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Royal Mail — Strictly Confidential
ROYAL MAIL HOLDINGS plc
(Company no. 4074919)
Minutes of the meeting of the Board of Directors
Sir Mike Hodgkinson
Allan Leighton
David Burden
Alan Cook
Adam Crozier
lan Duncan
David Fish
lan Griffiths
Richard Handover
Tony McCarthy
John Neill
Baroness Prosser
Helen Weir
In attendance:
Jonathan Evans
Also present:
Frank Schinella
Dawid Konotey-Ahulu
Alex Smith
Doug Evans
Paul Tolhurst
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held at 148 Old Street, London, on 6 February 2007
Non-Executive Director (Chairman of meeting)
Chairman (by telephone — for RMH07/17-28)
Group Technology Director
Managing Director, Post Office Ltd
Group Chief Executive
Group Finance Director
Non-Executive Director
Managing Director, Royal Mail Letters
Non-Executive Director
Group Director, People and Organisational Development
Non-Executive Director
Non-Executive Director
Non-Executive Director
Company Secretary
Finance Director, Royal Mail Letters, for RMH07/25
Redington and Partners, for RMHO7/25
Group Strategy Director, for RMH07/26-28
General Counsel, for RMHO7/26-27
Network Director, Royal Mail Letters, for RMH07/29
CHAIRMAN OF MEETING
Sir Mike Hodgkinson chaired the meeting as Allan Leighton was
unable to be in Old Street, although he was in communication by
telephone.
MINUTES OF PREVIOUS MEETING RMH(07)1°"
The minutes of the previous meeting were agreed by the Board
and signed by Sir Mike Hodgkinson.
MATTERS ARISING — RMH(07)12
The Board noted the status report;
OTHER MINUTES
The Board noted the minutes of the meetings of:
« the Group Executive Team of 19 December 2006
«the Pensions Sub-Committee of 12 December 2006
«the Post Office Ltd Board of 20 December 2006.
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CHAIRMAN’S BUSINESS
The Chairman had no business other than that elsewhere on the
agenda.
REPORTS FROM CHAIRS OF BOARD COMMITTEES
Remuneration Committee: David Fish reported that the
Government had been supplied with all the information they had
requested in respect of the LTIP, and a decision from them was
awaited;
Nomination Committee: Richard Handover reported that there
had been no further progress in the appointment of a Deputy
Chairman since the previous meeting.
EXECUTIVE DIRECTORS’ REPORTS
Royal Mail Letters: lan Griffiths reported that quality of service
levels were holding up well, although during the Christmas
period they had shown their usual dip in performance:
the industrial relations scene was still difficult, with both sides to
an extent skirting around some current issues in anticipation of
bigger arguments to come later in the year. The CWU had
withdrawn its industrial action ballot about drivers’ working hours,
after having been made aware by the Company that the wording
of the ballot paper was flawed. However the proposal for
changes to drivers’ payments was being progressed, and lan
Griffiths expected it to be eventually accepted;
the Board discussed the contingency arrangement options for
the Company in the event of a drivers’ dispute. lan Griffiths and
Tony McCarthy reported that contingency arrangements were in
place, but these would not provide for a replacement capability in
the event of an all-out drivers’ strike. They advised that it would
be unlawful for the Company to hire workers to replace
employees on official strike, and that there was no other third
party company that could replicate at short notice the scale of
operation required by Royal Mail;
lan Griffiths stated that revenue levels in the Letters business
were still following the trend reported at previous meetings of
falling short of budget. In order to try to protect the profit
position, the business was now heavily engaged in extensive
curbing of expenditure;
lan Griffiths reported that it was proving very difficult to find a
new Operations Director to replace Tom Melvin later in the year.
While some good potential candidates had been identified, they
were generally cautious about joining the Company at the
current time. Other options were being pursued for filling the
post, and the Nomination Committee was fully engaged with the
matter;
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Parcelforce Worldwide: the Board noted that David Smith had
taken over as MD of Parcelforce. The Board asked Jonathan
Evans to draft a letter to Vanessa Leeson thanking her for her
work over the previous seven years, and for her achievements in
restoring the business to profitable trading;
GLS: Rico Back reported that period 9 revenues were 0.6%
higher than prior year, while EbitA was €3.4m lower than prior
year, and €2.0m lower than budget. Margins in GLS Germany
had been impacted by a difficult trading environment, and
reductions in oil prices had had an adverse flow-through effect
on revenues. The salesforce was very active in trying to gain
and retain business, and a major cost-cutting drive was in place;
the performance of GLS France had been impacted by an
increase in line haul costs, caused by the implementation of a
revised transport plan which was not yet working well.
Revenues were holding up well, and Rico Back estimated that
the operational problems would be resolved by February;
plans were being worked upon for start-up operations in the
Baltic states and Romania. In Italy the Bologna acquisition had
been completed, and discussions were continuing on the Milano
case. Anew possible target company was being investigated in
Spain;
overall Rico Back confirmed that he still expected GLS as a
whole to meet its forecast profit target, with the possibility of
there being a £2m upside. The budget process for 2007/08 was
currently underway: he warned that it could prove difficult to
sustain profit levels. He anticipated that there would not be a
cash problem, but that the profit margin was likely to be some
1% lower than the current year;
Post Office Ltd: Alan Cook reported that negotiations were
continuing with both WHSmith and the Bank of Ireland about
crown offices. He estimated that there was potentially a £25m
per annum profit benefit from franchising opportunities with
WHSmith, and £15m per annum from Bank of Ireland. The
Board agreed with his strategy to keep both partners in play for a
while longer, before returning to the March Board meeting with a
definitive proposal for how to proceed. Alan Cook said that he
would also require a mandate from the Board to enter pay
negotiations with the CWU in respect of changes to the crown
office network. The Board agreed that he could circulate these
for the Board's approval in correspondence in advance of the
March meeting;
Alan Cook updated the Board on progress with finalising the new
Horizon contract. The Board had given him authority on 2
August 2006 to sign the contract, subject to the satisfactory
Conclusion of negotiations with Fujitsu. The contract provided for
Post Office Ltd to back out of the new contract if suitable funding
from Government had not been forthcoming. Alan Cook
informed the Board that although the funding arrangement with
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Government had not been finalised, it was nevertheless
sufficiently advanced to proceed with completing the Fujitsu
contract. The Board concurred with the course of action;
(m) Technology: David Burden referred to the actions in hand to
improve the relationship with CSC. The Board asked for a report
ACTION on the state of the relationship and the future strategy in respect
David Burden of CSC for the May meeting of the Board;
(n) People and Organisational Development: Tony McCarthy
reported that the pension scheme non-joiners exercise was
reaching the final cut-off dates. The latest position was that 568
people had opted to join the scheme from a retrospective date,
and this would incur a past liability of some £4.5million,
substantially below the earlier estimates reported to the Board.
The final figure would be known within the following few weeks
when all replies had been received;
(0) Tony McCarthy reported that following a recent EU decision on
the VATability of medical services, the ATOS contract would be
incurring an additional £2million per annum VAT charge.
RMHO07/24 FINANCE DIRECTOR’S REPORT — RMH(07)13
(a) The Board noted the period 9 report, and lan Duncan's
accompanying presentation giving the flash results for period 10;
(b) Group profit before exceptional items in period 10 was £7 million
below forecast and £1million below the prior year. This
performance to an extent masked the fact that there had been a
revenue shortfall of £29million against budget, mainly in the
Letters business, as expenditure had fallen substantially during
the month as a result of some one-off issues. Were revenue to
continue its trend, as was likely, then it could not be assumed
that expenditure would continue to fall commensurately in the
remaining weeks of the year;
(c) the cumulative profit position at period 10 showed a Group
Operating profit before exceptional items of £1 10million, £1million
adverse to forecast and £170million adverse to prior year;
(d) lan Duncan estimated that there was a further £40-60million
revenue risk in the Letters business. Action was being taken to
pursue additional sources of revenue aggressively, while
management was making all efforts to cut any unnecessary
expenditure, including significant reductions in operational
overtime and new hires. The Board Supported these actions,
providing they did not jeopardise Letters quality of service
performance. lan Griffiths assured the Board that the actions
would fall short of doing that, as the loss in terms of reputation
and risk of regulatory fines would make such action counter-
productive;
(e) the Board went on to discuss the importance of making costs in
the Letters business more responsive to changes in volume: as
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the profile of mail volumes in the future was likely to be
downward, it was vital that the business model was changed.
The Board wanted to understand how the future business plan,
now supported by the funding arrangements agreed with:
Government, would be used to bring about such a change in the
business model. lan Duncan would bring the budget proposals
for 2007/08 to the April Board, when this would be considered
further;
the Board observed that a feature of the past year's financial
reports had been the inaccuracy of sales forecasts in the Letters
business. lan Duncan agreed to examine ways of improving the
forecasts, possibly by taking more input from the front-line sales
force, and to bring to the Board periodic reviews of forecasting
accuracy.
RMPP INVESTMENT STRATEGY — RMH(07)14
The Board noted lan Duncan's paper and Frank Schinella’s
presentation, which set out the rationale for the proposed phased
reduction in equities to 50% of the Plan's assets, an assessment
of why the Company should endorse a liability matching strategy
considering the relatively low yields available in current markets,
and an explanation of how the impact on the Board’s return on
assets could be minimised. The Board was reminded that
ultimately the RMPP investment strategy was a matter for the
Trustee, although in view of the major impact of the strategy on
the Company's finances the Company was seeking to influence
the Trustee to arrive at a strategy that reduced investment risk
while minimising the impact on expected returns;
Company representatives had been having in depth discussions
with the Trustee and its advisors, and had broadly reached a
consensus around the preferred investment strategy identified in
the paper. The Board also concurred that this strategy was the
appropriate one to follow to achieve the objective of reducing risk
while protecting returns;
there were however some concerns that the Trustee may be
more driven to move quickly from equities to bonds than to
implement some of the alternative investment approaches, such
as the use of swaps and other investment vehicles. Also the
Board wished to ensure that in effecting the new strategy, the
Trustee would do so in such a way as to minimise transaction
costs;
overall, after full discussion, the Board supported the Trustee's
proposed investment strategy. In order to reinforce the Board’s
support and raise its concerns with the Trustee, lan Duncan was
asked to write to the Trustee setting out the Board's views.
GOVERNMENT FUNDING
Adam Crozier shared with the Board the final version of the term
sheet agreed with Government for the future funding of the
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Company, together with draft internal and external
announcements. He explained to the Board the course of events
over the previous few days of intense and difficult negotiations
with the Government. The result that had been achieved was
within the Board's remit given at the previous meeting:
the Board congratulated Adam Crozier and his team on
achieving this outcome in what had been very testing
circumstances. Although it had not been possible, for political
reasons, to secure the Government's agreement to a real
employee share scheme, the terms of the rest of the deal — a
phantom share scheme based on 20% of the economic value of
the Company, further funding to allow for the business plan to be
implemented over a longer period in view of the lack of the extra
incentive from a real employee share scheme, Government
support for the change programme that management would
need to introduce including amendments to arrangements for
pension provision — provided a good basis for the Company to
proceed with its transformation plan;
directors made suggestions for amendments to the
communication material which Adam Crozier undertook to review
before finalising the documents over the following few days;
the Board recognised that now the funding negotiations were
over — subject to formally agreeing them before the end of March
— it should increasingly turn its attention to discussing the key
strategic issues that implementing the plan presents. The Board
agreed that the July awayday should be devoted to the
consideration of these;
in order to finalise the funding arrangements, the Board
delegated to Adam Crozier and lan Duncan the authority to
finalise the documentation and sign it on behalf of the Company.
BUSINESS PRIORITIES
Tony McCarthy updated the Board on the current state of
progress with developing the plans for introducing the phantom
share scheme and changes to pension arrangements. In future
meetings specific items would be presented for the Board's
approval, beginning at the March Board meeting with the terms
for the phantom share scheme.
PACKETS STRATEGY — RMH(07)16
The Board noted Adam Crozier's paper and Alex Smith's
presentation which outlined the progress made since July 2005,
when the Board first considered the packets strategy, in
delivering a suite of changes to ensure the Company was fit to
compete successfully for the growth in this market. The
presentation also highlighted the latest developments in the
market and showed that competitors were beginning to compete
aggressively with both Royal Mail and Parcelforce Worldwide. A
business model being deployed by the competition was using
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self-employed couriers equipped with hand held devices,
bringing the advantages of low labour costs and new generation
Us
Royal Mail's response had been two-fold. First, the launch was
planned for July 2007 of the new Techpack product to fill the gap
in the Royal Mail portfolio. The Investment Committee had given
in principle approval to the product, in particular the initial
development costs. The business case (RMH907)16b), a copy of
which had been circulated in advance and which was noted by
the Board, was being submitted for full approval of the
Investment Committee later in February. The Group Executive
Team considered this to be a vital development for 2007, but in
the medium term a “necessary but not sufficient” response to
changes in the marketplace;
secondly evaluation was being undertaken of whether RMG
should build or acquire a courier capability in order to be fully
competitive at all weight steps up to 15kg in the “budget
business to consumer” marketplace. If it were considered the
right thing to do then the relevant business case would need to
be approved in time to secure a share of the autumn 2007
growth that would be available. Work was in hand to assess a
number of potential solutions to this, and further reports would be
made to the Board;
after some discussion the Board supported the direction the work
was taking, and requested that the evaluation of the options for a
courier capability be conducted with pace.
LAST LETTER DELIVERIES — RMH(07)15
The Board noted lan Griffiths’ paper and Paul Tolhurst’s verbal
summary of the proposals. Further to the Board's earlier
consideration of the impact of driving speed restrictions in
November 2006, analysis had been carried out on options for
minimising the impact of the restrictions on latest delivery times.
The preferred option now was not to make a wholesale change
to delivery times across the UK, but to retain the existing
specification except in those isolated areas where service could
not be maintained without unjustifiable additional cost. The
additional capital expenditure requested in the earlier submission
would still be required to upgrade air and road network
capabilities, and in addition some £5-10million of operating
expenditure would be required to maintain service levels;
Paul Tolhurst indicated that it would probably become necessary
to review latest delivery times again in the future on the
introduction of walk sequencing;
Adam Crozier said that to retain the existing specification
generally would be challenging, a factor which should influence
the approach made to Postcomm about the possible impact of
the speed restrictions, but he felt it was the right course to be
followed. Tony McCarthy added that there was a substantial
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management challenge in making the changes of start and finish
times to many thousands of front-line people’s work patterns;
after further discussion the Board:
approved the investment of £10.1m Capital Expenditure, £1.7m
Operating Expenditure, £2.2m Capitalised Lease, £3.3m
recurring costs in the Network and £5m recurring costs in Area
operations for a total cost to the Business of £47.0m over four
years;
noted that of these sums, the Board had authorised at the
November 2006 Board meeting £11.7m in respect of the net
increase in air flights;
directed that consideration of the requested incremental area
operating costs of £5-10m be considered as part of the
forthcoming budget discussions for 2007/08.
REGULATION REPORT — RMH(07)17
The Board noted the report.
TECHNOLOGY AT ROYAL MAIL — RMH(07)18
The Board noted David Burden’s paper. David Burden
emphasised that there was a big unexploited opportunity in the
usage made of the Royal Mail website, which had over 7million
registered users, but negligible revenue; while the biggest risk in
the technology area arose from the lack of an adequate HR
system;
the Board considered that the issues raised in the paper merited
a longer strategic discussion, which it aimed to do at the July
awayday. In the meantime David Burden was asked to clarify
the “general principles and strategies” referred to in his paper.
QUARTERLY INVESTMENT REPORT — RMH(07)19
The Board noted the report.
CORPORATE RISK SCORECARD — RMH(07)20
The Board noted the report.
COMPANY SECRETARY’S REPORT — RMH(07)21
The Board noted the report.
CLOSE
In the absence of any further business, the Chairman closed the
meeting. The next meeting of t ard was scheduled for 13