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Report and Accounts
Year Ended 28 March 2004
WAIOOKUTCR 0880
COMPANIES HOUSE 0905/04
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Royal Mail Holdings ple
Report and Accounts
Year Ended 28 March 2004
Contents Page
Chairman's Statement 2
Joint Deputy Chairman's and Chief Executives’ Statement 4
Annual Review 2003-04 8
Operating and Financial Review 9
Royal Mail Holdings ple Board 7
Directors’ Report 9
Corporate Governance a
\nternal Consol 2
Directors’ Remuneration Report 24
Statement of Directors’ responsibilities in respect of the accounts x»
Independent Auditors' Report to the members of Royal Mail Holdings plo 3t
Accounting policies 32
Group profit and loss account 7
Group statement of total recognised gains and losses 3%
Reconciliation of movements in Group shareholders’ funds 36
Balance sheets aw
Group cash flow statement 38
Notes to the cash flow statement 39
Notes to the accounts 40
Five-year summary 6
Glossary of terms 62
Corporate information 64
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Chairman's Statement
‘We've come a long way ~ but there's still much work to be done,’
2003-04 was a fough year for Royal Mail but it was also @ year of solid
achievement. For the first time in four years, the Group made a profit from its
operations ~ £220m - which was an improvement of more than 200% on the
£197m loss from operations a year earlier. That's real progress, driven mainly by a
mix of market growth, cost efficiencies, the impact of the increases in postage.
prices in May 2003 and the increases in banking revenues. Overall, the Group’
made a pre-tax profit of £105m, compared to a loss of £611m a year earlier, when
there were heavy exceptional costs.
Our top priority now is to improve the quality of service to our customers, That
means urgently tackling those areas where we know mail is being delayed and
completing as quickly as possible much-needed operational changes in our letter
business. These changes are crucial to defiver and sustain @ high quality of service
in the longer-term and the efficiency savings to achieve our financial target for
2004-05 of a £400m profit on our day-to-day operations.
This level of profit will not be an easy target to hit, as Royal Mail letters will have an additional cost of £340m in this current year to fund the
14.5% pay increase for postmen and women and other businesses need to fund their own pay awards, We are very determined, however, to
achieve our financial goal, as it wil trigger a Share in Success payment of at least £800 to our people. We very much want fo make this payment.
W's achievable - but it rests on completing the essential operational changes that will deliver productivity savings through more efficient working.
Making a £220m profit from operations, when Royal Mail was losing well over £1m every working day two years earlier, was not our only success
in 2003-04, far from it. There was real progress in the way we operate. We are well on the way towards introducing a single daily mail delivery, a
huge change. Significant progress has been made towards completing a new distribution network for the letters business ~ the biggest change
Royal Mail has ever undertaken to its transport operation. Efficiency improvements are also being introduced in mail centres.
The strike in our letters business in the autumn of 2003, in the London area, was a setback. It cost Royal Mall £25m and, much worse, it hit
quality of service and ieparably undermined the effort to hit the quality targets sel by Postcomm. We had shown in the summer of 2003 that we
ate capable of world-class quality of service when we hit some of the highest levels of customer service since the current measuring system was.
introduced 15 years ago. .
We are working hard to improve quality of service as rapidly as possible. As competition intensifies and business customers find more choice,
Royal Mail must ensure its customers choose us, not because there is no altemative but because we offer them unbeatable service at value-for-
‘money prices, and they trust us consistently to deliver win-win solutions to meet their needs.
However, the unprecedented level of major change actoss our entire letters business — in deliveties, transport and mail centres ~ is inevitably
hitting customer quality of service. We apologise to our customers for any adverse impact on our service, but these are key operational changes
that we must make to improve Royal Mail's competitive edge. We have to go through this period of vital change to improve quality of service, not
just now, but in the fong-term.
The overall changes we are making span the entire range of our business — letters, the Past Office network, parcels and logistics, For most
businesses, successfully implementing one of our programmes would be @ hard task. Making real headway in all of them underlines the scale
‘and scope of the work Roya! Mail is doing to achieve the biggest tumaround in UK industry.
‘The Post Office network is expanding its range of financial services, following the joint venture agreement it signed with the Bank of tretand.
Parcelforce Worldwide reduced its operating losses, and has now embarked on the fina! phase of Its restructuring with the aim of delivering a
‘break-even profit from operations in the third year of the Renewal Plan,
The year saw the first agreement reached with another mail company for access to Royal Mail's sorting and delivery network. There are now
three such agreements. They allow Royal Mail {o eam @ commercial retum on the service it provides for other operators, while preventing the sort
of creamt-skimiming which would damage our ability to continue providing the one-price-goes-anywhere universal service to the UK's 27 million
addresses. It's right that customers have more choice, and access deals also offer the potential for market growth. One thing fs certain - Royal
Mail will fight vigorously for every letter in the market.
‘Companies with highly motivated people deliver high quality service, That's why I believe the agreement on the pay package, which is giving
postmen and women basic pensionable pay of £300 a week, will deliver benefits fo our customers - as better pay will play a significant role In our
efforts to make Royal Mail a great place in which fo work. We've made modest progress here, with 57% of our people saying they enjoy working
for the Company. This Is still far short of the 75% minimum level we want to achieve but it's a further sign that things are getting better in Royal
‘Mail, not worse, es was the case for too meny years.
Last year, we set up a confidential helpline staffed round the clock by professional, independent counsellors, wito can give help and support to
any of our people who make contact because they are concemed about bullying and harassment. There were just under 4,000 calls in the year to
the telephone helpline, a totally unacceptable number, but we ere determined to confront this issue and eliminate all forms of bullying and
harassment.
‘We remain committed to ensuring the pension plan meets all its funding obligations. This has resulted in an additional payment of £132m into the
plan to fund the deficit, on top of an increase in regular contributions of some £140m.
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Chairman's Statement (continued)
Royal Mailis already a very different company to the one that embarked on the Renewal Plan two years ago. We've come a long way and we're
within sight of our goals. But we can't afford any let-up and it wil be essential in this current year that we finish laying the foundations, not just to
be profitable in a year’s time, but to be able to earn and sustain profits in the years that follow. Our people are the crucial point of difference
between Royal Mail and the competition. Recognising this strength and using itis the way in which we will realise our full potential, We can be the
best postal business in the world and Royal Mails people will give us our distinctive edge.
Allan Leighton
Chairman
26 May 2004
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Joint Deputy Chairman's and Chief Executives’ Statement
We've been successful in the past year in terms of growing our revenue and improving efficiency and our financial results reflect this progress.
But we have to keep the momentum going — there's still much tough work to complete across our business if we're to provide our customers with
a consistently high quality of service in the face of competition entering our markets, and deliver the Renewal Plan. Improving quality of service to
our customers is Royal Ma's number one priority.
A key efficiency improvement inthe last few months of 2003-04 has been the introduction, finaly, of Single Daily Delivery, The change has been
introduced successfully into 900 of the 1,400 main delivery offices and we are working hard to suocessfully complete the implementation in a
further 200 ofices with completion of the change in all our offices belng a vital goal in 2004-06. Efficiency improvements are also being introduced
in the offices which sort and handle the mail with changes already made in 31 out of 72 mail centres, and in 45 of the 100 distribution hubs.
Also vital to our business is the transformation of our transport network. We are establishing a simple system for an efficient mails business,
involving a reduction in the number of daly vehicle journeys from 9,000 to some 2,900 through the more efficient use of road transport and a hub-
and-spoke operation. A new road and air network was launched in January this year and the changes we are making include: closing seven ofthe
416 regional distribution centres, opening a new National Distribution Centre at Daventry and reducing nightly air services, with the intention of :
running 24 services from 20 airports by the end of this year, based on large aircraft with mail transported in containers. The last Travelling Post
Offices ran in January and the one remaining ral mall feight service is expected to end in May.
In February 2004, we signed a deal covering pay, London weighting and changes to the business (including the introduction of single daily
deliveries). This 14.5% pay package is giving every postman and woman basic pensionable pay of £300 a week — a key milestone for our
frontline people. Royal Mail is a people business and we know that pay has been an important issue, so we are pleased we've reached this
landmark agreement.
However, the pay agreement was reached following the worst period of industrial action since 1996 - despite the majority of our people voting
against strike action in a nationwide ballot. During the year, there were just over 85,000 days lost to strikes — the bulk in October and early
November, when more than 80,000 days were lost in the dispute over London weighting, even though many of our people in London continued to
work, This cost us some £25m and had a major impact on our quality of service, so almost everybody lost - our people, our business and, most
importantly, our customers.
The cumulative effect ofthe essential operational changes we are making — in deliveries, in the transport network and in our mail centres ~ has,
unavoidably, led to a reduction in quality of service in the latter half of the year. We apologise to customers who will continue to see adverse
effects while we complete these key operational changes in our letters business, The magnitude of the changes we are making over a period of
just some six months amounts to the biggest restructuring of any company in the UK. I's notable that until September 2003, we were exceeding
some of our targets and the First Class level of service was the best for 15 years.
However, in the latter haf ofthe year, as the impact ofthe auturnn industrial action took its toll, we failed every single operational target set by
Postcomm in our licence. Not only does this undermine customer confidence, it exposes us to the risk of being fined by Postcomm and paying
‘compensation to bulk mailers and retail customers. Last year the Regutator fined us £7.5m for falling to meet the targets for two First Class
business mail services. In the light of our recent poor quality of service performance, the prospect of fines, that will not benefit our customers or
the Company, only underlines how vita tis for us to complete the operational changes that wil bring efficiency savings and better services to
customers.
‘After many months of discussion, Royal Mail agreed with Postcomm a three-year price control, allowing @ modest ‘p rise in basic First and
‘Second Class postage in May 2003, the first rises in basic postage for three years. Over the past year, letter mail volumes have increased by
1,6%, whilst mail prices have increased by approximately 3% in the first year of the price control. This tariff increase generated some £200m, but
the RP! -1% formula applying in the coming year will see Royal Mail's basket of prices falling in real terms, underlying the need to make further
efficiencies and cost savings in the year ahead, particularly because we need to find £340m more to fund the 14.5% pay increase for frontline
people within the letters business.
Our estimate has been that some 30,000 jobs in the Group would be made redundant over the course of the three-year Renewal Plan, with some
further jobs going through outsourcing and natural tumover. By the end of March 2004, some 27,100 people had left the Group — through a
combination of voluntary redundancy (10,900), natural tumover (8,000) and outsourcing (8,200). A further 5,000, who have accepted voluntary
redundancy, are working their notice period, many of whom will leave the business by September 2004, By this date, therefore, 32,100 people will
have left Royal Mail through voluntary redundancy, natural turnover or outsourcing.
‘Our outsourcing contracts cover a range of non-core services including IT support, employee health services, buildings maintenance and cleaning
services, and the management of the company car fleet. Of course, the jobs of people working in these roles continue with the suppliers of these
services.
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Joint Deputy Chairman's and Chief Executives’ Statement (continued)
Parcetforce Worldwide continues to strengthen its position in the express-only, guaranteed delivery market for its 17,000 business customers. It
has halved its number of depots fo around 50, and its high 98% quality of service on its core product is among the best compared to its 4,000
rivals. It has cut its losses by almost £100m compared to the previous year - thanks to the efforts everyone in the business have made to make
efficiency savings but itis still losing money - £102m over this financial year. It is vital it completes its restructuring plans to hit its goal of breaking
‘even in this current financial year.
Our European parcels business, GLS, had a very good year, increasing its revenue by £32m (4%) to £818m, and more than doubling its profit
from operations of £11m in the previous year to £25m in 2003-04. GLS is now delivering one million parcels a day on average in 30 countries,
and itis a formidable player in its markets.
Post Office Limited also cut its operating losses over the year - fo £102m. The result, however, does not include the financing ofthe rural Post
Office branches through the Rural Network Reserve. A total of 1,278 branches closed in the same period, but Post Orfice Limited stil faces a
considerable challenge to replace its traditional benefit payment business, which is being lost because of the Department for Work and Pensions’
programme to switch to the direct payment of benefits into customers’ bank accounts.
‘A combination of new services, coupled with a plan to manage a significant reduction in the number of urban Post Office branches, is helping the
network to drive forward financially and to create a vibrant business for the future. Over 21 milion customers can now withdraw cash from their
current accounts at Post Office branches with just their bank card and personal identification number, as can the basic bank account customers of
17 banks and building societies. More than two million customers have opened a Post Office Card Account since its launch in April last year.
During the year, the Post Office finalised an agreement with the Government to utilise £450m of Royal Mail Group pk’s reserves to finance the
tural network over the three years to March 2006. The joint venture signed in March 2004 with the Bank of ireland provides a £100m investment
for the development of a broader range of fnancial services. Personal loang are now available, by phone or through the web, to the 29 million
customers who visit the 16,000-strong branch network every week. More new financial services wil be launched in the coming financial year,
including motor insurance, a range of savings accounts and a credit card
The financial problem of having too many urban branches chasing too litle business is being addressed through the managed closure of up to
3,000 Post Office branches in towns and cities. The Government has sanctioned £210m of funding from existing financial resources - £180m to
‘compensate outgoing subpostmasters for their investment in the business and £30m for investing in the branches that remain. More than 1,000
urban Post Office branches have already closed and consultations on the proposed closure of most of the remainder are underway with
Postwatch, local communities, local authorities and MPs. Meanwhile, the Post Office has become one of the leading players in travel financial
services — number one in providing foreign currency and the largest independent provider of travel insurance.
‘As we enter the final year of the Renewal Plan, we still face a significant number of challenges. Only by further reductions in costs, improving
efficiency, consistently detivering a first class service to customers and making Royal Mail a truly great place to work for our people, will we be on
a sound footing for the future.
Elmar Toime
Executive Deputy Chairman Chief Executive
Royal Mail Holdings plc Royat Mail Group plo Post Office Limited
26 May 2004 26 May 2004 26 May 2004
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Annual Review 2003-04
Reaching more people than anyone else
Foundation for the future
Royat Mail is unique in reaching everyone in the UK every working day for prices that are amongst the cheapest in Europe. Every working day we
collect, process and defiver around 82 million items to 27 million addresses; each week we serve 29 million customers through our network of
16,000 Post Office branches and deliver some 40 million express parcels every year. But we need to change and modemise operations to
improve service to customers and keep ahead of the competition in the letters business.
During the second year of our three-year Renewal Plan, there has been a huge effort to complete the implementation of operational changes
within the mails business. There's still a fot of hard work to be done, but progress is being made. Out of 1,400 main delivery offices, more than
900 have successfully implemented a single daily delivery of mail, or have reached an agreement at local level ont doing so, and now millions of
customers receive letters through a single daily delivery. Our people are now benefiting from an increase in basic pay and a five-day working
week. We are also committed to improving working practices in our 72 mail centres and 100 distribution hubs across the UK, so that all of them
adopt a best practice standard for productivity and efficiency.
Over the past year, we have continued to improve our UK-wide transport network, We are aiming to create a new network that will be more
robust, flexible and reliable than before, capable of delivering a better quality of service to customers and cost savings to Royat Mail. A key
component of the new network has been the opening of the £40m National Distribution Centre in Daventry, and the use of larger jet aircraft to
transport more mail from 20 airports. By using fewer, larger vehicles and aircraft, the new integrated road and air network reduces the impact on
the environment of Royal Mails distribution operation by 30%.
As part of the Transport Review, we have revised our use of rail for transporting mail - a decision driven by economic considerations. Whilst the
use of rail has not been ruled out for the future, it needs to be commercially beneficial in terms of quality of service and price - our customers
cannot subsidise rall operators. This resufted in us reducing train services from 68 to just one, including ceasing the use of Travelling Post Offices
(TPOs). In service since 1838, TPO use was at its peak in the early 1900s when rail was the most reliable way of sending mail long distances.
Although the TPOs were great in their time and did an excellent job, they were a Victorian answer to a Victorian problem of moving mail around
the country in the pre-motorway and pre-air era. However, the world has moved on and, like mail coaches before them, TPOs are now a proud
part of Royal Mail's history, not its future.
Service to customers
{mn the first half of the year, our First and Second Class services showed their strongest ever performance, with both ahead of targets. However,
whilst our people have been doing an outstanding job in implementing changes across the business that will provide the foundation for
consistently good service, the scale and pace of those changes had an impact on quality of service in the second half of the year. Inevitably,
making these changes is causing turbulence. We regret any reduction in customer service caused by these necessary changes but we are putting
in place a long-term sustainable network to provide a better service than ever before. We also felt the impact of strike action in the autumn, which
disrupted mail across the country even though the majority of postmen and women continued to work normally, With Postwatch's endorsement
we agreed that it was a good idea to donate £1m to London's bid for the Olympic Games in 2012, to say sorry to out customers for the disruption
this strike action caused.
‘Whilst our aim is to ensure customers get the service they expect from Royal Mail, in handling around 82 million items @ day, sometimes things
go wrong. If they do, we want fo compensate customers quickly and fairly. Royal Mail has introduced new compensation arrangements for
customers whose mail is delayed. We offer better protection for customers in the UK than almost anywhere else, and are one of the very few
postal services to pay compensation for delay.
New compensation schemes were introduced where individual customers can claim a book of 12 First Class stamps, for First Class letters that
attive more than four working days after posting, and also for Second Class letters that arrive more than six working days after posting, Business
customers can get a percentage refund on their postage bils if Royal Mall does not meet regulatory performance targets.
We have set up a comprehensive range of processes to monitor the Group's performance on health and safety issues, as well as care of the
environment. In September, we published our first external Health, Safety and Environmental Report as part of our commitment to transparent
Teporting in these areas. This report was recognised as the Best First Tine Environmental Report at the Association of Chartered Certified
Accountants’ (ACCA) UK Awards for Sustainability Reporting in 2003. A copy of the report can be found on our website. 1t highlights how we have
invested in improved health service support for employees, revised approaches to safety management that have yielded significant improvements,
in many parts of the business and cut carbon dioxide emissions by 6% since 2001-02. We have also reduced our use of energy by 8% and have
begun using renewable energy for the first time. We will be producing our first full Corporate Sociat Responsibility (CSR) Report in September
2004.
‘With us it's personal’
in the second year of our three-year Renewal Plan, the focus has been on our core businesses and improving our service to customers. This has
seen us undetining the unique benefits of using Royal Mail services through our ‘get personal’ advertising campaign. This features a number of
Royal Mail people demonstrating how our people go the extra mile every day to deliver around 82 millon items of mail o 27 million addresses
‘across the UK.
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Annual Review 2003-04 (continued)
In September, Royal Mail launched its Special Delivery 9am service - a direct challenge to the courier market. This guarantees next working day
detivery to most UK destinations by 9am, or customers get their money back. It costs as little as £6.95 to anywhere in the UK. It is challenging the
market and offering customers a better deal.
Doing business online is not stamping out stamps. in January, Royal Mail launched the UK's first digital stamp with a new onfine postage
purchasing system called ‘SmartStamp'. Aimed at businesses, customers can create SmartStamps on their desktop computer, buy them over the
Intemet and print them directly onto envelopes from a normal printer at any time of the day or night. SmartStamps can be printed for most UK and
interational mail, and can be posted directly into post boxes or taken to a Post Office branch in the usual way.
‘Small businesses can add their own logo designs and print them directly on to an envelope or label in the office. The abilty to personalise the
logo gives small businesses the opportunity to differentiate themselves from competitors and achieve a professional brand appearance more
‘commonty associated with larger companies.
Celebrations through stamps
For customers who want to continue using traditional stamps, our 2003 stamp programme was packed with anniversaries and celebrations,
including two Royal occasions, both in June. Fifty years on, Royal Mail issued ten stamps to mark the Coronation of Her Majesty The Queen. On
17 June 2003, the Queen's grandson, Prince William, celebrated his 21* birthday, the first time Royal Mail has marked a ‘coming of age’ with a
‘stamp issue.
In November 2003, as England celebrated winning the Rugby World Cup with a 20-17 victory over Australia, Royal Mail set to work designing four
‘commemorative stamps, which went on sale in December. Hugely popular with the public and collectors alike, the Rugby World Cup set
comprised two First Class and two 68p stamps - the latter being the 20g air-etter rate to Australia.
Christmas greetings by mail
Last Christmas saw another bumper postbag for Royal Mail, with average daily postings up from 82 million to over 135 million on peak days.
Total festive mail volumes reached 2.1 billion, including a huge growth in Intemet shopping with Royat Mail delivering more than 40 million items
‘bought online, double the quantity we handled last year.
Royal Mail delivered its biggest ever e-Christmas, as online shoppers broke all records by spending £3.34bn on gifts and presents ordered over
the Intemet. The popularity of text messaging and e-mail has done nothing to halt the sending of Christmas cards - in the UK we sent and
received some 700 milton Christmas cards posted at home and abroad.
And sending a Christmas wish-list to Santa Claus was as popular as ever. Royal Mail helped Santa by delivering replies to more than 750,000
children who wrote to him last Christmas.
Young Letter-Writers
Royal Mails Young Letter-Writers Competition has attracted over four milion entrias since it began 26 years ago, making it the biggest letter-
writing competition of its kind in the UK. This year the competition challenged the nation's young letter-writers to ‘Write to Their First Class Hero.
Primary school children throughout the UK are invited to enter the competition, in three categories: ages 7-8, 9-11, and Special Achievement - for
children who overcome exceptional difficulties in order to write their letter.
Postal Heritage Trust
The Postal Heritage Trust was set up in 2003, to protect over 300 years of Royal Mait history, with Tony Conder appointed as the first Chief
Executive. Building on the history and reputation established through the centuries is a key part of Royal Ma's Renewal Plan to retum the
business to proftabiity. The vast historic collection dates back to the 17 century, and by establishing a charitable trust, and appointing an
independent management boar, its fulure is secure for new generations. The Postal Heritage Trust will be established as an entity separate from
Royal Mail during 2004,
Strengthening our reputation in express
Investing in the customer experience
Parcelforce Worldwide continues to work to establish itself as one of the UK’s leading providers of global express, time-guaranteed delivery
services. The past year has seen the business consistently deliver a quality of service of 98%, a standard that is one of the best, if not the best, in
the industry. This has bean recagnised by our customers, from small businesses to major retailers, with contract wins fo provide services for well-
known brands such as the famous London department store, Harrods, and DVD retailer, Play.com. We have also invested in new technology to
improve the all-round collection and delivery experience. New web-trading services enable our customers to order collections and print labels
online, access information on the delivery of their item more quickly, as well as arrange redeliveries. We have also added 24-hour voice
Tecognition to our portfolio of customer service options, meaning customers can access aur services any time of the day or night, seven days a
week.
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Annual Review 2003-04 (continued)
The transformation of the business into an express, time-guaranteed delivery service provider only, has enabled Parcelforce Worldwide to reduce
its losses by 48% in the financiat year. However, the profit challenge remains, and further restructuring will take place in the coming year to bring
down costs, while maintaining a high quality of service to customers.
For the 11% year, we recognised small business excellence through the Parcelforce Worldwide Small Business Awards. Endorsed by the
Federation of Smal! Businesses, the winner wes Croft Engineering Services, which beat off competition from 4,500 entrants. The company,
based in Warrington, was also recognised for its export achievements.
New solutions for UK businesses
Adding logistics expertise
Royal Mail has continued to provide tailored logistics solutions, utilising its warehousing and fulfilment services, to meet the specific needs of
major UK businesses. We have developed a strong track record in handling retumed goods for major retailers, and reinforced our position by
winning a major contract with television channel, Auctionworld.tv. And we have moved a step ahead of the competition, with an innovative
solution to give retallers a better return on unwanted goods. Using Intemet-based auctions, we handle the whole process of selling the items -
from assessing the condition of the goods through to delivery to the buyer and follow-up customer service. Through this channel, which has
proved popular in the past year, items fetch up to five times the vatue they would get through other disposal channels.
Investing in our retail network
Changes and challenges
Over the past year, the Post Office has continued to invest in its branch network, introducing new products and forming partnerships with other
organisations to improve services to customers. From April 2003, Post Office customers have been able fo access current aocounts (of selected
banks), basic bank accounts and the Post Office Card Account al branches, in many cases just using thelr bank card and personal identification
number. This has seen the Post Office establish itself as a key provider of banking services through ils extensive branch network, especially in
tural areas, as 60% of villages have a Post Office branch but only 9% have a bank branch. The Post Office Carry on Collecting Roadshow visited
‘some 160 shopping centres, high streets and seaside locations throughout the spring and summer to raise awareness of Post Office banking
‘services, and let customers know how they can continue to collect their benefits in cash at Post Office branches as the Goverment moves closer
towards paying all benefits directly into customer accounts by 2005.
Customers are also now able to pay for many Post Office products end services using a debit card, as well as cash or cheques.
Building a sustainable urban network
The restructure of the urban Post Office branch network has gathered pace with the planned closure of up to 3,000 urban branches expected to
be complete by the end of the year. Consultations are now being carried out on an aree-by-area basis, so that customers and subpostmasters get
a realistic picture of future Post Office services in every town and city. This also helps reduce the uncertainty facing subpastmasters so they can
concentrate on buikding sustainable businesses. The consultation process, agreed by Postwatch, was extended to give everyone affected by a
Potential closure a better chance to make their views known. MPs are now given earlier notification of closure proposals, and local authorities are
able to contribute further planning and regeneration information to the programme's planning process, in addition to the information we already
obtain, As a sustainable urban network takes shape, we are determined that over 95% of our urban customers nationally will remain within a mile
of aPost Office branch
Safeguarding rural Post Office branches
In May 2003, the Government received approval from the European Commission for a £450m, three-year funding package to support Post Office
branches in rural areas. This money, which is drawn from Royal Mail's existing financial resources, enables the Post Office to continue to provide
customers with face-to-face access to its services, and recognises the important social role that Post Office branches play in everyday life,
particularly in rural communities,
The Post Office remains committed to preventing avoidable closures of rural Post Office branches and the rate of closures has slowed in recent
years. This reflects the work of our dedicated team of rural transfer advisors, who actively seek solutions to potential rural branch closures. This
has seen branches in pubs, churches, village halls, butchers, pharmacists, @ police station and even a fish and chip shop. These increasingly
offer a wider range of Post Office products — in February, the vehicle licensing service was extended to almost 600 additional Post Office
branches, many in rural areas. The Post Office now offers electronic mobile phone top-ups, supplementing the top-up vouchers that continue fo
be offered at branches, giving customers in rural and urban locations the convenience of crediting their phones at thei local Post Office branch.
For the little things that make the big things happen
The Post Office has consolidated its position as a key provider of travel services, capturing a 20% share of the foreign currency exchange market
with sales of £2bn from nearly 9 million transactions per year. The Post Office is also now the fifth largest provider of travel insurance, with an 8%.
share of the market. We also plan to build on the trust and convenience that customers associate with the Post Office, to move into the financial
‘sefvices products market with the launch of a personal loan — the first of a portfolio of products from the Bank of Ireland and Post Office Limited
joint venture. Other products in the pipetine will be motor insurance, savings accounts, a credit card and mortgages, and these are expected to be
launched over the next two years. With a range of new products, investment in branches and building on agreements with existing partners, as its
new advertising campaign maintains, the Post Office really is forthe litle things that make the big things happen.
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Operating and Financial Review
Introduction
‘This year is the second year of the Group's three-year Renewal Plan, which sets out to fundamentally restructure our operations and create a
profitable and sustainable business that can confidently face the imminent challenge of new competition within our core market.
‘Year two has delivered 2 significant improvement to profitability and
cashflow, which have been restored. Efficiencies have continued to be
introduced and costs are under tight control. However, retums are stil
uncommercial and Parcetforce Worldwide and Post Office Limited are
both loss making and consuming large amounts of cash. Unless the
cost base is further reduced, future results will quickly slip back into
Josses. {tis our imperative to continue to deliver operational efficiency
programmes and to reduce expenditure in ali areas of the business.
This will allow us to face up to new competitors and afford to pay the
recent pay agreement, whereby wages within the letters business will
increase by 14.5%, which will cost an additional £340m on an annual
basis. These programmes, including Single Daily Delivery, Mail Centre
paeriesboe Automation programmes and initiatives, Parcelforce
Worldwide overhead and infrastructure cost reduction, and managerial
overhead reductions, are estimated to cost some £550m of cash to
finalise. We expect most of this spend to take place in the next financial
year.
A maior focus is placed on extemal turnover and profits from operations, which best reflect underlying performance at both Group and business:
unit level, This year, the Group recorded £220m of profit from operations, a very significant improvement on the losses reported for the last three
years, This is still lower than the £259m achieved In 1998-99, and considerably less than the £387m recorded in 1997-98, when profits from
operations reached their peak. The major contributor to this result is the Royal Mail letters business, which contributed 76% of external tumover
and £253m of profit from operations. General Logistics Systems, our European parcels business, also contributed to profitability by more than
doubling its profits from operations from £11m to £25m. Parcelforce Workiwide and Post Office Limited both recorded losses from operations of
£102m, although these are almost half of the losses recorded last year by each of these businesses.
Royal Mall Holdings plc and the Royal Mail group of companies
The Royal Mail group of companies comprises Royal Mail Holdings plc (the Company) - which is wholly owned by HM Government - and its
‘subsidiaries. The Company Is incorporated under the Companies Act 1985 (the Act) and the accounts are produced in accordance with the Act
and applicable UK accounting standards.
The accounts are drawn up for the 52-week period ended 28 March 2004 (2003 52 weeks ended 30 March 2003) and have been prepared on a
going concem basis.
Financlal highlights
‘Summary of results 2004 2003 External tumover
fm £m Extemal tumover has increased by £334m (4%) to £8,633m, driven
mainly by tariff increases of some £200m and 1.6% volume growth in
Extemal tumover 8,633 8209 the Royal Mall UK letters business, partaly offset by customers trading
; down fo lower priced products. Post Office Limited reported an increase
ufos) from o 9 N87) Gf £78m (0%) as a result of increases in banking revenue, whilst
Exceptional items Nit {695) _ retaining much of the Department for Work and Pensions related
income. Parcel revenue within General Logistics Systems in Europe
Net interest receivable bd 35 grew by £32m (4%) - largely as a result of volume increases in
. Germany and higher parcel yields in France. These increases are partly
Profitloss) before taxation 105 (611) offset by a dectine in Parcelforoe Worldwide inoome of £5m (17%),
Taxation (change)/credi 52 tiven by fs downsizing and strategy of focusing on ‘next day’ services,
sxaton (charge) (98) and £12m (2%) relating to the Royal Mais intemtional ettors
Profit{loss) after taxation 7 (559) operation, as a result of lower cross-border volumes.
Net cash outflow (222) (486)
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Operating and Financial Review (continued)
Profiti(loss) from operations
Summteny 71042008 roi fom operations of 220m represents a 417m
a tumaround against the comparable loss in 2003 of
Group operating profit before exceptional items st 49 £197m. This is mainly a resutt of market growth, price
Add charge/(benefit} in respect of pensions increases, cost efficiencies and increases in banking
deficit(surplus) 132 (246) revenues. The reconciliation to Group operating profit in
‘Add share of profits in associates and joint the profit and loss account is shown in the adjacent
ventures _ 7 30 table.
Profit(loss) from operations 220 (197)
Margin from operations
Margin from operations (profit from operations expressed as a percentage of external turnover) of 2.5% improved considerably over the negative
retum of 2.4% from the corresponding period last year but is still way below a commercial retum, and much lower than in the 1990s when
margins of nearly 6% were generated (5.7% in both 1996-97 and 1997-98)
Exceptional items
Net exceptional items were zero and comprise £64m of operating exceptional costs (2003 £697m) offset by £64m of non-operating exceptional
profit (2003 £2m). The £64m of operating exceptional costs comprises impairment of xed assets of £41m (2003 £97m) and a further £23m
restructuring costs (2003 £600m), including an increase in the provision for surplus properties of £17m (2003 £18m) associated with the core
programmes underpinning the Renewal Pian,
The £64m of non-operating exceptional profit comprises £67m of profit associated with the sale of properties (2003 £24m), Enil forthe impaiment
‘of goodwill in associales (2003 £24m) and £3m (2003 £2m) of lasses relating to business disposals for this year (2003 £2m profits), primarily the
‘outsourcing of IT operations and the associated disposal of CSC Business Systems Limited (formerly RM Business Systems Limited),
Net interest receivable
Net interest received during the year reduced from £35m in the prior year to £17m. This was due to lower interest rates received on the Group's
cash and current asset investments, compounded by a reduction in average net investment balances, which were used to fund Post Office
Limited's working capital and the cost of the rural network.
Taxation
The accounts include a current tax charge of £12m (2003 a credit of £4m) and a deferred tax charge of £86m (2003 a credit of £48m) for the year.
‘The tax charge for 2004 represents an effective tax rate of 93% on the Group's profit before tax, compared to a 9% credit on its loss before tax for
2003. The high effective tax rate is mainly due to the tax on disposal of assets and the unrelieved losses in Post Ofice Limited.
Cash flow and capital expenditure
Net cash outflow of £222m was significantly better than last
Summary of cash flows 2004 2003 year’s outflow of £486m. This is mainly due to the increase in
£m £M__ profit from operations and the flow through benefit of the pension
Net cash outflow from operating activities (241) (383) prepayment for regular and deficit contributions of £400m made
Dividends received from joint ventures and in March 2003, offset by outflows relating to Post Office
associates a 7 Limited's working capital cash, and payments relating to one-off
. . expenditure to sur delivery of the Group-wide Renewal Plan.
Capital expenditure and disposals (56) (189) frerases aie received fom joint ventures and
Tax and interest 2 3 associates to £21m (2003 £7m) are the result of dividends
Business acquisitions and cisposals 25 (2). received mainly from Quadrant £7m (2003 £3m), Camelot £7m
(2003 £4m) and the Bureau de Change business £5m (2003
Net cash outflow (222) (486) fi,
Capital expenditure, net of disposals of £56m (2003 £159m) comprises £158m (2003 £221m) of expenditure for projects, including the
intemational mail centre near Heathrow and further spend on mails automation, offset by inflows of £102m (2003 £62m), mainly relating to
‘surplus property disposals. Tax and interest inflows in the year of £29m (2003 £51m) are the result of less interest income and the recovery of
£42m of tax (2003 £17m). Business acquisitions and disposals resulting in a £25m inflow (2003 £2m outflow) arise primarily from the disposal of
CSC Business Systems Limited (£29m), offset by minor aoquisition spend to buy the Italian subsidiary of our European parcels business, GLS.
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Operating and Financial Review (continued)
Business acquisitions and disposals
In June 2003, the Group disposed of its IT operation for £29m of cash, resulting in an exceptional charge of £3m.
In March 2004, the Group signed a joint venture agreement with the Bank of Ireland to sell Post Office branded financial service products, such as
personal loans, motor insurance, a credit card and savings accounts. This arrangement will initially run for ten years. As part of the transaction,
the Bank of Ireland invested £100m to enable the establishment of the joint venture and to provide the core infrastructure and start-up costs.
Other minor acquisitions were made for £4m to support the development of our European parcels business in Italy.
Pensions
Pension scheme overview
Royal Mail operates the 5° largest UK occupational pension scheme, with asset values of some £12bn at March 2003, the date of the most
recent triennial actuarial valuation, a fall of some £5bn since the previous valuation in March 2000. A recovery in the scheme’s asset values to
£15.1bn at March 2004 is offset by an equivalent increase in the scheme's liabilities, as assessed by the actuaries. The scheme has 180,000
members and 250,000 pensioners. Due to its size, even minor changes to assumptions used to calculate pension costs and liabilifes, and the
mere fact that asset values are dependent on the UK equity markets, mean that there can be large volatility in the pension costs recorded in the
profi and loss account.
Pension charges in the profit and loss account
‘Summary of pension charges 2004 = 2003 The Group continues to account for pension costs under SSAP 24
£m £m Accounting for pension costs. The 2004 charges/deficits are based on the
recent full triennial valuation as at March 2003, whilst the 2003
Regular pension costs 243-311 comparatives are based on the March 2000 triennial valuation,
Pension deficit(surplus) adjustment 132 (246). The latest valuation highlights a movement from a surplus to a
, substantial deficit due principally to increased life expectancy of
Exceptional redundancy costs 54__ 200 crnployees, compounded by lower discount rates which increase the
Total charge included in profit(loss) liabilities of the Plan.
before taxation 429 265 :
Regular pension costs, which are included within profit from operations, of £243m (2003 £31 1m) have decreased due to lower pensionable
payroll costs and changes in underlying assumptions. The pension deficit net cost of £132m consists of £188m in respect of recognising the
accounting deficit over 12 years ~ the average remaining service lives of employees — offset by notional interest on the pension asset of £56m.
This compares to a surplus in 2003 of €246m (including £45m notional interest credit) based upon the March 2000 triennial valuation. Charges
relating to redundancy provisions of £54m (2003 £200m) relate to pension costs associated with implementing the Group-wide Renewal Plan.
Pension cash funding
‘Summary of pension cash flows 2004 += 2003-— The calculations to determine the funding of the pension schemes do not
£m £m___tely on the same assumptions that are used to generate the SSAP 24
. . charge to the profit and loss account. More prudent actuarial assumptions
Regular pension contributions 16 184 are used by the Trustees and independent Plan actuary, and using the
latest valuation this has confirmed a cash funding shortfall of £2.5bn, which
ss caatiastl naam 4554 requires an initial cash contribution of £132m, substantially higher than the
Paymens relating to redundancy 44 38 £100m anticipated at the time of publishing last year’s aocounts. Cash flows
telating to pensions are highlighted in the adjacent table. This year’s cash
Prepayments for next year 125 400 flows are positively impacted by £275m due to the timing of pension
prepayments.
Net cash payments 380676
‘Accounting stenderds
The accounting standard, FRS 17 Retirement benef introduces radical changes to accounting for pensions and similar benefits in the UK.
Royal Mait is complying with the transitional arrangements as modified by the Accounting Standards Board in November 2002. The balance sheet
and profit and loss impacts are disclosed in note 19 to the accounts. This is further complicated because the Group plans to adopt international
Financial Reporting Standards (for pensions accounting these are expected (0 be similar to FRG 17), which means thal the FRS 17 disclosures
will continue to be made next year, with March 2008 being the first year in which all pension costs and related information will be reported in
accordance with the intemational standards.
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Operating and Financial Review (continued)
Treasury management
The Group operates a central Treasury function that manages some £1bn of current asset investments, £600m of borrowings and £ 1bn of cash,
in accordance with investment restrictions set by the Government. It also acts as internal banker for the Group's business units. The Group
finances its operations largely through retained profits and borrowings.
Group Treasury derives its authority from the Royal Mail Holdings plc Board, and provides monthly monitoring reports for their review. The
‘Treasury function only has the authority to undertake financial transactions relating to the management of the 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
temained unchanged during the year. The principal financial instruments are deposits, gis and long and short-term borrowings.
During the year the Group entered into the following financing arrangements for the future funding of Post Office Limited:
- in October 2003, the Group signed a committed borrowing facility between the OT! and Post Office Limited for £1,150m. This financing
is intended to replace the pre-funding provided by the Department for Work and Pensions for benefit payments prior to the introduction
of Automatic Credit Transfer for claimant payments. The facility is in the form of short and Jong-term bonds; and
- the Framework Agreement entered into last year between Post Office Limited, Royal Mail and the DTi, granted Post Office Limited a
further borrowing facility of £250m for a maximum of 28 days from Royal Mail surpluses.
The terms of the Government borrowing facility and the associated Framework Agreement impose strict constraints on the separation of cash
funds within the Royal Mail Group and the purposes to which they can be used,
The principal treasury risks arising from the Group's activities are currency, counterparty, commodity (fuel) and liquidity risk. These are managed
as follows:
- the Group is exposed to foreign currency risk due to Royal Mail Intemational's obligation to pay overseas postal operators for carrying UK
‘mail abroad, and the balances held to operate the Bureau de Change services within Post Office Limited. These risks are mitigated by 2
hedging programme managed by Group Treasury. Where possible, exposures are netted intemally and any remaining exposure is hedged
using a combination of extemal spot and forward contracts. All other significant liabilities are hedged when they become contractual;
- the Group's obligation to pay overseas postal operators is denominated in Special Drawing Rights (SDRs) - a basket currency comprising
‘of USD, JPY, Sterling and euro, The Group has a policy of matching receipts and payments for individual currencies. The policy is that
80% of the forecast exposure is hedged. Group Treasury operate a rolling 18-month programme, which is subsequently reviewed on a
‘quarterly basis. Major currency holdings for the Bureau de Change business are hedged along with minor currencies showing a correlated
‘movement. The Group does not hedge the translation exposure created by the net assets of its overseas subsidiaries;
- the Group is exposed to fuel risk since it operates one of the largest vehicle fleets in Europe and consumes over 150 milion litres of fuel
er year,
- ‘the Group's fuel risk management strategy aims to reduce uncertainty created by the movements in the oil market. The strategy operates
within the parameters set by the Board. The fuet procurement programme allows for the use of over-the-counter derivative products to
manage both the commodity and foreign exchange elements of the exposure;
= counterparty risk is managed by limiting aggregate exposure to any individual counterparty. These exposures are reviewed regularly and
adjusted as appropriate; and
: ‘the committed borrowing facilities relating to Post Office Limited and Royal Mail Group ple, along with net cash investments held on the
balance sheet, ensure that the Group can finance its operations into the foreseeable future.
Regulation
‘The Postal Services Commission (Postcomm) was created as the independent Regulator for the UK postal industry in 2000. Subsequently, Royal
Mail was granted its first licence, which required it to provide @ universal postal service at affordable prices. Currently, several other companies
have also been granted licences.
In March 2003, Royal Mail accepted Postoomm’s proposals for a second price control over a three-year period starting 1 April 2003, This allowed
Royal Mail to increase its prices by approximately 3% on 8 May 2003, followed by a conventional RPI-1% approach in the second and third
years.
In May 2003 Postcomm published its proposal for downstream access prices and on 20 August 2003 Royal Mail submitted its response to the
‘access consultation. In February 2004, Royal Mail agreed terms with Business Post Group plc to provide access to its delivery network and
consequently Business Post withdrew its application to Postoomm for a determination on aocess. In April 2004, Royal Mail also agreed access
terms with TPG N.V. and Deutsche Post A.G.
In April 2004, Postcomm commenced a consultation process for size based pricing. Royal Mail believes size based pricing is much more cost
reflective than the current weight based pricing structure and will be responding accordingly.
Royal Mail has recently started planning for its next price control, which is due to commence in April 2006, and Postcomm has already issued its
business planning questionnaire, The outcome of the next price control will determine the ultimate success or failure of liberalising the postal
sector and Royal Mail believes Postcomm must build enough pricing flexibility within the next control, particularly around size, channel and zonal
pricing, to facilitate the introduction of fair and efficient competition rather than aliowing entrants to capitalise on areas where Royal Mails prices
are currently misaligned.
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‘Operating and Financial Review (continued)
People
Management of our people and their costs remains a key comerstone of the three-year Renewal Plan, and success or failure in this area wilt
determine whether the Group can remain a profitable and sustainable business into the foreseeable future. The chart below highlights the
reduction in headcount since April 2002 by the UK businesses.
During the year, headcount reduced by 10,500 due to, the outsourcing of 1,700 people, net leavers of 3,400 and 5,400 from the voluntary
redundancy schemes relating mainly to the following programmes:
- Single Daily Delivery within Royal Mail Letters;
2 Mail Centre Review within Royal Mail Letters;
= Transport Review within Royal Mail Logistics and Royal Mail Letters;
= Continuation of the Apollo project within Parcelforce Worldwide; and
. Managerial voluntary headcount reduction programme within the Group Centre and other overhead areas of our businesses.
Al the end of the year, 5,000 people remained in the business who have accepted voluntary redundancy, 2,203 of whom had left by the end of
April 2004, and most of the remainder will leave by September 2004.
Special reserves
During the period, £1,121m of the Mails Reserve has been utilised for the provision of financial assistance to Post Office Limited, including £450m
to set up the Rural Network Reserve and £671m to cover the write-off of Post Office Limited's intercompany debt to Royal Mail Group pic, £146m
of the Rural Network Reserve has been used by Post Office Limited, representing the financing required during the year to maintain the rural
Network of post offices.
International Financial Reporting Standards (IFRS)
The Group plans fo adopt and implement IFRS for the year ending March 2006, in fine with requirements announced in June 2002 by the Council
of the European Union, which are mandatory for ail listed companies. The Company has established a project team to manage the convergence
to IFRS and this team is working closely with our auditors.
A\ the date of this report, the Group has made good progress on converting to IFRS. Whilst the Group has commenced an exercise to understand
the diflerences between Intemational Accounting Standards (ASVIFRS and the Group's current policies, the conversion project is and will
‘continue fo be ongoing. A number of revised standards were issued by the Intemational Accounting Standards Board {IASB) in December 2003
and March 2004. The iASB has confirmed that only standards issued and in place by March 2004 will apply for adoption for the year ending in
‘March 2008. However, the IASB will continue to issue further new standards during 2004, 2005 and beyond, for which the Group will consider
early adoption on a case-by-case basis, In addition, the International Financial Reporting interpretations Committee is expected to continue to
issue interpretations, which will apply to the standards that are mandatory for listed companies for March 2006.
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Operating and Financial Review (continued)
‘Segmental analysis - turnover and profitability
The segmental analysis in note 1 to the accounts analyses the operating profit/(loss) in accordance with SSAP 25 - Segmental reporting. The
analysis below sets out trading results, which focus on:
7 ‘operational business units rather than the statutory segments; and
- external tumover and profit from operations (the latter excluding the charge/benefitin respect of pensions deficitisurplus but including
share of profits from joint ventures/associates and the charging of internal interest for centrally managed funding resources)
Furthermore, comparatives have been restated to reflect the changes in organisational structures that took place during the year. The segmental
analysis in note 1 to the accounts has two principal segments: () Mails and Parcels covering Royal Mail, Parcelforce Worldwide, and General
Logistics Systems and (i) Post Office Limited,
Group external tumiover of £8,633m (2003 £8,299m) and profit from operations of £220m (2003 £197m loss) is made up as follows:
_External tumover Profiti(loss) from operations
Business unit performance 2004 2008 2004 2003
£m £m fm £m
Royal Mail 6,589 6,290 253 2
Post Office Limited 977 899 (102) (198)
General Logistics Systems 818 786 B tt
Parcelforce Worldwide 245 296 (102) (198)
Other Businesses 4 28 146 168
Group 8,633, 8,299 220 (197)
A further analysis of results, on a unit-by-unit basis, is shown below:
Royal Mail 2004 2003 -—_—Extemal tumover rose by £299m (5%) to £6,589m, £311m of which relates to
fm ___fm__ av increase in the UK letters business as a result of priog increases on 8 May
2003, and an increase in volumes of 1.6%, offset by an adverse shift towards
External tumover 6,589 6,290 lower priced products. The price increases of approximately £200m (3%)
across most products are the result of Royal Mail aocepting a new price
control regime which was agreed by Postcomm. The growth in volume from
23.1 blion o over 23.5 billion items is driven by the Mailsort, Door-4o-Door,
Presstream and Cleanmail product range. Tumover of the intemationat letters operation declined by £12m (2%), due to lower volumes as a result
of both higher prices and further impacts due to electronic substitution, particularly on cross-border social mail
Profit from operations 253 20
The increase in profit from operations of £233m is mainly driven by the turnover growth highlighted above and cost savings resulting from tight
cost control, rather than from the productivity savings required to fund the cost of increasing basic weekly pay to £300 per week. Costs would
have been lower if savings relating to key productivity programmes were delivered as planned but these were delayed to the last quarter of the
year because of difficulties in gaining union agreement, which culminated in a series of official and unofficial strikes. A direct result of the strike
action was @ reduction of revenue and increases in costs, which had the combined impact of reducing profitability by some £25m.
In December 2003, union agreement on the key productivity programmes was reached, which allowed the essential changes in working practices
at both delivery office and mai centres to be implemented. Itis anticipated that these programmes will now be completed by September 2004.
These productivity savings will help fund the increase in annual salary costs of some £340m and provide a platform to allow Royal Mail to
effectively compete with competitors in the future.
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Operating and Financial Review (continued)
Post Office Limited 2004 —2003.-»—_—Past Oifice Limited is responsible for 15,961 retail outlets, of which 560 are
fm ___&m___direclly owned, Since March 2003, 1,101 urban Post Offices have been
closed as part ofthe Urban Reinvention Programme.
Extemal tumover increased by £78m (9%) to £977m, primarily due to an
Loss from operations (102) __(198)__increase in banking revenue. In addition, new products, such as e-top-ups,
allowing customers to top-up their mobile phone credit over the counter, have
been successfully introduced and further growth has been registered for existing products, such as the Bureau de Change business, which is now
the largest provider in the UK.
Loss from operations improved by £96m (48%) to £102m, primarily driven through cast control and headcount reductions, better product
profitability and network restructuring, Savings have been made in staff and agents’ costs through the efficiency programme and Network
Reinvention strategy. During the second half-year, a new marketing strategy spearheaded by the ‘Anis’ commercials on both radio and television,
Contributed to the increase in revenue,
in March 2004, a joint venture agreement with the Bank of Ireland was signed, which further demonstrates Post Office Limited's commitment to
growing revenues and margins by utilising its netwark and brand to sell financial services.
External tumover 977 899
General Logistics Systems 2004 2003 External tumover increased by £32m (4%) compared with the prior year but
fm £m___ included a £13m reduction as a result of the weakening ofthe euro. The
underiying growth of £45m (6%) resulted from strong growth in core parcel
Extemal turnover 818 786. volumes particularly in Central Europe. Profit from operations more than
. doubled from £11m to £25m reflecting tight cost control and improvements in
Profit from operations 2 a underlying profitability.
2003 Extemal tumover decreased by £51m (17%) to £245m as the full year impact
Pareaiforca Worltwide ioral ‘em ___oflast year’s decision to exit standard products and terminate contracts with
~—T— _ inadequate yields has flowed through. However the progress planned for
External tumover 245 296 __reducing costs, particulary in the South East, and increasing the number of
owner drivers has not been achieved and the cost base is stil too high by
Loss from operations (102) (198) some £100m when compared against competitive benchmarks, However,
underlying income performance and average yields have improved against a
felatively Weak parcels market.
‘The operational restructuring continued with focus upon improving efficiency and reducing costs within the restructured network. The decrease in
tumover was more than offset by reductions in costs, mainly due to the impact of last year's restructuring and downsizing flowing through into this
year's results. As a result, the loss from operations was reduced by £96m (48%) to £102m. The major focus of the business next year is to
reduce further its cost base and to increase the level of owner drivers fo deliver the required cost flexibility to compete profitably and effectively.
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Operating and Financial Review (continued)
Other businesses 242008 oer Group businesses principal comprise intemal interest income of
m £m __£134m (2003 £162m) and £15m (2003 £10m) share of profits of centrally
Extemal tumover 4 28 held associates and its joint venture Romec. The increase of £5m in share
of profits mainly relates to Romes.
Profit from operations 148168
Way forward
This year's results represent a key stage in our Renewal Plan in that they show a tumaround in the financial fortunes of the Group as a whole,
from a loss making and cash consuming business to one that is now profitable for the first time in four years. Particularly successful has been the
performance of our European ground-based parcel business, which delivered profits of £55m at the EBITDA level and a margin of 7%. Our
challenge next year is to address our two major loss making businesses - Parcelforce Worldwide and Post Ctfice Limited, although both have
halved their losses over the year to some £100m. Parcelforce Worldwide needs to reduce its cost base significantly if it is to break even at an
operating level and Post Office Limited needs to drive up income, particularly from its new products and financial services joint venture with the
Bank of Ireland, ift is to achieve its ambition of becoming cash generative over the next two years. The letters operation has two major
challenges to deliver - to complete its strategic efficiency programmes in order to deliver sufficient savings to help fund the cost of £340m for the
£300 per week wage package and the growing pensions burden, and to recover its quality of service to acceptable levels to meet its licence
commitment to deliver the quality of service our customers expect and to avoid the substantial financial costs and penalties of failure. The Group
has made good progress but there is still a way to go before we are generating sustainable profits, at acceptable levels of margin, and healthy
cash flows.
Group Finance Director
26 May 2004
16
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Royal Mail Holdings plc Board
Non Executive Directors
‘ALLAN LEIGHTON (CHAIRMAN)
Allan (54) joined the Board in April 2001 as a Non Executive Director, becoming Chairman in March 2002. He began his career with Mars
Confectionery and moved to Pedigree Petfoods as Sates Director. In 1992 he became Group Marketing Director of Asda Stores Limited, and
Chief Executive in 1996, becoming President and CEO of Wal-Mart Europe when Wal-Mart bought Asda in 1999. He left in 2000 and is currently
Chairman of BHS Limited, and Lastminute.com ple, Non Executive Chairman of Cannons Health Club Investments Limited, Non Executive
Director of Dyson Limited, BskyB, Selfridges Holdings Limited, and Business in the Community. He is also a Director of Post Office Limited, and a
member of the Nomination Committee.
DAVID FISH
David (55) joined the Board on 1 January 2003. He was a member of the Mars Inc Operating Board from 1994 to 2001, and Joint President of
Masterfoods Europe. He has also been President of Snackfoods Europe, and held European Vice-President positions in marketing and
personnel. He is Chairman of United Biscuits Group (Investments) Limited, Chairman of Christian Salvesen and Tate & Lyle PLC. David is
Chairman of the Remuneration Committee, and a member of the Nomination Committee.
RICHARD HANDOVER,
Richard (68) is Chairman of WH Smith ple. He is also Chairman of the Adult Leaming Inspectorate and Business in the Community Education
Leadership, and is a Non Executive Director of the Nationwide Building Society. Richard was appointed to the Board on 1 January 2003. He is
Chairman of the Nomination Committee, and a member of the Remuneration Committee.
SIR MICHAEL HODGKINSON.
Mike (60) wes Chief Executive of BAA plc unt reting in June 2003, He is Board Member and Chairman of the Finance Committee of Transport
for London, a Non Executive Director of FKI ple and the Non Executive Chairman of First Choice Holidays ple. Mike was appointed to the Board
on f January 2003, He is the Senior Independent Director, and a member of the Remuneration Committee, In May 2003, he was eppointed
Chairman of Post Office Limited and he is aiso Chair of the Corporate and Social Responsibility Governance Committee.
JOHN NEILL CBE
John (56) has been Group Chief Executive and Deputy Chairman of the Unipari Group of companies since 1987. He was formerly a Director of
the Court of the Bank of England, and a Non Executive Director of Charter plc. He is also Vice-President of the Society of Motor Manufacturers
and Traders, and a Director of the SMMT industry Forum, Business in the Community, and Vestcave Limited. John was appointed to the Board
‘on 4 January 2003, and is a member of the Audit and Risk Committee.
Re TH i
Rosemary (52) is Group Finance Director of Bradford & Bingley plc. She joined the Board in October 1996 and left on 25 March 2004 at the end I
of her appointed term as Non Executive Director. She was Chair of the Audit and Risk Committee, and a member of the Remuneration
Committee. Rosemary is also a member of the Financial Reporting Council, Financial Reporting Review Panel and The Hundred Group's main
and technical committees.
‘BOB WIGLEY
Bob (43) is Chairman of Merril Lynch's European Corporate Banking Business, and a Trustee ofthe children’s mobility charity, Whizz-Kidz. Bob
joined the Board on 1 April 2003, and is a member of the Audit and Risk Committee and became its Chairman following the departure of
Rosemary Thome in March 2004.
Executive Directors
(LMAR TOIME (EXECUTIVE DEPUTY.
Elmar (56) joined the Company on 1 March 2003, having been Chief Executive of New Zealand Post since 1993. Prior to that he held senior
appointments in New Zealand Post in Business Planning, Marketing and Retail Operations. In 2002 he established Kiwibank, a new, full-service
tetail bank, as a wholly owned subsidiary of New Zealand Post. Elmar semains a Non Executive Director of Sky City Entertainment Group in New
Zealand. He is a Director of Post Office Limited, a member of the Corporate and Social Responsibility Governance Committee, Chair of the GLS
Supervisory Board and Chair of the Management Board.
MARISA CASON! (GROUP FINANCE DIRECTOR)
Marisa (52) joined the organisation in February 2001 from Britannic Assurance plc, where she had been Group Finance Director from 1998, Prior
to that she had been Finance Director ofthe Prudentia’s UK Division since 1994. She became a Non Executive Director of Sevem Trent plein
September 2001. She is also a member of the Management Board, and Chair of the Pensions Committee, Chair of the Risk Management
Committee, a Trustee of the Royal Mail Pension Plan, and a member of the GLS Supervisory Board.
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Royal Mail Holdings ple Board (continued)
(MANAGING DIRE (AL MA
Jerry (52) joined the organisation in 1973 and held senior positions in Personnel and Industrial Relations, line management and Strategic and
Commercial Planning. He was appointed to the Board in 1996 as Group Managing Director Strategy and Business Development. He became
‘Group Managing Director of Mail Services in September 2001. He also held positions as a shareholder-nominated Director of Camelot, and
Chairman of the Govemors of Kingston University. Jerry left the Company on 14 November 2003,
EXE( Mall C)
Adam (40) joined the Company on 1 February 2003, having previously been Chief Executive of the Football Association since 2000. Before then.
he had held a number of senior roles at Saatchi and Saatchi Advertising, including that of Joint Chief Executive from 1995. He Is also a member
of the Management Board.
TONY MeCARTHY (GROUP DIRECTOR, PEOPLE & ORGANISATIONAL DEVELOPMENT)
Tony (48) joined the Company on 6 January 2003, having previously been Group Human Resources Director of BAE Systems, where he had
worked in a variety of HR roles since 1978. He is also a member of the Management Board, the Pensions Committee and the Corporate and
Social Responsibility Governance Committee.
DAVIOMILLS (CHIEF EXECUTIVE, POST OFFICE LIMITED)
David (60) joined the organisation as an Executive Director and Chief Executive of Post Office Limited on 15 April 2002. He began his career with
Midland Bank (now HSBC Bank pic) in 1962, where he conceived and established First Direct. In December 1999, he was appointed General
Manager, Personal Banking. He is currently Chairman of Post Office Financial Services, and the Employers’ Forum on Disability, a Director of
Camelot, and a Trustee of the Royal Association for Disability and Rehabilitation (RADAR). He is also a member of the Management Board.
JONATHAN EVANS (COMPANY SECRETARY)
Jonathan (52) joined the organisation directly from university in 1974, Before his appointment as Company Secretary in 1999, he held a wide
range of management positions throughout the Group, latterly as Network Director in Post Office Limited. He is also a member of the
Management Board and Pensions Committee, Secretary to the Audit and Risk, Remuneration and Nomination Committees.
18
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Royal Mail Holdings pic
Directors’ Report
The Directors present the Group Accounts for Royal Mail Holdings plc. These accounts relate to the 52 weeks ended 28 March 2004 (2003 52
weeks ended 30 March 2003).
Principal activities
The Group provides a nationwide and intemational distribution service, principally of mails and parcels. The Group also provides access to a wide
range of financial and retail services through its network of Post Office branches across the United Kingdom (UK).
Review of the business and future developments
A review of the Group's business and future developments is presented in the Chairman's Statement, Joint Deputy Chairman's and Chief
Executives’ Statement, Annual Review and the Operating and Financial Review.
Results and dividends
The profit on ordinary activities before taxation amounted to £105m (2003 £61 1m loss). After taxation, the profit was £7m (2003 £559m loss). The
Directors do not recommend a dividend (2003 nil dividend).
Political and charitable contributions
During the year the Group made charitable contributions of £0,6m. No political contributions were made.
Policy on the payment of suppliers
The policy of the Company and its principal operating subsidiaries is to use their purchasing power fairly. Payment terms are agreed in advance
for all major contracts. For lower value transactions, the standard payment terms included on the purchase order apply. It is Company policy to
‘make payments within 45 days of receiving a valid invoice. The Company and its principal operating subsidiaries in the UK have sought to comply
with the DTI's Better Payment Practice Code. Copies of this can be obtained from the DTI. As the Company is a non-operating company, the
creditor days are zero. The creditor days of the operating subsidiaries can be found in their accounts.
Land and buildings
In the opinion of the Directors, the aggregate market value of the Group's land and buildings exceeds the net book value, based upon a historic
ost accounting policy, of £1,162m by significant margin.
Directors and their interests
The Directors of the Company and details of changes during the year are given on page 26. The Secretary of State appoints the Chairman; al
other Directors are appointed by the Company with the Secretary of State's consent.
HM Government is the Company's sole shareholder and accordingly, the Directors have no interest in shares of the Company. The Directors’
biographical details are included on pages 17 and 18.
People
Royal Mail Group employs around 200,000 people. Our people are our strategic strength and competitive advantage.
The Group's policy is to encourage effective communication and consultation between employees and management, particularly on matters
relating to strategy, financial and economic factors that may influence the Group's performance. This is achieved through the use of an extensive
range of communication channels, including magazines, briefings, open forums and an intranet website. Employees have various bonus
‘schemes, significant elements of which are based on business-related targets.
We actively encourage continuous training and skill development for all employees to ensure achievement of corporate and individual objectives,
Management development and training programmes have been designed to attract and retain the best people. The Group has worked with the
Unions to introduce several innovative working practices to improve efficiency
‘An Equal Opportunities policy is maintained in all respects including disability, age, religion, colour, sex, nationality, ethnic origin, sexual
otientation, race, creed and marital status.
In 2002, our Chairman created a programme to make Royal Mail Group a ‘Great Place to Work’ and made ita priority for everyone across the
business. This was emphasised by the appointment of a Director People & Organisational Development to the Holdings and Management Boards
and has been followed by the transformation of the People & Organisational Development function to ensure people considerations wil be at the
heart of all major business decisions.
19
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Royal Mail Holdings plc
Directors’ Report (continued)
ur people strategy will ensure we realise our potential as an organisation through the strength of our people by developing a high-performing,
sustainable culture where everyone feels involved and valued. It focuses on seven key areas
- defining, recruiting and developing the core capabilities we need to thrive in a competitive, deregulated market;
= developing a high-performance culture in which everyone understands their contribution and is motivated to achieve their full potential:
- creating interesting, meaningful jobs with more flexible working pattems
~ building afuid, innovative and adaptive organisation to improve our response to environmental and market changes;
~ identifying and developing in al our people a set of core behaviours that determine how we treal each other, our customers and our
shareholders;
~ recruiting, attracting and developing the leadership and management capability we need to deliver our goals; and
- enhancing our abiliy to attract and retain the talent required to compete successfully
Our intention is to underpin our people strategy with a measurement system that will objectively demonstrate the value of our people and their
contribution to the success of our business.
Currently, our key mechanism for monitoring our progress towards becoming a ‘Great Place to Work’ is the Employee Opinion Survey, launched
in January 2003, This is administered annually, on a rolling basis, across all employees. Comments from this survey have resuited in significant
improvernents at a local level across our business.
Corporate Social Responsibility
Royat Mail is committed to carrying out its activities in a socially responsible manner in respect of the environment, employees, customers and
local communities. A Corporate and Social Responsibility (CSR) Governance Committee has been established which reports to the Board. It
publishes an annual report ofits activities and last year’s report won the Association of Certified Chartered Accountants’ Best First Time
Environmental Report Award, a significant recognition of progress in this area. Further details of our CSR governance structure and activities will
be available in our 2004 CSR Report, due to be published in September 2004.
Disabled employees
The Group's policy isto give full consideration to applications for emptoyment fram disabled persons. Employees who become disabled whilst
employed receive full support through the provision of training and special equipment to facilitate continued employment where practicable. The
Group provides training, career development and promotion to disabled employees wherever appropriate.
Going concem
After analysis ofthe financial resources available and cash flow projections for the Group, the Directors consider that it is appropriate to prepare
the financiaf statements on a going concem basis.
Auditors
A resolution to reappoint Ernst & Young LLP as auditors will be put to the Annual General Meeting.
By Order of the Board
Jonathan Evans.
Secretary
26 May 2004
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Corporate Governance
Statement by the Directors on compliance with the Combined Code
The Company recognises the importance and is committed to high standards of Corporate Governance. The Directors confirm that forthe year
ended 28 March 2004 and upto the date of approval of these accounts, the Company has fully complied withthe provisions of the Combined
Code (the Code), s issued by the UK Listing Authority in June 1998, in so far as they are appropriate to a public company with a single
shareholder with the exception of the membership ofthe Audit and Risk Committee. This arose following the resignation of Rosemary Thome on
‘the 25 March 2004, which resulted in the composition of this Committee falling below the recommended level of three Non Executive members.
The Company is currently seeking to fil the vacancy created by recruiting a candidate with relevant experience,
‘The new Combined Code, arising out of the Higgs Review of the Role and Effectiveness of Non Executive Directors, and a review of Audit
Committees led by Sir Robert Smith, came into effect during 2003 for reporting periods beginning on or after 1 November 2003. The Directors will
be reporting on compliance with the new Code in the Annual Report and Accounts published in 2005. However, as evidenced below, the
‘Company is already largely compliant with these requirements,
The Secretary of State also approves the remuneration of both Executive and Non Executive Directors, including all incentive plans.
The Board
‘The Board is responsible for setting the objectives and strategy of the Group and for monitoring performance. The Board currently comprises a
part-time Non Executive Chaitman, five Executive Directors and six Non Executive Directors. The biographies of each of the Directors seting out
their current roles, commitments and previous experience are on pages 17 and 18. The Board usually meets monthly, and has defined those
matters that are reserved exclusively for its consideration, During the financial year, the Board met 11 times. Individual Director attendance was:
‘Allan Leighton (14), Elmar Toime (11), Adam Crozier (11), Tony McCarthy (11), Marisa Cassoni (11), David Mills (10), Richard Handover (8),
David Fish (10), Mike Hodgkinson (11), Rosemary Thome (6), John Neill (11) and Bob Wigley (9 out of 10). For each scheduled meeting of the
Board, the Company Secretary, on behalf of the Chairman, collates and circulates the papers, airing to allow sufficient time for the Directors to
review the information provided. The Board is confident that all its members have the knowledge, talent and experience to perform the functions
required of a Director of the business, There is currently a Non Executive Director vacancy, which the Company is seeking to fl, Executive
Directors have roling 12-month contracts and Non Executive Directors are generally appointed for a three-year term.
The Board considers that each of the six Non Executive Directors is independent. This means that in the view of the Board, they have no links to
the Executive Directors and other managers, and no business or other relationship with the Company that could interfere with their judgement.
Performance evaluation of the Board, its committees and individual Directors takes place on an annual basis.
There is a clear division of responsibilities between the Chairman, the Executive Deputy Chairman and Chief Executives.
Directors may take independent professional advice in the furtherance of their duties, at the Group's expense. All Directors have access to the
advice and services of the Company Secretary, the appointment and removal of whom is a matter for the Board as a whole.
(On appointment, the Directors take part in an induction programme where they receive information about the Royal Mail Group, the role of the
Board and matters reserved for its decision, the terms of referenice and membership of the principal Board committees, the Company's Corporate
Govemance arrangements and the latest financial information about the Group. This is supplemented by visits to key business locations. The
Company engages in two-way communication with the Shareholder to discuss information on its strategy, performance and policies. The Board
receives feedback on these meetings from the Directors attending the meeting.
Outside appointments.
‘The Remuneration Committee betieves that there are significant benefits to both the Company and the individuat from Executive Directors
accepting Non Executive Directorships of companies outside of the Group, and for which the Director may retain the fees.
The following committees deal with specific aspacts of the Group's Governance:
Audit and Risk Committee
The Audit and Risk Committee consists of Non Executive Directors. The Committee met four times during the year. Its membership and individual
attendance was: Rosemary Thorne (Chair) (4), John Neill (3) and Bob Wigley (4), who replaced Allan Leighton on 1 April 2003 and assumed
Chairmanship of the Committee in succession to Rosemary Thome. The Committee, which is assisted by the Risk Management Committee,
provides a forum for reporting by both internal and extemal auditors and is responsible for a wide range of matters including:
monitoring the effectiveness of internal controls;
— reviewing the half year and annual accounts before their submission to the Board;
— advising the Board on the appointment of external auditors and on their remuneration both for audit and non-audit work;
— discussing the nature, scope and outcomes of the audit with extemal auditors;
— keeping under review the independence and objectivity ofthe extemal and internal auditors, and
= agreement of the Internal Auait Plan.
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Royal Mail Holdings plc
Corporate Governance (continued)
Management Board
The Executive Deputy Chairman, Elmar Toime, chairs the Management Boatd, which comprises alt Executive Directors of Royal Mail Holdings
plc and Royal Mail Group ple and certain other Senior Executives of the Group, The Management Board develops and monitors deployment of
the Group's strategy, annual operating plans and budgets for Board approval. t reviews operational activities, and sets policies where these are
not reserved to the Board, The Holdings Board has delegated authority tothe Investment Committees of the Management Board end Post Ofice
Limited to make investment decisions of up to£10m.
The members of the Management Board are
Elmar Toime, Executive Deputy Chairman ‘Adam Crozier, Chief Executive Royal Mail Group plo
Paul Bateson, Managing Director Logistics David Burden, Chief Information Officer
Marisa Cassoni, Group Finance Director Mary Fagan, Group Corporate and Government Affairs Director
Vanessa Leeson, Managing Director Parcelforce Worldwide Tony McCarthy, Group Director People & Organisational Development
David Mills, Chief Executive Post Office Limited Paul Rich, Deputy Managing Director and Marketing Director UK, Royal Mail
Jonathan Evans, Company Secretary
Pensions Committee
The Pensions Committee is chaired by Marisa Cassoni. The other members are Tony McCarthy and Jonathan Evans. The Committee is
responsible for reviewing funding, benefits, scheme structure and strategic developments impacting on the Group's occupational pension
schemes. The Committee represents the Group in discussions with the Trustees of the Group's occupational pension schemes
Remuneration Committee
The Remuneration Committee reviews the Company's policy on Executive Directors’ remuneration for approval by the Board and the Secretary of
State. The Committee consists of Non Executive Directors and it met five times during the year. The membership and individual attendance was;
David Fish (Chairman) (6), Rosemary Thome (f), Mike Hodgkinson (4) and Richard Handover (4)
Nomination Committee
The Nomination Committee has the overall role of leading the process both for appointments to the Board of the Company, and for appointments
to subsidiary boards. The Committee advises the Board on succession planning for the positions of Chairman, Deputy Chairman, Chief Executive
and all other Board appointments and other senior appointments. Some appointments wit! be subject to the consent of the Special Shareholder,
as provided in the Articles. The Committee consists of Non Executive Directors and it met four times during the year. Its membership and
individual attendance was Richard Handover (Chairman) (4), Allan Leighton (3) and David Fish (4),
Corporate and Social Responsibility Governance Committee
The Corporate and Social Responsibility Governance Committee has been established reporting to the Board. Chaired by Sir Michael
Hodgkinson, the Committee acts on behalf of the Management Board to identify Corporate and Social Responsibility issues with Group-wide
impact and makes recommendations on minimum Corporate and Social Responsibilities standards and policies. The other members of the
Committee include Elmar Toime, Tony McCarthy, the Head of CSR, Heads of Environment, Health and Safety and other Senior Executives from
across the Group.
Internal Control
The Directors are responsible for the Group's system of internal control and risk management, as well asthe timely review of ils effectiveness
The system is designed to manage rather than eliminate the risk of failure to achieve business objectives and can only provide reasonable but not
absolute assurance against material misstatement or loss.
The Group's approach to internal control is based on the underlying principle of line management accountability for controt and risk management.
There is an ongoing process for identifying, evaluating and managing the significant risks faced by the Group in accordance withthe guidance
detailed by the Tumbull Committee as part of the Code, including financial, operational and reputational isks. The Board regularly reviews this
process. The process has been in place throughout the year and up to the date of approval ofthese accounts.
The Board has reviewed the effectiveness of the system of risk management and intemal control. The key elements include a review of Intemat
Audit Reports, regular confirmations from focal management and communications from the Chair of the Audit and Risk Committee on the
outcome of Audit and Risk Committee Meetings.
The key processes of internal control and risk management include the following
Management structure
The business units have authority to manage within the limits set by the Board and within the scope of reserved powers. The Code of Business
Standards sets the principles of professionalism and integrity for our people.
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Royal Mail Holdings plc
Internal Control (continued)
Identification and evaluation of business risks
The Directors have overall responsibility for overseeing the process for identifying and managing risks. A process of intemal control self-
assessment encompasses all areas of the Group. The process defines significant risks and the controls in place to manage them, and requires
‘each business unit Managing Director to undertake a formal assessment of the effectiveness of the control processes on a quarterly basis. The
Management Board reviews the Company's key risks and ensures that mitigating actions are taken.
The Internal Audit and Risk Management function regularly reviews the management of the Group's risks. The function also undertakes regular
reviews of the most significant areas of risk and ensures that key controls remain in place, and reports its findings to the Audit and Risk
Committee.
Information and financial reporting system
‘The Group's planning, financial and reporting procedures include the review and approval of annual budgets by the Board. Performance is
‘monitored monthly by reference to key performance indicators, updated forecasts and information on the key risk areas. The Group operates a
business-wide risk management framework to support operational management in the assessment and mitigation of risk.
Audit and Risk Committee
The Committee reports to the Board and meets as a minimum on a quarterly basis to monitor and review the effectiveness of the control
environment. The Committee reviews the scope of work, authority and resources of the internal Audit and Risk Management function.
Risk Management Committee
This is a sub-committee of the Audit and Risk Committee. It sets the framework for risk management within the Group and ensures integration
with strategic planning. It also facilitates regular reporting of key risks and the actions to manage the risks to a desired level. The members of this
committee include Marisa Cassoni, the Head of Treasury, the Head of Intemal Audit, the Head of CSR and other Senior Executives from across
the Group.
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Royal Mail Holdings plc
Directors’ Remuneration Report
Information not subject to audit
This report provides the information required by the Directors’ Remuneration Report Regulations 2002 (the Regulations). The Company confirms
that throughout the year it has complied with the principles in Section + of the Combined Code on Corporate Govemance (the Code).
The Royal Mait Group is committed to achieving demanding improvements in its performance and is undergoing extensive changes to ensure
that the public are offered high quality and cost-effective services. The Board believes that an effective remuneration strategy is essential to
support these objectives by ensuring thal the Group has people of the right calibre and skills. Incentives, which create an identity of interest
between employees and the Shareholder, form a vital part of this.
The Remuneration Committee
‘The Board retains overall accountability for the framework and costs of executive remuneration and the materiat terms of the service contracts
offered to all Executive Directors, which require the consent of the Secretary of State. The Remuneration Committee's role is to develop the
femuneration policy for Executive Directors and their immediate reports and specifically, to make recommendations on their salary, benefits,
bonuses, pensions and other terms and conditions of employment. The Committee also recommends appropriate compensation on the cessation
‘of employment.
The Remuneration Committee is made up wholly of independent Non Executive Directors. Its membership is described on page 22. The
Executive Deputy Chairman, Elmar Toime, the Chief Executive of Royal Mail Group pic, Adam Crozier and the Director People & Organisational
Development, Tony McCarthy, may attend these meetings by invitation but are not present at the discussion of their own remuneration.
The Committee met on five occasions in 2003-04 and details of members’ attendance is set out on page 22.
Advice to the Remuneration Committee
The Committee may call for information and advice from inside and outside the Group. It takes advice from those independent, professional
organisations that are best able to assist its consideration of the particular topics under discussion.
During 2003-04, advice on the performance of key executives was given by the Chairman, Executive Deputy Chairman and the Chief Executive.
Extemal professional advice was given by Mercer, the Hay Group and Watson Wyatt. Infernal support is primarily provided by the Director People
& Organisational Development, Tony McCarthy, advised by Ernst & Young LLP, and from the Company Secretary, Jonathan Evans. Other advice
has been provided by specialists from People & Organisational Development and Finance.
During the year Watson Wyatt also advised the Company on pension and actuarial matters and Emst & Young LLP, the Group extemal auditors,
on taxation and regulation matters.
Remuneration policy
The Company's policy on Directors’ remuneration is that:
. ‘the overall remuneration package should be sufficiently competitive to attract and retain executives of the necessary quality in a complex
business and a competitive market place, and who will deliver success for the Shareholder and high levels of customer service, safety and
‘environmental performance;
- a significant proportion of the remuneration package should be dependent on performance in both the short and the fong-term; and
J the system of remuneration should establish an identity of interest between Senior Executives and the Shareholder.
The policy for Senior Executives takes into account pay and employment conditions elsewhere in the Group.
The Committee regutarly reviews the structure of the package and its competitiveness against appropriate marketptaces. The Committee aims to.
‘ensure that the package is proportionate and effective, and that it is developed in accordance with accepted best practice. During 2003-04, as
Part of its regutar review, the Committee has reviewed the current base pay and annual and fong-term incentive arrangements.
The main components of remuneration
The main components for Executive Directors are: basic salary, an annual performance-related bonus, a Long-Term Incentive Plan, pension and
other benefits. The Committee believes that there should be a continuing emphasis on those elements of remuneration that are performance-
related.
Base salaries
The Committee believes that base salaries should be set at levels that are sufficient to recruit and retain high calibre executives. In making its
judgement, the Committee is informed by a variety of data aimed at making a fair comparison with enterprises 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 is necessary
to reflect performance, increased individual responsibilities and market levels. No awards are made unless performance warrants it.
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Directors’ Remuneration Report (continued)
Performance-related, personal annual bonus
The Chairman and Executive Directors may eam a performance-related bonus for achievement of financial and customer targets. These bonuses
are based on targets set each year inline with the Renewal Plan and agreed with the Shareholder.
The maximum annual bonus for al Executive Directors, except the Executive Deputy Chairman and Chief Executive of Royal Mail Group ple, is
40% of basic pay. The Executive Deputy Chairman and Chief Executive of Royal Mail Group plc can achieve a maximum of 75%; the Non
Executive Chaiman may earn an annual performance-related bonus of £180,000. 80% of potential bonus earnings relate to financial
performance and 20% to the achievement of customer service targets. The Chief Executive of Post Orfice Limited can achieve a maximum of
40% of basic pay based upon achievement of targets of Past Office Limited (80%) and Group (20%). As a result of these bonus opportunities, all
Executive Directors have a substantial proportion of their annual remuneration at risk. For those with a 40% opportunity, 28% of their combined
base salary and bonus is at risk. n the case of the Executive Deputy Chairman and the Chief Executive of Royal Mall Group pl, the percentage
at risk exceeds 40%.
Long-Term Incentive Plan
The Company operates a Long-Term incentive Plan (LTIP) forthe Executive Directors and certain other senior employees, which has been
approved by the Secretary of State for Trade and Industry. The objectives ofthe LTIP are to incentivse the delivery ofthe long-term business
goals of the Group and to reward success in achieving or exceeding these goals over a three-year period.
The LTIP consists of Annual Company Performance Awards and Bonus Awards, both of which are made at the discretion of the Remuneration
Committee. Anaual Performance Awards will accrue on a sliding scale above a threshold level of financial performance of the Group, in line with
the Renewal Plan targets for profit from operations, and subject to satisfactory personal performance. The Renewal Plan operating targets have
been agreed with the Shareholder and are based on moving the Group from a level of loss from operations in 2001-02 to a targeted profi in 2004-
05.
Individual senior managers are eligible for annual awards of up to 37.5% of their basic salary if the Group achieves 120% of the agreed target.
For performance levels between 87.5% and 120% of the agreed targets, awards are made on a sliding scale in 5% steps. The award for on-target
Performance is 25% of basic salary and no award is made for performance below 87.5% of the agreed target. The Bonus Award element of the
‘scheme allows the Remuneration Committee to award into the LTIP up to 50% of their performance-related personal annual bonus, taking into
account individual preferences.
At the end of the three-year period, the value of these annual accrued awards, fogether with any deferred bonus element wil be paid out in cash
and enhanced by up to 33% ifthe cumulative target over the three-year period is met. The maximum enhancement is 100% ifthe cumulative
target over the three years is exceeded by 178%. The Remuneration Committee may, ifit is appropriate for the retention of key senior managers,
permit a further period of deferral wth enhancement beyond the proposed three-year period, All awards under the LTIP are subject to payments
being made under the Share in Success scheme to all our people. ifno payments are made to our people under this scheme, no Annual
Performance Awards will be paid and there will be no enhancement to Bonus Awards. The Share in Success scheme is designed to pay £800 to
all our qualifying people for achieving on-target profits for the financial year ending March 2005 and up to £1,200 if stretch targets are achieved
Benefits
Benefits include the provision of company cars, health insurance, relocation expenses, plus the cash-equivalent of any benefits not taken.
Pensions
The Group has a liability to pay pensions in respect of Directors’ services and for some Executive Directors makes contributions to pension
‘schemes for this purpose. The Company has set up a retirement pension arrangement, which will provide benefits to Directors whose
contributions to the Company scheme are restricted by the Inland Revenue earings cap.
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Directors’ Remuneration Report (continued)
Service contracts
The Committee's policy is that Executive Directors appointed to the Board are offered notice periods of one year. The Committee has a defined
policy on compensation and mitigation, to be applied in the event of a UK Director's contract being prematurely terminated. In such circumstances
steps would be taken to ensure that poor performance is not rewarded.
The rolling service contracts and letters of appointment of the Directors include the following terms:
Expiry date of
current service Unexpired term
Date of contract contract (months)
Chairman (Non Executive)
Allan Leighton (appointed Chairman on 25 March 25 March 2002 25 March 2005 12
2002. intially appointed as Non Executive Director
‘on 2 April 2001.)
Executive Directors
(i) All Executive Directors have a contracted 12-month notice period from the Company; the Director may give six-months notice. The standard
term for compensation for loss of office is a maximum payment of 12-months basic salary. The Company is committed for the full three-year term
for Non Executive Directors, including the Chairman.
Non Executive Directors
The fees paid to the Non Executive Directors are determined by the Board and approved by the Shareholder. Independent market surveys are
consuited in determining them. Fees may comprise a basic fee for Board membership and, as appropriate, additional fees for the membership or
chairmanship of the Audit and Risk, Remuneration and Nomination Committees, Details of the fees are given on page 27.
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Directors’ Remuneration Report (continued)
Audited information
Directors’ remuneration, excluding pensions, was as follows:
congenaein
Basic salary Performance: Awards: for loss of
‘sitet cies et neny St 0
Total 2004 2,290,982 812,200 (453,600) 165,269 277,343 3,092,194 -
Total 2003 1,318,724 619,848 (157,631) 482,037 119,108 - 2,082,086,
‘Allan Leighton has voluntarily decided to defer his entire performance-related bonus entitlement of £144,000 into 2004-05. This will only be paid
if the four key quality of service targets (1% Class, 2”4 Class, Mailsort 2 and Mailsort 3) are achieved in the final quarter of 2004-05. This effectively
converts any bonus entitlement in 2003-04 which related to profit achievement, into a quality of service bonus for next year.
2EImar Toime has voluntarily decided to defer half his £300,000 performance-related bonus entitlement amounting to £150,000. This will only be
paid if the four key quality of service targets (1 Class, 2 Class, Mailsort 2 and Mailsort 3) are achieved in the final quarter of 2004-05, This
effectively converts any bonus entitlement in 2003-04 which related to profit achievement, into a quality of service bonus for next year.
3 Jerry Cope left the Company on 14 November 2003 and he retained his benefits (car and private medical insurance) until March 2004. He also
received the benefit of outplacement and legal services amounting to £29,500.
4 John Roberts retired on 31 December 2002, and the contracts of John Lloyd and Miles Templeman expired on 25 Match 2003.
No fees (2003 nil} were paid to third parties in respect of services provided by Directors.
The figures in the table represent emoluments earned and receivable as Directors during the financial year, whenever paid. Such emoluments are
‘normally paid in the same financial year with the exception of the annual, performance-related bonus, which is paid in the year following that in
which itis earned, (with the exception of the performance-related bonus for Jerry Cope, which was paid during 2003-04). Prior year amounts have
been restated to remove the element of the performance-related bonus deferred into the Long-Term Incentive Plan.
On 7 Aprit 2004, the Secretary of State for Trade and Industry, as Special Shareholder, approved the following basic salary/fee increases:
: Marisa Cassoni’s salary increased to £330,000 per annum with effect from 1 July 2003; and
- David Mills’ salary increased to £275,000 per annum with effect from 1 July 2003.
Annual performance-related bonuses for 2003-04
‘As agreed with the Secretary of State for Trade and Industry, the Remuneration Committee has the role of authorising the annual performance-
telated bonuses for the Chairman and the Executive Directors.
The details of the scheme are outlined on page 25, For 2003-04, the Remuneration Committee concluded that the financial targets set for the
Group had been met, triggering payment of 80% of maximum bonus potential. Whilst some customers service measures within parts of the
Group had been met, for which an element of bonus would have been warranted under the terms of the scheme, the Directors have
recommended and the Remuneration Committee have agreed fo waive any award for customer service for the year. For David Mills, the portion
cof his potential bonus relating to the customer service performance of Post Office Limited has been awarded as the target was fully achieved.
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Directors’ Remuneration Report (continued)
Annual Performance and Bonus Awards held under the Long-Term Incentive Plan at 28 March 2004
Awards held LTIP awards during Awards held
at 30 March 2003 2003-04 at 28 March 2004
£ £ £
The amounts awarded into the Long-Term Incentive Plan in 2003-04 include the Annual Company Performance Award and the Bonus Award.
Neither the Annual Company Performance Award nor the enhancements will be paid if the target in 2004-06 is not achieved.
Non Executive Directors
The fees of the Chairman and the Non Executive Directors are agreed with the Secretary of State, and are currently £20,000 per annum and
£30,000 per annum respectively. Additional fees are paid to the Chairs (£2,500) and members (E1,500) of committees. Sir Michaet Hodgkinson
receives additional fees of £37,800 for his position as Chairman of Post Office Limited.
Pensions
The Group normally offers its most senior people membership of the Royal Mail Senior Executive Pension Plan (RMSEPP). Details of the
RMSEPP are set out in note 19 to the accounts. The Plan is a funded, Inland Revenue-approved final salary occupational pension scheme. The
‘scheme provides for a two-thirds final pensionable salary at normal retirement age, subject to the necessary pensionable service and Inland
Revenue eamings cap. Pensions in 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 is payable if death in service occurs.
For Senior Executives whose membership of the RMSEPP is restricted by the earings cap, pension provision is made by a combination of the
Company scheme and an appropriate Funded Unapproved Retirement Benefits Scheme (FURBS) or equivalent. Gross employer contribution
rates range between 25% and 55% of base pay above the earnings cap. The Company has made provision for retirement pension arrangements
for Elmar Toime and Adam Crozier at arate of 40% and at a rate of 55% for Marisa Cassoni. The increase in this provision made during the year
was £446,382 for the current year and a further £120,069 adjustment following finalisation of prior year pension arrangements, The total
provisional the year end is £734,191 (2003 £167,740), The Company is also due to establish a reserve for the additional pension for Tony
McCarthy to provide the total reirement pension, including the pension from previous employer's pension scheme, of two-thirds of base pay at
‘normal retiement age. In addition, David Mills receives cash supplements of 24.2% of earings below the pensions cap, and 40% of eamings
above, giving a total of £84,358 (2003 £80,754),
Disclosure of Directors’ pension transfer values i required under two separate requirements:
Stock Exchange Listings Rules: the requirements are the same as that disclosed in last year's accounts and are designed to place a
value on the increase in Directors’ accrued benefits during the period. The transfer value is calculated on the basis of actuarial advice
in accordance with Actuarial Guidance Note GN11 and excludes Directors’ contributions; and
- Directors' Remuneration Report Regulations 2002: this is designed to assess the change in transfer values during the year, taking into
account movement in investment market conditions. Falfs in market values may generate a negative movement in the transfer values.
The transfer values disclosed represent a potential liability of the pension plan rather than any remuneration due to the individual and cannot be
meaningfully aggregated with annual remuneration, as it is not money the individual is entitled to receive.
28
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Royal Mail Holdings plc
Directors’ Remuneration Report (continued)
The pension entitlements (under Stock Exchange Listing Rules) of the Directors at the year end were
Transfer value’ of
Increase in accrued increase before
Increase in accrued —_ benefits during the inflation less
Accumulated accrued benefit benefits during the period (net of Directors’
at 28 March 2004 inflation)’ contributions
£.
Movement in
the period
Transfer value Plus transfers-in Transfer value less Directors’
Age — at 31 March 2003 received Subtotal at 28 March 2004 contributions
£ £ £ £ £
Marisa Cassoni, Tony McCarthy and David Mills are also on a 1/60th basis due to the effect of retained benefits from previous employers. All
other Executive Directors are members of RMSEPP on a 1/30th basis.
Jonathan Evans
Secretary
26 May 2004
29
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Royal Mail Holdings plc
Statement of Directors’ responsibilities in respect of the accounts
Company law requires the Directors to prepare accounts for each financial year which give a true and fair view of the state of affairs of the
Company and of the Group and of the profit or loss of the Group for that period.
In preparing those accounts Directors are required to:
— _ select suitable accounting policies and apply them consistently;
- make judgements and estimates that are reasonable and prudent; and
— _ state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the
accounts.
Directors are responsible for ensuring that proper accounting records are kept which disclose with reasonable accuracy, at any time, the financiai
position of the Company and of the Group, and which enable them to ensure that the accounts comply with the Companies Act 1985. Directors
are also responsible for ensuring that the assets of the Group are safeguarded and hence for taking reasonable steps for the prevention and
detection of fraud and other irregularities,
30
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Royal Mail Holdings plc
Independent Auditors’ Report to the members of Royal Mail Holdings pic
We have audited the Group's financial statements for the year ended 28 March 2004, which comprise the Group profit and loss account, the
Group and Company balance sheets, the Group cash flow statement and associated notes, the Group statement of total recognised gains and
losses, the reconciliation of movements in Group shareholders’ funds, accounting policies and the related notes 1 to 23. These financial
statements have been prepared on the basis of the accounting policies set out therein, We have also audited the information in the Directors’
Remuneration Report that is described as being audited.
This repor is made solely to the Company's members, as a body, in accordance with section 235 of the Companies Act 1985. Our audit work has
been undertaken so that we might state to the Company's members those matters we are required to state to them in an Auditors’ Report and for
no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibilty to anyone other than the Company and the
Company's members as a body, for our audit work, for this repor, or for the opinions we have formed
Respective responsibilities of Directors and auditors
The Directors are responsibie for preparing the accounts, including the financial statements, which are required to be prepared in accordance with
applicable United Kingdom law and accounting standards as set out in the statement of Directors’ responsibilities in respect of the accounts.
ur responsibilty is to audit the financial statements in accordance with relevant legal and regulatory requirements and United Kingdom Auditing
Standards.
We report to you our opinion as to whether the financial statements give a true and fair view and whether the financial statements have been
properly prepared in accordance with the Companies Act 1985. We also repert to you if, in our opinion, the Directors’ Report is not consistent with
the financial statements, ifthe Company has not kept proper accounting records, if we have not received al the information and explanations we
‘require for our audit, or if information specified by law regarding Directors’ remuneration and transactions with the Group is not disclosed
‘We read other information contained in the accounts and consider whether it is consistent with the audited financial statements. This other
information comprises the Directers' Report, Operating and Financial Review, Directors’ Remuneration Report and Corporate Governance
Statement, We consider the implications for our report if we become aware of any apparent misstatements or mater'al inconsistencies with the
financial statements. Our responsibilities do not extend to any other information
Basis of audit opinion
We conducted our auait in accordance with United Kingdom Auditing Standards issued by the Auditing Practices Board. An audit includes
examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of
the significant estimates and judgements made by the Directors in the preparation of the financial statements, and of whether the accounting
policies are appropriate to the Group's circumstances, consistently applied and adequately disclosed.
We planned and performed our audit $0 as to obtain al the information and explanations, which we considered necessary in order to provide us
with sufficient evidence to give reasonab'e assurance that the financial statements are free from material misstatement, whether caused by fraud
‘other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial
statements.
Opinion
In our opinion the financial statements give a true and fair view of the state of affairs of the Company and of the Group as at 28 March 2004 and
of the profit cf the Group for the year then ended, and the financial statements and the part of the remuneration report to be audited have been
properly prepared in accordance with the Companies Act 1985.
GRO
Emst & Young LLP
Registered Auditor
London
26 May 2004
34
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Royal Mail Holdings ple
Accounting policies
The following accounting policies apply throughout the Group:
Financial year
The financial year ends on the last Sunday in March and accordingly, these accounts are made up to the 52 weeks ended 28 March 2004
(62 weeks ended 30 March 2003).
Basis of preparation
The accounts on pages 32 to 60 have been prepared in accordance with applicable accounting standards under the historic cost
accounting convention and the requirements of the Companies Act 1985, except for investments in Government gilt-edged securities as
described in the Current Asset Investments accounting policy.
Royal Mail Holdings plc (the Company) has not presented its own proft and foss account, as permitted by the Companies Act 1985 s230(3).
‘However, the results of the Company for the year are disclosed in note 16 to the accounts.
No new Financial Reporting Standards, which affect the presentation of these accounts, have been issued by the Accounting Standards Board.
These accounts have been prepared in accordance with the current accounting standard SSAP 24 Accounting for pension costs. The Group has
also adopted the transitional arrangements of the latest pensions accounting standatd, FRS 17 Retirement benefits.
Royal Mail Group pic is exposed to the risk of being fined by its industry regulator and of being required to pay compensation to certain
Customers, as a result of failing to meet operational targets set by the regulator in the Company's licence. The amount of such fines and
compensation will be determined by the regulator after further representations from the Company and no further information is being disclosed on
the grounds that it can be expected to prejudice the outcome ofthat process.
Basis of consolidation
The accounts consolidate the accounts of Royal Mail Holdings plc and its subsidiary undertakings.
Enlities, other than subsidiary undertakings, in which the Group has a participating interest and over whose operating and financial policies the
Group exercises a significant influence, are treated as associates or where the Group exercises joint control, joint ventures.
‘The Group operates through business units that make use of each other's services in order to take advantage of Group synergies, having regard
to the mutual dependencies that exist, The interbusiness charges recognise these dependencies. The Board's policy is to maintain controls to.
ensure adherence to appropriate pricing principles.
Tumover
Tumover comprises revenue receivable directly from customers as adjusted for an assessment of prepaid stamps and meter sales still in the
hands of the public. Turnover excludes VAT.
{tis not considered that there is a material difference between turnover by origin and destination.
Goodwill
Goodwill arising on acquisition, being the excess of the fair value of consideration over the fair value of the separately identifiable net assets
acquired, is capitalised and amortised on @ straight-line basis over its estimated useful economic life of 20 years. it is reviewed for impairment at
the end of the first full financial year following acquisition and thereafter, as appropriate. Further details on goodwill can be found in note 7 to the
accounts,
Tangible fixed assets
Tangible fixed assets are recognised at cost, including directly attributable costs in bringing the asset into working condition for its intended use.
Depreciation of tangible fixed assets is provided on a straight-line basis by reference to original cost and to the remaining useful economic lives of
assets and their estimated residual values. The lives assigned to major categories of tangible fixed assets and remaining lives are:
‘Average remaining _ Range of asset
lives lives
Land and buildings:
freehold tand not depreciated not depreciated
freehold buildings 14 years up to 80 years
leasehold land and buildings Q years the shorter of the period of the lease, 50 years or the estimated remaining useful life
Plant and machinery 5 years, 3-15 years
Motor vehicles and trailers years: 1-12years
Fixtures and equipment 2years 2-15 years
Impairment reviews of fixed assets are performed where there is an indication of impairment as defined by FRS 11 Impairment of fixed assets
‘and goodwill. Further details on tangible fixed assets can be found in note 8 to the accounts.
Leasing and hire purchase
Assets acquired under finance leases or hire purchase agreements are capitalised and treated as tangible fixed assets. Depreciation is provided
accordingly and the capital element of future rentals is included within creditors. Interest on such contracts is charged to the profit and loss
‘account over the period of the contract and represents a charge tha relates to the proportion af the capital repayments outstanding. All other
leases are regarded as operating leases and rentals are charged to the profit and loss account over the lease term.
32
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Royal Mail Holdings plc
Accounting policies (continued)
Fixed asset investments.
Investments in subsidiaries, joint ventures and associates within the Company's accounts are stated at cost less provision for impairment and at
net asset value for internally formed companies.
Investments in joint ventures and associates are incorporated within the Group accounts using the gross equity method and the equity method of
accounting respectively, such that the Group's share of their profit and loss is included within the Group profit and loss account and the Group's
share of the net assets of each associate and joint venture is recorded in the Group balance sheet. Other fixed asset investments are stated at
cost less provision for impairment. Further details on fixed asset investments can be found in note 9 to the accounts.
Stocks
Stocks include uniforms, bicycles and stationery, and in the case of Counter Services also include retail stocks. All stocks are carried at the lower
of cost and net realisable value.
Current asset investments
Government gil-edged securities, held as current assets, are stated at market value at the balance sheet date and the difference between cost
and market value is taken to the profit and loss account. The treatment is a departure from UK accounting rules, which stipulate that unrealised
profits be credited to a revaluation reserve. In the opinion of the Directors, the treatment adopted is necessary to present a true and fair view. The
‘accounting treatment adopted represents a fairer reflection of the investment retum. All other current asset investments are treated according to
standard UK accounting rules. Other current asset investments mainly comprise short-term deposits with the National Loans Fund or Local
Authorities all of which are held at historic cost
Further details on current asset investments can be found in note 1f to the accounts.
Deferred tax
Deferred lax is generally provided in full on timing differences at the balance sheat date, at rates expected to apply when the tax liability (or asset)
crystallises based on substantially enacted tax rates and law. Timing differences arise from the inclusion of items of income and expenditure in
‘taxation computations in periods different from those in which they are included in the accounts.
Deferred tax is not recognised in the following instances:
- _ ongains on disposal of fixed assets where, on the basis of available evidence, it is more likely than not that the taxable gain will be rolled
‘over into replacement assets and charged to tax only when there is a commitment to dispose of those replacement assets;
= on unremitted eamings of subsidiaries and associates where there is no commitment to remit those earnings; and
= deferred tax assets are recognised only tothe extent thatthe Directors consider that iis more fikely than not that there will be suitable
taxable profits from which the future reversal of the underlying timing differences can be deducted,
Deferred tax assets and liabilities are not discounted. Further details of deferred tax can be found in notes 6 and 15 to the accounts.
Pensions and other post-retirement benefits
Membership of occupational pension schemes is open to most permanent UK employees of the Group. All members of defined benefit schemes
are contracted out of the eamings-related part of the State pension scheme. Overseas subsidiaries make separate arrangements for the provision
‘of pensions and other post-retirement benefits.
The defined benefit schemes are financed on the basis that the combined current service contributions payable by the employees and employer
are sufficient to cover the cost of the benefits which are expected to acorue in the future to members. The charge to the profit and loss account is
calculated so s to spread variations from regular cost and to amortise the surplus or deficit over the expected remaining service lives of the
employees. The assets of the schemes are held in separate trustee administered funds.
Valuations of the defined benefit schemes are carried out by independent professionalfy qualified actuaries at intervals not normally exceeding
three years, as determined by the Trustees. The accounting charge for pensions reflects best estimate assumptions as required by SSAP 24,
whereas the funding arrangements use a more cautious assumption for investment returns to assess the cash position of the Royal Mail Pension
Plan (RMP). This results in the cash payments being higher than the accounts charge for the RMPP. The difference is dealt with through the
long-term pensions prepayment in the balance sheet. Further details on pensions and other retirement benefits can be found in note 19 to the
accounts,
Research and development
Expenditure on research and development is written off in the year it is incurred. Further detaits can be found in note 3 to the accounts.
Foreign currencies
Transactions in foreign currencies are recorded at the rate ruling at the date of the transaction {or at the contracted rate if the transaction is
covered by a forward foreign currency contract). Monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of
‘exchange ruling at the balance sheet date (or the appropriate forward contract rate). All differences are taken to the profit and loss account with
‘the exception of differences on foreign curtency borrowings, which are used fo finance or provide a hedge against foreign equity investments.
‘These are taken directly to reserves together with the exchange difference on the carrying amount ofthe related investments. Tax charges and
credits attributable to exchange differences on those borrowings are also dealt with in reserves. The accounts of overseas subsidiary
undertakings are translated at the rate of exchange ruling at the balance sheet date and the differences arising from the transtation of opening net
investments are taken to reserves.
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Accounting policies (continued)
Financial instruments
The Group uses forward foreign currency contracts to reduce exposure to foreign exchange rates, The Group's policy is that its derivative
instruments qualify for hedge accounting when the following criteria are met:
the instrument must be related to a foreign currency asset or liability that is probable and whose characteristics have been identified;
- _ itmust involve the same currency as the hedged item; and
+ itmust reduce the risk of foreign currency movements on the Group's operations.
The contracted rates are used to record the hedged item. As a result, gains and losses are offset against the foreign exchange gains or losses on
the related financial assets and liabilities. Where the instrument is used to hedge a committed or probable future transaction, gains or losses are
‘not recognised until the transaction occurs.
In addition, over-the-counter derivative products are used to manage both the commodity and foreign exchange risks associated with the fuel
procurement policy. Further details on financial instruments can be found in note 18 to the acoounts.
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Royal Mail Holdings pic
Group profit and loss account
for the years ended 28 March 2004 and 30 March 2003
2004 2003,
Tumover: Group and share of joint ventures’
tumover 8,768 : 8,768 8,378 : 8.378
Less: share of oint ventures’ tumover (135) 2 (135) 79) E (79)
Turnover 1 8,633 : 8633 8,299 : 8,299
Costs: (8,582) (64) (8,646) (8,280) (697) (8,977)
Staff costs 2 (4,888) (68) (4,956) (4,632) (664) (6,196)
Depreciation and amortisation 3 (195) : (195) (233) : (233)
Impairment oa . (a1) (41) ‘ (97) (7)
Other operating charges 34 (3.499) 45 (3.454) (3.415) (36) (3451)
Group operating profit(loss) 18 st (64) (13) 19 (697) (678)
Share of operating proft in joint ventures 2 : B 18 - 18
Share of operating proftin associates 4 : 4 12 - 2
_Imnpairrment of goodwill in associates. 4 : : : : (24) (24)
Total operating profitloss): Group and share of
joint ventures and associates. 88 (64) 24 49 721) (672)
Net profit on disposal of tangible fixed assets 4 : 67 or - 4 4
(Loss)/profit on disposal of subsidiary undertaking 4 : @) @) = 2 2
Profiti(loss) on ordinary activities before interest 88 : 88 49 (695) (646)
Net interest receivable 5 7 : ald 35 : 6
Profit(loss) on ordinary activities before taxation 105 : 105 84 (695) 611)
Taxation 6 (98) 52
Profitiloss) retained for the financial year 16 ul (559)
35
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Royal Mail Holdings pic
Group statement of total recognised gains and losses
for the years ended 28 March 2004 and 30 March 2003
2004 2003
Note £m £m
Loss for the financial year excluding share of profit in joint ventures and
associates 30) (688)
Share of joint ventures’ profit for the year B 18
Share of associates’ profit for the year 4 4
Profittoss) for the financial year 1 (669)
Exchange differences on retranslation of net assets ) 40
Unrealised gain on joint venture transaction 9 46 2
Total recognised gainsi(losses) for the financial year 50 (517)
There is no statement of historical cost profits and losses as the accounts are produced under the historic cost accounting convention.
Reconciliation of movements in Group shareholders’ funds
2004 2003
Note ém £m
Opening shareholders funds 16 2,088 2,605
Total recognised gains/{losses) for the financial year (see above) 50 617)
Closing shareholders’ funds 16 2,138 2,088
36
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Balance sheets
at 28 March 2004 and 30 March 2003
Group Company
2004 2003 2004 2003
__ Notes £m £m £m £m
Fixed assets
Intangible assets 7 123 156
Tangible assets 8 1,550 1,648
Investments: 9 138 83 2146, 2,180
Share of gross assets of joint ventures 139 64 .
‘Share of gross liabilities of joint ventures (64) (54)
‘Share of net assets of joint ventures 5 10
Investments in associates 6 62
Other investments. 7 1 2146 2,180
Total fixed assets 4,814 1,887, 2146 2,180
Current assets:
Stocks 2 33 .
Debtors - receivable within one year 10 471 1,296 :
Debtors - receivable beyond one year 10 784 712 .
Investments. " 999 1,250
Cash at bank and in hand 1,049 1,060 4 =
4,035 4351 . -
Creditors - amounts falling due within
‘one year 12 (2,590) (2,566) : :
Net current assets 4,445 1,785 a :
Total assets less current liabilities 3,256 3,672 2,146 2,180
Creditors - amounts falling due after
more than one year 13 (643) (613)
Provisions for liabilities and charges 18 (675) (966) _ -
Net assets 2438 2,088 2146 2,180
Capital and reserves:
Called up share capital 7 . .
Profit and loss account 16 989 218 2,146 2,180
Mails Reserve 16 165 1,853 :
Rural Network Reserve 16 311 *
Other reserves 16 63 7 :
Shareholders’ funds 2138 2,088 2146 2.180
The accounts on pages 32 to 60 were approved by the Board of Directors on 26 May 2004 and signed on is benalf by:
37
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Royal Mail Holdings plc
Group cash flow statement
for the years ended 28 March 2004 and 30 March 2003
Reconciliation of operating profit to net cash outflow from operating activities Notes on
Group operating profit before exceptional items @ st 19
Depreciation and amortisation 195 23
Changes in working capital and other non-cash items: 5) (396)
Decrease in stock 1 9
Decrease/(increase) in debtors 42 (673)
Increase in creditors uo 198
(DecreaseYincrease in client balances (287) 67
Decrease in provisions (174) 7)
Cash payments in respect of operating exceptional items b) (442) (239)
Net cash outflow from operating activities (244) (383)
Group cash flow statement
Net cash outflow from operating activities (241) (383)
Dividends received from joint ventures and associates 2 7
Dividends received from joint ventures 6
Dividends received from associates 15 7
Returns on investments and servicing of finance 7 34
Interest received 52 69
Interest paid (35) (35)
Taxation
Corporation tax recovered 12 7
Capital expenditure and financial investment (56) (159)
Purchase of intangible fixed assets (2) -
Purchase of tangible fixed assets (158) (221)
Purchase of fixed asset investments (5) 7
Sale of tangible fixed assets 100 58
Sale of fixed asset investments 9 4
‘Acquisitions and disposals 25 (2)
Purchase of interest n joint ventures and associates (4) =
Payment of deferred consideration in respect of prior years’ acquisitions - ®
Disposal of subsidiary undertaking 2 7
Cash outflow before use of liquid resources and financing (222) (486)
Management of liquid resources
Net movement in current asset investments @) 254 550
Net cash inflow before financing 29 64
Financing 440) (61)
Repayment of finance leases and hire purchase agreements @) (32) (37) I
New long-term foans (a) - 53
Repayment of loans (a) 8) ml
(DecreaseVincrease in cash in the period (11) 3
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Group cash flow statement (continued)
for the years ended 28 March 2004 and 30 March 2003
Reconciliation of net cash flow to movement in net funds (see note (a))
2004 2003
£m £m
{Decrease)jinerease in cash in the period (1) 3
Repayment of nance leases and hire purchase agreements 32 7
New long-term loans (63)
Repayment of loans 8 7
Cash flow from management of liquid resources (net movement in current asset investments) (251) (550)
Change in net funds resulting from cash flows (222) (486)
Exchange diflerences : 1
‘Movement in net funds in the period (222) (485)
Opening net funds 4873 2.158
Closing net funds 4451 4,673
Notes to the cash flow statement
{a) Analysis of net funds
At Other At
34 March non-cash 28 March
2003 Cash flows movements 2004
£m £m £m
Cash at bank and in hand 4,080 ) : 4,049
Loans due beyond one year 615) 8 - (507)
Loans due witin one year (83) - : 53)
Finance leases and hire purchase agreements due beyond one year (35) 32 1 @
Finance leases and hire purchase agreements due within one year (34) : () 5)
Current asset investments. 1,250 (251) 999
Total 4,673 (222) : 1451
{b) Cash flows relating to operating exceptional items charged in both current and prior years,
The net cash outflows relating to the above were as follows:
2004 2003,
Net cash outflow relating to: £m £m
‘Current year exceptional iteras 3 29
Prior year exceptional tems 409 210
Total 42 239
The net cash outflow of £412m comprises the £329m in respect of exceptional provisions (as shown in note 15) and a further £83m relating (othe settlement of
the prior year pensions redundancy fabilty, which was recorded within creditor.
(c) Group operating loss of £13m (2003 £678m loss) includes £64m of operating exceptional charges (2003 £697m charge) which have been added back to
derive a Group operating profit before exceptional items of £54m (2003 £19m).
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Notes to the accounts
4 Segmental Information
The Group discloses its segmented results as required by SSAP 25 into the two classes of business: Mails and Parcels, and Counter Services. in the following
analyses, the costs of the Group's corporate activities have been allocated, which means that the results disclosed below may be different from the reported
results of each segment within their own statutory accounts.
Analy oftumover by cass of businest 2006 2003
ssresae
tm im
Tenover Trower
Yoal—tatwoenExtemat Tos between tad
tumovee augments turnover amore uno
Mails and Parcels 7878 (2) 1656 TABS (18) 7.400
Counter Services, 4278 (304) Lua 4186 (287) 899
Tota 8.956 (323) £633 8,604 (305), 8.299
Analysis of operating profitiloss) by class of business: 2006 203
seresiaed
tm tm
Before Batore
Operatonsi Pensions exceptional Exceptional Cperctonal Pensions exception »—_—Excepboral
activity deficit Koms: ‘ems Total activity surplus ters items Total
Mais and Part 0s 2) te «) m 9 mm 2 10) (2)
‘Coumer Services (122) my (133) Hy 51) an 2 (195 (87) (382)
Pensions adjustment (132) 432, : : 2 246 (246)
Group operating profs) A 7 st is) tt) 9 : 8 fou 878)
Analyals of tu mover and operating profit{loss) by geographiic area of origin cal 203
Sparing protons) _ Doering poo) _
Betore After, Betore Afer
External exceptional exceptional Extema —evceponal —_excefonat
tumover tee itr ‘unover ‘tes ‘ens
‘on on on ‘mn om mn
‘United Kingdom 1795 2 (18) 7481 1 (678)
Resto the Word {grincpaty Europe) 838, at 5 818 r
Total 8.833 Lil (13) 8,209 19 (578)
Analysis of net assota/(Rabiities) by class of business: 0 2003
sresttes
fm fm
Mails and Parcels 17 2233
Counter Services 160 217)
2007 2016
Shar olnet sets oil vertives % 10
Share of nase . _ % _ e
Te - 2338 - 2068
All net assets other than £381m (2003 £404m) were located in the United Kingdom with the balance principally in Europe.
CComparatives have been restated to reflect the changes in organisational structures and the impact of fully allocating the ‘Other’ segment (2003: £26m operating loss) to
underlying operational segments, The overall net impact of these two changes is to inorease the 2003 operating loss before and after exceptional items for Mails and
Parcels by £17m and Counter Services by £9m.
40
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Royal Mail Holdings plc
2 Staff costs and numbers 2004 2003
£m £m
‘Wages and salaries 4,226 4,628
Social security costs 301 303
Pension costs (note 19) 429 265
Totat 4956 5,196,
A loan to one officer totalling £2,113 {2003 — one officer £3,818) was outstanding at the end of the year.
Staff costs include £68m (£14m wages and salaries and £54m pension costs), which is included in operating exceptional items (2003 £564m,
£364m and £200m respectively).
Staff numbers, calculated on a headcount basis, were:
Period end employees ‘Average employees
2004 2003 2004 2003
UK Mails and Parcels 189,221 198,552 194,606 202,134
UK Counter Services 13,115, 14,260 13,590 14,568
‘UK total 202,336 212,812 208,196 216,702
Overseas 9,974 40,497 10,442 10,541
Group total 212,310 223,09 218,638 227,243
There were 13,575 subpostmasters at the end of the year (2003 14,567).
Details of Directors’ remuneration and pension entitlements are included in the Directors’ Remuneration Report.
3 Operating profiti(loss) 2004 2003
£m £m
Group operating profitloss) is stated after charging:
Depreciation and amortisation: 195 233
Depreciation of owned tangible fixed assets 164 196
Depreciation of tangible fixed assets held under finance leases and hire purchase agreements 4 a
Amortisation of intangible fixed assets 10 10
Exceptional impairment write-down: 4 97
Tangible fixed assets "7 9
Intangible fred assets 24 7
‘Subpostmasters' costs 557 875
Research and development expenditure 3 5
Operating lease charges: 207 202
Land and buildings 119 113
Vehicles and equipment 88 89
Regulatory body costs: 7 16
Postoomm 7 6
Postwatch 40 10
4
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3 Operating profitoss) (continued)
Auditors’ remuneration 2004 2003
£000 £000.
Audit of statutory accounts 1,488 1,548
Audit of regulatory accounts 502 323
Further assurance services 375 1,037
Tax services: 715 658
‘Compliance services 493
Advisory services 22
Other services: 63
Financial information technology 5 Era
Other services 63 298
Total auditors’ remuneration _ _ 3,443 3,901
42
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4 Exceptional items
Exceptional tems comprise operating exceptional items, which are recorded within the Group operating profit loss), and non-operating exceptional
items, which are recorded below Group operating profil(lss) inthe profit and loss account. Both are further highlighted below:
2004 2003
&m £m
Operating exceptional items:
Impairment of tangible fixed assets (17) a
Impairment of goodwill relating to subsidiaries 24) (90)
Provision for onerous contracts relating to surplus properties (17) (18)
Provision for Renewal Plan restructuring 6) (82)
(64) (697)
Non-operating exceptional items:
impairment of goodwill relating to associates . (24)
Net profit on disposal of tangible fixed assets 6 Py
{Loss)/profit on disposal of subsidiary undertaking 3) 2
Total : (695)
‘The £64m of operating exceptional costs comprises impairments of tangible and intangible fixed assets of £41m (2003 £97m}, £17m of costs relating to
‘onerous contracts for surplus leasehold properties (2003 £ 18m) and £6m charges relating fo the Group-wide Renewal Plan (2003 £582m). The £6m
charges comprise a £68m charge in respect of employee-retated costs and a £62m release in provision in respect of other operating costs, Furthermore,
this £62m release and the £17m onerous property contracts costs above comprise the £45m shown separately as other operating charges in the profit
and loss account.
‘The £64m of non-operating exceptional profit (2003 £2m) comprises £67m profil arising from the sale of a number of properties (2003 £24m), End for the
impairment of goodwill in associates (2003 £24m) and a £3m loss relating to business disposals (2003 £2m prof, inthis instance the outsourcing of IT
operations and the associated disposal of CSC Business Systems Limited (formerly RM Business Systems Limited),
The tax chargel{credit) on non-operating exceptional items were:
2004 2003
ém £m
Disposal of CSC Business Systems Limited 39 :
Disposal of tangible fixed assets 6) 2
Total tax charge on non-operating exceptional tems 33 :
Net interest receivable
2004 2003,
£m £m
Interest payable on bank loans and overdratis : 6)
Interest payable onotherloans oe 35) (29)
Total interest payable 35) (34)
Interest receivable on investments 82 69
Total net interest receivable id 35
43
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6 Taxation
(a) Tax on profiti(loss) on ordinary activities
The tax charge/(credit) is made up as follows:
2004 2003
Current tax Bu fm
Amount receivable for surrender of losses to associates and joint ventures in respect of consortium relief (10) (40)
Tax under/(over)-provided in previous years 4 @
UK current tax 6) (17)
Foreign current tax 6 2
Group current tax - (15)
‘Amount payable by joint ventures in respect of consortium relief 6 5
Amount payable by associates in respect of consortium relief 4 5
Share of joint ventures’ current tax payable 1 .
‘Share of associates’ current tax payable _ 1 1
Total current tax (see table below) 12 (4)
Total deferred tax (note 15) a 86 (48)
Total taxation 98 (62)
(b) Factors affecting the current tax charge/(credit)
The tax assessed for the year differs from the standard rate of corporation tax in the UK of 30% (2003 30%). The differences are explained below:
2004 2003
£m £m
Profit/(loss) on ordinary activities before tax. 105 (611)
Profit(loss) on ordinary activities multiplied by the standard rate of corporation tax in the UK of 30% (2003 30%) 22 (183)
Deferred relief for asset depreciation and impairment 32 52
Deferred/{accelerated) relief for pension contributions 58 (180)
Provisions not deductible untl incurred (98) 88
Impairment and amortisation of goodwill 7 6
Losses and other reliefs not utilised 9 196
Utilisation of prior year tosses. (41) ;
Other 12 18
Total current tax (see table above) 12 (4)
Pensions contributions qualify for tax refief in the year in which they are paid. Charges to the profit and loss acoount in respect of pensions exceeded
contributions paid in the year.
(c) Factors that may affect future tax charges.
‘The Group has unrecognised deferred tax assets of £144m (2003 £146m) relating to tax losses in subsidiaries that are available to offset against future
taxable profits of those companies. The Group has unrecognised deferred tax assets of £178m (2003 £158m) relating mainly fo fixed asset timing
differences.
Deferred tax assets have not been recognised in respect of these items, as they have arisen in companies that are loss-making and the losses, in
particular, may not be used to offset future taxable profits elsewhere in the Group. The unrecognised deferred tax assets will be recognised in future to
the extent that suitable taxable profits are expected to become available.
The Group has capital losses carried forward, the tax effect of which is approximately £12m (2003 £12m). These may be set-off in future years against
capital gains. The Group has rolled over capital gains, the effect of which fotals £88m (2003 £75m). It is expected that gains on tangible fixed assets sold
in the year will be fully rolled over in due course,
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7 Intangible fixed assets
Group
Goodwill Other Total
cost £m £m £m
AU31 March 2003 482 19 501
Exchange movement ” 3 7)
‘Acquisition of business 4 : 4
At 28 March 2004 479 19 498
AMORTISATION
At31 March 2003 M3 2 345,
Exchange movement (4) - 4)
Charge for the year 9 4 10
Impairment 24 24
‘At28 March 2004 _ I) 5
NET BOOK AMOUNT
At 28 March 2004 107 16 123
At31 March 2003 4139 17 156
Other intangible fixed assets include the value of master franchise licences relating to parcel delivery in Italy.
8 Tangible fixed assets
Group Land and buildings
tong Short Plant and Motor Fixtures and
Freehold leasehold leasehold machinery vehicles: ‘equipment. Total
cost £m £m £m fm £m £m tm
At34 March 2003 1,557 232 422 666 246 856 3979
Exchange movements = . < (f) = (a) (2
Rectassification 6) 3 (20) 8 . 6) °
Additions 12 1 76 50 13 13 165
Disposals (8) (2) (24) (40) (63) @ (197)
Disposal of business (17) : : : : (77) (94)
At 28 March 2004 1,488 244 457 693 190 79 3,851
“ACCUMULATED DEPRECIATION
AU31 March 2003 687 128 195 336 176 809 2.331
Exchange movements . . (1) > (1) 2)
Reclassification (ay 2 ® 412 3 6
Charge for the year 48 10 32 67 18 10 185
Impairment 4 - 7 - 4 2 7
Disposals 35) (1) (22) 9) (62) (6) (165)
Disposalofbusiness 5 5 ee 1) (65)_
At 28 March 2004 685 439 203 375 136 763 2,301
NET BOOK AMOUNT
At 28 March 2004 803 405 254 318 54 16 1,550
At31 March 2003 870 104 227 330 70 47 1,648
Depreciation rates are disclosed within the accounting policies. No depreciation Is provided on freehold land, which represents £156m (2003 £151m} of
the total cost of freehold properties. The net book value of the Group's tangible fixed assets held under hire purchase contracts and finance leases
amounts to £86m (2003 £110},
45
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9 Fixed asset investments
Group
Share of (lossy
profit
Ast retained by ont A
March ventures! ‘March
2003 Additions Disposals Reclassification Amortisation associates 2004
£m £m tm tm £m im tm
Netinvestments in associates 62 S. 2 é. (3) (3) 56
Share of net assets in associates 4 - : fa) : @) at
Goodwill relating to associates 2 - : z 3) : 25
Net investment in joint ventures 10 #0 ~. bd 15 75
Share of net assets in joint ventures 10 50 (2) : 15 73
Goodwill relating to joint ventures Le : __ 2 a = 2
Other investments {Local Authority deposits) 41 5 (9) : = : 1
Total 83 55 (9) . QB) 12 138
In March 2004, the Group signed a joint venture agreement with the Bank of Ireland to sell Post Office branded financial service products such as
‘personal foans, motor insurance, credit cards and savings accounts. This arrangement will initially run for ten years. As part of the transaction, the Bank
of lreland invested £100m to enable the establishment of the joint venture - Midasgrange Limited - and to provide the core infrastructure and start-up
costs. The Group's share of the investment, recorded as additions to net assets in joint ventures amounts to £50m. Other additions comprise £5m
relating to Local Authority deposits.
Details of principal joint ventures and associates are given in note 23.
Company 2008 2003,
£m £m
At 31 March 2003 2,180 2725
Change in net asset vaiue of subsidiary undertaking (34) (545)
‘At28 March 2004 2146 2,180
The fixed asset investment of the Company represents the net asset value of its investment in an internally formed subsidiary undertaking.
10 Debtors
2004 2003
_ _£m £m
Receivable within one year:
Trade debtors 673 695
Pension prepayment 128 400
Other prepayments and accrued income 370 201
Total 4474 4,296
2004 2003
£m fm
Recelvable beyond one year:
Pension prepayment 770 707
Other debtors 44 §
Total 784 712
The pension prepayment beyond one year relates to the cumulative excess of the amounts funded in the Group's defined benefit schemes over the
amounts chazged to the consolidated profit and loss account. The amount within one year represents prepaid contributions.
Other long-term debtors mainly represent amounts payable from employees in respect ofthe home computing intative launched in Novernber 2003
46
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11 Current asset investments
2004 2003
£m £m
Government gitt-edged securities 134 253
Government short-term deposits (National Loans Fund) 583 913
Other deposits 285 84
Total 999 41,250
In accordance with the relevant accounting policy, current asset investments are stated at market value. The difference between cost and market value
taken to the profit and loss account for these investments was a loss of £4m (2003 £1m).
‘The above investments include deposits of £549m, which are subject to a charge as security against the loans from the Department of Trade and
Industry (OT!). The balance of investments are restricted in their use to that permissible by the section 72 order, which created the Mails Reserve (note
16).
12 Creditors — amounts falling due within one year
2004 2008
ém £m
Loans (note 14) 53 53
Obligations under finance leases and hire purchase agreements (note 14) 35 34
Client services balances 167 1.054
Trade creditors and accruals 4377 1,026
Advance customer payments 224 253
Corporation tax 10 12
Other taxation and social securty 106 112
Other creditors _ 18 ee
Total 2,590 2,566
The Group, via its Post Orfioe Limited subsidiary, receives and disburses cash on behalf of Govemment agencies and other clients to customers through
its Post Office branch network. Amounts owed to these parties are separately shown as cient service balances above. The level of cash held and the
felated creditors can vary significantly at each balance sheet date.
13 Creditors ~ amounts falling due after more than one year
2004 2003
&m £m
Loans (note 14) S07 515
Obligations under finance feases and hire purchase agreements (note 14) 2 3%
Deferred consideration (note 14) 2 :
Pension oreditor : 68
Other 2 :
Total 543 618
Other long-term creditors represent £ 10m payable to the leasing company in respect of the home computing initiative launched in November 2003 and
£22m in respect of deferred income.
47
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14 Borrowings including loans, finance leases, hire purchase agreements and deferred consideration
2004, 2003,
ta as
vara wan
aa re
vane goes codon Toul tore tanta
= < s rai =<
‘Amounts falling due in:
One year or less or on demand 53 KC) - 88 53 Ky : 87
More than one year 507 2 2 514 515 36, : 550
More than one year but not more than two years 1 - 2 3 1 32 - B
More than two years but not more than five years - i - 1 5 1 - 6
More than five years 506, 1 : 507, 509 2 : 511
Total 560 37 2 599. 568 69 a 637,
Analysis of loans and facilities
Average Average
funter Tait ly
Loan tncility facility range date
tn rH 2. ee
DT! loans to Royal Mail Group pic 500 1,044 1,544 58 2023
HM Treasury toans to Post Office Limited 50 1,100 41,150 at 2004
Committed facilities 550 2.444 2,694
Miscellaneous long-term bank loans taken out by overseas subsidiaries 10 : 10 3.36-7.35. 2009
Total 560 2444 2,704
‘At 28 March 2004, the Group borrowing limit under section 115(6)(b) of the Postal Services Act 2000 was £5bn (2003 £5bn) subject to Govemment
agreement.
‘The Group has various borrowing facilities available to it The undrawn committed facilities avallable at 2B March 2004, in respect of which all conditions
precedent had been met at that date, are as follows:
2004 2003
£m fm
Expiting in one year or less 500
Expiring in more than one year but not more than two years : 500
Expiring in more than two years 1,644 494
Total 2444 994
The undrawn amounts comprise multiple loan facilities amounting to £2, 144m, of which £550m had been utilised at 28 March 2004. The £500m loan is
secured by way of a fixed and floating charge on various assets of the Group. The £50m loan is secured against cash and near cash items.
48
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15 Provisions for liabilities and charges
Charged
At Inthe Utlised Utlined at
34 Mareh 2008 yor omcash eanh Mach 2004
fm tm £m £m im
Mails and Parcels 865 24 (159) (301) 42
Counter Services ET 9 (15) 5) 50
Deferred tax 10. 86 : 96
Total 966 119 (174) (336) 515
The Mails and Parce's provision includes amounts relating to redundancy and other non-tedundanecy items for the following major change projects:
Single Daily Delivery, Mail Centre Efficiency Review, Transport Review, Parcelforce Worldwide restructuring and managerial overhead reduction. During
the year &144m was charged to exceptional tems and £ 10m to other operating costs, A further £29m was ullised to write-down fixed assets and £130m
transferred to creditors due within one year; the latter representing amounts payable to employees who had an agreed leaving date under voluntary
redundancy but who remained in the business at the year end, together wth a contractual liability now agreed to be seted in 2004-05. £360m ofthis
provision is expected to be utilised in 2004-05 and the remainder over the following two to three years, except for £46m relating fo onerous property
‘contracts, which is expected to be utilised over a longer period
Counter Services provisions include amounts relating to Network Reinvention and its share of the managerial overhead reduction. During the year £9m
was charged to exceptional costs. A further £15m was transferred to creditors due within one year, representing amounts payable to employees who had
accepted voluntary redundancy but who remained in the business at the year end. £48m is expected tobe utilised in 2004-05 and the remainder in the
following year.
‘The cash uiilisation of £336m includes £329m ot spend relating to exceptional rationalisation. Total cash spend in the year relating to exceptional
ratonalistion is shown in the cash flow statement.
Included within provisions is £53m (2003 £40m) relating to onerous property contracts, all of which relate to Mails and Parcels.
‘The deferred tax provision comprises:
2004 2003
£m £m
Deferred capital allowances 2 43
Pension contributions timing differences (250) (338)
Provisions 98 197
Losses 33 88
Total (96) (10)
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16 Reserves
Group Dispiowabe reserves
andloss 2004
wecount, Walls Rural Network ‘Other Total
a a a m =
At31 March 2003 218 1,853 - 7 2,088
Profit for the financial year 7 : 7
Transfer of Mails Reserve 671 (4,121) 450 .
Transfer of Rural Network Reserve 146 (146) -
‘Transfer of interest income (40) 33 7 :
Untealised gain on joint venture transaction . 46 46
Exchange differences _ 7 3} = fol
At 28 March 2004 999 765 3u 2,138
‘The Malls Reserve was created in Royal Mait Group plc on 3 February 2003, following directions issued by the Secretary of State for Trade and Indusby
under section 72 of the Postal Services Act 2000. The amounts allocated to the reserve are to be applied as if they were profits available for distribution
‘and they are to be principally used to provide financial assistance to Post Office Limited and security for loans to Royat Mail Group pkc.
During the period, £1,121m of the Mails Reserve has been utilised for the provision of financial assistance to Post Office Limited, including £450m to set
up the Rural Network Reserve to provide funding for the rural network of Post Offices for three years, and £671m to cover the write-off of Post Office
‘Limited's intercompany debt to Royal Mail Group pic. The Rural Network Reserve has been reduced by £146m, representing the financing required
during the period in maintaining the rural network of Post Offices.
‘The transfer of interest relates to income recorded in the profit and loss account, which has been eamed on the assets that support the Mails and Rural
Network Reserves.
The unrealised gain on the joint venture transaction relates to the joint venture agreement with the Bank of ireland, which is fully explained in note 9.
Company Profit and lors 2004
poined ‘at
= - —~ ™ ~ sn fm
At31 March 2003 2,180 2,480
Loss for the year (34) (4)
At 28 March 2004 2.1446 2,146
The toss dealt with a the accounts ofthe parent company was £34m (2003 £545m). The Company is a non-trading company and the loss for the
financial year represents the net asset value adjustment arising as a result of the accounting policy on Fixed Asset investments. This states that the
investments in internally formed subsidiary undertakings are stated at net asset value. Accordingly, the Company's loss for the financial year is
eliminated in the Group Accounts and does not therefore form part of the Group results. Further details can be found in note 9.
50
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17 Share capital
Authorised 2004 2003
£ £
Ordinary shares of £1 each 100,000 100,000
_Special Rights Redeemable Preference Share (Special Share} of £1 each 1 1
Total 100,001 400,001
Allotted and called up. 2004 2003
£ £
‘Ordinary shares of £1 each 36,000 50,000
Special Rights Redeemable Preference Share (Special Share) of £1 each 1 1
Total 50,001 50,001
‘The Special Share can be redeemed at any time by its holder (the Special Shareholder). The Company cannot redeem the Special Share without the
prior consent of the Special Shareholder. No premium is payable on redemption. Subject to, and in accordance with, the provisions of the Postal
Services Act 2000, the Special Shareholder can at any time require the Directors to declare and pay a dividend to the Special Shareholder or its
nominee.
On distribution in a winding up of the Company, the Special Shareholder is entitled to repayment of the capital paid up on the Special Share in priority to
‘any repayment of capital to any other member.
The Special Share does not carry any rights to vote.
Jn accordance with section 63{7) of the Postal Services Act 2000, for the purposes of the Companies Act 1985, the shares issued to the Special
‘Shareholder shall be treated as if their nominal value had been fully paid up.
51
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18 Derivatives and other financial instruments.
‘An explanation of the Group's treasury policy and controls is included in the Operating and Financial Review. The role of financial instruments in creating
‘or changing the risks the Group faces in its activites is also explained in that section.
Financial assets and tablites are a subset of the overall assets and liabliies ofthe Group and include balances which generally have interest rate
andior foreign currency risks attached. FRS 13 Derivatives and other financial instruments, permits exclusion of tems such as trade debtors, trade
creditors, prepayments and accruals, The assets and liabilities which fall under the defintion, along with thec far values, are highighted in (I) below:
(1) Fair value of financial assets/(iabilities)
Fair value is defined as the amount at which a financial instrument could be exchanged in an arm's length transaction between informed and willing
parties and is calculated by reference to market rates discounted to current value. Where market rates are not available, fair values have been calculated
by discounting cash flows at prevailing rates transacted at year end exchange rates.
2004 2003.
Gross Gross Net book Fair Gross Gross Net book Fair
asset lability value value ‘asset liability value vale
£m im £m £m £m fm £m £m.
Cash 1,049 + 1089 1,049 1,080 - 1060 1,060
Current asset investments (note 11) 999 a) 999 1,250 - 1,250 1,250
Local Authority deposits (note 9) 7 5 7 7 "1 - " "
Borrowings (note 14) - (699) (599) (599) - 637)_—(637)_——«(637)
Client services balances (note 12) -___@67)__—767)_—__—re) = (1,054) (1,054) (1,054)
Total 2055 (1,366) __689 689 2321 (1691) 630630
Fair values for borrowings and deposits have been calculated by discounting at an appropriate rate.
The carrying value of gits is £138 (2003 £263m), of which £131m (2003 £253m) is included in the current asset investment figures and £7m (2003,
£10m)} in the fixed asset investment figures. The Group portolo of git holdings showed a loss of £4m (2003 £1m) during the financial year when
revalued. :
(i) Maturity profite of the Group's financial liabilities
‘The maturity profile of the Group’s financial liabilities at 28 March 2004 is set out below:
2004 2003
Borrowings: Client Borrowings Giient
(cote 14) balances Total (note 14 balances Tota
fm. fm fm fn £m fm
‘One year or less or on demand 88 18? 855 87 1,054 4.141
More than one year but not more than two years 3 : 3 33 : 2
‘More than two years but not more than five years 1 : 1 6 : 6
More than five years. 507 : Eid St : sit
Total 599 787 4,366 637 4,054 4,694
(il) Maturity profile of the Group's undrawn committed borrowing facilities
Details of the Group's borrowings and undrawn committed borrowing facilities can be found in note 14.
52
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18 Derivatives and other financial instruments (continued)
iv) Interest rate profile and foreign currency analysis
2004 2004
Financial liabilities Financial assets
Gross ‘Gross Net
‘Sterling Euro Other total Sterling usp Euro Other total total
£m. £m £m tm £m £m £m £m £m £m
Fixed rate (650) ) . (558) 1,006 : . . 1,006 448
Floating rate : () : @ : 2 54 : 33 49
Non-interest bearing (804) a - (804) 936 20 38 2 996. 192
Total (1,354) (12) - (1,366) 41,942 2 89 2 2,055 689
2003 2003
Financial liabilities Financial assets:
Gross. Gross Net
Sterling Euro Other total Sterling usD Euro Other total totat
£m £m £m £m £m £m £m £m £m fm
Fixed rate (850) (12) . (562) 1,261 - - - 1,261 699
Floating rate (40) @ F (48) 5 - 43 : 43 @)
Non-interest bearing (1,083) : (1,083) 986 7 2 2 4,017 (66)
Total (1,673) (18) - (1,691) 2,247 7 65. 2 2.321 630
The fixed rate sterling financial fabilities of £550m have a weighted average interest rate of 5.7% and an average time to maturity of 17 years (2003
5.67% and 18 years). The fixed rate sterfing financial assets of £1,006m have a weighted average interest rate of 3.95% and an average time to maturity
of 20 days (2003 3.59% and 82 days)
The floating rate euro financial labiities have a weighted average interest rate of euro LIBOR plus 2% and an average time to maturity of four years
(2003 euro LIBOR plus 2% and 5 years). The floating rate euro financial assets have a weighted average interest rate of bank rate minus 1% and an
average time to maturity of one day (2003 bank rate minus 1% and one day).
Of the £804m of non-interest-bearing financial labiliies, £767m is payable on demand and £37m has an average maturity date of 202 days. All he non-
interest-bearing financial assets are receivable on demand.
‘A one percentage increase in interes rates throughout the period would have increased profit before tax by £11m.
(¥) Derivative financial instruments held to manage currency and commodity price fluctuations
2003
Fair value
£m
Foreign currency transactions 185
Fuel derivatives 16 18
Atthe balance sheet date, the Group held contracts to purchase foreign currency for £153m (2003 £185m) and £ 16m (2003 £18m) fuel contracts. No
carrying amounts are shown as all these items are held off balance sheet. The difference between the contracted forward rate and mark to market rate
was a loss of £4m (2003 £m) for currency contracts and a gain of £1.5m (2003 £1.4m) for fuel contracts.
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18 Derivatives and other financial instruments (continued)
(vi) Forward transactions
‘The Group had outstanding forward transactions to hedge foreign currencies and fuel purchases as follows:
In currency (millions) Sterling equivalents (millions)
2004 2003 2004 2003
Waturing within one year
Euro eB 80 2% 55
JPY 745, 1,781 4 9
USD 207 181 121 116
AUD 3 3 1 1
Maturing after one year
uSsD 1 - 1 -
Euro 2 4 . 5
(vii) Gains and losses on transactional exposures
The table below shows the Group's currency transactional exposures that give tise to net currency gains and losses recognised in the profit and loss
account. These liabilities arise from the net payments due fo overseas postal administrations for delivery of mail, and are denominated in Special
Drawing Rights (SDRs}. This is a basket of currencies comprising US Dollar, euro, Japanese Yen and Sterling. Such exposures comprise the monelary
abilities of the Group that are not denominated in the functional currency of the operating unit involved.
This year 100% (2003 80%) ofthe exposure to pay overseas administrations was hedged; consequently there is no unhedged exposure (2003 21 milion
SDRs were unhedged).
a __. 2004 2003
Net foreign currency fabilities (SDRm) . 2
Sterling equivalent value (fm) s 49
At28 March 2004, the Group also held various open forward contracts that were taken out to hedge expected future foreign curency payments (as
shown in note (vi) above).
(vill) Gains and losses on hedges
Foreign exchange exposures are hedged using currency deposits, currency borrowings, forward currency contracts and currency options.
Gains and losses on these instruments are not recognised unt the hedged exposure itself is recognised. Unrecognised gains and losses on these
instruments used for hedging are not materia
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19 Pensions
‘The Group operates pension schemes as detailed below:
Kame Eligibility Type
Royal Mail Pension Plan (RMPP) UK employees Defined benefit
Royal Mail Senior Executive Pension Plan (RMSEPP) UK Senior Executives Defined benefit
Royal Mail Retirement Savings Plan (RMRSP) ‘UK employees Defined contribution
Various other small-scale schemes operated by overseas subsidiaries Overseas subsidiary employees Defined contribution
The terms of the merger of the two former schemes - the Post Office Staff Superannuation Scheme (POSSS) and the Post Office Pension Scheme
(POPS) - with effect from 1 April 2000, required them to be considered as separate sections of the RMPP whilst one section remained in surplus and
‘one remained in deficit. As both of these sections are now in deficit, this requirement falls away and the RMPP is now dealt with as a single plan with no
‘separate sections for overall funding and accounting requirements.
Pension charges in the profit and loss account
‘The Group continues to account for pension costs under SSAP 24 Accounting for pension costs, and a summary of pension charges, including those
relating to redundancy provisions, is shown below:
2004 2003
£m £m
Regular pension costs - defined benefit schemes 242 310
- defined contribution schemes 1 1
Regular pension costs 243 3tt
Accounting defii/(surplus) and best estimate reduction 188 (201)
Notional interest on pension asset (56) (45)
Charges relating to redundancy provisions 54 200
Total net charge included in proft(loss) before tax (note 2)_ 429 265
Pension valuations
Valuations of the defined benefit schemes are cartied out at intervals not normally exceeding three years as determined by the trustees. The latest
actuarial assessments of the RMPP and the RMSEPP were carried out as at 31 March 2003, These were performed using an assumed rate of inflation
of 2.5% for both schemes. Investment retums real were assumed to be 4.9% and 4.3% respectively. Pay increases real were assumed to be 1.5% and
3.0% respectively and pensions, both in payment and deferred, were assumed to increase at 2.5% for both schemes. The market value of assets al the
latest actuarial assessments was £11,954m for the RMPP and £86m for the RMSEPP. The asset cover of the benefits accrued fo members after
allowing for future increases in eamings was 91% for the RMPP and 82% for the RMSEPP, both as at 31 March 2003. The next ful valuation of both the
RMPP and the RMSEPP Is due to be carried out as at 31 March 2006. Key factors generating the move from surplus to deficit were investment market
experience over the three years ending 31 March 2003 of some £725m, demographic changes, including increased Ife expectancy of members, of
some £420m, and the higher assessed liabilies of some £1,350m based upon a lower discount rate.
Accounting standards
‘These accounts have been produced in accordance with the current accounting standard SSAP 24, The latest pensions accounting standard, FRS 17
Retirement benefits, has been adopted by the Group in accordance with the transitional arrangements. This is further complicated because the Group
plans to adopt international financial reporting standards (these are expected (o be similar to FRS 17), which means FRS 17 disclosures will continue to
be made next year, with the year to March 2006 being the first year in which all pension costs and related information are reported in accordance with
the international standards.
FRS 17 disclosures
The following FRS 17 disclosures relate to the RMPP and RMSEPP plans:
a) Assumptions
The major assumptions used by the actuary were:
At 26/03/2004 ‘At 30/03/2003 At 31/03/02
%pa % pa Sepa
Rate of increase in salaries 4.10 3.55 3.80
Rate of increase in pensions 260 2.25 250
Discount rate 5.50 5.50 6.00
Inflation assumption 260 225 2.50
Expected average rate of retum on assets 7.50 7.90 770
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19 Pensions (continued)
b) Plan assets and expected rates of return
‘The assets in the Pians and the expected rates of return were:
At 28 March 2004
Market value af 28 March 2004
Long-term rate of return
RMPP RMSEPP expected at 28 March 2004
£m £m tepa
Equities 12,066 106 8.00
Bonds 4,754 2 4.80
Property 4313 : 640
Other net assets (43) 6 3.60
Total market value of assets 15,090 124
Present value of Plan liabilities (19,438) __-_ (156)
Deficitin scheme (4,348) 82)
Related deferred tax (liabiltyVasset® 2 2
Net pension liability (4,348) (32)
‘At30 March 2003
Market value at 30 March 2003
Long-term rate of retum
RMPP RMSEPP expected at 30 March 2003
_. __ £m . £m %pa
Equities 9,650 56 850
Bonds 1,562 6 450
Property 1,240 : 6.50
Other assets (352) 25 4.25
Total market value of assets 12,100 87
Present value of Plan labiities (16,752) (119)
Pension liability before deferred tax (4,652) (82)
Related deferred tax (iabiltyVasset* : :
Net pension liabitity __ (4,852) (32)
‘At31 March 2002
Market value at 31 March 2002
Long-term rate of return
RMPP RMSEPP expected at 31 March 2002
£m £m Sepa
Equities 12,607 63 8.20
Bonds 1,708 7 5.30
Property 1,194 - 670
Other assets 106 7 450
Total market value of assets 15.613 7
Present value of Plan liabilities (15,331) (87).
Surplusi(dleficit) in scheme 282 (10)
‘Surplus restriction : :
Pension asseti(liabitity) before deferred tax 282 (10)
Related deferred {ax (labity)asset* __ (65) 3
Not pension asset/(liability) 197 @
No deferred tax is recognised in relation to the pension fabillies due to uncertainty regarding the existence of future tax liabilities against which
tax relief on pension costs might be offset
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19 Pensions (continued)
c) Components of defined benefit costs
‘An analysis of the separate components of the cost that would be reflected in the performance statements is as follows:
2004 2003
RMPP = -RMSEPP Total RMPP = RMSEPP Total
£m £m £m Em im £m
Analysis of amounts charged to operating profit:
Current service cost 394 3 397 382 4 386.
Total charge to operating profit 394 3 397 382 4 386
Analysis of other amounts (credited)icharged to profit and loss account:
Gain on settlements . . - (18) - (18)
Loss on curtailments” Lid & 93 105 4 49
‘Totat net operating charge _. . 481 9490 463 [ee Ta
"These costs have already been recognised in the Group primary statements on a SSAP 24 basis.
Analysis of amount charged/(credited) to other finance income:
Interest on Pension Plan llabilities 908 6 15 05 5 910
Expected retum on Pension Plan assets 950) 48) $956) ___ (1.1 (1,191)
‘Net credit to other finance income. a) 2 (41) (280) {) (281)
‘Total profit and loss charge before deduction for tax _ 0 A 49 189 1 26
Analysis of amounts recognised in statement of total recognised gains and losses (STRGL):
Difference between actual and expected return on Plan assets: (2,063) (18) (2,079) 4342, 2B 4,370
Experience loss/(gain) on Plan liabilities RB 2 nid (22) 5 a7)
Loss on change in assumptions (financial and demographic) 1,886 24 4310 872 4 676
Actuarial (gainyloss recognised in STRGL (104) 10 (94) 482 7 §,029
d) Movement in (deficitsurplus
Analysis of the movement in (deficitsurplus in the Plans during the period: 2004 2003
RMPP = RMSEPP Total RMPP —-RMSEPP Total
£m fm tm Bul £m £m
{Deficitsurplus in Plan at beginning of period (4,652) (82) (6,684) 282 (10) 22
‘Company contributions paid 640 19 659 Prd a2 29
‘Current service cost (894) @ (397) (382) a) (386)
Settement gain . - “ 8 « 18
Curtailment loss (7) 6) 33) {105) (14) (119)
Other finance income a4 - at 280 1 284
Actuarial gain/(loss) 404 {10) 4 (4,992) (32) 45,023)
Deficit in Plan at end of period . 18,348) (32) (4,380) (4,652) 432) (4,684) _
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19 Pensions (continued)
¢) History of experience gains and losses
2004 2003
RMPP__RMSEPP Total _——RMPP_RMSEPP____Total
(Galayloss between actual and expected return on Plan assets:
‘Amount (Em) (2.063) (16) 079) 4.342 2% 4370
Percentage of Plan assets at end of peviod 17% 129% «= 13.7% 359% ATH 35H
Experience loss/(gain) on Plan liabilities:
‘Arnount (£m) B 2 % (2 5 (7)
Percentage of Plan lisiltes at end of period 04% 1.3% 04% 01% 42% 0.1%
Total actuarial (gainyloss recognised in STRGL:
‘Arnount (Em) (108) 10 4982 7 5029
Percentage of Pan lables at end of period 05% 64% 04% 28% 3% 29.8%
4) Balance sheet presentation
Net assets as stad in balance sheet 2,138 2,088
Pension prepayment recaverable beyond one year (SSAP 24) 0) 707)
Related deferred tax . . . . ae =
Net assets excluding pension asset 1368 1381
RS 17 pension ability (4380) (4684)
Net assets including FRS 17 pension liability ote) (3303)
Prof and loss reserve as stated in balance sheet 999 28
Pension prepayment recoverable beyond one year (SSAP 24} (70) (707)
Related deferred tax . —_
Profit and loss reserve excluding amounts celating to pension asset E) (489)
FRS 17 pension liability (4.380) (4.684)
Profit and loss reserve including amounts relating to FRS 17 pension liability 4.151) (5173)
‘The fong-term rates of future contributions expressed as a percentage of pay are 12.6% for the RMPP and 20.9% for the RMSEPP.
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20 Commitments
Capital commitments contracted for but not pravided in the accounts amount to £84m (2003 £138m).
The Group is committed to the following payments on operating leases during the next 12 months:
Lard sd ea tice sd
am za ——
a a rd =
For leases which expire:
Within one year 10 9 16 14
Between one and five years ral 26 ci 56
Beyond five years 89 86 1
Total 120 121 68 70
21 Contingent liabiities and guarantees
Royal Mail Group ple, a subsidiary of the Company, has guaranteed the performance of a thie party in relation to lease payments payable over the 15-
year term of a ‘ease entered into on 21 December 2000, and has given certain tax indemnities to the US lessors. In the opinion of the Directors, no loss
will esull to the Group as a result of these guarantees.
AAs required by the Notes Sorting Faciity rules, notes in transit to cash handling centres and those processed ovemight, for which the Group has
received credit, are secured by gits deposited with the Bank of England. On default, the estimated maximum liability would be £131m,
Royal Mail Group ple, has given a guarantee to the Secretary of State for Works and Pensions, the Department for Social Development (Northem
Iteland) and the Commissioners of Inland Revenue, to underwrite the performance of Post Office Limited ofits obligations under the Universal Banking
Contract (Past Office Card Account).
Royal Mail Group plc has also given a guarantee to Electronic Data Systems Limited to underwrite Post Office Limited's performance of its obligations
under the Universal Banking Contract (Post Office Card Account).
22 Related party transactions
During the year the Group entered into transactions with other related parties. The transactions were in the ordinary course of business and included
administration and investment services recharged to the Group's Pension Plan by Royal Mail Pensions Trustees Limited. The transactions entered into
and the balances outstanding at 28 March 2004 were as follows:
‘Amounts ‘Amounts
Salosto related ——Purchanes from owedfromrelated owed torelated
party ‘lated party paty party
2006 © 200320042003. 20082003, 200s 2003
fm fm gm fm em fm tm itm
Royal Mail Pension Plan a 42 : - 0 19 :
Quadrant Catering Limited 1 re 7 - 4 1
‘Camelot Group ple 1 14 . “ . - . =
63 Worldwide Mall N.V. (trade name “Spring’) 5 5 0 @ tf 98 3 5
First Rate Travel Services Holdings Limited Group 0 17 : 3 - 2 : :
Romec Limited a 1 - BB Bw
‘Companies tisted above are joint ventures and associates of the Group with the exception of the Royal Mail Pension Plan.
David Mills, a Director, is a shareholder-nominated Director of Camelot Group plo, with whom the Group has a commercial relationship for the sale of
£750m (2003 £770m) lottery products per annum.
Bob Wigley, a Non Executive Director, is Chairman of Merill Lynch's European Corporate Banking Business, with whom the Royal Mail Pension Plan
thas a commercial relationship to manage short-term investments to the value of £89m during the year.
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23 Principal subsidiary undertakings, joint ventures and associates
Country of incorporation Percentage holding % Principal activities
‘Subsidiary undertakings:
Royal Mail Group pict UK 100 Mails and parcels services
Post Office Limited UK 100 Counter and financial services
General Logistics Systems Intemational Holdings 8.V.? Netherlands 400 Parcel services
Associates.
‘Camelot Group ple UK 20 Lottery operations
‘Quadrant Catering Limited? UK 51 Catering services
G3 Worldwide Mail N.V. (trade name ‘Spring’) Netherlands Pid Mail services
a vrare
Romec Limited UK 51 Facilities management
First Rate Travel Services Holdings Limited UK 50 Bureau de Change
Midasgrange Limited UK 0 Financial services
1 This investment is held by the Company. all other investments are held by subsidiaries.
2 This is a nor-trading holding company, which has investments in other operational companies that are based in Europe.
The Group holds 51% of the share capital of Quadrant Catering Limited. However, the voting rights attached to the various classes of shares give the
other investor operational control. Quadrant is therefore treated as an associate in the Group Accounts.
Al these principal subsidiaries, joint venture and associates have @ 31 March year end date withthe exception of Quadrant Catering Limited which has a
30 September year end date and G3 Worldwide Mail N.V. and Romec Limited which both have a 31 December year end date.
A full list of subsidiary undertakings, joint ventures and associates is available from the Company's Registered Office. All shareholdings are equity
shares.
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Five-year summary
Profit and loss account 2000 2001 2002 2003 2004
as restated
£m £m £m £m £m
Extemal tumover _ 7522 8119 8,408 8,299 8,633
Profiy(loss) from operations 150 (206) (318) (197) 20
Less share of operating (profit}oss of joint ventures and associates 4) . 1 (30) 7)
‘Add pensions benefit(charge) in respect of pensions surplus/(deficit) 235, 228 250 246 (132)
Group operating profi{loss) before exceptional items 38 2 (67) 19 at
Operating exceptional items - (656) (67) __(1.119) (697) (64)
Group operating loss (278) (45) (1,486) (678) (13)
‘Share of operating profit of joint ventures and associates 4 - 4 Eo) 7
Impairment of goodwill in associates: Z = _ (12) (24) .
Total operating (loss)profit ert) (45) (1,194) (672) 4
Non-operating exceptional terns 4 20 14 6 64
(Loss)/profit before interest (260) (25) (1,180) (646) 88
Net interest receivable 89 106 56 35 7
(Loss)/profit before tax (7 81 (1,124) (ott) 105
Taxation (96) (34) 179 52 (98)
(Loss)proft after tax (267) a7 (945) (659) 7
Equity minority interests 3 2 5 - 5
(Loss)profit for the financial year (264) 49 (940) (559) 7
‘Transfer to dividend reserve (151) (93) : :
{Loss)/profit retained (415) (44) (940) (559) 7
Balance sheet 2000 2001 2002 2003 2004
as restated
£m ém £m £m m
Intangible assets: 270 421 146 156 123
Tangible fixed assets 2419 2,06 1,783 1,648 1,550
Fixed asset investments 6 80 4 83 138
Net current assets 1,723 2,008 1,987 1,785 1445
Creditors beyond one year and provisions (342) (977) (1,405) (1,584) (1,948)
Total assets less liabities 4,096 3,538 2,605 2,088 2,138
Cash flow 2000 2001 2002 2003 2004
£m fm £m £m £m
Net cash flow from operating activities (68) 33022 (383) (241)
Net cash outflow before use of quid resources and financing (474) (121) (100) (486) (222)
Note
The restated figures for 2001 reflect the impact of the implementation of FRS 19 Deferred tax, and the change to the historic cost accounting convention.
Profit/(ioss) from operations reflects the underlying performance of the Group as defined in the Operating and Financial Review.
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Glossary of terms
Accounting convention
‘The basis on which accounts are prepared.
‘Accounting Standards Board (ASB)
‘The Accounting Standards Board is responsible for producing accounting standards which are known as Financial Reporting Standards. The Group is.
required to comply with Financial Reporting Standards when preparing accounts,
Capital expenditure
Expenditure on new, or additions to existing, fixed assets,
Cash
Cash in hand and deposits repayable on demand (within 24 hours or one working day) with any financial institution.
Client services balances
Balances owed to of due from clients in respect of counter transactions carried out by Post Office Limited.
Counter Services
The services provided to customers by the network of Post Office branches.
Creditors
The amount owed to others for pay, goods and services.
Currency options
‘An option to buy or sell foreign currency.
Current assets
Cash or other assets readiy convertible into cash.
Debtors
Mainly amounts owed by customers for services provided and pension prepayments.
Deferred taxation
The estimated future tax consequences of transactions and events recognised in the financial statements of the current and previous periods.
Department of Trade and industry (OT!)
The Department of Trade and Industry.
Financiat Reporting Standard (FRS)
A Financial Reporting Standard issued by the Accounting Standards Board.
Finance lease
A lease that transfers substantially all the risks and rewards of ownership of an asset to the lessee.
Goodwilt
The excess of consideration paid over net assets acquired,
Group
Comprises Royal Mall Holdings ple and its subsidiary undertakings.
Hedge
The use of nancial assets and financial iabiliées to manage risk.
Historic cost basis
‘The system of accounting where all current and capital expenditure is recorded at its cost at the time of purchase.
International Accounting Standards Board (IASB)
‘The intemational accounting regulatory body that produces Intemational Financial Reporting Standards, which the Group will have fo comply with from
April 2005 onwards.
Liquid funds (cash flow)
Current asset investments that are readily convertible into known amounts of cash at, or close to, their carrying amount and can be disposed of without.
curtailing business operations.
Malls reserve
A distributable reserve created under the Postal Services Act 2000 to provide funding.
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Glossary of terms (continued)
Nationa! Loans Fund (NLF)
National Loans Fund provides a source of funds for Government lending.
Operating lease
A lease other than a finance lease.
Operating profit
Represents the profit (before interest and non-operating exceptional items) on ordinary acthities wit the exception of where interest falls to be treated
within operating activities.
Postcomm
The postal industry regulator.
Postwatch
The body that represents the interest of the consumer.
Profit and loss account reserve
The profit and loss account reserve represents retained profs to the extent these have not been transferred to another designated reserve.
Provisions
Amounts set aside to meet known liabilities likely to be incurred or certain to be incurred but where the amount or timing are uncertain.
Rural Network Reserve
A reserve created to fund the rural network.
Statement of Standard Accounting Practice (SSAP)
Financial reporting standards developed originally by the Accounting Standards Committee (ASC) and adopted by the Accounting Standards Board
(ASB) in 1990.
Shareholder
‘The Company's shareholder is HM Government.
Spectal Share
One Special Rights Redeemable Preference Share of £4 in the capital ofthe Company.
Special Shareholder
The Nolder of the Special Share (i.e. The Secretary of State for the Department of Trade and industry).
Tangible fixed assets
Land and buildings, plant and vehicles purchased for use over a number of years.
Total recognised gains and losses
Total of ali gains and tosses — realised and unrealised — that are recognised ina period and are atbibutable tothe sharcholder
Universal Service Obligation (USO)
‘The requirement to provide a universal postal service in the UK.
Value Added Tax (VAT)
An indirect tax on goods and services.
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Corporate information
Registered Office and Group Head Office
Royal Mail Holdings plc
148 Old Street
LONDON
EC1V9HQ
020 7250 2888
Registered No: 4074919
Corporate website
Additional corporate and other information can be accessed on the following website (wwsw.foyalmail.com). Information made available on
the website is not intended to be, and should not be regarded as being, part of the accounts.
The maintenance and integrity of the Group's websites is the responsibilty of the Directors; the work carried out by the auditors does not
involve consideration of these matters and accordingly, the auditors accept no responsibifty for any changes that may have occurred to
the financial stalements since they were intially presented on the website.
Auditors
Emst & Young LLP
1 More London Place
LONDON
SE1 2AF
Actuaries
Watson Wyatt Worldwide
‘Watson House
London Road
Reigate
Surrey
RH29PQ
Solicitors
Slaughter and May
4 Bunhill Row
LONDON
ECtY 8YY
Regulator (Postcomm)
Postal Services Commission
Hercules House
6 Hercules Road
LONDON
SE1 7DB
Consumer Body
Postwatch
28 Grosvenor Gardens
LONDON
‘SW1W OTT
Financial Calendar
Reguiatory Accounts uly 2004
Interim Accounts 2004-05 November 2004
Preliminary results 2004-05 May 2005