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Royal Mail Holdings plc
Report and Accounts
Year Ended 25 March 2007
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Royal Mail Holdings plc
[coat Mail Group is unique in reaching everyone in me
UK through its mails, Post Office® and parcels businesses
- which directly employ nearly 185,000 people in the UK.
Every working day Royal Mail processes and delivers
almost 83 million items to 27 million addresses for
prices that are amongst the lowest in Europe; each week
we serve over 24 million customers through our network
of 14,219 Post Office® branches and each year our
domestic and European parcels businesses - General
Logistics Systems and Parcelforce Worldwide - handle
\ some 360 million parcels. a)
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Royal Mail Holdings ple
Contents Page
Chairman and Chief Executive s Statement 4
Annual Review 2006-07 8
Operating and Financial Review 1
Royal Mal Holdings plc Board 27
Directors Report 29
Corporate Governance 31
Internal contrat 36
Directors Remuneration Report 37
Statement of Directors responsibilities «n relation to the Group financial statements. 45
Independent Auditors Report to the members of Royal Mail Holdings plc 46
Group income statement for the years ended 25 March 2007 and 26 March 2006 47
Group statement of recognised income and expense for the years ended 25 March 2007 and 26 March 2006 48
Group balance sheet at 25 March 2007 and 26 March 2006 49
Group cash flow statement for the years ended 25 March 2007 and 26 March 2006 50
Notes to the Group accounts 52
1 Authorisation of financial statements and staternent of compliance with IFRSs- 52
2 Accounting policies 52
3 Segment information 59
4 People formation 61
5 Operating costs 62
6 Auditors remuneration 62
7 Operating exceptional items 63
8 Net finance income 63
9 Income tax 64
10 Property plant and equipment 66
‘11 Goodwill 67
12 Intangtble assets 67
13 Business combinations 68
44 Investments in jot ventures and associates 69
15 Non-current assets held for sale 70
16 Inventories 71
17 Current trade and other receivables 71
18 Cash and cash equivalents 71
19 Financral liabilities 72
20 Provisions for liabilities and charges 74
21 Current trade and other payables 75
22 Non-current other payables 75
23 Financial nsk management objectives and pohcies 75
24 Financial instruments 77
25 Employee benefits - pensions 83
26 Share capital 86
27 Total equity 87
28 Commitments 90
29 Related party transactions 1
30 Events after the balance sheet date 92
Group five-year summary (unaudited) 3
Parent Company accounts %
Statement of Directors responsibilities in relation to the parent Company financial statements 9%
Independent Auditors report to the members of the Company Royal Mail Holdings pic 5
Parent Company balance sheet 96
Notes to the parent Company accounts 7
Forward Looking Statements: 99
Corporate Information 9
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Royal Mail Holdings plc
Chairman and Chief Executive's Statement
The Group delivered record quality of service to our customers in 2006-07 and secured a vital commercial funding package for the
modernisation of the Company while profits fell as a result of a significant increase in pension costs Looking to the future, f we are
to continue on our sourney to become the worlds best and most trusted postal service we must now take action to meet the
challenges of securing a viable pension scheme for our people dealing with the impact of both substantially increased competition
and falling mail valumes and building a tong term sustainable Post Office® network Modernising our letters business remains
central to our strategy as we are competing in an open carnpetitive market where despite all the improvements we have made we
are still 40% less efficient than our rivals ~ because they have already invested in the technology that provides more efficent
operations
For Royal Mail this has been a critical period during which we have worked to create the platform from which we can achieve success
1m the competitive market and secure a strong future for the business The building blocks we have now put m place include
* Around £4bn funding package from the Government to enable us to modernise the business
* Agreement with the unions on the flexibility and changes in working practices that are vital if we are to modernise
successfully, and
* Support for the pension reform needed to allow us to become competitive and protect a Defined Benefit pension scheme
for our existing employees
The Group's achievements so far
Remarkable progress has been made since we embarked on our transformation in 2002 Five years ago the Group was losing well
over £1m every day failing its quality of seruce targets and facing a downward cycle of decime unless it cut costs and renewed its
focus on customers It was in no position to compete in a market that was moving towards full competition in January 2006
Today, its clear that we have come along way As the table below illustrates. we have achieved significant cost savings with the
Company employing 45 000 fewer people At the same time customers have received the best letters quality of service performance
against target on record with targets achieved for both First and Second Class stamped mail as well as for business mail Operating
Profit m 2006-07 was in line with expectations at £233m although this was down on the previous year as a result of mcreased
pension costs
Employees First Class stamped
at financial and meter mait Operating profit/{loss)*
year end Quality of Service £m
2001-02 229,400 916% (318)
2002-03 212.800 917% (a97)
2003-04 202 300 901% 220
2004-05 196 400 914% 537
2005-06 193 000 941% 355**
2006-07 184 800 940% 233
* Accounting basis changed from UK GAAP to IFRS from 2005-06 onwards Pror to this reported results shown as “(loss)/profit
from operations”, which excluded benefits/charges relating to pension funding surpluses/deficits
** Equivalent to profit from operations of £609m consistent with UK GAAP accounting policies as applied im 2004-05
In addition, Parcelforce Worldwide has made an operating profit for the second year running after more than 15 consecutive years
of losses Meanwhile the Groups European parcels bustness General Logistics Systems (GLS), has continued to build on its
Teputaton as a leading player in the European market place and has increased its revenues and profits A sertes of operational
changes have been embedded in Royal Mail Letters including the move to a single dally delivery nearly two decades after it was first
mooted In the Post Office® network new products and services have been launched to help replace lost revenue from traditional
Government business
Funding
Finalising with our Shareholder, the Government the details of nearly £4 billion of investment for the Group was a major task over
‘the last 18 months Crucially this has at last put in place the financing to carry out the modernisation thats essential for us to
compete effectively agaist intensifying competition - not just from rival mail companies but also from other forms of communication
including broadband internet In addition, the Government has allowed us to allocate 20% of the value generated through the efforts
of everyone in the business over the next few years in the form of ColleagueShares The ColleagueShare scheme which is worth up
to £5 300 for each of our people over five years depending on performance 1s a recognition of the critical rote they wilt play in the
modernisation of the Group and mn achieving the stretching targets we have set ourselves The table below summanses the funding
package
Debt facility on commercial terms to modernise Royal Mail Letters operations £12 billion
Restructuring and supporting the Post Office® network £17
on
Security for the pension fund trustees £10 billion
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Royal Mail Holdings plc
Chairman and Chief Executive's Statement (contmued)
2006-07 Financial Performance
Our financial performance in 2006-07 was adversely impacted by a number of factors including nsing competitor activity falling
mail volumes mail customers trading down to lower-priced services and the continuing losses im the Post Office® network However
the single largest negative impact has been the rise in pension fund costs, which continue to represent a long-term risk for the
Group The table below summanses financial performance in 2006-07
External revenue Operating profit/(loss)
Business unit performance 2007 2006 2007 2006
£m £m £m £m
Royal Mail Letters 6,857 6859 194 344
General Logistics Systems 1,082 1037 115 100
Parcelforce Worldwide 337 314 10 5
Post Office Limited 868 838 (99) (113)
Other businesses 35, 8 13 17
Group 9,179 9.056 233 355
Looking in more detail at the Group’s performance in 2006-07:
© Group externat revenue rose 14% to £9 2 billion boosted by strong performances by Parcelforce Worldwide and GLS
which together contributed just over half of the revenue increase,
* Group operating profit fell by a third to £233m However operating profit included the benefit for the first time of £75m
from the Governments Social Network Payment to support loss-making Post Office® branches - from the half-year point
onwards this payment is treated as revenue Underlying profit m 2006-07 was £158m - less than half the previous years
£355m profit on a like-for-tke basis
© Inland addressed mail volumes fell by 2 3% - the first decline after many years of growth The growth in ematl
undoubtedly played a key factor an the fall and the realistic prospect facing the Company is for further volume declme The
peak in mail volumes looks likely to be behind us
© Post Office Limited continued to grow revenues from new products and services but further declines in its traditional
Government business leading to lower customer footfall and sales meant its underlying revenues - excluding the benefit
of the £75m Soctal Network Payment - last year fell by £45m Its underlymg loss on the same basis increased by 57% to
£174m
© Parcelforce Worldwide grew its revenue by 7 3% in a market that became even tougher, and delivered a record operating
profit of £10m and
© GLS grew its revenues by 4 9% ma very competitive market and its operating profit increased to £115m The results of
both GLS and Parcelforce Worldwide demonstrate the Groups potential in areas where it 1s allowed to compete freely
without regulatory constraint
The challenges facing the Group have been underlined in the first part of the new financial year (2007-08) which shows a distinct
deterioration in Roya! Mail Letters revenue
The challenge of rising pension fund costs
The cost of servicing the Company s pension plans rose steeply m 2006-07 by £193m to £722m and accounted for the bulk of the
drop in the Groups profit In addition the Group faces making cash payments to the pension fund of around £800m annually for 17
years to cover both ongoing contributions and the funding of the deficit At the year-end the defiatt stood at £5 0 billion in
accounting terms Against this backdrop it 1s clear that if the Group 1s to be successful as a business in the future it must tackle its
long-term pension fund obligations
Thats why we have recently outlined a series of proposals on which we are shortly to consult our people and other stakeholders -
and which now have the support of the unions as part of our agreements on pay modernisation and pension reform Our number
one pnonty 1s to protect our existing peoples pensions in a way that 1s affordable to the Company and which does not expose our
people or the business to unacceptable risk going forward The outline of the proposals is
* No mcrease m employee contributions
* Keeping a defined benefit scheme for existing employees
» — An increase in the normal retirement age from 60 to 65 with effect from 1 April 2010 Employees could still retire at 60 if
they chose but any pension earned from Apni 2010 would be reduced if taken before the age of 65
* — Pension benefit earned fromm 1 Apri! 2008 would be calculated on a Career Average Revalued Earnings basis an approach
that has emerged from our discussions with the unions over recent months,
* Pension benefits earned to 1 April 2008 would remain in place with the rate at which they grew in future continuing to be
linked to final salaries, and
* Closing the current defined benefit plan to new members on 31 January 2008 with a defined contribution scheme to
replace tt
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Royal Mail Holdings plc
Chairman and Chief Executive's Statement (contmued)
We antiapate that the Company's current level of contributions to the pension plan - equivatent to 30% of the pensionable pay bill -
will reduce to 22% in five years time still well ahead of the average UK contribution
The challenge of increased competition and a declining market
Its clear that competition has developed much mare quickly than anyone forecast When the tough control on our prices was fixed
Postcomm forecast that nvals in 2006-07 woutd be handling around 1 9 billion letters under access arrangements to Royal Matl
Letters delivery network In fact the competition picked up 2 4 billion letters mn 2006-07 - one in every eight posted - and we
expect from current volumes that nvals will this year be handling around 4 billion letters around one letter in every five posted This
was a level Postcomm had forecast would not be reached until 2010 At the same time the average 13p revenue Royal Mail Letters
receives for delivering access mail does not cover our costs and this has generated a loss of £44m in 2006-07 heavily driven by the
growth m competition through access to our delivery network
The 23% overall decline m the UK inland addressed mail market this year mirrors emerging trends in many other European
countries The expectation in Europe and elsewhere 1s for a continuing decline of 2-3% a year The fall in the market 1s at odds with
the prediction for a 1-2% annual rise in volumes on which the control on Royal Mail Letters prices was set
Itts not surprising therefore given that mail volumes have mn fact fallen under a pricing regime that anticipated volume increases
that for the first time, Royal Maul Letters made a loss - of £12m -in the sector which is price controlled This area, comprising
revenues of just under £6 billion 1s by far the biggest part of the mails business and the loss contrasts with a profit of £197m the
previous year The pressures on the business were further underlined by the thin profit of ust £27m we made m 2006-07
delivening the one-price-goes-anywhere Universal Service This 1s despite Royal Mail Letters achieving a 3% year on year efficiency
gain
In summary the reality we face 1s,
* The mail market in the UK is declining by around 2 5% per year
‘© Royal Mait 1s losing 40% of bulk business mail to rival postal operators
© Overall this year rivals will handle one in five of all letters posted in the UK
© Our rivals are 40% more efficient not because their people work harder but because they have already modernised ~ as we
must now do - and have much more technology and
* Our nvals pay their people 25% less than we do at Royal Mail
The challenge of building a sustainable Post Office® network
The loss on operations in 2006-07 was £99m This result included, for the first time, six months worth of the Government's £150m
annual Social Network Payment to support the costs of loss-making branches Without this sum the underlying loss was £174m -
£63m higher than the previous year
Even with this added Government revenue which Post Office Limited has warmly welcomed, losses at the current level are clearly
unsustainable and the business has embarked on a wide-ranging plan to create a strong and viable network in the long-term with
the £17 billion financing provided by the Government
A key prionty 1s to address the Crown network, where £70m was lost in 2006-07 Following a successful trial in 2006-07 involving
a retail partnership under which stx Crown branches were transferred to WH Smith branches agreement was reached in April 2007
to the transfer of a further 70 branches to the retailer However, this 1s just one step of many that have to be taken across the whole
of the network Another key challenge in the current year is to implement the closure programme agreed with Government, with our
role being to ensure the most accessible network possible within the stringent criteria laid down by the Government We will do our
utmost to ensure that as many people as possible are as clase as possible to a Post Office® branch
Underlying revenues fell last year by £45m This reflected the continuing effects of payments of henefits directly into bank accounts
a decline in the number of car tax licences issued in branches as motorists stepped up their use of the DVLA web site, the
replacement of the E111 forms with the issue of the European Health Insurance Card and the loss of the BBC Licence contract
However, the revenue loss was partly offset by increased income from new products and services Post Office Limited now covers 1
in 50 of all cars insured in the UK, while strong revenue growth for HomePhone the Post Office@’s telephony business brought in
new income The Instant Saver accounts also performed well with a keenly competitive high interest rate that attracted almost £2
bilhon of deposits in the year The Post Office® has now won more than one million financial services customers making it the
fastest growing financial services provider in a highly competitive market
Our current trading and outcome of industrial action
The current year has seen a sharp fail in revenues In the letters business with income in the first five months of 2007-08 to the end
of August down £78m on the same period in the previous year The revenue fall came despite a nse im postage prices in April 2007
Overall revenue across the Group fell £39m excluding the impact of the Government s Social Network Payment to support loss~
making Post Office® branches
The emerging picture ts that the combination of pension costs revenue decline through losses to competition and the overall fall in
mail volumes means that Royal Mail s letters business is heading towards breakeven m the current financial year Combined with the
continued losses we will see in the Post Office® network and expected profits from Parcelforce Worldwide and GLS this means that
the Group as a whole ts expected to be near breakeven in the current financial year or return a small profit Without the contribution
from GLS, the Group could again become loss-making
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Royal Mail Holdings plc
Chairman and Chief Executive's Statement (continued)
The immediate outlook 1s difficult. The UK postal market has changed for ever under competition and Royal Mail Letters stark choice ts to
modernise or face stagnation and decline We continue to make progress with much-needed changes to our operations but we must
move faster and further and we know the importance of bringmg our people with us as we transform the Company
This therefore has been a cnitical pend in the history of Royal Mail On top of securing the £4 billion package from our Shareholder to
fund cur modernisation a mayor milestone in the history of Royal Mail was achieved im October this year when the Company reached
agreement with the Communication Workers Union on pay modernisation and pension reform The agreement gives us the flexibility we
need to transform our operations so that we can compete effectively against nvals who have already modernised and so have lower costs
and prices Some key points in the agreement include
‘* Full cooperation and support on the deployment of new technology:
* Ensuring all our peoples paid work hours are utilised,
* — Covenng for one another within a unit - and within paid hours - to help absorb colleagues absence or an increase in workload
* Rebalancing the normal working pattern to reflect the traffic profile {such as higher or lower levels of mail on certain days of the
week) and
‘* The agreement with the CWU also secures their support for the Company's overall proposed pension reform as outlined earlier
Once again we would like to apologise to our customers for the problems they have experienced in recent months because of the
industnal action and assure them that we will all be working hard tagether restore the great quality of service they have come to expect.
The onty option Is to modernise
‘To meet the challenge of improving our efficiency and productwity the only option for Royal Mail Letters 1s to modernise There ss no way
to avoid this challenge There has been under-investment for decades and we now have a unique opportunity to use the £1 2 billion
available at commercial interest rates from our Shareholder to replace obsolete equipment, accelerate the pace of new technology and
provide our postmen and women with the tools to work efficiently
The agreement from our Shareholder for a ColleagueShare scheme will play a significant role in ensunng our people are rewarded for
their efforts as we transform the business The first batch of ColleagueShares has just been issued and the twice-yearly updates on ther
value will be important indicators of the progress we are all making as well as demonstrating to our people the tangible effect of their
efforts to modernise the Company
Much has already been achieved to transform our business but with the increasing pace of competition and the dechne in mail volumes
we are ali too aware of the scate of the challenges ahead We are therefore at a unique moment in the development of the Company
With aur finanang m place an incentive plan for our people launched consultabons underway on significant changes to our pension plan
and a ground breaking agreement reached with the CWU to modernise our business we can remain fully confident that the Company will
reach its goal of becoming demonstrably the worlds best and most trusted postal service
Allan Leighton
Charman Chief Executwe
26 October 2007 26 October 2007
All references to operating profit are before exceptional items
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Royal Mail Holdings plc
Annual Review 2006-07
This was the year the UK postal industry changed forever The first full year of competition in the UK mail market saw major rival
companies fighting to take business from Royal Mail But our focus did not change - doing our best to serve our customers even
more effectively and efficiently Independently measured quality of service figures show world-class quality of service in 2006-07
with prices among the very lowest in Europe At the same ume investment for the future was agreed with the Goverment.
Our people - their year
‘We're continuing to engage with our people and listening to what they've got to say as part of our continuing commitment to make
Royal Mail a great place to work With the mvestment case now agreed theres a clear incentive to ensure we re in shape to provide
an even better and more efficient service Weekly Worktme Listenmg and Learning sessions remain an important way to do this
Our programme to tackle absenteeism across the business made further progress with support for people who are off sick and
rewards for those people who do not take any unplanned sick leave
Over the 2006-07 financial year, absence rates continued to fall below 5% Royal Mails incentive-based approach and improvements
im procedures to help people get back to work contributed to this performance This was a key factor in Royal Mail being able to offer
a consistently high quatity of service to its customers while also cutting costs
The winners in the last prize draw those who took no sick leave over the full year, qualified for £2000 worth of holiday vouchers
and 5 extra days off Additionally the programme has also improved support for people who are on sick leave and ensures they
receive prompt treatment and ongoing contact
The number of accidents resulting in people having to take 3 days or more off work continued to decrease ~ for the fifth year
running Tailored training and enhanced safety management helped achieve this
‘And there was further imnovation in ways for our people to seek confidential advice and different forms of support Anew
confidential and tegal advice line called HELP (Health and emotional well-being Employment advice Legal services and Practical
assistance) was launched An average of 1 700 calls were made each month on issues ranging from childcare advice to how best to
manage stress
We also recognise our people for the support they give to people and their communities Customers can norninate postmen and
ostwomen for the 1st Class People Awards Nominees include champion charity fundraisers community actwists and lifesavers
This year s overall winner was Grimsby postman Norman Walker, who helped save a man bacly inured in a car crash Hes one of
4,500 people at Royal Mail who are trained first-aiders Amongst the nominations were 28 examples of people saved by postmen
and women - the emergency services said 19 of these people would not be alive today had st not been for someone from Royal Mail
going to their aid
And its not just m the UK where our people are helping In Afghanistan, eight Royal Mail employees who are members of the
Terntonal Armys 88 Postal and Courier Management Royal Logistics Corps joined the 22-strong team from the Briush Forces Post
Office providing delivery, collection sorting and counter service to 6,000 servicemen and women
Gwing to charity
The long-standing reputation of our people for their generosity and chanty fund-raising has achieved another landmark this year
They have raised more than £m for the Groups nominated chanty Help the Hospices Just two years into their partnership The
partnership, which was the result of a company-wide vote, has now been extended for a further year
Much of this came through specially organised events, such as sponsoring the Help the Hospices team in the 2006 London
marathon 22 Royal Matt runners from across the UK including Chief Executive Adam Crozier, completed the 26 3 miles cheered on
by colleagues
The company also donated £250,000 in matched funding after the money collected by our people surpassed this figure
Over the tast 16 years, our people have made a big impact donating more than £30m through regular payroll giving to more than
200 chanties This earned Royal Mail a gold award from Pay Magazine in recognition of the continuing generosity of ts people
Postal innovation
The boom in internet shopping has also been an important development for Royal Mail At Christmas some 100 million items
ordered online were delivered from e-retailers to customers And the growth in online business has also led to more people using
catalogues to make their selection catalogues also delivered by Royal Mail
Royal Mail has also adapted to react to this demand Customers can now buy online postage By going to royalmail com, they can
ay for. download and print out their own stamps for letters and packets a full internet postal solution The same service is also
available through the popular eBay website
The way people pay for their mail changed in 2006-07 with the launch of Primg in Proportion This meant mail was classified not
only by weight but by its dimensions as well in order to bring our prices more into line with the costs of handling it Three categories
were introduced in August - Letter Large Letter and Packet We spent £10m telling our customers about the change by sending a
size-guide to every home and through a major media and advertising campaign The change was an important step towards fairer
prices so that they better reflected the true cost of handling items
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Royal Mail Holdings plc
Annual Review 2006-07 (continued)
Regular mystery shopper surveys have shown that the awareness campaign has been a success We estimate that the number of
letters and parcels for which postage has been underpaid ts at the same level as it was before the move to Pricing in Proportion took
place further supporting the findings of the survey
Business customers were also able to take advantage of new products The Automated Standard Tarif Large Letter offers a
discount of between 6% to 9% to companies sending a minimum of 250 Large Letter-sized items that can be machine sorted
Cleanmail Advance will also make it easier for businesses sending more than 1 000 items with correct and machine-readable
addresses to claim discounts
Royal Mail took a significant step in shrinking the size of its carbon footprint by one-fifth The business signed a three-year deal with
EDF Energy to ensure that power for more than 2 000 Royal Mail buitdings came from renewable sources Other improvements.
included using double-deck tratlers for long-haul mail journeys which are able to carry 50% more letters than regular trailers and
mean fewer road journeys
Celebrating stamps
‘Stamps continued to make headlines across the world and it was the collection celebrating the music of The Beatles that became
like the band an internatronal best-seller
Canada Post offered the six stamp issue for sale across its own counters - the first time another countrys postal service had done so
with a Royal Mail issue Postmen from the local St John's Wood delivery office recreated the iconic “Fab Four on the zebra crossing”
from Abbey Road for a photo opportunity for the worlds media Sot Pepper's Lonely Hearts Club Band and Let It Be also featured in
the collection of album covers
A set featuring football teams ‘who had won the World Cup was also issued in June as the 2006 championship was beginning in
Germany Stamps dedicated to marine life and Great British inventions were also released
Media coverage was also focused on the stamps released to commemorate the 200th anniversary of the abolition of the slave trade
They depicted Willam Wilberforce, Olaudah Equiano and other notable campaigners who fought to outlaw the trade
Post Office”: looking ahead
Detailed planning 1s underway to secure the long-term structure of the Post Office® following the Government s announcement in
May 2007 of a funding package for Post Office Limited up to March 2011 The Governments Post Office® closure programme 1s
designed to ensure as many people as possible are as near as possible to a branch and Post Office Limited will be doing all it can to
ensure the most accessible network within the criteria laid down by the Government.
The Post Office® has continued to support new ways that villagers and people tiving in the countryside can continue to use its
services These include mobile Post Office® outlets - in specially adapted vans - and branches in pubs ullage halls tea rooms and
churches
WHSmith 1s following a long established practice of retailers mcorporating a Post Office® outlet into their shop floor with the
relocation of 70 Crown Offices into its network of High Street stores The expansion of the partnership comes after a successful tral
relocating 6 Post Office® branches in Shrewsbury Altrincham Ashton Under Lyne Hammersmith Slough and Swansea to nearby
WHSmith branches A further 15 Crown Offices have been identified as being suitable for a franchise partner while the remaining
373 Crown Offices will remain owned and managed by Post Office Limited
Meanwhile television presenter Lorraine Kelly hosted an award ceremony designed to recognise the great service dedication and
community spint of the people who run the UK s 14 219 branches
The overall winner of the 2006 Best Post Office® Competition in association with National Savings and Investments was
Hungerford Road Post Office® in Crewe Cheshire Customers said the team at the branch was “the best in every way” in everything
from serving customers efficiently to caring about them
In everyday business, The Post Office® continued to strive to give its customers the best possible deal Six new currencies including
the Namibian dollar and the Uruguayan peso, were added to the market-leading travel money portfolio to bring the total to 78 And
the number of Post Office® branches in which customers could buy euros - the best-selling currency - over the counter without,
pre-ordering was expanded to 5,500
Also added was a pre-paid PIN-protected Post Office® Travel Money Card Customers can load this electronic wallet with cash to
spend in restaurants and shops abroad without going into the red Post Office® credit card holders also benefited from being able to
use the card abroad without being charged commission - one of the few cards to offer this benefit
Travel insurance was one of the fastest-selling products as the Post Office® cemented its reputation as the place to prepare for
holidays and travel This was recognised by the travel industry as the Post Office® beat 9 other companies to win Best Travel
Insurance Direct Provider at the 2006 British Travel Awards
The traditionat connection of the Post Office® with savings was also reinforced with the Instant Saver Account which encouraged
people to invest their savings with the Post Office® Almost £2 billion was deposited as customers took advantage of one of the best
high street rates on the market and one of the few products that swiftly adjusted sts rates in lime with the Bank of England s interest
rate mses
Other new products were added to its range of home and car insurance which offered people £50 cashback One in every 50 cars in
the UK Is now insured with Post Office Limited ~ half of them using the Post Office® website Small businesses bought specially-
tailored van msurance which offered free physiotherapy for any drivers left with aches and pains after an accident
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Royal Mail Holdings plc
Annual Review 2006-07 (contmued)
The Postal Order was modernised and revamped on its 125th anniversary Customers can now ask them to be made out for any
amount and printed out on the spot. instead of making up the figure the old way from 13 different printed postal order amounts
and stamps to make up the odd penny One new market that helped st reach more than £400m worth of sales was internet
shopping as more customers pard for goods on online auctions using postal orders instead of electronic methods
Parcelforce Wortdwide
Parcelforce Worldwide became the first distribution company in the fiercely competitive non-regulated express parcel delivery sector
to offer its customers a “carbon-neutral parcel” This offered the choice of paying Sp extra for domestic parcels and 10p for v
international packages to offset the carbon emissions generated by the journey of the parcel Theres been encouraging take-up
reflecting concerns felt by customers about environmental issues
Handling 49 million parcels a year to 239 countries and territories means driving Is integral to the business and millions of miles are
clocked up each year Royal Mails 1st Class People Awards 2006 saw Parcelforce Worldwide driver Steve Gilbey who's based in
Liverpool, win Driver of the Year Steve volunteered to change his start and finish times so he could better serve a major customer
He also won the challenge of putting his technical driving skills to the test on a driving track in Oxfordshire along with 12 other
finalists
And more than 250 Parcelforce Worldwide colleagues took part in their own National Community Team Chaltenge Day to help local
people They gave up their own time to take part in a variety of projects ranging from refurbishing a flat for homeless people im
Coventry to clearing and landscaping a public garden in Teesside
General Logistics Systems
Royal Mail s European operation 1s General Logistics Systems (GLS) Set up eight years ago the parcel delivery and logistics network
covers 35 European states - the latest to become part of its integrated operation is Bulgaria after a partnership agreement was
signed with Interlogistica in February 2007
This year, the company turned over £1 082m and carried 311 million parcels It uses 17 800 vehicles a day and employs over
12 000 people working fram 31 hubs and 645 depots across Europe
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Royal Mail Holdings plc
Operating and Financial Review
Introduction
Royal Mail Holdings plc {the Company) 1s 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 pic together with its subsidianes associates
and joint ventures comprise ‘the Group’
The Group has aver 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 is, however, rapidly changing Government revenue such as from benefit payments 1s being lost from Post Office
Limited whilst the UK mails market has been fully liberalised since January 2006 resulting in full competition
We continue to provide services to meet these challenges - from a range of Post Office® financial services including personal toans and
a ‘two-in-one credit card to electronic ‘stamps online shopping fulfilment and mail-related data tools such as onlme electronic
pricing news and product information to help companies improve their marketing performance
Our continued aim 1s to put the customer at the heart of everything we do by
® increasing value through excellent quality of service
© curumique reach to every address in the UK,
® enhancing our trusted brands,
© becoming easier to do business with,
© expanding our profitable business and
© developing mnovative products and services for our customers.
Performance Highlights
In the following analysis all references to operating profit are before exceptional items
Fimancial Highlights Key Non-Financial Highlights
Summary of Results Key Performance
Em untess stated otherwise 2007__2006 Area Indicators 20072006
External revenue 91799056 Customer I 2 Class Stamp & Meter
S ty of S Or 941%
Operating profit 233355. ence ee
if taints,
return on sles ( oa sek No of Complamts (mons) 241163
Post Office Lnited
Net exceptional items, (125) _(143) Customer Satisfaction Index__95%__—94K.
Profit before financing and Great Place I Employee Survey
taxation 208 __232 to Work “Great Place to Work” 66x Gat
Net finance incomed{costs) 6 (et) RIDDOR Acctents/1000
Net pensions interest 199101 staff 261 267
Profit before taxation 343 312 Sick Absence sen 49%
Taxation (charge)/credit (27) 83 Good
Corporate
Profit after taxation 286 395 Citzen CO, Emssions/1000 tems* __18 7 199
Charitable Donations (£m) 12 13
“represents preceding year
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Royal Mail Holdings pic
Operating and Fimancial Review (contmued)
Governance
The EU Accounts Modernisation Directwe (AMD) applies for all medium and large EU companies including listed companies and
Fequires a mandatory addition to the existing Directors Report to provide an enhanced review of a company $ business
The Directive states that the review should provide a balanced and comprehensive analysis of the development performance and
Position of the Companys business including the principal risks and uncertainties facing the organisation The analysis should include
both financial and where appropriate non-financial key performance indicators (KPis) relevant to the particular business including
information relating to environmental and employee matters It 1s recognised that to the extent that this information appears in the
Operating and Financial Review (OFR) it is incorporated by reference into the Directors Report
Legal Structure
Royal Mail Holdings plc 1s directly owned by HM Government and is the ulumate parent company of the Group The Group primaniy
operates within the United Kingdom having a number of subsidiaries jomt ventures and associates but also has presence in most
European countries mainly through General Logistics Systems BV Its basic legal structure 1s as follows
Royal Mail Holdings pic
Royal Mail group Ltd --. Pension Schemes
T I \
Post Office Royal Mail Investments Royal Mail
Limited Limited
Estates Limited @
General Logistics
Systems BV.
{on 29 March 2007 Roya Ma Group hac As name changed to Royal Mai Group Lid (see nete 2) The Royal Ma and Parcedorce Werkdwce busines Us arent searat egal ents
rma dung he franca year = see Funding eben
Further details on the principal subsidiantes are provided in note 29 to the accounts
Our Operating Units
The Group 's organised into four principal operating units
Royal Mail
Royal Mail processes and delivers almost 83 million letters and packages to 27 million addresses every working day in line with its
unique Universal Service Obligation (USO) It is also responstble for designing and producing the UK s stamps and philatelic products
General Logistics Systems B V {GLS)
GLS 1s a pan-European company providing reliable, high-quality parcel and express services as well as value-added logisties
solutions
Parcelforce Worldwide
Parcelforce Worldwide 1s a leading provider of collection and delivery services for urgent packages and parcels within the UK and
throughout the world providing both business and private addresses with a range of timed delivery options
Post Office Limited
The Post Office®s national network of branches is 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 Groups 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 unt facts and figures section
Our Pension Schemes
Royal Mait Group Ltd 1s the sponsoring employer for the Royal Mail Pension Plan and Royal Mail Senior Executive 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 Plan 1s the sixth 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 Groups
other assets and tiabitittes This results in the Group being one of the most exposed UK corporates to pension scheme volatility
particularly with respect 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
Unitand %of I No.of I Region I Revenue* Facts and Figures Vision
Group External I Employees (em)
Revenue Profit* (£m)
Margin (%)
167640 I UK I Revenue I + 115000 pillar boxes tobe demonstrably
£6.857m I » 69 Mai Centres the best and most
* 1.400 delivery offices, trusted postat services
Profit * 30000 vehicles company in the world”
£194m I © 33,000 bicycles,
747% of Group # Almost 83 million items handled every
sete Margin working day
eveniie 28% © Detiver to 27 million addresses a day
# Ast Class Quality of Service - 94 0%, and
© 2nd Class Quality of Service - 98 9%
. 12137 I Europe Revenue * 34 hubs to provide ‘service
CAlGs £1082m I © 645 depots quality and reliability
+ 17 800 vehicles with local expertise and
Profit * 220.000 customers, knowledge of different
11 8% of Group £115m I © Over 1 million parcels handled every I cultures being mtegral to
External working day, the end-to-end service
Revenue Margin I © 20Subsidianes and
106% * Covers 35 states in Europe
4176 UK Revenue I © 2 hubs (1 national 1 international), to be the UKs most
£337m I © 48 depots trusted worldwide
© 1600 vehicles carner
Profit * 185 000 parcels delivered every day,
£10m 267,000 every day m December and
37% of Group © Parcelforce 24 Quality of Service -
Rael Margin 96 2% delivered on time and with
evesiae 30% electronic proof of delivery
. 9.990 UK I Revenue I © Equivalent 14pin every £1 transacted I to sell products and
3) £868m in the UK is handled through the Post} services that are
Office® network important to our
Loss © 14 219 branches including 458 Crown I customers simply and at
(£99m) Offices a profit backed up by a
9 4% of Group © Over 60,000 customer facing business approach of
External Margin colleagues - including those employed I being community
Ravens (114%) by Post Office Limited by munded and profit
subpostmasters and/or by franchisees, I driven and putting
* Over 24 million customers making customers at the heart
over 36 million visits a week of the business’ :
conducting almost 61 million
transactions,
© UK's leading supplier of foreign
currency and
© 95% of customers satisfied with ther
branch
* Revenue «5 for subsidianes only profit before exceptional tems
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Royal Mail Holdings plc
Operating and Financial Review (contmued)
Unitand% I No of [Region I Revenue™ Facts and Figures Vision
of Group I Employees (£m)
External IProfit® (Em)
Revenue Margin (%)
Other 2,961 UK [Revenue I Including
Wholly £35m I PostCap Guernsey Limited - captwe
owned insurers (100% subsidiary)
subsidianes « Romec Limited- facilities
04% of Profit management operation (51%
Sroup 4592 £13m subsidiary)
premal I Part owned + NDC 2000 Limited - building
jevenue
subsidianes engineering services operation (51%
subsidiary)
Quadrant Catering Limited -
catering services (51% associate)
Camelot Group ple - UK National
Lottery operator (20% associate)
Our Group Property unit - including
Royal Mail Estates Lirmted and
Central shared services for the UK
and corporate centre - not a revenue
or profit centre
.
“Revenue 1s for subsidiaries only profit 1s before exceptional items
Funding .
Group excluding Post Office Limited
Following extensive negotiations between the Company and its Shareholder, a refinancing package for the Group (excluding Post Office
Limited) was completed on 23 March 2007 The agreed package includes
* — £900m senior debt facility repayable in 2014 at commercial interest rates
* — £300m Shareholder toan repayable from 2016 at commercial interest rates
* £1 billion escrow established as secunty for the Royal Mail Pension Plan
‘* £850m funded prinapally from the Mauls Reserve (see section on Mails and Rural Network Reserves), and
‘+ £150m funded from Group resources
© Anincentive package for employees based on ColleagueShares worth up to £5 300 per person and inked to performance
In relation to the above Royal Mail Estates Limited a wholly owned subsidiary was formed during the financial year The security on the
senior debt facility includes a fixed charge over shares in Royal Mail Estates Lirmted and a floating charge over all the assets of Royal Mail
Estates Limited (see note 19) On the last day of the financial year Royal Mail Group Ltd transferred most of its directly held property
assets to Royal Mail Estates Limited
Post Office Limited
On 14 December 2006 the Secretary of State for Trade and Industry made an announcement regarding the future of the Post Office®
network which commenced a consultation process On 17 May 2007 the Secretary of State announced the outcome of that consultation
process including
1. A funding package for Post Office Limited up to March 2011
2 Aclosure programme involving the compulsory compensated closure of up to 2 500 Post Office® branches and
3 The imposition of certain geographic access cntena designed to ensure the continued maintenance of a national network of post office
branches
During 2006-07 the following payments were made by Government to support the Post Office® network
* £145m to reimburse Royal Mail Group Ltd for amounts that had been advanced to Post Office Lmited and
+ £231m to fund the ongoing cash requirements of Post Office Limited to meet its debts as they fall due
In addition £150m was paid to Post Office Limited during the year to fund the maintenance of a rural network of post offices £75m of
this was paid during the first half of the year by way of a transfer from Royal Mail Group Ltd its mmechate parent company The
remaining £75m was paid during the second half of the year by Government in the form of a subsidy and recorded within revenue as a
Social Network Payment. ,
All of the above payments made during 2006-07 were made in accordance with approval received from the European Commission under
relevant state aid rules
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Royal Mail Holdings plc
Operating and Financal Review (continued)
Group Financial Analysis
In the following analysis all references to operating profit are before exceptional items
This year we report an operating profit of £233m compared to £355m for 2005-06 a fall of €£122m (34 4%) mamly driven by the
performance of Royat Mail Most other operational business units contributed to offsetting this decrease with General Logistics Systems
{GLS) improving profitability by £15m (15 0%) Post Office Limited by £12m (10 8%) and Parcelforce Worldwide by £5m (>100%)
External Revenue
Group external revenue increased by £123m (1 43) from £9 056m to £9,179m dren by increases in GLS, Post Office Limited,
Parcelforce Worldwide and Other, offset by a marginal decline in Royal Mail
Royal Mail revenue remained virtually flat declining by £2m (0 03%) despite an increase in average prices of around 5% for the regulated
area Revenue grew in International products and Special Delivery helping to maintain revenue year on year but these factors were
wholly offset by declining market volumes losses to Downstream Access (DSA) and customers downtrading to cheaper praducts
General Logistics Systems increased tts revenue by £45m (4 3%) from £1,037m to £1 082m driven by volume growth in domestic and
export parcels Parcelfarce Worldwide mcreased its revenue by £23m {7 3%) from £314m to £337m through higher volumes particularly
tn the business to consumer market Post Office Limited showed a revenue increase of £30m (3 6%) from £838m to £868m, although
removing the impact of the £75m Social Network Payment (SNP) received from Government there was an underlying decline in revenue
‘of £45m to £793m This reduction Is 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 £8,985m have increased from £8,733m by £252m (2 9%)
People costs of £6,145m represent 68 4% ot the Lroups cost base ang have increased year on year by £1//m (3U%) [nis Is prmanty
due to an increase in the Group's pensions cost of £193m This increase mainly relates to the higher cost of employing members of the
schemes principally due to an allowance for increased life expectancy and lower long-term interest rates The majonty of front line staff
received a 2 9% pay award effectwve from 3 April 2006 and an additional 1 0% productwity payment from 5 June 2006 This has been
more than offset by a decline in headcount in UK wholly owned subsidiaries of over 8 000 since March 2006 (primarily in Royal Mail) As a
result, underlying wages and salaries have actually fallen by £19m over the year
Distribution and conveyance casts of £1 237m representing 13 8% of the Group's cost base, have increased by £19m (1 6%) driven
mainly by GLS and Parcelforce Worldwide, and their associated costs of volume growth
Other operating costs of £1 603m, representing 17 8% of the Groups cost base have mcreased by £56m (3 6%) This nse 1s driven by
£46m cost of sales relating to Post Office Limited HomePhone product an mcrease in strategic initiative spend (£54m) aimed at
increasing the efficiency of operations, and depreciation costs (£19m), both primarily within Royal Mail The rise ts partially offset by
focused cost savings in other non-people expenditure categories, in areas such as computers, marketing and compensation across the
Group
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Royal Mail Holdings plc
Operating and Fmancial Review (continued)
Penstons
2007 2006 Pension costs (pre-exceptionals) have increased by over 36% from
Pension charges within operating profit £m fm £529m to £722m OF this £193m mcrease £16m relates to past
Within operating profit before service The balance some £177m mainly relates to the increased
exceptionals 722 529 cost of employing members of the schemes, principally due to an
Within exceptionals (relating to allowance for mcreased life expectancy and lower long-term
redundancy) 51 24 interest rates
Within operating profit 773 553 The balance sheet pension deficit has decreased from £5 588m in
March 2006 to £4 985m The decrease in the deficit of £603m
principally relates to an actuarial gain of £340m and net pensions interest of £199m The majority of the actuanal gain arose due to
investment returns on the schemes assets being in line with market performance and therefore higher than the long-term expected rate
of return This gain is recorded in the statement of recognised mcome 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 liabilities are
higher than assets, the expected rate of return on these assets (biased toward equities) s substantially higher than the discount rate for
habilities (high quality corporate bond rate) resulting in a net interest credit This interest 1s recorded in the income statement after profit
before financing and taxation
As part of the new funding package the Group established £1bn of mvestments in escrow shortly before 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 2007 2006 Regular pension contributions increased by over SB% from £343m to
contributions Emm £543m This additonal £200m cash outftow has been principally
drven by the regular rate of employer contributions for the Royal Mail
Regular pension contnbutions 543-343 pension Plan mereasing from 12 6% to 20 0% of pensionable pay,
Fondeng of pensian dali 243 113 _effectve from the beginning of the current year Key elements of this
increase are an allowance for increased life expectancy and lower
Payments relating to redundancy 74% 209 expected long-term mvestment returns A rate of 12 6% applied
Viet cash payers geo 665 throughout the prar year The regular rate of employee contributions
for the Royal Mail Pension Plan remains unchanged at 6 O%
Deficit recovery payments by the Group more than doubled increasing by £130m (115%) Of this increase £68m was due to the tming
of the payments made with the balance (£62m) principally arising as a result of the latest full actuarial valuation of the Royal Mail
Pension Plan There have been no employee deficit contributions The Group has been contributing an average of some £140m per year
to fund the deficit m the Royal Mail Pension Plan lower in 2005-06 due to the timing of payments made This will increase to an
average of over £260m per annum from the beginning of 2007-08
Share of Profits im Joint Ventures and Associates
The Groups share of profits in joint ventures and associates of £39m (2006 £32m) comprises profits of £42m (2006 £41m) from
Camelot (The National Lottery operator), Post Office Limited s Bureau de Change joint venture (First Rate Exchange Services Holdings
Limited) and Quadrant our catering associate offset by a loss of £3m {2006 loss of £9m) from Post Office Limited s financial services
venture (Midasgrange Limited) The losses from Post Office Limited s financial services venture were planned and are a result of sales
and marketing expenditure to promote new products
Net Exceptional Items
Net exceptional items of £125m (2006 £143m) comprise operating exceptional costs of £243m (2006 £210m) partially offset by profits
of £118m fram property disposals {2006 £67m from property and business disposals) Operating exceptional costs include £180m
(2006 £75m) for redundancy and £64m (2006 £44m) for impairments less a £1m (2006 Eni) net exceptional provision release for
property In addition the pnor year mcluded a £91m charge in respect of Share in Success (see note 7)
Of the profits from property disposals during the year £74m (2006 Enil) arose from the disposal of a property group The disposal group
consisted of both property related assets and liabilities This disposal was structured as a sale and part leaseback, with related proceeds
of £71m received during the year (see Cash Flow section)
Net Finance Income
Net finance income of £6m {2006 £1m costs) comprises interest earned on investments of £56m {2006 £48m) and other interest
receivable of £6m (2006 £3m), offset by interest payable on DTI borrowings of £50m (2006 £48m) and other interest payable of £6m
(2006 £4m) Interest payable on OT! borrowings increased by £2m due to higher average borrowing votumes to support our Post
Office® network and higher average borrowing rates
Net pensions interest
Net pensions interest of £199m {2006 £101m) a non-cash item for the Group has increased by £98m mainly due to an increase in
equity values during 2005-06
Taxation
The taxation charge of £27m (reported rate 9%) comprises £45m current tax payable with respect to UK operations, a £31m current tax
charge on overseas profits a UK deferred tax credit of £59m and an overseas deferred tax charge of £10m Last year a credit of £83m.
was recorded comprising £11m current tax charge with respect to UK operations, a £25m current tax charge on overseas profits a
£112m UK deferred tax credit and a £7m overseas deferred tax credit The low reported rate 1s mainly due to the mcreased amount of
deferred tax asset recognised
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Royal Mail Holdings plc
Operating and Financial Review (continued)
Cash Flow
The foltowing table 1s a summary of the Group cash flow statement
Summary of cash flows ad ae Cash inftow from operations 1s £117m {2006 £10m outflow) which
compnses
Cash inflow/{outftow) fi 117 (10)
eeiamieidiiaiia nina * Earnings Before interest Tax, Depreciation and Amortisation
Dpadends from sount'ventianes: and (EBITDA) inflows of £392m (2006 £497m)
associates 39 30
Capital expenditure and disposals (244) (170) *» Wortang capital inflows of £7m (2006 €17m)
rotmat fein sae of roniety aroun ug . # Share in Success payments of £90m (2006 £218m) and
© Other payments relating to exceptional items of £192m (2006
B th id di It
an Seeeeens Stee (20) (a7) £306m), comprising pension top ups of £74m (2006 £209m) and
Acquisition and sale of financial assets (318) a further rationalisation costs of £118m (2006 £97m)
Proceeds from issue of ardinary shares 430 - Dividends received from joint ventures and associates of £39m (2006
Net repayment of borrowings and. £30m mcluding £m Spring and £1m Camelot International Services
financing (64) (16) _—_Limited) are from First Rate Exchange Services Holdings Limited £23m
Tax interest and other 24 5 (2006 £17m) Quadrant, £10m (2006 £4m) and Camelot, £6m (2006
£7m)
Net cash inflow/{outflow) 35 (179)
Capitat expenditure and disposals of £244m (2006 £170m) compnses £309m (2006 £243m) of expenditure including motor vehicles of
£73m plant and equipment of £57m, £52m for GLS projects and £62m for property mprovements with the remaming £65m on
software and other intangibles offset by inflows of £65m (2006 £73m) mainly from surplus property disposals In addition proceeds of
£7:1m (2006 Eni) were received from the sale of a property group - see Net Exceptional Items section above
Acquisition and sate of financial assets of £318m (2006 £1m} represents the net of the mvestments made by the Group from cash and
cash equivalent resources It prinapally retates to the investment of €1bn (2006 €nil) in escrow provided as security for the Royal Mail
Pension Pian partially funded by the realisation of other investments
During the period five ordinary shares in the Company were issued to the Secretary of State for Trade and Industry under section 63(1)
of the Postal Services Act 2000 Of the consideration received £145m was used to rermburse Royal Mail Group Ltd for amounts that had
been advanced to Post Office Limited £231m was transferred to Post Office Limited to fund its ongoing cash requirements and £54m
partly offset the transfer of £75m from the Mails Reserve to Post Office Limited earlier in the year
Net repayments of borrowings and financing of £64m (2006 £16m) comprises £63m (2006 £15m) net repayment of borrowings and
£m (2006 £1m) payment of capital element of obligations under finance leases and hire purchase contracts The net repayment of
borrowings compnses £60m (2006 Enil) net repayment of DTI loans to Post Office Limited and £3m (2006 £15m) net repayment of
other toans
Provisions
Provisions at the end of March 2007 were £11:1m (March 2006 £111m) The zero net movement comprises cash spend of £128m,
transfers to short-term pension creditors of £4%1m and the disposal of a property group with liabilities of £24m, offset by £193m of new
Provisions relating to rationalisation and onerous property contracts
Mails Reserve & Rural Network Reserve
During the year £75m was transferred to Post Office Limited from Royal Mail Group Ltd its immediate parent company This was
transferred from the Mails Reserve and allocated by Post Office Limited to the Rural Network Reserve In addition, Post Office Limited
received £75m from the Government in the form of a subsidy, recorded within revenue as a Social Network Payment Under the terms of
an agreement, Post Office Limited allocated £75m to the Rural Network Reserve on receipt of the Social Network Payment During the
year, £150m of this reserve was applied towards the maintenance of a rural network of Post Office® branches
Under the new funding package the balance on the Mails Reserve shortly before year end some £795m, was distributed by Royal Maul
Group Ltd to Royal Mail Holdings ple, its immediate parent company to enable an escrow of £850m to be established m Royal Mail
Holdings plc as security for the Royal Mail Pension Ptan The batance of the funds was generated through mterest (E1m) and the issue of
1 ordinary share in the Company to the Secretary of State for Trade and Industry under section 63(1) of the Postal Services Act 2000
{€54m) The consideration received for the share partly offset the transfer of the £75m from the Mails Reserve to Post Office Limited
earlier in the year
An addhtional escrow of £150m was established by Royal Mail Group Ltd as security for the Royal Mail Pension Plan
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Royal Mail Holdings plc
Operating and Financiat Review (continued)
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 appropnate KPIs and
monitored by the Royal Mail Holdings plc Board and its sub Commuttees as highlighted below
Customer
Service
Our customers are at the
heart of everything we
do The key to winning
and keeping customers is
to provide a consistently
high quality of service
This has been the top
priontty of everyone in the
business and is at the
heart of our strategy
moving forward That
Great Place
to Work
This initiative established
im 2003 works on the
basis that we can only
move forward and
succeed as a business if
we involve our people in
making change happen
The plan focuses on
engaging and involving
people in managing and
Profitability and
Cash Flow
Funding from
Government on
commercial terms has
now been secured
enabling the Group
(excluding Post Office
Limited) to support the
capital mvestment
Programme which
addresses the historic
undennvestment in
Good Corporate
Citizen
Corporate Socal
Responsibility (CSR) is
doing the night thing
for our people our
business and the
communities we
operate in, as our
* customers want to
buy from companies
that share their
Health & Safety
Customer Satisfaction
Index
RIDDORS {reportable
accidents) /1000 staff
Sick Absence
Return on sales*
Return On Total
operating Assets*
Operating cash flow
means amfrosing, there the letters business values,
workplace i
© delivering a high Post Office Limited * colleagues want to
quality of service and and Government have work for companies
mails inte 4 that provide a
grity agreed a long-term
Funding package which healthy and safe
* developing products wiimentm a environment and
that match the needs. national network and whose values align
of our customers, ani put Post Office Limited to theirs, and
© becoming easier to do on a sustainable * communities want
business with footing compantes that
Contrng to develop I I] eete the eames
more efficient ways of -s fuse ion
working will empower bribed lad
us to succeed ina cohesion that builds
comnstioe the neighbourhoods
‘ where people want
marketplace allowing
us to maintain to lve and work.
sustainable profitability
and cash flow to
eventually generate a
return for our
stakeholders
Customer People Financial Environmental
QofS targets Employee Survey Turnover CO2 Emissions/1000
items. I
Number of Complaints Operating profit*
Social & Community
Charitable Donations
*before exceptional items
“as defined in the Directors Rernuneration Report
With the exception of the introduction of the Return On Total operating Assets measure (defined in the Directors Remuneration Report)
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 plc
Operating and Fimancial Review (contmued)
Treasury Management
The Group operates a central Treasury function that manages some £1bn of financial asset investments (substantially all of which are
now held i escrow in favour of the pension fund trustees) £1 2bn of cash and cash equivatent investments (inctucing £768m cash in the
Post Office® network funded mamly by a Government loan facility) and £811m of financial liabilities, in accordance with investment
Testrictions set by the Government It also acts as internal banker for the Groups business units The Group finances its operations largely
through cash generated from its operations and borrowings
Group Treasury derives its authority from the Royal Mail Holdings plc Board and provides quarterly monitoring reports for their review
The Treasury function only has the authonty 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 remained unchanged during the year The principal financial mstruments are deposits and long and short term borrowings
At the batance sheet date the Group is financed from the following facilities provided by the DTI
‘Average
loan
Facility Facility Utilised maturity
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 -
Royal Mail Group Ltd General Purpose / Working Capital 2014 300 Nil -
Royal Mail Group Lté General Purpose / Working Capital * 300 Nil -
Post Office Limited __Network cash repayable on demand 2010 1.150 300 2007
*Expires on the later of 2016 and the release of the pension escrow mvestments This Royal Mail Group Ltd facility 1s subordimate to all
other creditors
The terms of the Government borrowing facility and the associated Framework Agreement impose strict constraints on the separation of
cash funds within the Group and the purposes far which they can be used
The Royal Mail Group Ltd undrawn facilities of £4 200m in total were agreed shortly before year end and replace the previous facility of
£844m
The principal treasury risks arising from the Groups actwities are currency counterparty commodity (fuel) and liquidity nsk These are
managed as follows
» the Group 1s 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, revaluation of the currency balances held to operate the Bureau de Change services
within Post Office Limited and various sales and purchase contracts denommated 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 external spat 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 expasure 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 mn place throughout the financial year
2006-07 due to there being no material net exposure
= Bureau de Change balances are grouped into baskets of closely correlated currencies Each currency basket (eg USS or euro}
1s then sold forward creating a bability to match the underlying asset
+ significant foreign currency risk arising from sales and purchase contracts primarily in USS and 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 subsidianes
+ the Group 1s exposed to fuel risk arising from operating one of the largest vehicle fleets m Europe and a jet fuel risk from the
purchasing of air freight services The Group's fuel risk management strategy aims to reduce uncertainty created by the
movements in the oil and foreign currency markets The strategy operates within the parameters set by the Board which atlow
the use of over-the-counter denvative products to manage these exposures and
= counterparty risk is managed by limiting aggregate exposure to any mdiwidual counterparty based on their financial strength
These exposures are reviewed regularly and adjusted as appropriate
The policies for financiat assets - vestments and derivative financial instruments - are shown in note 2
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Royal Mail Holdings plc
Operating and Financial Review (continued)
Business Environment
Regulation
Until the last few years Royal Mail had a monopoly status in the UK letters industry However in 2000 the Postal Serwces 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 Mails tetters business controls the terms and conditions for nearly all sts services sets the quality of service
targets and determines compensation arrangements
Post Office Limited 1s mereasingly subject to regulation in financial services (Financiat Services Authority) and in telephony (Ofcom) Post
Office Limited 1s an appointed representative of Bnstol & West plc which in turn is regulated directly by the Financiat Services Authority
Its the Groups policy to be fully compliant with the regulatory framework in which we operate During 2006-07 we continued to
strengthen our compliance activities working in close larson with our Regulators
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Competition
The Group s business units now all operate i 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 m a non-regulated and competitive environment
which 1s reflected in their annual results
Post Office Limited due to a reduction in income from benefit payments and a significant and continuing decrease in Government use,
has developed revenue streams from finanaal services products (including car msurance a ‘two-in-one credit card and personal loans)
and its HomePhone and directory enquiries services These products are in direct competition with services offered by banks insurance
and telephony companies as are many of the services it has traditionally offered eg bill payments renewal of car tax discs and travel
services
Royal Mail s operating environment has gradually been opened up to competition since February 2004 with the letters market fully
liberalised in 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 2006-07
In November 2006 the Group responded to Postcomm s Strategy Review 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 ts
sustamable Some competitors in the UK are basing their entry strategres on unsustainable business models which target the
historical cross-subsidies in Royal Mails pricing structure but cross subsidies are fundamentally incompatible with an effectively
functioning competitive market. Postcomm should allow Royal Mail to remove these cross-subsidies so that customers face the
right pricing signals and competitor models going forward are based on effictency,
+ Anarrower range of universal 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, expected to represent 40% of bulk mail next
year 1s encouraging business customers to demand more commercial and innovative responses from Royal Mail However
Royal Mail is prevented from responding rapidly by regulatory requirements such as an involved process for changing terms
and conditions Royal Mail envisages a near term future in 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 Price Control Review and intend to make a final decision by November 2007 Royal
Mail has asked Postcomm to consider the following pricing proposals in this review alll of which are consistent with realigning prices to
costs and entirely driven by the need to react to both the volume erosion and significant downtrading that has been evident for the last.
eighteen months
* Reducing the difference 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 Mails 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 pice of the “one
price goes anywhere” stamp, and
‘+ 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
Corporate Social Responsibility
Corporate Social Responsibility (CSR) 1s a key component in supporting the business to be recognised as a responsible organisation that
seeks to optimise the beneficial impacts mherent 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 CO, and make our people healthier We recognise that the route to achieving
and sustaining our goats 1s through our people and our relationship with customers, business partners suppliers communities and other
stakeholders
A more comprehensive overmew of our CSR will be found in the 2007 Corporate Socal Responsibility report due to be published im due
course
ral
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Royal Mail Holdings plc
Operating and Fimancial Review (contmued)
key Relationships
The Group has several key relationships that are cntical to its day-to-day actiwities 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-managenial staff with the Communication Managers Association
(CMA) representing managenal staff The Groups policy 1s 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 penstoners and independent members The trustee board 1s under review following the introduction of
the member-nominated trustee regulations They take external professional advice from Sacker & Partners LLP (legal) Watson Wyatt
Limited {actuary) and PricewaterhouseCoopers LLP (financial) They are responsible for full and interim valuations and for reaching
agreement with Royal Mail on appropriate funding for the pension schemes There is a separate trustee board for the sentor executives
pension pian which ts made up of 5 individuals which inciude employees pensioners and an independent member This board 1s also
under review following the introduction of the member-nommated trustee regulations
Customers - The Group's 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 16% of Royal Mails turnover and consequently the business ts reliant on a small
customer base As competition increases the Group will have to continue to simplify ways of doing 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 14 219 Post Office® branches are operated by subpostmasters and
franchise partners The National Federation of Subpostmasters (NFSP) represents the interests of all subpostmasters and currently has a
membership of 10 020 Post Office Limuted conducts annual remuneration negotiations with the NFSP and works closely with them to
support a viable network The NFSP 's separately an active body tobbying Government regulators and consumer bodies
‘There are several major retailers who are also significant partners operating between them around 2 400 branches across the country
Post Office Limited liaises closely with these companies to maintain successful working relationships It is through effective partnership
with these various organisations that the business takes into account the interests of agents and seeks to support the achievement of
their sales potential and longer term network viability
Suppliers - The Group has a wide range of supplrers, 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 mght time at
competitive costs A central purchasing team monitor 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 adverse impact on Royal Mails 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 creases or reductions allowed by Postcomm
through the Price Control have a very material 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 repnmand or fine Royal Mail if it finds tt in breach of
those conditions :
Shareholder - The Company is a plc that is 100% owned by the Government. The Shareholder Executive (within the Department of Trade
and Industry) 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 annually to approve the Group's business 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 pnnaiptes
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Royal Mail Holdings plc
Operating and Financial Review (continued)
Segmental Analysis - Revenue and Profitability
In the following analysis all references to operating profit are before exceptional items
Group external revenue of £9,179m (2006 £9 056m) and operating profit before exceptionals of £233m (2006 £355m) are made up as
follows
External revenue Operating profit/(toss)
2007 2006 2007 2006
Business unit performance £m £m £m £m
Royal Mail 6,857 6859 19% 344
General Logistics Systems 1,082 1037 115 100
Parcelforce Worldwide 337 314 10 5
Post Office Limited 868 838 (99) (114)
Other businesses 35 8 13 17
Group 9,179 9.056 233 355
‘A further analysis of results by business unit 1s shown below
External revenue fell by £2m to £6 857m despite an average price
2007 2006 increase on regulated products in April 2006 of around 5% The expected
Royal Mait £m £m_ improvement from price increases was more than offset by a reduction
External revenue 6.857 6859 ‘volumes increased losses to competition and switches by customers
to lower priced products For the Addressed Inland products market
Operating profit before exceptionals 194 344 revenue actually declined by 11%
Overall Addressed Inland volumes saw a 2 3% fall against last year with a significant loss of associated revenue Downstream Access (DSA)
volumes rose by 1 3bn items compared to the pnor year bringing the full year to 2 4bn items The financial impact on Royal Mail income
of the switch to OSA was a dilution of £71m Other switches to lower price products further reduced revenue by £84m The 2006 results
include the mpact of the general election and European elections which generated £27m in revenue
The decrease in revenue contributed to an operating profit decline of £150m (43 6%) to £194m This profit decline was primarily driven
by increased pension costs (up £164m) and an increase in the level of expenditure on strategic nitatives, aimed at creating a more
modern and efficient operation The level of operational efficiency savings delivered in the year has more than offset inflation impacting on
both our payroll and third party procurement expenditure
2007 2006 + —_ External revenue rose by £45m (4 3%) from £1 037m to £1 082m
General Logistics Systems £m £m___ including the £6mn negative impact as a result of the weakening of the
euro The underlying growth of £51m (4 9%) results from higher domestic
External revenue 4,082 1037 and export volumes across Europe with particularly strong growth
Operating profit before exceptionals 4145 109. achteved in international shipments reflecting the strength of the GLS
European network
Operating profit mereased by £15m (15 0%) from £100m last year to £115m This represents a strong performance despite challenging
trading conditions in Germany and the significant network and operational changes implemented to adapt the French network to the new
speed limit law in France which came into effect on 1 January 2007
2007 2006 External tumover rose by £23m {7 3%) with volume growth of 11.2%
Parcelforce Worldwide £m £m drven by UK contracts This was partly offset by continued decline in
international standard and economy products This mmx reduced average
Extermat revenue 337 314 unit prices by 31%
Operating profit before exceptionals 10 5 The high volume during Christmas (and the New Year) was driven by
exceptional business to consumer volumes Growth was underpinned by
strong quality of service results (PF24 product 96 2% and premium timed service 96 7% exceeded prior year results) and improved
customer service focus
Px}
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Royal Mait Holdings plc
Operating and Financial Review (continued)
Operational efficiency improved by over 4% compared to last year Total costs creased by £18m, nearly 6% to support 11 2% volume
growth
2006-07 saw Parcelforce Worldwide achieve record profits and volumes Operating profit of €10m has improved by £5m These
outstanding results have been achieved through untt cost efficiency in a year of strong volume growth whilst improving quality of service
Revenue shows an increase of £30m (3 6%) over the prior year
2007-2006 however 2007 includes £75m of Social Network Payment (SNP) from
Post Office Limited £m £m Government. This SNP has been recognised as revenue and relates to a
Turnover 793838 Government grant to match the related costs during the second half of
the year of providing the network of public post offices that the
Social Network Payment 75 = Secretary of State considers appropriate and which would otherwise
External revenue 868-838 not be provided
Operating loss before exceptionals (99) (aun) Underlying trading revenue decreased by £45m (5 4%) due to a number
of factors icluding the loss of TV Licensing work from the BBC
migration of motoring volumes to the DVLA web application the
replacement of E111 forms with the issue of European Health Insurance Card (EHIC) and the effects of the change to direct payment of
benefits These have been partly offset by increases in Post Office Limiteds new commercial products of which HomePhone revenue ts
significantly higher than last year The business continues to expand its presence in the Financial Services sector with the launch of the
Post Office® Instant Saver account which has been exceptionally well received in the mstant access savings market
The underlying loss of £174m which increased by £63m includes £150m of costs for maintaming the uneconomic part of the rural
network, for which funding from Royal Mail Group Ltd and Government was received during the year, £75m of which was recorded as
revenue
Overall expenditure increased mainly driven by subpostmasters pay costs associated with new commercial products and increased
Pension costs These were partially offset by cost reductions in staff costs via headcount reductions IT costs through rewsed contracts and
tught control of all discretionary spending
2007 2006 External revenue from other subsidiaries has increased to £35m (2006
Other businesses €m Em £8m) and includes the consolidation of Romec Services Limited
Sitarcal coverun = ; Operating profit is £4m lower primarily due to decreased profits in
Romec our facilities management operation (a 51% subsidiary)
Operating profit before exceptionals 13 17
Principal Risks and Uncertainties
The Group uses a business-wide framework for the identification assessment, treatment monitoring and reporting of sk The process
helps support the business objectives by linking into business strategy identifying and reacting to emerging risks, developing cost effective
solutions to risk
The following Group-level sks have been identified and are beng managed to support the fong-term sustamability of the Group The
impact of some of these risks could be impairment to the value of the Groups brands - Royal Mail Post Office® and Parcelforce
Worldwide which are some of the most well known and trusted brands in the UK and major intangible assets of the Group
The Government is 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 effectwe business
strategy This is particularly significant for Post Office Limited that 1s required to run its branch network as a commercial business
Subject to EC approval the Government has agreed a support package for the social branch network If Government faited to deliver this,
support package this may have a prejudicial effect on Post Office Limited's ability to run an efficient and profitable retail network
Group revenues and profit are subject to several uncertainties
The postal market is rapidly evolving as a result of bberalisation Competitors are being increasingly aggressive and target our business
customers where Royal Mail derives most of its profit Additionally business customers may “downtrade” and use less profitable products
The loss of key business customers is exacerbated by the Universal Service Obligation (USO) The USO obliges Royal Mail to maintain a
national collection and delivery network and consequently incur fixed costs which our competitors do not have to bear
There 1s also uncertainty as to how the licence and regulatory regime will affect Royal Mail in the future Unless the regulatory restraints
are changed to permit Royal Mail to recover from the imbalance of business mai! subsidising stamped mail there 1s a nisk that Royal Mail
will always lose money on stamped mail whilst its competitors cream-off more profitable business mail without the requirements of a
USO The USO does however ensure that Royal Mail has the largest distribution network in the country - which may present future
‘opportunities:
24
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Royal Mail Holdings plc
Operating and Financial Review (contmued)
The Group ts subject to regulatory restrictions on its 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 its network
tn addition to its postal operators licence the Group 1s also subject to oversight by ather regulators This affects Post Office Limited which
as an appointed representative of Bristol & West plc who are authorised and regulated by the FSA has to satisfy the FSA that it 1s
meeting the relevant regulatory requirements It is also subject to anti-money laundering regulations issued under the Proceeds of Crime
Act 2002 and enforced by HM Revenue and Customs Post Office Limited 1s also licensed as a telephone service provider by Ofcom Ofcom
requires service providers to issue and adhere to Codes of Practice If Royal Mail breaches certain licence conditions and its regulatory
requirements it may be subject to financial penalties
The financial restructuring package agreed with the Government needs to be managed effectively
‘The business has agreed a financial restructunng package that will allow it to restructure the business, invest in new equipment and
address the pension fund deficit that has a major impact on Group profit and the balance sheet. The effective management of the
restructuring package 1s crucial in light of the major challenges that the business faces in terms of the impact of competition pricing and
regulation capital investment and fluctuations in equity markets adversely affecting the pension fund deficit Unless the business remains
vathin the agreed financial restructuring parameters, sanctions or penalties could ensue
Without a continued change of culture within the organisation future development may be impeded
‘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 increased customer expectations place major challenges 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 flewble efficient and cooperative culture
Royal Mail could become loss-making as mail volumes decline and labour rates increase Significant ndustrial action could have a major
detrimental effect on the Group s reputation and profits
If the UK's economy slows or goes into recession it ts 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 maits revenue If the economy weakens or goes into recession this
vall have a direct impact on mail volumes and consequently on Group profit
The increasing substitution by alternatives could lead to declining profitability and volumes, which would have an adverse
impact on profit
Delivering business mail for major customers is a vital part of our business Technologies can be used to send information or make
information available faster and, in many cases at a lower cost than traditional mail services If substitution continues mails volumes will
decrease resulting in an associated fall in profit.
Ineffective investment in the operational network could affect productivity levels and our ability to compete effectively
The business 1s about to embark on a major investment programme to replace equipment and technology that 1s nearing the end of its
life cycle The mvestment programme needs to be effectively deptoyed and ongoing investment in the Group s operational network in
future years secured to ensure the Groups ability to compete effectively in the open market
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 that are largely outside its
control including natural disasters fire flood explosion, possibility of work stoppages or civil 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 mayor disruption cauld have an adverse impact on business and operating results
The Group is a major energy consumer and may be affected by future environmental and fiscal measures
‘The Group operates a large vehicle fleet and a substantial property portfolio that consume large amounts of energy Although the Group
4s 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 taxation
The Group operates a substantial treasury operation and is exposed to foreign currency risk and fuel price risk
The Group ts 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 the batances held to operate the Bureau de Change services and various sales
and purchase contracts denominated in foreign currency The fuel price nsk arises from operating a large vehicle fleet and an aviation fuel
nisk from purchasing air freight services If the treasury strategy is appropriate to cover the Groups exposures this could result in funds
not being readily available when required or having a negative impact on profit due to increased costs
a
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Royal Mail Holdings plc
Operating and Financial Review (continued)
Way forward
The Group has expenenced a difficult trading year with revenues continuing to fall below expectations in core markets and with profits
declining for the first ume in five years Our operating profit has reduced to £233m compared to £355m last year The combined impacts
of additional pensions charges falling volumes and the effects of competition have squeezed margins in Royal Mail Post Office Limited's
losses have reduced to £99m from £111m but the inclusion of £75m of Social Network Payment within operating profits for 2006-07
masks an underlying worsening a consequence of further losses in traditional mcome from Government not being fully offset by new
commercial product revenues There is better news in our non-regulated parcels businesses where both GLS and Parcelforce Worldwide
continue to improve their revenue and profit performance year on year
On 14 December 2006 the Government announced a long-term funding arrangement for Post Office Lirnited with the final contracts
agreed in May 2007 Certain elements of this package remain subject to State Aid approval This package will enable the reshaping of the
network and ultimately allow the business to deliver a significantly improved performance
On 8 February 2007 the Group announced that it would consult on the future of tts defined benefit pension scheme A series of proposals
has been outlined recently and consultation with our people ts to commence shortly It is anticipated that any changes to be made will
help the Company to ensure it can continue to provide attractive pension benefits for employees
On 23 March 2007 a package to fund the transformation of the Royal Mail busmess was agreed with the Shareholder At the same time,
an Employee ColleagueShare Scheme was also approved providing an opportunity for the business to engage its people in the targe scale
change that 1s required With both these enablers in place tt is management's challenge to ensure that the investment ts used to deploy
the mitiatives and improvements that will underpm long-term operational transformation
Moving forward the major challenges that face the Group are
© Increased competition within the communications sector and continuing letter market decline, and
* — Transformation and modernisation of our operations in order to improve our efficiency and productivity
Despite the challenges, with the full support of our people the Group ts now well placed to accelerate its transformation in order to.
provide improved service and increased value to all our stakeholders
GRO I
lan Duncan
Group Finance Director
26 October 2007
Understanding the OFR
Statement of compliance
This OFR 1s intended to develop the Groups narrative reporting to meet many of the recommendations of the Accounting Standards
Board s Reporung Statement of Best Pracuce on the OFR This OFR ensures compliance with the legal requirement under the Companies
Act to provide a Business Review and is 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 tme of their approval of this report, These statements should be treated with appropnate caution due to the inherent
uncertainues underlying any such forward looking information
26
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Royal Mail Holdings pic
Royal Mail Holdings plc Board
Non Executive Directors
ALLAN LEIGHTON (54) joined the Board in April 2001 as a Non Executive Director, becoming Chairman in March 2002 He ts also a
Director of Post Office Limited and a member of the GLS Superwsory 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
1996 becoming President and CEO of Wal-Mart Europe when Wal-Mart bought Asda in 1999 He 1s currently Chairman of BHS Limited
Non Executive Director of BSkyB Selfridges & Co, and George Weston Ltd Allan 1s also Chatrman of Race for Opportunity
DAVID FISH (59) joined the Board in January 2003 He is 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 He has
also been President of Snackfoods Europe and held European Vice-President positions in marketing and personnel He s currently
Executive Chairman of United Biscuits Group and Chairman of Christian Salvesen
RICHARD HANDOVER (61) joined the Board in January 2003 He 1s Chairman of the Nomination Committee and a member of the
Remuneration Committee Richard was Chairman of WH Smith plc until January 2005 He 1s also a Non Executive Director of the
Nationwide Building Society
‘SIR MICHAEL HODGKINSON (63) jomed the Board in January 2003 He is the Senior Independent Director and a member of the
Remuneration Committee In May 2003 he was appointed Chairman of Post Office Limited and Chatr of the Corporate and Social
Responsibibty Governance Committee, and was Post Office Limited's nominated director on the Bank of Iretand Board until 31 July 2005
Sir Mike was Chief Executive of BAA plc until retiring in June 2003 He 1s currently a Board Member and Chairman of the Finance
Committee of Transport for London, a Non Executive of FKI plc and Non Executive Chairman of First Choice Holidays plc
JOHN NEILL CBE (60) jomed the Board m January 2003 and 1s a member of the Audit and Risk Committee John has been Group Chief
Executive and Deputy Chairman of the Unipart Group of companies since 1987 He was formerly a Director of the Court of the Bank of
England and ts Non Executive Director of Charter plc He 1s also Vice- President of the Society of Motor Manufacturers and Traders and a
Director of the SMMT industry forum and Business in the Community
BARONESS MARGARET PROSSER OBE (70) jomed the Board in November 2004 and ts a member of the Nomination Committee and Audit
and Risk 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 (45) joined the board in January 2006 and is Chair of the Audit & Risk Committee Helen has been Group Finance Director
at Lloyds TSB Group since 2004 Prior to that she was Group Finance Director of Kingfisher She ts a member of the Accounting
Standards Board
Executive Directors
ADAM CROZIER (43) joined the Company in February 2003 He 1s Group Chief Executive and leads the Group Executve Team He also has
direct day-to-day control of the Letters Business He is a director of Debenhams plc and Camelot Group pic Adam was Chief Executive of
the Football Association from 2000-2003 Between 1988 and 1999 he held a number of senior roles at Saatchi and Saatcht Advertising
including that of Joint Chief Executive from 1995
DAVID BURDEN (60) joined the Company in November 2002 was appomted to the Board m July 2004. and 1s Group Technology Osrector
He 1s a member of the Group Execute Team David was previously Group Executive General Manager Technology and Services at \
Qantas Aways Ltd in Sydney, responsible for (T, purchasing property motor transport and fuel services He was a member of the I
Executive Committee throughout the transition from Government ownership to a successful listed public company '
ALAN COOK CBE (54) joined the Company in March 2006 as Managing Director of Post Office Lirmted, having been a non-executive \
Director of Post Office Limited since February 2005 He 1s a member of the Group Executive Team Before joining as Managing Director of
Post Office Limited Alan was Chief Executive of National Savings and Investments. prior to which he had been Chief Operating Officer of
the Prudential Assurance Company Alan ts also currently serving on the Council of the Institute of Financial Services
IAN DUNCAN (46) lan Ouncan was appointed as Finance Director of Royal Mail Group in September 2006 He joned 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 Oirector at British Nuclear Fuels pic Before that lan was in corporate finance with Dresdner Klemwort Benson Ltd and
Uoyds Merchant Bank Ltd He started his career with Deloitte & Touche in London He 1s a member of the Institute of Chartered
Accountants of England and Wales
TONY MeCARTHY (51) joined the Company in January 2003 and 1s Group Director People and Organisational Development He 1s a
member of the Group Executrve Team the Pensions Committee and the Corporate and Social Responsibility Governance Committee Tony
had previously been Group Human Resources Director of BAE Systems where he had worked m a variety of HR roles since 1978 He ts
also a member of the Council of the University of Lancaster and a member of the Home Office Reform Group
a
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Royal Mail Holdings plc
Royal Mait Holdings ple Board (continued) 1
Company Secretary
JONATHAN EVANS OBE (55) joined the Company directly from university in 1974 and has been Company Secretary since 1999 having
held a wide range of management positions throughout the Group He 1s a member of the Group Executive Team and Pensions
Committee Secretary to the Audit and Risk Remuneration and Nomination Committees a Trustee Director of the Royal Mail Pension
Plan a Trustee of the Royal Mail Seruor Executive Pension Plan and a member of the GLS Supermsory Board
Director who resigned during the year
BOB WIGLEY resigned with effect from 31 October 2006 1
Directors who left or were appointed after the year end
DAVID BURDEN retired 31 July 2007
JAN GRIFFITHS resigned with effect from 30 April 2007
SIR MICHAEL HODGKINSON contract ended 31 August 2007
JOHN NEILL contract ended 31 August 2007
STEPHEN CARTER appointed 1 September 2007
28
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Royal Mail Holdings plc
Directors’ Report
The Directors present the Group accounts for Royal Mail Holdings plc These accounts relate to the 52 weeks ended 25 March 2007
(2006 52 weeks ended 26 March 2006)
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 serwices through its network of Post Office” branches across the United Kingdom
Review of the business and future developments
A remew of the Groups business and future developments ts presented in the Chairman s Statement and Chief Executive s Statement,
Annuat Review and the Operating and Financial Review
Results and dividends
The profit before taxation amounted to £313m (2006 £312m) After taxation, the profit was £286m (2006 £395m) Of the profit after
taxation £nil (2006 Enil) 1s attnbutable to minonty interests The Directors do not recommend a dividend (2006 nil dividend)
Political and charitable contributions
During the year the Group made charitable contributions of £1m (2006 £1m) No pohtical contributions were made in the year (2006
Eni)
Research and development
Research and development expenditure during the year amounted to £1m {2006 £4m)
Policy on the payment of suppliers
‘The poticy 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 Company's 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 Trade and Industry s (OT!) Better Payment Practice Code Copies of this can be obtained from the DTI As the Company 1s
a non-operating company the creditor days are zero The creditor days of the operating subsidianes are set out in their accounts
Land and buildings
The net book value of the Group's land and buildings based upon a histenc cost accounting policy and excluding fit-out, is £667m (2006
£694m) In the opmion of the Directors. the aggregate market value of the Company s land and buildings exceeds this net book value by
£798m (2006 £679m)}
Financial instruments
Details of financial instruments and financial sk management objectives and policies are shown in note 24 and note 23 respectively
Directors and therr interests
The Directors of the Company and details of changes during the year are given on pages 27 and 28 The Secretary of State appomts the
Chairman all other Directors are appointed by the Company with the Secretary of States 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 ts 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
auditors are aware of that information
Qualifying third party indemnity provisions for Directors
At the time the Directors Report was approved under section 234A of the Companies Act 1985 a partial qualifying third party indemnity
provision was and rernains in force for the benefit of all Directors of the Company and was and remains in force for the benefit of one or
more persons who were then Directors of the Company 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 emptoys almost 185 000 people (2006 atmost 193,000) in our UK wholly owned subsidiaries A reconciliation to the Group
headcount is shown in note 4 to the accounts Our people are our strategic strength and competitive advantage
The Group's policy 1s to encourage effective communication and consultation between our people, particularly on matters relating to
strategy financial and economic factors that may influence the Group's performance This is achreved through the use of an extensive
range of communication channels including magazines briefings open forums and an intranet website Our people have various bonus
schemes significant elements af 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 mdividuat
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 's maintained in all respects including disability age religion colour sex. nationality ethnic origin sexual
orientation race, creed and marital status
29
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Royal Mail Holdings plc
Directors’ Report (continued)
In 2003 the Chairman created a programme to make Royal Mail Group a Great Place to Work’ and made it a prority for everyone across
the business The purpose of the programme 1s to encourage people to contribute to improving their working environment, to equip our
people 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 sustamnable 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 in all our people a set of core behaviours that determine how we treat each other our customers and
our Shareholder
building a fluid mnovative and adaptive organisation to improve our response to environmental and market changes
* developing a high-performance culture nm which everyone understands their contnbution and is motivated to achieve therr fult
potential,
* defining recruiting and developing the core capabilities 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
their contribution to the success of our business
Currently, the way we monitor our progress towards becoming a ‘Great Place to Work’ ts by using Have Your Say, our employee opinion
survey launched in January 2003 This is carried out on a rolling basis across all employees and the results are reviewed monthly nght
through the business - from local level up to Board level
Corporate Social Responsibility
The Group 1s 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 wall be available m our 2007 CSR Report. due
to be published in due course
Disabled employees
The Group s policy is to give full consideration to applications for employment from disabled persons Employees who become disabled
whilst emplayed recerve full support through the provision of traming and special equipment to facilitate contmued employment where
practrcable The Group provides training career development and promotion to disabled ernployees wherever appropriate
Going 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 details are provided under funding m note 2 to the accounts
Auditors
A resolution to reappoint Ernst & Young LLP as auditors wall be put to the Annual General Meeting
By Order of the Board
Jonathan Evans
Company Secretary
26 October 2007
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Royal Mail Holdings plc
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 in June 2006 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 mto how the Board and management run the business for the benefit of the Shareholder The Company has fully
complied with the provisions of the Code
The Board
The Board ts responsible for setting the objectives and strategy of the Group and for monitoring performance The Board currently
comprises a Non Executive Chairman, five Executive Directors and six Non Executive Directors 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 exclusively for its consideration These include the approval of financial statements
acquisitions and disposals material agreements non-recurring projects major capital expenditure and strategic plans It also 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 circutates the papers aiming to allow sufficient time for the Directors to review the information provided The
Board ts confident that alt 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 a three-year term
The Board considers that each of the six Non Executive Directors is independent. This means that in the view of the Board they have no
links to the Executive Directors and other managers and no business or other relationship with the Company that could interfere with
their judgement Sir Michael Hodgkinson is the Senior Independent Director There 1s 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 The Board initiated a systematic approach to the evaluation of the effectiveness of the Board its Committees and individual
Directors This was undertaken by the Chairman and implemented in collaboration with the Committee Chairmen and with the support of
the Company Secretary The evaluation was conducted by way of a formal questionnaire that enabled Directors perspectives on the
effectiveness of the Board and Committees to be fed back to the Chairman and the full Board Performance evaluations of Board
Committees were conducted on behalf of the Chairman by the Chairmen of the respective Board Committees The Non Executive
Directors led by the Senior Independent Director, reviewed the performance of the Chairman and the Executive Directors
Directors may take independent professional advice in the furtherance of their dutres at the Group's expense All Directors have access to
the advice and services of the Company Secretary the appointment and removal of whom is a matter for the Board as a whole
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 appomtment On appointment the Directors take part in an induction programme where they receive information about
the Group the role of the Board and matters reserved for its decision the terms of reference and membership of the principal Board
Committees, the Groups Corporate Governance arrangements and the latest financial information about the Group This is supplemented
by wisits 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
31
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Royal Mail Holdings plc
Corparate Governance (continued)
Dunng the year the Directors attended the following number of meetings of the Board and its main Committees
Number of meetings Audit and
Risk Remuneration Nomination
Board Committee Committee Committee
Number of meetings during the year 12 6 6 7
Non Executive Chairman
Allan Leighton 12
Executive
‘Adam Crozer 12
David Burden 12
Alan Cook 12
lan Duncan? 7
lan Griffiths 12
Tony McCarthy BEN
Non Executive
David Fish 12 6 7
Richard Handover 12 6 7
Sir Michael Hodgkinson 12 6
John Neill 12 6
Baroness Margaret Prosser 12 4 7
Heten Weir 10 6
Former O:rectors
Bob Wigley”) 5 2
® attended all Board meetings since becoming a Director during the year
Resigned 31 October 2006
Outside appomtments
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 and for which the Director may retain the fees (see the Directors
Remuneration Report on page 43 for details) The Boards policy is normally to limit Executive Directors to no more than one Non
Executive Directorship
Board Committees
The following Committees deal with speafic aspects of the Groups governance The terms of reference for each of the principal
Committees are available on the Companys website (www rovalmailgroup com) or on wnitten request from the Company Secretary The
details of Committee membership are as at 25 March 2007
32
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Royal Mail Holdings plc
Corporate Governance (continued)
Group Executive Team
Char
Adam Crozer Group Chief Executive
Membership
The Group Executive Team compnses David Burden {Group Chief Information Officer) Alan Cook (Managing
Director Post Office Limited), lan Duncan (Group Finance Director) Jonathan Evans (Company Secretary)
Mary Fagan (Group Corporate and Government Affairs Director) lan Griffiths (Managing Director Letters)
Tony McCarthy (Group Director People and Organisational Development) Alex Smith (Director of Strategy)
and David Smith (Managing Director Parcelforce Worldwide)
Role
The Committee s responsibikties include
to develop and monitor deployment of the Groups strategy. annual operating plans and budgets for
Board approval
to review operational activities and set policies where these are not reserved to the Board and
to allocate 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 from 1 November 2006
Bob Wigley was Chairman of the Audit and Risk Committee until he resigned as a Director of the Company on
31 October 2006
Membership
John Neill Baroness Margaret Prosser, Helen Weir until appointed to Chair 1 November 2006
The Board 1s confident that the collective 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 Campany s expense if
required
Role
The Committee which 1s assisted by the Group Risk Committee provides a forum for reporting by both
internal and external auditors and 1s responstble for a wide range of matters including
to monitor the integrity of the financial statements of the Group
to review the Group's internal financial control system and unless addressed by the separate Risk
Management Committee or by the Board itself internal contro! and risk management systems
‘to monitor and review the effectiveness of the Groups Internal Audit function
to make recommendations to the Board for Shareholder approval in general meetings in relation
to the appointment of the external auditors and to approve the remuneration and terms of
engagement of the external auditors
to monitor and review the external auditors’ mdependence objectwity 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 Audit and Risk Committees monitoring and review activities reveal cause for concern or
‘scope for improvement to make recommendations to the Board on action needed to address the
Issue or to make improvements
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Royal Mail Holdings plc
Corporate Governance (continued)
Remuneration Committee
Chair David Fish
Membership — Richard Handover Sir Mike Hodgkinson
Role The Committees responsibilities include
+ to determine and recommend for the Boards approval, the framework for the remuneration of the
senior executives of the Group.
* to determine the indidual remuneration packages for the Chairman, the Executive Directors and
the Company Secretary, subject where necessary to the consent of the Secretary of State for Trade
and Industry (the Secretary of State), and
+ toagree the targets for any performance-related incentive schemes applicable to Execute
Directors and senior executives
Nomination Committee
Chair Richard Handover
Membership Baroness Margaret Prosser David Fish
Role The Committee s responsibilities include
* to lead a formal rigorous and transparent process both for appointments to the Board of the
Company and for appointments to the boards of subsidiaries Some appointments will be subject to
the consent of the Secretary of State as provided in the Articles
* — toadvise 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 membership and ensure that the Boards have the required mix
of skills knowledge and expenence
In addition to the principal Committees above there are also the following Committees
Corporate and Social Responsibility Governance Committee
Chair Sir Mike Hodgkmson
Membership — Tony McCarthy, Group Director People and Organisational Development Director of Corporate and Social
Responsibility Head of Environment Head of Health Head of Safety other senior executives across the Group
Role The Corporate and Social Responsibility Governance Committee reports to the Board and has responsibilities
including
* to act on behalf of the Group Executive Team to provide an overview of the social environmental
and ethical impacts of the Groups actwities and
* to make recommendations on minimum Corporate and Social Responsibility standards and policies
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Royal Mail Holdings plc
Corporate Governance (continued)
Pensions Committee
Char tan Duncan
Membersup Tony McCarthy Jonathan Evans
Role The Commuttee s responsibilities include
* to review funding benefits scheme structure and strategic developments impacting on the Groups
‘occupational pension schemes and
= to represent the Group in discussions with the Trustees of the Group s occupational pension
schemes
Non-audit services provided by the external auditors
In some cases the nature of advice required makes it more tmely and cost effective to select the external auditors who already have a
good understanding of the Group In order to maintain the objectivity and independence of the external auditors the Board has
determined what work can be provided by the external auditors and the approval processes associated with them The Audit and Risk
Committee monitors the level of non-audit fees paid to the external auditors
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Royal Mail Holdings plc
Internal control
Overview
The Directors are responsible for the Group s system of internal control and nsk management as well as the timely review of its
effectiveness The system 1s 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 1s based on the underlying principle of line management accountability for control and risk
management There is an ongoing process for identifymg evaluating and managing the significant risks faced by the Group in accordance
with the guidance detailed by the Turnbull Committee as part of the Code including financial and operational nsks 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 jomt 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 effectiveness of the systern 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 cn a quarterly basis to monitor and review the effectiveness of the risk
Management processes and the contral enwronment 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 nsk profile
Key control processes
The key processes used to assess the effectiveness of systems 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 principles of professionalism and integnity 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 mformation on the key risk
areas
at least quarterly reviews by the Audit and Risk Committee of the scope and results of internal audit work across the Group The
scope of the work covers all key activities of the Group and concentrates on higher risk areas
+ eviews of the scope of the work of the external auditors by the Audit and Risk Committee and any significant issues arising,
* eviews by the Audit and Risk Committee of accounting policies and delegated authontty levels and
* consideration by the Audit and Risk Committee 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 through a self assessment process of the key risks to achieving
their business objectives and the controts in place to manage them The likelihood and potential impact of each nsk Is evaluated
al certification by management that they are responsible for managing the nisks to their business objectives and that the internal
controls are such that they provide reasonable but not absolute assurance that the nsks are appropriately identified evaluated
and managed and.
+ independent assurance by Internal Audit as to the existence and effectweness of the risk management activities described by
management
The system of internal contro! and risk management is embedded into the operations of the Group and the actions taken to mitigate any
weaknesses are carefully monitored
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Royal Mail Holdings plc
Directors’ Remuneration Report
This report provides the information required by the Directors Remuneration Report Regulations 2002 (the Regulations) The Companys
remuneration policy follows the Combined Code and common practice in other UK organisations, The Royat Mat! Group strategic plan
commits to extensive transformationa! change to ensure that customers are offered high quality and cost effective services The Board
believes that an effective remuneration strategy is essential to support the plan by ensuring that the Company has people of the night
calibre and skills to meet the considerable challenges the Company faces Incentives which create an identity of interest between
employees and the Shareholder form a vital part of this strategy
The elements of this report that have been audited are
Directors emoluments with respect to 2006-07
Performance-related personal annual bonuses outtumn for 2006-07
Company Awards and Bonus Awards accruing in respect of the 2005-06 to 2007-08 Long Term Incentive Plan and
Pensions
Directors’ emoluments with respect to 2006-07
Directors’ remuneration excluding pensions was as follows
Waved Total excluding
Annual performance bonus bonus pensions
Current Waived Annual from Compensation
annual Salary/ I Performance- mto_— performance prior for loss of
salaryffees fees I related bonus __LTIP* _bonuspaid _—years__—Benefits office __2007 2006
£000 I £000 ‘£000 £000 000 —«£000~—« E000. 000 £000 ‘£000
Non Executive Chairman
Allan Leighton 20 20 180 - 180 - - : 200 201
Executwe
Adam Crozier 633 629 469 (257) zz - 18 - 859 790
David Burden 283 281 168 (92) 76 - 13 - 370 359
Alan Cock”! 257 255 165 (93) 72 - 19 - 346 22
fan Duncan 300 175 101 (55) 46 - 143 : 364 -
lan Griffiths 500 500 226 - 226 18 69 - 813 106
Tony McCarthy 344 32 204 (112) 92 - 25 - 459 454
Non Executive
Sir Michael Hodgkinson 83 83 - : - 7 7 : 83 9
David Fish 45 45 - - - - - - 45 “4
Richard Handover 45 45 - : - - - - 45 ry
John Neill 38 35 - - - - - : 35 34
Baroness Margaret
Prosser 40 40 - - - - - - 40 35
Helen Weir” 43 38 - - : - - ~ 38 9
Former Directors
Marisa Casson! - - - - - - - - - 656
David Mills = © = - - - - - - 816
Bab Wigley" - 25 - - - - - - 25 40
Total 2007 2628 I 2,513, 2,513 (609) 904 FU 287 o 3.722 -
Total 2006 2326 2135 1031 (463) 568 - 115 865 : 3.683
* The annual performance bonus waived into LTIP 1s explained on page 40
tan Duncan joined the Board on 1 September 2006
® Heten Weir and Alan Cook jomed the Board on 1 January 2006 and 1 March 2006 respectwely
© Mansa Cassont and David Mil left the Board on 17 November 2005 and 34 December 2005 respectwely
“Bob Wigley left the Board on 31 October 2006
‘tan Griffiths joined the Board on 7 February 2006 and resigned on 30 April 2007
As noted above there have been a number of changes to the Board New executive members have been recruited at lower base salary
tevels than their predecessors and on a like-for-like basis executive Directors base pay was 2 7% lower than previously
‘The figures in the table represent emoluments earned and recewable as Directors during the financial year whenever paid Such
emoluments are normally paid in the same financial year with the exception of the annual performance-related bonus which is paid in
the year following that in which it s earned and the amount deferred into LTIP which is not paid until the LTIP matures
a
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Royal Mail Holdings plc
Directors’ Remuneration Report (continued)
In addition some Directors receive supplements in tieu of pension contnbutions (see page 43)
Cash supplement in lieu of pension (see Total excluding pensions but including
page 43) cash supplement mm lieu of pension
2007 2006 2007 2006
£000 £000 £000 £000
‘Adam Crozier 140 - 999 790
Alan Cook 100 8 466 30
lan Duncan 45 - 409 -
lan Griffiths 187 24 970 130
David Mails : 137 - 953
442 169
The total Directors remuneration excluding pensions and Long-Term Incentive Plan including cash supplement in lieu of pension 1s
£4,164 000 (2006 £3 852 000)
These payments are consistent with the policy of the Remuneration Committee The following sections describe the constitution of the
Committee, its general policy and the main constituents of remuneration
The Remuneration Committee
The Board retains averall accountability for the framework and costs of executive remuneration and the terms of the service contracts
offered to all Executive Directors, which require the consent of the Secretary of State for Trade and Industry The Secretary of State also
gives consent for the remuneration arrangements for Non Executive Directors The Remuneration Committees role is 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
cessation of employment giving careful consideration to what compensation should be paid taking mto account the circumstances of the
particular case and the ability of the mdividual to mitigate
The Remuneration Committee is made up wholly of independent Non Executive Directors Membership of the Commuttee 1s disclosed on
page 34 The Chief Executive Adam Crozier, and the Director People & Organisational Development Tony McCarthy may attend these
meetings by invitation but are not present at the discussion of their own remuneration
Advice to the Remuneration Committee
The Committee calls for mformation and advice from inside and outside the Group It takes advice from those independent professional
organisations that are best able to assist its consideration of the particular topics under discussion
During 2006-07 advice on the performance of key executives was given by the Charman ang the Chief Executive Information on the
external marketplace was given by Monks Partnership (a trading name of PriceWaterhouse Coopers) Deloitte & Touche LLP and Watson
Wyatt Limited Internal support 1s primarily provided by the Director People & Organisational Development Tony McCarthy, and from the
Company Secretary, Jonathan Evans Other advice and information has been provided by specialists from People & Organisational
Development and Finance
Ouring the year advice was given to the Company by Watson Wyatt Limited on pension and actuarial 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 in both the short and the long-term
and
the system of remuneration should establish an identity of mterest between 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 structure of the package and its competitrveness agamst appropnate marketplaces The Committee
aims to ensure that the package Is proportionate and effective, and that it 1s developed in accordance with 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 continuing emphasis an those elements of remuneration that
are performance-related
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Directors’ Remuneration Report (continued)
Base salaries
The Committee believes that base salaries should be set at levels that are sufficient to recruit and retain high calibre executives. In making
Its yudgement the Commuttee 1s informed by a vanety of data aimed at making a fair comparison with enterprises of a similar size and
complexity to Royal Mail This data is provided by independent consultancies Increases are recommended where the Committee believes
that it ts necessary to reflect contribution increased individual responsibilities and market levels The Secretary of States consent 1s
required for atl material changes to Directors’ remuneration
Last year the increase applied was 2.9% which was below the market movement for jobs of this size but m line wath increases applied
elsewhere in the Company It has been decided that for 2007-08 the increase in base salaries for Executive Directors will be zero
Performance-retated, personal annual bonus 2006-07
For 2006-07 the annual bonus plan followed the model of the previous year except that
* all Business roles had a weighting of 30% on Group Performance and 70% Business This applied to the Managing Directors of
Letters and Post Office Limited and
* all Group roles had an additional 10% weighting gwen to Post Office Limited s performance in view of the importance of
supporting the recovery of that business This applied to all Executive Directors except for the Managing Oirectors of Letters
and Post Office Limited
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 60 40 100
Other Executive Directors 48 32 80
On-target levels Profit Service Quality Total
Chief Executive 30 30 60
Other Executive Directors 24 24 48
Threshold levets Profit Service Quality Total
Chief Executive 15 15 30
Other Executive Directors 12 12 24
The financial target was based on Group profit
The Service Quality measures were
First Class stamped and metered
Second Class stamped and metered,
Mailsort 2
Mallsort 3
Special Delivery
2nd Class PPI
Parcelforce 24 and
A Post Office Limited Customer Service Effectiveness measure
In addition Post Office Limited has a measure of new products sold
Long-Term Incentive Plans
Last year it was noted that a Long-Term Incentive Plan with similar characteristics to the previous one was beng discussed with
Government
After the discussion of various options a three year LTIP ts in place for 2005-06 to 2007-08 A further three year LTIP for the period
2007-08 to 2009-10 will be put in place This arrangement will allow the last plan to come to an end at the same time as the next
PostComm review
Performance is measured by Return on Total Assets
For the three years 2005-06 to 2007-08 the principles of the plan are as follows
{a) Annuat 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 ts 25% of annual base salary and for exceptional performance this
rose in accordance with a stepped scale to a maximum of 37 5% For 2007-08 the potential awards are half of these -1e they would
begin at 6 25% of annual base salary with 12 5% for on-target performance and 18 75% for exceptional performance
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Directors’ Remuneration Report (continued)
(b) Bonus Awards A Bonus Award can be made each year by the Remuneration Commuttee These are only made in situations where the
Director waives a proportion of their annual bonus and do not 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 Any decision to waive must be taken in the first quarter of the
relevant year If a bonus above on-target would otherwise be payable then three quarters of this additional amount will be compulsorily
waived For 2007-08, the Bonus Award would be one half of the normal level If a proportion of annual bonus 1s waived then a Bonus
Award may be made within the LTIP not exceeding that value
(c) A Multiplying factor Company Awards may be increased by a factor which measures Return on Total Assets across the plan If the on-
target level 1s achieved for the relevant period then each of the Company Awards to which it applies 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 m June 2008
The 2007-08 to 2009-10 LTIP will have the same principles as the previous LTIP, with 2007-08 also counting for one half of the normal
amount in that plan Any Company and Bonus Awards for 2007-08 are effectively shared equally between the two plans
The performance targets for the 2007-08 to 2009-10 plan are still under discussion with the Government
The proposals are being structured such that.
~ three year plans could be used while aligning the maturity of the second plan with the next PostComm review and
~ there 1s a connection between the two plans through the common year with one half of the 2007-08 bonus award being carried
forward ‘
Company Awards
These are measured against an annual Return On Total operating Assets target (ROTA) ROTA incentivises the productive value of the 0
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 Companys achievernent was 13 7% 22% above the target and above the proposed
stretch of 13 4% This resulted m Company Awards of 37 5%
For 2006-07 the following table against annual ROTA applied
Royal Mail ROTA achievement Percentage of Base Salary
Below 38% Nil
38-41% 125%
42-67% 250%
48-53% 275%
54-71% pro-rata 300% to 375%
7.1% and above 375%
The outturn was 5 4% but the Committee made an award of 25% of base salary for 2006-07
Bonus Awards
As descnbed 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 is waived then a Bonus Award may be made
within the LTIP, not exceeding that value
Multiplying Factor
The Multiplying Factor 1s dependent upon cumulatwe 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 33 at the maximum If the on-target level of cumulative ROTA 1s exceeded at the end
of March 2007 the percentage multiplier at that position on the performance scale 1s applied to the awards made so far and the final
outcome 1s applied to the awards made in the last year only and in this case 1s subject to Remunerauon Committee discretion
40
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Royal Mail Holdings plc
Directors’ Remuneration Report (continued)
The performance scale for the Multiplier 1s as follows
Award enhanced by
Below threshold on
On-target 33%
Maximum stretch 100%
With intermediate levels of performance attracting pro-rata awards The outturn for 2006-07 was 19 0% resulting in a factor of 84%
Benefits
Benefits include the provision of company cars health insurance relocation costs or the cash equivalent of any benefits not taken
Penstons
The Group has a trability to pay pensions m respect of Directors services and for some Executive Directors makes contributions to pension
schemes for this purpose The Company has set up a retirement pension arrangement which will provide benefits to Directors whose
contributions to the Company scheme are restricted by the Inland Revenue earnings cap Foltowing the recent changes in pensions
legislation the Company will continue to apply the previous earnings cap indexed by inflation each year as a constraint on the amount of
salary which Is pensionable through the Company scheme
The Company has announced a review of its pension provisions for all employees The results of this review once it is concluded will affect
Executive Directors
Fixed and performance-related elements of Executive Directors’ remuneration (excluding pensions)
For 2006-07, 26% of Directors potential annual earnings related to fixed elements whilst 74% related to annualised performance
elements for the Group Chief Executive 24% was fixed and 76% was variable The element of remuneration at risk ta performance is that
available through the Long-Term Incentive Plan and the performance-related personal annual bonus
Service contracts
The Committee s policy 1s 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 is not rewarded
The rolling service contracts and letters of appomtment of the Directors include the following terms as at 25 March 2007
Expiry date of current service Unexpired term
Date of contract contract {months} :
Non Executive Chairman
Allan Leighton 25 March 2005 25 March 2008 22
Executive Directors
Adam Crozier 4 February 2003 12
fan Duncan 1 September 2006 12
lan Griffiths 6 February 2006 12
Atan Cook 4 March 2006 12
Tony McCarthy 6 January 2003 12
David Burden 1 July 2004 311 July 2007 4
The Non Executive Directors do not have service contracts The dates of the current Non Executive Director appointments are as follows
Non Executive Directors
Str Michael Hodgkinson 1 January 2003 31 August 2007 5
Dawid Fish 1 January 2003 30 September 2008 18
Richard Handover 1 January 2003 30 September 2008 18
John Neill 1 January 2003 31 August 2007 5
Baroness Margaret Prosser 1 November 2004 31 October 2007 7
Helen Weir 1 January 2006 31 December 2008 21
Bob Wigley 1 Apnil 2003 34 October 2006 -
4
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Royal Mail Holdings plc
Orrectors’ Remuneration Report (continued)
© All Executive Directors have a contracted 12-month notice penod from the Company the Director must give svc-months notice The standard term for compensation
for loss of office s a manrsum payment of 12-months basic salary which may be subject to mutigation avid Burden retired from the Company with effect from 31.
July 2007 The Company 1s commited for the full three-year term for Non Execute Directors including the Charman
Dunng the year the Secretary of State agreed contract extensions of up to 27 months
© During the year the Secretary of State agreed contract extensions of up to 4 months John Neill and Sir Michaet Hodgkinson s contracts came to an end on 31
August 2007
* Bob Wigley resigned on 31 October 2006 During the year the Secretary of State agreed a contract extension of up to 6 months
Stephen Carter was appomted as a Non-executive Director on 1 September 2007
Non Executive Directors
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 m determining them Fees may comprise a basic fee for Board membership and, as
appropriate additional fees for the membership or chairmanship of the Audit and Risk, Remuneration and Nomination Committees
Details of the fees are given below
Performance-related, personal annual honuses outturn for 2006-07
The details of the scheme are outlined on page 39 For 2006-07 the Remuneration Committee concluded that the financial performance
was between the on-target and the maximum and that all of the quality of service targets set for the Group had been met or exceeded,
triggenng payment of 741% of maximum bonus potential to Adam Crozier David Burden, lan Duncan and Tony McCarthy, 80 5% of
maximum bonus potential to Alan Cook and 56 4% of maximum borus potential to tan Griffiths As the Company had exceeded its financial
target and had overall exceeded its quality targets it was decided to award the Non-Executive Chairman a bonus of £180 000
Company Awards and Bonus Awards Accruing in respect of the 2005-06 to 2007-08 Long Term Incentive Plan
The Remuneration Committee policy 1s that a high proportion of total remuneration 1s at risk to performance
Awards made under this plan are not payable until 2008 except in the case of leavers in good standing
Company
Lip
Bonus Awards Bonus award
Awards Transferred Company Awards Company excluding
held at to Awards in m respect Awards = Application Total individual
27. March — remuneration respect of af im respect of of Awards Bonus
2006 tm 2006-07 2005-06 2006-07 2006-07 Multiplier Het Awards
£000 £000 £000 £000 £000 £000 000 £000
Executive
Adam Crozier 248 - 234 257 158 751 1645 1140
David Burden” 89 - 103 92 70 298 652 471
Alan Cook - : 8 93 65 139305 212
Jan Duncan - - 7 55 43 82 180 125
lan Griffiths 18 (18) : - - - - -
Tony McCarthy 108 = 126 142 86 362 794 574
“ David Burden waived his LTIP payment before the value was determined
42
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Royal Mail Holdings plc
Directors’ Remuneration Report (continued)
Non Executive Directors
The fees of the Chairman and the Non Executive Directors are agreed with the Secretary of State and are currently £20000 per annum
and £30 000 per annum respectively
‘Sir Michael Hodgkinson receives additional fees of £37 500 (2006 £37,500) for his position as Chairman of Post Office Limited and
£10000 for his role as Sentor Independent Director The annual fee for committee membership 1s £5 000 £10 000 for chatrmanship and
£12,500 in the case of the chairman of the Audit and Risk Committee
Executive Directors’ outside appointments
The Executive Directors may retain fees from their Directorships The annual fees due to Executive Directors in respect of their Non
Executive Directorships are shown in the table below
2007 2006
Directorship £ £
Adam Crozier Debenhams ple 40.000 -
lan Griffiths Ultra Electronics Holdings ple 34.000 33.000
Pensions
The Group normally offers its most sentor people membership af the Royal Mail Sennor Executive Pension Plan (RMSEPP) Details of the
RMSEPP are set out in note 25 to the accounts The Plan 1s a funded Inland Revenue-registered final salary occupational pension
scheme The scheme provides for a two-thirds final pensionable salary at a normal retirement age of 60 subject to the necessary
pensionable service and scheme specific earnings cap (previously the Inland Revenue earnings cap) Pensions im payment are increased
annually in line with Retail Prices Index (RPI) subject in some cases to a cap 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 RMSEPP 1s restricted by the earnings cap pension provision 1s made by a combination of
the Company scheme and a cash pension supplement or its equivalent From Apni 2006 there are no further contributions mto the
Funded Unapproved Retirement Benefits Scheme (FURBS) lan Gniffiths lan Duncan and Adam Crozeer (since August 2006) receive a cash
supplement of 40% of base pay above the earnings cap Alan Cook 1s not a member of the Company scheme and receives a cash
supplement of 40% of base pay less the equivalent member pension contributions payable under the Company scheme The Company has
made provision for retirement pension arrangements at a rate of 40% of base pay above the earnings cap for David Burden and for Adam
Crozier until July 2006 A reserve has been established for the additional pension for Tony McCarthy to provide the total retirement
Pension including the pension from his previous employer's penston scheme, of two-thirds of base pay at normal retirement age Dunng
the year the provision of £645 911 for Adam Crozier was released to a private Fund (provision held at 2006 £574 439) The total
provision for Tony McCarthy and David Burden at the year end 1s £1169 933 (2006 £847,008) The Company decided at its discretion to
make a pension contnbution payment for David Burden of £652,277 This contribution is of equal value to the Long Term Incentive Plan
and bonus payments waived by David Burden and does not therefore represent any additional cost to the company than had such
incentive payments been made
Orsclosure of Directors pension transfer values ts required under two separate requirements
* Stock Exchange Listing Rules the requirements are the same as disclosed in last year s accounts and are designed to indicate
‘the increase in the value of Directors accrued benefits during the period The transfer value 1s calculated on the basis of
actuanal advice in accordance with Actuarial Guidance Note GN11 and excludes Directors’ contributions and
* Directors Remuneration Report Regulations 2002 this is designed to assess the change in transfer values during the year,
taking into account movement in investment market conditions Falls in market values may generate a negative movement in
the transfer values
Directors’ Remuneration Report (continued)
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Royal Mail Holdings plc
The pension entitlements (under Stock Exchange Listing Rules) of the Directors at the year end were
Increase in ‘Transfer value
accrued of
Increase in benefits increase
accrued during the before
Accumulated benefits during period (net inflation less
Age at accrued benefit the of Directors’
Year at 25 March 2007 period inflation) contributions
end £000 £000. £000 £000
Executive Directors
Adam Crozier 43 65 5 3 32
David Burden 60 16 4 4 67
lan Duncan 46 2 2 2 24
lan Griffiths: 56 4 4 4 59
Tony McCarthy 50 59 8 6 92
® Appointed on 1 September 2006
Transfer
value
at 26 March
2006
or at date of Movement m
appointment Plus transfers- Transfervalue the period
Age at to m at25 March less Directors’
Year Board if later received Sub total 2007 contributions.
end £000 £000 £000 £000 £000
Executive
Directors
Adam Crozier 43 581 - 581 79% 208
David Burden 60 247 . 247 335 82
lan Duncan 46 . « = 28 24 H
lan Griffiths 56 8 . 8 74 59 !
Tony McCarthy 50 720 = 720 1,068 334
‘The transfer values disclosed represent a potentual liability of the pension plan rather than any remuneration due to the mdividual and
cannot be meaningfully aggregated with annual remuneration, as it 1s not money the individual is entitled to receive
By Order of the Board
GRO
Company Secretary
26 October 2007
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Royal Mail Holdings plc
Statement of Directors’ responsibilities in relation to the Group financial statements
The Directors are responsible for preparing the Annuat Report and the Group financial statements in accordance with applicable United
Kingdom law and those International Fmancial Reporting Standards {IFRSs) as adopted by the European Union
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
tn prepanng those Group financial statements the Directors are required to
* select suttable 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 im 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 matenal departures disclased 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 Compamtes Act 2985 and Article 4
of the IAS Regulation They are also responsibte for safeguarding the assets of the Group and hence for taking reasonable steps for the
prevention and detection of fraud and other irregularities
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Companys
website Legislation m the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation
m other jurrsdictions
45
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Royal Mail Holdings plc
Independent Auditors’ Report to the members of Royal Mail Holdings pic
We have audited the Group financial statements of Royal Mail Holdings plc for the year ended 25 March 2007 which compnse the Group
income statement, Group statement of recognised income and expense, Group balance sheet, Group cash flow statement and the related
notes 1 to 30 These Group financial statements have been prepared under the accounting policies set out therein
We have reported separately on the parent company financial statements af Royal Mail Haldings ple for the year ended 25 March 2007
and on the information in the Oirectors Remuneration Report that 1s descnbed as having been audited
This report is made solely to the Company's members as a body in accordance with Section 235 of the Companies Act 1985 Our audit
work has been undertaken so that we might state to the Company's members those matters we are required to state 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 sn 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 responsibitity 1s to audit the Group financial statements in accordance with relevant legal and regulatory requirements and
International Standards on Auditing (UK and Iretand}
We report to you our opinion as to whether the Group financial statements give a true and fair view and whether the Group financial
staternents have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regutation We also report
to you whether m our opinion the information given in the Directors Report 1s consistent with the Group financial statements The
mformation given in the Directors’ Repart mcludes that specific information presented in the Group Operating and Financial Review that 1s
cross referred from the Review of the business and future developments section of the Directors Report
In addition we report to you if, m our opinion 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 1s not disclosed
We review whether the Corporate Governance statement reflects the Companys compliance with the nine provisions of the 2003
Combined Cade specified for our review by the Listing Rules of the Financial Services Authority, 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 risk and control procedures
We read other information contained in the Annual Report and consider whether it 1s consistent with the audited Group 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 Group financiat statements Our responsibilities do not extend
to any other information
Basis of audit opinion
We conducted our audit in accordance wath International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board
An audit includes examination on a test basis. of evidence relevant to the amounts and disclosures im the Group financial statements It
also includes an assessment of the significant estimates and judgments made by the directors in the preparation of the Group financial
statements, and of whether the accounting policies are appropriate to the Group's circumstances consistently applied and adequately
disclosed
We planned and performed our audit so as to obtain 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 matenal 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 staternents
Opinion
In our opinion
+ 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 Groups affairs as at 25 March 2007 and of its profit for the year then ended
* the Group financial statements have been properly prepared in accordance with the Compames Act 1985 and Article 4
of the IAS Regulation, and
* The mformation given in the Directors Report 1s consistent with the Group finanaaal statements
Registered auditor.
London
26 October 2007
46
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Royal Mail Holdings plc
Group income statement for the years ended 25 March 2007 and 26 March 2006
2007 2006
Notes £m £m
Continuing operations '
Turnover 9,104 9,056 ‘
Social Network Payment 75 -
Revenue 9,479 9056
People costs (6,145) {5 968)
Royal Maii Group people
Wages and salaries (4,511) (4530)
Pensions Sa} (722) (529)
Social security {320) (326)
Subpostmasters. (534) {507)
Temporary resource (58) (76)
Distribution and conveyance operating costs 5(b) (1,237) (1.218)
Other operating costs 5{c) (1,603) (1547)
Share of post tax profit from jomt ventures and associates 14 39 32
Operating profit before exceptional items 233 355
Operating exceptional tems 7 (243) (210)
Operating (loss)/profit (10) 445
Profit on disposal of businesses - 6
Profit on disposal of property group mh -
Profit on disposal of property plant and equipment bh 61
Profit before financing and taxation 108 212
Finance costs 8 (56) (52)
Finance income 8 62 51
Net pensions interest 25 199 101
Profit before taxation 313 312
Taxation (chargeV/credht 9 (27) 83
Profit for the financial year from continuing operations 286 395
Profit attributable to
Equity holder of the parent company 286 395
Minonty interest
47
Royal Mail Holdings plc
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Group statement of recognised income and expense for the years ended 25 March 2007 and 26 March 2006
2007 2006
Notes. £m £m
Translation differences on foreign currency net vestments 27 (2) ~
Actuarial gains/(losses) on defined benefit schemes 25/27 340 (1659)
(Losses/gams on cash flow hedges deferred into equity 26/27 () 3
Losses/(gains) on cash flow hedges released from equity to income 24/27 4 (20)
Gains on cash flow hedges released from equity to the carrying amount of non-financial
assets. 26/27 - (a)
Taxation on items taken directly to equity 927 27 {26)
Net income/(expense) recognised directly in equity 360 (1.693)
Profit for the financial year from continuing operations 27 286 395
Total recognised mcome/({expense) for the penod 646 (1,298)
Attributable to:
Equity holder of the parent company 646 (1.298)
Minority interest 27 = -
Effects of changes m accounting policy
Loss on first time adaption of IAS 32 and IAS 39 27 = GB)
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Royal Mail Holdings plc
Group balance sheet at 25 March 2007 and 26 March 2006
2007 2006
Notes £m £m
Non-current assets
Property plant and equipment 10 2,619 1594
Goodwill Bey 143 132
Intangible assets 12 64 42
Investments in joint ventures and associates 4 114 124
Financial assets - pension escrow investments 24 1,000 -
~ other investments ray - 5
Other receivables 4 6
Deferred tax assets 9 403 393
3,347 2296
Non-current assets held for sale 15 7 4
Current assets
Inventories 16 26 27
Trade and other receivables 7 1,032 1093
Financial assets - investments 24 7 694
~ derivatives 24 - 3
Cash and cash equvalents 18/24 1,196 1161
2,270 2978
Total assets 5,624 5285
Current abilities
Trade and other payables 24 (1,924) (2,013)
Financial liabilities - interest bearing loans and borrowings 19/24 (301) (361)
- obligations under finance lease and hire purchase contracts 19/24 - (1)
- derivatives 19/24 vd) (3)
Income tax payable (29) (7)
Provisions 20 (69) (58)
(2,330) (2.443)
Non-current liabilities
Financial liabilities - interest bearing loans and borrowings. 19/24 (502) (505)
+ obligations under finance lease and hire purchase contracts 19/24 (a) @)
Provisions 20 (42) (53)
Retrement benefit obligation - pension deficit 25 (4,985) (5.588)
Other payables 22 (25) (31)
Deferred tax trabilities 9 (3) (3)
(5,558) (6181)
Total abilities (7,888) (8624)
Net ttabilitres (2,264) 3339)
Equity
Share capital 26 - -
Share premium 27 430 -
Retained earnings a7 (2,775) (4270)
Reserves 27 78 927
Equity attributable to equity holder of parent company (2,267) (3343)
Minonty interest 27 3 4
Total equity (2,264) (3339)
The accounts on pages 47 to 92 were approved by the Board of Directors on 26 October 2007 and signed on its behalf by
Ai
lam Crozier
49
fan Duncan
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Royal Mail Holdings plc
Group cash flow statement for the years ended 25 March 2007 and 26 March 2006
2007 2006
Notes £m fm
Cash flow from operating activities
‘Operating profit before exceptional items 233 355
Add back
Depreciation and amortisation 5 198 174
Share of post tax profit from jomt ventures and associates 44 (39) (32)
392 497
Working capital and other non-cash movements 7 17
Decrease in inventones 16 a -
Decrease/(increase} in receivables 42 {130)
(Decrease)/increase in payables (49) 22
Decrease in chent debtors 17 17 134
IncreaseAdecrease} in client creditors 21 55 {75)
Net (decreaseV/increase in retirement benefit obligation (64) 72
Net increase/(decrease) in derivatives 2 (11)
Increase in non-exceptional provisions 4 8
Other movements (1) {3)
Cash payments in respect of operating exceptional items (see note (a) below) (282) (524)
‘Share in Success (90) (218)
Other (292) (306)
Cash inflow/(outflow) from operations 117 (10)
Income tax recovered 13 4
Net cash inflow/(outflow) from operating activities 130 (6)
Cash flows from investing activities
Dividends recerved from joint ventures and associates 14 39 30
Finance income recewed 67 53
Proceeds from sale of property group 1 7
Proceeds from sale of property plant and equipment 65 3
Purchase of property, plant and equipment (244) (210)
Proceeds from sale of businesses - 6
Acquisition of businesses net of cash acquired (a7) ()
Purchase of intangible assets (65) (33)
Payment of deferred consideratron in respect of prior years acquisitions (3) (22)
Net movement in financial assets investments (non-current) 24 (995) 2
Net movement in financial assets investments (current) 24 677 (3)
Net cash outftaw from investing activities (405) (205)
Net cash outflow before financing activities (275) (414)
Cash flows from financing activities
Proceeds from issue of ordinary shares 27 430 -
Finance costs paid (55) (52)
Payment of capital element of obligations under finance lease contracts (a) (1)
Net repayment of borrowings (63) (15)
Dividend paid to minonty interest 27 (a) :
Net cash inflow/(outflow) from financing activities 310 (68)
Net increase/(decrease) in cash and cash equivalents 35 (179)
Cash and cash equivalents at the beginning of the period 1,161 1340
Cash and cash equivalents at the end of the period 18/24 1,196 1161
50
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Royal Mait Holdings ptc
{a) Cash flaws relating to operating exceptional items charged to the income statement in current and prior years
The net cash outftows relating to the above were as follows
2007 2006
Net cash outftow relating to £m £m
Current year operating exceptional items. 114 38
Pnor years operating exceptional items 168 486
Total 282 524
The net cash outflow of £282m (2006 £524m} comprises £118m (2006 £96m)} retating to cash utilised to settle exceptional provisions
£27m (2006 £1m) relating to current year pension redundancy liabilities £47m (2006 £208m) relating to prior year pension redundancy
abilities £nit (2006 £1m) in respect of other costs which were recorded within creditors and £90m (2006 £218m) Share in Success
payment in respect of the pnor year
51
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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 finanaal statements for the year ended 25 March 2007 were authonsed for issue by the Board on 26 October 2007 and the
balance sheet was signed on the Boards 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 year ended 25 March 2007 The principal accounting
policies adopted by the Group are set out in note 2
2 Accounting policies
Basis of preparation and accounting
The Group compnses Royal Mait Holdings ptc (the Company) - which is wholly owned by HM Government - and its subsidiaries The Company
1s incorporated in the United Kingdom under the Companies Act 1985 (the Act) and the accounts are produced im accordance with the Act and
applicable International Financial Reporting Standards {IFRSs)
On 20 March 2007 Royal Mail Group ple a wholly owned subsidiary of the Company had its name changed to Royal Mail Group Ltd following
an agreement between the Company and its Shareholder on a new funding package (see below) All previous references to Royal Mail Group
plc {including comparative information) have been changed to reflect the name change to Royal Mail Group Ltd
The Group finanaal 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 risk of being fined by its mdustry 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 sts licence The
amount of such fines and compensation witl be determined by the Regulator after further representations from Royal Mail Group Ltd and no
further information is being disclosed on the grounds that it can be expected to prejudice the outcome of that process
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
liabilities within the next financial year relate to the measurement of the defined benefit pension obligations and deferred tax Measurement of
these 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
major assumptions are disclosed in note 25 Assessment of the deferred tax asset requires an estimation of future profitability Such
estimation Is inherently uncertain in a market subject to various competitive pressures Should estimates of future profitability change in future
years the arnount of deferred tax recognised will also change accordingly
Funding
Royal Mail Group Ltd
Royal Mail Group Ltd Is profitable even after bearing tosses relating to stamped mail and carrying out its Universal Service Obligations but it
now faces considerable cash requirements with respect to its proposed mvestment in plant and equipment and funding its pension deficit at a
‘tume when the market has been opened up to full competition
On 23 March 2007 the Company completed an agreement with its Shareholder for a new funding package which will enable the
transformation of Royal Mail Group Ltd to take place and has enabled the establishment of investments in escrow of €1bn provided as security
to the Royal Mail Pension Plan in support of the 17 year deficit recovery period from March 2006
‘The European Commisston has launched an 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 recent funding
package 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 25 March 2007 and as explained i the Operating and Financial Review has operated at a loss
during 2006-07 and prior years, primarily because of supporting the loss-making rural network.
To become wable in the longer term new business areas continue to be developed to replace the lost contribution fram traditional income
sources and significant cost reduction programmes continue to be implemented
During the year Post Office Limited has updated its five-year strategic plan and its future financing ts underpmned by
* rural network funding of £75m recewed as a Government grant in the second half of 2006-07 in addition to the £75m received during
2006-07 fram Royal Mail Group Ltd (its immediate parent company) and £150m received on 2 April 2007 for 2007-08 State ard
approval for these payments was recewved in February 2006
= short-term funding of £234m received in the second half of 2006-07 to meet the ongoing cash requirements of Post Office Limited
State aid approval for this funding was recewed in May 2003, and
* a funding agreement with Government announced on 17 May 2007 which provides, amongst other matters, for a payment from
Government by 31 July 2007 of £313m to compensate Post Office Limited for the other net costs of providing certain specified “services
of general economuc interest” State aid approval for that payment of £313m was received in March 2007
52
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2 Accounting policies (contmued)
The funding agreement addresses the following areas all of which are subject to state aid approval
* the extension to March 2016 of the esting working caputal facility of £1 15bn
* providing network substdy 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 foss-making parts of the network and
* the prowsion of funding to compensate Post Office Limited for the other net costs of providing certam specified “services of general
economic interest”
After careful consideration and having regard among other factors, to the Government funding package and the requirement to obtain state
aid approval for certain elements of this package the Directors believe that Post Office Limited will be able to meet tts liabilities as they fall due
over the foreseeable future
Conclusion
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 s 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 basis of charges reached through a negotation with the respective businesses
Subsidianes are consolidated from the date on which control is obtained by the Group and cease to be consolidated from the date on which
control 1s no longer held by the Group Where the Group ceases to hold contrat of a subsidiary the consolidated financial statements include
the results for the part of the reporting year during which the Group held contrat
Minority 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 minonty interests balance is presented separately within equity mn the consolidated balance sheet separately from parent
shareholders equity
Investments in jomt ventures and associates
The Groups investments in its yornt ventures and associates are accounted for under the equity method of accounting Under the equity
method the investment 1s 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 soint ventures
fassociates
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 abilities and contingent liabiltues acquired 1s included in the carrying amount and not amortised To
the extent that the net fair value of the associate s identifiable assets liabilities and contingent liabilities ts greater than the cost of the
investment a gain Is recognised and added to the Groups share of the associate s profit or loss in the period in which the investment 1s
acquired
Revenue
Revenue reported in the income statement comprises of Turnover and the Social Network Payment Turnover principally relates to the
rendering of services
Royal Mail
Account revenue 1s dered from specific contracts and recognised when the mail delivery 1s substantially complete Prepard revenue mainly
relating to stamp and meter come is recognised when the sale is made adjusted to reflect a value of stamp and meter credits held but not
used by the customer
Parcelforce Worldwide
Account revenue 1s derived fram specific contracts and recognised when the delivery of an item 1s substantially complete :
Post Office Limted
Revenue is recognised when retail and financial services are provided
General Logistics Systems
Revenue ts dered from specific contracts and ts 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 Trade and Industry considers appropriate and which would otherwise not be provded
Distributron 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 matl carers and Parcelforce Worldwide delivery operators These costs are disclosed separately
on the face of the income statement
Operating profit before exceptional items
Operating profit is the profit anssing from the normal, recurring operations of the business This incorporates revenue people costs distribution
and conveyance costs, other operating costs and the Groups post tax share of profits from jont ventures and associates Operating exceptionat
items are separately identified
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2. Accounting policies (continued)
Operating exceptional items
Operating exceptional items are material items of income and expenditure arising from the operations of the business which, due to the nature
of the events giving nse to them, require separate presentation on the face of the income statement to allow a better understanding of
financial performance in the year in companion to prior years
Operating profit
Operating profit 1s the profit arising from the normal recurring operations of the business and after charging operating exceptional iterns
defined above It excludes the non operating exceptional items for profit or loss an 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 matenal, 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 cost of the business combination over the Group s interest im the net fair value of the identifiable assets liabilities and contingent
hhabitities at the date of acquisition is recognised in the balance sheet as goodwill and is not amortised
After initial recognition goodwill is stated at cost less any accumulated impairment tosses Goodwill arising 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 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
For the purpose of such impairment reviews goodwill ts allocated to the relevant cash generating units
Goodwill arising on the acquisition of equity accounted entities 1s included i the cost of those entities and therefore not reported in the balance
sheet as goodwill
Intangible assets
Intangible assets acquired as part of a business combination are capitalised separately from goodwill if the fair value can be measured retiably
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 indefinite 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 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
exceeds its recoverable amount which is the higher of an assets net realisable value and its vatue in use
Amortisation of intangible assets with finite lives is charged annually to the income statement The useful lives of such intangible assets are in
the range of 1-6 years:
Research and development
Expenditure on research 1s written off in the year it is incurred Development costs are capitalised where they meet the critena required under
IFRSs If these cnteria 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. including attributable costs in bringing the asset into working condition for its intended 1
use Depreciation of property, plant and equipment is provided on a straight-line basis by reference to net book value and to the remaming I
useful economic lives of assets and their estimated residual values The useful lives and residual values are reviewed annually and adjustments.
where applicable are made on a prospective hasis The lives assigned to major categones of property plant and equipment are I
Range of asset lives
Land and buildings
Freehold land Not depreciated
Freehold buildings Up to 50 years
Leasehold buildings The shorter of the penod of the lease 50 years or the estimated remaiing useful fe
Plant and machinery 3-15 years
Motor vehicles and trailers 1-12 years
Futures and equipment 2-15 years
An individual property that the Group has identified as surplus is reclassified as 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 is 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 activites 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 2
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 appropriate an
impairment loss ts recognised in the income statement for the amount by which the carrying value of the asset (or cash generating unit)
exceeds its recoverable ammount, which ts the higher of an asset's net realisable value and its value in use
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2 Accounting policies (continued)
Leases
Finance leases where substantially all the sks and rewards incidental to ownership of the leased item have passed to the Group are
capitalised at the inception of the lease with a corresponding liability recognised for the fair value of the leased item or if ower at the present
value of the minumum 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 remaiing balance of the tiability 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 aver 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
Inventories are carned at the lower of cost and net realisable value after adjusting for obsolete or slow-moving stock Cost mcludes all costs in
bringing each item to its present location and condition and comprises weighted average cost for supplies and matenals and purchase cost for
merchandise
Trade and other receivables
Trade receivables are recognised and carried at original mvoice amount {ess 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
Cash and cash equivatents
Cash and cash equivalents in the balance sheet compnse cash at bank and in hand and short-term deposits with an orginal maturity 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 categonsed 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
Financial assets - mvestments
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, loans and recervables held to maturity investments, or as available for sale financial assets, as appropriate The
Group determines the classification of its financial assets at initial recognition and re-evaluates this designation at each financial year end
When financial assets are recognised initially, they are measured at fair value being the transaction price plus 1n the case of financial assets
not at fair value through the income statement any directly attributable transactional costs
The subsequent measurement of financial assets 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 mn the short term Denwvaties 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 in the
income statement
Held-to-maturity investments
Non-derwative 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 investments are carried 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 receivables
Non-derwative financial assets with fixed or determinable 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 imcome statement or avatlable for sale Such assets are carried at amortised
cost using the effective interest rate method if the time value of money is significant Gains and losses are recognised in the income statement
when the foans and receivables are derecognised or impaired as well as through the amortisation process
Avatable for sale financial assets
‘Available for sale financial assets are non-derivative financial assets that are designated as such or are not classified in any of the three
preceding categories After mitial recognition available for sale financial assets are measured at fair value with gains or losses being recognised
aS a separate component of equity until the investment is derecognised or until the mvestment is deemed to be impaired at which time the
cumulative gain or loss previously reported in equity 1s included in the mcome statement.
Interest-bearing loans and borrowings
All loans and borrowings are mitially recognised at the farr value of the consideration recewed less directly attributable issue costs After initial
Tecognition interest-bearing loans and borrowings are subsequently measured at amortised cost using the effective interest method Gains
and losses are recognised in the mcome statement when the liabulities are derecognised or impaired as well as through the amortisation
process
Borrowing costs are recognised as an expense when incurred
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2 Accounting policies {contmued)
Derivative financial instruments
The Group uses denvative 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 Groups treasury management policies Such derivative financial instruments are initially stated at fair value
For the purpose of hedge accounting hedges are classified as cash flow hedges where they hedge exposure to variability in cash flows that 1s
either attributable to a particular risk associated with a recognised asset or liability or a highly probable forecasted transaction
In relation to cash flow hedges to hedge the foreign exchange nsk of firm commitments that meet the conditions for hedge accounting, the
portion of the gain or loss on the hedging instrument that is determined to relate to an effective hedge ts recognised directly in equity and the
ineffective portion is recognised in the income statement
‘When the hedged firm commitment results in the recognition of a non financial asset or non financial lability then at the time the asset or
(iability 1s recognised, the associated gains or losses that had previously been recognised in equity are included 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 profitNoss 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 mcome
statement in the period
Hedge accounting ts discontinued when the hedging instrument expires or is sold terminated or exercised or no longer qualifies for hedge
accounting At that point in time any cumiulative gain or loss on the hedging instrument recognised in 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 im equity 1s transferred to
the mcome statement for the year
Fair value measurement of financial 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 1s
no active market fair value 1s determined using valuation techniques These include using recent arms length market transactions, reference to
the current market value of another instrument which is 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 lability 1s derecognised when the contract that gives nse to it is settled sold cancelled or expires
Income tax and deferred tax
The charge for current taxation is based on the results for the year as adjusted for items that are non-assessable or disallowed It is calculated
using rates that have been enacted or substantively enacted at the batance sheet date
Deferred tax 1s provided using the lability method on all temporary differences at the balance sheet date, between the tax bases of assets and
lrabilites and their carrying amounts for financiat reporting purposes
Deferred income tax liabilities are recognised for all taxable temporary differences except
+ nit recognition of goodwill
. the mitial recognition of an asset or liability m a transaction that 1s 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 ts probable that the temporary difference will not reverse in the
foreseeable future
Other than stated below, 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 ts 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
. deductible temporary differences arising from the initial recognition of an asset or lability in a transaction that 1s 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 subsidianes associates and interests in joint ventures except to the
extent that it 1s probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against
which the temporary difference wall be utibsed
The carrying amount of deferred tax assets 1s remewed 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 1s realised or the
liability 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
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2 Accounting policies (continued)
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
itis recognised in the income statement
Provisions
Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event its 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 matenal provisions are determined by discounting the expected future cash flows at an appropriate pre-tax rate
Pensions and other post-retirement benefits
Membership of occupational pension schemes is open to most permanent UK employees of the Group All members of defined benefit schemes
are contracted out of the earnings-related part of the State pension scheme Overseas subsidiaries make separate arrangements for the
Provision of 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 actuanal 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 liability is presented separately on the face of the balance sheet Full actuarial
valuations are carried out at intervals not normally exceeding three years as determmed by the Trustees and with appropriate updates and
accounting adjustments at each balance sheet date form the basis of the deficit disclosed
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
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 labilities 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 in 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 nat 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 Groups 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 loss
Non-monetary items that are measured in terms of histoncal cost in a foreign currency are translated using the exchange rates as at the dates
of the imttal 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 tiabilitres and financial guarantee contracts
Financial guarantee contracts are inttially 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 babilities are not disclosed if the possibility of losses occurring is considered to be remote
57
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2 Accounting policies (continued)
Segment information
The Groups primary reporting format is by business segments and its secondary format 1s 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 {etters to all addresses m 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
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 waa its subsidianes and partners offers its services in 35 European states
Other businesses includes PostCap Guernsey Limited a wholly owned subsidiary Romec Limited and NDC 2000 Limited both part owned
subsidiaries investments in the following associates - Quadrant Catenng Limited Camelot Group plc and Camelot Internationat 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
Is not a revenue or profit centre but mcurs certain costs on behalf of the business segments which are passed on and manages certain assets
and liabilities of the Group
Accounting standards and mterpretations 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 or after the date of these financial
statements Of these the Group has not applied the following
International Accounting Standards (IAS/IFRSs) Effective date
IFRS 7 Financial instruments Disclosures 1 January 2007
IFRS 8 Operating Segments 1 January 2009
asd Amendment - Presentation of Financial Statements Capital Disciosures 2 January 2007
International Financial Reporting Interpretations Committee (IFRIC)
IFRIC 8 Scope of IFRS 2 1 May 2006
IFRIC 9 Reassessment of Embedded Derivatives 1 June 2006
IFRIC 10 Interim Financial Reporting and Impairments: 1 November 2006
IFRIC 11 IFRS 2 Group and Treasury Share Transactions 1 March 2007
IFRIC 42 Service Concession Arrangements 1 January 2008
The Directors do not anticipate that the adoption of these standards and interpretations will have a material impact on the Groups primary
financial statements Certain of the above standards will require amendment to disclosures in the period of mmitial application
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3 Segment information
Analysts of segment revenue and segment result by class of business and geographic area
European
UK operations operations
Year to 25 March 2007 Total
revenue
Post General from
Parcelforce Office Other Logistics continuing
Royal Mail Worldwide Limited businesses Total Systems operations
£m £m £m fm £m £m £m
Extemal revenue 6,857 337 868 358,097 1,082 9479
Revenue between segments 106 5 348 ~__ 459 : 459
Segment revenue 6,963 342 1,216 35__8,556 1,082 9,638
Operating profit before exceptional
items 194 10 (99) 1300 «a8 115 233
Less share of post tax profits fram joint
ventures and associates - = (27) (12) (39) * (39)
Operating exceptional items (154) (4) (88) - (243) - (263)
Profit on disposal of property group - - - T% 1% - %
Profit on disposal of property plant and
equipment : - 45 29 4 : bb
Segment result 40 9 (199) 104 (46) 115 69
Share of post tax profits from joint
ventures and associates : - 27 12 39 : 39
Segment result after share of post tax
profits from joint ventures and associates 40 9 (172) 116 (7) 215 108
Not included in segment result after share of post tax profits from joint ventures and associates Is net pensions interest of £199m (2006 £101m)
finance income of £62m (2006 £51m) finance costs of £56m (2006 £52m) and a taxation charge of £27m (2006 a credit of £83m) which when
added reconciles to the ‘profit for the financial year from continuing operations’ in the income statement of £286m (2006 £395m)
European
UK operations operations
Year to 26 March 2006 Total
revenue
Post General from
Parcelforce Office Other Logistics continuing:
Royal Mait Worldwide Limited busmesses Total Systems operations
£m £m £m £m £m. £m £m
Extemal revenue 6859 314 838 8 8019 1037 9056
Revenue between segments 107 5 336 - 448 = 448
Segment revenue 6,966 319 11474 8 8467 1037 9504
Operating profit before exceptional items 344 5 a 7 (55 100 355
Less share of post tax profits from joint
ventures and associates (a) - (19) (a2) (32) bs (32)
Operating exceptional items (452) (2) (56) - (210) - (210)
Profit on disposal of business 6 - a - 6 - 6
Profit on disposal of property plant and
equipment, = > 8 53 61 as 61
Segment result 197 3 (178) 58 80 100 180
Share of post tax profits from jomt
ventures and associates 1 = 19 12 32, = 32
‘Segment result after share of post tax
profits from jomt ventures and associates 198 3 (159) 70 212 100 212
Profits on disposal of properties held by our Group Property unit previously allocated between Royal Matt (£53m) and Parcelforce Wortdwide (Enil)
are now disclosed with the Other businesses segment
it
59
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3 Segment information (continued)
Analysis of net assets/{liabilities) by class of business and geographic area
European
UK operations operations
Year to 25 March 2007 Total
Post General unallocated —Total
Royal Parcelforce Office Other Logistics assets/ assets/
Mail Worldwide Limited businesses Corporate“ Total +=» Systems (abilities) (liabilities)
£m £m £m £m £m £m £m £m £m
Assets 1,443 82 1,026 661 61 3,273 520 1831 5,624
Liabilities (5,222) (337) (913) (179) (194) (6,845) (198) (845) __ (7,888)
Year to 26 March 2006
£m £m £m £m £m £m —m. £m £m
Assets 1452 75-1078 713 49 3367 455 1463 5285
Labilives (5746) (366)___(929) (215) (313) (7569) (73) (882) (8 624)
*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 £7m (2006 £11m) relating to Other businesses
Unallocated assets and ttabilities comprise af the following items
Year to 25 March 2007
Year to 26 March 2006
Unallocated Unallocated Unallocated Unallocated
assets labilties assets liabilities
£m £m £m Em
Cash and cash equivalents - interest bearing sty - 361
Financial assets - mvestments 1,017 - 699 =
Loans and borrowings - (803) - (866)
Obligations under finance leases and hire purchase contracts - (a) - (2)
Derivative financial (liabilties/assets - 7) 3 @)
Interest (payables)/recewables - (2) 7 @)
Income tax payable - (29) - 7)
Deferred tax assets/(liabulities) 403 (3) 393 @)
Total 1,831, (845) 1463 (882)
The above analysis has been restated for the inclusion of our Group Property unit within Other businesses and the separate identification of
Corporate
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Royal Mail Holdings plc
3 Segment information (continued)
Other segment information
European
UK operations operations
Year to 25 March 2007
Post General
Parcelforce Office Other Logistics
Royal Mail = Worldwide Limited businesses Corporate Total ‘Systems: Total
Em £m im £m fm Em £m £m
Additions
Property, plant and
equipment 154 4 8 34 12 212 52 264
Intangible assets 21 3 35, = 6 65 = 65
Non cash expenses
Depreciation and
amortisation 142 - 1 28 p 172 26 198
Impairment 14 ~ 50 = hal 64 = 64
Year to 26 March 2006 .
£m £m £m £m fm =m £m £m
Additions
Property plant and
equipment 143 2 6 26 - 177 42 219
Intangible assets 19 = 15 = 8 42 = 42
Non cash expenses
Depreciation and
amortisation 122 - 1 26 - 149 25 174
Impairment 9 EN 30 4 - 44 : 44
The above analysis has been restated for the clusion of our Group Property unit within Other businesses and the Separate identfication of
Corporate
4 People information
(a) Headcount
The number of people employed calculated on a headcount basis were
Period end employees Average employees
2007 2006 2007 2006
Royal Mail 167,640 174 202 170,127 176,415
Parcelforce Worldwide 4,176 4,092 4,141 4183
Post Office Limited 9,990 11327 10,640 11774
Corporate and Group Property 2,961 3348 3,181 3,588
UK wholly owned subsidiaries 184,767 192 969 188,089 195 960
UK partially owned subsidianes 4,592 4852 4,600 4854
General Logistics Systems 12,137 11.045 11,749 10671
Group total 201,496 208 866 206,438 211485,
2007 2006
Number of subpostmasters at year end 11,494 11608
(b) Directors’ emoluments
2007 2006
£000 £000
Directors emoluments 4164 3.852.
Amounts receivable under Long-Term Incentive Plans 3,113 463
Number of Directors accruing benefits under defined benefit schemes 5 A
The Directors Remuneration Report discloses fut! details of Directors’ emoluments and can be found on pages 37 to 44
61
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5 Operating costs
Operating profit before exceptional items 1s stated after charging
2007 2006
fa) £m £m
Pensions charge (see nate 25) 722 529
Cash 543 343
Non-cash 179 186
{b)
Distnbution and conveyance operating costs 1,237 1218
Operating lease charges on vehicles 64 66
Other distribution and conveyance 1173 1152
(eo)
Depreciation and amortisation 198 174
Depreciation of owned property plant and equipment 169 149
Depreciation of property plant and equipment under finance lease and hire
purchase contracts 17 18
Total depreciation {see note 10) 186 167
Amortisation of intangible assets (see note 12) 12 7
Property facilities and maintenance costs 263 274
Computers and telephones costs 259 276
Consultancy marketing and legal fees 187 174
Operating lease charges on property plant and equipment (excluding vehicles) 148 179
Foreign currency exchange losses/(gains) 4 (6)
Research and development expenditure 1 a
Regulatory body costs 49 20
Postcomm 10 9
Postwatch 9 11
6 Auditors’ remuneration
2007 2006
£000 £000
Audit of statutory finanoal statements 607 689
Other fees to auditors
Statutory audits for subsidiaries 1,270 1,241
Other services supplied pursuant to such legislation 468 516
Taxation services 279 368
Corporate finance services 1 27
Litigation services 128 41
Other services 133 682
Total 2,976 3564
The Group paid an additional £500,000 in 2007 relating to the 2006 audit.
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Royal Marl Holdings plc
7 Operating exceptional items
2007 2006
£m £m
Operating exceptional items
Share in Success - (91)
Provision for restructuring (note 20) (179) (75)
Impairment of property plant and equipment (note 10) (45) (a7)
Impairment of intangible assets (note 12) (39) (15)
Impairment retating to associates (note 14) (20) (9)
Impairment of property subsequent to categorisation as non-current assets held for sale (note 15) = 3)
Total operating exceptional items. (243) (210)
The restructuring charge 's in respect of employee related redundancy costs of £180m (2006 £75m) resutting mainly from operational
efficiency initiatives in Royal Mail and organisational design review in Post Office Limited net of £m (2006 £nil) exceptional property provision
release Of the above impairments £50m (2006 £30m) relates to Post Office Limited £15m (2006 £15m) property plant and equipment and
£35m (2006 £15m) mtangible assets Due to ongoing losses the carrying vatues of asset purchases made by Post Office Limited during the
year have been impaired to recoverable amount The £10m impairment relating to associates in the current year 1s in respect of G3 Worldwide
Mail NV (Spring) (2006 €8m)
‘The Share in Success scheme was launched during 2002 Under the scheme, eligible employees received a one-off discretionary payment on
the successful completion of the Group's three-year Renewal Plan The cost of the three-year scheme was charged to the income statement in
2004-05 A second Share in Success scheme for one year was launched during 2005-06 Eligible employees and subpostmasters receved a
one-off discretionary payment on meeting a specific profit target for that year There was no further Share in Success scheme in 2006-07
8 Net finance income
2007 2006
£m £m
Interest payable on DTI borrowings (50) (48) I
Other interest payable (6) (4)
Finance costs (56) (52)
Interest received on investments 56 48
Other interest receivable 6 3
Fiance mcome 62 5a
Net finance income/(costs) 6 (4)
All finance costs of £56m (2006 £52m) relate to financial abilities that are not held at fair value through the income statement
Of the £56m (2006 £48m) interest received on investments £55m (2006 £43m) relates to interest on financial assets not held at fair value
through the mcome statement and £1m (2006 £5m) relates to mterest on financial assets held at fair value through the income statement
63
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Royal Mail Holdings plc
9 Income tax
The major components of income tax expense/{credit) for the years ended 25 March 2007 and 26 March 2006 are
2007 2006
£m £m
Tax charged to the income statement
Current income tax
Current UK income tax charge 49 a4
Foreign tax 31 25
Adjustments in respect of current come tax of prior years (4) (20) ;
1% 36
Deferred income tax
Relating to origination and reversal of temporary differences (49) (419)
Income tax charge/(credit) reported in the mcome statement 27 (83)
Tax charged to equity
Income tax related to items charged or credited directly to equity
Current income tax relief for pension deficit recovery payment (66) (32)
Deferred income tax charge related to actuanal gains/(losses) on pension deficit 39 58
Income tax (credit)/expense reported in equity (27) 26
Total taxation losses/(gains) recognised
Current income tax charge 10 4
Deferred mcome tax (credit) (10) (61)
Income tax (credit)/expense reported in equity = (57)
A reconciliation between tax expense and the product of accounting profit multiplied by the UK rate of Corporation Tax for the years
ended 25 March 2007 and 26 March 2006 s as follows
2007 2006
£m £m
Accounting profit before tax from continuing operations 313 342
‘At UK standard rate of Corporation Tax of 30% 4 93
Overseas current tax rates 5 8
Tax overprovided in prior years (4) (10)
Non-deductible expenses 8 19
Associates /yoint ventures’ profit after tax charge included in Group pre-tax profit (12) (7)
Net decrease in tax charge resulting from recognition of deferred tax assets (23) (269)
Profit from asset disposals eligible for relief (37) a7)
Other (4) -
Tax charge/(credit) in the income statement 27 (83)
Effective mcome tax rate o% (27%)
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Royal Mail Holdings plc
9 Income tax (continued)
Deferred tax relates to the following
Batance sheet Income statement.
2007 2006 2007 2006
£m £m £m £m
Liabilities
Accelerated capital allowances (3) (3) - 2
Assets
Deferred capitat allowances 27 36 (9) 36
Prousions 10 Fey () (14)
Pensions temporary differences 345 317 67 93
Losses available for offset against future taxable income. 6 10 (4) 1
Goodwill qualifying for tax allowances 15 19 (C3) 1
Gross deferred tax assets 403 393
Net deferred tax asset 400 390
Consolidated income statement 49 119
The Group has unrecognised deferred tax assets of £1159m (2006 £1,380m) relating to the retirement benefit obligation £272m (2006
£224m) relating mamly to fixed asset temporary differences and £101m (2006 £113m) relating to tax losses in subsidianes that are available
to offset against future taxable profits The Group has capital losses carried forward, the tax effect of which 1s £13m (2006 £12m) The Group
has rolled over capital gains of £86m (2006 £83m), no tax liabitity would be expected to crystallise shauld the assets into which the gains have
been rolled be sold at their carrying value as it 1s anticipated that a capital loss would arise
At 25 March 2007, there was no recognised or unrecognised deferred income tax ability (2006 Enil) for taxes that would be payable on the
unremitted earnings of certain of the Groups subsidiaries associates or joint ventures as the Group has no liability to additional taxation should
‘such amounts be remitted due to the availability of double taxatron relief or other exemptions
In his Budget on 21 March 2007 the Chancellor of the Exchequer announced a reduction of 2% in the main rate of corporation tax with effect.
from Aprit 2008 together with changes to the capital allowances regime In accordance with accounting standards the effect of the 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 The effect of the reduction in the tax rate on the Groups deferred tax asset at the balance sheet date would be to reduce
the recognised amount by £25m and the unrecognised amount by £101m
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Royal Mail Holdings plc
10 Property, plant and equipment
Land and buildings 2007
Long, Short Motor Fixtures and.
Freehold leasehold leasehold vehicles ‘equipment Total
Cost £m £m im £m £m £m
At 27 March 2006 1490 260 494 230 812 4079
Exchange movements 2) - - - - 8)
Reclassification (9) 4 5 - 2 -
Additions 72 3 12 75 50 264
Acquisition of subsidiary - - - - - a
Disposals (46) (5) (8) G2) 6) (67)
Reclassification to non-current assets
held for sale (see note 15) {49) (4) = : : = (53)
At 25 March 2007 1.486 258 503 au2 27%, 858 4,224
Depreciation and impairment
At 27 March 2006 723 150 246 an 143 782 2485
Exchange movements - - - a) - a) (2)
Reclassification 7 - - (a) 7 1 -
Depreciation {see note 5) 45 6 28 55 39 13 186
Impairment {see note 7) 1 = 6 * 1 7 15
Disposals 1) @) 8) (2) (29) (5) (58)
Reclassification to non-current assets
held for sale (see note 15) (22) (2) : : : : (24)
At 25 March 2007 736 154 272 522 124 797 2,602
Net book value
At 25 March 2007 750 107 23a 320 150 611,619
At 27 March 2006 767 210 248 323 17 29 1594
Depreciation rates are disclosed within accounting policies (nate 2) No depreciation 1s provided on freehold land which represents £154m (2006
£134m) of the total cost of properties The net book value of the Group's property plant and equipment held under hire purchase contracts and
finance leases amounts to £37m (2006 £54m) all relating to plant and machinery The net book value of the Groups property plant and
equipment includes £112m (2006 £73m) in respect of assets in the course of construction The net book vatue af the Groups land and buildings
includes £429m (2006 £445m) m respect of building fit-out
Land and buildings 2006
Long ‘Short Plant and Motor —-Fimtures and
Freehold leasehold leasehold machinery vehicles: equipment. Total
Cost £m £m Em fm fm —m Em
‘At 28 March 2005 1498 254 476 743 199 798 3968
Exchange movements 1 - - - - - a
Reclassification (10) 3 7 - - - -
‘Additions 62 7 16 54 60 20 29
Disposal of subsidiaries 7 a. 5 a) - - (a)
Ossposals (a4) 7 (5) (2) (29) 7) (57)
Reclassification to non-current assets:
held for sale (47) (4) = - : - (51)
‘At 26 March 2006 1490 260 494 794 230 811 4079
I
Oepreciation and impairment ‘
‘At 28 March 2005 704 147 220 423 aa 772 2377 '
Exchange movements - - - - . - - ,
Reclassification - - - - - - - f
Depreciation (see note 5) 42 7 25 Exe 30 42 167
Impairment (see note 7) 6 - 6 - - 5 v7
Otsposal of subsidiaries - 7 = tot) = = [e)
Disposals (8) . (5) (2) (28) ie) (50)
Reclassification to non-current assets:
held for sale (24) (4) - - : : (25)
At 26 March 2006 723 150 246 471 113 782 2.485
Net book value
‘At 26 March 2006 767 1140 248 323 147 29 1594
‘At 28 March 2005 79% 107 256 320 88 26 1591
66
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11. Goodwill
2007 2006
Cost £m £m
At 27 March 2006 and 28 March 2005 476 475
Exchange movement (a) -
Additions {see note 13) 12 1
At 25 March 2007 and 26 March 2006 487 476 H
Impairment
At 27 March 2006 and 28 March 2005 346 344
Exchange movement “ :
At 25 March 2007 and 26 March 2006 3446 344
Net book value
At 25 March 2007 and 26 March 2006 143 132
At27 March 2006 and 28 March 2005 132 131
The carrying value of goodwill arising on business combinations of £143m (2006 £132m) at the balance sheet date includes £142m (2006
£131m) relating to the General Logistics Systems (GLS) business segment In lime with the accounting policy (see note 2) this goodwill has
been reviewed for impairment An impairment loss ts 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 in use The carrying value of GLS,
excluding interest bearing and tax related assets and liabilities 1s £322m (2006 £282m) at year end (see note 3) and the operating profit
before exceptional items is £115m (2006 £100m) for the year (see note 3) The carrying value represents a multiple of 2 8 (2006 2 8) on
operating profit before exceptional tems The net reatisable value of GLS for the purposes of the impairment review (ie the ‘fair value less
costs to sell) has been assessed with reference to earnings multiptes 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 multiples referenced
would reduce the net realisable vatue to below the carrying value
412 Intangible assets
2007 2006
Master Master
franchise Customer Software franchise Customer Software
licences listings licences Total ~—iicences. ~—slistings.»=—stcences.~—Total
Cost £m £m fm___£m £m £m £m Em
‘At 27 March 2006 and 28 March 2005 19 i 42 68 19 6 - 25
Additions - - 65 65 a * 42 42
Aquisition of businesses = 8 : 8 - 1 : 1
‘At 25 March 2007 and 26 March 2006 19 15 107141 19 z 42 68
Amortisation and impairment
‘At 27 March 2006 and 28 March 2005 8 3 15 26 4 - - 4
Impairment - - 39 39 - - 15 15
Amortisation 4 3 5 12 4 3 - 7
‘At 25 March 2007 and 26 March 2006 12 6 59 7 8 3 15 26 \
Net book value :
‘At 25 March 2007 and 26 March 2006 7 9 48 64 11 4 27 42
‘At 27 March 2006 and 28 March 2005 11 4 27 42 15 6 : 21
The intangible assets recognised in the Groups balance sheet have finite lives and are being written down on a straight-line basis over their
remaining economic lives as follows
Intangible asset Remammg economic life m years
Master franchise licences 1to4
Customer listings, 1to4
Software licences 1to6
The amortisation charge of £12m (2006 £7m) relating to intangible assets is 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
67
13 Business combinations
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Royal Mail Holdings plc
The acquisitions during the current or prior years are not matenal and therefore the following disclosures are made on an aggregated basts
The table below sets out the identifiable assets and liabilities 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
2007 2006
£m £m
Trade and other recewables 9 -
Trade and other payables (aa) -
Net working capitat acquired (2) =
Property plant and equipment 1 »
Cash and cash equivalents 2 -
Net assets acquired a -
Intangible assets recognised on acquisition 8 1
Goodwill recognised on acquisition 12 1
Total cost recognised 21 2
Gross consideration 20 2
Acquisition costs 1 -
Total costs 21 2
Less deferred consideration (2) a
cash and cash equivalents acquired (2) =
Net cash outflow 17 1
‘The current year acquisitions relate to the purchase by General Logistics Systems (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) If these combinations had taken place at the beginning of the financial year Group revenue
from continuing operations would have been £9 251m The profit or loss of the combined entities for the penod if these combinations
had taken place at the begmning of the year 1s not matenal in the context of the Group s profit after tax
The goodwill arising on the above acquisitions principally relates to ABX Belgium Distribution GLS management believe that this goodwill
represents the benefits expected to be achieved in providing further scale in the umportant Benelux market
The pnor year acquisitions represent £1m in respect of the remaining 9% shareholding of GLS Stafetten A/S (ging the Group 100%
ownership) and £1m retating to the acquisition by GLS of a franchisee business in Italy
14 Investments im joint ventures and associates
Jomt ventures
Royal Mail Holdings plc
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During 2006-07 and 2005-06, the Groups only joint venture mvestment 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 Group s 2006-07 and 2005-06 associate investments are provided in note 29 The reporting dates for these investments 1s
31 March 2007 except for Quadrant Catering Limited (30 September 2006) and G3 Wortdwide Mail N V (Spring) (31 December 2006)
Estimates of the profits of Quadrant Catering Limited and G3 Worldwide Mail NV (Spring) from their reporting date to 25 March 2007 (and
26 March 2006 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
At 27 Share of post At 25
March Impairment tax pre dividend March
2006 {see note 7) profit Dividend 2007
£m £m £m £m £m
Jomt ventures
Share of net assets 51 - 30 (23) 58
Goodwill 1 : : - 1
Net investments 52 r 30 (23) 59
Associates
Share of net assets 56 3) 9 (16) 46
Goodwill 16 7) = S Ld
Net investments 72 (10) 2. (16) 55
Total net investments in joint ventures/associates, 124 (10) 39 (39) 144
At 28 Share of post At 26
March Impairment tax pre dividend March
2005 (see note 7) profit Dridend 2006
£m £m £m £m £m
Jomt ventures
‘Share of net assets 40 - 28 (17) 54
Goodwill 1 : : : 1
Net investments 4a 28 (a7) 52
Associates
Share of net assets 65 a 4 (13) 56
Goodwill 25 (9) : - 16
Net investments 90. (9) 4 (13) 2
Total net investments in joint ventures/associates 131 (9) 32 {30} 124
69
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Royal Mail Holdings plc
14 Investments in joint ventures and associates (continued)
2007 2006
Jomt Joint
ventures Associates Total ventures Associates Total
Share of assets and liabilities £m £m £m £m £m £m
Current assets 128 102 230 162 116 278
Non-current assets 2 39 41 2 33 35
Share of gross assets 130 14a 274 164 149 313
Current liabilities (72) (91) (163) (413) (92) (205)
Non-current liabilities : (4) (4) = (1) (a)
Share of gross liabilities (72) (95) (167) (113) (93) (206)
Share of net assets. 58 46 104 51 56 107
Share of revenue and profit.
Revenue 60 1,084 1,164 55 1,084 1,139
Profit after tax 30 9 39 28 4 32
15 Non-current assets held for sale
Assets Disposal group
Long Long
Freehold leasehold Freehold leasehold Total
Net book amount £m £m £m £m £m
At 27 March 2006 41 - - - Bay
Reclassification from property, plant and equipment 8 - 19 2 29
Impairment. - 5 - = -
Disposals a2) - a9) 2) (33)
At 25 March 2007 1 - - 2 7
Assets Orsposal group
Long Long
Freehold leasehold Freehold leasehold Total
Net book amount £m £m £m £m £m
At 28 March 2005 - - - ” .
Reclassification from property plant and equipment 26 - - - 26
Impairment (3) - - - @)
Disposals (2) : = = (12)
At 26 March 2006 11 = s = 11
The expected disposal of these properties 's as a result of the rationalisation of the portfatio
Non-current assets held for sale are reported m the relevant business segment Further details are provided in note 3
During the year, certain properties were sold as part of a disposal group, which also included liabilities, creating a profit on disposal of £74m
recognised in the income statement In addition a gain of £43m (2006 £20m) was recognised in the income statement in relation to the
disposal of other assets held for sale
During the year Enil (2006 £3m) was recognised as an impairment in operating exceptional items {note 7)
70
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Royal Mail Holdings plc
16 Inventories
2007 2006
£m fm
Supplies and materials (uniforms fuel, printing and stationery mailbags
engineering spares) 16 7
Merchandise (Post Office Limited retail and lottery products) 10 40
Total 26 27
During the year £3m (2006 Enil) of inventory items were wnitten off The cost of inventories recognised as an expense in the income
statement was £41m (2006 £44m)
17 Current trade and other receivables
2007 2006
£m £m
Trade receivables 803 783
Prepayments and accrued income 167 227
Sub total 970 1010
Client debtors 61 78
Interest - 5
Total 1,031 1093
Trade recetvables are net of a bad debt provision of £28m (2006 £24m) In the year bad debts written off amounted to £6m (2006
£4m) Details of related party transactions can be found in note 29
18 Cash and cash equivalents
2007 2006
£m £m
Cash im the Post Office Limited network 768 782
Other cash in hand 17 18
Cash at bank 45 29
Total cash at bank in hand or in Post Office Limited network 830 829
Cash equivalent investments Short-term deposits 366 332
Totat 1,196 1,164
Other than cash in the Post Office Limited network and i hand of £785m (2006 £800m), the cash and cash equivalent balances of £411m
(2006 £361m) are interest bearing Cash at bank of £45m (2006 £29m) earns mterest at either floating or short-term fixed rates based upon
daily bank deposit rates Short-term deposits of £366m (2006 £332m) 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 196m (2006 £1 161m)
ra)
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Royal Mail Holdings plc
19 Financial labilities
2007
Finance
lease/hure
purchase Derwative
Loans 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 (non-current) 502 1 : 503
‘More than one year but not more than two years - a - 1
More than two years but not more than five years 1 - - 1
More than five years 501 a 501
Total 803 2 7 811
2006
Finance
lease/hire
purchase Derivative
Loans contracts liabilities Total
£m. £m £m £m
Amounts falling due in
‘One year or less or on demand (current) 361 1 3 365
More than one year (non-current) 505, 1 : 506
More than one year but not more than two years 1 1 - 2
More than two years but not more than five years 2 - - 2
More than five years 502 = - 502
Total 866 2 3 871
Analysts of foans and commutted facilities 2007
Average
Average maturity
Further interest/interest date
committed Total range of loan of loan
Loans facility facility drawn down — drawn down.
£m £m £m x Year
DTI loans to Royal Mail Group Ltd 500 1,200 1,700 58 2023
DTI 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 46-54 2010
Total 803 2,050 2,853
72
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Royal Mait Holdings plc
29 Financial abilities (continued)
2006
Average Average matuntty
Further interest/interest date
committed Totat range of loan of loan
Loans facility faciity drawn down drawn down
£m £m £m x Year
DTI loans to Royal Mail Group Ltd 500 844 1344 58 2023
OTH loans to Post Office Limited 360 790 1150 48 2006
Committed facilities 860 1634 2496
Miscellaneous bank loans in overseas subsidiaries 6 : 6 31-69 2010
Total 866 1,634 2.500
The miscellaneous bank loans in overseas subsidianes 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 maturity periods
The obligations under finance leases and hire purchase contracts are either unsecured or secured on vanous assets of the overseas
subsidiaries These are repayable m vanable and fixed amounts over their matunty periods The average interest rate 1s 5% (2006 6%) The
average maturity date is within one to two years (2006 - within one to two years)
The undrawn committed facilities, in respect of which alt conditions precedent had been met at the balance sheet date expire as follows
2007 2006
£m £m
Expiring i one year or tess . 200
Expiring in more than one year but not more than two years - 150
Expinng m more than two years 2,050 1284
Total 2,050 1634
The following secunties apply to the Group s committed facilities
2007 2006 Security
ém Em
Royal Mail Group Ltd 500 500. Fixed charges over Royal Mail Group Ltds loans to General Logistics Systems BV Royal Mail Group
drawn down loans tds loans to subsidianes of General Logistics Systems BV and Royal Mail Investments Limited s
shares in General Logistics Systerns 8 V. Floating charge over non regulated assets of Royal Mail
Group Ltd
Royal Mail Group Ltd 900 844 Fixed charges over Royal Mai Holdings plc's shares in Royal Matl Group Ltd and Royal Mail Group
senior debt facility tds 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 + None
Sharehotder loan
facility
2,700 1344
Post Office Limited 2,150 1150 Floating charge over all assets of Post Office Limited and a negative pledge over cash and near cash
facility tems*
Total 2.850 2494
* The negative pledge is an agreement not to grant secunty over these assets or to set up a vehicle that has the same effect
‘The Post Office Limited facility of £1 150m ts restncted to funding the cash and near cash items held within the Post Office Limited network,
As at 25 March 2007 the balance of this cash was £768m (2006 £782m) as shown in note 18
The DTI loans to Post Office Limited under the facility are short dated on a programme of liqutdity management and mature on average 16
days after the year end (2006 four days) On maturity it s expected that further loans witl be drawn down under this facility which expires in
2010
The security in place in the previous year was as disctosed above apart from the Royal Mail Group Ltd senior debt facility The previous
facility which was replaced by the senior debt facility was secured waa a floating charge over all assets and cash deposits with the National
Loans Fund The Royal Mail Group Ltd Shareholder loan facility was not in place in the previous year
‘The DTI loans to Royal Mail 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 mterest and total
indebtedness It 1s not anucipated that the Company is at risk of breaching any of these obligations
73
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Royal Mail Holdings plc
20. Provisions for liabilities and charges
Held for Mails
Current Non-current sale and Counter
provisions provisions provisions Tatal Parcels Services Total :
£m £m £m £m £m £m im
At 27 March 2006 58 53 - 414 109 2 111
Reclassification to Matls and Parcels ~ - ~ -~ i. (a) -
Charged in operating exceptional items 179 - - 179 141 38 179
Charged in other operating costs 4 10 - 14 a4 3 14
Reclassification to non-current
provisions 4) 4 = - - - -
Reclassification to held for sale
provisions - {25) 25 - - - -
Utilised non-cash (41) = - (41) (29) (22) (41)
Utilised cash (127) - (a) (128) (103) (25) (228)
Disposal of property group : - (24) (24) (24) - (24)
At 25 March 2007. 69 42 = iia 106 5 111
Mails
Current Non-current and Counter
provisions provisions Total Parcels Services Total
£m £m £m £m £m £m
At 28 March 2005 124 48 172 160 12 172
Charged in operating exceptional items. 75 - 75 60 as 75
Charged in other operating costs 7 4 qa a1 - a
Reciassifications to non-current provisions (3) 3 - - - -
Utilised non-cash (48) . (48) (39) (9) (48)
Utilsed cash (97) ie) (99) (83) (a6) (99)
At 26 March 2006 58 53 141 109 2 1141
The Mails and Parcels provision includes amounts relating to onerous property contracts £27m (2006 £54m) and decommissioning costs
£9m (2006 £13m), with the balance of £70m (2006 £45m) principally relating to redundancy The Mails and Parcels provision 1s in the
main expected to be utilised in 2007-08 with the remaining amount expected to be utilised over the next two to three years except for
£19m relating to onerous property contracts and £8m relating to decommissioning costs which are expected to be utilised over a tonger
period The timing of cash flows for such provisions are by their nature uncertam and dependent upon the outcome of related events
Counter Services prowsions include amounts in respect of the organisational design review and onerous property contracts These prowsions
are expected to be utilised in 2007-08 with the exception of certain property provisions which are expected to be utilised over a longer
period
Details of amounts charged as operating exceptional iterns are contained im note 7 The amounts charged in other operating costs relate to
onerous property contracts and decommissioning costs The change im the carrying value of the discounted element of the provision balance
due to the passage of time 1s 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
£27m (2006 £4m) had been cash settled by the balance sheet date
The cash utilised of £128m (2006 £99m) includes £118m (2006 £96m) of spend relating to exceptional rationalisation and £10m (2006
£3m) relating to other operating costs Total cash spend in the year relating to exceptional rationalisation 1s shown in the cash flow
statement
4
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Royal Mail Holdings plc
24. Current trade and other payables
2007 2006
£m £m
Trade payables and accruals 1,178 1226
Advance customer payments 264 255
Social security 89 92
Sub total 1531 1573
Deferred consideration 3 3
Client creditors 303 248
Amounts due to pension schemes relating to redundancies 4 47
Interest 2 1
Capital ree 51
Share in Success - 90,
Total 1,924 2013
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 evel of cash held and the
related creditors can vary significantly at each balance sheet date
The change tn 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
2007 2006
£m £m
Deferred consideration 1 -
Other payables 26 31
Total 25 3
23. Fmancial risk management objectives and policies
The Group's principal financial instruments other than derivatives compnse short-term deposits, money market liquidity vestments
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 anise directly from operations
The Group enters into derwative transactions, principally commodity swaps and forward currency contracts The purpose is to manage the
commodity and currency risks arising from the Group's operations
Its, and has been throughout the year under review the Group policy that no speculative trading in financial instruments shall be
undertaken
The main risks arising fromm the Group’s financial instruments are interest rate msk lquidity risk, foreign currency risk, commodity price and
credit risk The Board reviews and agrees policies for managing each of these risks and they are summarised below
Interest rate risk
‘The Groups exposure to market risk for changes in interest rates relates to the Group's debt obligations and interest bearing financial assets
The DTI loans to Royal Masl Group Ltd of £500m (2006 £500m) are at a fixed interest rate to maturity with an average maturity date of 2023
(2006 average date of 2023) The DTI loans to Post Office Limited of £300m (2006 £360m) are at short-dated fixed interest rates - average
maturity 16 days (2006 average 4 days) The total interest bearing financial assets of the group of £1 428m (2006 £1 060m) are at short-
dated fixed or variable interest rates with average matunty 8 days (2006 average 50 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 vanable rate financial mstruments No external
hedging of interest rate risk is undertaken
5
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23 Fmancial risk management objectives and policies (continued)
Foreign currency risk
‘The Group 1s exposed to foreign currency risk due to trading with overseas postal operators for carrying UK matl abroad and delivenng foreign
origin mail in the UK the balances held to operate the Bureau de Change services within Post Office Limited and various sales and 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 ts normally confined to 80% of the forecast exposure where forecast
cash flows are highly probable
The Groups obligation to settle with overseas postal operators 1s denominated in Special Drawing Rights (SDRs) - a basket of currencies
comprising of US Dollar (US$) Japanese Yen Sterling and euro Group Treasury operates a rolling 18-month hedge programme which 1s
subsequently reviewed on a quarterly basis There has been no external SDR hedge in place throughout the financial year 2006-07 due to
there being no material net exposure
For the Bureau de Change business balances of major currency holdings are hedged along with minor currencies showing a closely correlated
movement.
The Group obligations to settle conveyance charges in USS and euro has been hedged {to April 2007}
The Group's obligations to settle euro invoices on a specfic capital project were hedged This programme matured during the year
Two further hedge programmes have been initiated during the year The Group s obligations to settle euro invoices on two separate capital
projects (IMPS and FLATS) have been hedged (as far forward as February 2009)
The Group does not hedge the translation exposure created by the net assets of its overseas subsidiaries
Commodity price risk
The Group 1s exposed to fuel price risk arising from operating one of the largest vehicle fleets in Europe which consumes over 150 million
litres of fuel per year and a jet fuel price risk arising from the purchasing of air freight services The Groups fuel risk management strategy
aims to reduce uncertainty created by the movements in the oil and foreign currency markets The strategy uses over-the-counter derivative
products (in both USS commodity pnice and USS/Sterling exchange rate) to manage these exposures
In addition, the Group ts exposed to the commodity price nsk of purchasing electricity and gas The Groups risk management strategy ams to
reduce uncertainty created by the movernents in the electricity and gas markets These exposures are managed by locking into fixed rate pnce
contracts with suppliers
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 is
based on a customer's risk profile assessed by an independent crecit referencing agent The Credit Policy is applied rigidly within the regulated
products area so as to ensure that Royal Mail is not m breach of compliance legislation Assessment of credit for the non-regulated products ts
based on commercial 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
appropnate Despite alt the controls in place Royat Mail does suffer from bad debts but the level of bad debts incurred 1s below 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 receivables financial assets and certain derivative
instruments the Groups 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 £1bn 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 1s 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 gitts and treasury bills Borrowing facilities are regularly reviewed to
ensure continuity of funding
The unused facilities for Royal Mail Group Ltd were renegotiated dunng the year with the effect that £1 200m expires between 2014 and
2016 (2006 £844m expinng by 2009) The unused facility for Post Office Limited of £850m (2006 £790m) expires in 2010 Additionally the
Group has £300m (2006 £300m) of uncommitted lines of credit which are revewed annually
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Royal Mail Holdings plc
24 Financial instruments
Financial assets - pension escrow mvestments
On 23 March 2007 Royal Mail Hotdings plc and Royat Mail Group Ltd established £1bn of mvestments in escrow These mvestments are held
as secunty to the Royal Mail Pension Plan in support of the 17 year deficit recovery period from March 2006 At 25 March 2007 Royal Mail
Holdings plc had £850m of investments in the pensions escrow and Royal Mail Group Ltd had £150m Charges over these assets have been
registered Further details on the Royal Mail Pension Plan, including the latest full actuanal valuation are contained in note 25
Carrying amounts and fair values
Set out below 1s a companson by category of the carrying amounts and fair values of all the Groups financial nstruments Trade debtors
creditors prepayments accruals and client creditors have been omitted from this analysis on the basis that carrying value is 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 appropriate discount rates
The tables below also set out the carrying amount of the currency of the Groups financial instruments
2007
Sterling uss euro Other Total
Financiat assets £m —m £m £m £m
Cash at bank in hand or in Post Office Limited network 680 7 109 24 830
Cash equivalent mvestments. 366 - - - 366
Cash and cash equivalents 1,046 a7 109 24 1,196
Loans and receivables financial assets 16 - - - 14
Available for sale financial assets 3 - - : 3
Financial assets - investments (current) 17 : : - 17
Financial assets - pension escrow investments (non-current) 1,000 - - = 1,000
Total 2,063 a7 109 24 2,213
Fimancial abilities
OT! loans to Post Office Limited (300) - - - (300)
Miscellaneous bank loans in overseas subsidiaries (current) - - (4) : (a)
Financial habilities - loans (current) (300) - (a) = (304)
OTI loans to Royal Mail Group Ltd” (500) - - - (500)
Miscellaneous bank loans in overseas subsidianes (non-current) = = (2) = (2)
Financial habilities - loans (non-current) (500) = (2) = (502)
Obligations under finance leases and hire purchase contracts (non
current) - - (a) - (a)
Derivative lrabitities a LY] : = (7)
Total (800) @ 44) al (811)
Net total financial assets 1,263 10 105 26 1,402
7
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Royal Mail Holdings plc I
24, Financial instruments (continued) '
I
2006 i
Sterting uss euro Other Total I
Financial assets £m £m £m £m £m
Cash at bank in hand or in Post Office Limited network 75 13 79 22 829 I
Cash equivalent investments. 332 - - - 332
Cash and cash equivalents 1067 23 79 22 1161
Financial assets at fair value through the income statement 133 - - - 133
Held to matunty financial assets 549 - - - 549
Loans and recervables financial assets 12 - - - 12
Financial assets - investments (current) 694 - - : 694
Financial assets - mvestments {non-current) 5 - = - 5
Derwative assets - 3 : - 3
Total 1746 16 79 22 1863
Financial Wrabilities
DTI loans to Post Office Limited (360) 7 3 - (360)
Miscellaneous bank loans in overseas subsidianes (current) - - @) : (4)
Finanaal habilities ~ loans (current) (360) : a) : (364)
OT! loans to Royal Mail Group Ltd” (500) - - - (500)
Miscetlaneous bank loans in overseas subsidiaries (non-current) al 7 (5) = (5)
Finanaal Wabilities - loans (non-current) (500) = (5) : (505)
Obligations under finance leases and hire purchase contracts (current) - - (a) - (a)
Obligations under finance leases and hire purchase contracts {non-current) - - (a) = (a)
Derivative liabilities oa 3) = - (3)
Total (860) (3) (8) - (871)
Net total financial assets 886 13 71 22 992
{1 The only financial instrument where the carrying amount is different to the fair value 1s the DTI loans to Royal Mail Group Ltd At the
year end the respective fair value 1s £494m (2006 £520m)
All the above financial assets and liabilities are recorded in the accounts at amortised cost with the exception of the following
* — Financial assets - investments (non-current) Enii (2006 £5m) and available for sale financial assets £3m (2006 Enil) are classified as
available for sale and valued at fair vatue with the movement taken to reserves
* — Financial assets at fair value through the income statement €nil (2006 £133m) all of which are classified as held for trading are valued
at fair value with the movement taken straight to the income statement. and
* — Derivative assets Emil (2006 £3m) and liabilities £7m (2006 £3m)} 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.
78
24 Financial mstruments (continued)
Interest rate risk
Royal Mail Holdings plc
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Interest on financial instruments classified as floating 1s repnced at intervais of less than one year Interest on financial struments classified
as fixed rate 1s fixed until the matunty of the instrument
A one-percentage point increase in interest rates throughout the period would have mcreased profit before tax by £8m {2006 £6m)
Calculated as the increase in interest income less expense on floating rate financial instruments and fixed rate financial mstruments that
matured dung the year plus the profit/loss impact on fixed rate financial mstruments that are carned at fair value
The table below sets out the carrying amount by maturity of the Group's financial instruments that are exposed to interest rate nsk The
Pension escrow investments mature within 1 year but have been disclosed as maturing in greater than 5 years as the investments have been
provided as security to the Royal Mail Pension Plan in support of the 17 year deficit recovery penod from March 2006
Financial year ended 25 March 2007
Average
effective Within 1-200 2-3 3-4 4-5 More than
interest rate lyear = -years-—years years years 5 years Total
Fixed rate % £m £m £m £m £m £m £m
Cash at bank 38 21 - - - - bl 2
Cash equivalent investments 52 366 - - - - - 366
Loans and receivables financial
assets 54 16 - - - - - 4
Available for sale financial assets 54 3 - - - - - 3
DTI loans to Post Office Limited 57 (300) « * bl - - (300)
DTI loans to Royal Mail Group
Ld 58 : : : 2 : (S00) (500)
Total 104 - : = - (500) (396)
Floating rate
Cash at bank 29 24 - - - - - 2
Financial assets ~ pension escrow
investment (non-current) 5.2 - - - - - 1,000 = 1,000
Miscellaneous bank loans in
overseas subsidiaries 48 (a) 3 (a) - ‘si (a) (3)
Obligations under finance leases
and hire purchase contracts 53 : (1) = a = = (a)
Total 23 (et) @ : = 999 1,020
Non-interest bearing
Cash in hand or in Post Office
Limited network 785 - - - - - 785
Denwvative babilities (7) ©, = = fe 7 {7)
Total 778 : = = : : 778
Net total financial assets/(liabilities) 905, (a) (a) = : 499 1,402
ce)
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Royal Mail Holdings plc
26 Fimancial instruments (continued)
Financial year ended 26 March 2006
Average
effective Within 1-20 2-3 3-4 4-5 More than
nterest rate 1year = -years_-—years years years Syears Total
Fixed rate % &m £m £m £m £m Em &m
Cash at bank 27 12 - - - - - 12
Cash equivalent investments 44 332 - - - - - 332
Financial assets at fair value
through income statement 4h 133 - - - - - 133
Held to matunity financial assets 45 549 - - - - - 549
Loans and receivables financial
assets 48 12 - - - - - 12
Financial assets - investments (non-
current) 45 - 3 2 - - - 5
OT! loans to Post Office Limited 48 (360) - - - - - (360)
DTI loans to Royal Mail Group Ltd 58 - - - - - {500) (500)
Miscellaneous bank loans m
overseas subsidiaries 61 a) (e)) - ce) - aa) 4)
Obligations under finance leases and
hire purchase contracts 61 - (a) - x : : a)
Total 677 1 2 ) - (501) 178
Floating rate
Cash at bank 20 17 - - - - - 7
Miscellaneous bank loans m
overseas subsidiaries 31 - 7 (1) - - () (2)
Obligations under finance teases
and hire purchase contracts 64 (a) = = : = - (1)
Totat 16 = (a) s : (4) 14
Non-interest bearing
Cash in hand or in Post Office
Lumited network 300 - - - - - 800
Derwvative assets 3 - - - - - 3
Dervative liabilities (3) = - - = - (3)
Total 300 = - - - - 800
Net total financial assets/(tiabilities) 1493 1 1 () - (502) 992
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24 Financial instruments (continued)
Hedging Activities
The Group had six designated cash flow hedge programmes dunng the current and previous financial year
4) 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
v) The air conveyance hedge programme uses USS and euro forward currency purchase contracts to hedge the exposure ansing from
USS/GBP and GBP/euro exchange rates for forecast air conveyance purchases
uu) The euro capital programme uses euro forward currency purchase contracts to hedge the exposure ansing from GBP/euro exchange rates
for contracted capital expenditure This programme matured during the year
v) The USS capital programme used USS forward currency purchase contracts to hedge the exposure arising from USS/GBP exchange rates
for contracted capital expenditure This programme matured during the previous financial year
v) The FLATS capital programme uses euro forward currency purchase contracts to hedge the exposure arising from GBP/euro exchange rates
for contracted capital expenditure This programme commenced during the year
vi) The IMPS capital programme uses euro forward currency purchase contracts to hedge the exposure arising from GBP/euro exchange rates
for contracted capital expenditure This programme commenced during the year
The following table shows the movements on the hedging reserve for each of these hedge programmes
Gams/(tosses) deferred into
(Gamns)/losses released from
(Gains)losses reteased
from equity to the
carrying value of non-
financial assets during
equity during year equity to income during year year
2007 £m £m £m
Diesel Fuel (8) 3 =i
Air Conveyance @ 1 a
Total (9) 4
2006
Oresel Fuel 3 (10) =
Capital Programme - USS - : (a)
Total 3 (10) (a)
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
a1
Royal Mail Holdings plc
24 Financial instruments (continued)
The following table shows the derivatives outstanding at the year end
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Average Derwative
contracted asset Denvative liability
Commodity/ —- Nomimat commodity price/ far vatue fair value
2007 currency __amount_—Maturity date exchange rate im €m
Diesel fuel Diesel fuel 249k tonnes Apr O7-Oct 08 USS644/tonnes - @)
Diesel fuet uss $96m Apr 07-Oct 08 uss1.88/e . (2)
Ar conveyance uss $3m Apr 07 us$1 77/€ . :
Ar conveyance euro €im Apr 07 £0 70/€ . “
woreme euro €5im May 07-Feb 09 £0 69/6 . 0“
piriebasteg euro €51m Jul 07-Nov 08 £0 69/€ - =
Cash flow hedges . (5)
Other derivatives : (2)
Total - (7)
2006
Diesel fuel Diesel fuel 131k tonnes Apr 06-July 07 _USS618/tonnes 2 Q
Diesel fuel uss $81m Apr 06-Jul 07 uss1 77/¢ 1 a
‘Ar conveyance uss $24m Apr 06-Apr 07 USS1 74/¢ - -
ur conveyance euro e4m Apr 06-Apr 07 £069/€ “
Capital programme euro €4m Apr 06-Nov 06 £0 65/¢ - -
Cash flow hedges 3 (3)
Other derivates : :
Total 3 @
Other derivatives represent hedges by the Group of ather 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)
The Group had outstanding forward transactions to hedge foreign currency and fuel purchases as follows
In currency (millions)
Steriing equivalents (millions)
2007 2006 2007 2006
Maturing within one year
euro 410 103 7% 7a
US Dollars 133 140 71 80
Australian Dollars 4 7 2 3
Fuel (US Doltars) % 94 51 53
Maturing after one year
euro Bh - 58 -
US Doltars 25 1 23 9
Fuel (US Dollars) 25 12 FE] 7
The Groups fuel hedges which fix the GBP cost of purchasing fuel, consist of two elements
© a commodity forward transaction fixing the cost in US Dollars of purchasing fuel and
© a currency 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) ~
$94m maturing within one year and $25m maturing after one year The related currency forward transactions are contained within the total
of US Dollars - $133m maturing within one year and $25m maturing after one year
82
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25 Employee benefits - pensions
The Group operates pension schemes as detailed below
Scheme Etigibitity 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 contnbution
Vanous other small-scale schemes operated by overseas subsidianes Overseas subsidiary employees Defined contnbution
Defined Contribution
A charge for the defined contribution schemes of £2m (2006 £2m) was recognised in operating profit before exceptional items within the
income statement The Company contributions to these schemes was £2m (2006 £1m)
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 carned out as at 311 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
Payment of £541m (2006 £342m) was made during the year in respect of regular future service contributions, with £538m (2006 £337m)
relating to RMPP. The regular future service contributions for RMPP expressed as a percentage of pensionable pay has increased from 12 6%
{the rate during the prior year) to 200% effective from the beginning of the year This rate ts not expected to change matenally during 2007-
08 For RMSEPP these contributions have been at 20 9% (2006 20 9%) The rate increased to 48 2% from 1 Apnl 2007
Payment of £243m (2006 £113m) was made during the year to fund the deficit in the schemes with £241m (2006 £109m) 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 Groups year end (the last Sunday in March) Over the 16 years from
34 March 2007, planned deficit payments are £260m per annum increasing m line with RPI (base year 1s 2006-07) For RMSEPP, deficit
recovery payments will be £Sm per annum from 4 Apnl 2007 to 34 December 2015
A current liability of £14m (2006 £47m) has been recognised for payments to the pension schemes relating to redundancy (see note 21)
During the year, payments of £74m (2006 £209m) relating to redundancy were made
On 23 March 2007 the Group established £1bn of investments in escrow as secunty to the Royal Mail Pension Plan in support of the 17 year
deficit recovery period
The foltowing 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) Mayor assumptions
The size of the pension deficit which 1s 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 income statement charge The
mayor assumptions were
At 25 March 2007 At 26 March 2006
upa Spa
Rate of increase m salaries 41 38
Rate of increase in pensions and deferred pensions 31 28
Discount rate $3 49
Inflation assumption 34 28
Expected average rate of return on assets 70 71
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 detaled below
Average expected life expectancy from age 60 2007 2006
For a current 60 year old male RMPP member 26 years 26 years
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 30 years 30 years
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25 Emptoyee benefits - pensions (contmued)
b) Plans’ assets and expected rates of return
The assets in the plans and the expected rates of return were
At 25 March 2007
Market value Long-term expected rate of return
2007 2006 2007 2006
£m £m Xpa %pa
Equities 15,372 17190 80 77
Bonds 5,693 2682 46 42
Property 2.486 1835 62 59
Other assets 29 140 44 38
Fair value of plans assets 23,578 21847
Present value of plans habilites (28,563) (27.435)
Deficit in schemes (6,985) (5588)
There ts 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 15 not material The pension plans have not invested in any other assets used by the Group or in the Groups own financial instruments
c) Recognised charges
‘An analysts of the separate components of the amounts recognised in the mcome statement and statement of recognised income and
expense (SORIE) 1s as follows
2007 2006
£m £m Y
Analysis of amounts recognised in the income statement
Analysis of amounts charged to operating profit before exceptional items
Current service cost, 704 527
Past service cost 16 :
Total charge to operating profit before exceptional items 720 527
Analysis of amounts charged to operating exceptional items
Loss due to curtailments (within provision for restructuring charge - note 7) 51 24
Total charge to operating profit 771 551
Analysis of amounts charged/(credited) to financing
Interest on plans abilities 1,342 1162
Expected return on plans assets (1,541) (1. 263)
Total net credit to financing (199) (101)
Net charge to mcome statement before deduction for tax 572 450 I
Analysis of amounts recognised m the statement of recognised income and
expense (SORIE)
Actual return on plans assets 1,713 4684
Less expected retum on plans assets (4,544) (2,263)
Actuarial gams on assets (all experience adjustments) 172 3421
Expenence adjustments on liabilities (122) (161)
Effects of changes in actuarial assumption on liabilities 290 (4999)
Actuarial gains/{losses) on liabilities. 168 (5 080)
Total actuarial gains/(tosses) recognised m SORIE before deduction for tax 340 (1.659)
wh
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25 Employee benefits - pensions (continued)
4) Movement in plans’ assets and liabilities
Changes in the present value of the defined benefit penston obligations are analysed as follows
2007 2006
£m £m
Plans liabilities at beginning of penod (27,435) (21315)
Current service cost (704) (527)
Past service cost (16) -
Curtailment costs* (4a) (48)
Finance cost (2,342) (1162)
Employee contributions (162) (162)
Actuarial gain/(loss) (recognised m SORIE) 168 (5.080)
Benefits paid 969 859
Plans liabilities at end of period (28,563) (27 435)
*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, im 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 in an accounting
penod subsequent to the recognition of costs in the incame statement
Changes in the fair value of the plans’ assets are analysed as follows
2007 2006
£m £m
Plans assets at beginning of period 21,847 17,357
Company contributions paid 858 664
Movement in company contnibutions accrued (33) (161)
Employee contributions 162 162
Finance income 1,541 1263
Actuarial gam (recognised in SORIE) 172 3,421
Benefits paid (969) (859)
Plans’ assets at end of period 23,578 21847
e) History of experience gains and losses
The cumulative amount of actuanal gains and losses recognised since transition to IFRSs at 29 March 2004 in the statement of recognised
income and expense 1s £908m loss {2006 a loss of £1 248m) 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 /FRSs
2007 2006 2005 2004
£m £m £m £m
Fair value of assets 23,578 21,847 17357 15 200
Present value of liabilities (28,563) (27,435) (21 325) (19594)
Deficit in schemes. (4,985) (5 588) (3.958) (4394)
2007 2006 2005
£m £m £m
Experience adjustment on assets 172 3421 1043
Experience adjustment on liabilities (122) (261) (302)
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Royal Mail Holdings plc
26 Share capital
Authorised 2007 2006
£ £
Ordinary shares of £1 each 100,000 100000
Special Rights Redeemable Preference Share (Special Share) of £1 each 1 1
Total 100,001 100001
Issued and called up 2007 2006
£ £
Ordinary shares of £1 each 50,005 $0000
Special Rights Redeemable Preference Share (Special Share) of £1 each 1 1
Total 50,006 50001
The Special Share can be redeemed at any time by its holder (the Secretary of State for Trade and Industry) subyect 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 is payable on redemption
On distribution in a winding up of the Company, the holder of the Special Share is entitled to repayment of the capitat paid up on the
Special Share in pronty 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 Trade and Industry may issue directions to the
Company which depending on the direction issued could result in the recognition of a distnbution
The increase in share capital in the period was due wholly to the 1ssue of shares Details of the share issues are contained in note 27
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Royal Mail Holdings plc
27 Total equity
Eeuy
Mails POL Heldngs furat POL beleer
Share Retalned Contribution Contnbuton Escrow Mails Funding. ‘Tranal diner I afte Minority I otal
‘premium earning Reserve Reserve Reserve Reserve Reserva Reserve Reserve Reserve ReservesI parent interest equity
fm em im mem em em em mdm em I em em I tm
‘At 27 March 2006 = (4,270) = = a 836 28 ¥, s - $5 _I (3 363) 4 (3,335
Profit for the period - 286 - - - - - - . . - I 286 . 286
fransavon dterences - : - Se @ - -I @ -] @
hana ganson define beet.
Fotemes - uo 3 © - « «= - eed er re Bey
Loss an cas ow ees deferred
ite equity - - . - - - - - . o - o - (9)
Loss on cash flow hedges released
extn o tems taken recy to
fou a 7 : es : ee ee eee
Recognised Income/expense) for
‘the penod - 653 - - - - - - @ ® - 646 - 646
Transfer from Mais Reserve to
Rural Network Reserve - - - - - 7s) Bs - - . . . . os
Allocation to Rural Network Reserve 4175) - - - - 7s - - - - - . -
Transer from Rural Network
Revove - 10 : 7 ee : - -f oe. :
‘ara of eres reset Ral
Network Reserve - 8 . : ee Bs rs :
tesue of erénary shares 3) use . . Soe . - ef as. I ous
Atcabon te Mats Cortbaton
Reserve - ess “ - oe = s = «al - = .
Trane rm Wats Cons baton
Reserve - us (145) - - - . - . - . . - -
tssue of orcimary shares (2) 234 - - - - - - - : - : 231 : 24
Allocation to POL Contnbution
‘Reserve - (231) - 231 - - - - - - - . . -
Transfer from POL Coneriaton
ReserwtoPOLFundegReseve == = en - ee om . ee -
Irate of mterest come to POL
Fema Reserve nr) - : ee . - .f eo. .
Transfer from POL Fundeg Resene = 233 - : a) - - sf « « :
Transfer of terest ncome to Mats
Osstnbution of Maits Reserve - 795, - - - (795) - = - - . . . -
Atoaten to Mating Escrow
Reserve - (795) 7 . 795 - - - - - - - . «
Issue of ordimary shares (3) Ly - : - - - - : - - - cy . Cy
‘ocaven to Helings Erow
Reser - 60 . < eo» « 3 3 re :
“rasta of newest cone 2
Holdings Escrow Reserve - @ - - a - - - - - . - . 7
Tarte rom lbgs Escrow
eseve - 880 ‘ en) - 2 - es .
‘Transfer of unrealsed gan - a - - - - - . - (3) - : -
Cmndend eto mneriyitest_ = : : _ oe. : -.-I - wl ow
‘At. 25 March 2007. 430 (2,775) = = = = 30 = G (5) A7 I 42.267) 3 (2 264)
a7
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Royal Mait Holdings plc
27. Total equity (continued)
Fore Eauey
Rural Currency holder
Retained ‘Mails Network ‘Translaton: Hedging Other, ofthe Minonty: ‘Total
earnings Reserve Reserve Reserve Reserve Reserves, parent interest: equity,
£m £m £m £m £m fm £m fm im
‘Mt 28 March 2005 (3 085) 601 i171 6 : cy (2.042) + (2,038)
Restatement forte efecto US 32 ard AS 39a 28
March 2005 (21) = = - 8 - (3) a &)
Restated balance at 28 March 2005 43.096) 801 371 cy Ly 6 42.045) 4 (2041)
prs torte peed 35 “ ; : : : 395 : 395
Actuarial (losses) on defined benefit schemes (1659) - - - - - (1659) . 1659)
fuss on cashflow hedges deterred nt ety : : : : 3 : 3 : 3
ana on cash ow hades released ram ety to
come : - - - (20) : Qo) - ao)
sans) on eashfw hedges released rom equty to he
Farry:ng amount of non-financial assets - - : - a : a : @
fFaxation on tems taken directly to equity, (26) - : = a : (26) - (26)
Re ised income/{expense) for the period (1.290) - - - (a) - (1,298) ba (2298)
Transfer ror Rural Network Reserve 7 - aun : ‘ 3 < : .
Transfer of interest mcome Bs) 35 4 - . - - - -
Tans of unre gan 8 : : 7 ; @ : E :
At 26 March 2006 (4,270) 836 2. & - $5 (3,343) 4 (3.339)
Share issue (1) & Mails Contribution Reserve
During the period one ordinary share of £1 in Royal Mail Holdings pic (the Company) was allotted and issued to the Secretary of State for
Trade and Industry (the Secretary of State) under section 63(1) of the Postal Services Act 2000 (the Act) Consideration in full of £145m was
received on the same day A share premium of £144 999 999 resulted from this subscription
Following a direction issued by the Secretary of State under section 72 of the Act. the Company upon receipt of the £145m consideration
created the Mails Contribution Reserve and allocated to st a sum of £145m Under the direction issued the Company then immediately
transferred funds of £145m from the Mails Contribution Reserve to Royal Mail Group Ltd, a wholly owned subsidiary of the Company
Under the terms of an agreement the funds transferred have been applied by Royal Mail Group Ltd as reimbursement in full of £145m that
had been advanced to Post Office Limited Post Office Limited ts a wholly owned subsidiary of Royal Mail Group Ltd
Mails, Rural Network and POL Funding Reserves
The Mails Reserve was created by Royal Mail Group Ltd on 3 February 2003 following directions issued by the Secretary of State under
section 72 of 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 Mails Reserve may be utilised are stated i the directions issued, and principally relate to providing financial assistance to Post Office
Limited (but also relate under certain circumstances to making a distribution to the Company) Financial assistance of £1 121m has been
provided from this Reserve to Post Office Limited up to the beginning of the 2006-07 financial year
The Rural Network Reserve was created by Post Office Limited following directions issued by the Secretary of State under section 72 of 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 mamtenance of a rural network of post offices
A total of £444m has been used from this Reserve towards the maintenance of a rural network between March 2003 and the beginning of the
2006-07 financal year
Following directions issued by the Secretary of State under section 72 of the Act. Royal Mail Group Ltd transferred funds of £75m from the
Mails Reserve to Post Office Limited during the period (2006 Enil} and upon receipt, Post Office Limited allocated these funds to the Rural
Network Reserve In addition Post Office Limited recerved £75m during the period (2006 Eni!) from the Secretary of State following an order
tssued by the Secretary of State under section 103 of the Act 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 £75m to the
Rural Network Reserve on receipt of the Social Network Payment Dunng the period £150m (2006 £147m) of the Rural Network Reserve was
applied towards the maintenance of a rural network of Post Offices
Following a further direction issued by the Secretary of State, Royal Mail Group Ltd made a distribution to the Company of a sum equal to the
amount standing to the credit of the Mails Reserve (£795m) and applied the Mails Reserve to make the distribution This reduced the balance
‘on the Mails Reserve to Enil Under the direction issued the Company allocated £795m to the Holdings Escrow Reserve (see below)
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Royal Mail Holdings plc
27 Total equity (continued)
The POL Funding Reserve was created by Post Office Limited following directions issued by the Secretary of State under section 72 of 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 POL
Funding Reserve may be utilised are stated in the directions issued and principally relate to meeting the ongoing requirements of Post Office
Limited such as to ensure that it may meet its debts as they fall due The Reserve has not been used prior to the beginning of the current
financial year Of the £233m allocated to the Reserve during the period £2311m arose from funds transferred from the POL Contribution
Reserve (see below) and £2m relates to the transfer of interest (see below) Following a further direction issued by the Secretary of State
under section 72 of the Act, the amounts standing to the credit of the POL Funding Reserve were released
Interest
The transfer of interest relates to income recorded in the income statement which has been earned on the assets that support the Mails, Rural
Network POL Funding and Holdings Escrow Reserves
Share tssue (2) & POL Contribution Reserve
During the period three ordinary shares each with a nomial value of £1 in the Company were allotted and issued to the Secretary of State '
under section 63(1) of the Act Consideration in full of £37 5m, £156m and £37 5m respectively was received on the same day as issue (a total
consideration of £231m) A share premium of £230 999 997 resulted fram these subscriptions
Following a direction issued by the Secretary of State under section 72 of the Act, the Company upon receipt of the £37 5m consideration for
the first share created the POL Contribution Reserve and allocated to it a sum of £37 5m Under the direction issued the Company then
immediately transferred funds of £37 5m from the POL Contribution Reserve to Post Office Limited a wholly owned subsidiary of Royal Mail
Group Ltd and upon receipt Post Office Limited allocated these funds to the POL Funding Reserve Royal Mail Group Ltd 1s a whally owned
subsidiary of the Company Similarly the Company upon receipt of the consideration for each of the second and third shares, allocated a sum
of £156m and £37 5m respectively to the POL Contribution Reserve, immediately transferred funds equal to these amounts from the POL.
Contribution Reserve to Post Office Limited and upon receipt Post Office Limited altocated these funds to the POL Funding Reserve
Share issue (3) & Holdings Escrow Reserve
Following a direction issued by the Secretary of State under section 72 of the Act the Company recewed a distribution of £795m from Royal
Mail Group Ltd created the Holdings Escrow Reserve and allocated to it a sum of £795m Subsequently one ordinary share of £1 in the
Company was allotted and issued to the Secretary of State under section 63(1) of the Act. Consideration in full of £54 273m was recerved on
the same day A share premium of £54,272 999 resulted from this subscription Under the direction issued the Company then allocated a
further £54 273m to the Holdings Escrow Reserve The amounts allocated to this Reserve are to be applied as if they were profits available for
distribution The purposes for which the Holdings Escrow Reserve may be utilised are stated in the directions sssued and include the use of
£850m for the provision of secunty m favour of the trustee of the Royal Mail Pension Plan Following the transfer of interest (see above) of
£1m the balance on this reserve was £850m Immediately following the transfer of interest £850m of the reserve was applied to provide this
secunty through an escrow The £54m received from this subscription partly offset the transfer of £75m from the Mails Reserve in Royal Matl
Group Ltd to Post Office Limited earlier in the year (see above) This transfer resulted in a lower amount standing to the credit of the Mails
Reserve at the time of the distribution from Royal Mail Group Ltd (see above)
Note An additional escrow of £150m was established by Royal Mait Group Ltd as security for the trustee of the Royat Mail Pension Plan The
£150m was not connected to any balances on reserves established following directions issued by the Secretary of State under section 72 of
the Act and as such does not appear in the analysis of reserve movements
Foreign Currency Translation Reserve
The Foreign Currency Translation Reserve ts 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 1s used to record gains and losses arising from cash flow hedges since 28 March 2005
Other Reserves
Other Reserves of £47m (2006 £55m) comprise £2m (2006 £2m) unrealised gain on Furst Rate Exchange Services Holdings Limited a joint
venture transaction, and £45m (2006 £45m) and Enul (2006 £8m) relating to unrealised gams on Midasgrange Limited and G3 Worldwide
Mail NV (Spring) respectively both associate transactions During the year £8m (2006 £8m) was transferred to retained earnings following
impairment of the mvestment in G3 Worldwide Mail NV (Spring) (see note 7)
89
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Royal Mail Holdings plc
28 Commitments
Operating lease commitments
The Group 1s committed to the following future minimum lease payments under non-cancellable operating teases as at 25 March 2007
Vehicles:
Land and Buildings and equipment IT equipment Total
2007 2006 2007 2006 2007-2006 2007 2006
£m £m £m £m £m £m £m £m
Within one year 120 124 36 49 15 46 471 219
Between one and five years 366 419 42 7 52 169 460 664
Beyond five years, 679 755, : 2 12 7 691 834
Total 1165 1298 78 127 79 292 1322-1717
Existing property leases have an average term of 14 years and any new leases entered into generally have a 15-year term with a 10-year
break clause Vehicle leases generally have a term of between 3 and 7 years depending on the class of vehicle, with the average term being 4
years The existing leases will mature between 2007 and 2011 The IT contract has a term of 10 years with 6 years remaming at the balance
sheet date
Capital commitments
The Group has commitments of £110m (2006 £59m) at 25 March 2007 which are contracted for but not provided in the accounts
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Royal Mail Holdings plc
29. Related party transactions
‘The ultimate parent (the Company) and principal subsidiaries
Royal Mail Holdings plc ts the ultimate parent company of the Group The consolidated financial statements mclude the financial statements
of Royal Mail Holdings plc and the principal subsidiaries listed in the following table
Company Country of incorporation ‘% equity mterest
2007 2006
Royal Mail Group Ltd United Kingdom 100% 100%
Post Office Limited United Kingdom 100% 100%
Royal Mail Investments Limited United King¢om 100% 100%
General Logistics Systems BV Netherlands 100% 100%
Royal Mail Estates Limited United Kingdom 100% ”
Romec Limited United Kingdom sik 51%
Royal Mail Estates Limited a wholly owned subsidiary was formed during the financiat year The security on the Royal Mail Group Ltd senior
debt facility mcludes a fixed charge aver shares in Royal Mail Estates Limited and a Roating charge over all the assets of Royal Mail Estates
Limited (see note 19) On the last day of the financial year Royal Mail Group Ltd transferred most of its directly held property assets to
Royal Mail Estates Limited
Jomt venture
The Group has a 50% interest in First Rate Exchange Services Holdings Limited (previously known as first Rate Travel Services Limited untl its
name change on 23 February 2006) a company registered in the United Kingdom
Associates
The following companies are the principal assoaates of the Group
Company Country of mcorporation 2007 2006
Quadrant Catering Limited United Kingdom sit 51%
Camelot Group ple United Kingdom 20% 20%
G3 Worldwide Mail N V (Spring) Netherlands 245% 245%
Midasgrange Limited United Kmadom 50% 50%
The majority of the Board and voting power in Quadrant Catering Limited 1s held by the Groups partner hence it ts not a subsidiary
Related party transactions
During 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 Penstons 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 inctuding
related party related party outstanding toans outstanding loans
2007 2006 = 2007-2006 = 2007 2006 2007 2006
£m £m £m £m £m Em £m £m
Royal Mail Pension Plan 9 9 - : : 7 A -
Quadrant Catering Limited = - 43 42 - - 5 6
Camelot Group ple 48 49 - - 1 a - -
G3 Worldwide Mail N V (Spring) 1 1 12 13 13 1 2 2
Midasgrange Limited 9 6 - - 8 - - -
First Rate Exchange Services
Holdings Limited Group 26 26 - - 1 - 4 -
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)
* the Group has received certain funding via the issue of shares to Government (see note 27) and
* the Group has received the Social Network Payment from Government (see notes 2 and 27)
of
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Royal Mail Holdings pic
29 Related party transactions (continued)
Key management compensation
2007 2006
£000 £000
Short-term employee benefits 4,164 2.987
Post-employment benefits 707 688
Termination benefits - 865
Other long-term benefits 3,413, 463
Total compensation paid to key management. 7,984 5,003
Key management comprises Executtve and Non Executive Directors of the Royal Mai! Haldings plc Board
HM Government is the Companys sole Shareholder and, accordingly the Directors have no interest in the shares of the Company
Transactions with other related parties
Bob Wigley a Non Executive Director of the Company until his resignation on 31 October 2006, 1s Chairman of Mernll Lynchs 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 {fult year to 26 March
2006 £950m) Bob Wigley is not a Trustee of the Royal Mail Pension Plan
John Neill a Non Executive Director 1s Group Chief Executive and Deputy Chairman of Unipart Group which 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 (2006 £0 5m) John Neill took no part in the decision to appomt Unipart Group
30 Events after the balance sheet date
A funding agreement for Past Office Limited was announced by Government on 17 May 2007 Details of the announcement are set out in the
funding section of note 2
Since the year end there has been a period of industriat action In October agreement was reached wath the Communication Workers Union on
pay modernisation and pension reform The Group has recently outlined a senes of proposals for pensions on which consultation 1s to
commence shortly The prionity 1s to protect our existing people s pensions in a way that 1s affordable and does not expose our people or the
business to unacceptable risk going forward
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Royal Mail Holdings plc
Group five-year summary (unaudited)
Prepared or restated under
UK GAAP. IFRS
2003 2004 2005 2006 2007
Income statement £m £m Em____&m £m '
Revenue 8299 8633 8956 9056 9,479
(Loss}/profit from operations 197) 220 - - -
Pensions benefit/(charge) in respect of pensions surplus/(deficit) under SSAP 24 246 (132) - - -
Operating profit before exceptional items 49 88 302-355 233
Operating exceptional items (721) {64) (277) __ (210) (243)
Operating (lossVorofit (672) 24 250 14s (20)
Non-operating exceptional items 26 64 67 67 118
(Loss¥profit before interest (646) 88 920 (te 108
Finance mcome and costs_mcluding net pensions interest 35 17 75 100 205
(Loss\profit before tax (611) 14105 167-312 313
Taxation 52 (98) {16) 83 (27)
(Loss\/profit after tax {559) 7 11395 286
2003 2006 2005 2006 2007
Cash flow £m £m fm ___€m £m
Net increase/(decrease) in cash 6 (41) (159) (61) 1
Net increase/(decrease) in cash equivatents a na 134 (118) 34
Net {decrease)/increase in cash and cash equivalents Wa nla (25) (179) 35
Prepared or restated under
UK GAAP IFRS
2003 2004 2005 2006 2007
Balance sheet Em £m fmm £m
Goodwill and intangible assets 156 123 4520-174 207
Property plant and equipment 1648 1550 1591 1,594 1,619
Other non-current assets including those classified as held for sale 83 152 486 539 1,528
Net current assets 1785 212 298 = 535 (60)
Non-current liabilities (2.584) (5.016) (4565) (6 181) (5,558)
Net assets/{liabulities) 2.088 (2979) ___(2038)_(3339)___(2,264)
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 1s also required of the nature of the mam 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,
. deferred tax charges to reflect the introduction of the retirement benefit obligation
. an annual leave accrual 1s included in trade and other payables
. the income 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 is now produced in IFRS format showing operating financing and investing activities
®
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Royal Mail Holdings plc
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 finanaal statements in accordance with applicable {aw 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 periad In preparing those financial statements, the Directors are required to
* select suitable 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 matenal departures disclosed and explained in
the financial statements, and
© prepare the financial statements on the going concern basis unless it is 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
wreguianities
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Royal Mail Holdings ple
Independent Auditors’ report to the members of the Company, Royal Mail Holdings ple
We have audited the parent Company financial statements of Royal Mail Hotdings plc for the year ended 25 March 2007 which comprise the
balance sheet and the related notes 1 to 6 These parent Company financial statements have been prepared under the accounting policies set
out therein We have also audited the formation in the Directors’ Remuneration Report that is described as having been audited
We have reported separately on the Group financial statements of Royal Mail Holdings pic for the year ended 25 March 2007
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 Companys 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 1s to audit the parent Company financial statements and the part of the Directors Remuneration Report to be audited in
accordance with retevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland)
We report to you our opinion as to whether the parent Company financiat 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 properly prepared in accordance
with the Companies Act 1985 We also report to you whether, in our opinion, the mformation in the Directors’ Report 1s consistent with the
financial statements
In addition we report to you if 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 contamned in the Annual Report and consider whether it 1s consistent with the aucited 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 Internat 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) issued by the Auditing Practices Board An
audit mcludes 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 judgments,
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 disclased
We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provde 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 I
. the parent Company financial statements give a true and fair view in accordance with United Kingdom Generally Accepted I
Accounting Practice of the state of the Company s affairs as at 25 March 2007,
. 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 1s consistent with the parent Company financial statements
Emst & Young LLP
Registered auditor
London
26 October 2007
95
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Royal Mail Holdings plc
Parent Company balance sheet !
at 25 March 2007 and 26 March 2006
2007 2006
Notes £m £m
Fixed assets
investments in subsidianes 4 3,784 3786
investments in pension escrow 850 -
Total net assets 4.636 3,784
Capital and reserves
Share capital 5 - -
Share premium 6 430 -
Profit and loss account 6 4,206 3786
Shareholder’s funds 4,634 3784
The accounts on pages 96 to 98 were approved by the Board of Directors on 26 October 2007 and signed on its behalf by
Adam Crozier Jan Duncan
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Royal Mail Holdings plc
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 52 weeks ended 25 March
2007 (52 weeks ended 26 March 2006)
Basis of preparation
The accounts on pages 96 to 98 have been prepared in accordance with applicable UK Accounting Standards and law including the
requirements of the Companies Act 1985 Unless othermse stated in the accounting policies below the accounts have been prepared
under the historic cost accounting convention
Royal Mail Holdings plc (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 6 to the accounts
No new UK Accounting Standards which affect the presentatron 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 within the Company's accounts are stated at cost less any accumiulated impairment losses The opening and
closing carrying value relates solely to the Companys mvestment in Royal Mail Group Ltd, a 100% subsidiary of the Company Royal
Mail Group Ltd 1s 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 short-term deposits which mature within 1 year but have been included 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 fram March 2006
The investments are non-denvative assets that are neither held for trading nor quoted in an active market and are therefore classified
as loans and receivables for measurement purposes under FRS 26 The mvestments are initially recognised at fair value, being the
amount deposited The vestments accrue interest, thereby increasing the carrying value of the investments This interest is mcluded
In the reported profit/(toss) for the year The investments are derecognised when they mature
Contingent liabitities
Contingent liabilities are not disclosed if the possibility of losses occurring is 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 Audhtors 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 is disclosed in the Group accounts
4 Investments in subsidiaries
Cost Impairment 2007 2006
£m £m £m £m
‘At 27 March 2006 and 28 March 2005 3,784 - 3,784 3784
Additions (see note 6) 376 - 376 -
(mpairment (see note 6) - (376) (376) :
‘At 25 March 2007 and 26 March 2006 4,160 (376) 3,784 3,784
5 Share capital
Details of the share capital are disclosed in the Group accounts im note 26 Detarls of the share issues during the period are contained
in the Group accounts im note 27
7
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Royal Mail Holdings plc
Notes to the parent Company accounts (continued)
6 Shareholder’s funds
Profit and Mails POL Holdings
Share loss Contribution Contribution Escrow
premium account Reserve Reserve Reserve _— Total
£m Em £m £m £m £m
At 28 March 2005. 3784 - - - 3,784
Profit for the year - - - : : -
At 27 March 2006 - 3,784 - - - 3,786
Profit for the year - 420 - - - 420
Issue of ordinary shares (1) 145 - - - - 145
Allocation to Mails Contribution Reserve - (245) 145 - 7 =
Transfer from Mails Contnbution Reserve - 145 (145) “ - -
Issue of ordinary shares (2) 231 - ad " ° 231
Allocation to POL Contribution Reserve - (231) - 231 - -
Transfer from POL Contribution Reserve - 231 - (231) - -
Allocation to Holdings Escrow Reserve - (795) - - 795, -
Issue of ordinary shares (3) 54 - - - - 54
Allocation to Holdings Escrow Reserve « (54) “ = 54 -
Transfer of interest to Holdings Escrow Reserve - (a) = = a -
Transfer from Holdings Escrow Reserve - 850 : - (850) -
At 25 March 2007 430 4,206 : : = 4,636,
The profit dealt with in the accounts of the parent Company was £420m (2006 Enil) The profit of £420m comprises of the distribution
relating to the Mails Reserve received from Royal Mait Group Ltd (£795m) and mterest earned on assets that support the Holdings
Escrow Reserve (£1m) less impairments on investments {£376m) The impairments arose on transfer of funcs from the Mails
Contribution (£145m) and POL Contribution Reserves (£231m) for the benefit of Post Office Limited a wholly owned subsidiary of Royal
Mail Group Ltd Due to the ongoing losses of Post Office Limited these investments were immediately impaired Accordingly the
Company s profit for the financial year, with the exception of the interest earned (€1m) ts eliminated in the Group accounts and does not
therefore form part of the Group results
Details are contamed in the Group accounts in note 27 on (i) the distribution of the Mails Reserve (u) the Holdings Escrow Mails
Contribution and POL Contribution Reserves and (mi) the share issues
7. Charges
Details of charges registered aver the assets of the Company are contained in the Group accounts in notes 19 and 24
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Royal Mail Holdings plc
Forward Looking Statements
This document contains statements concerning the Groups business, financial condition results of operations and certain of the Groups
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 nat to place undue reliance
‘on forward loolang statements The Company undertakes no obligation to release publicly the result of any revisions to these forward
looking statements that may be made to reflect events or circumstances after the date of this document including without limitation
changes in the Groups strategy or to reflect the occurrence of unanticipated events
By their nature forward looking statements mvolve 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 mclude 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 indebtedness undertakings and guarantees relating to pension funds
contungent liabilities risks of litigation and nsks associated with the Group s overseas operations
Corporate Information
Registered Office and Group Head Office
Royal Mail Holdings plc
148 Old Street
LONDON
EC1v 9HO
020 7250 2888
Registered No 4074919
Royal Mail, the Cruciform the colour red Parcelforce Worldwide and the Parcelforce Worldwide logo are registered trademarks of
Royat Mail Group Ltd Post Office and the Post Office symbol are registered trademarks of Post Office Limited Report and Accounts
2007 © Royal Mail Group Ltd 2007 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 Groups websites ts 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
Ernst & Young LLP Postwatch
1 More London Place 28 Grosvenor Gardens
LONDON LONDON
‘SE1 2AF SW1W OTT
Actuaries Regulator (Postcomm)
Watson Wyatt Limited Postal Services Commission
Watson House Hercules House I
London Road 6 Hercules Road
REIGATE LONDON
Surrey SE1 708
RH2 9PO. !
Solicitors I
Slaughter and May
1 Bunhill Row
LONDON
EC1Y 8YY