relationship
Unions - The Communications Workers Union (CWU) represents non-managerial staff with Unite the Union - Communication and
Managers’ Association (CMA) sector representing managerial staff The Group s policy is to work with the CWU and CMA to engage staff in
the development and execution of business decisions
Pension trustees - Our pension trustee board for the main pension plan comprises an independent chairman plus 10 people including
employees, union representatives, a pensioner and independent members They take external professional advice, from Sacker & Partners
LLP (legal) Watson Wyatt Limited (actuary) KPMG LLP (auditors) and PricewaterhouseCoopers LLP (financial) They are responsible for
obtaining regular actuanal valuations of the plan to satisfy the statutory funding objective, which involves reaching agreement with Royal
Mail Group on the statement of funding principles, the recovery plan and the schedule of contributions There 1s a separate trustee board
for the senior executives pension plan which comprises the chairman plus 5 individuals including employees pensioners and an
independent member
Customers - The Groups businesses and brands are used or recognised by almost everyone in the UK - from the largest of companies to
individuals However, the 30 largest customers generate ¢ 15% of Royal Mails turnover and consequently the business is reliant on a !
small customer base As competition increases the Group will have to continue to simplify ways of dong business and design products
around customers’ needs Customers are offered standard terms and conditions for the markets and countries in which the Group
operate
Subpostmasters - The vast majority of Post Office Limited s 13,852 Post Office branches are operated by subpostmasters and franchise
partners The National Federation of Subpostmasters (NFSP) directly represents the interests of their members currently the
membership stands at 9297 As a consequence of this direct representation the NFSP mdirectly influences all other agents through the
representations and negotiations conducted on behalf of the majority of subpostmasters Post Office Limited conducts annual
remuneration negotiations with the NFSP whilst also working closely with them on the many agent related aspects of Post Office Limited's
Forward four2eleven strategy, designed to deliver a viable physical network by 2010-11
There are several major retailers who are also significant partners operating between them around 2,000 branches across the country
Post Office Limited liatses closely with these compamies to maintain successful working relationships It 1s through the effective partnership
with the NESP and these various retail organisations that the business takes into account the interests of all agents whilst seeking to
support the development and achievement of their sales potential and importantly the longer-term viability of the network
Supptiers - The Group has a wide range of suppliers with its primary reliance on those relating to outsourcing of non-core services, such
as IT support It works in partnership with its suppliers to ensure the right products and services are delivered at the right time at
competitive costs A central purchasing team monitors compliance to Group policy in awarding contracts or new business and adheres to
agreed credit terms
The consumer body Postwatch - Postwatch’s role is to act as a consumer advocate in postal matters Its public views on the effect of
Royal Mails policies and management actions on customers can have an impact on Royal Mail's reputation, regardless of the quality of
service achieved
The Regulator: Postcomm - Nearly 90% of Royal Mail Letters’ revenues are price-controlled and the Price Control is set periodically by
Postcomm in the form of a cap on the average price of a basket of products The price increases or reductions allowed by Postcomm
through the Price Control have a very matenal impact on the likely levels of cash flow the Company can generate Postcomm also
investigates compliance with Licence conditions and has broad powers to publicly reprimand or fine Royal Mail if it finds it in breach of
those conditions
Shareholder - The Company 's a plc 100% owned by the Government The Shareholder Executive (within BERR) manages the
shareholder relationship with the Company as a commercial shareholder While management of the Group therefore lies with the
Company's Board of Directors, the Shareholder 1s kept up-to-date through quarterly performance reviews and 1s asked to approve the
Group's strategic plan Any new funding required by the Group (apart from short term borrowings of less than one year) can only be
approved by Government if it meets commercial principles
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Royal Mail Holdings plc
Operating and Financial Review (continued) I
‘Segmental Analysis - Revenue and Profitability
In the following analysis, all references to operating profit are before exceptional items The 2006-07 operating profit has been restated
for each UK operating business unit due to the impact of the new subsidiary Royal Mail Estates Limited, as explained in note 3 There is
no impact on the Group operating profit
Group external revenue of £9,388m (2007 £9,179m) and operating profit before exceptionals of £162m (2007 £233m) are made up as
follows
External revenue Operating profit/{loss)
2008 2007 2008 2007
Business unit performance £m £m £m £m
Royal Mail 6,830 6857 (3) 136
General Logistics Systems 1,232 1082 116 115
Parcelforce Worldwide 379 337 8 7
Post Office Limited oa 868 (34) (108) i
Other businesses, 36 35, 7 83
Group 9,388 9479 162 233
A further analysis of results, by business unit is shown below
External Revenue fell by £27m to £6 830m, despte this year being 53
. 2008 = 2007 weeks long and an average price increase on regulated products in
Royal Mail £m___£M _ Apr 2007 of around 5% A reduction in mail volumes offset the benefit I
External revenue 6,830 6857 __of the price rise together with increasing losses to competition and
Operating (loss)/profit before customers switching further to lower priced products For the
exceptionals (3) 136 Addressed Inland products market, volumes declined 3 2% after
adjusting for the 53 week
Profitability contmued to decline from an operating profit of £136m to an operating loss of £3m driven by decreasing revenues through
continued market decline and increased operating costs as a result of the additional 53 week. The business has however made progress
on its strategic initiatives aimed at creating a more modern and efficient operation, delivering efficiencies to largely absorb the impact of
inflation and additional investment costs
2008 = 2007 External revenue rose by £150m (13 9%) from £1,082m to £1,232m
General Logistics Systems £m £m__ including a £45m positive impact as a result of the strengthening of the
External revenue 4,232 1082 euro The underlying growth of £105m (9 7%) results from higher
domestic and export parcel volumes and the impact of the acquisition
Operating profit before exceptionals 114 115 of ABX Belgium (completed 31 December 2006) Growth rates
continued to be particularly strong in Eastern Europe
Operating profit decreased by £1m (0 8%), from £115m last year to £114m This represents a good performance in light of the
challenging market conditions and also significant network and operational changes implemented to adapt the depot network to the
recently amended speed limit law in France
External revenue rose by £42m (12 5%) with volume growth of 12 2%
2008 = 2007 (40 44 after adjusting for the 53 week) The majority of this growth
Parcelforce Worldwide £m_£M_ was attributable to increases in UK regional sales and international
External revenue 379 337 import volumes The average unit price has remained largely flat year
fon year, principally due to increased price pressures across both
Operating profit before exceptionals 8 7 domestic and international markets
Revenue growth has been underpinned by the continued focus on customer service and quality of service Quality of service for the year
has improved by 0 3% to 96 5%, whilst carrying significant extra volume in the network The emphasis on customer service has led during
the year to a 4 4% improvement in first time deliveries
Operating profit of £8m has grown by 10 9% Inflationary cost pressures have been more than offset by the strong revenue growth and
Improvements in operating efficiencies
23
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Royal Mail Holdings plc
Operating and Financial Review (continued)
2008 2007 Revenue shows an increase of £43m (5 OX) over the pnor year, however
Post Office Limited £m £m 2008 includes an additional £75m compared to last year for the Social
Network Payment (SNP) from Government This SNP has been recognised
Turnover 761 793 as revenue and relates to a Government grant to match the related loss
Social Network Payment 150 75 during the year of providing the network of public post offices that the
Secretary of State for BERR considers appropriate and which would
otherwise not be provided
External revenue 911 868
Operating loss before exceptionals. (34) _(208)_ndertying trading revenue decreased by £32m (4 0%) mainly due to
Underlying operating loss before reduced Card Account transactions, loss of remaining TV Licensing work
exceptionals (184) (183) _ from the BBC and migration of motoring volumes to the DVLA web
application These decreases have been partly offset by increases in Post
Office Limited's new commercial products of which HomePhone revenue (now including broadband) is higher than last year The business
also continues to expand Its presence in the fiercely competitive financial services sector
Overall expenditure has decreased year on year in line with transformation plans Increases in subpostmasters costs were offset by
decreases in staff costs as expected Improved performance of Post Office Limited’s joint venture (First Rate Exchange Service Holdings
Limited) and associate (Midasgrange Limited) also offset the revenue decline, ensuring the underlying operating loss was virtually flat year
‘on year adjusting for the 53rd week
2008 2007 External revenue from other subsidiaries has increased slightly to
Other businesses £m £m £36m (2007 £35m) and includes the consolidation of Romec Services
Limited Operating profit includes the impact of revenue between
segments (refer to note 3) and is largely attributable to the activities of
Operating profit before exceptionals 7 83 Royal Mail Estates Limited The decline in operating profit year on year
of £6m is driven by start-up losses of the new subsidiary iRed
Redefining Document Management Ltd
External revenue 36 35
Principat Risks and Uncertainties
The Group uses a business-wide framework for the identification, assessment, treatment, monitoring and reporting of risk. The process
helps support business objectives by linking into business strategy identifying and reacting to emerging risks, and developing cost effective
solutions to the management of risk
The following Group-level risks have been identified and are being managed to support the long-term sustainability of the Group The
impact of some of these risks could be impairment to the value of the Groups brands - Royal Mail GLS Parcelforce Worldwide and Post.
Office which are some of the most well known and trusted brands in the UK, and major intangible assets of the Group
The financial restructuring package agreed with the Government needs to be managed effectively
The business has agreed a financal restructuring package that will allow it to restructure the business, mvest im new equipment and
address the pension fund deficit that has a major impact on Group profit and balance sheet Effective management of this package 1s !
crucial for the business to remain within the agreed financial restructuring parameters and to avoid potential sanctions or penalties that
could ensue i
Ineffective investment in the operational network could affect productivity levels and our ability to compete effectively
The business 1s embarking on a major investment programme to replace equipment and technology that 1s nearing the end of its life
cycle The investment programme needs to be deployed effectively and future ongoing investment in the Group's operational network
maintained to ensure the Group s ability to compete effectively in the open market
The Group has a large pension fund deficit that requires funding
The Group's pension fund deficit is being funded mn tine with a schedule of contributions agreed with the pension fund trustees Future
pension risk has been mitigated in part by the closure to new employees of the final salary pension scheme and other measures
introduced as part of the pension reform commencing 1 April 2008 There remain uncertainties over the impact of fluctuations in the
equity and debt markets affecting the value of the funds’ assets and liabilities and the ability of the business to achieve the required levels
of profitability and maintain our contributions at the agreed level
Weakness in the UK economy or recession is likely to have a detrimental impact on the Group's profits
Ongoing changes in the global economy pose challenges and opportunities for the UK and all advanced economies Historically there has
been a correlation between the state of the UK economy and level of mails revenue Economic weakness or recession will have a direct
impact on mail volumes and consequently on Group profit
The Government ts the Company's only shareholder and the Group may be affected by any future change in Government policy
The influence of public policy considerations on Government may adversely affect the Group's ability to promote an effective business
strategy This ts particularly significant for Post Office Limited which ts required to run our branch network as a commercial business and
1s reliant on Government support for loss making branches
24
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Royal Mail Holdings plc
Operating and Financial Review (continued)
Group revenues and profit are subject to several uncertainties
‘The postal market has evolved rapidly as a result of liberalisation Competitors are aggressively targeting business customers Additionally
business customers are downtrading using {ess profitable products In addition overall mait market volumes are declining Technological
innovation is increasing customers can now switch to alternative offermgs and information can be sent or made available faster and, in
many cases at a lower cost than traditional mail services If technological substitution continues market volumes will decrease further
Furthermore Royal Mails regulatory regime impacts the business s profitability in two key areas
The Unwersal Service Obligation (USO) requires Royal Mail to maintain a national collection and delivery network The USO results in
Royal Mail incurring a higher fixed cost base than our competitors Royal Mail has some of the cheapest stamp prices in Europe, as
historically business mail has subsidised the losses made on stamped mail Unless the applicable regulatory restramts permit Royal
Mail to recover from this imbalance, there 1s a risk that Royal Mail will always lose money on stamped mail, whilst competitors
Procure more profitable products such as business mail The USO does however ensure that Royal Mail has the largest distnbution
network in the country - which may present future opportunities, and
* Royal Mails prices for most of its letters products are determined by Price Control reviews and negotiation with Postcomm which
can reduce our flexibility and profitability, leading to uncertainty over how the future Licence and regulatory regime will affect Royal
Mail
The Group ts subject to regulatory restrictions on our operations and the risk of penalties for non-compliance
Royal Mails postal operator s Licence contains material restrictions on the operation of the business These include
* Obligations over the delivery and collection of mail,
* Restrictions over the freedom to set prices and
* — Obligations to give competitors access to our network
If Royal Mail breaches certain postal operator's Licence conditions or other regulatory requirements it may be subject to financial
penalties In addition to our postal operator's Licence the Group is also subject to oversight by other regulators This affects Post Office
Limited which has to satisfy the FSA's requirements as an appointed representative of The Governor and Company of the Bank of Ireland
who are regulated by the FSA in respect of investment, mortgage and insurance intermediation actwity in the UK It is also subject to anti-
money laundering regulations issued under the Proceeds of Crme Act 2002 and enforced by HM Revenue and Customs Post Office
Limited 1s also licensed as a telephone service provider by Ofcom who require service providers to issue and adhere to Codes of Practice
Without a contimued change of culture within the organisation future development may be affected
The business has undergone, and will continue to undergo, a significant amount of change Additionally the changing and uncertain postal
market place, the impact of competition and regulation and creased customer expectations place major chatlenges on all employees to
adapt and improve productivity to levels that will allow the business to compete effectively
These challenges need to be met by ongoing cultural change within the organisation Without a flexible efficient and co-operative culture,
Royal Mail could become loss making as mail volumes decline and labour rates increase Significant mdustrial action could have a major
detrimental effect on the Group's reputation and profits
The Group's business activities are time critical and if key infrastructure facilities were disrupted it could have an impact on
results
The business 1s subject to a number of operational risks to its nationwide delivery and retail outlet networks including natural disasters
fire flood explosion possibility of work stoppages or civit unrest. transport infrastructure disruption, power failures unavailability of key
supplies, breakdown or failure of equipment health pandemics terrorism and the normal hazards associated with running a complex
infrastructure A major disruption could have an adverse impact on customer services as well as business and operating results
The Group may be affected by future environmental and related fiscal measures
The Group operates a large vehicle fleet and a substantial property portfolio that consume large amounts of energy Although the Group
1s disposing of surplus property and 1s deploying a Carbon Management Programme, it may be affected by future environmental
Measures and adverse fiscal impact from increased energy costs and “green” taxation The increasing awareness and focus on
environmental issues may also impact on the Group's current product and service offerings
The Group operates a substantial treasury operation and is exposed to foreign currency risk and fuel price risk
The Group 1s exposed to foreign currency risk and fuel price risk The former 1s due to trading with overseas postal operators for carrying
UK mail abroad and delivering foreign origin mail in the UK, revaluation of currency balances held to operate the Bureau de Change
sermces and various sales and purchase contracts denominated in foreign currency The fuel price risk arises from operating a large
vehicle fleet and on jet fuel risk from purchasing air freight services If the treasury strategy is inappropriate to cover the Group's
exposures, this could result in funds not being readily available when required or a negative impact on profit due to increased costs
The Group ts subject to changes in both domestic and European regulation and legislation, which could expose it to possible
additional costs
Vanious changes to European or domestic law will have a direct impact on the Group such as the European Working Time Directive,
speed restrictions on the Group’s vehicles and increased liberalisation of the market for postal service providers Any future changes may
have a material impact on the Group and its individual business units
ry
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Royal Mail Holdings plc
Operating and Financial Review (continued)
Summary
The Group has produced a robust financial performance with operations remaining profitable before exceptional items and cash
generative even with difficult trading conditions and challenges experienced during the year Despite continued efficiency improvements
the Letters business made a loss as revenues have continued to fall with core market decline, increased losses to competition and
customers downtrading further to cheaper products Post Office Limited s underlying performance 1s broadly flat largely due to losses in
traditional mcome streams which have been partially mitigated by new commercial product revenues and cost savings Both of our parcels
businesses, GLS and Parcelforce Worldwide, have improved their revenue performance, with strong growth underpinning solid profits in
highly competitive markets this year
Our main achievement 1s to have secured landmark agreements on pay, pensions and modernisation for the business - we are now well
placed to press ahead with the vital investment in Royal Mail Letters to improve our efficiency and productivity With the full support of
our people, our strategy to modernise and transform the Letters business - with investment in both our people and technology - will
provide the platform for new and mare flexible products and services for our customers, who remain at the heart of everything we do
lan Duncan
Group Finance Director
19 May 2008
Understanding the Operating and Financial Review
Statement of compliance
This OFR 1s intended to develop the Group's narrative reporting to meet many of the recommendations of the Accounting Standards
Board's ‘Reporting Statement of Best Practice on the OFR’ This OFR ensures compliance with the legal requirement under the Companies
Act to provide a Business Review and ts referenced from the Directors’ Report
‘We will continue to review the narrative disclosures we provide in the annual Report and Accounts to ensure that the disclosures provided
meet the requirements of our stakeholders
Cautionary statement
The OFR focuses on matters that are relevant to the interest of the Shareholder of the Company The purpose of the OFR is to assist the
Shareholder of the Company in assessing the strategies adopted by the Company and the potential for those strategies to succeed It
should not be relied on by any other party or for any other purpose
Where this OFR contains forward looking statements these are made by the Directors in good faith based on the information available to
them at the ume of their approval of this report These statements should be treated with appropriate caution due to the herent
uncertainties underlying any such forward looking information
26
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Royal Mail Holdings ple
Royal Mail Holdings plc Board
Non Executive Chairman I
ALLAN LEIGHTON (55) joined the Board in April 2001 as a Non Executive Director, becoming Chairman in March 2002 He 1s also a !
Director of Post Office Limited, and a member of the GLS Supervisory Board Allan 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 1
1996, becoming President and CEO of Wal-Mart Europe when Wal-Mart bought Asda in 1999 He is currently President and Deputy
Chairman of Loblaw Companies Ltd Deputy Chairman of George Weston Limited and Selfridges and Co Ltd, as well as a Non Executive
Director of BSkyB
Non Executive Directors
DAVID FISH (59) joined the Board in January 2003 He 1s Chairman of the Remuneration Committee, and a member of the Nomination
Committee David was a member of the Mars Inc Operating Board from 1994 to 2001 and Joint President of Masterfoods Europe
President of Snackfoods Europe and held European Vice-President positions in marketing and personnel He has also been Chairman of
Christian Satvesen and 1s currently Executive Chairman of United Biscurts Topco Limited
RICHARD HANDOVER CBE (62) joined the Board in January 2003 He 1s the Senior Independent Director and 1s Chairman of the
Nomination Committee, and a member of the Remuneration Committee and the Audit and Risk Committee Richard was Chairman of WH
Smith plc until January 2005. and is currently Non Executive Chairman of Alexon Group ple
BARONESS MARGARET PROSSER OBE (70) joined the Board in November 2004 and 1s a member of the Nomination Committee Audit
and Risk Committee and Remuneration Committee Margaret has been a Member of the House of Lords since 2004 She 1s a Non
Executive Director of the Trade Union Funds Managers and has been Chair of the Women and Work Commission since July 2004 She is
also Deputy Chair of the Commission for Equality and Human Rights
HELEN WEIR CBE (45) joined the Board in January 2006 and 1s Chair of the Audit and Risk Committee Helen ts Group Executive Director
at Lloyds TSB plc with responsibilty for UK Retail Banking, having jomed as Group Finance Director in 2004 Prior to that she was Group
Finance Director of Kingfisher pic She 1s a member of the Said Business School Advisory Board and previously sat on the Accounting
Standards Board Helen is a Fellow of the Chartered Institute of Management Accountants
Executive Orectors
ADAM CROZIER (44) jomed the Company in February 2003 He 1s Group Chief Executive, and leads the Group Executive Team, and is the
Company's Shareholder representative on the Board of Camelot Group plc Adam 1s a Non-Executive Director of Debenhams plc and
Chairman of the Employers Forum on Disability He was Chief Executive of the Football Association from 2000-2003 Between 1988 and
1999 he held a number of senior rales at Saatchi and Saatchi Advertising, including that of Jomt Chief Executive from 1995
ALAN COOK CBE (54) joined the Company in March 2006 as Managing Director of Post Office Limited having been a Non-Executive
Director since February 2005 He is a member of the Group Executive Team Chairman of Post Office Financial Services and First Rate
Exchange Services Holdings Limited Alan was previously Chief Executive of National Savings and Investments, prior to which he had been
Chief Operating Officer of the Prudential Assurance Company Alan 1s also on the Council of the Institute of Financial Serwces, and on the
board of the Financial Ombudsman Service
JAN DUNCAN (47) was appointed as Group Finance Director in September 2006 and is a member of the Group Executive Team and the
GLS Supervisory Board He joined from Westinghouse Electric Company based in the USA. where he had been Chief Financial Officer since
1999 Prior to joing Westinghouse lan was Corporate Finance Director at Bnitish Nuclear Fuels plc and before that in corporate finance
with Dresdner Klemwort Benson Ltd and Lloyds Merchant Bank Ltd lan started his career with Deloitte & Touche in London, and 1s 2
member of the Institute of Chartered Accountants of England and Wales j
MARK HIGSON (52) joined the Company in November 2007 as Managing Director of the Letters Business and 1s a member of the Group
Executive Team Mark was previously divisional Chief Executive and Group Operations Director of BPB plc Prior to that, he held senior
positions at Courtaulds Pic, including CEO at its UK Coatings division He has also worked at HJ Heinz and British Aerospace
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Royal Mail Holdings pic
Royal Mail Holdings ple Board (continued)
Company Secretary
JONATHAN EVANS OBE (56) jomed the Company directly from university n 1974 and has been Company Secretary since 1999, having
held a wide range of management positions throughout the Group He s a member of the Group Executive Team Secretary to the Audit
and Risk, Remuneration and Nomination Committees, a Trustee Director of the Royal Mail Pension Plan, Chairman of the Royal Mail
Sentor Executives Pension Plan and a member of the GLS Supermsory Board
Directors who left during the year
IAN GRIFFITHS 30 April 2007
DAVID BURDEN 31 July 2007
SIR MICHAEL HODGKINSON 31 August 2007
JOHN NEILL 31 August 2007
TONY McCARTHY 7 December 2007
STEPHEN CARTER 8 January 2008 (appointed 1 September 2007)
28
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Royal Mail Holdings plc
Directors’ Report
The Directors present the Group accounts for Royal Matl Holdings plc These accounts relate to the 53 weeks ended 30 March 2008
(2007 52 weeks ended 25 March 2007)
Principal activities
The Group provides a nationwide and international distnbution service principally of mails and parcels The Group also provides access to
a wide range of financial and retail services through its network of Post Office branches across the United Kingdom
Review of the business and future developments
A review of the Group’s business and future developments is presented in the Chairman and Chief Executive's Statement Annual Review
and the Operating and Financial Review
Results and dividends
The loss before taxation amounted to £77m (2007 £313m profit) After taxation the profit was £135m (2007 £286m) Of the profit after
taxation, €nul (2007 €nil) 1s attnbutable to minonty interests The Directors do not recommend a dividend (2007 nil dividend)
Political and charitable contributions
During the year the Group made charitable contnbutions of £2m (2007 £1m) No political contributions were made in the year (2007
nil)
Research and development
Research and development expenditure during the year amounted to €1m (2007 £1m)
Policy on the payment of suppliers
The policy of the Company and its principal operating subsidiaries 1s to use their purchasing power fairly Payment terms are agreed in
advance for all major contracts For lower value transactions, the standard payment terms of the supplier apply It is the Companys policy
to abide with the agreed terms The Company and its principal operating subsidiaries in the UK have sought to comply with the
Department for Business Enterprise and Regulatory Reform (BERR) Better Payment Practice Code Copies of this can be obtained from
the BERR As the Company is a non-operating company, the creditor days are zero The creditor days of the operating subsidiaries are set
out in their accounts
Land and buildings
The net book value of the Groups land and buildings, based upon a historic cost accounting policy and excluding fit-out, 1s £669m (2007
£667m) In the opinion of the Directors, the aggregate market value of the Company's land and buildings exceeds this net book value by
£713m (2007 £798m)
Financial instruments
Details of financial mstruments and financial risk management objectives and policies are shown mn note 24 and note 23 respectively
Directors and their interests
The Directors of the Company and details of changes during the year are given on pages 27 and 28 The Secretary of State appoints the
Chairman, alt other Directors are appomted by the Company with the Secretary of State’s consent
HM Government is the Company s sole Shareholder and accordingly the Directors have no interest in shares of the Company
Audit information
The Directors confirm that, so far as they are aware, there 1s no relevant audit information of which the auditors are unaware and that
each Director has taken all reasonable steps to make themselves aware of any relevant audit information and to establish that the I
auditors are aware of that information
Qualifying third party indemnity provisions for Directors
A partial qualifying third party indemnity provision (as defined in section 234 of the Companies Act 2006) was and remains in force for
the benefit of all the Directors of the Company and former Directors who held office during the year The indemnity 1s granted under
article 129 of the Company's Articles of Association The indemnity is partial in that it does not allow the Company to cover the costs of an
unsuccessful defence of a third party claim
People
The Group employs over 181,000 people (2007 almost 185 000) in our UK wholly owned subsidiaries An analysis of the Group
headcount 1s shown in note 4 to the accounts Our people are our strategic strength and competitive advantage
The Group’s policy is to encourage effective communication and consultation between our people, particularly on matters relating to
strategy, financial and economuc factors that may influence the Group's performance This ts achieved through the use of an extensive
range of communication channels, including magazines, briefings, open forums TV screens and an intranet website Our people have
various bonus schemes, significant elements of which are based on business-related targets
We actively encourage continuous training and skill development for all our people to ensure achievement of corporate and individual
‘objectives Management development and training programmes have been designed to attract and retain the best. The Group has worked
with the unions to introduce several innovative working practices to improve efficiency
‘An Equal Opportunities policy 1s maintamed in all respects including disability, age, religion, colour sex, nationality, ethnic origin sexual
orientation, race, creed and marital status
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Royal Mail Holdings pic
Directors’ Report (continued)
In 2003, the Chairman created a pragramme to make Royal Mail Group a Great Place to Work and made it a priority for everyone across
the business The purpose of the programme ts to encourage people to contribute to improving their working environment. to equip them I
with the skills they need to develop pride in and understanding of the business and to drive respect for colleagues - in short to ensure
people considerations are at the heart of all major business decisions The programme 1s ongoing and will remain an integral part of our
people strategy
Our 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
© creating interesting meaningful jobs with more flexible working patterns
‘* identifying and developing for all our people a set of core behaviours that determine how we treat each other, our customers and
our Shareholder
© building a fluid mnovatwe and adaptive organisation to improve our response to environmental and market changes
‘¢ developing a high-performance culture in which everyone understands their contribution and 1s motivated to achieve their full
potential
* defining recruiting and developing the core capabihties we need to thrive in a competitive deregulated market,
* 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 1s to underpin our people strategy with a measurement system that will objectively demonstrate the value of our people and
thesr contribution to the success of our business
Currently the way we monitor our progress towards becoming a Great Place to Work 1s by using Have Your Say our emptoyee opinion
survey launched in January 2003 This 's carned out on a rolling basis across all employees and the results are reviewed monthly right
through the business - from local level up to Board level
Corporate Social Responsibility
The Group is committed to carrying out its activities in a socially responsible manner in respect of the environment employees customers
and local communities A Corporate and Social Responsibility (CSR) Governance Committee reports to the Board which publishes an
annual report of its activities Further details of our CSR governance structure and activities will be available in our 2008 CSR Report, due
to be published later in the year
Disabled employees
The Group s policy 1s to give full consideration to applications for employment from disabled persons Employees who become disabled
whilst employed receive full support through the provision of traming and special equipment to facilitate contmued employment where
practicable The Group provides training career development and promotion to disabled employees wherever appropriate
Gaing concern
After analysis of the financial resources available and cash flow projections for the Group, the Directors consider that it 1s appropriate to
prepare the financial statements on a going concern basis Further detals are provided under funding in note 2 to the accounts
Auditors
A resolution to reappoint Ernst & Young LLP as auditors will be put to the Annual General Meeting
By Order of the Board
Jonathan Evans
Company Secretary
19 May 2008
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Corporate Governance
Statement by the Directors on compliance with the Combined Code
The Board 1s committed to high standards of Corporate Governance and supports the Combined Code on Corporate Governance (the
Code) published in July 2003 and revised im June 2006 The Company has fully complied with the Code during the year The following
statement is intended to explain our governance policies and practices in light of the Code principles and provisions in so far as they are
appropriate to a public company with a single Shareholder, and to provide insight into how the Board and management run the business.
for the benefit of the Shareholder
The Board
The Board is responsible for setting the objectives and strategy of the Group and for monitoring performance At the end of the year, the
Board compnsed a Non Executive Chairman four Executive Directors and four Non Executive Directors At that date there were one
executive and two non-executive Director vacancies The biographies of each of the Directors, setting out their current roles,
commitments and previous experience are on pages 27 and 28 The Board usually meets monthly, and has defined those matters that
are reserved excluswvely for its consideration These include the approval of strategic plans, financial statements acquisitions and
disposals major contracts projects, and capital expenditure It delegates responsibilities to the Board Committees detailed below For each
scheduled meeting of the Board the Company Secretary, on behalf of the Chairman collates and circulates the papers aiming to allow
sufficient time for the Directors to review the information provided The Board 1s confident that all its members have the knowledge
talent and experience to perform the functions required of a Director of the business Executive Directors have rolling 12-month contracts
and Non Executive Directors are generally appointed for three-year terms
The Board considers that each of the Non Executive Directors 1s 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. During the year Richard Handover replaced Sir Mike Hodgkinson as Senior Independent Director There ts also a clear division
of responsibilities between the Chairman and the Chief Executive Performance evaluation of the Board, its Committees and individual
Directors takes place on an annual basis This ts led by the Senior Independent Director with the support of the Company Secretary The
evaluation 1s conducted by way of a formal questionnaire that enables Directors perspectives on the effectiveness of the Board and its
Committees to be fed back to the full Board Performance evaluations of Board Committees are conducted by the Chairmen of the
respective Board Committees The Non Executive Directors ted by the Senior Independent Director review the performance of the
Chairman and the Executive Directors The Executive Directors, ted by the Group Chief Executive, review the performance of the Non
Executive Directors
Directors may take independent professional advice in the furtherance of their duties at the Groups expense All Directors have access to
the advice and services of the Company Secretary the appomtment and removal of whom 1s a matter for the Board as a whole
All Directors appointed by the Board are required by the Company's Articles of Association to be elected by the Shareholder at the first
AGM after their appointment On appointment. the Directors take part im an mduction programme in which they receve information about
the Group, the role of the Board and matters reserved for its decision, the role of the principal Board Committees, the Group's Corporate
Governance arrangements and the latest financial information about the Group This 1s supplemented by visits to key business locations
The Group engages in two-way communication with the Shareholder to discuss information on its strategy, performance and policies The
Board receives feedback on these meetings from the Directors attending them
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Royal Mail Holdings pic
Corporate Governance (continued)
Number of meetings
During the year, the Directors attended the following number of meetings of the Board and tts main Committees with the maximum
number that each could have attended shown in brackets
Audit and 1
Risk Remuneration Nomination
Board Committee Committee Committee
Number of meetings during the year 22 5 9 9
Non Executive Chairman
Allan Leighton 11 (12)
Executive
Adam Crozer 42 (42)
Alan Cook 12 (12)
fan Duncan 12 (42)
Mark Higson 5 (5)
Non Executive
David Fish 14 (12) 99) 919) 1
Richard Handover 10 (12) 3(3) 79) 919) I
Baroness Margaret Prosser 10 (12) 4(5) 5 (6) 8 (9) :
Helen Weir 9 (42) 5 (5)
Former Directors
David Burden 4 (4)
fan Griffiths 0()
Tony McCarthy 8(9)
Sir Mike Hodgkinson 5 (5) 3 (3)
John Neill 3(5) 2(2)
Stephen Carter 3 (4)
Outside appointments
The Board believes that there are significant benefits to both the Group and the individual from Executive Directors accepting Non
Executive Directorships of companies outside of the Group The Board's policy is normally to limit Executive Directors to one Non
Executive Directorship, for which the Director may retain the fees (see the Directors’ Remuneration Report on page 42 for details)
Board Committees
The following Committees deal with specific aspects of the Group's governance The full terms of reference for each of the principal ]
Committees are available on the Company's website (www royalmaitgroup com) or on written request from the Company Secretary The I
details of Committee membership shown are as at 30 March 2008
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Royal Mail Holdings pic
Corporate Governance (continued)
Group Executive Team
Chair Adam Crozier
Membership Alan Cook (Managing Director Post Office Limited), Robin Dargue (Chief Information Officer) lan Duncan
(Group Finance Director) Jonathan Evans (Company Secretary), Mary Fagan (Group Corporate and
Government Affairs Director) Mark Higson (Managing Director Letters) Alex Smith (Group Director of
Strategy) and David Smith (Managing Director Parcetforce Worldwide)
Role The Committee's responsibilities include
+ to develop and monitor deployment of the Group s strategy annual operating plans and budgets
+ to review operational actrvittes, and set policies where these are not reserved to the Board and
= toallocate resources, both people and financial across the Group
The Holdings Board has delegated authority to the Investment Committees of the Group Executive Team to
make investment decisions of up to £20m
Audit and Risk Committee
Chair Helen Weir
Membership Richard Handover, Baroness Margaret Prosser
The Board 1s confident that the collecte experience of the Audit and Risk Committee members enables them,
as a group, to act as an effectwe Audit and Risk Committee The Committee also has access to the financial
expertise of the Group and its auditors and can seek further professional advice at the Companys expense if
required
Role The Committee which is assisted by the Corporate Risk Management Committee provides a forum for
reporting by both mternal and external auditors and 1s responsible for a wide range of matters including
= to monitor the integnity of the financial statements of the Group,
* to review the Group's internal financial control system and, unless addressed by the Corporate Risk
Management Committee or by the Board itself, internal control and risk management systems,
* to monitor and review the effectiveness of the Groups Internal Audit function I
* to recommend to the Board for Shareholder approval the appointment of the external auditors and
to approve their remuneration and terms of engagement,
* to monitor and review the external auditors’ independence, objectivity and the effectiveness of the
audit process
= to develop and implement policy on the engagement of the external auditors to supply non-audit
services and
= where the Committee's monitoring and review actuities reveal cause for concer or scope for
improvement to make recommendations to the Board or management on action needed to
address the tssue
Audit & Risk Committee report
See Internal control on page 36
Non-audit services provided by the external auditors
In some cases the nature of advice required makes it more timely and cost effective to select the external auditors who already have a
good understanding of the Group In order to maintain the objectwity and independence of the external auditors, the Committee has
determined what work can be provided by the external auditors and the approval processes associated with them The Committee
monitors the level of non-audit fees paid to the external auditors
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Corporate Governance (continued)
Remuneration Committee
Chair David Fish
Membership Richard Handover Baroness Margaret Prosser
Role The Committee's responsibilities include
* to determine and recommend for the Board's approval the framework for the remuneration of the
senior executives of the Group
* to determine the individual remuneration arrangements for the Chairman the Executive Directors
and the Company Secretary subject where necessary to the consent of the Secretary of State, and
+ to agree the targets for any performance-related incentive schemes applicable to senior executives,
Remuneration Committee Report
See page 37
Nomination Committee
Chair Richard Handover
Membership David Fish, Baroness Margaret Prosser
Role The Committee's responsibilities include
* to lead a format, rigorous and transparent process for appomtments to the Board of the Company.
to the boards of subsidianes and to other senior executive positions,
* to advise the Board on succession planning for the positions of Chairman, Chief Executive and all
other Board appointments and other senior appointments, and
* to keep under review the balance of Board membership to ensure that it has the required mix of
skills knowledge and experience
Nomination Committee Report
The Committee met nine times during the year The Committees main focus was on the selection and recruitment of Non-
Executive and Executive Directors and other senior executives The Commuttee took external advice from executive search
consultants, and considered internal candidates where appropriate All Board appointments require the consent of the
Shareholder representatives of whom were involved in the selection, giving mput to the Committee
In addition to the principal Committees above there are also the following Committees
Corporate and Social Responsibility Governance Committee
Chair Adam Crozier
Membership Group Director of People and Organisational Development, Managing Directors of business units Director of
Corporate and Social Responsibility, Head of Environment, Head of Health Head of Safety and other senior
executives from across the Group
Role The Committee's responsibilities include
= to provide an overview of the social environmental and ethical impacts of the Group s activities, and
= to make recommendations on Corporate and Social Responsibility standards and policies
Corporate and Social Responsibility Committee Report
The Committee is chaired by the Group Chief Executive and met on four occasions during the year The principal activity of the
Committee was to undertake a thorough review of the Groups CSR Strategy Engagement & Inclusion and Social policies
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Corporate Governance (continued)
Penstons Committee
Chair fan Duncan,
Membership Doug Evans Jon Millidge
Role The Committee's responsibilities include.
= to review funding benefits, scheme structure and strategic developments impacting on the Group's
occupational pension schemes and
+ to represent the Group in discussions with the Trustees of the Group's occupational pension
schemes
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Internal control
Overview
‘The Directors are responsible for the Group's system of risk management and internal contral as well as the 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 loss
The Group's approach to internal control is based on the underlying principle of line management accountability for control and risk
management There 1s an ongoing process for identifying, evaluating and managing the significant risks faced by the Group in accordance
with the guidance detailed by the Tumnbull Commuttee as part of the Code, including financial operational, compliance risks and risks to
reputation The Board regularly reviews this process The process has been in place throughout the year and up to the date of approval of
these accounts The responsibility for yoint ventures and associates rests, on the whole, with the senior management of those operations
The Company monitors its investments and exerts influence through Board representations
The Board has reviewed the effectrveness of the system of risk management and internal control The key elements include a review of
internal 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
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 risk
management processes and the control environment The Committee reviews the scope of work, authority and resources of the Internal
Audit and Risk Management function The Audit and Risk Committee regularly reviews the Group risk profile
Key control processes
The key control processes are ongoing and include the following
= the business units have authority to manage within the limits set by the Board and within the scope of reserved powers The
Group's Code of Business Standards sets the pnnciples of professionalism and mtegrity for our people,
* discussion and approval by the Board of the strategic direction, plans and objectives of the Group and each operating company
and the risks to achieving them,
. reviews and approval by the Board of budgets and forecasts,
. monthly reviews of performance by reference to key performance indicators updated forecasts and information on the key risk I
areas,
. at least quarterly reviews by the Audit and Risk Committee of the scope and results of internal audit work across the Group The I
scope of the work covers all key activities of the Group and concentrates on higher risk areas,
. reviews of the scope of the work of the external auditors by the Audit and Risk Committee and any significant issues arising, H
. reviews by the Audit and Risk Committee of accounting policies and delegated authority levels and I
. consideration by the Board of the major risks facing the Group and procedures to manage them
Risk Management process
The process consists of formal identification by management at each level of the Group of the key risks to achieving their business
objectives and the controls in place to manage them The likelihood and potential impact of each risk 1s evaluated The process also
includes
* _br-annual certification by management that they are responsible for managing the risks to their business objectives and that the
internal controls are such that they provide reasonable but not absolute assurance that the risks are appropriately identified,
evaluated and managed and
* independent assurance by Internal Audit as to the existence and effectiveness of the risk management activities described by
management
The system of risk management and internal control 1s embedded into the operations of the Group, and the actions taken to mitigate any
weaknesses are carefully monitored
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Directors’ Remuneration Report
This Report provides the information required by the Directors’ Remuneration Report Regulations 2002 (the Regulations) The Company's
remuneration policy follows the Combined Code and best practice in other UK organisations The Royal Mail Group strategic plan requires
fundamental change to make sure that customers are given high quality services which are good value for money The Board believes
that to achieve this it 1s necessary to have people of the right calibre who are given incentives to produce results which benefit customers
and the Shareholder
The parts of this Report that have been audited are
* Directors’ emoluments with respect to 2007-08,
* Performance-related annual bonuses outturn for 2007-08,
* Company Awards and Bonus Awards under Long Term Incentive Plans (LTIP) and
* Pensions
Directors’ emoluments with respect to 2007-08
Total excluding
LTIP, pensions and
pension
‘Annual performance bonus supplement I
Performance- Waived
Current related bonus Waived bonus Compensation
‘annual I Salary/ inctudmg into from prior for loss of
salary/fees I __ fees IColleagueShare __LTIP* years Benefits office 2008 2007
‘£000 I £000 £000 £000 £000 ‘£000 £000 €000 £000
Non Executive Chairman
Allan Leighton 20 20 180 : 180 - - + 200 200
Executive
‘Adam Crozer 633. I 633 381 a9) 190 - 20 - BAB 859
‘Alan Cook 257 257 142 (70) rR - 28 - ur 346 I
tan Duncan 300 300 142 (70) r - 88 = 460 3647
Mark Higson * 420 270 82 (4a) 41 - 6 - a7 -
Non Executive
David Fish 4“ “5 : - - - : - 4s 45
Richard Handover 60 48 - - - - - - rey 45
Baroness Margaret
Prosser 45 43 - - - - : - 3 40
Heten Weir 3 43 - : - - - - a3 38
Former Directors
David Burden ? - %% - - - - 4 : 98 370
lan Griffiths * : 42 - - - : 1 500 $43 813
Tony McCarthy * - 236 - - - - 14 - 250 459
Stephen Carter * - 1 - - : - - - 1 -
Sr Michae! Hodgkinson * - 4 - - - - - - Ey 83
John Nealt © . 15 - - : - - 15 35
Bob Wigley : : - : - - - - - 25
Total 2008 2,823 I 1,994 927__(372) 555 - 151 500__3.197 :
Total 2007 2628 I _ 2513 1513 (609) 904 18 287 : 3722
* The annual performance bonus waved into LTIP is explamed on page 40
+ Mark Higson jomed the Board on 5 November 2007
? David Burden left the Board on 31 July 2007
lan Griffiths left the Board on 30 April 2007
Tony McCarthy left the Board on 7 December 2007
‘Stephen Carter yined the Board on 1 September 2007 and left on 8 January 2008
‘Sir Michael Hodgkinson and John Neill left the Board on 31 August 2007
lan Duncan jomed the Board on 1 September 2006 therefore this represents pro-rated payment for the year
7
As noted above there has been a number of changes to the Board The figures m the table represent emoluments earned and receivable as
Directors duning 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 1s paid in the year following that in which it 1s earned and the amount deferred into LTIP that 1s
not paid until the LTIP matures
37
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Directors’ Remuneration Report (continued)
In addition some Directors receive supplements in lieu of pension contributions (see page 42)
Total emoluments excluding
Cash supplement im lieu of pension (see page 42) LTIP and pensions
2008 2007 2008 2007
£000 £000 £000 £000
Adam Crozier* 208 140 1,051 999
Alan Cook 105 100 452 466
lan Duncan 75 45 535 409
Mark Higson 68 - 285 -
fan Griffiths 23 157 556 970
469 442
* Adam Crozier elected with effect from August 2006 to take his pension provision above the earnings cap as a cash supplement.
The total Directors’ remuneration, excluding pensions and Long-Term Incentive Plan and including cash supplement in leu of pension, ts
£3,666,000 (2007 £4,164 000)
These payments are consistent with the policy of the Remuneration Committee The following sections describe the Committee, its
general policy and the main elements of remuneration
Remuneration Poticy
The Remuneration Committee
The Board retains overall accountability for the framework and costs of executive remuneration and the terms of the service contracts
offered to all Executive Directors These also require the consent of the Secretary of State for Business, Enterprise and Regulatory
Reform The Secretary of State also gives consent for the remuneration arrangements for Non Executive Directors The Remuneration
Committee s role 1s to develop the remuneration policy for Executive Directors and their immediate reports and specifically to make
recommendations on their salary, benefits, bonuses and other terms and conditions of employment The Committee also recommends
appropriate compensation on the ending of employment, giving careful consideration to the circumstances of the particular case and the
ability of the individual to mitigate
The Remuneration Committee is made up wholly of independent Non Executive Directors Membership of the Committee ts given on page
34 The Chief Executive, Adam Crozier, and the Group Director People & Organisational Development, may attend these meetings by
invitation and are not present at the discussion of their own remuneration
Advice to the Remuneration Committee
The Committee calls for information and advice from inside and outside the Group It takes advice from those independent professional
organisations that are best able to assist it on the particular topic under discussion
During 2007-08 advice on the performance of key executives was given by the Chairman and the Chief Executive Information on the
external marketplace was given by Monks Partnership (a trading name of PriceWaterhouseCoopers), Deloitte & Touche LLP, Hay
Management Consultants and Watson Wyatt Limited Internal support 1s primarily provided by the Group Director People & Organisational
Development, and from the Company Secretary, Jonathan Evans Other advice and information has been provided by specialists from the
People & Organisational Development and Finance Departments
During the year, advice was given to the Company by Watson Wyatt Limited on pensions and actuanal 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 quality na
complex business and a competitive market place, 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 - both short and long-term and
the system of remuneration should bring together the interests of senior executives, customers and the Shareholder
The policy for senior executives takes into account pay and employment conditions elsewhere in the Group
The Committee regularly reviews the package and its competitiveness against appropriate marketplaces The Committee aims to ensure
that the package ts proportionate and effective and that it follows accepted best practice
The main components of remuneration
The main components for Executive Directors are basic salary, an annual performance-related bonus, a Long-Term Incentive Plan (LTIP)
pension and other benefits The Committee believes that there should be a particular emphasis on performance-related elements
Directors’ Remuneration Report (continued)
Base salanes
Royal Mail Holdings plc
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The Committee believes that base salaries should be set at levels that are sufficient to recruit and retain high calibre executives In making
tts judgement the Committee considers information from several sources so that a fair comparison can be made with enterprises of a
similar size and complexity to Royal Mail This data is provided by independent consultancies, usually based on the published annual
reports of other organisations Increases are recommended where the Committee believes that it is necessary to reflect contribution
increased mdividual responsibihties and market levels The Secretary of State’s consent is required for all material changes to Directors’
remuneration
There was no increase to base salaries for Executive Directors for 2007-08 For 2006-07 the increase was 2 9%
Performance-related, annual bonus 2007-08
For 2007-08 the annual bonus plan followed the model of the previous year, which included the following weightings
* all Business roles had a weighting of 30% on Group performance and 70% Business performance This applied to the Managing
Directors of Letters and Post Office Limited and
* all Group roles had a weighting of 90% on Group performance and a further 10% weighting given to Post Office Limited s
performance in view of the importance of supporting the recovery of that business
The following tables show the make up of the annual bonus plan as percentages of annual salary
Maximum levels Profit Service Quality Total
‘Chief Executive 70% 30% 100%
Other Executive Directors 56% 244 80%
On-target levels Profit Service Quality Total
Chief Executive 36% 244 60%
Other Executive Directors 29% 19% 48%
Threshold levels Profit Service Quality Total
Chief Executive 15% 15% 30%
Other Executive Directors 12% 42% 24%
The financial target was based on Group profit.
The Service Quality measures were
Retail First Class
Retail Second Class
Bulk First Class,
Bulk Second Class
Bulk Third Class,
Special Delivery,
Parcelforce 24,
eee eres
A Post Office Limited Customer Service Effectiveness measure, and
‘A Post Office Limited measure of new products sold
Executive Directors also participate in the ColleagueShare plan on the same terms as all other eligible employees This is explained in note
2 on page 53
Long-Term Incentive Plans
A three-year LTIP was in place for 2005-06 to 2007-08 and a further three-year plan covers the period 2007-08 to 2009-10 This
arrangement will allow the last plan to come to an end at the same time as the next Postcomm price control review Half of the awards
for 2007-08 are attributed to the 2005-06 to 2007-08 plan and the remaining half to the 2007-08 to 2009-10 pian
Performance 1s measured by Return on Total operating Assets (ROTA)
For the three years 2005-06 to 2007-08 the principtes of the plan were as follows
(a) Annual Company Performance Awards which accrue on a sliding scale above a threshold level of performance and begin at 12 5% of
annual base salary For on-target performance, the Company Award 1s 25% of annual base salary and for exceptional performance
this rises to a maximum of 37 5%
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Directors’ Remuneration Report (continued)
(b) Bonus Awards A Bonus Award can be made each year by the Remuneration Committee These are only made in situations where
the Director waives a proportion of their annual bonus Bonus awards do nat exceed the amount waived A Director has the
discretion to waive a maximum of one half of any annual bonus up to the on-target level If a bonus above on-target would
otherwise be payable then three quarters of this additional amount will be compulsorily waived
(c)_ A Multiplying factor Company and Bonus Awards may be increased by a factor that measures ROTA across the plan If the on-
target level is achieved for the relevant period then each of the Company Awards and Bonus Awards to which it apples may be
Increased by an additional one third In the case of exceptional performance, then up to a maximum addition of 100% can be added
Payments under the plan will be made in June 2008
The 2007-08 to 2009-10 LTIP has the same principles as the previous LTIP
The Company and Bonus Awards for 2007-08 are effectively shared equally between the two plans
The performance targets for the last two years of the 2007-08 to 2009-10 plan are sll under discussion with the Government
Company Awards
These are measured against an annual ROTA target ROTA mcentivises the productive value of the business and emphasises the need to
make efficient use of all operational assets It covers the need to make a proper return both on any new investments that are made and
on the existing asset base
For 2005-06 the ROTA target was 11 2% and the Company's achievement was 13 7%, 22% above the target and above the stretch of
13 4% This resulted in Company Awards of 37 5% For 2006-07 the ROTA target was 4 2% with astretch of 71% A ROTA of 5 4% was
achieved but the Remuneration Committee exercised its discretion to cap this at the on-target level of 4 2%, resulting in a Company
Award of 25%
For 2007-08 the following table against annual ROTA applied
Royal Mail ROTA achievement Percentage of Base Salary 1
24% 25%
514 375%
The outturn achievement was 3 9% resulting in a Company Award of 32 5%
Bonus Awards
As described above a Director may waive a maximum of one half of any annual bonus up to the on-target level and must waive three
quarters of any bonus earned above the on-target level If a proportion of annual bonus 1s waived then a Bonus Award may be made
within the LTIP, not exceeding that value
Multiplying Factor
The Multiplying Factor 1s dependent upon cumulative ROTA over 2005-06 to 2007-08
The cumulative ROTA works as follows Targets for the end of the third year are 15 9% at the threshold level, 17 4% at the on-target level
and 25 7% at the maximum To ensure consistency of performance there are intermediate targets at March 2007 of 13 6% at the
threshold level 15 1% at the on-target level and 20 3% at the maximum As the on-target level of cumulative ROTA was exceeded at the
end of March 2007, the percentage multiplier at that position on the performance scale was applied to the awards made so far The
cumulative ROTA for the preceding 2 years was 19 0% and gave a multiplier of 184 Across the whole of the three-year period, the
cumulative ROTA achieved was 22 6% and this gave a multiplier of 175, which was applied to Company and Bonus Awards for 2007-08
Benefits
Benefits include the provision of a company car, health insurance, relocation costs or the cash equivalent of any benefits not taken
Pensions
The Group has a liability to pay pensions in respect of Directors’ services and for some Executive Directors, makes contnbutions to
pension schernes for this purpose The Company pays a cash supplement to Directors whose contributions to the Company scheme are
restricted by the scheme-specific earnings cap The Company continues to apply the scheme-speaffc earnings cap indexed by inflation
each year, as a constraint on the amount of salary that is pensionable through the Company scheme
Following a review of its pension arrangements the Company has introduced changes to its pension provision for all employees including
Executwe Directors with effect from 1 April 2008 From 1 April 2008 the defined benefit pension plans have been closed to new members
and pension for future service accrues on a career salary basis Furthermore from 1 April 2010 the normal retirement age under the
plans increase to age 65 and the earliest age for receipt of a reduced pension will be 55
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Directors’ Remuneration Report (continued)
Fixed and performance-related elements of Executive Oirectors’ remuneration (excluding pensions)
For 2007-08, 33% of Directors potential annual earnings related to fixed elements whilst 67% related to annualised performance
elements for the Group Chief Executive 30% was fixed and 70% was variable The element of remuneration at risk to performance 1s that
available through the Long-Term Incentive Plan and the performance-related annual bonus
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 Director s contract being prematurely terminated In such
circumstances, steps would be taken to ensure that poor performance 1s not rewarded
The rolling service contracts and letters of appointment of the Directors include the following terms as at 30 March 2008
Expiry date of current service Unexpired term
Date of contract contract (months)
Non Executive Chairman
Allan Leighton 25 March 2008 25 March 2009 12
Executive Directors
‘Adam Crozier 4 February 2003 12
Alan Cook 1 March 2006 12
lan Duncan 1 September 2006 12
Mark Higson 5 November 2007 12
The Non Executive Directors do not have service contracts The dates of the current Non Executive Director appointments are as follows
Non Executive Directors
David Fish 1 January 2003 30 September 2008 6
Richard Handover 1 January 2003 30 September 2008 6
Baroness Margaret Prosser 1 November 2004 31 October 2010 31
Helen Weir 1 January 2006 31 December 2008 9
All Executive Directors have a contracted 12-month notice period from the Company, the Director must give six-months notice The
compensation for loss of office 1s a payment of 12-months basic salary which may be subject to mitigation Oavid Burden retired from
the Company with effect from 31 July 2007
Non Executive Directors
The Company ts committed for the full term of appointments for Non Executive Directors, including the Chairman The fees paid to the
Non Executive Directors are determined by the Executive Directors and approved by the Secretary of State Independent market surveys
are consulted in determining them Fees 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, and for the Senior Independent Director
Details of the fees are given below
Performance-related, annual bonuses outturn for 2007-08
The details of the bonus plan are given on page 40 Bonuses awarded for 2007-08 have suffered due to the period of industrial action
although financial performance has been better than budget The Remuneration Committee also disallowed any short-term financial
benefits from the delays in implementing planned projects that were a result of industnal action in the case of Adam Crozier the bonus
awarded was 60 1% of the maximum For lan Duncan it was 58 9% for Alan Cook 68 7% and for Mark Higson 61 5% As the Company had
exceeded its financial target it was decided to award the non-executwe Chairman a bonus of £180,000
lan Griffiths and Tony McCarthy were made no awards in respect of their part-year service durmg 2007-08
Adam Crozer, Alan Cook and lan Duncan were awarded £800 ColteagueShare stakeholder dividend for the year Mark Higson was
awarded a pro-rata amount of £317
a
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Directors’ Remuneration Report (continued)
Company Awards and Bonus Awards under the Long Term Incentive Plans
The Remuneration Committee policy 1s that a high proportion of total remuneration js at risk to performance
Awards made under the 2005-06 to 2007-08 plan are not payable until June 2008, except in the case of leavers in good standing
Awards for the second plan are payable in June 2010
Company Bonus Company Bonus Company Enhancement
and Awards Awards in Awardsin Awards in Awards In of Awards for
Bonus paid respect of I respectof —respactof respect of I 2005-08 plan
Awards and 2007-08 = 2007-08 © 2007-08 2007-08 from Total = LTIPfor LTP for
held at waived for for tor for application LTIPat payment payment
26 March in 2008-08 © 2005-08 = 2007-10 2007-10 of 30 March in in
2007 2007-1 plan plan plan plan multiplier 2008 © 2008-09» 2010-11
£000 £000 £000 £000 £000 £000 £000 £000 £000 £000
Executive j
Adam Crozier 1645 - %6 103 6 103 149 2a 1993 198
‘Alan Cook 305 : 35 42 35 42 58 517 440 n
Jan Duncan 180 : 38 “9 35 49 63 aad 327 8
Mark Higson - - a 27 20 a 36 131 a or
Tony McCarthy 794 (794)? - : - - : - : -
David Burden 652 (652) a : - - - - : -
lan Griffiths, David Burden and Tony McCarthy were made no awards in respect of their part-year service during 2007-08 lan Griffiths
was made no LTIP award for service in 2006-07
* David Burden waived the Long Term Incentwe Plan payment and the Company decided at its discretion to make a pension contribution payment for David Burden of
£652 277 This 1s of equal value to the payment wawed and does not therefore represent any additional cost to the Company
? Tony McCarthy was paid his award during the year
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
‘Sir Michael Hodgkinson receed additional fees of £15 625 (2007 £37 500) for his position as Chairman of Post Office Limited The
annual fee for committee membership is £5,000. £10 000 for chairmanship and £12,500 in the case of the chairman of the Audit and
Risk Committee The annual fee for the Senior independent Director is £10,000
Executive Directors’ outside appointments
The Executive Directors may retain fees from their Directorships The annual fees due to Executive Directors im respect of their Non
Executive Directorships are shown in the table below
2008 2007
Directorship £000 £000
Adam Crozer Debenhams plc 45 40
Alan Cook Financial Ombudsman Service 20 :
lan Griffiths Ultra Electronics Holdings ple 35 34
Pensions
The Group previously offered its most senior people membership of the Royal Mail Senior Executives Pension Plan (the Plan), which 1s
now closed to new members Details of the Plan are set out in note 25 to the accounts The Plan is a funded, Inland Revenue-registered
final salary occupational pension scheme The Plan provides for a pension on a final salary basis for service up to 31 March 2008 and for
subsequent service on a career salary basis The pension 1s payable from normal retirement age (currently age 60) and 1s subyect to the
maximum pensionable service and the scheme-specific earnings cap Pensions in payment are increased annually in line with Retail Prices
Index (RP!) subject in some cases to a cap of 5% Pensions are also payable to dependants on the death of the member and a lump sum
1s payable if death in service occurs
For senior executives whose membership of the Plan 1s restricted by the earings cap pension provision is made by a combination of the
Company scheme and a cash pension supplement or its equivalent lan Duncan and Adam Crozier receive a cash supplement of 40% of
base pay above the earnings cap Alan Cook and Mark Higson are not members of the Plan and receive a cash supplement of 40% of base
pay The Company has made provision for retirement pension arrangements at a rate of 4O% of base pay above the earnings cap for
David Burden, and this provision was used to buy an additional pension on his retirement from the Company A reserve has been
established for the additional pension for Tony McCarthy to provide the total retirement penston, including his previous employer's
pension scheme, of two-thirds of base pay at normal retirement age During the year the provision for David Burden was released and
the total provision at the year-end for Tony McCarthy was £1m (2007 £1m)
42
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Ourectors’ Remuneration Report (contmued)
The following table 1s designed to indicate the increase in the value of Directors’ accrued benefits during the period The transfer value 1s
calculated on the basis of actuarial advice in accordance with Actuarial Guidance Note GN111 and excludes Directors contributions
The pension entitlements of the Directors at the year end were
Increase in Transfer value I
Increase in accrued of mcrease
accrued benefits before
Accumulated benefits during the ~—inflation less I
Age at accrued benefit during the period (net of Directors’ I
Year at 30 March 2008 period inflation) contributions i
end £000 £000 £000 £000
Executive Directors
Adam Crozer 44 7 6 4 54
David Burden * 61 18 2 41
lan Duncan 47 6 4 4 63
lan Griffiths ? - - - - -
Tony McCarthy > 51 64 6 6 117
The following table is designed to assess the change in transfer values during the year, taking inta account movement in investment
market conditions Falls in market values may generate a negative movement in the transfer values
Transfer value
at 25 March 2007 Transfer Movement in
or at date of Plus value the period
Age at appointment to transfers-in at30March less Directors’
Year Board if later recewed Sub total 2008 contributions
end £000 £000 £000 £000 £000
Executive
Directors
Adam Crozier 4h 796 - 796 1156 354
David Burden ? 61 335, - 335 396 58
lan Duncan 47 28 - 28 109 1%
lan Griffiths ® - 74 - 74 - -
Tony McCarthy ? 51 1,068 - 1,068 1442 365
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 1s not money the individual is entitled to receive
+ Dawid Burden retired on 31 July 2007 and started drawing his pension
2 {an Griffiths left the Board on 30 April 2007 elected to transfer his pension benefits before the year-end and no longer has any
accrued benefits under the plan
3 Tony McCarthy left the Board on 7 December 2007
By Order of the Board 1
Jonathan Evans
Company Secretary
19 May 2008
43
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Statement of Directors’ responsibilities in relation to the Group financial statements
The Directors are responsible for preparing the Annual Report and the Group financial statements, in accordance with applicable United
Kingdom law and those International Financial Reporting Standards (IFRSs) as adopted by the European Union I
The Directors are required to prepare Group financial statements for each financial year which present fairly the financial position of the
Group and the financial performance and cash flows of the Group for that period
In preparing those Group financial statements the Directors are required to
* select suitable accounting policies in accordance with IAS 8 ‘Accounting Policies Changes in Accounting Estimates and Errors
and then apply them consistently,
* present information including accounting policies, in a manner that provides relevant, reliable, comparable and
understandable information,
= provide additional disclosures when compliance with the specific requirements in IFRSs 1s insufficient to enable users to
understand the impact of particular transactions, other events and conditions of the Group's financial position and financial
performance, and
= state that the Group has complied with IFRSs subject to any material departures disclosed and explained in the financial
statements
The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial
position of the Group and enable them to ensure that the Group financial statements comply with the Companies Act 1985 They are also
Tesponsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and .
other irregularities I
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's
website Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ fram legistation
in other yurisdictions
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Independent Auditors’ Report to the members of Royal Mail Holdings plc
We have audited the Group financial statements of Royal Mait Holdings plc for the year ended 30 March 2008 which comprise the Group
income statement Group statement of recognised income and expense Group balance sheet Group cash flow statement and the related
notes 1 to 29 These Group financial statements have been prepared under the accounting policies set out therein
We have reported separately on the parent company financial statements of Royal Mail Holdings plc for the year ended 30 March 2008
and on the information in the Directors Remuneration Report that is described as having been audited
This report 1s 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 to them in an
auditors’ report and for no other purpose To the fullest extent permitted by law we do not accept or assume responsibility to anyone
other than the Company and the Company's members as a body for our audit work, for this report, or for the opinions we have formed
Respective responsibilities of Directors and auditors
The Directors responsibilities for preparing the Annual Report and the Group financial statements in accordance with applicable United
Kingdom law and International Financial Reporting Standards (IFRSs) as adopted by the European Union are set out in the Statement of
Directors Responsibilities,
Our responsibility 1s to audit the Group financial statements in accordance with relevant legal and regulatory requirements and
International Standards on Auditing (UK and Ireland)
We report to you our opinion as to whether the Group financial statements give a true and fair view and whether the Group financial
statements have been properly prepared in accordance with the Companies Act 1985 We also report to you whether, in our opinion, the
information given in the Directors Report is consistent with the Group financial statements The information given in the Directors’ Report I
includes that specific formation presented in the Group Operating and Financial Review that is cross referred from the Rewew of the
business and future developments’ section of the Directors’ Report
In addition we report to you if in our opmion we have not received all the information and explanations we require for our audit, or if
information specified by law regarding directors remuneration and other transactions is not disclosed
We review whether the Corporate Governance statement reflects the Company's compliance with the nine provisions of the 2006
Combined Code spectfied for our review by the Listing Rules of the Financial Services Authonty, and we report if it does not We are not
required to consider whether the Board's statements on internal control cover all risks and controls or form an opinion on the
effectiveness of the Group s corporate governance procedures or its nisk and control procedures
We read other information contained in the Annual Report and consider whether itis consistent with the audited Group financial
statements The ather information comprises only the Chairman and Chief Executive's Statement the Annual Review, the Operating and
Financial Review, the Directors’ Report the Corporate Governance statement, the Internal Control statement the unaudited part of the
Directors’ Remuneration Report and the Statement of Directors Responsibilities We consider the implications for our report if we become
aware of any apparent misstatements or material inconsistencies with the Group financial statements Our responsibilities do not extend
to any other information
Basis of audit opinion
We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board I
‘An audit includes examination on a test basis, of evidence relevant to the amounts and disclosures in the Group financial statements It i
also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the Group financial
statements, and of whether the accounting policies are appropriate to the Groups circumstances consistently applied and adequately
disclosed
We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to
provide us with sufficient evidence to give reasonable assurance that the Group 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 Group financial statements
Opinion
In our opinton
+ the Group financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union of
the state of the Group s affairs as at 30 March 2008 and of its profit for the year then ended,
* the Group financial statements have been properly prepared in accordance with the Companies Act 1985 and
The information given in the Directors Report 1s consistent with the Group financial statements.
Lust! Az Yausny LLL’ -
Ernst & Young LLP
Registered auditor
London
19 May 2008
45
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Royal Mail Holdings plc
Group income statement for the 53 weeks ended 30 March 2008 and 52 weeks ended 25 March 2007
2008 2007
Notes £m £m
Continuing operations
Turnover 9,238 9,104
Social Network Payment 150 75
Revenue 9,388 9,179
People costs excluding ColleagueShare and restructuring costs (6,209) (6145)
Royal Mail Group people
‘Wages and salaries (4,550) (4,511)
Pensions 5la) (701) (722)
Social secunty (319) (320)
Subpostmasters (50) (534)
Temporary resource (89) (58)
Distribution and conveyance operating costs S(b) (1,341) (1 237)
Other operating costs 5t0) (1,723) (1,603)
Share of post tax profit from joint ventures and associates 44 47 39
Operating profit before exceptional items 162 233
Operating exceptional items 7 (441) (243)
Government grant income 313 -
ColleagueShare costs (277) .
Other restructuring costs (47) (243) i
Operating toss (279) (10)
Profit on disposal of property group - 1h
Profit on disposal of property. plant and equipment 58 44
(Loss)/profit before financing and taxation (22a) 108
Finance costs 8 (713) (56)
Finance income 8 84 62
Net pensions interest 25(c) 131 199
{Loss)/profit before taxation (77) 313
Taxation credit/(charge) 9 212 (27)
Profit for the financial year from continuing operations 135 286
Profit attributable to
Equity holder of the parent company 135 286
Minority interest. - -
Royal Mail Holdings plc
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Group statement of recognised income and expense for the 53 weeks ended 30 March 2008 and 52 weeks
ended 25 March 2007
2008 2007
Notes £m £m
Translation differences on foreign currency net investments 27 63 (2)
Actuarial gains on defined benefit schemes 25/27 1,798 340
Gains/(losses) on cash flow hedges deferred into equity 24/27 36 (9)
(Gains)/iosses on cash flow hedges released from equity to come 26/27 (3) 4
Gains on cash flow hedges released from equity to the carrying amount of non-financial assets 24/27 (a) -
Taxation on items taken directly to equity 9/27 (18) 27
Gains on financial assets deferred into equity 27 13 =
Net income recognised directly in equity 1,888 360
Profit for the financial year from continuing operations 27 135 286
Total recognised mcome for the period 2,023 646
Attributable to
Equity holder of the parent company 2,023 646
Minontty interest 27 - -
47
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Royal Mail Holdings plc
Group balance sheet at 30 March 2008 and 25 March 2007 i
2008 2007 i
Notes £m £m.
Non-current assets
Property plant and equipment 10 1,671 1,619 '
Goodwitl 11 173 143
Intangible assets 12 67 64
Investments in joint ventures and associates 14 136 114
Financial assets - pension escrow investments 26 1,070 1,000
~ derivatives 24 8 -
Other receivables a 4
Deferred tax assets 9 608 403
3,734 3347
Non-current assets held for sale 15 a 7
Current assets
Inventories 16 33 26
Trade and other recewables 17 1,116 1031
Financial assets - investments 24 21 17
~ derivatives 2h 26 -
Cash and cash equivalents 19/24 1,427 11%
2,619 2,270
Total assets 6,354 5624
Current liabilities
Trade and other payables a (2,354) (1.924)
Financial ltabilties - interest bearing loans and borrowings 19/24 (289) (301)
~ obligations under finance lease and hire purchase contracts 19/24 (10) -
~ derivatives 19/24 (3) 7)
Income tax payable (a5) (29)
Provisions 20 (248) (69)
(2,919) (2,330)
Non-current abilities
Financial liabilities - interest bearing loans and borrowings 19/24 (502) (502)
+ obligations under finance tease and hire purchase contracts 19/24 (43) (a)
Provisions 20 (163) (42)
Retirement benefit obligation - pension deficit 25 (2,923) (4,985)
Other payables 22 (40) (25) I
Deferred tax liabilities 9 (5) 3) 1
(3,676) (5558) I
Total wabilities, (6,595) (7,888)
Net Wabitities (241) (2,264)
Equity
Share capital 26 - -
Share premium 27 430 430
Retained earnings 27 {863) (2,775)
Reserves 27 189 78
Equity attributable to equity holder of parent company (244) (2,267)
Minority interest 27 3 3
Total equity (264) (2.264)
The accounts on pages 46 to 96 were approved by the Board of Directors on 19 May 2008 and signed on its behalf by
Adam Crozier fan Duncan
48
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Royal Mail Holdings plc
Group cash flow statement for the 53 weeks ended 30 March 2008 and 52 weeks ended 25 March 2007
2008 2007
Notes £m £m
Cash flow from operating activities
Operating profit before exceptional items 162 233
Add back
Depreciation and amortisation 5 236 198
Share of post tax profit from joint ventures and associates 14 (47) (39)
351 392
Working capital and other non-cash movements 7 7
{Increase)/decrease in inventories 16 a) 1
(Increase)/decrease in recewables (52) 42 I
Increase/(decrease) in payables 86 (49) I
Decrease in client debtors 17 - 17
Increase in client creditors 2 123 55
Net decrease in retirement benefit obligation (133) (64)
Net increase in derivative (assets)/iabilities (4) 2
(Decrease)/increase in non-exceptional provisions (6) 4
Other movements. - a)
Receipt of Government grant 33 -
Cash payments in respect of operating exceptional items (see note (a) below) (188) (282)
Share in Success . (90)
Other (188) (192)
Cash inflow from operations 483 117 ,
Income tax (paid)/recovered (33) 13 ‘
Net cash inflow from operating activities 450 130
Cash flows from investing activities
Dividends received from joint ventures and associates 44 36 39
Finance income received 82 67
Proceeds from sale of property group - 74
Proceeds from sale of property plant and equipment 1h 65
Purchase of property plant and equipment (263) (244)
Investment in associate 16 (a0) -
Acquisition of businesses net of cash acquired 13 (5) (a7)
Purchase of intangible assets (67) (65)
Payment of deferred consideration in respect of prior years acquisitions - (3)
Net purchase of financial assets investments (non-current) 24 (87) (995)
Net movement in financial assets investments (current) 24 (6) 677
Net cash outflow from mvesting activities (247) (405)
Net cash inflow/(outflow) before financing activities 233 (275)
Cash flows from financing activities
Proceeds from issue of ordinary shares - 430
Finance costs pad (87) (55)
Payment of capital element of obligations under finance lease contracts 3) (a)
Cash received on sale and leasebacks 55 :
New foans 2 -
Repayment of borrowings (2a) (63)
Dividend paid to minontty interest - (a)
Net cash (outflow)/inflow from financing activities (24) 310
Net mcrease in cash and cash equivalents 209 35
Effect of exchange rates on cash and cash equivalents 45 :
Cash and cash equvalents at the beginning of the penod 1,196 1161
Cash and cash equivalents at the end of the period 18/24 1,420 1196
The £1 420m cash and cash equivalents balance 1s net of a £7m overdrawn bank balance relating to the General Logistics Systems
{GLS) subsidiary This £7m 1s included in the Financial tiabilities - interest bearing loans and borrowings balance of £289m in the
balance sheet
49
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Royal Mail Holdings plc
(a) Cash flows relating to operating exceptional items charged to the income statement in current and prior years
The net cash outflows relating ta the above were as follows
2008 2007
Net cash outflow relating to £m £m
Current year operating exceptional items. 121 114
Prior years’ operating exceptional items 67 168
Total 188 282
The net cash outflow of £188m (2007 £282m) comprises £144m (2007 £118m) relating to cash utilised to settle exceptional provisions,
£4m (2007 £27m) relating to current year pension redundancy liabilities £32m (2007 £47m) relating to prior year pension redundancy
abilities £8m (2007 Enu) in respect of other costs which were recorded within creditors and Eni! (2007 £90m) Share in Success.
payment
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Royal Mail Holdings plc
Notes to the Group accounts
1. Authorisation of financial statements and statement of compliance with IFRSs
The Group's financial statements for the 53 weeks ended 30 March 2008 were authorised for issue by the Board on 19 May 2008 and the
balance sheet was signed on the Board s behalf by Adam Crozier and lan Duncan
The Group's financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the
European Union and as they apply to the financial statements of the Group for the 53 weeks ended 30 March 2008 The principal accounting
policies adopted by the Group are set out in note 2
2. Accounting policies
Basis of preparation and accounting
The Group comprises Royal Mail Holdings plc (the Company) - which 1s wholly owned by HM Government - and its subsidiarres The Company
1s incorporated in the United Kingdom under the Companies Act 1985 (the Act) and the accounts are produced in accordance with the Act and
applicable IFRSs
The Group financial statements are presented in sterling and all values are rounded to the nearest £m except where otherwise indicated
Royal Mail Group Ltd, a wholly owned subsidiary of the Company, 1s exposed to the nsk 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 its licence The
amount of such fines and compensation will be determined by the Regulator after further representations from Royal Mail Group Ltd and no
further mformation 1s being disclosed on the grounds that it can be expected to prejudice the outcome of that process
Changes in accounting policy
The accounting policies adopted are consistent with those of the previous financial year except as follows
The Group has adopted the following new and amended IFRS and IFRIC interpretations during the year Adoption of these revised standards
and interpretations did not have any effect on the financial performance or position of the Group in the current or prior periods In certain
cases, they did however give rise to additional disclosures
«© IFRS7 Financial Instruments Disclosures
© =IAST Amendment - Presentation of Financial Statements Capital Disclosures
© IFRIC9 Reassessment of Embedded Derwatives
IFRS 7 Financial Instruments Disclosures
This standard requires disclosures that enable users of the financial statements to evaluate the significance of the Group's financial
instruments and the nature and extent of risks arising from those financial instruments The new disclosures are mcluded throughout the
financial statements While there has been no effect on the financial position or results comparative information has been revised where
necessary
JAS 1 Amendment - Presentation of Financial Statements Capital Disclosures
This amendment requires the Group to make new disclosures to enable users of the financial statements to evaluate the Group's objectives
policies and processes for managing capital These new disclosures are shown in note 23
JFRIC 9 Reassessment of Embedded Derwatives
IFRIC 9 states that the date to assess the existence of an embedded derivative 1s the date that an entity first becomes a party to the contract,
with reassessment only if there 1s a change to the contract that significantly modifies the cash flows As the Group has no embedded derwvative
Fequiring separation from the host contract, the interpretation has no impact on the financial position or performance of the Group
Key sources of estimation uncertainty
The key sources of estimation uncertainty that have a significant risk of causing material adjustment to the carrying amounts of assets and
uabilttes within the next financial year relate to the measurement of the defined benefit pension obligations, deferred tax and ColleagueShare
plan costs Measurement of the defined benefit obligations requires certain assumptions to be made including on life expectancy, future
changes in salaries, inflation and a suitable discount rate The size of these obligations and therefore the pension deficit 1s materially sensitive
to the assumptions adopted The assumptions which have the most significant impact on the measurement of the defined benefit obligations
are the real discount rate and the mortality rates A 01 percentage point change to the discount rate could change the liabilities by
approximately £450m An additional one year on the life expectancy could increase liabilities by approximately £650m The major assumptions
are disclosed in note 25 Assessment of the deferred tax asset requires an estimation of future profitability Such estimation 1s inherently
uncertain in a market subject to various competitive pressures Should estimates of future profitability change in future years, the amount of
deferred tax recognised will also change accordingly
The calculation of the ColleagueShare costs and liabilities is rebant an a number of estimates These include in particular forecasts for the
potential equity value of ColleagueShares, forecasts of joiners and leavers throughout the life of the plan and judgements on when participants
are likely to exercise their rights for the Company to redeem the ColleagueShares that they hold The magnitude of the costs involved is
sensitive to these forecasts and assumptions
51
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2. Accounting policies (continued)
Funding
Royal Mail Group Ltd
Royal Mail Group Ltd made a loss in 2007-08 after bearing losses relating to stamped mail and carrying out its Universal Service Obligations
In addition it has been facing considerable cash requirements with respect to its proposed investment in plant and equipment and funding its
pension deficit at a time when the market has been opened up to full competition On 23 March 2007, a funding package totalling £1 2bn up
until 2016 was completed with Government
The European Commussion is continuing its investigation under the EC Treaty's rules on State Aid into a sertes of funding measures taken by
the United Kingdom Government in its capacity as Shareholder in favour of Royal Mail between 2001 and 2007 including the funding
agreement completed on 23 March 2007 In its response to the EC in relation to this investigation the United Kingdom Government has stated
that it believes that the measures being investigated by the EC were concluded on commercial terms
Post Office Limited
Post Office Limited had net liabilities as at 30 March 2008 and has operated at a loss during 2007-08 and prior years primarily because of
‘supporting the loss-making rural network
To become viable in the longer-term, new business areas continue to be developed and grown in order to replace the lost contribution from
traditional income sources and significant cost reduction programmes continue to be implemented
During the year Post Office Limited has updated tts five-year strategic plan and will proceed with the implementation of a number of radical
programmes which are designed to improve the profitability of the company These programmes include
* the development of new business and drive for sales growth,
* the restructuring of the network,
* bringing the crown branch segment into profit, and
* a programme of fundamental cost reduction
The future financing of this Plan is underpinned by
* rural network funding of £150m received from Government during 2007-08,
* a funding agreement with Government announced on 17 May 2007, which provided a further £313m, which was received on 31 July
2007 to compensate Post Office Limited for the other net costs of providing certain specified “services of general economic interest’,
* a further equity injection of £77m recewed on 1 April 2008 and £75m on 15 April 2008
© the extension on 18 April 2008 of the existing working capital facility of £1 15bn to 2011 {at the balance sheet date this was to 2010),
and
‘State Aid approval has been recened for the above funding and also for the provision of network subsidy payments of around £150m per
annum in each of the three financial years 2008-09 to 2010-11 for the purposes of meeting, up to a specified limit, the net costs of
maintaining certain loss-making parts of the network
‘Whilst the Directors are satisfied with the progress that has been made it should be noted that the completion of the regeneration
programmes will take several years to achieve, as anticipated in the company's five-year strategic plan Accordingly there will be a need to gain
agreement with respect to the continuation of the network subsidy payment for the period beyond March 2011, as well as the replacement or
extension of the working capital facilities These arrangements will need State Aid approval
Notwithstanding these uncertainties the Directors recognise that significant progress has been made in delivering its Plan and that the
Funding Agreement is now in place and, after careful consideration, continue to believe that Post Office Limited will be able to meet its
liabilities as they fall due in the foreseeable future Accordingly on that basis, the Directors consider that it 1s appropriate that these financial
statements are prepared on a gomg concern basis
After analysis of the financial resources available and cash flow projections for the Group including consideration of the financing
arrangements outlined above, the Directors consider that it 1s appropriate to prepare the financial statements on a going concern basis
Basis of consolidation
The consolidated financial statements comprise the accounts of the Company and its subsidiary undertakings The financial statements of the
major subsidiaries are prepared for the same reporting year as the Company, using consistent accounting policies
All intragroup balances and transactions, including unrealised profits arising from intragroup transactions have been eliminated in full
Transfer prices between business segments are set on a basts of charges reached through a negotiation with the respective businesses
‘Subsidiaries are consolidated from the date on which control is obtained by the Group and cease to be consolidated from the date on which
control is no longer held by the Group Where the Group ceases to hald control of a subsidiary, the consolidated financial statements include
the results for the part of the reporting year during which the Group held control i
Minontty interests represent the portion of profit/loss, gains/losses and net assets relating to subsidiaries that are not attributable to members.
of the Company The minority interests balance 1s presented separately within equity in the consolidated balance sheet, separately from parent
shareholders’ equity
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2 Accounting policies (continued)
Investments in joint ventures and associates
The Group’s investments in its joint ventures and associates are accounted for under the equity method of accounting Under the equity
method the investment is carried in the balance sheet at cost plus post-acquisition changes in the Group s share of the net assets of the joint
ventures/associates less any impairment in value The income statement reflects the Groups share of post tax profits from the joint ventures/
associates:
Any goodwill ansing on acquisition of an associate representing the excess of the cost of the investment compared to the Group's share of the
net fair value of the identifiable assets, liabilities and contingent liabilities acquired, 1s included in the carrying amount and not amortised To
the extent that the net fair value of the associates identifiable assets, lrabilities and contingent liabilities 1s greater than the cost of the
investment a gain 1s recognised and added to the Group’s share of the associate's profit or loss in the period in which the investment 1s
acquired
Revenue
Revenue reported in the mcome statement comprises of Turnover and the Sacial Network Payment Turnover principally relates to the
rendering of services
Royal Mail
Account revenue 1s derived from specific contracts and recognised when the mail delivery 1s complete Prepaid revenue mainly relating to
‘stamp and meter income is recognised when the sale 1s made, adjusted to reflect a value of stamp and meter credits held but not used by the
customer
Parcelforce Worldwide
Account revenue is derived from specific contracts and recognised when the delivery of an item is complete
Post Office Limited
Revenue 1s recognised when retail and financial services are provided
General Logistics Systems
Revenue ts derived from specific contracts and 1s recognised at the time of delivery
The Social Network Payment is Government grant revenue recognised to match the related costs of providing the network of public post
offices that the Secretary of State for Business, Enterprise and Regulatory Reform considers appropnate and which would otherwise not be
provided
Distribution and conveyance
Distribution and conveyance costs relate to third party costs incurred in carrying mail These include conveyance by rail, road, sea and air,
together with costs incurred by international mail carriers and Parcelforce Worldwide delivery operators These costs are disclosed separately
on the face of the income statement.
Operating profit before exceptional items
Operating profit 1s the profit arising from the normal recurring operations of the business This incorporates revenue, people costs, distribution
and conveyance costs, other operating casts and the Group's post tax share of profits from joint ventures and associates Operating exceptional
items are separately identified
Operating exceptional items
Operating exceptional items are matenial items of income and expenditure arising from the operations of the business which due to the nature
of the events giving rise to them require separate presentation on the face of the income statement to allow a better understanding of
financial performance in the year, in companson to prior years
ColteagueShare plan
ColleagueShare 1s the name for the Group's phantom share plan The plan, introduced in 2007-08, 1s a five-year plan spanning the accounting i
years from April 2007 to March 2012 and comprises both a phantom share scheme and a related stakeholder dividend worth up to £5,300
per person throughout the life of the plan The ColleagueShares represent up to a total of 20% of the projected equity value of the Group
Additionally Royal Mail plans to pay a stakeholder dividend dependent on the achievement of certain targets
The costs of the plan are being charged to the income statement as an exceptional item throughout the life of the plan Any long-term
{labilities arising in relation to the plan will be discounted at an appropriate high quality corporate bond rate These discounts will be unwound
through the income statement during the life of the plan The Group will redeem ail ColieagueShares by 2012
Operating profit
Operating profit 1s the profit arising from the normal, recurring operations of the business and after charging operating exceptional items
defined above It excludes the non operating exceptional items for profit or toss on disposal of businesses and profit or loss on disposal of
property, plant and equipment These items are not part of the normal recurring operations of the business but are material so are presented
separately on the face of the income statement to allow a better understanding of financial performance in the year in comparison to prior
years
Goodwill
Business combinations on or after 29 March 2004 are accounted for under IFRS 3 ‘Business Combinations’ using the purchase method Any
excess of the cast of the business combination over the Group's interest i the net fair value of the identifiable assets, liabilities and contingent.
liabilities at the date of acquisition 1s recognised in the balance sheet as goodwill and is not amortised_
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2 Accounting policies (continued)
After initial recognition, goodwill is stated at cost less any accumulated impairment losses Goodwill ansing from business combinations 1s
reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired
An impairment loss 1s recognised in the income statement for the amount by which the carrying value of the asset (or cash generating unit)
exceeds its recoverable amount, which is the higher of an asset's net realisable value and its value mn use
For the purpose of such impairment reviews, goodwill is allocated to the relevant cash generating umits
Goodwill arising on the acquisition of equity accounted entittes 1s mcluded in the cost of those entities and therefore not reported m the balance
sheet as goodwil
Intangibte assets
Intangible assets acquired as part of a business combination are capitalised separately from goodwill f the fair value can be measured reliably
‘on initial recognition Intangible assets acquired separately or development costs that meet the criteria to be capitalised are initially recognised
at cost and are assessed to have either a finite or mdefinite useful life Those with a finite life are amortised over their useful life and those '
with an indefinite life are reviewed for impairment annually or more frequently if events or changes in circumnstances indicate that the carrying
value may be impaired An impairment loss 1s recognised in the income statement for the amount by which the carrying value of the asset
exceeds its recoverable amount, which is the higher of an asset's net realisable value and its value in use
Amortisatton of intangible assets with finite ves 1s charged annually to the mcome statement The useful lives of such intangible assets are in
the range of 1-6 years
Research and development
Expenditure on research is written off in the year it 1s curred Development costs are capitalised where they meet the criteria required under
IFRSs If these criteria are not met then the costs are recognised in the income statement as they are incurred
Property, plant and equipment
Property, plant and equipment is recognised at cost, cluding attributable costs in bringing the asset mto working condition for its intended
use Depreciation of property plant and equipment is provided on a straight-line basis by reference to net book value and to the remaining
useful economic lives of assets and their estimated residual values The useful lives and residual values are renewed annually and
adjustments, where applicable, are made on a prospective basis The lives assigned to major categories of property, plant and equipment are I
Range of asset ives
Land and buildings
Freehold tand Not deprecated
Freehold buildings Up to 50 years
Leasehold buildings The shorter of the period of the lease 50 years or the estimated remaining useful life
Plant and machinery 3-15 years
Motor vehicles and trailers 1-12 years
Fixtures and equipment 2-15 years
An individual property that the Group has identified as surplus 1s reclassified within ‘non-current assets held for sale’, a separate category on
the balance sheet, when a sale is highly probable This has been determined to be when authority to market the property has been approved
and the property 1s vacant and therefore available for immediate sale and occupation by a third party Such properties are expected to
generate economic cash flow primarily by sale of the asset rather than by operational activities, and are expected generally to be disposed of
within a year ‘
For a disposal group of properties or other assets and liabilities the requirements of IFRS 5 ‘Non-current assets held for sale and discontinued \
operations’ are applied to the specific circumstances of the disposal group
Impairment reviews
Unless otherwise disclosed in these accounting policies, assets are reviewed for impairment if events or changes in circumstances indicate that
the carrying value may be impaired The Group assesses at each reporting date whether such indications exist. Where appropiate, an
impairment loss is recognised in the income statement for the amount by which the carrying value of the asset (or cash generating unit)
exceeds Its recoverable amount which is the higher of an asset's net realisable value and its value in use
Leases
Finance teases, where substantially all the risks and rewards incidental to ownership of the leased item have passed to the Group, are
capitalised at the mception of the lease with a corresponding liability recognised for the fair value of the leased item or, if lower at the present
value of the minimum lease payments Lease payments are apportioned between the finance charges and reduction of the lease liability to
achieve a constant rate of interest on the remaining balance of the lability Capitalised leased assets are depreciated over the shorter of the
estimated useful life of the asset and the lease term
Leases where substantially all the risks and rewards of ownership of the asset are retained by the lessor, are classified as operating leases and
rentals are charged to the income statement over the lease term The aggregate benefit of incentives are recognised as a reduction of rental
expenses over the lease term on a straight-line basis
Inventories
Inventones are carried at the lower of cost and net realisable value after adjusting for obsolete or slow-moving stock Cost includes all costs in
bringing each item to its present location and condition and comprises weighted average cost for supplies and materials and purchase cost for
merchandise
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2 Accounting policies (continued)
Trade and other receivables
Trade receivables are recognised and carried at original invoice amount less an allowance for any non-collectable amounts An estimate for
doubtful debts 1s made when collection of the full amount 1s no longer probable Bad debts are written off when identified
Financial instruments
Financial assets within the scope of IAS 39 ‘Financial Instruments Recognition and Measurement’ are classified as, financial assets at fair value
through the income statement (held for trading) held to maturity investments, loans and recervables or available for sale financial assets as
appropriate Financial liabilities within the scope of IAS 39 are classified as either financial lrabilities at fair value through the income statement
or financial liabilities measured at amartised cost.
The Group determines the classification of its financial instruments at initial recognition and re-evatuates this designation at each financial year
end
When financial instruments are recognised initially they are measured at fair value, being the transaction price plus, in the case of financial
Instruments not at ‘fair value through the income statement’, any directly attributable transactional costs
The subsequent measurement of financial instruments depends on their classification as follows
Financial assets at fair value through the income statement (held for trading)
Financial assets are classified as held for trading if they are acquired for sale m the short term Derwatives are also classified as held for
trading unless they are designated as hedging instruments Assets are carried in the balance sheet at fair value with gains or losses recognised
1m the income statement
Held-to-matunty investments
Non-derivative financial assets with fixed or determinable payments and fixed maturity are classified as ‘held to maturity when the Group has
the positive intention and ability to hold to maturity Held to maturity mvestments are carned at amortised cost using the effective interest rate
method Gains and losses are recognised in the income statement when the investments are derecognised or impaired as well as through the
amortisation process Investments intended to be held for an undefined period are not included in this classification
Loans and recewables
Non-derivative financial assets with fixed or determmable payments that are not quoted on an active market do not qualify as trading assets
and have not been designated as either ‘fair value through the income statement’ or available for sale Such assets are carried at amortised
Cost using the effective interest rate method if the time value of money ts significant Gains and losses are recognised in the income statement
when the loans and recetvables are derecognised or impaired, as well as through the amortisation process
Available for sale financial assets
‘Available for sale financial assets are non-derwative financial assets that are designated as such or are not classified in any of the three
preceding categones After initial recognition, interest 1s taken to the income statement using the effective interest rate method and the assets
are measured at fair value with gains or losses being recognised as a separate component of equity until the ivestment is derecognised, or
until the investment 1s deemed to be impaired at which time the cumulative gain or loss previously reported in equity 1s included in the income i
statement
Financial halulities at fair value through the income statement (held for trading)
Denwatives liabilities are classified as held for trading unless they are designated as hedging instruments They are carried in the balance sheet
at fair value with gains or losses recognised m the income statement
Financial habilities measured at amortised cost
All non-derivative financial liabilities are classtfied as financial liabilities measured at amortised cost. Non-dertvative financial abilities are
initially recognised at the fair value of the consideration received, less directly attributable issue costs After initial recognition, non-deriatrve
financial liabilities are subsequently measured at amortised cost using the effective interest method Gains and losses are recognised in the
income statement when the liabilities are derecognised or impaired, as well as through the amortisation process
Cash and cash equivalents
Cash and cash equivalents in the balance sheet comprise cash at bank and in hand and short-term deposits (cash equivalents) with an original
matuntty date of three months or less In addition, the Group uses Money Market funds as a readily available source of cash which are bought
and sold on a daily basis to meet the cash requirements of the business These funds are also categorised as cash equivalents
For the purpose of the cash flow statement, cash and cash equivalents consist of cash and cash equivalents as defined above, net of bank
overdrafts
Cash equivalents are classified as loans and recetvables financial instruments.
Financial assets - pension escrow investments
Financial assets ~ pension escrow investments comprise short term deposits with banks conventional gilt edged securities index-tinked gilt
edged securities and Treasury bills
Short term deposits with banks (pension escrow investments) are classified as loans and receivables financial instruments
Conventional gilt edged securities index-linked gilt edged securities and Treasury bills are classified as available for sale financial instruments
on the basis that they are quoted investments that are not held for trading and may be disposed of prior to maturity
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2. Accounting policies (continued)
Financial assets - other investments
Financial assets - other investments comprise, short term deposits (other investments) with Government local government or banks with an
‘original maturity of three months or more and conventional gilt edged securities Short term deposits are classified as loans and receivables
financial instruments Conventional gilt edged securities are classified as available for sale financial instruments on the basis that they are
quoted investments that are not held for trading and may be disposed of prior to maturity
Financial liabilities - interest-bearing loans and borrowings
All loans and borrowings are classified as financial liabilities measured at amortised cost Borrowing costs are recognised as an expense when
meurred
Financial liabilities - obligations under finance lease and ture purchase contracts
All obligations under finance lease and hire purchase contracts are classified as financial labilties measured at amortised cost.
Borrowing costs are recognised as an expense when incurred
Denwvative financial instruments
The Group uses derwative instruments such as foreign currency contracts in order to manage the risk profile of any underlying risk exposure of
the Group, in line with the Group's treasury management policies Such derivative financial instruments are mitially stated at fair value
For the purpose of hedge accounting, hedges are classified as cash flow hedges where they hedge exposure to variability m cash flows that 1s
either attributable to a particular nisk assouated with a recognised asset or iabilty or a highly probable forecasted transaction
In relation to cash flow hedges to hedge the foreign exchange risk of firm commitments that meet the conditions for hedge accounting the
portion of the gain or loss on the hedging instrument that 1s determined to relate to an effective hedge 1s recognised directly in equity and the
ineffective portion 1s recognised m the income statement I
When the hedged firm commitment results in the recognition of a non financial asset or non financial labilty then at the time the asset or
hhabilty ts recognised, the associated gains or losses that had previously been recognised in equity are cluded in the initial measurement of
the acquisition cost or other carrying amount of the asset or liability For all other cash flow hedges the gains or losses that are recognised in
equity are transferred to the income statement in the same year in which the hedged firm commitment affects the net profit/loss for example
when the future sale actually occurs
For derivatives that do not qualify for hedge accounting any gains or losses arising from changes in fair value are taken directly to the income
statement in the period
Hedge accounting is discontinued when the hedging instrument expires or is sold terminated or exercised, or no longer qualifies for hedge
accounting At that pomt in time any cumnulative gain or loss on the hedging mstrument recognised m equity 1s kept in equity until the forecast
transaction occurs If a hedged transaction 1s no longer expected to occur, the net cumulative gain or loss recognised in equity 1s transferred to
‘the income statement for the year
Fair value measurement of financiat instruments
The fair value of quoted investments 1s determined by reference to bid prices at the close of business on the balance sheet date Where there is,
no active market fair value 1s determined using valuation techniques These include using recent arm’s length market transactions reference to
the current market value of another instrument which 1s substantially the same and discounted cash flow analysis and pricing models
Specifically, in the absence of quoted market prices derivatives are valued by using quoted forward prices for the underlying commodity/currency
and discounted using quoted interest rates (both as at the close of business on the balance sheet date)
For the purposes of disclosing the fair value of investments held at amortised cost in the balance sheet, in the absence of quoted market prices,
fair values are calculated by discounting the future cash flows of the financial instrument using quoted equivalent interest rates as at close of
business on the balance sheet date
Derecognition of financial instruments
A financial asset or liability is derecognised when the contract that gives rise to it Is settled sold cancelled or expires
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2 Accounting policies (continued)
Income tax and deferred tax
The charge for current taxation 1s based on the results for the year as adjusted for ttems that are non-assessable or disallowed It 1s calculated
using rates that have been enacted or substantively enacted at the balance sheet date
Deferred tax 1s provided using the liability method, on all temporary differences at the balance sheet date, between the tax bases of assets and
liabilities and their carrying amounts for financial reporting purposes
Deferred income tax liabilities are recognised for all taxable temporary differences except
° initial recognition of goodwill,
. ‘the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction,
affects neither the accounting profit nor taxable profit or loss, and
. taxable temporary differences associated with investments in subsidiaries, associates and interest in joint ventures, where the timing of
the reversal of the temporary differences can be controlled and it 1s probable that the temporary difference will not reverse in the
foreseeable future
Other than stated betow, deferred tax assets are recognised for all deductible temporary differences carry-forward of unused tax assets and
unused tax losses, to the extent that it 1s probable that taxable profit will be available against which the deductible temporary differences
carry-forward of unused tax assets, and unused tax losses can be utilised Deferred tax assets are not recognised in respect of
s deductible temporary differences arising from the initial recognition of an asset or liability in a transaction that ts not a business
combination and at the time of the transaction, affects neither the accounting profit nor the taxable profit or loss and
. deductible temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, except to the
extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against
which the temporary difference will be utilised
The carrying amount of deferred tax assets 1s reviewed at each balance sheet date and increased or reduced to the extent that sufficient
taxable profit will be available to allow all or part of the deferred tax asset to be utilised
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the tax asset is realised or the
lability 1s settled based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date Deferred tax
balances are not discounted
Current and deferred tax 1s charged or credited directly to equity if it relates to items that are credited or charged directly to equity Otherwise
it 1s recognised in the income statement
Provisions:
Provisions are recognised when the Graup has a present obligation (legal or constructive) as a result of a past event, it 1s probable that an
outflow of resources will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation If the effect
of the time value of money 1s material, provisions are determined by discounting the expected future cash flows at an appropriate pre-tax rate
Pensions and other post-retirement benefits
The pension plans’ assets for the defined benefit schemes are measured at fair value Liabilities are measured on an actuarial basis using the
projected unit credit method and discounted at a rate equivalent to the current rate of return on a high quality corporate bond of equivalent
currency and term The resulting defined benefit asset or lability 1s presented separately on the face of the balance sheet. Full actuanal
valuations are carried out at intervals not normally exceeding three years as determmed by the Trustees and with appropnate updates and
accounting adjustments at each balance sheet date form the basis of the deficit disclosed All members of defined benefit schemes are
contracted out of the eamnings-related part of the State pension scheme
For defined benefit schemes, the amounts charged to operating profit are the current service costs and any gains and losses arising from
settlements, curtailments and past service costs The net difference between the interest costs and the expected return on plan assets 1s
recognised as net pensions interest in the mcome statement Actuarial gains and losses are recognised immediately in the statement of
recognised income and expense (SORIE) Any deferred tax movement associated with the actuarial gains and losses ts also recognised in the
SORIE
For defined contribution schemes, the Group s contributions are charged to operating profit within people costs in the period to which the
contributions relate Overseas subsidianes make separate arrangements for the provision of pensions and other post-retirement benefits
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2. Accounting policies (contmued)
Foreign currencies
The functional and presentational currency of Royal Mail Holdings plc 1s sterling (£) The functional currency of the overseas subsidiaries in
Europe is mainly the euro (€)
The assets and liabilities of foreign operations are translated at the rate of exchange ruling at the balance sheet date The trading results of
foreign operations are translated at the average rates of exchange for the reporting period being a reasonable approximation to the actual
transaction rate The exchange differences arising on the translation, since the date of transition to IFRSs are taken directly to the Foreign
Currency Translation Reserve in equity
Transactions mn foreign currencies are initially recorded in the functional currency by applying the spot exchange rate ruling at the date of the
transaction Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rate of exchange
ruling at the balance sheet date Currently hedge accounting 1s not claimed for any monetary assets and liabilities All differences are therefore
taken to the income statement, except for differences on monetary assets and liabilities that form part of the Group's net investment in a
foreign operation These are taken directly to equity until the disposal of the net investment occurs at which time they are recognised in profit
or toss
Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates
of the intial transactions Non-monetary items measured at fair value in foreign currency are translated using the exchange rates at the date
when the fair value is determined
Contingent liabilities and financial guarantee contracts
Financial guarantee contracts are initially measured at fair value and subsequently at the higher of amounts under IAS 37 or the amounts
initially recognised less when appropriate cumulative amortisation recognised in accordance with IAS 18 ‘Revenue
Contingent liabilities are not disclosed if the possibility of losses occurring 1s considered to be remote
Government grants
Government grants of a revenue nature are credited to the income statement and are shown separately to the expenditure to which they
relate
Segment information
The Group's primary reporting format 1s by business segments and its secondary format 's by geographical segments The business segments
are organised and managed separately according to the nature of the products and services provided with each segment representing a
business unit that offers different products and serves largely different markets The five business segments are
Royal Mail Delivers letters to all addresses in the United Kingdom Royal Mail offers a number of products to both business and domestic
users
Parcelforce Worldwide The parcels business unit operating within the UK i}
Post Office Limited A limited company responsible for the network of Post Office branches offering a series of retail services
General Logistics Systems The European parcels business which, via its subsidiaries and partners offers its services in 36 European states
Other businesses Includes PostCap Guernsey Limited and iRed Redefining Document Management Ltd, both wholly owned subsidiaries,
Romec Limited. and NDC 2000 Limited, bath part owned subsidiaries investments in the following associates ~ Quadrant Catering Limited,
Camelot Group pic and Cametot International Services Limited, and our Group Property unit The Group Property unit includes Royal Mail
Estates Limited, a wholly owned subsidiary
Transfer prices between business segments are set on a basis of charges reached through negotiation with the respective businesses
The two geographical segments are UK operations and European operations The latter consists of the GLS business segment The former
includes the other four business segments plus Corporate representing central shared services for the UK and the corporate centre Corporate
ts not a revenue or profit centre but incurs certain costs on behalf of the business segments which are passed on and manages certain assets
and liabilities of the Group
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2 Accounting policies (continued)
Accounting standards and interpretations not applied
The International Accounting Standards Board (IASB) and International Financial Reporting Interpretations Committee (iFRIC) have issued
accounting standards and interpretations with an effective date for accounting periods beginning on ar after the date of these financial
statements Of these the Group has not applied the following
International Accounting Standards (IAS/IFRSs) Effective date i
IFRS 2 Amendment to IFRS 2 - Vesting Conditions and Cancellations 1 January 2009 i
IFRS 3 Business Combinations (revised January 2008) 1 July 2009
IFRS 8 Operating Segments 1 January 2009
1AS 1 Presentation of Financial Statements (revised September 2007) 1 January 2009
IAS 23 Borrowing Costs (revised March 2007) 1 January 2009
AS 27 Consolidated and Separate Financial Statements (revised January 2008) 1 July 2009
IAS 32 &IAS 1 Amendments to JAS 32 Financial Instruments Presentation and IAS 1 1 January 2009
Presentation of Financial Statements - Puttable Financial Instruments and
Obligations Arising on Liquidation
Internationat Financial Reporting Interpretations Committee (IFRIC)
IFRIC 12 Service Concession Arrangements 1 January 2008
IFRIC 13 Customer Loyalty Programmes 1 July 2008
IFRIC 14 IAS 19 - The Limit on Defined Benefit Asset Minimum Funding Requirements and
their interaction 1 January 2008
IFRS 2 Vesting Conditions and Cancellations
The amendment to IFRS 2 deals with vesting conditions and cancellations for shares Although the Group operates the Colleagueshare
phantom share scheme (see policy note above) this does not constitute a share based payment arrangement under IFRS 2 Consequently the
Group has no share based payment arrangements, and therefore, this amendment will have no impact on the financial position or performance
of the Group
IFRS 3 Business Combinations
The Group does not anticipate early adopting the revised IFRS 3 and so will apply it prospectively to all business combinations on or after
29 March 2010 Whilst it 1s not possible to estimate the outcome of adoption, the key features of the revised IFRS 3 include a
requirement for acquisition-related costs to be expensed and not included in the purchase price, and for contingent consideration to be
recognised at fair value on the acquisition date (with subsequent changes recognised in the income statement and not as a change to
goodwill) The standard also changes the treatment of non-controlling interest (formerly minority interests) with an option to recognise
these at full fair value as at the acquisition date and a requirement for previously held non-controlling interests to be fair valued as at the
date control 1s obtained, with gains and losses recognised in the income statement
IFRS 8 Operating Segments
This standard requires disclosure of information about the Group s operating segments and replaces the requirement to determine primary
(business) and secondary (geographical) reporting segments It is anticipated that the operating segments will be the same as the business
segments previously reported under IAS 14 It is expected that this new standard will be adopted with a commencement date of 30 March
2009 and will have no impact on the financial position or performance of the Group
IAS 4 Presentation of Financial Statements
‘This revised standard sets overall requirements for the presentation of financial statements guidelmes for their structure and minimum
requirements for their content It does not change the recognition, measurement or disclosure of specific transactions and other events
required by other IFRSs Hence it 1s expected that this new standard which will be adopted with a commencement date of 30 March 2009, will
have no impact on the financial position or performance of the Group
JAS 23 Borrowing Costs
This standard has been revised to require capitalisation of borrowing costs when such costs relate to a qualifying asset. A qualifying asset is an
asset that necessarily takes a substantial period of time to get ready for its intended use or sale {t 1s expected that this new standard will have
‘No impact on the financial position or performance of the Group although the standard will be adopted with a commencement date of 30
March 2009
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2 Accounting policies (contimued)
IAS 27 Consolidated and Separate Financiat Statements
AS 27 revised is effective for annual pends beginning on or after 1 July 2009, with earlier application only permitted when the revised IFRS 3 1s
applied The revised standard applies retrospectively with some exceptions IAS 27 revised no longer restricts the allocation to minority interest of
losses incurred by a subsidiary to the amount of the non-controlling equity investment in the subsidiary A partial disposal of equity interest ma
subsidiary that does not result in a loss of control will be accounted for as an equity transaction and will have no impact on goodwill nor will it
give rise to any gain or loss Where there 1s loss of control of a subsidiary, any retained interest will have to be remeasured to fair value, which
will impact the gain or loss recognised on disposal It 1s expected that retrospective application of this standard will have no impact on the
financial position or performance of the Group although the standard will be adopted with a commencement date of 29 March 2010
JAS 32 & IAS 1 Puttable Financial Instruments and Obligations Arising on Liquidation
The amendments to IAS 32 & IAS 11 require that puttable financial instruments and instruments that impose an obligation to deliver to another ;
party a pro-rata share of net assets on liquidation are classified as equity provided that they have particular features and meet specific conditions
It 1s expected that these amendments will be adopted with a commencement date of 30 March 2009 and will have no impact on the financial
position or performance of the Group
IFRIC 12 Service Concession Arrangements
This interpretation applies to service concession operators and explains how to account for the obligations undertaken and rights received in
service concession arrangements No members of the Group are operators in this regard and hence the interpretatron will have no impact on
the Group
IFRIC 13 Customer Loyalty Programmes
The Group has no schemes involving custorner loyalty awards hence there will be no impact on the Group's financial statements when this
IFRIC 1s adopted
IFRIC 14 - IAS 19 - The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their interaction
This interpretation provides guidance on how to assess the limit on the amount of surplus im a defined benefit scheme that can be recognised
as an asset under IAS 19 on Employee Benefits It is expected that at present, this interpretation will have no impact on the financial position
or performance of the Group as the Group has an absolute right to any assets left over after benefits have been secured
The Directors do not anticipate that the adoption of these standards and interpretations will have a material impact on the Group's primary
financial statements Certain of the above standards will require amendment to disclosures in the period of inttral application
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Royal Mail Holdings plc
3 Segment information
Analysis of segment revenue and segment result by class of business and geographic area
53 weeks to 30 March 2008 European
UK operations operations
Segment revenue Post General
Parcelforce Office Other Logistics
Royal Mail Worldwide Limited busmesses Total ‘Systems Total
£m £m £m £m £m £m £m
External revenue 6,830 9 bby 36 8,156 1,232 9,388
Revenue between segments 106 4 358 246 mu - 716
Segment revenue 6,936 383 1,269 282 8.870 1,232 10,102
Segment result
Operating (loss)/profit before exceptional items (3) 8 (34) 7 48 416 162
Less share of post tax profits from joint
ventures and associates fet} - (36) (40) (47) bd (47)
Operating exceptional tems - Government grant - - 313 - 313 - 313
> other (353) (a7) (382) (2) (754) - (754)
Profit on disposal of property plant and
equipment - : s 83 58 - 58 .
Segment result (357) 9) (134) 418 (382) 114 (268) I
Share of post tax profits from jot ventures
and associates 1 = 36. 10 AT = 47
Segment result after share of post tax profits
from joint ventures and associates {356) (9) (98) 128 (335) 114 (221)
Not included in segment result after share of post tax profits from joint ventures and associates is net pensions interest of £131m (2007 £199m),
finance income of £84m (2007 £62m), finance costs of £71m (2007 £56m) and a taxation credit of £212m (2007 £27m charge), which when
added reconciles to the ‘profit for the financial year from continuing operations’ m the income statement of £135m (2007 £286m)
European
52 weeks to 25 March 2007
wee! arch UK operations (restated) operations
Segment revenue Post General
Parcelforce Office Other Logistics
Royal Mail Worldwide Limited businesses Total Systems Total
£m £m £m Em Em £m £m
External revenue 6857 337 868 358097 1,082 9,179
Revenue between segments (restated) 106 5 348 237-696 : 696
Segment revenue 6,963 342 1.216 272__ 8793 1,082 9,875
Segment result
Operating profit/(loss) before exceptional
items 136 7 (108) a3 118 115 233
Less share of post tax profits from joint
ventures and associates - - (27) 2) 9) - (9)
Operating exceptional items (054) a) (88) ~ (243) . (243)
Profit on disposal of business - - - 74 1% - 1%
Profit on disposal of property, plant and
equipment : : 15 29 46 - 44
Segment resutt (a8) 6 (208) 174 = (46) 115 69
Share of post tax profits from jomt ventures
and associates : : 27 12 39 : 39
Segment result after share of post tax profits,
from joint ventures and associates (1a) 6 (281) 186 eu) 115 108
61
Royal Mail Holdings plc
3. Segment information (continued)
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The above analysis of revenue between segments for 2006-07 has been restated to include the impact of the operations of Royal Mail Estates
Limited (RMEsL) £94m and Romec Limited £143m within the ‘Other businesses’ segment These amounts were previously classified as internal
recharges and hence did not form part of revenue between segments
Operating profit before exceptional items for all UK operations has also been restated as if RMEsL had been operating in 2006-07 in the way it has
operated in 2007-08 The effect of this change has been to reduce the operating profit before exceptional iterns of Royal Mail by £58m and
Parcelforce Worldwide by £3m and to increase the operating loss before exceptional items of Post Office Limited by £9m Consequently, the
operating profit before exceptional items of the Other businesses segment has increased by £70m There has been no overall change to the Total
Segment result as a result of this restatement
Analysis of net assets/(labiiities) by class of busimess and geographic area
European
UK operations operations
‘At 30 March 2008 Total
Post General unallocated ‘Total
Royal Parcelforce Office Other Logistics assets/ assets/
Mail Worldwide Limited busmmesses Corporate* Total Systems —_(Wrabilitues) (iiabilities)
£m £m £m £m £m £m £m £m £m
Assets 4524 101 -1,203 656 56 3,537 595 2,222 © 6,384
Liabiities (3,672) (226) (1,166) (374) (248) (5,486) (226) (e83)___ (6,595)
At 25 March 2007
£m £m £m £m £m £m £m £m ém
Assets 1443 82 1026 661 61 3273 520 1831 5624
Liabitties (5222) (337)___(913) (179) (194) (6845) (198) (845) (7888)
*In the context of the above table Corporate, as defined in the accounting policies note, holds certain assets and liabilities that do not form part of
any business segment but which do form part of the UK geographic segment
Assets include Non-current assets held for sale’ of £1m (2007 £7m) relating to Other businesses
Unallocated assets and liabilities comprise the following items
2008 2007
Unallocated Unallocated Unallocated Unallocated
assets Uabilities assets liabilities
£m £m £m £m
Cash and cash equivalents - interest bearing 489 - 411 :
Financial assets - investments. 1,091 - 1017 -
Loans and borrowings - (791) - (803)
Obligations under finance leases and hire purchase contracts - (53) - (a)
Derivative financial asset/(lrabilities) 32 (3) - (7)
Interest receivables/(payables) 2 (16) - (2)
Income tax payable - (15) - (29)
Deferred tax assets/(abulities) 608 (5) 403 (3)
Total 2,222 (883) 4,831 (845)
62
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Royal Mail Holdings plc
3 Segment information (continued)
‘Other segment information
European
UK operations operations
At 30 March 2008 Post General
Parcelforce Office ‘Other Logistics
Royal Mail Worldwide Limited busmesses Corporate Total ‘Systems Total
£m £m £m £m £m £m £m £m
Additions
Property, plant and
equipment 178 4 40 32 (6) 248 36 284
Intangible assets 14 4 52 = 9 78 1 79
Non cash expenses
Depreciation and
amortisation 166 1 1a 36 3 207 29 236
impairment. - 6 91 - - 97 - 7
Negative additions in the year within the Corporate segment are due to the transfer of expenditure (including amounts brought forward from
2006-07) to other segments mainly Royal Mail being higher than expenditure incurred by Corporate im 2007-08
At 25 March 2007
£m £m £m £m £m £m. £m £m
Additions
Property, plant and
equipment 154 4 8 34 12 212 $2 264
Intangible assets 21 3 35, - 6 65 - 65
Non cash expenses
Depreciation and
amortisation 142 - 1 28 1 172 26 198
impairment 14 = 50 = = 64 : 64
4 People information
(a) Headcount
The number of people employed calculated on a headcount basis were
Period end employees Average employees
2008 2007 2008 2007
Royal Mail 164,995 167 640 165,257 170127
Parcelforce Worldwide 4,664 4,176 4,386 4141
Post Office Limited 9,163 9990 9,600 10,640
Corporate and Group Property 2,656 2961 2,732 3.181
UK wholly owned subsidiaries 181,276 184 767 181,973 188,089
UK partially owned subsidiaries 4,313 4592 4,330 4,600
General Logistics Systems 13,135 12,137 12,715 11749
Group total 198,726 201,496 199,018 204 438
2008 2007
Number of subpostmasters at year end 10,768 11494
(b) Directors’ emoluments
2008 2007
£000 £000
Directors’ emoluments 3,666 4.164
Amounts recewable under Long-Term Incentive Plans 1,120 3113
Number of Directors accruing benefits under defined benefit schemes 4 5
The Directors Remuneration Report discloses full details of Directors’ emoluments and can be found on pages 37 to 43
63
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Royal Mail Holdings plc
5 Operating costs
Operating profit before exceptional items is stated after charging
2008 2007
£m £m
fa)
Pensions charge (note 25) 701 722
Cash 550 543
Non-cash 154 179
(b)
Distribution and conveyance operating costs 1,344 1237
Operating lease charges on vehicles 38 64 :
Other distribution and conveyance 1,303 1,173 ‘
{c)
Depreciation and amortisation 236 198
Depreciation of owned property, plant and equipment 189 169
Depreciation of property, plant and equipment under finance lease and hire
purchase contracts 22 47
Total depreciation {note 10) 211 186
Amortisation of intangible assets (note 12) 25 12
Property facilities and maintenance costs. 264 263
Computers and telephones costs 281 259
Consultancy, marketing and legal fees 263 187 !
Operating lease charges on property plant and equipment (excluding vehicles) 149 148
Forergn currency exchange (gains)/losses 3) 4
Research and development expenditure 1 a
Regulatory body costs 16 19
Postcomm 9 10
Postwatch 7 9
6, Auditors’ remuneration
2008 2007
£000 £000
Audit of statutory financial statements 647 607
Other fees to auditors
Statutory audits for subsidiaries 1,359 1270
Other services supplied pursuant to such legislation 388 468
Taxation services 283 279
Corporate finance services 109 91
Litigation services 265 128
Other services sa 133
Total 3,082 2,976
The Group paid an additional £185,000 in 2008 relating to the 2007 audit
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Royal Mail Holdings plc
7. Operating exceptional items
2008 2007
£m £m £m £m
Government grant income 343 -
ColleagueShare costs - phantom share scheme (116) -
- stakeholder dividend (361) -
(7m :
Other restructuring costs
Provision for restructuring (note 20) (363) (479)
Other exceptional write-offs (a7) -
Impairment of property plant and equipment (note 10) (40) (15)
Impairment of intangible assets (note 12) (57) (39) '
Impairment relating to associates {note 14) = (20)
477) (243)
Total operating exceptional items (44a) (243)
The £313m (2007 nil) relates to a Government grant received by the Group under the Industrial Development Act (IDA) 1982 This amount
was used during the year to compensate Post Office Limited for providing certain specified “services of general economic interest”
The £116m (2007 Enil) phantom share scheme costs and £161m (2007 £nil) stakeholder dividend costs are the estimated costs relating to
the first year of the Company ColleagueShare plan The stakeholder dividend will be paid to qualifying employees in 2008-09 whilst the costs
of the phantom share scheme are discounted and will be repurchased by the Group by 2012
The provision of £479m in note 20 is shown as £363m im the above table after excluding the £116m ColleagueShare provision separately
identified
The £363m (2007 £179m) restructunng charge 1s in respect of employee related redundancy costs of £165m (2007 £180m) resulting mainly
from operational efficiency initiatives in Royal Mail and organisational design review in Post Office Lirmited, £141m (2007 Enil) subpostmasters’
compensation paid through the Agency Network Change (ANC) programme, £43m (2007 Enil) exceptional charge for project fees for the WH
Smith and the ANC programmes, £10m (2007 £1m release) exceptional property charges and €4m other Group exceptional charges (2007
Emi)
Of the above impairments £91m (2007 £50m) relates to Post Office Limited comprising £40m (2007 £15m) property, plant and equipment.
and £54m (2007 £35m) intangible assets The remaining £6m relates to Parcelforce Worldwide intangible assets Due to ongoing losses the
carrying values of asset purchases made by Post Office Limited during the year have been impaired to recoverable amount There was no
impairment relating to associates in the current year The prior year relates to the impairment of G3 Worldwide Mail N V (Spring) (2007
£10m)
Other exceptional write-offs of £17m (2007 Enil) include £9m in Post Office Limited relating to professional fees for the new Government
funding agreement and £8m for other restructuring exceptional items charged in the current year I
8 Net finance income (excluding net pensions interest)
2008 2007
£m £m
Interest payable on financial liabilities carned at amortised cost (74) (56)
Finance costs (71) (56)
Interest received on available for sale financial assets 12 -
Interest received on held for trading financial assets - 1
Interest received on loans and receivables financial assets 72 61
Finance income Bh 62 :
Net finance income (excluding net pensions interest) 13 6
No gains/losses on available for sale financial assets were released from equity and recognised in the income statement for the year
The finance costs of £71m (2007 £56m) include £1m (2007 Enil) in respect of finance charges payable under finance lease and hire purchase
contracts
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Royal Mail Holdings ple
9 Income tax
The major components of income tax (credit/charge for the years ended 30 March 2008 and 25 March 2007 are
2008 2007
£m &m ,
Tax charged to the income statement ;
Current income tax
Current UK income tax charge (22) 49
Foreign tax 29 34
Adjustments in respect of current income tax of prior years (3) (4)
4 76
Deferred income tax
Relating to origination and reversal of temporary differences (266) (49)
Effect of change in tax rate 30 -
Income tax (credit)/charge reported in the income statement (222) 27
Tax charged to equity
Income tax related to items charged or credited directly to equity
Deferred income tax charge related to actuarial gains on pension deficit - 39
Effect of change in tax rate on deferred tax in equity as -
Current income tax relief for pension deficit recovery payment - (66)
Current income tax charge for fair value adjustments on fixed asset investments 3 =
Income tax charge/(credit) reported in equity 18 (27)
Total taxation tosses/{gams) recognised
Current income tax charge 7 10
Deferred income tax (credit) (201) (20)
Total income tax credit reported (194) -
A reconciliation between tax expense and the product of accounting profit muttiplied by the UK rate of Corporation Tax for the years
ended 30 March 2008 and 25 March 2007 ts as follows.
2008 2007
£m £m
Accounting (loss)/profit before tax from continuing operations (77) 313
At UK standard rate of Corporation Tax of 30% (23) 9
Overseas current tax rates 1 5
Tax overprovided in prior years (3) (4)
Non-taxable income (94) -
Non-deductible expenses (4) 8
Associates /joint ventures’ profit after tax charge included in Group pre-tax profit (14) (12)
Net decrease in tax charge resulting from recognition of deferred tax assets (97) (23)
Effect of change in tax rate on deferred tax 30 -
Profit from asset disposals eligible for relief (4) (37)
Other (4) (4)
Tax (credit)/charge in the income statement (212) 27
Effective income tax rate nla %
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Royal Mail Holdings plc
9 Income tax (continued)
Deferred tax relates to the following
Balance sheet Income statement
2008 2007 2008 2007
ém £m £m £m
Liabilities
Accelerated capital allowances (3) (3) - -
Goodwill qualifying far tax allowances (2) - (2) -
Gross deferred tax liabilities (5) (3)
Assets
Deferred capital allowances 62 27 35 (9)
Provisions 26 10 16 a
Pensions temporary differences 470 345 140 67
Losses available for offset against future taxable income 4a 6 36 (4)
Goodwill qualifying for tax allowances 9 15 (u) (4)
Gross deferred tax assets 608 403
Net deferred tax asset 603 400
Consolidated income statement 216 49
The Group has unrecognised deferred tax assets of £338m (2007 £1,159m) relating to the retirement benefit obligation, €289m (2007
£272m) relating mainly to fixed asset temporary differences, and £189m (2007 £101m) relating to tax losses in subsidiaries that are available
to offset against future taxable profits The Group has capital losses cared forward the tax effect of which 1s £16m (2007 £13m) The Group
has rolled over capital gains of £74m (2007 £86m) no tax liability would be expected to crystallise should the assets into which the gains have
been rolled be sold at their carrying value, as it is anticipated that a capital loss would anse
At 30 March 2008, there was no recognised or unrecognised deferred income tax ability (2007 nil) for taxes that would be payable on the
unremitted earnings of certain of the Group’s subsidiaries, associates or joint ventures as the Group has no liability to additional taxation should
such amounts be remitted due to the avatlability of double taxation relief or other exemptions
The Finance Act 2007 reduced the main rate of corporation tax to 28% with effect from 1 April 2008 The effect of this change on deferred tax
balances ts cluded in these accounts and is detailed above In his 2007 Budget the Chancellor of the Exchequer announced forthcoming
changes to the capital allowances regime which have subsequently been confirmed In accordance with accounting standards the effects of
these capital allowances changes on deferred tax balances has not been reflected in these accounts due to the relevant legislation not having
been substantively enacted at the balance sheet date It 1s expected that the phased abolition of industrial buildings allowances will reduce the
Group's unrecognised deferred tax assets by approximately £100m
67
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Royal Mail Holdings plc
10, Property, plant and equipment.
ings 2008
ong Short Plant and Motor — Fixtures and
Freehold leasehold = leasehold = machinery. vehicles ‘equipment Total
Cost £m £m £m £m £m Em £m
At 26 March 2007 1486 258 503 842 274 858 4221
Exchange movements 23 1 - 13 3 11 51 '
Reclassification (15) - 14 a - - - :
Additions 66 10 20 85 63 42 284
Acquisition of subsidiary - - : - - 1 a
Disposals (18) (6) a (13) (48) (24) (86)
Reclassification to non-current assets
held for sale (note 15) {2) : : : - : (2)
At 30 March 2008 1,538 263 530 928 322 888 4,669
Depreciation and impairment
At 26 March 2007 736 151 272 522 124 797 2602
Exchange movernents 5 1 - 9 2 9 26
Reclassification a) - 1 - - - -
Depreciation (note 5) 54 6 29 62 45 15 211
Impairment (note 7) 3 1 12 - 6 18 40
Disposals (16) 5) 3) (a3) (16) (24) (80)
Reclassification to non-current assets
held for sale (note 15) (a) : : : - - (a)
‘At 30 March 2008 780 154 308 580 164 815 2,798
Net book value
‘At 30 March 2008 758 109 222 348 464 73 1,674 I
‘At 26 March 2007 750 107 231 320 150 61 1619 !
Depreciation rates are disclosed within accounting policies (note 2) No depreciation is provided on freehold tand which represents £156m (2007
£151m) of the total cost of properties The net book value of the Groups property plant and equipment held under hire purchase contracts and
finance leases amiounts to £83m (2007 £37m) mainly relating to vehicles plant and machinery The net book value of the Groups property plant
and equipment includes £156m (2007 £112m) in respect of assets in the course of construction The net book value of the Groups land and
buildings includes £433m (2007 £429m) in respect of building fit-out
Land and buildings 2007
‘Long Short Plant and Motor Futures and
Freehold leasehold leasehold machinery vehicles: equipment Total
Cost £m £m £m £m £m £m £m
‘At 27 March 2006 1490 260 496 796 230 814 4079
Exchange movements. (2) - - (a) - - @)
Reclassification (9) 4 5 (2) - 2 -
Additions 72 3 12 52 5 50 264
Disposal of subsidiaries - - - 1 - - 1
Disposals (16) (5) 8) 2) (1) (5) (67)
Reclassification to non-current assets
held for sale (49) (4) - - = : (53)
At 25 March 2007 1486 258 503 842 276 858 4221
Depreciation and impairment
At 27 March 2006 723 150 246 47 13 782 2485
Exchange movements - - - @ - (a) (2) I
Reclassification - - - (a) - 1 - I
Depreciation (note 5) 45 6 28 55 39 13 186 I
Impairment (note 7) 1 - 6 - a 7 15
Disposals (a1) 3) (3) (2) (29) (5) (58) I
Reclassification to non-current assets '
held for sale (note 15) (22) (2) - - : : (24) '
‘At 25 March 2007 736 181 272 522 124 297 2602 I
Net book value i
At 27 March 2006 767 110 248 323 117 29 1596
At 25 March 2007 750 107 231 320 150 61 1619 I
I
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11 Goodwill
2008 2007
Cost £m £m
At 26 March 2007 and 27 March 2006 487 476
Exchange movement 70 (y)
Acquisition of businesses (note 13) 8 12
At. 30 March 2008 and 25 March 2007 565 487
Impairment
At 26 March 2007 and 27 March 2006 344 344 !
Exchange movement 48 - !
At 30 March 2008 and 25 March 2007 392 344
Net book value
At 30 March 2008 and 25 March 2007 173 143 i
At 26 March 2007 and 27 March 2006 143 132 I
The carrying value of goodwill arising on business combinations of £173m (2007 £143m) at the balance sheet date includes £172m (2007 I
£142m) relating to the General Logistics Systems (GLS) business segment In line with the accounting policy (see note 2) this goodwill has I
been reviewed for impairment An impairment loss 1s recognised for the amount by which the carrying value of an asset or cash generating !
unit exceeds the recoverable amount The recoverable amount is the higher of net realisable value and value m use The carrying value of GLS,
excluding interest bearing and tax related assets and liabilities is £369m (2007 £322m) at year end (see note 3) and the operating profit
before exceptional items 1s £114m {2007 £115m) for the year (see note 3) The carrying value represents a multiple of 3 2 (2007 2 8) on
operating profit before exceptional items The net realisable value of GLS. for the purposes of the impairment review (1e the ‘fair value less I
costs to sell), has been assessed with reference to earnings multiples for quoted entities in a similar sector On this basis, the net realisable
value of GLS has been assessed to be in excess of the carrying value No reasonable possible change in the earnings muttiples referenced
would reduce the net realisable value to below the carrying value ;
22. Intangible assets I
2008 2007 i
Master Master
franchise Customer Software franchise Customer Software
licences listings = licences — Total licences listings licences Total
Cost £m £m £m____£m £m £m £m £m
At 26 March 2007 and 27 March 2006 19 15 107, 441 19 7 42 68
Additions - - 79 79 - - 65 65
Disposals - - (3) (3) - - - -
Acquisition of businesses (note 13) - 4 - 4 - 8 - 8
Exchange differences 3 2 : 5 5 5 : =
‘At 30 March 2008 and 25 March 2007 22 21 183226 19 15 407144 !
i
Amortisation and impairment
At 26 March 2007 and 27 March 2006 12 6 59 7 8 3 15 26 I
Impairment - - 57 57 - - 39 39
Amortisation 4 4 47 25 4 3 5 12
Disposals : - 8) 3) - - - -
Exchange differences 2 1 - 3 : : - : '
At 30 March 2008 and 25 March 2007 18 41 130159 12 6 59 77
Net book value
At 30 March 2008 and 25 March 2007 4 10 53 67 7 9 48 64
At 26 March 2007 and 27 March 2006 7 9 48 64 Fe 4 27 42
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12 Intangible assets (continued)
The intangible assets recognised in the Group s balance sheet none of which have been internally generated, have finite lives and are being
written down on a straight-line basis over their reaming economic ives as follows
Intangible asset. Remaining economic life in years
Master franchise licences 1to3 I
Customer listings 1to3 I
Software licences 1t06 i
The amortisation charge of £25m (2007 £12m) relating to intangible assets 1s aggregated within other operating costs within the income
statement and disclosed in note 5 to the accounts Details of impairments are disclosed in note 7 to the accounts
13 Business combmations
The acquisitions during the current or prior years are not material and therefore, the following disclosures are made on an aggregated basis
The table below sets out the identifiable assets and tiabilities that were acquired at their provisional fair values to the Group as at the date of
acquisition which where relevant, are consistent with their book values immediately before the acquisition
Book value/ Book value/
fair value fair value
Total Total
2008 2007
£m £m
Trade and other receivables - 9
Trade and other payables (4) (aa)
Net working capital acquired et) 2)
Property plant and equipment a a
Cash and cash equivalents :
Net assets acquired - a
Intangible assets recognised on acquisition 4
Goodwill recognised on acquisition 8 12
Total cost recognised 12 24
Gross consideration 12 20
Acquisition costs : 4
Total costs 12 21
Less deferred consideration m {2)
cash and cash equivatents acquired : 2)
Net cash outflow 5 47,
On 1 October 2007 certain assets of a Milan Franchise Area business Italy were acquired by the General Logistics Systems (GLS)
subsidiary If this combination had taken place at the beginning of the financial year, Group revenue from continuing operations would
have been £9.392m The profit of the acquired entity since its acquisition date and if it had been acquired at the beginning of the financial
year ts not material in the context of the Group's profit after tax
The goodwill arising on this acquisition represents the strategic benefit of securing control of operations in one of the major industrialised
areas of Italy and thereby significantly increasing GLS's presence in this market
The prior year acquisitions relate to the purchase by GLS of 100% of the voting shares of ABX Belgium Distribution a parcels and general
cargo business based in Belgium, on 31 December 2006, and certain assets of three franchisee businesses in Italy (not material in
aggregate)
Royal Mail Holdings plc
14, Investments in joint ventures and associates
Joint ventures
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During 2007-08 and 2006-07, the Group's only joint venture investment was a 50% interest in First Rate Exchange Services Holdings
Limited, whose principal activity 1s the provision of Bureau de Change
Associates
Details of the Groups 2007-08 and 2006-07 associate investments are provided in note 29 The reporting dates for these investments 1s
31 March 2008 except for Quadrant Catering Limited (30 September 2007) and G3 Worldwide Mai! NV (Spring) (31 December 2007)
Estimates of the profits of Quadrant Catering Limited and G3 Worldwide Mat! NV (Spring), from their reporting date to 30 March 2008 {and
25 March 2007 for the prior year) have been included to ensure that the reported share of profits of associates aligns with the Group's
financial year There are no significant restrictions on the ability of associates to transfer funds to the Group in the form of cash dividends
repayment of loans or advances
Share of post
At 26 tax pre At 30
March dividend Investment Exchange March
2007 profit m associates Dividend differences 2008
£m £m £m £m £m £m
Jomnt ventures
Share of net assets 58 34 - {24) - 68
Goodwill 1 : : - - 1
Net investments 59 34 : (24) - 69
Associates
Share of net assets 46 13 10 (12) 4 58
Goodwill 9 : : = = 9
Net investments 55 13 10 (12) 1 67
Total net investments in joint
ventures/associates 414 47 10 (36) 1 136
At 27 Share of post At 25
March Impairment. tax pre dividend March
2006 (note 7) profit Owidend 2007
£m £m £m £m £m
Jomt ventures :
Share of net assets 51 - 30 (23) 58 I
Goodwill a : : - 1
Net investments 52 : 30 (23) 59
Associates
Share of net assets 56 @) 9 (16) 46
Goodwill 16 @ - ~ 9
Net investments 72 (10) 9 (16) 55
Total net investments in joint
ventures/associates 124 (10) 39 (39) 114
71
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Royal Mail Holdings plc
14. Investments m jomt ventures and associates (continued)
2008 2007
Joint Joint
ventures Associates Total ventures Associates Total
Share of assets and liabilities £m £m £m £m £m £m
Current assets 139 113 252 128 102 230
Non-current assets 2 47 49 2 39 41
Share of gross assets 141 160 301 130 141 271
Current liabilities (73) (101) (174) (72) (91) (163)
Non-current babilities 5 ie) (er) : ) (4)
Share of gross liabilities (73) (102) (475) (72) (95) (267)
Share of net assets 68 58126 58 46 104
Share of revenue and profit.
Revenue 68 1,095 1,163 60 1,084 1144
Profit after tax 36 23 47 30 9 39
15. Non-current assets held for sale
Assets
Long I
Freehold leasehold Total ‘
Net book amount £m £m £m i
At 26 March 2007 7 - 7 '
Reclassification from property, plant and equipment 1 : 1
Disposals a) : @
At 30 March 2008 1a : 1
Disposal group Assets
Long Long
Freehold leasehold Freehold leasehold Total
Net book amount £m £m £m £m. £m
At 27 March 2006 - - 11 - 11
Reclassification from property, plant and equipment 19 2 8 - 29
Disposals (29) fe 2) : (33)
At 25 March 2007 - - 7 : 7
The expected disposal of these properties is as a result of the rationalisation of the portfolio
Non-current assets held for sale are reported in the relevant business segment Further details are provided in note 3
During the year a gain of £11m (2007 £13m) was recognised in the income statement mm relation to the disposal of assets held for sale
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16 Inventories
2008 2007
fm £m
Supplies and materials (uniforms, fuel, printing and stationery, mailbags,
engineering spares) 23 16
Merchandise (Post Office Limited retail and lottery products) 10 10
Total 33 26
During the year £3m (2007 £3m) of inventory items were written off Engineering spares items are included net of a provision for
impairment of £2m (2007 Enil) The cost of mventones recognised as an expense in the income statement 1s £49m (2007 £41m)
17 Current trade and other receivables
2008 2007
£m &m
Trade receivables 859 818
Prepayments and accrued income 194 152
Sub total 1,050 970
Client debtors 61 61
interest 2 -
Income tax receivable a -
Total 1416 1,034
Movements in the provision for bad and doubtful debts were as follows
2008 2007 I
£m £m i
At 26 March 2007 and 27 March 2006 36 34 i
Exchange adjustment (4) - I
Receivables provided for during the year 20 16 I
Release of provision (6) 0) I
Acquisition through business combinations - 1
Utiksation of provision (16) (8)
At 30 March 2008 and 25 March 2007 33 36
The amount of trade receivables that were past due but not impaired is as follows
2008 2007
£m £m
Past due not more than one month 78 55
Past due more than one month and not more than two months 12 15
Past due more than two months 16 27
Total past due but not impaired 106 7
Provided for or not yet overdue 786 757
Provision for bad and doubtful debts (33) (36)
Total trade receivables 859 818
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18 Cash and cash equivalents
2008 2007
£m £m
Cash in the Post Office Limited network 933 768
Other cash in hand 5 v
Cash at bank 138 45
‘Total cash at bank, in hand or in Post Office Limited network 1,076 830
Cash equivalent investments Short-term deposits 351 366
Total 1,427 1,196
Other than cash in the Post Office Limited network and in hand of £938m (2007 £785m), the cash and cash equivalent balances of £489m
(2007 £411m) are interest bearing Cash at bank of £138m (2007 £45m) earns interest at either floating or short-term fixed rates based
upon bank deposit rates Short-term deposits of £351m (2007 £366m) are made for varying periods of between one day and three months
depending on the immediate cash requirements of the Group and earn interest at the respective short-term deposit rates The fair value of
cash and cash equivalent investments 1s not materially different from the carrying value of £1 427m (2007 £1 196m)
The £1,427m total cash and cash equivalents does not include a £7m (2007 Enil) overdrawn bank balance relating to the General Logistics
Systems (GLS) subsidiary This £7m ts included in the Financial liabilities ~ interest bearing loans and borrowings balance of £289m in the
balance sheet
74
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19. Fmancial liabilities
2008
Finance I
Loans _lease/hire
and purchase Derivative
borrowings contracts abilities Total
£m £m £m £m
Amounts falling due in
One year or tess or on demand (current) 289 10 3 302
More than one year (non-current) 502 43 - 545
More than one year but not more than two years, - 11 - 11
More than two years but not more than five years 2 25 - 27
More than five years 500 7 - 507
Total 791 53 3 867
Included within the £289m loans and borrowings 1s an overdrawn bank balance of £7m (2007 Enil)
2007
Finance
Loans lease/hire
and purchase Derivative
borrowings contracts abilities Total
£m £m £m £m
Amounts falling due in
One year or less or on demand (current) 301 - 7 308
More than one year (nen-current) 502 1 - 503
More than one year but not more than two years - 1 - 1
More than two years but not more than five years a - - 4
More than five years 501 - - 504
Total 803 1 7 811
Analysis of loans and committed facilities 2008
Average
Average maturity
Loans Further Interest rate date
and committed Total of toan of toan
borrowings facility facility drawn down drawn down
£m £m £m x Year
*BERR loans to Royal Mail Group Ltd 500 1,200 2,700 58 2023 I
*BERR loans to Post Office Limited 280 870 1.150 56 2008
Committed facilities 780 2,070 2,850 I
Miscellaneous loans and borrowings in subsidiaries 11 - 11 45 2009
Total 791 2.070 2,861
* The Department for Business Enterprise and Regulatory Reform (BERR) was formerly known as the Department for Trade and Industry
(oT)
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19. Financial abilities (contmued)
2007
Average Average maturity
Loans Further Interest rate of date
and committed Total loan of loan
borrowings facility facility drawn down drawn down
£m £m £m x Year.
BERR loans to Royal Mail Group Ltd 500 1200 1,700 58 2023
BERR loans to Post Office Limited 300 850 1,150 57 2007
Commuted facilities 800 2.050 2,850
Miscellaneous bank loans in overseas subsidiaries 3 = 3 48 2010
Total, 803 2050 2,853
The miscellaneous loans and borrowings in subsidiaries are either unsecured or secured on various assets (mainly property) of the overseas
subsidiaries The loans are repayable in variable and fixed amounts over their matunty periods
The obligations under finance leases and hire purchase contracts are either unsecured or secured on the leased assets These are repayable
In variable and fixed amounts over their maturity periods The average interest rate 1s 6% (2007 5%) The average matunty date 1s within
two to three years (2007 - within one to two years)
The undrawn committed facilities, in respect of which all conditions precedent had been met at the balance sheet date expire as follows
2008 2007
£m £m
Expiring in one year or less - -
Expiring in more than one year but not more than two years - -
Expiring in more than two years 2,070 2,050
Total 2,070 2.050
‘The following securities apply to the Group's committed facilites
2008 2007
fm tm Security
Royal Mail Group Ltd 500 500 Fixed charges over Royal Mail Group Ltd loans to General Logistics Systems BV Royal Mail Group
drawn down loans Ltd loans to subsidiaries of General Logistics Systems B V and Royal Mail Investments Limiteds
shares m General Logistics Systems BV Floating charge over non regulated assets of Royal Mail
Group Ltd
Royal Mail Group Ltd 900 900 Fixed charges over Royal Mail Holdings ptcs shares in Royal Mail Group Ltd and Royal Mail Group
senior debt facility Ltd's shares in Royal Mail Estates Limited Floating charges over all assets of Royal Mail Holdings
plc Royal Mail Group Ltd and Royal Mail Estates Limited
Royal Mail Group Ltd 300 300 None
Shareholder loan
facility
1,700 «1700
Post Office Limited 1,150 ©1150 Floating charge over all assets of Post Office Limited and a negative pledge over cash and near cash
facility ttems*
Total 2,850 2850
* The negative pledge 1s an agreement not to grant security over these assets or to set up a vehicle that has the same effect
The Post Office Limited facility of £1 150m ts restricted to funding the cash and near cash items held within the Post Office Limited network
As at 30 March 2008, the balance of this cash was £933m (2007 £768m) as shown in note 18
The BERR loans to Post Office Limited under the facility are short dated on a programme of liquidity management and mature on average 1
day after the year end (2007 16 days) On maturity it is expected that further loans will be drawn down under this facility, which expires in
2011 At the balance sheet date this was to 2010 and extended on 18 April 2008 to 2011
The security in place in the previous year was as disclosed above
The BERR loans to Royal Matt Group Ltd and Post Office Limited become repayable immediately on the occurrence of an event of default
under the loan agreements These events of default include non-payment, insolvency and breach of covenant relating to interest and total
indebtedness It is not anticipated that the Company ts at risk of breaching any of these obligations
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20 Provisions for liabilities and charges
Held for Mails
Current Non-current sale and Counter
Provisions —_provisians provisions Total Parcels Services Total
£m £m £m___£m £m £m £m
At 26 March 2007 69 42 - at 106 5 111
Reclassification to Mails and Parcels - - - - ) 1 -
Charged in aperating exceptional items 347 132 - 479 218 261 479
Charged in other operating costs 1 (2) - (a) (3) 2 (a)
Reclassification to current provisions 8 (8) - - - - -
Utlised non-cash (29) - - (29) (19) (10) (29)
Utlised cash (148) () = (149) (83) (66) (149)
At 30 March 2008 248 163 = 441 218 193 41
Held for Mails
Current Non-current sale and Counter
Provisions provisions provisions —_Total Parcels Services Total
£m £m —m___ £m £m £m £m
At 27 March 2006 58 53 - ant 109 2 111
Reclassification to Mails and Parcels - - - - 1 @ -
Charged in operating exceptional items 179 - - 179 161 38 179
Charged in other operating casts 4 10 - 11 3 14
Reclassification to non-current
provisions (4) 4 - - - - -
Reclassification to held for sale
provisions - (25) 25 : - : -
Uulised non-cash (61) - - 1) (29) (12) (41)
Utilsed cash (427) - (4) (428) (103) (25) (128)
Disposal of property group - : (24) (24) (24) : (24)
At 25 March 2007 69 42 = 111 106 5 414
The Mails and Parcels provision includes amounts relating to ColleagueShare £105m (2007 Enil) onerous property contracts £15m (2007
£27m) and decommissioning costs, £7m (2007 £9m) with the balance of £91m (2007 £70m) principally relating to redundancy The Mails and
Parcels provision in the main 1s expected to be utilised in 2008-09 with the remaining amounts expected to be utilised aver the next two to three
years, except for £105m (2007 Enil) retating to ColleagueShare expected to be utilised within 5 years and £2m relating to onerous property
contracts expected to be utilised over a period longer than 3 years The tring of cash flows for such provisions are by their nature uncertain and
dependent upon the outcome of related events
Counter Services provisions include amounts in respect of Agency Network change £127m (2007 Eni), a programme to close 2,500 agency
branches agreed with Government to be completed during 2008-09 the WH Smith project £22m (2007 Enil), a programme to transfer 70
branches to WH Smith, the organisational design review and other redundancy €14m (2007 €£1m) onerous property contracts £19m (2007
£4m) and ColleagueShare £11m (2007 Enil) These provisions are expected to be utilised in 2008-09 with the exception of ColleagueShare,
expected to be utilised within 5 years and certain property provisions that are expected to be utilised aver a period longer than 3 years
Details of amounts charged as operating exceptional items are contained in note 7 The amounts released in other operating costs relate to
onerous property contracts and decommissioning costs The change in the carrying value of the discounted element of the provision balance due
to the passage of time is not material Non-cash utilised amounts principally relate to transfers from provisions to current payables for amounts
due to the pension scheme for redundancies with early retirement Of the current payables recognised in this way during the year £22m (2007
£27m) had been cash settled by the balance sheet date
The cash utilised of £149m (2007 £128m) includes £144m (2007 €118m) of spend relating to exceptional rationalisation and £5m (2007
£10m) relating to other operating costs Total cash spend mn the year relating to exceptional rationalisation is shown in the cash flow statement
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21. Current trade and other payables
2008 2007
£m £m
Trade payables and accruals 1,251 1178
‘Advance customer payments 27% 264
Social security 122 89
Sub total 1,647 1531
Deferred consideration on business combinations 5 3
Client creditors 426 303
Amounts due to pension schemes relating to redundancies 7 14
Interest 16 2
Capital creditors 92 71
ColleagueShare accrual 164 :
Total 2,354 1,924
The Group, through Post Office Limited receives and disburses cash on behalf of Government agencies and other clients to customers through
its Post Office branch network Amounts owed to these parties are separately shown as client creditors above The level of cash held and the
related creditors can vary significantly at each balance sheet date
The change in the carrying value of the discounted element of the payable balance due to the passage of time is not material
22 Non-current other payables
2008 2007
£m £m
Deferred consideration 4 1
Capital creditors 12 -
Other payables 24 24
Total 40 25
23. Financial risk management objectives and policies
The Group's principal financial instruments, other than derivatives, comprise short-term deposits money market liquidity nvestments,
Government gilt edged securities, loans, finance leases and hire purchase contracts and cash The main purposes of these financial instruments
are to raise finance and manage the liquidity needs of the business operations The Group has various other financial instruments such as
trade debtors and trade creditors, which arise directly from operations
The Group enters into derwative transactions principally commodity swaps and forward currency contracts The purpose 1s to manage the
commodity and currency risks ansing from the Group's operations
Its, and has been throughout the year under review, the Group's policy that no speculative trading m financial mstruments shall be
undertaken
The main risks arising from the Group's financial instruments are interest rate risk, liquidity risk, foreign currency risk. commodity price and
credit nsk The Board reviews and agrees policies for managing each of these nsks and they are summarised below
Interest rate risk
‘The Group's exposure to market risk for changes in interest rates relates to the Group's debt obligations and interest bearing financial assets
The BERR loans to Royal Mail Group Ltd of £500m (2007 £500m) are at a fixed interest rate to maturity with an average maturity date of
2023 (2007 ~ average date of 2023) The BERR loans to Post Office Limited of £280m (2007 £300m) are at short-dated fixed interest rates -
average maturity 1 day (2007 average 16 days) The total interest bearing financial assets of the group (excluding the pension escrow
investments) of £510m (2007 £428m) are at short-dated fixed or variable interest rates with average maturity 12 days (2007 average 15
days) These short-dated financial instruments are maturity managed to obtain the best value out of the interest yield curve
The Group's policy 1s to manage its net interest expense using an appropriate mix of fixed and variable rate financial instruments No external
hedging of interest rate risk ts undertaken
The following table demonstrates the sensitivity to reasonably possible changes in interest rates, with all other variables held constant of the
Group's profit before taxation and equity based upon the financial instruments held at the balance sheet date
The effect from available for sale (whether floating or fixed rate) financial assets is calculated as the change i fair value at the balance sheet
date and impacts equity
78
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23 Financial risk management objectives and policies (continued)
The effect from other floating rate financial instruments 's calculated as the balance of the instruments multiplied by the change in interest
rates and impacts profit before taxation
There 1s no effect on either profit before taxation or equity from other financial instruments
2008 2007
Effect on Effect on
profit profit
before Effect on before Effect on
taxation equity taxation equity
gains/{losses) —_gains/(losses) gains/(losses) gains/(losses)
£m £m £m £m
Effect on of an increase in GBP interest rates of 100 basts pomts (1%) 4 (52) a1 -
Effect on of a decrease n GBP interest rates of 100 basis pomts (1%) ) 72 1) :
Foreign currency risk
The Group ts exposed to foreign currency risk due to trading with overseas postal operators for carrying UK mail abroad and delivering foreign
origin mail in the UK, the balances held to operate the Bureau de Change services within Post Office Limited and various purchase contracts
denominated in foreign currency These risks are mitigated by hedging programmes managed by Group Treasury Where possible, exposures
are netted internally and any remaining exposure 1s hedged using a combination of external spot and forward contracts Hedging will not
normally be considered for exposures of less than £1m hedging is normally confined to 80% of the forecast exposure where forecast cash
flows are highly probable
The Group's obligation to settle with overseas postal operators is denominated in Special Drawing Rights (SDRs) - a basket of currencies
compnsing of US Dollar (USS), Japanese Yen, Sterling and euro Group Treasury operates a rolling 18-month hedge programme which is
subsequently reviewed on a quarterly basts There has been no external SDR hedge in place throughout the financial year 2007-08 due to
there being no matenal net exposure
For the Bureau de Change business, balances of mayor currency holdings are hedged along with minor currencies showing a closely correlated
Movement
The Group's obligations to settle conveyance charges in USS and euro has been hedged (USS to April 2011, euro to April 2008)
The Group has four active hedge programmes covering obligations to settle euro invoices on automation projects
The Group does not hedge the translation exposure created by the net assets of its overseas subsidiaries
The following table demonstrates the sensitivity to reasonably possible changes in exchange rates, with all other variables held constant of the
Group's profit before taxation and equity based upon the financial instruments held at the balance sheet date
The effect from financial struments owned by GLS denominated in foreign currency and held at amortised cost in the balance sheet is
calculated as the balance of the struments multiplied by the change in exchange rates and impacts equity
The effect from other financial instruments denominated in foreign currency and held at amortised cost in the balance sheet 1s calculated as
the balance of the struments multiplied by the change in exchange rates and impacts profit
The effect from derivative assets and liabilities 1s calculated as the change in fair value at the balance sheet date and impacts equity (for
derwatives within an effective hedging relationship) or profit before taxation for ineffective hedges and derwatives not designated in hedging
relationships
There is no effect on either profit before taxation or equity from other financial instruments.
2008 2007
Effect on Effect on
profit profit
before Effect on before Effect on
taxation equity taxation equity
gains/(losses) gais/(losses) gains/{losses) gains/(losses)
£m £m £m £m
Effect on of an increase in USD/GBP exchange rates of 20 cents (2) (12) (a) {4)
Effect on of a decrease in USD/GBP exchange rates of 20 cents 2 15 1 5
Effect on of an increase in GBP/eura exchange rates of 10 pence @) 34 1 14
Effect on of a decrease in GBP/euro exchange rates of 10 pence 1 (34) - (47)
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23 Fmanciat risk management objectives and policies {contmued)
Commodity price risk
The Group ts exposed to fuel price risk arising from operating one of the largest vehicle fleets in Europe, which consumes over 140 million
litres of fuel per year, and a jet fuel price risk arising from the purchasing of air freight services The Group's fuel nisk management strategy
aims to reduce uncertainty created by the movements in the oil and foreign currency markets The strategy uses over-the-counter derivate
products (in both USS commodity price and USS/Sterling exchange rate) to manage these exposures
In addition, the Group 1s exposed to the commodity price risk of purchasing electricity and gas The Group s risk management strategy aims to
reduce uncertainty created by the movements in the electricity and gas markets These exposures are managed by lacking into fixed rate price
contracts with suppliers
The following table demonstrates the sensitivity to reasonably possible changes in commodity prices with all other variables held constant, of
the Group s profit before taxation and equity based upon the financial instruments held at the balance sheet date
The effect from derivative assets and liabilities 1s calculated as the change in fair value at the balance sheet date and impacts equity (for
derivatives within an effective hedging relationship) or profit before taxation for ineffective hedges and derivatives not desginated in hedging
relationships
‘There ts no effect on either profit before taxation or equity from other financial instruments.
2008 2007
Effect on Effect on
profit profit
before Effect on before Effect on
taxation equity taxation equity I
gains/{losses) gams/(losses) gains((losses) gains/(losses)
£m £m £m £m
Effect on of an increase in Diesel fuel prices of 10 US cents per litre - 5 = 9 '
Effect on of a decrease in Diesel fuel prices of 10 US cents per litre - (5) - (9)
Effect on of an increase in Jet fuel prices of 10 US cents per litre a - 2 -
Effect on of a decrease in Jet fuel prices of 10 US cents per tre (a) - (2) :
Credit risk
Royal Mail operates a Credit Policy, which provides a fair and equitable arrangement for all its account customers The level of credit granted 1s
based on a customer s risk profile assessed by an independent credit referencing agent The Credit Policy is applied rigidly within the regulated
products area so as to ensure that Royal Mail is not im breach of compliance legislation Assessment of credit for the non-regulated products is
based on commeraal factors which are commensurate with the Groups appetite for risk.
Royal Mail has a dedicated credit management team, which sets and monitors credit limits and takes corrective action as and when
appropriate Despite all the controls in place Royal Mail does suffer from bad debts, but the level of bad debts incurred 1s around 0 2% of
turnover
With respect to credit risk arising from other financial assets of the Group which comprise cash cash equivalent investments available for sale
financial assets, held to maturity financial assets held for trading financial assets, loans and recewvables financial assets and certain derivative
instruments, the Group invests/trades only with high quattyy financial institutions The Group's exposure to credit risk arises from default of the
counterparty with a maximum exposure equal to the carrying amount of these instruments
There are no significant concentrations of credit risk within the Group, apart from a £0 2bn exposure to the Royal Bank of Scotland as a result
of the establishment of the two pension escrow accounts This exposure is expected to be short-term, pending the implementation of a longer
term investment strategy for the accounts
Liquidity risk
The Group's primary objective is to ensure that the Group has sufficient funds available to meet its financial obligations as they fall due This 1s
achieved by aligning short-term investments and borrowing facilities with forecast cash flows Typical short-term investments include money
market funds, time deposits with approved counterparties, UK Government gilts and Treasury bills Borrowing facilities are regularly reviewed
to ensure continuity of funding
The unused facilities for Royal Mail Group Ltd of £1,200m expire between 2014 and 2016 (2007 £1,200m expiring between 2014 and 2026)
The unused facilty for Post Office Limited of £870m (2007 £850m) expires in 2011 Additionally the Group has £300m (2007 £300m) of
uncommitted lines of credit which are reviewed annually
Capital management
Royal Mail Holdings pic ts a public limited company which 1s not traded and regards its capital as share capital share premum, retained
earnings and debt provided by the UK Government The sole shareholder and the provider of the majority of debt to the Group 1s the UK
Government The management of capital 1s closely linked to the Group's relationship with its Shareholder The Group maintains its liquidity
requirements by the management of its internal funds and by the drawing down of equity and debt from its Shareholder as well as drawing on
limited external debt facilities The Group's debt to equity ratio 1s determined by its Shareholder
Financial assets - pension escrow investments
On 23 March 2007, Royal Mail Holdings ptc and Royal Mail Group Ltd established £11bn of investments in escrow These investments are held
as securty to the Royal Mail Pension Plan in support of the 17 year deficit recovery period from March 2006 At 30 March 2008, Royal Mail
Holdings plc had £909m of investments in the pension escrow and Royal Mail Group Ltd had £161m Charges over these assets have been
registered Further details on the Royal Mail Pension Plan including the latest full actuarial valuation are contained in note 25,
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24, Financial instruments.
Carrying amounts and fair values
Set out below 1s a summary by category of the carrying amounts of all the Group s financial instruments Trade debtors, creditors,
prepayments accruals and client creditors have been omitted from this analysis on the basis that carrying value 1s a reasonable approximation
for fair value Pension scheme assets and liabilities are also excluded Fair values have been calculated using current market prices (forward
exchange rates/commodity prices) and discounted using appropniate discount rates There are no material differences between the fair value
(transaction price) of all financial instruments at initial recognition and the fair value calculated using these valuation techniques The only
financial instrument where the carrying amount at year end is different to the fair value 1s the ‘BERR loans to Royal Mail Group Ltd’ At the
year end the respective fair value 1s £507m (2007 £494m)
The tables below also set out the carrying amount of the currency of the Group's financial instruments
2008
‘Sterling uss euro Other Totat
Financial assets Classification £m £m £m £m £m
Cash at bank in hand or in Post Office Limited network 847 15 189 25 1,076 )
Cash equivatent investments I
- Money market funds Loans and receivables 88 - - - 8B
- Short-term deposits - Government/local government —_Loans and receivables 122 - - - 122
= Short-term deposits - bank Loans and recewables 46 : : - 164
Cash equivalent investment. 351 = = = 351
Cash and cash equivalents 1,198 15 189 25 1,427
Finanaal assets - vestments (current)
- Short-term deposits - bank Loans and recewables 20 - - - 20
~ Short-term deposits - Government/local government___Loans and recervables 1 = = - a
Financial assets - investments (current) 21 : : = 24
Financial assets - pension escrow investments (non-
current)
- Short-term deposits - bank Loans and recewables 187 - - - 187
~ Treasury balls Available for sate 640 - - - 640
- Gilt edged secunties (conventional) Available for sale 32 - - - 32
~ Gilt edged secunties (index linked) Available for sate 211 : : : 211
Financial assets ~ pension escrow investments (non-
current) 1,070 : = = 1,070
Denvative assets - (current) - 16 10 - 24
= (non-current) = 3 5 = 8 I
Total 2,289 32__ 204 25 2,550
Financial liabilities
BERR loans to Post Office Limited Amortised cost (280) - - - (280)
Miscellaneous loans in subsidiaries (current) Amortised cost, (2) - (7) - (9)
Financial abilities ~ loans and borrowings (current) (282) : fu) = (289)
Obligations under finance leases and hire purchase
contracts (current) Amortised cost (9) : (1) = (20)
BERR loans to Royal Mail Group Ltd Amortised cost (500) - - - {500)
Miscellaneous loans in subsidiaries (non-current) Amortised cost : : (2) - (2)
Financial liabilities - loans and borrowings (non-current) (500) : (2) : (502)
Obligations under finance teases and hire purchase contracts
(non-current} Amortised cost (43) - - - (43)
Derivative abilities : : (3) = (3)
Total (834) - (13) - (847)
Net total financial assets 1,455 32.194 25 1,703
81
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24 Financial instruments (continued)
2007
Sterling USS euro Other. Total
Financial assets Classification £m £m £m £m £m
Cash at bank in hand or in Post Office Limited network 680 17109 24 830
Cash equivalent mvestments
- Money market funds Loans and receivables 79 - - - 79
~ Short-term deposits - Government/local goverment Loans and receivables 285 - - - 285
~ Short-term deposits ~ bank Loans and receivables 2 : 5 - 2 \
Cash equivalent investment 366 - - : 366 I
Cash and cash equivalents 1046 17___109 26 1196
Financial assets ~ investments (current) I
~ Short-term deposits ~ bank Loans and receivables 2B - - - 13
- Short-term deposits - Government/local government —_ Loans and receivables 1 - - - a
- Gilt edged securities (conventional) Available for sale 3 - - : 3
Financial assets - investments (current) 17 : : : 17
Financial assets - pension escrow investments (non-
current)
= Short-term deposits - bank Loans and recewables__1 000 - - - 1,000
Financial assets - pension escrow investments (non-
current) 1,000 : - : 1000
Total 2,063 17109 26 2213
Financiat liabilities
BERR loans to Post Office Limited Amortised cost (300) - - - (300)
Miscellaneous bank loans in overseas subsidiaries (current) _Amortised cost - - a) - (4) I
Financial liabilities - loans (current) (300) : (a) - (301) I
BERR loans to Royal Mail Group Ltd Amortised cost (500) : - - (500)
Miscellaneous bank foans in overseas subsidiaries (non-
current) Amortised cost - - (2) - (2)
Financial labitities - loans (non-current) (500) - (2) - (502)
Obligations under finance leases and hire purchase contracts
{non-current) Amortised cost - - (a) - (4)
Oenvative liabilities : (a) = : 7)
Total (800) ” (4) : (814)
Net total financial assets 1263 10105 24 1,402
There are no financial assets or liabilities designated at fair value through the income statement on initial recognition
Derivative assets £24m current, £8m non-current (2007 Enil) and liabilities £3m (2007 £7m) are valued at fair value Effective changes in
the fair value of derivatives, which are part of a designated cash flow hedge under IAS 39, are deferred into equity All other changes in
derivative fair value are taken straight to the income statement.
None of the financial assets tisted above are either past due or considered to be impaired
The movements in pension escrow investments of £70m consists of £57m interest on the investments and £13m movement in fair value
deferred into the Financial Assets Reserve
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24 Financial instruments (continued)
Interest rate risk
Interest on financial instruments classified as floating 1s repriced at intervals of less than one year Interest on financial instruments classified
as fixed rate is fixed until the maturity of the instrument
The table below sets out the carrying amount by maturity of the Group s financial instruments that are exposed to interest rate risk. The
Pension escrow investments mature between 8 days and 48 years but have been disclosed as maturing in greater than 5 years as the
investments have been provided as security to the Royal Mail Pension Pian in support of the 17 year deficit recavery period from March 2006
Financial year ended 30 March 2008
Average
effective = Within 1-2 2-5 More than
interest rate year years years 5 years Total
Fixed rate % £m £m £m £m £m
Cash at bank 73 4 - - - 4
Cash equivalent investments i
~ Short-term deposits - Governmentiocal J
government 52 122 - - - 22
~ Short-term deposits - bank 5.0 41 - - - 4a :
Financial assets ~ investments (current) i
i
~ Short-term deposits ~ bank 58 20 - - - 20 !
~ Short-term deposits - Government/ocal :
government 7 1 - - - 1 I
Financial assets - pension escrow investments. 1
{non-current) ‘
~ Gilt edged securities (conventional) 48 - - - 32 32 '
BERR loans to Post Office Limited 56 (280) - - - (280) I
BERR loans to Royal Mail Group Ltd 58 - - - (500) (500) I
Obligations under finance lease and hire i
purchase contracts 58 (40) (a1) (25) (U) (53) !
Miscellaneous loans in subsidiaries 58 (2) : (a) : (3) I
Total (104) (11) (26) (475) (616) \
I
Floating rate '
i
Cash at bank 37 134 - - - 134 I
Cash equivalent investments I
- Money market funds 54 88 - - - 88 \
~ Short-term deposits - bank 54 100 - - - 100 I
Financial assets - pension escrow mvestments i
(non-current)
~ Short-term deposits - bank 52 - - - 187 187
+ Treasury bills 54 - - - 640 640 '
~ Gilt edged securities (index linked) 37 - - - 211 21a
Miscellaneous loans in subsidianes 39 (t) - @ : (8)
Total 315 : a) 1,038 1,352
Non-interest bearing
Cash in hand or in Post Office Limited network 938 - - - 938
Derivative assets 26 4 4 - 32
Derivative abilities (3) = = - 43)
Total 959 4 4 - 967
Net total financial assets/{liabitties) 1,270 i} (23) 563 1,703
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24, Financial instruments (continued)
Financial year ended 25 March 2007
Average
effective Within 1-2 2-5 More than
interest rate year years years 5 years Total
Fixed rate x £m £m £m £m £m
Cash at bank 38 24 - - - 21
Cash equivalent investments
~ Short-term deposits ~ Government/local
government 52 285 - - - 285
~ Short-term deposits ~ bank 52 2 - - - 2
Financial assets - mvestments (current)
~ Short-term deposits ~ bank 53 13 - - - 13
~ Short-term deposits - Government/locat
government 77 1 - - - 1
~ Gilt edged securities (conventional) 54 3 - - - 3
BERR loans to Post Office Limited 57 (300) - - : (G00)
BERR toans to Royal Mail Group Ltd 58 - : : (500) (500)
Total 25 : : (500) (475)
Floating rate
Cash at bank 29 24 - - - 24
Cash equivalent investments
+ Money market funds 52 9 - - - 79
Financial assets ~ pension escrow mvestments
{non-current)
~ Short-term deposits ~ bank 52 - - - 1000 1,000 :
Miscellaneous bank loans in overseas '
subsidiaries 48 @ - cy a) I
Obligations under finance leases and hire 1
purchase contracts 53 = (a) : = oO) i
Total 102 ie) (o)) 999 1,099
Non-interest bearing
Cash in hand or in Post Office Limited network 785, - - - 785
Denvative liabilities ” - - : 2)
Total 778 - - : 778
Net total financial assets/(liabitities) 905 @ a) 499 1,402
The money market funds have been reclassified as floating rate
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Royal Mail Holdings ple
24 Financial instruments (contmued)
Contractual maturity analysis for gross financial babilities
The table below sets out the gross (undiscounted) contractual cash flows of the Group's financial liabilities For overdrafts, loans and finance
leases/hire purchase contracts, these cash flows represent the undiscounted total amounts payable including interest. For derivatives which are
settled gross these cash flows represent the undiscounted gross payment due and do not reflect the accompanying inflow For derivatives
which are settled net, these cash flows represent the undiscounted forecast outflow
2008
Gross Gross finance Gross
loans and lease/hire payments on
borrowings purchase — derivatives
commitments —_instalments settled gross Total
£m £m £m £m
‘Amounts falling due in
One year or less or on demand (current) 317 12 191 520
More than one year (non-current) 919 51 99 1,069
More than one year but not more than two years 30 13 53 %
More than two years but not more than five years, 89 29 46 166
More than five years 800 9 : 809 :
Total 1,236 63 290 1,589
i
I
2007
Gross finance Gross
Gross lease/hire payments on Net liabilities
loan purchase derivatives. ~—on derivatives
commitments instalments settled gross settled net Total
£m £m £m £m £m
Amounts falling due in
One year or less or on demand (current) 330 - 119 5 454
More than one year (non-current) 947. 1 58 = 1,006
More than one year but not more than two years 29 a 58 - 88
More than two years but not more than five years 88 - - - 88
More than five years 830 a = = 830
Total 1277 1 177 51,460
Hedging Activities
The Group had the following designated cash flow hedge programmes during the current and previous financial year
1) The diesel fuel hedge programmes uses forward commodity price swaps and forward currency purchase contracts to hedge the exposure
arising from commodity price and USS/GBP exchange rates for forecast diesel fuel purchases
u) The air conveyance hedge programme uses USS and euro forward currency purchase contracts to hedge the exposure arising from
USS/GBP and GBP/euro exchange rates for forecast air conveyance purchases
1m) Four capital programmes using euro forward currency purchase contracts to hedge the exposure arising from GBP/euro exchange rates for
contracted capital expenditure on automation projects
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24 Financial instruments (contmued)
The following table shows the movements on the hedging reserve for each of these hedge programmes
Gains/(losses) deferred (Gains)/tosses released from equity to
into equity —_(Gains}/losses released from ‘the carrying value of non-financial
durmg year = equity to mcome during year assets during year
2008 £m £m £m
Diesel fuel 19 (3) -
Air Conveyance 1 - -
Capital programmes 16 - (a)
Total 36 (3) (1)
2007
Diesel fuel (8) 3 -
Air conveyance (4) 1 :
Total (9) 4 -
The £3m gains released from equity to income during year (2007 losses of £4m) are included within the distribution and conveyance operating
costs in the income statement
There 1s no material ineffectiveness recognised in the income statement relating to cash flow hedges
For all the above cash flow hedge programmes the underlying cash flows being hedged are expected to occur at the same dates as the hedge
instruments (derivatives) mature For the non-capital programmes (Diesel and Air Conveyance) the profit or loss will be taken on maturity For
capital programmes, the impact on the income statement will be through the depreciation charge over the life of the asset being hedged
The following table shows the derwatives outstanding at the year end
Derwative
Average asset Derwative asset Derivative
contracted non-current > current habulity
Commodity/ Nominal commodity price/ fair value fair value fair value
2008 currency __amount__Maturity date __exchange rate £m £m £m /
Diesel fuel Oresel fuel 79k tonnes Apr O8-Jan09 — USS684/tonne - 42 -
Diesel fuel us$ $182m Apr 08-Apr 11 USS1 96/£ 2 - -
‘Air conveyance us $ $69m Apr 08-Apr 14 US$1 97/£ a - -
Air conveyance euro €03m Apr 08 £0.69/€ : - -
Capital I
programmes euro €214m__ Apr 08-Apr 11. £0 73/€ 5 10 =
Cash flow hedges 8 22 -
Other derivatives - 2 (3)
Total 8 24 (3)
2007
Diesel fuel Diesel fuel 149k tonnes Apr 07-Oct 08 + US$644/tonnes - - (3)
Diesel fuel uss $96m — Apr 07-Oct 08 USS1 B8/E - - (2)
Aur conveyance uss $3m Apr 07 UsS1 7/£ - - -
Air conveyance euro €im Apr 07 £0 70/€ - - -
Capital
programmes euro €102m_ May 07-Feb 09 £0 69/€ : : :
Cash flow hedges - - (5)
Other derivatives = : (2)
Total - : (7)
Other derivatives represent hedges by the Group of other foreign exchange and commodity price exposures, which are not designated as
hedges under IAS 39 (including the hedge of jet fuel costs arising from the purchasing of air freight services and the hedge of the Bureau de
Change currency holdings within Post Office Limited)
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24 Financial instruments (contmued)
The Group had outstanding forward transactions to hedge foreign currency and fuel purchases as follows
In currency (millions) Sterling equivalents (miltions)
2008 2007 2008 2007
Maturing within one year
euro 210 110 153 74
US Dollars 142 133 7 74
Australian Dollars 9 4 4 2
Fuel (US Dollars) 65 94 33 51
Maturing after one year
euro 101 84 76 58
US Dollars 182 25 92 13
Fuel (US Dollars) : 25 - 13
The Group's fuel hedges, which fix the GBP cost of purchasing fuel consist of two elements which may be hedged jomtly or separately
* a commodity forward transaction fixing the cost in US Dollars of purchasing fuel, and
* — acurrency forward transaction fixing the GBP cost of these US Dollars
The table above contains both of these transactions The commodity forward transactions are shown under the heading Fuel (US Dollars) -
$65m (2007 $94m) maturing within one year and Snil (2007 $25m) maturing after one year The related currency forward transactions are
contained within the total of US Dollars - $142m (2007 $133m) maturing within one year and $182m (2007 $25m) maturing after one year
25. Employee benefits - pensions
The Group operates pension schemes as detailed below
Scheme Eligibitity Type
Royal Mail Pension Plan (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
Subsidiaries Overseas subsidiary employees Defined contribution
Defined Contribution
A charge for the defined contribution schemes of £2m (2007 £2m) was recognised in operating profit before exceptional items within the
Various other small-scale schemes operated by overseas I
income statement The Company contributions to these schemes was £2m (2007 £2m) I
Defined Benefit
Both RMPP and RMSEPP are funded by the payment of contributions to separate trustee administered funds The latest full actuarial
valuations of both schemes have been carried out as at 31 March 2006 using the projected unit method For RMPP this valuation has been
concluded at £3 4bn deficit For RMSEPP, the valuation has been concluded at £43m deficit A series of changes began to take effect on 1
April 2008 and are summarised in the Chairman and Chief Executive's Statement
Payment of £548m (2007 £54:1m) was made during the year in respect of regular future service contributions, with £542m (2007 £538m)
relating to RMPP The regular future service contributions for RMPP, expressed as a percentage of pensionable pay has remained at 200%
effective from the beginning of the previous year This rate 1s not expected to change materially during 2008-09 For RMSEPP, these
contributions have been at 48 2% (2007 20 9%)
Payment of £284m (2007 £243m) was made during the year to fund the deficit in the schemes with £276m (2007 £241m) relating to
RMPP Deficit recovery payments are planned for RMPP over the 17 years from the date of the latest full actuanal valuation These
payments will be made before each 31 March and may therefore span across the Group s year end (the last Sunday in March) Over the 16
years from 31 March 2007, planned deficit payments are £260m per annum, increasing in tine with RPI (base year ts 2006-07) For
RMSEPP deficit recovery payments will be £5m per annum from 1 April 2007 to 31 December 2015
A current liability of £7m (2007 £14m) has been recognised for payments to the pension schemes relating to redundancy (see note 21)
During the year, payments of £36m (2007 £74m) relating to redundancy were made
On 23 March 2007, the Group established £11bn of investments in escrow as secunity to the Royal Mail Pension Plan in support of the 17
year deficit recovery period
87
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25 Employee benefits - pensions (continued)
The following disclosures relate to the gains/losses and deficit in the schemes recognised for the RMPP and RMSEPP defined benefit plans in
the financial statements of the Group
a) Major assumptions
The size of the pension deficit which is large in the context of the Group and its finances, 1s materially sensitive to the assumptions
adopted Small changes in these assumptions could have a significant impact on the deficit and overall mcome statement charge The
mayor assumptions were
At 30 March 2008 At 25 March 2007
Apa ipa
Rate of increase in salaries 46 41a
Rate of increase in pensions and deferred pensions 36 31
Discount rate 65 53
Inflation assumption 36 31
Expected average rate of return on assets 68 70
The above assumptions relate to both defined benefit plans with the exception of the expected average rate of return on assets which is
computed for the combined assets of the plans The expected average rate of return on assets is a weighted average of the long-term
expected rate of return of each principal asset class (see section b) The expected average rate of return is computed at each balance sheet
date based on the market values and long-term rate of return of each principal asset class as at that date
Mortality
The mortality assumptions for the larger scheme are based on the 1992 series mortality tables allowing for medium cohort’ projections of
future improvements These are detailed below
Average expected life expectancy from age 60 2008 2007
For a current 60 year old female RMPP member 29 years 29 years
For a current 40 year old male RMPP member 28 years 28 years
For a current 40 year old female RMPP member 34 years 30 years
b) Plans’ assets and expected rates of return
The assets in the plans and the expected rates of return were
For a current 60 year old male RMPP member 26 years 26 years
i
At 30 March 2008
Market value Long-term expected rate of return
2008 2007 2008 2007
£m £m %pa Lpa
Equities 11,090 15,372 83 80 :
Bonds 10,064 5,693 52 46 :
Property 2,565 2,484 67 62
Other assets 204 29 46 44
Fair value of plans’ assets 23,923 23578
Present value of plans’ liabilities (26,846) (28 563)
Deficit in schemes (2,923) (4.985)
‘There 1s no element of the above present value of liabilities that arises from plans that are wholly unfunded
Certain of the above investments relate to properties occupied by the Group, but the contribution of these properties to the fair value of plans’
assets Is not material The pension plans have not invested in any other assets used by the Group or in the Group's own financial instruments
Royal Mail Holdings plc
25. Employee benefits - pensions (continued)
¢) Recognised charges
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An analysis of the separate components of the amounts recognised in the income statement and statement of recognised income and
expense (SORIE) 1s as follows
2008 2007
£m £m
Analysis of amounts recognised in the income statement
Analysis of amounts charged to operating profit before exceptional
Items
Current service cost 699 704
Past service cost - 16
Total charge to operating profit before exceptional tems 699 720
Analysis of amounts charged to operating exceptional items
Loss due to curtailments (within provision for restructuring charge - note 7) 42 54
Total charge to operating profit Ta mm
Analysis of amounts charged/(credited) to financing
Interest on plans’ abilities 1,509 1342
Expected return on plans assets (1,640) (4,541)
Total net credit to financing (131) (199)
Net charge to mcome statement before deduction for tax 610 572
Analysts of amounts recognised in the statement of recognised income
and expense (SORIE)
Actual return on plans assets 313 1,713
Less expected return on plans’ assets (2,640) (2.541)
Actuarial (tosses)/gains on assets (all experience adjustments) (4,327) 172
Experience adjustments on liabilities (169) (122)
Effects of changes in actuarial assumption on babilities 3,296 290
Actuarial gams on abilities. 3,125 168
Total actuarial gains recognised in SORIE before deduction for tax 1,798 340
d) Movement in plans’ assets and liabilities
Changes in the present value of the defined benefit pension obligations are analysed as follows
2008 2007
£m £m.
Plans’ liabilities at beginning of period (28,563) (27,435)
Current service cost (699) (704)
Past service cost - (16)
Curtailment costs* (29) (42)
Finance cost (1,509) (1,342)
Employee contributions (164) (162)
Actuarial gain (recognised in SORIE) 3,125 168
Benefits pard 993 969
Plans labilities at end of period (26,846) (28 563)
*The curtailment costs in the income statement are recognised on a consistent basis with the associated compensation costs Estimates
of both are included for example m any redundancy provisions raised The curtailment costs above represent the costs associated with
those people paid compensation in respect of redundancy during the accounting period Such payments may occur m an accounting
period subsequent to the recognition of costs in the income statement
89
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25 Employee benefits - pensions (continued)
Changes in the fair value of the plans’ assets are analysed as follows
2008 2007
£m €m
Plans assets at beginning of penod 23,578 21847
Company contributions paid 918 858
Movement in company contnbutions accrued (7) (33)
Company contnbutions prepaid for 2008-09 (50) -
Employee contributions 164 162
Finance imcome 1,640 1541
Actuarial (loss)/gain (recognised in SORIE) (2,327) 172
Benefits paid (993) (969)
Plans assets at end of period 23,923 23,578
e) History of experience gains and losses
The cumulative amount of actuarial gains and losses recognised since transition to IFRSs at 29 March 2004 in the statement of recognised
income and expense ts £890m gain (2007 £908m toss) The Directors are unable to determine how much of the pension scheme deficit
recognised in transition to IFRSs 1s attributable to actuarial gains and losses since inception of the pension schemes Consequently, the
Directors are unable to determine the cumulative amount of actuarial gains and losses that would have been recognised in the statement of
recognised income and expense between inception of the pension schemes and transition to IFRSs
2008 2007 2006 2005 2004
£m £m £m £m £m
Fair value of assets 23,923 23578 21.847 17,357 15,200 \
Present value of abilities (26,846) (28 563) (27 435) (21.315) (19.594) !
Deficit in schemes (2,923) (4,985) (5,588) (3 958) (4394)
2008 2007 2006 2005
£m £m £m £m
Expenence adjustment on assets (1,327) 172 3421 1,043
Experience adjustment on liabilities (169) (122) (161) (302)
26. Share capital
Authorised 2008 2007
£ £
Ordinary shares of £1 each 100,000 100,000
Special Rights Redeemable Preference Share (Special Share) of £1 each 1 1
Total 200,001 100,001
Issued and called up 2008 2007
£ £
Ordinary shares of £1 each 50,005 50,005
Special Rights Redeemable Preference Share (Special Share) of £1 each 1 1
Total 50,006 50,006
The Special Share can be redeemed at any time by its holder (the Secretary of State for Business Enterprise and Regulatory Reform)
subject to such redemption being compliant with the Companies Act 1985 The Company cannot redeem the Special Share without the
prior consent of its holder No premium 1s payable on redemption
On distribution in a winding up of the Company, the holder of the Special Share 1s entitled to repayment of the capital paid up on the
Special Share in priority to any repayment of capital to any other member The Special Share does not carry any nghts to vote
Under section 63(7) of the Postal Services Act 2000, for the purposes of the Companies Act 1985, certain shares issued shall be treated
as if their nominal value had been fully paid up
Under sections 72 and 74 of the Postal Services Act 2000, the Secretary of State for Business, Enterprise and Regulatory Reform may
tssue directions to the Company which depending on the direction issued could result in the recognition of a distribution
90
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Royal Mail Holdings plc
27 Total equity
faregn Eautty
fut currency hale
share Necwork Translation Hedging —_ Other ofthe Minority I Teta
premium Reserve Reserve Reserve Reserves parent interest I egulty
tm om fm em em tm tm fm
(At 26 March 2007 430 30 6 (5) 47 (2,267) 3 (2 264)
prot forthe pened - Bs : : : : : a3 : 435
Frarsauen dteences - - - “8 - : e : a
ftuana gms on dined benefit
cares - 3798 - : - - - 2798 =I are
fsa on cath few hedges deterced
ro easy - - : . Fy : 36 : 2»
fa on cash ow badges leases
From equity to income - - - - - a) - a) - a
Lan released frm equty tthe
Jntual carrying value of fixed assets - - - - - a - @ - a)
bans deferred ita reserves - 3 : : . : 2 : 2
fsaton on tems taken rect to
Equity = (a5) 43) =. ~ = = ta = a)
Recognised income for the
pared - ase Fy : ® 2 : 2023 =I 20a
Allocation to Rural Network Reserve - (50) - 150 - - - - - .
Transfer rom Rua Network
Reserve - 150 - (450) - - - : - -
Transfer of terest come to Rural
Network Reserve : a) : 6 : : : : : :
‘At 30 March 2008 430 (963) 10 36 CJ 27 a7 (244) 3 (243)
1
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27. Total equity (continued)
Foreign
Mats POL Holdings Rural POL Currency i
Share Retained Contribution Contribution Escrow Malls Network Funding Translation Hedging Other I of the Mmority I Total
pramlum earnings Reserve Reserve Reserve. Reserve Reserve Reserve Reserva. Reserve Reserves I parent interest I equity
fm fm fm fm fm fm tm ___ em fm Em tm I tm em fm
‘At 27 March 2006 = (4270) : : = 3% 28 : . ~ 55 I 3363) I 3339) :
Profit forthe pent - 286 - - - : : - - - >I ae 206 i
rranslation differences - - - - - - - : @ : - fay : (2) I
Fictuanal gains on defined benefit I
chemes er) : : - : - : : - -I mo 340 j
boss on cash flow hedges deferred
nto equty : : : : : : - - : @m -I mm - 0
boss on cash flow hedges released
from equity to mcome : : - - : - - - - ‘ - se ‘
raat on ters taken directly to
uty - 2 - : = = - : : 5 -I 27 2
Recognised Incame/lexpense) for
the period = 683 - - - - - - (o) 646
Transfer from Mas Reserve to
Rural Network Reserve - - - - - 0) 5 - : : : - -
Allocation to Rural Network Reserve = (75) - : : - : - - : - -
Transfer from Rural Network
Reserve - 350 - - - PC : - : - -
Transfer of mterest income to Rural
Network Reserve - 28 - - - - 2 : - : 5 - -
tssue of ordmary shares (2) 345 - : : - - - - - -I ous - 1s
‘location to Mails Contribution
Reserve - (145) 14s - : : : - - - : - -
“Transfer from Mails Contribution
Reserve - us (045) - - - : - : : : - -
Issue of ordinary shares (2) Bi - - - - : - - - - -I 2 zt
‘Allocabon to POL Contnbuton
Reserve - en) - 231 : : - - - - : oe -
“Transfer from POL Centnbuten
Reserve to POL Funding Reserve - - : en : - - Ba - : - - -
“Transfer of interest mcome to POL
Funding Reserve - 28 - - : : : 2 : : - - -
Transfer from POL Funding Reserve = = 233, - - - - - @33) - - - - -
Transfer of mterest income to Mats
Reserve - 3H - - - - - - - - - -
Ovstnbution of Mas Reserve 5 - - a - - : : - -
‘Atocaton to Holdings Escrow
Reserve - 095) - - 795 - : - : - - - -
tssue of ordinary shares (3) 56 - - - 7 - 7 - - - -I ome se I
Allocation to Holdings Escrow
Reserve - 8) - - 54 - - - - - - - oe - )
Transfer of mterest income to I
Holeings Escrow Reserve - @ - - 1 : : - - - : - - I
‘Transfer from Holdings Escrow
Reserve = 850 - - @s : - : - - - -
Transfer of unrealised gam - 8 - - : - : - : - wl o- - .
Dvdend pavd to monty terest : : : - : - - : : - - - w
‘At 25 March 2007 430__ (2775) : : : = 30 : 6 ts) _ 47 I e267 __3._I te 2660
92
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27 Total equity (contmued)
Rural Network Reserve
The Rural Network Reserve was created by Post Office Limited following directions issued by the Secretary of State under section 72 of the
Postal Services Act 2000 (the Act) The amounts allocated to this Reserve are to be applied as if they were profits available for distribution The
purposes for which the Rural Network Reserve may be utilised are stated in the directions issued, and principally relate to the maintenance of
a rural network of post offices A total of £594m has been used from this Reserve towards the maintenance of a rural network between March
2003 and the beginning of the 2007-08 financial year
Following an order issued by the Secretary of State under section 103 of the Act Post Office Limited received £150m during the period (2007 I
£75m) This subsidy has been accounted for as a Government grant and recorded within Revenue as the Social Network Payment (see note 2) :
Under the terms of an agreement Post Office Limited immediately allocated £150m to the Rural Network Reserve on receipt of the Social
Network Payment During the period £150m (2007 £150m) of the Rural Network Reserve was applied towards the maintenance of a rural
network of Post Offices
Interest
The transfer of interest relates to income recorded in the income statement, which has been earned on the assets that support the Rural
Network Reserve
Financial Assets Reserve
The Financial Assets Reserve is used to record fair value changes on available for sale financial assets
Foreign Currency Translation Reserve
The Foreign Currency Translation Reserve 1s used to record the gains and losses arising from 29 March 2004 on translation of assets and
liabilities of subsidiaries denominated in currencies other than the reporting currency
Hedging Reserve
The Hedging Reserve is used to record gains and losses arising from cash flow hedges since 28 March 2005.
Other Reserves
Other Reserves of £47m (2007 £47m) comprise £2m (2007 £2m) unrealised gain on First Rate Exchange Services Holdings Limited, a joint
venture transaction and £45m (2007 £45m} relating to unrealised gains on Midasgrange Limited, an associate company There were no
transfers between this Reserve and retained earnings during the year (2007 £8m)
93
28 Commitments
Operating lease commitments
Royal Mail Holdings plc
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The Group 1s committed to the following future minimum lease payments under non-cancellable operating leases as at 30 March 2008
Vehicles
Land and Buildings and equipment IT equipment Total
2008 2007 2008 2007 2008 2007 2008 2007
=m £m £m £m £m £m £m £m
Within one year 129 120 27 36 27 15 183 a1
Between one and five years 417 366 29 42 53 52 499 460
Beyond five years 640 679 3 : - 22 643 6
Total 1,186 1,165 59 78 80 79 1,325 1,322
Existing property leases have an average term of 15 years and any new leases entered into generally have a 15-year term with a 10-year I
break clause Vehicle leases generally have a term of between 3 and 7 years depending on the asset class with the average term being 4
years The existing leases have an average term remaining of 1 year There are two IT contracts, one expiring within a year and one with a
term of 10 years with 5 years rernaming at the balance sheet date
Finance lease and hire purchase commitments
2008 2007
Present value Present value
Minimum of mmimum Minimum of minimum
payments —_—lease payments payments lease payments
£m £m £m £m
Within one year 12 10 - -
Between one and five years 43 36 1 1
Beyond five years 8 7 : :
Total minimum lease payments 63 53 1 1
Less amounts representing finance charges (10) = = -
Present value of minimum lease payments 53 53 1 1
The Group has finance lease contracts for vehicles, property and equipment The leases have no terms of renewal purchase options or
escalation clauses and there are no restrictions concerning dividends borrowings or additional leases Vehicle leases have a term of between 2
and 5 years, depending on the class of vehicle, with the average term being 3 years The property lease is for a 15 year term and the
equipment for an average of 7 years
Capital commitments
The Group has commitments of £222m at 30 March 2008 (25 March 2007 £140m), which are contracted for but not provided im the
accounts
29 Related party transactions
The ultimate parent (the Company) and principal subsidiaries
Royat Mail Holdings plc 1s the ultimate parent company of the Group The consolidated financial statements include the financial statements
of Royal Mail Holdings pic and the principal subsidianes listed in the following table
Company Country of incorporation % equity interest
2008 2007
Royal Mail Group Ltd United Kingdom 100 100
Post Office Limited United Kingdom 100 100
Royal Mail Investments Limited United Kingdom 100 100 j
General Logistics Systems BV Netherlands 100 100 I
Royal Mail Estates Limited United Kingdom 100 100 i
Romec Limited United Kingdom 51 51 '
IRed Redefining Document Management Ltd United Kingdom 100 na I
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29 Related party transactions (continued)
Royal Mail Estates Limited, a wholly owned subsidiary, was formed during the 2006-07 financial year The security on the Royal Mail Group
Ltd senior debt faciity includes a fixed charge over shares in Royal Mail Estates Limited and a floating charge over all the assets of Royal Mail
Estates Limited (see note 19) Further to the transfer of most of the property assets of Royal Mail Group Ltd to Royal Mail Estates Limited in
2006-07, the remaining property assets in scope were transferred during the current financal year
iRed Redefining Document Management Ltd was formed during the year to source, produce procure and deliver all printed material being
created by the Group
Jomt venture
The Group has a 50% interest in First Rate Exchange Services Holdings Limited (previously known as First Rate Travel Services Limited until its
name change on 23 February 2006) a company registered in the United Kingdom
Associates
The following companies are the principal associates of the Group
Country of incorporation % Ownership
Company 2008 2007
Quadrant Catering Limited United Kingdom 51 51
Camelot Group ple United Kingdom 20 20
G3 Worldwide Mail NV (Spring) Netherlands 265 245
Midasgrange Limited United Kingdom 50 50
The majority of the Board and voting power in Quadrant Catering Limited 1s held by the Groups partner hence it is not a subsidiary
Related party transactions
Ouring the year the Group entered into transactions with related parties The transactions were in the ordinary course of business and
included administration and investment services recharged to the Group's pension plan by Royal Mail Pensions Trustees Limited The
transactions entered into and the balances outstanding at the financial year end were as follows
Amounts Amounts
owed from related owed to related
Sales/recharges to Purchases from party including party including
related party related party outstanding loans outstanding loans
2008 2007 2008 2007 2008 2007 2008 2007
£m £m £m £m £m £m £m £m
Royal Mail Pension Plan 9 9 - - - - - -
Quadrant Catering Limited - . 40 43 - - 9 5
Camelot Group ple 47 48 - - 4 4 - -
G3 Worldwide Mail NV (Spring) 1 4 9 12 10 13 4 2
Midasgrange Limited 16 9 - - 10 8 - -
First Rate Exchange Services
Holdings Limited Group (restated) 29 26 145 131 2 3 1 2
The 2006-07 purchases from First Rate Exchange Services Holdings Limited Group have been restated to include the margin charged by the
related party to Post Office Limited on foreign currency used m the Bureau de Change operation
‘The companies listed above are joint ventures and associates of the Group with the exception of Royal Mail Pension Plan
The sales to and purchases from related parties are made at normal market prices Outstanding balances at the year end are unsecured
interest free and settlement is made by cash
‘The Group trades with numerous Government bodies on an arm's length basis Transactions with these entities are not disclosed owing to the
significant volume of transactions that are conducted
Separately
* the Group has certain loan facilities with Government (see note 19), I
© the Group has received the Social Network Payment from Government (see notes 2 and 27) and
© the Group has received a Government grant (see notes 2 and 7)
95
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29 Related party transactions (contmued) I
Key management compensation :
2008 2007 I
£000 £000
Short-term employee benefits 3,166 4.164
Post-employment benefits 851 707
Termination benefits 500 -
Other tong-term benefits 1,120 3.113
Total compensation paid to key management 5,637 7.984
Key management comprises Executive and Non Executive Directors of the Royal Mail Holdings pic Board
HM Government is the Company s sole Shareholder and, accordingly, the Directors have no interest in the shares of the Company
Transactions with other related parties
John Neill, a Non Executive Director of the Company until he left on 31 August 2007, is Group Chief Executive and Deputy Chairman of Unipart
Group, which during 2006-07 had a contract for the supply of operational support services and expertise with Royal Mail for improvements to
mail centres The work programme was successfully completed during 2006-07 with a payment made of £1 4m John Neill took no part in the
decision to appoint Unipart Group
Bob Wigley a Non Executive Director of the Company until his resignation on 31 October 2006, is Chairman of Merrill Lynch's Europe Middle
East and Africa Business The Royal Mail Pension Plan not the Group had a commercial relationship with Merrill Lynch Investment.
Management for two UK equity portfolio mandates to the value of £970m for the 7 months up to 31 October 2006 Bob Wigley was not a
Trustee of the Royal Mail Pension Plan whilst he was a Non Executive Director of the Company
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Group five-year summary (unaudited)
Prepared or restated under
IFRS UK GAAP
2008 2007 2006 2005 2004
Income statement £m £m fm ___£m £m
Revenue 9,388 9179 9.056 __8 956 8633,
Profit from operations - - - - 220
Pensions charge in respect of pensions deficit under SSAP 24 : : - : (132)
Operating profit before exceptional tems 162 233 355-302 88
Operating exceptional items (46a) (243) (210) (277) (64)
Operating (loss)/profit (279) (10) 145 25 24
Non-operating exceptional items 58 118 67 67 64
(LossV/profit before interest (22a) 108 212 92 88
Finance income and costs including net pensions interest 164 205 100 75 17
(Loss)/profit before tax (77) 313 3142 167 105
Taxation 2az (27) a3 (16) (98)
Profit after tax 135 286 395151 z
2008 2007 = 2006» 2005 2004
Cash flow statement. £m £m £m £m. £m
Net increase/{(decrease) in cash 226 1 (o1)__ (159) ay
Net (decrease)/increase in cash equivalents (15) 34 (18) 134 Wa
Net increase/(decrease) in cash and cash equivalents 209 35 (79)___25) na
Prepared or restated under IFRS
2008 2007-2006 ~—-2005 2006
Balance sheet £m £m fm___ £m ém
Goodwill and intangible assets 240 207 17% 182 123
Property plant and equipment. 1,671 1619 1594 1591 1550
Other non-current assets including those classified as held for sale 1,824 1528 539486 152
Net current (liabilities)/assets (300) (60) 535 298 212
Non-current abilities (3.676) __(5558)__ (6181) _(4565)__—(5026)
Net labilties (asa) (2264) _—(339)_(2038) (2979)
Paragraph 37 of international Financial Reporting Standard 1 - First time adoption of IFRSs requires that information prepared under a
previous GAAP 1s clearly labeled Disclosure is also required of the nature of the main adjustments that would be necessary to comply with
IFRSs Quantification of those adjustments 1s not required The main adjustments to the Group accounts on the adoption of IFRSs are
‘* the inclusion of a retirement benefit obligation on the face of the balance sheet,
‘* trade and other receivables no longer include an element of pension prepayment I
‘© deferred tax charges to reflect the introduction of the retirement benefit obligation,
* an annual leave accrual 1s included in trade and other payables
* the imcome statement reflects a number of minor changes which are mainly presentational but changes to the pension charge and related
taxation are the major amendments, and
‘+ the cash flow statement 1s now produced in IFRS format showing operating financing and investing activities i
97 1
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Parent Company accounts
Statement of Directors’ responsibilities in relation to the parent Company financial statements
The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations
Company law requires the Directors to prepare financial statements for each financial year Under that law the Directors have elected to
prepare the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting
Standards and applicable law) The financial statements are required by law to give a true and fair view of the state of affairs of the Company
and of the profit or loss of the Company for that period In preparing those financial statements the Directors are required to
select suttable accounting policies and apply them consistently
make judgements and estimates that are reasonable and prudent,
state whether applicable UK Accounting Standards have been followed subject to any material departures disclosed and explamed in
the financial statements and
prepare the financial statements on the going concern basis unless it 1s inappropriate to presume that the Company will continue in
business
The Directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position
of the Company and enable them to ensure that the financial statements comply with the Companies Act 1985 They are also responsible for
safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other
irregularities
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Independent Auditors’ report to the members of the Company, Royal Mail Holdings ple
We have audited the parent Company financial statements of Royal Mail Holdings plc for the year ended 30 March 2008 which comprise the ‘
balance sheet and the related notes 1 to 9 These parent Company financial statements have been prepared under the accounting policies set
out therein We have also audited the information in the Directors’ Remuneration Report that 1s described as having been audited ‘
We have reported separately on the Group financial statements of Royal Mail Holdings plc for the year ended 30 March 2008
This report is made solely to the Companys 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 to them in an auditors’ report
and for no other purpose To the fullest extent permitted by law we do not accept or assume responsibility to anyone other than the Company
and the Company's members as a body, for our audit work, for this report, or for the opinions we have formed
Respective responsibilities of directors and auditors
The Directors’ responsibilities for preparing the Annual Report and the parent Company financial statements in accordance with applicable
United Kingdom law and Accounting Standards (United Kingdom Generally Accepted Accounting Practice) are set out in the Statement of
Directors’ Responsibilities
Our responsibility ts to audit the parent Company financial staternents and the part of the Directors’ Remuneration Report to be audited in
accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland)
We report to you our opinion as to whether the parent Company financial statements give a true and fair view, and whether the parent.
Company financial statements and the part of the Directors Remuneration Report to be audited have been property prepared in accordance
with the Companies Act 1985 We also report to you whether in our opinion the information in the Directors’ Report 1s consistent with the
financial statements
In addition we report to you ¢f, in our opinion, the Company has not kept proper accounting records if we have not received all the information
and explanations we require for our audit, or if information specified by law regarding directors remuneration and other transactions is not
disclosed
We read other information contained in the Annual Report and consider whether it 1s consistent with the audited parent Company financial
statements The other information comprises only the Chairman and Chief Executive's Statement, the Annual Review, the Operating and
Financial Review the Directors’ Report, the Corporate Governance statement the Internal Control statement the unaudited part of the
Directors’ Remuneration Report and the Statement of Directors’ Responsibilities We consider the implications for our report if we become
aware of any apparent misstatements or material inconsistencies with the parent Company financial statements Our responsibilities do not
extend to any other information
Basis of audit opmion
We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) tssued by the Auditing Practices Board An
audit includes examination on a test basis of evidence relevant to the amounts and disclosures in the parent Company financial statements
and the part of the Directors Remuneration Report to be audited It also includes an assessment of the significant estimates and judgements
made by the Directors in the preparation of the parent Company financial statements and of whether the accounting policies are appropriate
to the Company's circumstances consistently applied and adequately disclosed
We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide
us with sufficient evidence to give reasonable assurance that the parent Company financial statements and the part of the Directors’
Remuneration Report to be audited 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 parent Company financial statements and the part
of the Directors’ Remuneration Report to be audited
Opinion
In our opinion
© the parent Company financial statements give a true and fair view, in accordance with United Kingdom Generally Accepted
Accounting Practice, of the state of the Company's affairs as at 30 March 2008,
the parent Company financial statements and the part of the Directors’ Remuneration Report to be audited have been properly
prepared in accordance with the Companies Act 1985 and
. the information given in the Directors’ Report ts consistent with the parent Company financial statements
Lush a borg Ler
Ernst & Young LLP
Registered auditor
London
19 May 2008
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Parent Company balance sheet
at 30 March 2008 and 27 March 2007
2008 2007
Notes £m £m
Fixed assets
Investments in subsidiaries 4 3,784 3784
Investments in pension escrow 5 909 850
Total net assets 4,693 4,634
Capital and reserves
Share capital 7 - =
Share premium 8 430 430
Reserves 8 11 - :
Profit and loss account 8 4,252 4204 :
Shareholder’s funds 4,693 4,634
The accounts on pages 100 to 102 were approved by the Board of Directors on 19 May 2008 and signed on its behalf by
Adam Crozier
tan Duncan
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Notes to the parent Company accounts
1 Parent Company accounting policies
The following accounting policies apply
Financial year
The financial year ends on the last Sunday in March and, accordingly these accounts are made up to the 53 weeks ended 30 March
2008 (52 weeks ended 25 March 2007)
Basis of preparation
The parent Company's financial statements were authorised for tssue by the Board on 19 May 2008
The accounts on pages 100 to 102 have been prepared in accordance with applicable UK Accounting Standards and law including the
requirements of the Companies Act 1985 Unless otherwise stated in the accounting policies below, the accounts have heen prepared
under the historic cost accounting convention
Royal Mail Holdings ple (the Company) has not presented its own profit and loss account as permitted by the Companies Act s230 (3)
However, the results of the Company for the year are disclosed in note 8 to the accounts
The Company has taken advantage of paragraph 2D of FRS 29 (IFRS 7) Financial Instruments Disclosures and has not disclosed
information required by that standard as the Group's consolidated financial statements in which the Company ts included provide
equivalent disclosures for the Group under IFRS 7
No new UK Accounting Standards, which affect the presentation of these accounts, have been issued
Impairment reviews
Unless otherwise disclosed in these accounting policies fixed assets are reviewed for impairment if events or changes in circumstances
indicate that the carrying value may be impaired The Company assesses at each reporting date whether such indications exist Where
appropriate, an impairment loss 1s recognised in the income statement for the amount by which the carrying value of the asset (or cash
generating unit) exceeds its recoverable amount which 1s the higher of an asset's net realisable value and its value in use
Investments in subsidiaries
Investments in subsidiaries with the Companys accounts are stated at cost less any accumulated impairment losses The opening and
closing carrying value relates solely to the Company's investment in Royal Mail Group Ltd, a 100% subsidiary of the Company Royal
Mail Group Ltd is the only direct shareholding held by the Company
Investments in pension escrow
Investments in pension escrow are financial assets within the scope of FRS 26 Financial Instruments Recognition and Measurement’
The investments are a combination of short-term deposits and long-term investments which mature between 8 days and 48 years but
have been inctuded within fixed assets as the investments have been provided as security to the Royal Mail Pension Plan in support of
the 17 year deficit recovery period from March 2006
The investments comprise short-term deposits with a bank, Treasury bills and gilt edged securities
The bank deposits are non-derivative assets that are neither held for trading nor quoted in an active market and therefore classified as
‘loans and receivables’ for measurement purposes under FRS 26 (Financial Instruments Recognition and Measurement) The
investments are initially recognised at fair value being the amount deposited The investments accrue interest, thereby increasing the
carrying vatue of the investments This interest s included in the reported profit/(loss) for the year The investments are derecognised
when they mature
Treasury bills, index-lnked gilt edged secuntties and conventional gilt edged securities are classified as available for sale financial
instruments on the basis that they are quoted investments that are not held for trading and may be disposed of prior to maturity The
investments are initially recognised at fair value, being the purchase price After initial recognition, interest 1s included in the reported
profit/(loss) for the year, using the effective interest rate method and the assets are measured at fair value with gains or losses being
recognised in the Financial Assets Reserve until the investment 1s derecognised
Contingent liabilities
Contingent liabilities are not disclosed if the possibility of losses occurring 1s considered to be remote
2 Directors’ emoluments
The Directors of the Company are not paid fees by the Company for their services as Directors of the Company The Directors of the
Company are paid fees by other companies of the Group These emoluments are disclosed in the Group accounts
3 Auditors’ remuneration
The Auditors of the Company are not paid fees by the Company The Auditors of the Company are paid fees by the other companies of
the Group This remuneration 1s disclosed in the Group accounts
101
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I
4 Investments in subsidiaries !
Cost Impairment. 2008 2007 I
£m £m £m £m I
At 26 March 2007 and 27 March 2006 4160 (376) 3.784 3784 I
Additions. - - - 376
Impairment : fa - (376)
At 30 March 2008 and 25 March 2007 4,160 (376) 3,784 3,784
5 Investments in pension escrow
‘Average Average
effective effectwe
rate 2008 rate 2007
x £m x £m.
Short-term deposits - bank 52 159 52 850
Treasury bills 54 543 - -
Gilt edged securities (index linked) 37 180 - -
Gilt edged securities (conventional) 48 27 : =
Investments in pension escrow 909 850
6 Profit and toss account
The Company ts a non-trading company The profit for the period relates to mcome from the investments in pension escrow
7. Share capital
Details of the share capital are disclosed in the Group accounts in note 26
8 Shareholder’s funds
Profit and Financial 1
Share loss Assets 2008 2007 1
premium account Reserve Total Total
£m £m £m £m £m
At 26 March 2007 430 4,204 - 4634 3784
Profit for the year - 48 - 48 420
Issue of shares - - - - 430
Gams on financial asset investments = = EES a4 -
‘At 30 March 2008 430 4,252 aa 4,693 4,634
Financial Assets Reserve
The Financial Assets Reserve is used to record fair value changes on available for sale financial assets
9 Charges
Detatls of charges registered over the assets of the Company are contained in the Group accounts in notes 19 and 24
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Forward Looking Statements
This document contains statements concerning the Group's business financial condition, results of operations and certain of the Group's
plans, objectives, assumptions projections, expectations or beliefs with respect to these items
The Company cautions that any forward looking statements in this document may and often do vary from actual results and the
differences between these statements and actual results can be material Accordingly readers are cautioned not to place undue reliance
on forward looking staternents The Company undertakes no obligation to release publicly the result of any revisions to these forward
locking statements that may be made to reflect events or circumstances after the date of this document, including without limitation,
changes 1n the Group's strategy, or to reflect the occurrence of unanticipated events
By their nature forward looking statements involve risk and uncertainty because they relate to events and depend on circumstances that
will occur in the future Such forward looking statements should, therefore, be considered in light of various important factors that could
cause actual results and developments to differ materially by those expressed or implied by these forward looking statements These
factors include among other things the impact of competitive products and pricing, the occurrence of major operational problems, the
loss of major customers, limitations imposed by the Groups mdebtedness, undertakings and guarantees relating to pension funds,
contingent abilities risks of litigation and risks associated with the Group's overseas operations
Corporate Information
Registered Office and Group Head Office
Royal Mail Holdings ple
148 Old Street
LONDON
4074919
2)
Royal Mail, the Cruciform, the colour red Parcelforce Worldwide and the Parcelforce Worldwide lago are registered trademarks of
Royal Mail Group Ltd Post Office and the Post Office symbol are registered trademarks of Post Office Limited Report and Accounts
2008 © Royal Mail Group Ltd 2008 All Rights Reserved
Corporate website
Additional corporate and other information can be accessed on the following website (www royalmailgroup com) Information made
available on the website 1s not intended to be, and should not be regarded as being, part of the accounts
The maintenance and integrity of the Group's websites 1s the responsibility of the Directors the work carried out by the auditors does not
involve consideration of these matters and, accordingly the auditors accept no responsibility for any changes that may have occurred to
the financial statements since they were initially presented on the website
Auditors Consumer Body
Emst & Young LLP Postwatch
1 More London Place 28 Grosvenor Gardens
LONDON LONDON i
SE1 2AF SW1W OTT j
i
Actuaries Regulator (Postcomm)
Watson Wyatt Limited
Watson House
London Road
REIGATE
Surrey
RH2 9PQO,
Solicitors.
Slaughter and May
1 Bunhill Row
LONDON
EC1Y 8YY
Postal Services Commission
Hercules House
6 Hercules Road
LONDON
SE1 70B