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Present:
Donald Brydon
Royal! Mail — Strictly Confidential
ROYAL MAIL HOLDINGS plc
(Company no. 4074919)
Minutes of the meeting of the Board of Directors
held at 100 Victoria Embankment, London, on 27 January 2010
Andrew Carr-Locke
Alan Cook
Adam Crozier
Lord Currie
lan Duncan
Richard Handover
Mark Higson
Paul Murray
Les Owen
Baroness Prosser
In attendance:
Jonathan Evans
Also present:
Rico Back
Jon Millidge
Mike Devanny
Robin Dargue
Tony Marsh
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Chairman
Non-Executive Director
Managing Director, Post Office Ltd
Group Chief Executive
Non-Executive Director
Group Finance Director
Non-Executive Director
Managing Director, Royal Mail Letters
Non-Executive Director
Non-Executive Director
Non-Executive Director
Company Secretary
Chief Executive, GLS
Acting Group HR Director, for RMH10/11
Head of Fleet and Maintenance Services, Royal Mail Letters, for
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Chief Information Officer, for RMH10/14
Acting Group Security Director, for RMH10/15
LES OWEN
The Chairman welcomed Les Owen to his first meeting of the
Board, having been appointed Non-Executive Director of the
Company with effect from 27 January 2010.
MINUTES OF PREVIOUS MEETING — RMH(09)12™
The Board approved the minutes of the meeting held on 8
December 2009.
MATTERS ARISING — RMH(10)01
The Board noted the status report;
iRed (RMH09/178(c)): several non-executive directors had met Ray
Huntzinger, the MD of iRed, to discuss progress and future strategy.
The general view of the non-executive directors was that the
meetings had been useful in increasing their understanding of the
iRed business proposition. The challenge for the business unit was
quickly to secure more external customer contracts — a point which
had been underlined to Ray Huntzinger as the key issue for the
Board.
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the Committee had agreed that Jon Millidge would replace
Jonathan Evans as Company Secretary on the latter's retirement in
June 2010. In the short term Jon Millidge would combine the role
with that of acting Group Human Resources Director until a
permanent appointment to the HR role was made. Jonathan Evans
had agreed to continue as pension fund trustee and in other
miscellaneous part-time roles where his experience could be
valuable. The Board endorsed these changes which the Committee
had agreed on its behalf;
Remuneration Committee: Richard Handover reported that he was
in increasingly difficult dialogue with the Shareholder Executive
about the 2009/10 annual performance bonus plan for the executive
directors. The Committee was beginning to turn its attention to the
design of the long-term incentive arrangements to apply from
2010/11, and had engaged Deloittes to help with their
considerations.
CHIEF EXECUTIVE’S REPORT
Innovation: Adam Crozier reported that progress was continuing to
be made with Innovation projects following the Board's
endorsement in November 2009. He would bring a follow-up report
to the March board, and this would include options for the best
means of ensuring that projects were implemented, including the
possible use of a special purpose vehicle;
Pensions: the CWU had issued a document Time to Deliver which
set out their proposals for addressing the problems facing the
Company from the high level of deficit in the pension fund. The
document was well-written albeit with challengeable assumptions,
and was based predominantly on moral arguments for Government
support. The timing of the its publication was thought to be
connected with the current status of the wider negotiations with the
Company about Letters transformation, together with the need, for
CWU's own internal reasons, to be seen to be pursuing a pensions
solution with Government;
Project Q@: Adam Crozier reported that Postcomm were about to
issue a startement saying that they “were minded” to conclude that
a licence breach had occurred. Discussions would take place with
the Chairman and David Currie about how best to progress this
issue with Postcomm.
HEALTH AND SAFETY REPORT — RMH(10)02
The Board noted the report. The Board asked that future reports
showed more performance trends, that the low reported level of
compliance in crown offices in Post Office Ltd be verified, and that
further consideration be given to using more common measures
across the Group. It was agreed that in respect of GLS, safety
reports would be made to the GLS Audit Committee in the first
instance
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FINANCE DIRECTOR’S REPORT — RMH(10)03, AND
EXECUTIVE DIRECTORS’ MONTHLY REPORTS
Finance report: the Board noted lan Duncan’s report for period 9
This showed that operating profit before exceptional items in the
period was £74million, some £16million favourable to budget. The
cumulative position at the end of period 9 was an operating profit
before exceptional items of £279million, which was £7million and
£24million favourable to budget and prior year respectively. Profit
before tax was cumulatively £82million higher than budget driven by
£49million lower exceptional costs and £26million lower interest
payable. The exceptional items variance was driven by
ColleagueShares — the budget assumed maximum payout, while
the actuals reflected a lower valuation, partly offset by higher
redundancy costs than budgeted in the Letters business;
period 9 itself had been a good month, with the Letters business
packet performance better than the previous two months, although
volumes had still declined by 2% compared with the prior year.
Overall Letters revenues were £107million behind the year-to-date
budget;
the Chairman commented on the Engagement Index and the wealth
of information that lay behind it derived from the Have Your Say
process. The Board agreed that it would welcome an in-depth
presentation on Have Your Say at a future Board meeting;
turning to the full-year forecast as at the end of quarter 3, lan
Duncan said that all units were forecasting to achieve or exceed
their budgeted operating profit, leading to a Group forecast of
£375million, £68million favourable to budget. The Letters business
was forecasting to be some £160million below budgeted revenue,
but the profit forecast was nevertheless to achieve budget. Indeed
the intention of the Letters business was to exceed its operating
profit budget by the benefit of an accounting change for surplus staff
costs, estimated at £24million;
additional Group outperformance was driven by the release of
£33million in respect of the pension charge improvement held
centrally and £10million exchange rate benefit in GLS. PBIT was
expected to be £181million favourable to budget, reflecting
improvement in operating profit and lower ColleagueShare charges
for the year, partly offset by additional RML redundancy costs,
Group cash was forecast to improve by £193million from the budget
position, largely due to reduced capital expenditure, continued focus
on working capital and the flow-through impact of profit, partly offset
by higher redundancy costs;
risks to profit performance for the year remained, and included
further industrial action, further revenue decline, and potential fines
related to the industrial action in 2009. However there were also
further potential opportunities, and it was possible that operating
profit before exceptional items could reach £400million;
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the Board commended management for this improvement in
forecast performance, although there were some concerns that the
level of profit compared with the previous year and compared with
the lower forecast previously given to the Board could give rise to
presentational problems amongst some observers;
Business plan refresh update: lan Duncan updated the Board on
the further progress made with refreshing the Group business plan.
The key points were:
* overall, despite losing some £3billion of revenue compared with
the projections in the Investment Case, the refreshed plan was
currently showing the capacity to maintain financial headroom
during the plan period;
* whilst the Q3 forecast had downgraded Letters revenue by a
further £70million, the refreshed plan would not be amended
until March to take account of the likely full-year outturn,
* December inflation and the prospect of future inflationary
pressure meant that the plan assumptions, particularly for pay,
may be light. Illustrative modelling had been carried out to
determine the impact of raising the pay assumption for Letters in
2010/11 from 1.2% to 2.0% and accelerating incentive
payments linked to modernisation. Notwithstanding the need to
reassess inflation, the final refreshed plan would incorporate any
agreement reached with the CWU;
the pension charge for the following year could be in the order
of 20% compared with 17% in the plan, This would degrade
profit by some £100million. However there would be no cash
impact;
cash headroom had been shown to be tight in the December 2009
refresh despite potential measures to generate cash headroom,
including the sale of the investment in Camelot (£70m), and the sale
and leaseback on properties (£130m) and further leasing on
machines (£100m). The latest estimate at January 2010 showed
that the cumulative cash position by September 2011 was some
£100million worse than at the December 2009 refresh, with
RM Letters bringing forward incentive payments and revising the
RPI-based pay deal upwards. Cash risks would continue to be
monitored closely as the emerging revenue picture in the Letters
business became clearer and as agreement was reached with
the CWU. It was intended to begin discussions with the
shareholder over covenant waivers and approval for the financing
transactions assumed in the plan refresh. In addition, in order to
place a further control on cash, a capital rationing process was
being implemented by Group Investment Appraisal;
a further update would be provided to the Board in March. It was
proposed to share the December 2009 draft business plan refresh
with the Pension Plan trustees to allow their advisors PwC to start
to form a view on the strength of the employer covenant. It would
also be shared with Ernst and Young to allow them to commence
their work on assessing the Company's going concern position;
the Board noted the update on the refresh work, and requested that
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fan Duncan provide a short briefing note to explain the £3billion
revenue shortfall compared with the Investment Case assumption;
Royal Mail Letters’ Mark Higson reported that the bad weather
experienced in January had had a marked adverse effect on the
number of accidents and on quality of service performance;
work was continuing on the London Project — a rationalisation of
operational buildings in London ~ and a revised proposal with an
improved cash-flow would be brought to the Board in due course,
Mark Higson and fan Duncan thanked the Board for giving its
approval in correspondence in December to the acquisition, sale
and leaseback of a property in Hemel Hempstead. The deal had
been completed in all material respects in line with the Board’s
remit,
the Board went on to discuss the progress with Letters
Transformation, and agreed that it would be useful to have prepared
a summary of the changes introduced over the previous few years,
to demonstrate the scale of change that had been achieved:
Parcelforce Worldwide: Adam Crozier reported that the recent sale
of DHL's parcels business represented an opportunity for
Parcelforce to acquire new customers — an Opportunity that was
being pursued vigorously;
GLS Rico Back reported that trading was continuing to be affected
by the recession and, more recently, by the very bad weather on the
continent which had impacted markedly on customer behaviour.
Nevertheless the full-year forecast remained to achieve the budget
target. Setting the budget for the following year was proving a
tough challenge as revenue continued to be under great pressure.
The big issues to consider would therefore be GLS’s pricing
strategy, and its progress with turning round the operation in
France:
POL Alan Cook updated the Board on discussions with
Government about the future funding of POL. The aim remained to
gain Government approval to at least a roll-forward of £150million of
Social Network Payment funding in 2011, and to secure this before
General Election purdah began. While officials and Ministers in BIS
were thought to be supportive of this approach, the Treasury
position was currently not in agreement. Intense discussions on
this were continuing, and the Board recognised that the absence of
@ commitment to this minimum level of funding would create a
difficulty for going concern considerations at the year-end;
the new version of the Horizon software was currently going live
across the POL network. This was a major logistical challenge for
POL
the Board noted the post-investment review on the Network Change
Programme. This showed that the programme had succeeded in its
key objectives of making up to 2,500 compensated branch closures
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(2,432 achieved) and opening 500 outreach services (507
achieved). All the Government access criteria had been met, and
99.4% of customers had either seen no change or were within a
mile of an alternative branch following the Network Change
Programme. It had delivered the target annual profit improvement
of £45million at a cost £17million under budget (delivered £159m.
budget £176m), which meant that all the economic targets had been
exceeded;
Alan Cook undertook to provide the Board with information on the
size of debt recovered following attacks and burglaries at branches,
and when these sums were provided for in the accounts;
Alan Cook also undertook to provide a briefing note for the Board
‘on the impact on the Group of the UK Payments Council's recent
announcement that it was aiming to abolish the use of cheques by
2018.
LEASING OF MAIL AUTOMATION EQUIPMENT - RMH(10)04
The Board noted lan Duncan's paper which sought approval to
Royal Mail Group Limited signing master lease agreements with
Barclays and Royal Bank of Scotland (Lombard) for the leasing of
up to £63million of mails automation equipment to be delivered over
the following two years. Given current cash forecasts over the
coming few years, this would enable relief of some headroom
pressure against Government funding facilities at a lower cost than
Government borrowing;
in considering the proposal, the Board noted that should it become
necessary to release some equipment before the end of the lease
period, some costs would be incurred. The Board also asked lan
Duncan to consider whether other banks, in particular Australian,
may be able to offer better terms;
The Board:
¢ noted the outline terms of the proposed equipment leases
¢ noted that a further legal check would be made to confirm
RMG's capacity before the finalised lease agreements were
signed
* authorised, subject to legal capacity, and delegated authority to
lan Duncan to finalise the arrangements.
INDUSTRIAL RELATIONS UPDATE
Mark Higson and Jon Millidge updated the Board on the current
state of the negotiations with the CWU aimed at reaching
agreement on a range of issues to enable the transformation of
Royal Mail Letters. Progress was continuing to be made, although
there remained some difficult issues to resolve, in particular
Saturday working. However there was optimism that a satisfactory
settlement would be possible;
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the Board noted the update;
the Board went on to discuss the long-running difficulty for the CWU
of making a breakthrough on reforming its own internal machinery
and culture. It was clear that some innovative form of intervention
would be necessary to enable such reform be realised.
VEHICLES PLAN 2010/11 — RMH(10)06
The Board noted Mark Higson’s paper, which sought approval for
the proposed vehicle plan for 2010/11, requiring £36.9million to
replace 1,875 vehicles (5.1% of the fleet) in 2010/11. This figure
was for ‘business as usual’ replacements and did not include
Delivery Methods acquisitions in 2010/11 (5,986 vehicles, incurring
capital expenditure of £49.5million) which had been separately
authorised;
the Board
* approved the 2010/11 Vehicles Replacement Plan as set out in
the paper
* noted that the Group Investment Committee would exercise
ting-fenced authority for certain categories (totalling
£19.5million) with draw-down subject to agreement between the
relevant Business Unit and the Group Finance Director.
POST OFFICE LTD NEGOTIATING MANDATE — RMH(10)05
The Board noted Alan Cook's paper, which set out for the Board’s
endorsement the proposed approach to negotiating a changed
relationship with the Bank of Ireland (Bol);
the aspiration was to achieve a change in the business model,
specifically to improve the contribution that POL received and the
level of control that POL had over its personal Financial Services
business, moving POL more in the direction of being a distributor of
Financial Services products. In order to deliver this aspiration, POL
had identified three levers which would significantly improve POL’s
profit by some £15-25million a year by 2015/16, with significant
additional upside. The three levers were:
« to manage insurance directly within POL, ensuring that the
value flowing to POL properly reflected the contributions it
made, delivering an additional £10-13million;
* to improve commissions and margins on some savings and
lending products provided by Bol so that POL captured at least
£3-8million additional value. This would require Bol’s
commission payments to move towards industry benchmarks
over time, perhaps with volume discounts creating further
upside for POL as book values reached pre-agreed levels;
« to dissolve POFS (the JV between POL and Bol) and integrate
its key functions into POL to simplify the model, improve
transparency and set up a more efficient partnership. Removing
duplication of roles and support functions (some 20 people,
representing a third of POFS’ non-salesforce headcount),
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alongside administrative and operational IT systems savings
and premises synergies from moving staff to POL’s building
could realise £2-4million for POL;
Adam Crozier reported that he and Alan Cook had recently held a
meeting with the Chief Executive of Bol, at which the need from
POL’s perspective for a renegotiation of the relationship had been
clearly signalled;
after further discussion, the Board endorsed the proposed
negotiating aims and approach. The Board appointed a sub-
committee, comprising Les Owen, Andrew Carr-Locke and Paul
Murray, to act as a steering group for the negotiations between
Board meetings.
E-BUSINESS TRANSFORMATION — RMH(10)07
The Board noted Robin Dargue’s paper which sought approval to
spend £24.9million to help transform the eBusiness capability of the
Group, It was intended to contract with a systems integration and
business transformation partner to put in place new web technology
and an operating model that would enable the delivery of the
business units’ strategic plans, migrate and improve the current web
functionality delivering a customer-centric strategy and improving
accessibility, enable strategic applications that could not be
delivered by the current technology platform, safeguard existing
web presence as software moves out of extended support and
reduce both the operating costs of the current web platform by 20%
and future project development costs by 35%:
the Board noted in discussion that the proposed new platform would
represent a leapfrogging of the competition in terms of web
technology: however its success commercially would depend on the
quality of the products being sold over it;
the Board approved the proposal to contract with a systems
integration and business transformation partner to implement a new
eBusiness technology platform and operating model as set out in
the paper, at a total project cost of £24.9million.
ANNUAL SECURITY REPORT — RMH(10)08
The Board noted Tony Marsh's report and his presentation to the
Board, which highlighted the key security issues facing the Group
and the measures being taken to address them.
GOING CONCERN UPDATE — RMH(10)09
The Board noted lan Duncan's paper to the Audit and Risk
Committee. The Board further noted that the Audit and Risk
Committee had fully considered and approved the paper at its
January meeting, at which Ernst and Young had given its support to
the proposed process for monitoring going concern;
the Board also endorsed the proposed approach.