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Royal Mail Holdings plc
Annual Report and Financial Statements
Year ended 28 March 2010
Royal Mail
A
ACI
"AJZUFKQB"
10/06/2010
COMPANIES HOUSE
THURSDAY
Royal Mail Holdings plc
Royal Mail Group is unique in reaching everyone
in the UK through its mails, Post Office and
parcels businesses - which directly employ over
168,000 people in the UK.
Every working day Royal Mail processes and
delivers around 71 million items to 28 million
addresses for prices that are amongst the
lowest in Europe; each week we serve around 20
million customers through our network of
11,905 Post Office branches; and each year our
domestic and European parcels businesses —
General Logistics Systems and Parcelforce
Ee - handle some 400 million parcels.
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Royal Mail Holdings plc
Contents
Charmans Statement 4
Annual Review 2009-10 8
Operating and Financial Review n
Royal Mail Holdings pic Board 29
Directors Report 31
Corporate Governance 3
Internal Control 37
Directors Remuneration Report 38
Statement of Directors respansibilves m relation to the Group financial statements 44
Independent Auditor s Report to the members of Royal Mall Holdings pic 45
Consolidated income statement for the year ended 28 March 200 and 29 March 2009 46
Consolidated statement of comprehensive incame for the year ended 28 March 2010 and 29 March 2009 47
Conselidated statement of changes in equity for the year ended 28 March 2010 and 29 March 2009 48
Consolidated balance sheet at 28 March 2020 and 29 March 2009 49
Consolidated statement of cash flows for the year ended 28 March 2010 and 29 March 2009 50
Notes to the Group financial statements 52 I
1 Authorisation of financial statements and statement of compliance wath IFRSS 52 '
2 Accounting policies 52
3 Segment information 62
4, Peaple information 4
5 Operating casts 65
6 Aucitors remuneration 66
7 Operating exceptional tems 66
8 Net finance costs 67
9 Income tax 67
10 Property plant and equipment 69
41. Leasehold land payment 70
12 Goodwill 70
13 Intangible assets a
14 Investments in joint ventures and associates. 72 I
15 Non-current assets held for sale B ;
16 Inventones 3 I
17 Current trade and other receivables 1% !
18 Cash and cash equwvalents %
49 Financial babalties 75
20 Provisions for liabilities and charges 7
21 Current trade and other payables 78
22 Non-current ather payadles B
23 Financial risk management objectives and polices 78
24 Financial instruments 81
25 Employee benefits - pensions 87
26 Issued share capital and reserves 1
27 Commitments 92
28 Related party disclosures 2
29 Events after the balance sheet date %
Group five-year summary (unaudited) 5
Parent Company financial statements 96 .
Statement of Directors responsibiities in relation ta the parent Company financial statements 96
independent Auditor s report to the members of the Company Royal Mail Holdings plc 7
Parent Company balance sheet 98
Notes to the parent Company financial statements 9
Forward looking statements 108
Corporate information 402
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Royal Mail Holdings plc
Chairman’s Statement
Contmued improved performance m the face of many challenges
I am delighted to report that Royal Mail Group ( the Group ) has made further good progress in 2010 with operating profit* rising from
£321 million to £404 million 2 26% mcrease on the previous year despite continuing decline in mail markets in the UK and around the
world and a harsh economic climate
Overall Group revenue dipped for the first time in a decade to £9 349 miflian amidst difficult trading conditions but all four businesses
within the Group remained in profit Competitwe pressures from other forms of communication intensified with over 13 mitlon fewer
‘terns of mail bemg handled each day than just five years ago
Royal Mail continued to make significant advances in implementing modernisation and efficiency measures during the year ~ including a
significant mcrease in the volume of mail processed automatically The financial performance of the Group shows a clear positive impact
of cur modernisation programme which will be boosted further following the recent agreement with the Communication Workers Union
(CWU) Further momentum in our profitability is essential to mitigate the Group s net cash outflow
Key performance highlights in 2010
External revenue Operating profit*
Business unit performance 2010 2009 2010 2009
im £m £m £m
Royal Mail Letters 6,564 6707 121 58
General Logistics Systems 1,487 1495 412 124
Parcelforce Worldwide 399 399 uv 12
Post Office Limited 838 908 72 4“
Other businesses 61 51 82 86
Group 9,349 9560 404 321
“Operating profit s defined as profit before exceptional tems
Group cash flow summary
£m 2010 2009
EBITDA before pensions* 1082 9 1027
Pension payments (867) (873)
Exceptionals excluding redundancy
related pension payments canon
ColieagueShares (82) (158)
Government grant income o 152
Net capital expenditure (441) (494)
Other (48) (38)
Net trading cash outflow (517) (606)
“Excludes share of post tax profit from jomt ventures and associates
Key aspects of the 2010 performance include:
© — Group operating profit increased to £404 million - a 26% improvement on the previous year and for the second year running alt
four of the Group s businesses are profitable
© The recessionary trading conditions saw many customers posting fewer letters and belt-tightening by downtrading from premium,
services such as First Class to Second together with further switches away from traditional mail to email and web communications
These factors and falls in traditional Government business in the Post Office network, alf resulted in revenue reductions - but the
impact was more than offset by modernisation and efficiency improvernents cutting costs across the Group
© Despite strike action by the CWU at local and national level in Royal Mail Letters during 2009 the business made good progress in
its transformation plan with a further 150 new or upgraded machines installed bringing the total to 368 over the last three years
Over 80% of the mail is now sorted to the level of the individual postman or woman's walk, two thirds of Ad sized mail - including
magazines and catalogues - are now sorted automatically and the nationet ro!lout of walk sequencing machimes which sort the
mail to the exact route followed by the delivery postman or woman began in 2009 and more than five million letters a day are now
being processed using this automated technology We expect this figure to rise steeply in the current year as we roll out the
installation of further walk sequencing machines Five years ago just half the mail was being sorted automatically
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Royal Mail Holdings plc
Chairman's Statement (continued)
‘© Royal Mail Letters operating profit has more than doubted to £121 million despite an overall revenue fall of £143 million The
profit margin remains low - less than 2% - but the finanaal performance shows convincingly that Royal Mail s modernisation plan 1s
working and delivering real benefits
© — Post Office Limited s revenue fell by £70 million im 2010 and the business net cash outflow reflects the investment being made to
refurbish Crown branches and improve the networks IT capabilities to boost efficiency and reduce overheads The recession
naturally depressed income but despite the difficult trading condiions average branch remuneration across the network increased
by 5% fast year
The Groups headcount reduced by almost 8000 in 2010 and as in previous years the reduction was managed without any
compulsory redundancy - an approach we wit! do our utmost to maintain as we complete Royal Mails modernisation The total UK
workforce now numbers 168 500 more than 60,000 fewer than in the spring of 2002 when the company began its journey back
from the time it was losing well aver £1 million a day and regularly failing almost all its quatity targets
* Record target-beating performance was delivered by Royal Mails postmen and women in the spring and early summer of 2009
However we very much regret that CWU stnke action during the summer and auturnn inevitably resulted in Royal Mail falling short
of some of its annual quality of service targets A huge effort 1s underway to ensure we again deliver the above-target performance
we have previously provided
© Parcelforce Worldwide continued to perform well in the hugely competitiwe tme-guaranteed parcel sector Despite the recession it
maintained tts revenue at £399 million for the year and its operating profit rose to £17 million - a 42% increase Parcelforce 24 '
quality of service improved to 97 7% and there was also a 1.0% improvement to 96 8% in the level of parcels delivered on the first
wssit to the customer, a vital indicator of quality and customer satisfaction in the parcel sector
¢ — GLSs revenue fell slightly year on year although it still delivered significant profits and strong margins for the Group and in the
industry Asin the UK, the trading landscape was exceptionally tough but cost savings in its delivery operations limited the resulting
fall in operating profit - dawn just under 10% to £112 milion in 2010
Three major events
This was my first full year as Chairman and it was certainly eventful
Towards the end of the year Adam Crozier decided ta leave the Group to take up the position of Chief Executive of ITV plc His clanty of
purpose and strong leadership marked a period when the Group recovered from significant losses to be again profitable Adam leaves
behind a Group with a sense of purpose a modernising agenda and good people Together with colleagues I have been conducting a
search for his successor
The second major event was the withdrawal of the Postat Services Bill which was put on ice in the summer of 2009 and which then fell
away with the advent of the General Election The Board has consistently welcomed the plans for a new regulator and for the way in
which the pension deficit would be handled by Government under the terms of the Bill As it turned out it was not to be and while the
Bill may have gone the three central challenges highlighted within it - resolving the historic pension deficit establishing a fairer
regulatory regime and allowing the company flexible access to capital - still need to be tackled
The strikes called by the CWU in the summer and autumn of 2009 damaged custorners confidence in the Letters busmess and had an
adverse effect on the Group as a whole I understand that change ts very difficult for everyone but with falling revenue in core parts of
the Group we have no choice but to modernise It is therefore a great pleasure to note the result of the CWU ballot which endorsed the
agreement struck between the Group and the CWU and which will allow for further progress towards aur modernisation goals The
agreement will help us to protect the Universal Service while providing our people with a fair reward which recognises the important role
they play in achieving the transformation we need On both sides there were tireless efforts to find a mutually agreeable way forward
and I would like to place on record my gratitude to all mvalved within the business and the CWU as well as to ACAS and especially to
Roger Poole who so ably and independently helped to construct the framework within which this deal was able to be reached
We still face major issues and challenges
* The average daily mail bag now contains around 71 million letters packets and parcels Mail volumes declined by 7 3% in 2010 the
steepest fall since volumes peaked at 84 million im 2005 All other major postal operators around the world expect volumes to
decline further - TNT Post Group in The Netherlands for example is planning for a volume reduction of up to 9X this year and
around 30% over the next five years while the United States Postal Service 1s currently seeing its mail volumes decline by 13% a
year
© The volumes of mail handled by rivals under access arrangements with Royal Mail grew by over 20% in the last 12 months and
more than one in three letters - a total of 6,400 million items ~ was posted last year with a competitor but delivered by a Royat
Mait postman or wornan Access mail now accounts for more than half of all business mail
— The Group had a net trading cash outflow of £517 milion reflecting the continued investment being made in sorting technology ‘
new equipment for postmen and women improvements to Crown Post Office branches - as well as continuing heavy cash
payments to the Penston Fund amounting to £867m in 2010
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Royal Mail Holdings plc
Chairman's Statement (contimued)
¢ With the structural decline we are seeing in mail volumes ~ a phenomenon also seen in postal markets around the world - and
further decline in traditional Government business in the Post Office network it 1s essential we become leaders in mnovation and
devise new products and services to offer aur customers in the rapidly changing world in which we all live
© We continue to engage with the postal regulator Postcomm on the regulatory framework within which we operate As competition
imtensifies we remain convinced that regulation should be as focused as possible but of course with protection and safeguards for
those customers especially consumers and small busmesses who use stamped mail and may not have other or easy access to
‘other forms of communication like email But with most mail now subject to full competition - from rival operators or rivat forms of
communication - rt 1s essential that the regulatory constraints we face are appropriate and relevant to the competitive market in
which we are operating
© In March 2010 we agreed Post Office network funding of £180 million with the Government to cover 2011-12
~ and pensions
The Group and the Trustees have worked hard to find a solution to the problem of the actuarial deficit which 1s expected to be I
‘significantly higher than the previous figure of £3 4 billion when the current valuation 1s completed and continue to do so In 2010 the
Group paid £867m into the pension schemes of which £294m was to help fund the histaic deficit. 1 would like to thank Jane Newell and I
her fellow Trustees for all their work in the past year
Royal Mail Letters - the next phase
Royal Mail has continued to modernise its operations, with a further £500 mittion mvested in the tast 12 months largely in new
technology and equipment for our postmen and women bringing the total to over three quarters of the £2 billion investment
Programme since 2006 Continuing to invest in our business will be essential to keep up the pace and progress of modernisation
Two years ago just 34 new or upgraded sorting machines had been installed across the nationwide Royal Mail network. Now there are
368 new or upgraded machines in operation with 150 new pieces of equipment installed over the last 12 months The next phase of
modernisation will involve the completion of the installation of over 500 walk sequencing machines - 100 of which are already in place
We have also made progress in rationalising our mail centre network Four centres closed m the last 12 months - Oxford Reading
Oldham and Stockport - and further consultations are planned The final size of the mail centre network - currently there are 64 centres
- will depend on mail volumes
We have also made significant pragress on the World Class Mail programme to improve the efficiency of our large sorting offices with
strong input from our people at all levels being crucial After the significant efficiency gains already seen at Gatwick mail centre where
the programme began there are now 12 centres engaged in the drive to ensure that mail centres ~ which typically sort severat million
letters a day - are not just using the most modern equipment but are operating at warld class fevels of efficiency
Royal Mail Letters has put the safety of its people at the heart of its operations and the mvestment in the well-being of our people as
they go about their daily work has resulted in an impressive 12% reduction m serious accidents last year Our ultimate goal remains zero
accidents and we are determined to keep our focus on safety with this topic high on the agenda of every Board meeting
The decline in mail volumes accelerated in 2010 The daily matt bag of around 71 million items 1s now at levels last seen in the mid
1990s a time when we were accustomed to seeing year on year growth in letter volumes The trend for e-substitution will continue and
a key pnority going forward must be for Royal Mail to become a leader in innovation with new products and services based around our
Unique ability to delwer to the UKs 28 milion addresses and a passion for meeting the needs and wishes of our customers
Post Office Limited
The Post Office ended the year with a change of leadership with the appointment of David Smith to succeed Alan Cook as Managing
Oirector The business has already undergone significant change under Alan Cooks leadership as it continued to adapt to the challenges
of a changing market and to develop new revenue streams However challenges remain for the new leadership
Overall Post Office Limited's revenue declined by £70 million to £838 million mainly as a result of less income from the Post Office Card
Account {POCA) used by around 4 5 million peopte to receive their pensions and other benefits Customers have continued to switch from.
the POCA to a bank account - resulting in less revenue for the network - and a new contract for the POCA, which came into effect in
October 2009 rewards the Post Office at a lower rate per account.
The Post Office has continued to expand its range of financial services - a business insurance product was launched last year and
mortgages at competitive rates of interest were rolled out to the nationwide network after a successful regional trial - and it remains one
of the fastest growing brands m the highly competitive financial services sector with mare than 2 2 million customers However revenue
fell back in this sector due to the difficult market conditions
The Post Office has attracted £9 billon in savings, it insures the cars homes pets or businesses of 550000 customers it ssues more
than 3 000 credit cards a week to new customers and over 600000 consumers now carry one in their wallets The rollout of free-to-
use cash machines continued with 2 000 now installed at Post Office branches making it one of the UKs biggest no-fee cash machine
networks
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Royal Mail Holdings plc
Chairman’s Statement (contmued)
In addition the Post Office remains the market leader in the provision of foreign currency and one of the biggest providers of travel
insurance It also grew its revenue from its HomePhone services in 2010
‘The future
Despite the very significant pressures in alt parts of the Company Royal Mail Group has continued to demonstrate its ability to withstand
the combined pressures of recession and competition and has shown real momentum in driving forward our modernisation and making
the changes which are so important if the Company is to survive and thnve
As we enter the next stage of our evolution it 1s against 2 backdrop of regulatory uncertainty with our regulator Postcomm shortly to
conduct a Licence review the result of which will have profound implications for the Group Together with the management team I have
been leading a programme of work to define our longer term future in a competitive environment and one m which digital services will
be ever more relevant The output of this work will form an important input to Postcomms review and will of course help to infarm the
incoming Government. I anticipate that the results of this work will be made public in the next few months
To echo the words of Adam Crozier at this time last year we know that despite the challenges of difficult and uncertain markets we
have the resilience and determination to continue our transformation and to become the worlds best postal company The strong and
robust performance we have shown over the last 12 months shows we are making good progress
Thanks
Towards the end of my first year as Chairman I have assumed a more executive role pending the arrival of our new Chief Executive and I
would like here to record my thanks to all the colleagues in the Group who have not only made me welcome but given me support and
encouragement at all tmes As we announced on 27 May Moya Greene will be joining us as Chief Executive in July I look forward
greatly to working with Moya who brings a proven leadership track record - as well as hugely relevant experience - to the business at an
Important moment in its evolution
I was sorry to lose Helen Weir from the Board - she had been an excellent Chair of the Audit and Risk Committee - and to lose Andrew
Carr-Locke but delighted to welcome Paul Murray Les Qwen and after the year end Nick Horler As we also announced on 27 May the
Board will be further strengthened by the appointment of twa new members with specific consumer experience Orna Ni-Chionna and
Cath Keers
Royal Mail Group 1s a great enterpnse which 1s proud to be part of the social and economic fabric of our country and which plays a key
role im communities around the UK Working together we can ensure a tong and successful future for the business and its employees
and provide a fantastic service for our customers that meets their changing needs
GRO I
Donald Brydon
Chairman
Royal Mai! Group
28 May 2010
All references to operating profit are before exceptional items
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Royal Mail Holdings plc
Annuat Review 2009-10
A stronger, more efficient Letters business iconic album cover stamps 2,000th free-to-use cash machine at the Post
Office a boom in online shopping. SOth anniversary of the Royal Mail's postcode system time to tweet £27 million raised
for charity through payroll giving
A new age 1s dawning for Royal Mail as it modernises and builds cn its reputation as the customers champion and a business with a
world class edge After a period of uncertainty the Company is well placed to compete in a fiercely competitive marketplace Our brands
are trusted household names and with the growth in email and text messaging together with the booming home shopping market, Royal
Mall 1s changing quickly to give customers exactly what they want
Despite experiencing difficult trading conditions and falling volumes over the last year, Royal Mail has embraced opportunities to better
cater for custamers needs UK stamp prices have remained amangst the lowest in Europe and a recent Postcomm survey confirmed
that the vast majority of customers are happy with our services The last 12 months have seen Royal Mail significantly enhance its firmly
established role in the fulfilment of internet shopping orders We are using our postcode data to hetp businesses target their mailings
ang are opening more than 100 enquiry offices across the UK for longer and are planning to open many more enabling people to pick
up their mail when it is convenient for them
A boom in online shopping
Qnlne shopping Is big business and we are taking advantage of this boom, offering modern products like Royal Mait Tracked™ to
become more commercial and bring in vital revenues as letter volumes fall Tracked™ follows items from the moment they are
despatched to the time they are delivered and people can now get emails and texts to track their purchases We are also making it easy
for smaller businesses to benefit from Tracked™ lowering the threshold for using the service from 5,000 to 2.000 items from June
2010 The success of the service saw postmen and women at our state-of-the-art North West regional distribution centre star in a film
for retail giant Marks & Spencer who wanted to show its customers how we process their orders quickly and safely
Modernising our operations
Outdated working methods are being reptaced so mail arrives in delivery offices already sorted to exact rounds by walk-sequencing
machines We have now installed around 100 of these speedy bits of kit which can put thousands of items an hour into their exact
delivery order This means postmen and women spend less time preparing the mail in delivery offices and more time out on delivery In
the next 18 months Royal Mail will put in around 450 more machmes across the country meaning that three quarters of our mail will
be ‘walk sequenced’ by 2013 New equipment such as 2400 electric powered trotleys 4000 high capacity trolleys and 24000
lightweight trolleys 1s also beng introduced to take the weight off postmen and women's backs helping them deliver safely and
efficiently
Communicating with our customers.
We are using new ways to connect with customers Since March Royal Mail has been using the social networking website Twitter
{www twitter com/Roya'Mail) ta keep in touch with people help answer their questions and suggest solutions to their problems Twitter
gives us real-time feedback about what people are saying about us which helps shape our sermce Having such a rapid way to talk to
‘our customers came im especially handy during the disruption caused by volcanic ash which closed airspace Online chat blogging
podcasts and qu:ck query management systems are all things we are looking at to further improve the service we provide
Information 1s also posted at www royalmall com/serviceupdates which allows customers to find regular bulletins such as disruption
alerts. Royal Mail has also launched a new magazine to target small and start-up businesses UnLtd goes to businesses with up to ten
employees and is aimed at shawing business owners how Royat Mail can help them provide a better service for their customers and then
help them grow their customer base through effectve marketing
Prize winning mnovation
We have been winning prizes too A revolutionary new truck kitted out with cutting edge safety features saw Royal Mail take to the
winners podium to collect the EuroTra (European Transport Training Association) Safety and Innovation Award in 2009 Our safety
concept vehicle ts challenging the rest of the industry to improve drivers safety and that of other road users The prototype was fitted
with 55 safety elements and 1s undergoing a year-long trial spending two months at six sites across Britain
Eco-friendly busimess
Royal Mail is one of the first major companies m the UK to separate recyclable waste As well as being good for the environment the
scheme helps the Company make savings Leading by example was Cardiff mail centre but all recycling facies were mn place by the end
of May 2009
We delivered more than 100 million Sustamable Mail items by February this year just rine months after the service started This 1s an
important and impressive milestone for Rayal Mail The enviranmentally friendly product 1s now used by more than 75 firms including
retailer Bhs, EDF Energy and National Gnd It offers customers a discount for making direct mail eco-fendly by rewarding good
practices such as using paper from sustainable sources making envelopes from recyclable materials and ensuring mail stems are
correctly addressed so they do not go ta waste We are pleased to report that last year 76 5% of direct marketing material was recycled
outstripping the 2009 target of 55% as well as the 70% goal for 2013
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Royal Mail Holdings plc
Annual Review 2009-10 (continued)
50” annwersary of the postcode
The tast year has seen a great British invention - the modern postcode - celebrate its 50th anniversary The system helped revolutionise
mail services worldwide and the simple idea forms the basis of our whole mail delivery system When used with modern machinery it
allows us to sort millions of items across the business every hour Managers from postal services worldwide have come to see haw we
do things The Postcode Address File keeps the mail going but it also keeps the wheels of the country turning Who would have thought
when the modern postcode was invented that it would become such an integral part of life? .
‘Stamp of approval - from Pink Floyd to Great British Railways
{t 1s no secret that we are processing fewer items of mail But what does this mean for stamps? Philately is actually more popular than 4
ever due in part to some of the excellent designs we have run to mark special occasions Royal Mail has always celebrated and I
commemorated significant moments tn history and our special stamps are famous for their ability to capture on milhons of mimiature
canvasses the richness and diversity of British heritage and culture They generated enormous interest over the last year and among
the most popular were the ten iconic album covers from the past four decades Stamps showed the bent chromed pipe of Mike Oldfield s
70s masterpiece Tubular Bells the astonishing statues of Pink Floyd’s The Division Bell and the racing greyhounds of Blur’s Brit Pop
classe Parklife
It was not just music that was celebrated In February Royal Mail said 'Happy Birthday’ to the largest youth organisation in the UK, with
Giriguiding UK stamps and eminent Britons from the realms of sport science art, literature and politics were celebrated - such as Fred
Perry Henry Purcell Sir Arthur Conan Dayle and William Gladstone The bravery of men and women were marked by dramatic mages.
across six stamps portraying the many dangerous and demanding situations faced by those who work in the Fire and Rescue Service
Stamp issues to look forward to later im 2010 include Children’s Books and Great Bntish Raiways and we should not forget the success
of Smilers - our popular product enabling people to create personalised stamps online with their own photographs In the past we have
only offered ist Class Smilers but at Christmas we offered 2nd Class and Overseas stamps too The popularity of our stamps 1s
evidenced by the Royal Philatelic Society reporting its highest ever number of members and due to the soaring populanty of stamps we
set up an eBay stamp shop last year
Grwing back
The generosity of employees across the Group ging their own money to good causes was reflected m the £27 million donated by
People across the Company through payroll giving Around one im four of our people make contributions in this way A three year
Partnership with Barnardos was launched in June 2008 and raised £195,000 m the year ended 2030 on top of the £175 000 raised in
the previous year through a wide vanety of fund-raising actmities A total af 68 young people from Barnardos have done work
placements at Royal Mail over the past 12 months with 22 landing permanent jobs with the business after impressing managers
Postman Craig Francis rescued a stroke victim he found tying unconscious on her kitchen floor as he delivered letters to her house m
Dodworth near Barnstey South Yorkshire in September He gave her first aid while he waited for an ambulance Postman Enc Smart
raised more than £11 000 for the Myalgic Encephalopathy (ME) Association by cycling to Australia and hack a distance of 21 500 miles.
Meanwhile thousands of Royal Mail bikes judged past their pnme have found a new lease of life in Ainca helping medical workers to
save lives and local people to get around Bicycles have found thei way to 13 countries from Ghana to Uganda and recipients include
hundreds of children who previously faced round-trips on foot of up to 20 miles a day ta get to school
Serving their country
Postman Paul Brennan was one of 14 postmen and one postwoman who flew aut to Afghanistan in Apnt 2010 as part of the Ternitorial
Army's 88 Postal and Courier Regiment They are helping to continue an honourable tradition that has lasted well over a century, of our
people serving their country and distributing vitally important, morale-beosting mail The 15 are being split into groups to work at
several locations where they will run sorting offices and transport mail between locations
Royal Mail has a long tradition of supporting the Armed Forces from the formation of the Army Post Office Corps in 1882 and the
distinguished service of the Post Office Rifles in the First World War through to the efforts today of more than 200 Royal Mail people
who currently serve with the Terntorial Army And st doesn’t stop there Volunteers from Royal Mail have rebuilt a memorial garden in
honour of the Companys fallen in two world wars and other conflicts araund the globe
Post Office Limited
The Post Office network comprises over 11 500 branches and lies at the core of communities nationwide It serves around 20 million
customers undertaking almost 60 million transactions a week. It 15 our aim to keep the size and coverage of the branch network around
Its current level where over 90% of the UK the population is within one mile of a Post Office
The Post Office's joint venture with the Bank of Ireland provides a wide range of financial services products and reached its sixth
anniversary in March 2010 The Post Office 1s one of the fastest growing providers of financial and travet services in the UK with
products attracting income to the network helping to support its infrastructure
In 2009 the Post Office won numerous awards and the public once again named the Post Office as its favourite travel msurance and
foreign exchange provider We handle over 10 million travel money transactions annually and issue almost one million travel msurance
policies every year
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Royal Mail Holdings plc
Annual Review 2009-10 (continued)
There are now more than 2.000 free-ta-use cash machines at branches and over 3 000 credit cards a week are being issued £9 billion
has been invested in Post Office savings products and we insure one in 50 cars and one m 120 homes m the UK. A new expanded
Mortgage range has also been rolled out and over £1 billion has been lent to home buyers
As the bulk of financial services transactions have so far been in Crown branches it shows the significant potential for growth in sales m
other Post Offices We continue to work hard to develop further our financial services and generate as much additronal revenue as
possible for the entire network
In order to hetp detiver the renewal of driving licence photocards, we are installing digital technology in 750 of our busiest branches
Therefore we are starting to build on the unique capabilities of our netwark to provide the necessary interface between the physical and
digital worlds This 1s the kind of forward looking concept that will help the entire network thrive and develop in the fast changing world
of the future
Parcelforce Worldwide
Parcelforce Worldwide 1s one of the UKs leading guaranteed express delivery operators handling around 55 million parcels a year It
operates in an intensely competitive open market but despite this the latest results show significant profit growth In the face af such
imtense competition with many competitors affected by a downturn in volumes and revenue Parcelforce Worldwide has grown its
volumes maintained revenue and increased its market share
‘With UK companies taking advantage of the weak pound to seek cut new market opportunities, Parcelforce Worldwide has seen strong
export growth with exporting hotspots including major Asian and Eastern Eurapean destinations This enables customers to receive
consistently high levels of service and reliability whilst benefiting from a far-reaching locally based network Parcelforce Worldwide s
membership of the Kahala Postal Group a coalition of leading postal providers has helped strengthen export services to major
destinations across Asia-Pacific Eurape and the USA
New services introduced in June 2009 including Global Express Gtobal Priority and Global Value mean customers are able to choose
delivery options to best suit their needs That could be a fast efficient. fully-trackable global service a value tracked service for times
when a lower price 1s more important than speed or a balance of the two Customers posting into Europe are also able to setect
between tailored business and residentia! delivery seruces for the first time
As well as the international service launches Parcelforce Worldwide rebranded and simplified sts UK range last year introducing new
benefits for customers It also rolled out one of the biggest green detvery fleets in the UK. with 4 100 eco-start vans and continues to
Invest in area customer service teams providing them with coaching
General Logistics Systems (GLS)
Founded m 1999 with strong historical roots in each of its domestic markets GLS 1s the third biggest parcel service provider in Europe
today As our European parcels busmess with Parcelforce Worldwide as its UK partner GLS has a strong strategic position as a leading
ground-based provider of business-to-business parcel services, being a major player in this market with class-leading profit margins
Royal Mal Letters Parcelforce Worldwide and GLS together create a unique platform to be a customer champion for packages and
parcels
The GLS head office 1s based in the Netherlands The business employs around 13,000 people and handles over 1 million parcels a day
through its network of 665 depots 38 hubs and almost 17 000 vehicles Its core operation 15 business-to-business parcel delveries and
it has 220 000 customers in 36 states across Europe
Despite very tough trading conditions m the year GLS continued to deliver significant profits and strong margins for the Group This was
realised through maintaining focus on delivering quality for its customers and making efficiencies to deliver cost savings
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Royal Mail Holdings plc
Operating and Financial Review
Note tn the fotlowing analysis all references to operating profit are before exceptional items.
Performance Highlights
© Despite very difficutt trading conditions in the year leading to falling revenues the Group increased its operating profit from £321m
to £404m an improvement of £83m (26%)
© The Royal Mail Letters business Post Office Limited and Parcelforce Worldwide atl saw their profits grow year on year
© — Group external revenue fell by £212m from £9 560m in 2009 to £9 349m in 2010 the first time in a decade that revenue was
lower than the previous year The underlying decrease excluding exchange rate movements was even greater at £298m,
Royal Mail Letters revenue fell by £143m as tariff increases were not enough to offset volume decline of 73% losses to
competition and customers switching to lower priced products
© Post Office Limited saw revenue fall by £70m year on year as income from Government Services fell heavily and the recession
impacted revenues from Financial Services products
* Modernisation through a combination of mvestment and the efforts of the Group s people in embracing changing working practices
's enabling efficiencies to offset declming revenues
© Across the Group total costs excluding the adverse impact of exchange rate movements fell by £381m (41%) reflecting
modernisation efficiencies realising a headcount reduction of around 8000
@ Investment in the bustness has allowed gross hours to fall by over 5% in the Letters operation as levels of automatic sorting have
rapidly increased 150 new and upgraded machines have been deployed in the year and 12 mail centres piloted the introduction of
world class processing
* Despite operating profit growth profit before financing and taxation fell by £65m year on year as Government grant income
recened by Post Office Limited ended in 2009 and restructuring costs increased
The accounting pension deficit has increased from £6 8bn im 2009 to £80bn m 2010 driven by changes in market conditions
giving nse to higher projected liabilities Cash payments of £867m were made in the year to fund pensons
* A-cash inflow of £1 082m was generated by earnings before interest tax depreciation amortisation and pensions** reflecting a
‘strong operating performance in a tough climate
* However the net trading cash outflow of £547m refiects the Company's level of commitment to continue modernising operations
whilst fulfilling the Group s mast significant ongoing cash obligation pension funding
Summary Income Statement Summary Cash Flow
£m 2010-2009 £m 2010 2009
External revenue 9,349 9560 EBITDA before pensions** 1,082 1027
People costs (5,746) (6.012) Pension payments. (867) (873)
Disinbution & conveyance 4.579) (4577) Exceptionals excluding redundancy (444) (999)
operating costs related pension payments
Other operating costs (1,661) (1697) ColleagueShares (82) (158)
Share of profits from Jomt 4a “7 Government grant income 0 152
Ventures & Associates
r - nm 7] Working capital (83) (80)
tn it*
perating prof Cash outflow from operations (412) (154)
Government grant income o 152 Dividends fram Joint Ventures &
ColleagueShare costs (4) (Ba) Associates 6
Net other exceptional costs. (242) (206) Net capital expenditure (44a) (494)
Profit before financing
Net trading cash outflow 517) (606)
and taxation bad 183
**Excludes share of post tax profit from jont ventures and associates
“Operating profits defined as before exceptional items
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Royal Mail Holdings ple
Operating and Financial Review (continued)
Background
Royal Mait Holdings plc (the Company) is a public limited company wholly owned by the UK Government It became a ple on 26 March
2001 The framework for change was the Postal Services Act 2000 that created a commercially focused company with a more strategic
relationship with the Government Royal Ma:t Holdings plc together with its subsidiaries associates and joint ventures comprise the
Group The Group operates within a regulatory framework comprising of an mdependent Regulator Postcomm and a statutory consumer
organisation Consumer Focus
Royal Mail Group encompasses a set of trusted brands and companies that combine the best of a public service ethos with the
commercial requirement to operate effectively in the highly competite communications and fulfilments markets Through its brands it I
reaches everyone in the UX by way of its mail parcels and express services together with its Post Office branches Full market
liberalisation took place m the UK in January 2006 and since then all of the Groups businesses have been operating in competitive
marketplaces I
Legal Structure
Royal Mail Holdings pic 1s directly owned by HM Government and is the ultimate parent company of the Group The Group primarily
operates within the United Kingdom having a number of subsidiaries joint ventures and associates but also has presence in most
European countries mamly through Genera! Logistics Systems B V Its basic legal structure 1s as follows
toyal Mail Holdings pic
Royal Mail Group Lta
T
it iI
Post Office Royal Mail Investments Royal Mail
Limited Limited Estates Limited
General Logistics
Systems BV
"The Royal Mail and Parcelforce Workiwide busmess units mcluded m Royal Mail Group Ltd are not separate legal entites
Further details on the principal subsidiaries are provided in note 28 to the financial statements
Operating Units
The Group ts organised into four principal aperating units.
Royal Mail processes and delivers around 71 mullion letters and packages to 28 million addresses every working day i line with its
unique Universal Service Obligation {USO) It 1s also responsible for designing and producing the UKs stamps and philatelic products
General Logistics Systems B V (GLS) 1s the holding company for a pan-European group of companies providing reliable high quatty
parcet services logistics and express services throughout Europe
Parcelforce Worldwide is a leading provider of collection and delivery services for express packages and parcels within the UK and
throughout the world providing both business and private addresses with a full range of timed delivery options
Post Office Limited has a national network of branches at the heart of communities across the country They provide a trusted access
point for everyday products services and information in postal services financial services travel bankmg telephony bill payments
Government information retail and the secure transportation of cash
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Royal Mail Holdings plc
Operating and Financial Review (continued)
Operating Units Facts and Figures
Unit and % of
Revenue* (Em)
Group External I Na oF I Reston I Profits (£m) Facts and Figures Vision
tevenue* & I Employees Margin (2)
Profit
155312 I UK Revenue = €145 000 pillar boxes, to be demonstrably the
£6 564m * 64 mail centres best and mast trusted
+ 1390 delwery offices postal services company in
Profit » 29,900 vehicles the wortd
70 2% of £121m Around 71 millon items per day
Group delivered to 28 million addresses
revenue, 30 0% Margin © 82% of mail walksorted and
of profit 18% * 368 new or upgraded machines -
150 during the year
= 12885 I Europe I Revenue + 38 hubs to be the best European
SIGS €1487m © 665 depots parcel logistics & express
* 16950 vehules system with glabal reach
Profit 220.000 customers
15.9% of £212m © Over 13 million parcels handled
Group every working day
revenue, 27 7% Margin © 21 Substdianes, and
of profit 75% + Covers 36 states in Europe
4436 I UK Revenue 2 hubs (1 national 2 international) to be the UKs most
£399m © 47 depots § satellites 4 parcel trusted high value express
exchange area carrier
Profit * 1800 vehicles
€17m * 205 000 parcels delivered every day
4 3% of Group 272.000 every day in December, and
revenue, 4 2% Margin © Parcelforce 24 Quality of Service ~
of profit 43% 97 7% delivered on time and with
electronic proof of delivery
8209 I UK Revenue * 11905 branches including 373 “The Peoples Post Office
£838m Crown Offices always socially and
© Over 28 000 customer facing commercially retevant by
Profit pasitions, providing essential services
£72m © Each week around 20 millon for a fair return
9 0% of Group customers conducting almost 60
revenue, 17 8% Margin million transactions
of profit 86% © UKs leading supplier of foreign
currency wath a 25% market share
and
+ Customer satisfaction levels at 89%
545 UK Revenue Royal Mail Estates Limited - Groups
Other in wally £61m property unit (100% subsidiary)
owned PostCap Guernsey Limited - captive
0.6% of Group I *¥sdane Profit insurers (100% subsidiary)
revenue, 20 3% 4217 £82m oRed Partnership Limited - document.
of profit vparvonnel management operation {100%
subsidanes subsidiary)
Romec Limited - facilities management
operation (51% subsidiary)
NDC 2000 Limited ~ building
engineering services operation (51%
subsidiary)
Quadrant Catering Limited - catering
services (51% associate) and
Camelot Group plc - UK National
Lottery operator (20% associate)
“Revenue ws for subsidianes only profit before excepuonal tems
13
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Royal Mait Holdings plc
Operating and Fmancial Review (continued)
Group Fmancial Analysis
In 2010 Royal Mail Group ts reporting an operating profit of £404m compared to £321m in 2009 an increase of £83m (25 9%) All four
Group businesses remain profitable despite the impact of the difficult economic climate on their trading environments Royal Mail Letters
Post Office Limited and Parcelforce Worldwide all delvered year on year profit improvements given falling revenues GLS still generated
significant profits and achteved strong margins in the face of prevailing recessionary conditions across Europe
Operating profit by business unit - £m Operating profit growth/(dectine) by business unit - £m
404
EN cy
o s 7
aa ay
baad Err
n e
EU
I Raya Ma LetteGenerl Logics Paraforee Post Oce Linker buslesses Group I
‘sented 200 sil Umrao inca Prcetine Pat ree Ot bans 250,
Sime wri Umea
External Revenue "Tha lepact of the diference in FX rates year on year was ¢ E6m favourable in GLS,
The Group s externat revenue fell by £214m from £9 560m to £9 349m tn 2010 the first time in a decade that revenues are lower year
on year When excluding the favourable impact of foreign exchange (FX) n GLS underlying revenue has fallen by £298m The decline in
Tevenue has been experienced by Royal Mail Letters GLS and Post Office Limited with Parcelforce outturning flat to 2009 Other
businesses outperformed year on year driven by Romec (the Group s facilities management subsidiary) winning new contracts in the year
Royal Mail Letters revenue outturned £143m lower in 2010 despre a tariff increase of c 6% on the regulated area The fall year on year
's driven by continuing decine in volumes of 73% in the year impacted by the recession and losses to cther forms of media Customers
switching to lower priced products including Downstream Access has further decreased revenues
GLS revenue has fallen year on year by £8m from £1495m to £1487m Ignoring the favourable impact of FX driven by the
strengthening of the Euro against Sterling revenue has actually declined by £95m This underlying decline 1s driven by downward
Pressure on prices and volumes as a result of recessionary conditions across Europe and a highly competitive environment Post Office
Limited revenues also decreased from £908m to £838m a reduction of £70m predominantly due to year on year decline in
Government and Financiat Services income Ths 1s driven by changes in the Post Office Card Account contract and the impact of the
recession on travel and savings products
Costs {excluding exceptional items)
Total casts of £8 985m have decreased from £9 286m by £301m (32%) However when removing the impact of FX differences year on I
year costs have fallen even further reflecting underlying savings of £381m All the business units have made huge efforts to reduce
spending to maintain and grow profits in a difficult econornic clmate I
Cost by type - % Cost (savings)/growth by type - £m 7
cor eran anette 7
pair L =
eas) Sess =H
pamerely Tn
i 2009 Perle Dwerbutlan & Other eracatantnaerying
Comms Operalng eas” Ra ae
People costs of £5 746m represent 64% of the Groups cost base and have fallen year on year by £285m This decrease 1s driven by
Modernisation delrvering efficiencies enabling a headcount reduction of ¢ 8 000 for the Group Distribution and conveyance costs make up
17% of the Groups cost base and have fallen by £53m principally due to delivery of operational efficiencies and volume decline Other
‘Operating costs have decreased by £62m to £1367m drwen by cost saving initiatives across the business The depreciation and
amortisation charge has increased in line with capital investment supporting modernisation of the Royal Mai! Letters operation
14
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Royal Mail Holdings plc
Operating and Financial Review (continued)
Cash Flow
The followang table 1s a summary of the Group cash flow statement
‘Cash outfiow from operations of £111m (2009 £154m) comprises
Summary of cash flows = = * .
£m £m. = Earnings before interest Tax Depreciation Amortisation and
EBITOA oa 831 share of post tax profit from jot ventures and associates
Cremboral were ws) aD) (EBITOA) inflow of £641m (2009 £531m)
Working capral (83) (60) * Payments relating to exceptional tems of £293m (2009 £412m}
comprising ColleagueShare payments of £82m (2009 £158)
Pension payments not included in (376) (345) restructuring costs of £161m {2009 £222m) and pension top ups
a of £50m (2009 £32m)
Goveranens arent eam 0 152 + Working ceptal outflows of €83m (2009 £80)
Cash outflow from operations (1a) (154)
Ganienis Fomeet enmaresand + Outflow attributable to cash paid m respect of retirement benefit
3542 obligations in excess of that charged in operating profit of £376m
1 (2009 £345m) and
Property plant and equipment
intangibles purchases and disposal (441) (494) « In. 2009 non-recurring Government grant income of £152m was
proceeds received to compensate Post Office Limited for providing certain
specified services of general economic interest’ under the
ene I Industrial Development Act (IDA) 1982. Emil was received in 2010
Acquistion and sale of fmancial assets (80)———(5)
Dividends recewed from joint ventures and associates of £35m (2009
500 310 - £42m) are from First Rate Exchange Services Holdings Limited £29m
Net drawdown of borrowings and
fmanang (2009 £27m) Cametot Group ple £6m (2009 £10m) and Quadrant
Tax interest and other (28) (72) Catering Limited Enxl (2009 €5m)
Net cash outflow (125) (373) ~—- Property plant and equipment intangibles purchases and disposal
proceeds generated a £444m outflow (2009 £494m) comprising
£455m (2009 £514m) of expenditure partially offset by inflows of £14m (2009 £20m) from surplus property disposals Expenditure
includes £157m (2009 £138m) for property improvements £134m (2009 £207m) for plant and equipment £84m on motor vehicles
(2009 £91m) and the remaining £80m (2009 £78m) on information technology This analysis mcludes £52m (2009 £54m) in respect of
GLS projects
Acquisition and sale of financial assets generated an outflow of £80m (2009 £5m) and represents the net purchase of investments made
by the Group from cash and cash equivalent resources The £80m outflow comprises £41m relating to the imvestments in escrow
Provided as security for the Royal Mail Pension Plan and £45m relating to investment in (non-current) bank deposits partially offset by
the sale of £6m financial assets used for liquidity within the Group
Net drawdown of borrowings and financing of £500m inflow (2009 £310m) principally comprises £340m drawdown (2009 £300m) of
Government loans to Royal Mail Group Ltd £111m drawdown (2009 £48m net repayment) of Government loans to Post Office Limited
and £73m cash received (2009 £75m) on property sale and leasebacks partially offset by £22m payments (2009 £18m) of the capital
element of finance lease obligations \
Pensions
‘Schemes 1
Royal Mail Group Ltd 1s the sponsoring employer for the Royal Mail Pension Plan (RMPP) and the Royal Mail Senior Executwes Pension
Plan (both defined benefit schemes) and for the Royal Mail Retirement Savings Plan and the Royal Mail Defined Contribution Plan (both
defined contribution schemes) Based on assets the Royal Mail Pension Plan is one of the largest pension schemes in the UK The assets
and liabilities of the defined benefit schemes as measured under accounting standards are reported as a net pension deficit in the Group
balance sheet The gross assets and {iabilities and the net deficit are significantly larger than any of the Groups other assets and ltabilities.
This results in the Group being one of the most exposed UK corporates to pension volatdity particularly with respect to movements in
equity values and future expectations of inflation and bond rates
Both defined benefit schemes are now closed to new members The Retirement Savings Plan 1s in the process of being wound-up and
new employees are offered membership of the Defined Contribution Plan
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Royal Mail Holdings plc
Operating and Financial Review (continued)
Charges in Profit
Zeio 2009 _Pension charges within profit have increased year on year by £71m
from £641m to £812m Pension costs (pre-exceptionals) have reduced
by 111% from £496m to £441m The £55m reduction 1s principally as
461 496 a result of a reduction m the number of people emptoyed and market
Pension charges within profit ‘Gn en
Within operating profit before
exceptionals
conditions resulting m a pension charge that 1s 16 8% of pensionable
jel tials (relating to 42 31 pay compared to 181% fast year
Net pensions interest charge 329 4a4 The balance sheet pension deficit has increased from £6 776m in
March 2009 to £8041m this year end The increase in the defict of
Pension charges 812 641 £1. 265m principally relates to an actuarial loss of £1 312m
The actuarial toss arose due to changes in market conditions gwing rise
to higher liabilities only partially offset by improved asset values This loss 1s recorded m the statement of comprehensive income
The net pensions interest charge reflects the unwinding of the discount on the schemes liabilities less the long-term expected rate of
return on the schemes assets This interest is recorded in the income statement after profit before financing and taxation Net pensions
imterest charge of £329m (2009 £114m) a non-cash item for the Group has increased by £215m mamly due to a reduction im the
expected returns on Plan assets in line with market trends
As part of the actuarial valuation as at March 2006 the Group agreed 2 Memorandum of Understanding with the trustee to fund the
defict over 17 years One of the key terms was the establishment of escrow accounts totalling £1bn secured in favour of the RMPP The
Group established £1bn mn escrow on 23 March 2007 and charges over these assets have been registered
Cash Payments
Net cash payments to fund pensions have risen by £44m from £823m
Pensions cash funding Grout 2010 2009
contributions $ Group Em ¢m__ ‘0 £867m Regular pension contributons reduced from £551m to
£526m i le with tower pensionable pay The regular rate of
Regular pension contributions 526 __551_— employer contributions for the Royat Mail Pension Plan has remamed
Funding of pension defiet 291290 at 200% of pensionable pay effective from April 2006 The regular
rate of employee contributions for the Royal Mail Pension Plan remains
Payments relating to redundancy 50 32 unchanged at 6 0%
Prepayment of 2009 regular pension ~ (50) _ Deficit recovery payments by the Group have increased by £1m (03%)
contributions
from £290m to £291m and inctude £5m (2009 £5m) relating to the
Net cash payments 867 823 Royal Mail Senior Executes’ Pension Plan Deficit recovery payments
are planned for the Royal Mail Pension Plan over the 17 years from the
date of the latest full actuanal valuation - March 2006 The planned
payments are £260m per annum increasing in line with RPI for 16 years from the begining of the 2007 financial year There have
been no employee deficit contrigutions
Share of Profits m Joint Ventures and Associates
The Group s share of profits in joint ventures and associates of £41m (2009 £47m) comprises profits from Post Office Limited s Bureau
de Change joint venture (First Rate Exchange Services Holdings Limited) Camelot Group pic associate - UK National Lottery operator
Quadrant Catering Limited - the Groups catering associate G3 Worldwide Mail NV (Spring) - the Companys international mail
distribution associate and a loss from Post Office Limited s financial services associate (Midasgrange Limited)
Net Exceptional Items
Net exceptional items of £286m (2009 £138m) comprise operating excentionals of £291m (2009 £149m) partially offset by profits from
property disposals of £5m (2009 £11m) Operating exceptionals include £€178m of restructuring costs (2009 £213m) £44m of
ColleagueShare costs (2009 £84m) £76m impairments (2009 £77m) and a net £7m credit for other exceptional items (2009 £27m I
charge) There was no Government grant income recewed during the year (2009 £152m)
ColleagueShare Scheme
ColleagueShare 15 the Royat Mail phantom share plan and has a five year le span during which notional shares may be allocated to
employees tn addition, related stakeholder dividends may be paid for the first three years of the plan based on the achievement of certain
targets The ColleagueShare scheme has now completed a third year The costs of the scheme continue to be treated as an operating
exceptional tem due to both the magnitude and the nature of the plan outside of bustness as usual costs
The Company will again be making a stakeholder dividend payment of up to £400 to all eligible employees in recognition af achieving
certain Group and business unit targets The total charge to the incame statement in exceptional items arising from the stakeholder
dividend 1s £72m (2009 £70m) payable m 2010
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Royal Mail Holdings plc
Operating and Financial Review (continued)
Fulty eligible employees continue to hold 711 notional shares in the Company following their issue in 2007 (408 shares) and 2008 (303
shares) The Board has agreed that the third and final issue of notional shares 1s to be replaced by the payment of an additional
stakeholder dividend the payment of which wilt be Imked directly to the achtevement of key modernisation mitestones The value of the
ColleagueShares 1s based on the regularly updated Group share plan valuation model
The provision in the balance sheet for share payments at the end of the scheme is now £108m In line with the rules of the scheme all
ColteagueShares will be redeemed by the Company by 2012-13
Net Finance Costs
Net finance costs of £51m (2009 £20m) comprises finance costs of £98m (2009 £56m) offset by finance income of £47m {2009 £36m)
The increase m finance costs of £42m is mainly due to higher borrowings partially offset by lower borrowing rates The increase in
finance income of £11m 1s mainly due to higher investment yields on index linked gilts within the pension escrow investment portfolio
partially offset by lower investment yields in the other portfolios of Group funds and lower mterest recewable within General Logistics
Systems
Taxation
The taxation charge in the mcome statement of £58m (2009 £278m) comprises £27m current tax credit (2009 £1m payable) with
respect to UK operations a £31m (2009 £35¢r) current tax charge on overseas profits a UK deferred tax charge of £53m (2009 £237m)
and an overseas deferred tax charge of £1m (2009 £5m) A tax charge of £19m (2009 £192m) was taken directly to equity The
eduction im the tax charge reported in relation to the pre-tax toss compared to last year 1s mainly due to the decreased amount of
deferred tax asset writen off
Provisions:
Provisions at the end of March 2010 were £276m (2009 £310m) The £34m net reduction comprises utilisation of £211m and a
reduction in the ColleagueShare provision of £28m partially offset by new provisions for restructuring onerous property contracts and
estimated exposure resulting from legal claims totalling £196m and the unwinding of the ColleagueShare provisions discount of £9m_
Segmental Analysis - Revenue and Profitability
In the following analysis all references to operating profit are before exceptional items.
The Group s external revenue of £9 349m (2009 £9 560m) and operating profit before exceptionals of £404m (2009 £321m) are made
up as follows
External revenue Operating profit
Business unit performance bid 2009 2070 2009
£m £m £m £m
Royal Mail Letters 6,564 6707 121 58
General Logistics Systems 1,487 1495 112 124
Parcelforce Worldwide 399 399 av R
Post Office Lumited 838 908 72 41 !
‘Other businesses 61 51 82 86
Group 9,349 9560 404 321
A further analysis of results by business unit 1s shown below
2010 2009 External revenue of £6 564m was lower than last year by £143m
Royal Mail Letters £m £m (21%) A price crease on the regulated area of c6% was more than
Baers revenue 6564 6707 __ Dffset by volume declme customers switching to tower priced products
and the impact of competition The decline in inland addressed mail
Operating profit before exceptionals 121 58 volumes has continued to accelerate year on year and now stands at
73% (2009 55%) This is due to a number of factors mcluding
structural change in the mail market the impact of recession and
industrial action during the year which also adversely impacted quality of service
Operating profit has increased from £58m to £121m an improvement of £63m (108 6%) This ts primarily due to cost savings of £206m
‘outweighing the revenue toss demonstrating that modernisation ts driving operational efficiencies The decrease m costs 1s mainly due to
a significant reduction in people costs with 5 2% lower gross hours and c 7 000 fewer people
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Royal Mail Holdings plc
Operating and Financial Review (continued)
20102009 External revenue fell by £8m (05%) from £1495m to £1 487m
<m €m despite the impact of favourable foreign exchange movements When
removing the exchange impact. the underlying reduction in revenue 1s
Eemal revenue 1487 1495 ¢95m (6 4%) as lower average prices and marginally lower volumes
Operating profit before exceptionals «442 ~«124~~—«+have resulted from recessionary conditions across Europe an
extremely competitive market
Generat Logistics Systems:
Operating profit has reduced by £12m (97%) from £124m last year to £142m with an underlying decline excluding exchange rate
movements of £18m The profit fall has resulted from difficult trading conditions across Europe and therefore revenue decline could not
be fully offset by the delivery of cost savings
P. if 2010 2009 Although external revenue outturned flat year on year working day
‘arcetforce Worldwide €m £m adjusted revenues grew by £3m (06%) The underlying increase in
Exjernal reverwe 399399 Tevenues was driven by volume growth of 18% partially offset by
revenue per parcel declining by 12% Revenue growth has been
underpinned by continued focus on providing quality for the customer
Quaity of service for the year has improved by 02% from 975% to
97 7% and the ongoing emphasis on customer service has led to a 4.0% improvement in the first time deliveries to 96 8%
“_Operating profit before exceptionals 7 2
Operating profit of £17m has grown by 41 7% from £12m A reduction in operating unit cost per parcel and strong averhead cost control
coupled with underlying revenue growth has generated profit growth in a difficult economic environment
Boag 2009 «External revenue fell by £70m (7 7%) to £838m The main driver of
revenue decline has been in Government Services income relating to
the provision of the Post Office Card Account Customers have
continued to migrate to bank accounts and the new contract effective
Post Office Limited &m —m
Turnover 688 758
Network Subsidy Payment 350 150 from October 2009 1s at a lower rate per account Financial Services
income has also declined due to difficult market conditions but there
External revenue 838908 has been continued growth in Homephone and broadband revenues
Operating profit before exceptional 2 4a
Operating profit saw an improvement of £31m from £41m to £72m
This was dren by savings from transformation programmes
significantly reducing costs in line with expectations In addition tight cost control measures have contmued with robust challenge of all
areas of expenditure including working with key suppliers ta deliver efficiencies
External revenue from other Group business has increased from £5im
Other businesses _ to £61m (496%) Growth has been drven by Romec - the Groups
facilities management subsidiary - who have generated more revenue
External revenue 6a 51__by winning new customer contracts Operating profit has decreased by
Operating profit before exceptionals 82.86 -£4m mamly drwen by a one off VAT settlement credit receved m
2009
Funding
Royal Mail Group Ltd
Royal Mail Group Ltd continues to face considerable cash requirements with respect to its investment in modermsation and funding its
pension deficit at a time when the mails market has been opened up to full competition and there 1s ongoing volatility in mail volumes
On 23 March 2007 a funding package totalling £1 2bn was completed with Government and for which State Aid clearance was receved
In April 2009 The £900m senior debt facility expires in March 2014 It has been assumed that another facility will be negotiated to be
avallable by this time The remaming £300m subordinated loan was fully drawn in March 2009 and will not be repaid until the later of
the unconditional release of the monies held in escrow for the Royal Mail Pension Plan Trustee or 19 March 2016
In making an assessment on Royal Mail Group Ltd ability to continue as a going concern the Directors have assumed the successful
execution of the modernisation plan that an affordable payment profile will be agreed with the Royal Mail Pension Trustee i relation to
‘the 2009 valuation and have considered the ongoing volatility in the mails market along with the risk of greater market decline than
forecast These considerations are set out in greater detail in note 2 to the financial statements
{F risks in relation to the business plan materialise the Directors have identified a portfolio of operational actions and strategic options that
could be taken to mitigate any cash headroom exposures
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Royal Mail Holdings pic
Operating and Financial Review (continued)
Post Office Limited
As part of the funding package announced in May 2007, £150: (2009 £150m) was paid to Post Office Limited during the year to fund
the maintenance of a social network of post offices, which was recorded within revenue as a Network Subsidy Payment The Group did
not receive any non-recurring Government grant income in the year under the Industrial Development Act 1982 to compensate Post
Office Limited for the other net costs of providing certain specified “services of general economic interest” (2009 £152m)
All the above payments made during the year were in accordance with approval received from the European Commission under relevant
State Aid rules
On 24 March 2010 a further funding package was agreed that provides up to £180m for compensation for losses to be sustained in
arts of the network in the financial year ending March 2012 as well as providing access to the working capital factity for that year
These arrangements remain subject to State Aid approval
Treasury Management
The Group operates a central Treasury function that manages £1 3bn of financial asset investments (substantially all of which are now
held in escrow in favour of the pension fund trustees) and £0 9bn of cash and cash equivalent investments (including £708m cash in the
Post Office network funded partly by a Government loan facility) in accordance with mvestment restrictions set by the Government It also
manages £1 7bn of financial liabilities (mainly Government borrowings) and acts as internal banker for the Groups business units The
Group finances its operations largely through cash generated from its operations borrowings and grants
Group Treasury derives its authority from the Royal Mad Holdings plc Board and provides quarterly monitoring reports for their review It
only has the authonty to undertake financial transactions relating to the management of the underlying busmess risks it does not engage
In speculative transactions and does not operate as a profit centre All strategies are risk averse, and the treasury policy has remained
substantally unchanged during the year The principal financiat instruments are Treasury bills Gavernment gilt edged securities deposits
and long and short term borrowings
At the balance sheet date the Group 1s financed from the following facilities provided by the Department for Business Innovation and
Stalls (BIS)
Faciity Facility Utiised Average loan
Borrower Purpose end date £m £m___ maturity date
Roya! Mail Group Lid Acquisition funding 2021-2025 500 500 2023
Royal Mail Group Lid Capital Expenditure and Restructuring 2014 600 300 2014
Royat Mail Group Ltd General Purpose/ Working Capital 2014 300 40 2010
Royal Mail Group Ltd General Purpose/ Working Capital ; 337 337 *
Post Office Limited Network cash 2011 1150 343 2010
*Coan is repayable onthe later of March 2016 and the release of the persion escrow WwestTnenis The loan land faciiy) creased by £37mn (2009 Enilas a result of accrued mmerest added to
the lan balance The Royal Mail Group Lid [cars subordinate to all other credtiars
The terms of the Government borrowing facility and the associated Framework Agreement impose strict constraints on the separation of
cash funds within the Group and the purposes for which they can be used
The principal treasury risks arising from the Groups actwities are currency liquidity commodity (fuel) and counterparty risk These are
managed as follows
* — the Group ts exposed to foreign currency nsk due to trading with overseas postal operators for carrying UK mail abroad and
delivering foreign origin mail in the UK, revaluation of the currency balances held to operate the Bureau de Change services within
Post Office Limited revaluation of a USS bank deposit and various sales and purchase contracts denominated in foreign currency
Hedging pragramies managed by Group Treasury mitigate these risks Where possible exposures are netted internally and any
remaining exposure can be hedged using a combination of external spot and forward contracts
* the Groups obligatian to pay overseas postal operators 1s denominated in Special Drawing Rights (SDRs) - a basket currency
comprising US Dollar (USS) Japanese Yen Sterling and Euro The Group has a policy of matching receipts and payments far
individual currencies where possible and then hedging any material net exposure The policy 1s that up to 80% of the farecast net
exposure 1s hedged with agreement of the internal business unit Group Treasury operates a rolling 18-month programme which 1s
subsequently reviewed on a quarterly basis There has been no external hedge m place throughout the 2020 financial year
* Bureau de Change balances are grouped mto baskets of closely correlated currencies Each currency basket (eg USS or Euro) 1s
then sold forward up to 100% of the exposure creating a liability to match the underlying asset
* significant foreign currency risk arising from capital purchase contracts primarily in Euros may be hedged up to 100% depending
upon the reliabrtity of the forecast of the underlying cash flows and
* the Group does net hedge the translation exposure created by the net assets of its overseas subsidiaries However it does hedge the
transactional exposure created by inter-company loans with these subsidiaries
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Royal Mail Holdings plc
Operating and Fmancial Review (continued)
* the Group is exposed to various commodity price risks namely fuel price risk arising fram aperating one of the largest vehicle flects
1m Europe jet fuel price risk arising from the purchasing of arr freight services and electricity/gas price sks anising from the Group s
power usage The Groups commodity risk management strategy aims to reduce uncertainty created by the movernents in the
commodity and foreign currency markets The strategy operates within the parameters set by the Board which allow the use of
over-the-counter denvative products, together with fixed price purchase contracts to manage up to 100% of these exposures for up
to 24 months in advance
© the Group actively manages its liquidity risk through regular reviews of plan and budget projections against afl available saurces of
funding The projected headroom on these sources of financing 1s assessed reguiarly for adequacy and
= counterparty risk 1s managed by limiting aggregate exposure to any individual counterparty based on thetr financial strength
These exposures are reviewed regularly and adjusted as appropriate The policies for financial assets - investments and derwatwe
financial instruments - are shown im note 2
Business Environment
Competitive Markets
The Group s business units operate in a competitive marketplace Parcelforce Worldwide and GLS have been operating im an open market
since their inception These units have demonstrated their ability to perform in a non-reguiated and competitive environment which 1s
reflected in their annual results
Since February 2004, Royal Mails operating environment has gradually been opened up to competition with the letters market fully
liberalised in January 2006 - well in advance of the rest of Europe Competitors are now able to offer customers the opportunity of end-
to-end service for the collection sorting and delivery of their mail
The harsh economic climate 1s creating greater competitive pressures within the communications and logistics markets Difficult overall
market conditions are stmulating competition within the market and with the regulatory constramts imposed upon the business, Royal
Mail Letters 1s losing substantia! market share to external competitors The proportion of volumes handled by competitors upstream (that
's, collected sorted and then transported to a Royal Mail mait centre) before it is delivered by Royal Mail accounted for almost 6 5 billion
stems of mail m the year ended March 2010 Over half of Royal Mail business letters are now handled by competitors This in addition to
cost saving measures by customers 1s teading to a long-term dilution of Royal Mail letter revenues This income dilution 1s likely to be
offset somewhat going forward by mcreasing packet and parcels income, but competitive pressures within the industry remam high
Post Office Limited due to a reduction in income from benefit payments and a significant and continuing decrease in Government use
has developed revenue streams from Financial Services (products mclude car and home msurance a two-in-one credit card and range of
‘savings products) and its HomePhone and broadband services These new praducts are in direct competion with services offered by
banks insurance and telephony companies Many of the other services it offers also face direct competition eg bill payments renewal of
car tax dises and travel services
Regulation and Compliance
The EU Postal Services Directwe 97/67/EC ( PSD ) establishes the legal framework applying to postal services throughout the EU It
requires the provision of a universal postal service across the EU within the framewark of an internal EU postal market with the gradual
and controlled liberalisation of that postal market
In 2090 the Postal Services Act came mto force m the UK creating an independent postal regulator - Postcomm - which commenced a
process of market liberalisation and ticensing regime of Royal Mail and competitors Postcomm currently regulates the prices of over 80%
of the Royal Mail letters business controls the terms and conditions for nearly ali of its services sets the quality of service targets and
determines compensation arrangements
Post Office Limited 1s subyect to regulation in financial services {Financial Services Authority) and in telephony (Ofcom) Post Office Limited
15 an appointed representative of the Governor and Company of the Bank of Ireland which in turn 1s regulated directly by both the Insh
Financiat Regulator and Financial Services Authority (FSA) for conduct m the UK
It 1s the Groups poticy to be compliant with the regulatory framework in which it operates The focus of Royat Mails Compliance team
remains to work with all business units to minimise the risk of breaching licence conditions through raising awareness and promoting
adherence to agreed standards and procedures An investigation into the end-to-end quality of servce performance measurement
system by the Regulator 1s currently being finalised However it has already been agreed by the Regulator that there was no matenal
impact on the results An independent review of the testing methodology was undertaken and the suggested improvements are currently
being implemented
20
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Royal Mail Holdings plc
Operating and Fimancial Review (continued)
Mayor Regulatory Activity m 2010
In February 2009 the Government published legistation (the Postal Services Bill) in support of the independent review proposals and
aimed at ensuring the maintenance of a universal postal service and securing the future of a healthy Royal Mail The Bill provided for the
restructuring of Roya Mail Group Ltd changes in the Royal Mail Pension Plan and a change in the regulation of postal services (move of
Regulator from Postcomm to Ofcom) The Bill, however, was not progressed through Partament due to the difficulty in securing
investment within the economic climate at the tme
The current Price Contra! was set in 2006 and was expected to run for four years however given the change in regutation proposed by
the Bill Postcomm decided that the best way to secure their statutory duties in the interim was to maintain the current Price Control ~
which Is capable of operating for a further year to April 2011 Therefore the current Price Controt will contmue from April 2010 to April
2011
However in recognition of the significant changes in the postal market since the Price Control was sel m November 2009 Postcomm
made two changes to Royal Mails Licence for effect in the peniod from April 2010 to March 2011 namely
© allowing Royal Mail to use a zero inflation figure rather than negative inflation when setting its prices and
© a change to the detailed workings of the Price Control {the sub-cap mechanism ) so that it can work as mtended when the Price
Control was first introduced
Postcomm made these changes to ensure that over time Royal Mails total revenue allows it to afford to deliver the universal service, as
the provision of the universal service is the Regulator s primary duty
On 31 March 2010 Pastcomm issued their Forward Work Plan which arms to introduce a new regulatory framework in April 2012
(implementing some elements earlier f possible) with the following objectives
to ensure the future of the universal postal service and protects the interests of customers
© to allow freedom for Royal Mail and its competitors to innovate and become more efficient in meeting customers changing needs
and
© to provide flexibility and resilience so that it can be applied wathin any future statutory framework
The expectation 1s that some changes to the current regulatory framework could be in place by April 2011
Group Strategy and Key Performance Indicators (KPIs)
A passion for customers remains at the centre of everything we do The Groups strategic vision 1s to become an efficient world class
operator of the mails universal service in the UK a true customer champion in the UK and European parcels markets and sustain and .
grow the Post Office both commeraally and in its vital social and community roles Within the context of an industry undergoing major
structural change the Group has six strategic objectives to deliver its vision
* Be increasingly focused on delivering customer needs and becoming the customer champion m its markets
© Develop an efficent world class universal service in the UK,
* Develop a leading role m the growing fulfifment market across Europe
* Provide integrated solutions to customers through an expanded presence across the supply chain
* Continue to develop green solutions for customers consistent with the overall approach to Corporate Soctal Responsibility and
* Achieve efficient retail distribution primarily through the network of Post Office outlets and to become the most trusted provider of
essential Government and financial services to every person in the land
To support these objectives it 1s essential that we build excellent relationships with our Regulators so that we can play our fart in helping
to ensure that the framework of regulation within which we operate is appropriate to our changing environment
Our success 1s measured by the four areas central to our operating units objectwes These key strategies and objectives are
communicated widely across the Group embedded into its day-to-day activites and measured on a timely basis by appropriate KPIs and
monitored by the Royal Mail Holdings plc Board and its sub Commuittees as highlighted below
a
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Royal Mail Holdings plc
Operating and Financial Review (continued)
‘Customer
Service
‘Our customers are at the
heart of everything we do
The key to winning and
keeping customers is to
provide a consistently high
ality of service This has
been the top priontty of
‘everyone in the business
and is at the heart of our
strategy moving forward
That means
* detvering a high quality
of service and maits
integrity
* devetoping products that
match the needs of our
customers and
‘© becoming easter to do
business with
Great Place
to Work
We take health and safety
very seriously and this
subject comes first at each
Board meeting Throughout
‘our businesses we are
‘committed to ensuring our
employees and customers
are kept as safe as possible
We understand that we can
only move forward and
succeed we involve our
people in making change
happen This underpins our
‘commitment to employee
engagement through our
regular survey established sn
2003 and recently
refreshed to ensure we
remam aligned to our long
term strategy and ensure
maximum benefit to our
people
Profitability and
Cash Flow
Funding from Government on
commercial terms continues to
be used to support the capital
investment programme which
addresses the historic
underinvestment in the Letters
business
Post Office Limited and
Government remain in
discussions regarding a new
long-term funding package
‘which will maintain a national
network and keep Post Office
Limited on a sustainable
footing
Continuing to develop more
efficient ways of working wilt
empower us to succeed in a
competitive marketplace
allowing us to maintain
sustamable profitability and
cash flow to eventually
generate a return for our
Good Corporate
Citizen
Corporate Social
Responsibility (CSR) 1s
doing the right thing for
our people our business
and the communities we
operate in as our
customers want to
buy from companies
that share their
values
colleagues want to
work for companies
that provide a healthy
and safe environment
and whose values
align to theirs and
communities want
companies that
create the incomes
the jobs and
contribute to the
cohesion that builds
the neighbourhoods
piheholders where people want to
live and work
Customer People Financial Environmental
Quality of Service targets
Number of Complaints
Customer Satisfaction
Employee Survey
Health & Safety
RIDDORs (reportable
accidents)/1000 staff
Total Attendance
External revenue
Operating profit”
Profit margin*
Return On Total operating
Assets”
Operating cash flaw
CO, Emissions
Social & Community
Charitable Donations
In addition management attention remains focused on three areas vital to securing our future success
© ~~ Becoming leaders in innovation devising new products that will serve our customers better in a rapidly changing mcreasingly
digitalised world
*before exceptional items
as defined in the Directors Remuneration Report
© Continuing to invest and act with pace to deliver the modernisation needed within our core business operations in Letters and
transformation of the Post Office network. and
© — Growing our fulfilment and non postal revenue streams
The following non-financial KPIs monitored during the year demonstrate that we have delivered on key priorities such as improving
safety which we will continue to focus on for the benefit of our people and business We have also made good progress with our
commitment to reduce carbon emissions Retail First Class quality of service was adversely affected by the period of industrial action. but
has improved again by the year end The Engagement Index and Attendance KP!s also reflect, m part the impact of industrial action We
have nevertheless made significant progress with modernisation this year piloting 12 mail centres for world class processing investing in
150 new/upgraded machines and improving to walk sorting rates of 82%
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Royal Mail Holdings plc
Operating and Financiat Review (continued)
Area Non Fimancial KPIs 2010 2009
Customer I Retail First Class Quality
Service I of Serve ildded ic
No of Complamts a20 Perl
(millions)
Post Office Limited a Or
Customer Satisfaction
Parcelforce Worldwide
24 Quality of Service o778 S75
Great Place Engagement Index 54% 57%
to Work RIDDOR Accidents/1 000 28 256
staff
Total Attendance 95 0% 952%
Good Total CO Emissions
Corporate _I_(tonnes}* ae] en '
Crzen
Charitable donations (£m) 17 20
“Represents preceding year
Corporate Social Responsibility
Corporate Social Responsibility (CSR) is a key priority for the Groups Board members The business fully integrates CSR into its strategic
Management processes and engages its senior internal stakeholders
The Group ts proud of its CSR achievements over many years but recognises the need to strive for continued improvernent in the future
‘The business 1s arming to build a leadership role m CSR to enable it to differentiate itself in the marketplace by demonstrating innovative
approaches to reducing costs and any negative impacts on the environment recruiting and retaining the best talent ensuring a safe and
healthy workforce and increasing positive impacts on the communities & touches As the business faces significant commercial challenges
CSR activities will het the Group s customers and people benefit from the improvements made
‘As a unique organisation the Company serves every single person in the UK through its Royal Mail Post Office Limited and Parcelforce
Worldwide brands The scale of its operations help keep the UK connected and the Group actively contributes to the success of
communities across the country The Company connects people in the course of what it does and wants to ensure that the issues that
matter to them are taken seriously and opportunities are used to make a reat difference and a positive impact
2009 was the seventh year that the Group published an external CSR report and 2010 is the second successive year activities were
Teported using Business in the Communitys four-fold classification framework Through five major CSR ambitions delivered by a
Partnership approach the Group aims to demonstrate its commitment to do the right thing for its customers employees and suppliers
The Company's partnership approach to CSR enables stakeholders to be engaged in identifying the issues where the organisation and its
‘operations have the greatest impact and where the CSR programme can deliver the most benefit
Four-fold classification framework Five major CSR ambitions
= Workplace - Demonstrate equality and fairness throughout the workforce
- Community - Ensure unrwalled standards of safety in the workplace
> Marketplace and ~ Provide first class support to improve and maintain the health of colleagues
- Environment - Make a positive impact on colleagues communities customers and suppliers and
= Aspire to become carbon neutral by 2025 and help customers to do business in a
sustamable and competitive way
Workplace - The Group aims to become a world class organisation demonstrating equality and faimess throughout its operations
securing unrwvalled standards of safety for suppliers and customers and providing support to maintain the health and well-being of its
workforce The approach of the business has been to identify and manage key risks ensure effectwe monitoring and reporting 1s in place
and focus on engagement to build on successes and to identify areas for improvernent
Community - Royal Mail has a unique position im local communities and seeks to deliver a positive benefit wherever it can The Groups
social action programme helps harness its employees products services and purchasing power to address important communtty issues
and to help the people whose lives are touched by the business Royal Mail wants its employees customers and suppliers to share its
commitment to having a positive impact on local communities and have focused community strategy on areas where the enthusiasm of
employees and customers can be unlocked to help others using partnerships with organisations to focus and direct efforts
3B
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Royal Mail Holdings plc
Operating and Financial Review (continued)
Marketplace - As a large service provider employer and purchaser of products and services Royal Mail has a high profile in the
marketplace and opportunity to influence its supply chain The business 1s committed to sharing best pracuce amongst its suppliers and
using its mfluence in the supply cha:n to improve industry standards The Group has focused on recognising CSR for its products and
services customers and supply chain The Group continues to develop its strategy m these areas to manage the impacts of its products
and services through innovation and to work in partnership with sts suppliers to adopt and implement good practice CSR throughout the
supply chain
Environment - Climate change is the greatest environmental challenge facing this generation As a company with a large fleet of vehicles
the Group believes it must take responsibility im helping deliver a low carbon economy in a commercially viable way to achieve a
sustamable busmess approach The Groups sustainability strategy adopts two main principles firstly reducing the significant .
environmental impacts by applying the hierarchy of avoid reduce replace and offset, and secondly wia the Groups Carbon Management
Programme The Companys approach to sustainability is supported and governed by key business principles including creating innavatiwe '
approaches to improving environmental sustamability effective management of impacts developing sustamable products and services '
and reporting and monitoring progress on targets set The focus of the environmental sustainability programme has been on climate \
change mitigation measures and looking to the future adapting to climate change 1s a key area for development
For more detailed information on the Groups CSR initatwes and performance please refer to Royal Mails annual CSR report to be
published later m the year
Key Relationships
‘The Group has several key relationships that are critical to its day-to-day activities and its overall success
People - The Company s people are the lifeblood of the organisation and brands Without their continued support and dedication it will be
impossible to function on a day-to-day basis and embrace the change within the Groups markets Training diversity fleuble resourcing
and matang the business a great place to work are some of the ways Royal Mail continues to improve this relationship
Unions - The Communications Workers Union (CWU) represents non-managerial staff with Unite the Union - Communication and
Managers Association (CMA) sector representing managerial staff The Groups policy ts to work with the CWU and CMA to engage staff in
the development and execution of business decisions
Pension trustees - The pension trustee board for the main Pension Plan comprises an independent chair plus 10 others including
employees union representatives a pensioner and independent members They take external professional advice fram Sacker & Partners
LLP (legal) Towers Watson Limited (actuary), KPMG LLP (auditors) and PricewaterhouseCoopers LLP (financial) They are responsible for
obtaining regular actuarial vatuations of the plan to satisfy the statutory funding objective which mvolves reaching agreement with the
Group on the statement of funding principles the recovery plan and the schedule of contributions There is a separate trustee board for
the Senior Executives Pension Plan which comprises the chair plus 5 mdividuats mcluding employees pensioners and an independent
member The Defined Contnbution Plans trustee board currently comprises § individuals including an independent chair employees and
an independent member
Customers - The Groups busmesses and brands are used or recognised by almost everyone in the UK ~ from the largest of companies to
individuals However the 30 largest customers generate ¢ 13% of Royal Mail Retails turnover and consequently the business 1s reliant on
a relatively small customer base As competition increases the Group will have to continue to simplify ways of doing business and design
products around customers needs Customers are offered standard terms and conditions for the markets and countries in which the
Group operates
Subpostmasters - 97% of Post Offices are operated on a contractual basis by subpostmasters franchisees or multiple partners Post
Office Limited provides operational commercial and technical mfrastructure and resources to underpin postive working relationships with
these Post Office branches in order to ensure that high standards of consistent and compliant service are provided to customers wherever
they are in the UK As part of this general approach, Post Office Limited has constructive relationships with the National Federation of
Subpostmasters (which acts as a representative body for subpostmasters) as well as with a number of national multiple retail
‘organisations which each operate significant numbers of Post Offices In conducting its business and in determining future strategy Post
Office Limited remains aware of the mterests of subpostmasters and other agents and it works despite an often challenging economic
environment to help promote the sustainability and success of these local businesses
Suppliers - The Group has a wide range of suppliers with tts primary reliance on thase relating to outsourcing of non-core services such
as IT support It works in partnership with tts suppliers to ensure the right products and services are delivered at the night time at
competitive casts A Group purchasing team monitors compliance to Group policy in awarding contracts or new business and adheres to
agreed credit terms
The consumer body Consumer Facus - In October 2008, Postwatch merged with energywatch and the Welsh Scottish and National
Consumer Councils to form Consumer Focus itis the statutory organisation campaigning for a fair deal for consumers in England Wales
Scotland and for postal services Northern Ireland Consumer Focus wants to ensure postal consumers throughout the UK are recemng a
fair deal It has strong legislative powers including the right to investigate any consumer complamt if it 1s of wider interest the right to
open up information from providers the power to conduct research and the abilty to make an official super-complamt about failing
services
24
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Royal Mail Holdings plc
Operating and Financial Review (continued)
The Regulator Postcomm - The independent regulator for the postal market. Postcorim set up by the Postal Services Act 2000 1s
responsible for setting a framework for Royal Mails prices - the Price Contra! in the farm of a cap on the average price of a basket of
products The price increases or reductions allowed by Postcomm through the Price Controt have a very material impact on the likely
levels of cash flow the Company can generate Postcomm also investigates compliance with Licence conditions and has broad powers to
Teprmand publicly or fine Royat Mail if it finds wt m breach of those conditions
Shareholder - The Company 1s a plc 100% owned by the Government The Shareholder Executive (within BIS) manages its relationship
with the Company as a commercial shareholder While management of the Group therefore lies with the Companys Board of Directors
the shareholder 1s kept advised through regular performance reviews and provsion of information Any new funding required by the
Group (apart from short term borrowings of less than one year) can only be obtained from and approved by Government
Principal Risks and Uncertainties
The Group uses a business-wide framework for the identification assessment treatment monitoring and reporting of nsk The process
helps support business objectives by linking into business strategy identifying and reacting to emerging risks, and developing cost effective
solutions for the management of risk
The Audit and Risk Committee (ARC} reports to the Board and meets quarterly to monitor and review the effectiveness of the risk
management processes and the control environment. In addition the Corporate Risk Management Committee reports to the ARC and
meets quarterly to support the Group Executive Team in ensuring proactive management of risks within the business The committee
Promotes the establishment, communication and embedding of risk management throughout the business Furthermore, independent
assurance Is given to the Board and ARC by Internal Audit & Risk Management as ta the existence and effectiveness of risk management
activities described by management
The following Group-level risks have been identified and are actwely being managed to support the long-term sustainability of the Group
The impact of some of these nsks could be impairment to the value of the Groups brands - Royal Marl GLS Parcelforce Worldwide and
Post Office which are some of the most well known and trusted brands in the UK
The Group has a large penston fund deficit that requires funding
The size and volatility of the Royal Mails pension fund deficit 1s a major challenge to ensurmg modernisation of the Company There
Temain uncertainties over the impact of fluctuations in the equity and debt markets affecting the vatue of the funds assets and liabilities
and the abilty of the business to achieve the required levels of profitability and to maintain cash contributons at the agreed level
‘Weakness in the UK economy Is likely to have a detrimental impact on the Group's profits
Historically there has been a correlation between the state of the UK economy and level of mails revenue Economic weakness or
uncertainty will have a direct impact on maul volumes and consequently an Group profit. In addition there are certain critical suppliers to
the Group If any of them were unable in the current economic climate to meet their service obligations this would adversely impact the
Groups operations and results Economic downturn may also impact the ability of key customers ta continue trading which would directly
impact Group revenue and profits
The Government 1s the Company's only shareholder and the Group may be affected by any future change of Government
and/or Government policy
The influence of public policy considerations on Government may adversely affect the Groups ability to promote an effective business I
strategy This is particularly significant for Post Office Limited which is required to run its branch network as a commercial business and 1s '
Teliant on Government support for loss-making branches
The fmancial restructuring package agreed with the Government needs to be managed effectively
The business agreed a financial restructuring package that 1s allowing it to mvest in new equipment and meet instalments towards the
pension fund defict that has a mayor impact on the Group profit and balance sheet. Effective management of this package 1s crucial for
the business to remain within the agreed financial restructuring parameters and to avord potential sanctions or penalties that could ensue
The Group ts subyect to regulatory restrictions on its operations and the risk of penalties for non-compliance
Royal Mails postal operator's Licence contains material restrictions on the operation of the buses These include
¢ Obligations over the delivery and collection of matt
© Restrictions over the freedom to set prices and
© — Obligations to give competitors access to the network
If Royal Mail breaches certain postal operators Licence conditions or other regulatory requirements it may be subject to financial
penalties
In addition to the postal operators Licence the Group 1s also subject to oversight by other regulators This affects Post Office Limited
which has to satisfy the FSAs requirements as an appointed representative of The Gavernor and Company of the Bank of Ireland who are
regulated by the FSA in respect of investment mortgage and msurance intermediation activity in the UK It 1s atso subject to anti-money
laundering regulations issued under the Proceeds of Crime Act 2002 and enforced by HM Revenue and Custos Post Office Limited 1s
also licensed as a telephone service provider by Ofcom which requires service providers to issue and adhere to Codes of Practice
ca)
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Royal Mail Holdings plc
Operating and Fimancial Review (continued)
Ineffective investment in the operational network could affect productivity levels and the ability to compete effectively
The business 1s continuing a major mvestment programme to replace equipment and technology that is nearing the end of its life cycle
The investment programme needs to be deployed effectvely and future ongoing investment in the Groups operational network
maintained to ensure the Groups ability to compete effectively in the open market.
Group revenues and profit are subject to several uncertamties
The postal market has evolved rapidly as a result of liberalisation Competitors are increasingly targeting business customers Additionally
business customers are downtrading using less profitable products and overall mail market volumes are declining Technological
novation 1s inereasing customers can now switch to alternative offerings and information can be sent or made available faster and in
many cases at a lower cost than traditional mail services If technologica! substitution continues, market volumes will decrease further
The Group 1s currently undertaking a modernisation plan which 1s not yet complete At the same time increased awareness of and
sensitivity to green” issues mcluding the use of paper, may impact customer sentiment and drive down usage of mail or increase
suittching to alternatives.
Furthermore Royal Mails regulatory regime impacts the business profitability in two key areas
‘© The Universal Service Obligation (USO) requires Royal Mail to maintain a national collection and delivery network resulting in Royal
Mail incurring a higher fixed cost base than sts competnors Untess the applicable regulatory restraints permit Royal Mail to recover
from this imbalance there 1s a risk that Royal Mail will always lose money on stamped mail whilst competitors procure more
profitable products such as busmess mail and
‘* Royal Mails prices for most of its letters products are determined by Price Control reviews and negotiation with the Regulator which
can reduce its flexibility and profitability leading to uncertainty over how the future Licence and regulatory regime will affect Royal
Mail
The Group's business activities are time critical and, if key infrastructure facilities were disrupted, it could have an impact on
results
The business 15 subject to a number of operational risks to its nationwide delivery and retail outlet networks including natural disasters,
fire flood explosion possibility of work stoppages or civil unrest, transport infrastructure disruption power failures unavailability of key
supplies breakdown or failure of equipment, health pandemics terrorism and the normal hazards associated with running a complex
infrastructure A major disruption could have an adverse impact on customer services as well as business and operating results
The Group ts exposed to credit risk
‘As a result of the economic recession, the exposure of the business to credit risks with major trading partners has increased Management
have taken all the steps they believe to be practcal and appropriate in the circumstances to guard agamst these risks and continue to
‘monitor the situation carefully
‘The Group 1s subyect to changes in both domestc and European regulation and legislation, which could expose it to possible
additional costs
Various changes to European or domestic law will have a direct impact on the Group such as the European Working Time Directive
international financial reporting standards speed restrictions on the Group s vehicles and increased liberalisation of the market for postal t
service providers.
Without a continued change of culture within the organisation, future development may be affected
The changing and uncertain postal market place the impact of campetition and regulation and increased customer expectations place
mayor challenges on all employees to adapt and improve productivity to levels that will allow the business ta compete effectively These
challenges need to be met by ongoing cultural change within the organisation
Without a flexible efficient and co-operative culture Royal Mail could become loss making as mail volumes decline Significant industrial 1
action could have a major detrimental effect on the Group s reputation and profits
The Group may be affected by future environmental and related fiscal measures
The Group operates a large vehicle fleet and a substantial property portfolio that consume large amounts of energy Although the Group
15 disposing of surplus property and 1s deploying a Carbon Management Programme it may he affected by future envronmental
measures and adverse fiscal impact from increased energy costs and “green” taxation
The Group operates a substantial treasury operation and 1s exposed to foreign currency risk and fuel price risk
Foreign currency risk 1s due to trading with overseas postal operators for carrying UK mail abroad and delivering foreign origin mail in the
UK revaluation of currency balances held to operate the Bureau de Change services and various sales and purchase contracts
denominated in foreign currency The fuel price risk arises from operating a large vehucle fleet and on jet fuel risk. from purchasing air
freight services If the treasury strategy does not fully cover the Groups exposures this could result in funds not being readily available
when required or a negative impact on profit due to mcreased costs
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‘Operating and Financial Review (continued)
Summary
In 2010 the Group generated a strong set of results with operating profit growth of £83m and all businesses remaining profitable
despite revenue falling year on year for the first time in nearly 10 years This was achieved in a difficult trading environment impacted by
Tecessionary conditions an increasingly competitwe market place and a period of industrial action However the Group outturned with a
Tet trading cash outflow of over £500m This was attributable to the continued funding of the Group s pension obligations and investment.
im modernisation critical to the future success of the business
Royal Mail Letters improved their operating profit by over 100% year on year despite losing £143m of revenue This performance shows
that investment in modernisation 1s generating significant efficiencies AS volumes continue to fall competiuon intensifies and customers
switch to lower priced products this has to be offset by cost savings enabled by modernisation and revenue growth through the launch of
mnovative new products and services
Post Office Limited grew profits by £31m in 2010 despite a £70m fall in revenue largely in Government and Financial Services Savings
from transformation programmes and other tight cost control measures led to this improvement despite a decline in revenue of nearly
8% On 24 March 2010 a further funding package was agreed to help maintain the network although these arrangements remain subject
to State Aid approvat
The Groups parcel businesses operate in fiercely competitive markets and although recessionary conditions have put them under further
pressure they have performed strongly Parcelfarce Worldwide grew its profits by over 40% year on year through cost control coupled
with underlying revenue growth and a continued focus on quality of service GLS saw profit fall by 10% as difficult trading conditions in
Europe meant revenue decline could not be fully offset by cost savings However it still generated significant profits and achieved strong
margins for the Group ‘
Net trading cash outflow for the Group of £517m was driven by pension payments and investment in modernisation Funding on pension
obligations continues to be a heavy drain on the Groups cash resources with cash payments in excess of £850m The investment in
modernisation ts allowing operating profits to grow despite falling revenues
After another encouraging year the Groups performance 1s evidence of real pragress being made however big challenges remain The
continuing trend of deckne m traditional mail volumes may improve slightly as the UK economy recovers but will stil leave the Group
needing to explore and develop new revenue streams and to generate further efficiencies through continuation of modernisation A '
solution to the historic pension deficit and access to funding wilt also be cntical to ensure the long term success of the Group
Following the recent agreement with the union leadership Business Transformation 2010 and Beyond we are now well placed to build
upon this year’s progress Working together to deliver great products and services to the Groups customers 1s now more important than
ever before
Jan Duncan
Group Finance Oirector
28 May 2010
2
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Royal Mail Holdings plc
Operating and Financial Review (continued)
Understanding the Operating and Financial Review
Governance
The EU Accounts Modernisation Directive applies for all medium and large EU companies including Usted compares and requires a
mandatory inclusion to the existing Directors Report to provide an enhanced review of a companys business
The Directive states that the renew should provide a balanced and comprehensive analysis of the development, performance and position
of the Companys business including the principal risks and uncertainties facing the organisation The analysis should melude both
financial and where appropriate non-financial KPls relevant to the particular business including information relating to environmental
and employee matters It ss recagnised that to the extent that this information appears in the Operating arid Financiat Review (OFR) it 1s
incorporated by reference into the Directors Report
Statement of Compliance
This OFR ts tended to develop the Groups narrative reporting to meet many of the recommendations of the Accounting Standards
Boards Reporting Statement of Best Practice on the OFR This OFR ensures compliance with the legal requirement under the Companies
Act to provide a Business Review and 1s referenced from the Directors Report
The Group will contmue to review the narrative disclosures it provides in the Annual Report and Financial Statements to ensure that the
disclosures provided meet the requirements of the Groups stakeholders
Cautionary Statement
The OFR focuses on matters that are relevant ta the interest of the Sharehalder of the Company The purpose of the OFR 1s to assist the
Shareholder of the Company in assessing the strategies adopted by the Company and the potential for those strategies to succeed It
should not be relied on by any other party or for any ather purpose
Where this OFR contains forward looking statements these are made by the Directors m good faith based on the information available to
them at the time of their approval of this report These statements should be treated with appropnate caution due to the inherent
uncertainties underlying any such forward looking information
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Royal Mail Holdings pic Board
Chairman
DONALO BRYDON (65) became a non-executive Director on 27 January 2009 and Chairman on 26 March 2009 He 1s Chairman of the
Nommations Commuttee and a member of the Remuneration Committee He 1s also Chairman of Smiths Group plc the ifs School of Fiance
and the David Rattray Memorial Trust (UK) He had a 20-year career with Barclays Group during which time he was Chairman and Chief
Executive of BZW Investment Management and acting Chref Executive of BZW followed by ten years with the AXA Group including holding the
posts of Chairman and Chief Executive of AXA Investment Managers and Chairman of AXA Framlington He has also recently been Chairman of
Amersham pic and Taylor Nelson Sofres pic and a Director of Ailied Domecq plc and Scottish Power plc He is a past Chairman of EveryChild
Non-executive Directors
LORD CURRIE (63) joined the Board on 4 January 2009 and 1s a member of the Audit and Risk Committee He was the founding Chairman of
Ofcom (2002 - April 2009) He 1s also Chairman of the international Centre for Financial Regulation and of Semperan PPP investment
Partners Holdings Ltd and sits on the Boards of the accountancy firm BDO the Dubai Financial Services Authority IG Group plc and the
London Philharmonic Orchestra Previous appointments include positions with Nomura Terra Firma Unisys T-Systems and on the Boards of
Abbey National ptc and Ofgem
RICHARD HANDOVER CBE (64) joined the Board in January 2003 He 1s the Senior Independent Director and 1s Chairman of the Remuneration
Committee and a member of the Nominations Committee and the Audit and Risk Committee Richard was Chairman of WH Smuth ple until
January 2005 and is currently non-executive Chairman of Alexon Group pte
PAUL MURRAY (48) joined the Board m August 2009 and 1s Chair of the Audit and Risk Committee and a member of the Nominations
Committee Paut was Group Finance Director of the broadcasting company Carlton Communications and the oil and gas exploration business
Lasmo He ts non-executwe Director of Thomson the media and telecoms technology services and systems provider and a non-executive
Director of Knowledge Peers and Tangent Communications He was previously independent Director of TNS the Global market research
business
LES OWEN (61) jomned the Board in January 2010 Les 1s a qualified actuary with 35 years experience in the financial services industry From
2000 to 2006 he was the Graup Chief Executive Officer of AXA Asia Paafic Holdings Limited and responsible for AXAs Asian life msurance and
wealth management operations Prior to this he was Chief Execute of AXA Sun Life plc He was a member of the Global AXA Group Executive
Board Les 1s currently a Non-Executive director of Computershare the Football Federation of Australia and of Discovery Holdings 2 South
African listed health and life msurer
BARONESS PROSSER OBE (72) joined the Board in November 2004 and 1s a member of the Nominations Committee and Remuneration
Committee Baroness Prosser has been a Member of the House of Lords since 2004 She 1s a non-executive Director of the Trade Union
Funds Managers and has been Chair of the Women and Work Commission since July 2004 She ts also Deputy Chatr of the Commission for
Equality and Human Rights
Non-executive Director appointed since the year end
NICK HORLER (51) was appointed as a non-executive Director in April 2010 He ts Chief Executive Officer of Scottish Power and has held
senior strategic roles m major companies both in the UK and abroad
Executive Directors
ADAM CROZIER (46) joined the Company m February 2003 He was Group Chief Executive and led the Group Executive Team and was the
Companys Shareholder representative on the Board of Camelot Group ple Adam 1s a non-executive Director of Debenhams ple and Chairman
of the Employers Forum on Disability He was Chief Executive of the Football Association from 2000-2003 Between 1988 and 1999 he held a
number of senior roles at Saatchi and Saatchi Advertising inctuding that of Joint Chief Executive from 1995 He left the Company on 31 March
2010
JAN DUNCAN (49) was appointed as Group Finance Director in September 2006 and 1s a member of the Group Executive Team and the GLS
Supervisory Board He 1s Chairman of the Pensions Committee He joined from Westinghouse Electric Company based in the USA where he
had been Chief Financial Officer since 1999 Prior to joining Westinghouse fan was Corporate Finance Director at British Nuclear Fuels plc and
before that im corporate finance with Dresdner Kleinwort Benson Ltd and Lloyds Merchant Bank Ltd lan started his career with Deloitte &
Touche in London and is a member of the Institute of Chartered Accountants of England and Wales
MARK HIGSON (54) jomed the Company in November 2007 as Managing Director of the Letters Business and 1s a member of the Group
Executive Team Mark was previously divisional Chief Executive and Group Operations Director of BPB plc Prior to that, he held senior
positions at Courtaulds Plc including CEO at its UK Coatings division He has also worked at HJ Heinz and British Aerospace
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Royal Mail Holdings plc
Royal Mai! Holdings plc Soard (contmued)
Executive Director appomted since the year end
DAVID SMITH (45) was apponted Managing Director of Post Office Ltd in April 2010 after three years as Managing Director of Parcelforce
Worldwide David jomed Royal Matt Group in 2002 initially as Finance Director of Royal Mails Business Sales division before being appointed
as Finance Director of Parcelforce Worldwide in January 2003 and then Managmg Director of Parcelforce Worldwide He 1s a qualified
Chartered Accountant and prior to 2002 held a number of financial and commercial positions in the electronics industry, imcluding Finance
Director of RS Components UK
Company Secretary
JONATHAN EVANS OBE (58) joined the Company directly from urwversity in 1974 and was Company Secretary since 1999 having held a wide
Tange of management positions throughout the Group He was a member of the Group Executive Team Secretary to the Audit and Risk,
Remuneration and Nomination Committees a Trustee Director of the Royal Mail Pension Plan, Chairman of the Royal Mail Senior Executwves
Pension Pian and a member of the GLS Supervisory Board Jonathan retired from the Company in May 2010
JON MILLIDGE (46) was appointed Company Secretary in May 2010 He 1s also Acting Group HR Director and Chairman of NDC 2000 Limited
He 1s a Pension Scheme Trustee of the Royal Mail Retirement Savings Pension Pian and the Royal Mail Oefined Contribution Plan Jon jomed
Royal Mail m 1985 as a graduate entrant and has worked across many of the businesses in the Group notably as HR director in Royal Mail
Letters Parcelforce Worldwide and as a General Manager in Post Office Limited Jon 1s a fellow of the Chartered Institute of Management
Accountants
Directors who left during the year
ANDREW CARR-LOCKE was a non-executive Director from 1 September 2008 and left the Company on 24 March 2010
ALAN COOK CBE was Managing Director of Post Office Limited from 1 March 2006 and left the Company on 31 March 2010
HELEN WEIR was a non-executive Director from 1 January 2006 and left the Company on 31 July 2009
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Royal Mai Holdings pic
Directors’ Report
The Directors present the Group financial statements for Royal Mail Hotdings plc These financial statements relate to the year ended 28 March
2010 (2009 year ended 29 March 2009)
Principal activities
The Group provides a nationwide and mternational 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
Review of the business and future developments
A review of the Group's business and future developments is presented im the Chairmans Statement Annual Review and the Operating and
Financial Review -
Results and dividends
The loss before taxation amounted to £262m (2009 £49m profit) After taxation the loss was £320m (2009 £229m loss) Of the loss after
taxation £1m profit (2009 £3m profit) 1s attributable to minority interests The Directors do not recommend a dividend (2009 En:l dividend)
Directors
The names and biographies of the current Directors appear in the Royai Mail Holdings pic Board section pages 29 to 30
Political and charitable contributions
During the year the Group made chantable contnbutions of £2m (2009 £2m) No political contributions were made in the year (2009 fnil)
Research and development
Research and development expenditure during the year amounted to Enil (2009 Enil)
Policy on the payment of suppliers
The policy of the Company and its principal operating subsidiaries 1s to use their purchasing power fairly Payment terms are agreed in advance
for all major contracts For lower value transactions the standard payment terms of the supplier apply It is the Company s policy to abide with
the agreed terms The Company and its principal operating subsidiaries in the UK have sought to comply with the Department for Business
Innovation and Skills (BIS) Better Payment Practice Code Copies of this can be obtained from BIS As the Company is a non-operating
company the creditar days are zero The creditor days of the operating subsidiaries are set out in their financial statements
Land and butdings
The net book value of the Groups land and buildings based upon a histone cost accounting policy and excluding fit-out 1s £749m (2009
£721m) In the opmion of the Directors, the aggregate market value of the Groups land and buildings exceeds this net book value by £460m
(2009 £470m)
Financial instruments
Details of financial risk management objectives and policies and financial instruments are shown m note 23 and note 24 respectively
Orrectors and their interests
The Directors of the Company and details of changes during the year are given on pages 29 and 30 The Secretary of State appoints the
Chairman ali other Directors are appointed by the Company with the Secretary of States consent
HM Govemment is the Companys sole shareholder and accordingly the Directars have no interest in shares of the Company
Audit mformation
The Directors confirm that so far as they are aware there Is no relevant audit information of which the auditor 1s unaware and that each
Director has taken all reasonable steps to make themselves aware of any relevant audit information and to establish that the auditor 1s aware
of that information
Qualifying third party mdemnity provisions for Directors
A partial qualifying third party indemnity provision (as defined im section 234 of the Companies Act 2006) was and remains in force for the
benefit of all the Directars of the Company and former Directors who held office during the year The indemnity 1s granted under article 129 of
the Company's Articles of Association The indemnity 1s partiat in that it does not allow the Company to cover the costs of an unsuccessful
defence of a third party daim
Peopte
The Group employs aver 168 000 people (2009 over 176 000) in our UK wholly owned subsidiaries An analysis of the Group headcount is
shown in note 4 to the financial statements Our people are aur ambassadors our brand and our service
The Groups policy is to encourage effectwe communication and consultation between our people particularly on matters relating to strategy
financial and economic factors that may influence their business unit s performance This 1s achieved through the use of an extensive range of
communication channels including our employee opinion survey magazines briefings open forums TV screens and an intranet website Qur
people have vanous bonus schemes significant elements of which are based on business-related targets
We actwely encourage continuous trammg and skill development for all our people to ensure achievement of corporate and individual
objectives Management development and traning programmes have been designed to attract and retain the best The Group has worked with
the unions to introduce several innovative working practices to improve efficiency
31
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Royal Mail Holdings plc
Directars’ Report (continued)
‘An Equal Opportunities policy 1s maintained in all respects including disability age religion colour, sex nationality ethnic ong sexual
onentation race creed mantal status and equality
ln 2003, we embarked on a business wide engagement programme to make Royal Mail Group a Great Place to Work The purpose of the
Programme 1s to encourage colleagues to contribute to unproving ther working enviranment to equip them with the skills they need to
develop pride in and understanding of the business and to drive respect for colleagues In short to ensure peaple considerations are at the
heart of all major business decisions The programme 1s ongong and remains an integral part of our people strategy
This strategy wall ensure we realise our futl potential through the strength of aur people by developing a hgh-performing sustainable culture
where everyone feels involved and valued It focuses on seven key areas,
© creating interesting meaningful jobs with more flexible working patterns
* identifying and developing for all our people a set of core behaviours that determine how we treat each other our customers and our
shareholder
* building a fluid innovative and agile organisatian to improve our response to environmental and market changes !
* developing a high-performance culture m which everyone understands their contribution and 1s motwated to achieve their full potential
© defining recruiting and developing the core capabilities we need to thnve in a competitive, deregulated market
. recruiting attracting and developing the leadership and management capability we need to deliver our goals and
= enhancing our ability to attract and retamn the talent required to compete successfully
Currently the way we monitor our progress towards becoming a Great Place to Work 1s by using Have Your Say our colleague opinion survey
launched in January 2003 This is carried out on a rolling basis reaching 1/12" of our people every month and the results are reviewed
monthly nght through the business - from local level up to Board level
Corporate Social Responsibility
The Group 1s committed to carrying out its acuvities in a socially responsible manner in respect of the environment employees customers and
local communities A Corporate Social Responsibility (CSR) Governance Committee reports to the Board which publishes an annual report of its
actwities Further details of our CSR governance structure and activities will be available in our 2010 CSR Report due to be published later m
the year
Disabled employees
The Groups policy 1s to give full consideration to applications for employment from disabled persons Employees wha become disabled whilst
employed recewe full support through the provision of training and special equipment to facilitate continued emptoyment where practicable fl
The Group provides training career development and promotion to disabled employees wherever appropriate
Gomg concern
After analysis of the financiat resources available and cash flow projections for the Group the Directors consider that it 1s appropriate to
prepare the financial statements on a going concern basis Further details are provided under funding in note 2 to the finanaal statements
Auditor
A resolution ta reappoint Ernst & Young LLP as auditor will be put to the Annual General Meeting
By Order. of the Raard.. ,
_ GRO I
\
Jon Millidge
Company Secretary
28 May 2010
92
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Corporate Governance
Statement by the Directors on compliance with the Combined Code \
The Board 1s committed to high standards of Corporate Governance and supports the Combined Code on Corporate Governance (the Code) '
published in July 2003 and revised in June 2008 The Company has fully complied with the provisions set out in section 1 of the Code during
the year in so far as they are appropriate to a public company with a single shareholder The following statement 1s intended to explain our
governance policies and practices in light of the Code principles and provisions and to provide msight into how the Board and management run
the business for the benefit of the shareholder
The Board
The Board 1s responsible for setting the objectives and strategy of the Group and for monitoring performance At the end of the year the
Board comprised a Chairman three executive Directors and five non-executive Directors At that date there were two execute and two non-
executive Director vacancies The biographies of each of the Directors setting out their current roles commitments and previous experience
are on pages 29 and 30 The Board met on ten occasions during the course of the year under revew
The Board has defined those matters that are reserved excluswely for its consideration These include the approval of strategic plans. fmancial
statements acquisitions and disposals, major contracts projects, and capital expenditure It delegates responsibilities to the Board Committees
detailed below For each scheduled meeting of the Board the Company Secretary on behalf of the Chairman collates and circulates the
Papers arming to allow sufficient time for the Directors to review the information provided
The Board 's confident that all its members have the knowledge talent and experience to perform the functions required of a Director of the
business Executive Directors have rolling 12-month contracts and non-executwe Directors are generally appointed far three-year terms The
Board considers that each of the non-executive Directors is ndependent. 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 mterfere with their judgement
There 1s also a clear division of responsibilities between the Chairman and the Chief Executive
Performance evaluation of the Board its Committees and individual Directors takes place on an annual basis led by Richard Handover the
Senior Independent Director, with the support of the Company Secretary This years evaluation was conducted using an external factltator
Professor Rob Goffe of London Business School, using a combination of questionnaires individual interviews and a full board discussion
Performance evaluations of Board Committees were conducted by the Chairmen of the respective Board Committees The non-executive
Directors led by the Senior Independent Director reviewed the performance of the Chairman and the executive Directors The executive
‘Directors ted by the Group Chef Executive reviewed the performance of the non-executive Directors ‘
Directors may take independent professional advice in the furtherance of their duties at the Groups expense All Directors have access to the
advice and services of the Company Secretary the appointment and removal of whom 1s 2 matter for the Board as a whole
All Directors appamnted by the Board are required by the Companys Articles of Association to be elected by the shareholder at the first AGM
after their appomntment. On appointment, the Directors take part in an induction programme in which they receive information about the
Group the role of the Board and matters reserved for its decision the role of the principal Board Committees the Groups Corporate
Governance arrangements and the latest financial information about the Group This 1s supplemented by wsits to key business locations The
Group engages in two-way communication with the shareholder to discuss mformation on its strategy performance and policies The Board
receives feedback on these meetings from the Directors attending them
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Royal Mail Holdings plc
Corporate Governance (continued)
Number of meetings
Dung the year, the Directors attended the following number of meetings of the Board and its main Committees with the maximum number
‘that each could have attended shown in brackets
‘Audit and
Risk Remuneration Nommation
Board Committee Committee Committee
Number of meetings during the year 40 5 5 5
Chairman ‘
Donald Brydon 40 (10) - 5 (5) 44)
Executive
lan Duncan 10 (10) - - -
Mark Higson 10 (20) - a =
Non-executive
Lord Currie 10 (10) 3) - -
Richard Handover 9 (10) 4 (5) 5 (5) 4(5)
Paul Murray 6 (6) 3(3) - 33)
Les Owen 2 (2) 2 a 5
Baroness Prosser 10 (10) 2(2) 4(5) 5 (5)
Former Directors
Andrew Carr-Locke 10 (10) 5 (5) 5 (5) 5 (5)
Alan Cook 8 (9) 5 - =
Adam Crozer 10 (10) - - -
Helen Weir 3(4) 2(2) = =
Outside appomtments
The Board believes that there are significant benefits to both the Group and the indwvidual from executive Directors accepting non-executive
Directorships of companies outside of the Group The Boards policy 1s normally to limit executive Directors to one non-executive Directorship
for which the Director may retain the fees (see the Directors Remuneration Report on page 38 for details)
Board Committees
The following Committees deal with specific aspects of the Group's governance The full terms of reference for each of the principal
Commuttees are available on the Company's website www royalmailgroup com or on written request from the Company Secretary The details
of Commuttee membership shown are as at 28 March 2010
Group Executive Team
Chair Adam Crozier
Membership Stephen Agar (Managmg Director Wholesale) Alan Cook (Managing Director Post Office Limited) Rob Dargue (Chief
Information Officer), lan Duncan (Group Finance Director} Doug Evans (General Counsel) Jonathan Evans (Company
Secretary) Mary Fagan (Group Corporate and Government Affairs Director) Mark Higson (Managing Director Letters)
Jon Millidge (Acting Group HR Director) Atex Smith (Strategy & Commercial Director - Letters) David Smith
(Managing Director Parcelforce Worldwide) and Sue Whalley (Group Regulation and Strategy Director)
Role ‘The Committees responsibilities include
= to develop and monitor deployment of the Groups strategy annual operating plans and budgets
+ to review operational actwities, and set policies where these are not reserved to the Board and
= toallocate resources both people and financial across the Group
The Royal Mat Holdings plc Board has delegated authontty to the Investment Committee of the Group Executive
Team to make investment decisions of up to £20m
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Royal Mail Holdings plc
Corporate Governance (continued)
Audit and Risk Committee 1
Chair Paul Murray '
Membership Richard Handover Lord Curne
The Board 1s confident that the collective experience of the Audit and Risk Committee members enables them as a
group to act as an effective Audit and Risk Committee The Commntee also has access to the financial expertise of
the Group and its auditor, and can seek further professional advice at the Companys expense if required
Rote The Committee which 1s assisted by the Corporate Risk Management Committee provides a forum for reporting by
bath internal and externa! auditors and 1s responsible for a wide range of matters cluding
* to moniter the integrity of the financial statements of the Group
* to review the Groups internal financial control system and unless addressed by the Corporate Risk
Management Committee or by the Board itse'f, internal control and risk management systems
* to monitor and review the effectiveness of the Group s Internal Audit function
* to recommend to the Board for shareholder approval the appointment of the external auditor and to
approve its remuneration and terms of engagement
* to monitor and review the external auditors independence obyectty and the effectiveness of the audit
process
+ to develop and implement policy on the engagement of the external auditor to supply non-audit services
and
* where the Committees monitoring and review activities reveal cause for concern or scope for
Improvement to make recommendations to the Board or management on action needed to address the
vssue
Audit & Risk Committee Report
See Internal contral on page 37
Non-audit services provided by the external auditor
In some cases the nature of advice required makes it more timely and cost effective to select the external auditor who already has a good
understanding of the Group tn order to maintain the obyectvity and independence of the external auditor the Committee has determined what
work can be provided by the external auditor and the approval processes associated with the auditor The Committee monitors the level of
non-audit fees paid to the external auditor
Remuneration Committee
Chair Richard Handover
Membership Donald Brydon, Baroness Prosser
Role The Committee s responsibilities include
* to determine and recommend for the Boards approval the framework for the remuneration of the
senior executives of the Group
. to determine the individual remuneration arrangements for the Chairman the executive Directors and
the Company Secretary subject where necessary to the consent of the Secretary of State and
+ to-agree the targets for any performance-related mcentive schemes applicable to semor executives
Remuneration Committee Report
See page 38
35
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Royal Mail Holdings plc
Corporate Governance (continued)
Nomination Committee
Chair Donald Brydon
Membership Richard Handover Paul Murray. Baroness Prosser
Role The Committees responsibilities mclude
. to lead a formal rigorous and transparent process for appomtments to the Board of the Company to the
boards of subsidiaries and to other senior executive positions
. to advise the Board on succession planning for the positions of Chairman Chief Executive and all other
Board appomtments and other senior appointments and
. to keep under review the balance of Board membership to ensure that it has the required mix of skills
knowledge and experience
Nomination Committee Report
The Committee met 5 times during the year The Committees main focus was on the selection and recruitment of Directors and other senior
executwes The Committee tock external advice from executive search consultants and considered intemal candidates where appropriate All
Board appointments require the consent of the shareholder
{In addition to the principal Committees above there are also the following Committees
Corporate Social Responsibility Committee
Chair Adam Crozier
Membership Group HR Director Managing Directors of business units Director of Corporate Responsibility Head of Social Action :
& Inclusion and other senior executives from across the Group
Role The Committees responsibitities include
* to provide an overview of the social environmental and ethical impacts of the Groups activities, and
= to make recommendations on Corporate and Soaal Respansibility standards and policies
Corporate Social Responsibility Committee Report.
The Committee 1s chaired by the Group Chief Executive and met an 4 occasions during the year The principal activity of the Committee was to
undertake a thorough review of the Groups CSR Strategy Engagement & Inclusion and Social policies
Pensions Committee
lan Duncan
Membership Doug Evans (Genera! Counsel) Jon Millidge (Actmg Group HR Director)
The Committee 5 responsibilites include
+ to review funding benefits scheme structure and strategic developments impacting on the Groups
occupational pension schemes and
. to represent the Group in discussions with the Trustees of the Groups occupational pension schemes
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Royal Mail Holdings plc
Internal Control
Overview
The Directors are responsible for the Group s system of risk management and internal control as well as the timely review of its effectiveness:
The system 1s designed to manage rather than eliminate the risk of failure to achieve business objectives and can only provide reasonable but
not absolute assurance against material misstatement or loss
The Groups approach to internal control 1s based on the underlying principle of ine management accountability for control and risk
management There is an ongoing process for identifying evaluating and managing the significant nsks faced by the Group m accordance with
the guidance detailed by the Turnbull Committee as part of the Combined Code including financial operational compliance risks and risks to
reputation The Board regularly reviews this process The process has been in place throughout the year and up to the date of approval of
these financial statements The responsibilty for joint ventures and associates rests, on the whole with the senior management of those
operations The Company monitors its investments and exerts mfluence through Board representations
The Board has reviewed the effectiveness of the system of risk management and mternai control The key elements include a review of
Internal Audit reports regular confirmations from local management and communications from the Chair of the Audit and Risk Committee on
the outcome of Audit and Rsk Committee meetings
Audit and Risk Committee
The Committee reports to the Board and meets as a minimum on a quarterly basis to monitor and review the effectiveness of the risk
management processes and the control environment The Committee reviews the scope of work, authonty and resources of the Internal Audit
& Risk Management function The Audit and Risk Committee regularly reviews the Group risk profite
Corporate Risk Management Committee
The Committee acts as a sub-committee to the Audit and Risk Committee and meets quarterly to support the Group Executive Team in
ensuring proactive management of risks within the business The Committee promotes the establishment, communicatian and embedding of
isk management throughout the business as well as regularly reviewing emerging risks
Key control processes.
The key control processes are ongoing and include the following
. the Group s Code of Business Standards sets the principles of professionalism and integrity for our people
. the business units have authority to manage within the limits set by the Board and within the scope of reserved powers
: the Board discusses and approves the strategic direction plans and objectives of the Group and each operating company and the
risks to achieving them
. the Board and Group Executwe Team review and approve budgets and forecasts
. the Group Executive Team and executive business unit management review performance monthly by reference to key performance
indicators updated forecasts and information on the key risk areas,
: the Audit and Risk Committee reviews quarterty the scope and results of mternal audit work across the Group The scope of the work
covers all key activities of the Group and concentrates on higher risk areas
. the Audit and Risk Committee reviews the scope of the work of the external auditor and any significant issues arising and
. the Audit and Risk Committee reviews key accounting policies and delegated authonty levels
Risk Management process
The process consists of formal identification by management at each level of the Group of the key risks to achieving their business objectwes
and the cantrols in place to manage them The likelthaod and potential impact of each risk 1s evaluated Risk management action plans are
monitored at executive level to ensure key risks are being mitigated The process also includes
. bi-annual certification by management that they are responsible for managing the risks to their business objectives and that the
Internal controls are such that they provide reasonable but not absolute assurance that the risks are appropriately identified
evaluated and managed and
. independent assurance by Internal Audit & Risk Management as to the existence and effectiveness of the risk management activities
described by management
The system of risk management and internal control is embedded ito the operations of the Group and the actions taken to mitigate any
weaknesses are monitored
37
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Royal Mail Holdings plc
Directors’ Remuneration Report
The Companys remuneration policy follows the Combined Code and best practice i other UK organisations The Royal Mail Group strategic
plan demands fundamenial change in the Group The Board believes that to achieve this it 1s necessary to have people of the right calibre who
are given mcentives to produce results which benefit customers and the shareholder
The parts of this Report that have been audited are
. Directors emoluments with respect to 2009-10
. Performance-related annual bonuses outturn for 2009-10
. Company Awards and Bonus Awards under Long Term Incentive Plans (LTIP) 2009-10 was the final year of a three year Long
Term Incentwe Plan and
. Pensions
Directors’ emoluments with respect to 2009-10
‘Total emoluments pha
Total excluding “amounts payable on
Ln and ‘vesting of the 2007-10
‘Annual performance bonus Pensions ATP scheme
Tncludes
Annual P
Current Performance perform: cash
‘annual supplement
salary I Salary/ payable in intiew
fees tees June Benefits of pension 2010 2000 2009
‘£000 I £000 000 £000 £000 «£000 £000 £000 E000 £000
Chaleman
Denale Brycon* 200 200 F : : : - 200 8 200 8
Executive
Adam Crone? 633 633 _ _ _ Fu 205 a8 995 2428995
len Duncan 25 325 384 99) 85 ” a 508 498 1396498
Mark Hagson 428 428 an a4) 107 6 an m 722 1730722
Non-executive
Lore Curne 40 EY : . S : . Fs 9 38 9
Reckard Handover “s 65 : . = : e 6 64 65 “
Paul Muray* 40 Ey . : : 5 Es - * -
Les Owen? 8 ‘6 - : : ‘6 6 :
Baroness Prosser* 5s 55 - - - - - 5s Et 5s BY
Fermer Directors
‘drew Carz-Locke! 50 0 : : 3 : so 28 so 2
‘Aan Cook* 282 2 “9 08) n 18 113 ry 480 1252480
‘Alan Legiton® : : : . . - 100 = 300
awe Fish? - E 3 e : : - 23 - 2
Helen Weel? 48 6 : - : : 6 “6 16 “6
Total 2010 zai} 2232 556 (293) 263 9 574 3035 = 7273 :
Totl 2009 2i2sI__1903 116 (25) oon 3 567 3024 3024
* The annual performance bonus waived into LTIP 1s explamned on page 41.
* Donald Brydon joined the Board on 27 January 2009 and became Chairman on 26 March 2009
‘Adara Crozer (eft the Board on 31 March 2010 He was released from his nouce penod four manths early and it was mutually agreed that he should not be awarded an
‘annual bonus for 2009-10 As part of this bonus could have been waved in return for an award in the LTIP and the LTIP value was capped the total amount forgone was
£653 802
Lord Curne yomed the Aud and Risk Committee on 7 October 2009
Paul Murray jomed the Board on 4 August 2009 and became a member of the Audit and Risk Commuttee on 7 Octaber 2009
Les Owen joined the Board on 27 January 2010
Baroness Prosser left the Audit and Risk Committee and stood down as Chatr of the Nomunation Committee en 7 October 2009 She remains a member of the
Norunauon Commitee
[Andrew Carr-Locke left the Board on 24 March 2010
‘Alan Caok resigned from the Board with effect from 15 March 2010 and teft the Company on 31 March 2010
Allan Lewhton left the Board on 25 March 2009
*© David Fish left the Board on 30 September 2008
Helen Weir left the Board on 31 July 2009
The total emoluments plus amounts payable on vesting of the 2007-10 LTIP scheme columns have been included as they represent the total
that 1s paid or payable in respect of the year
>
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Royal Mail Holdings plc
Directors’ Remuneration Report (continued)
The figures in the table represent the qualifying emnaluments earned and receivable by anyone who has served as a Director at any time duning
the financial year whenever paid Such emoluments are normally paid m the same financial year with the exception of the annual
performance-related bonus. which 1s paid in the year foltowing that in which it 1s earned and the amount deferred into LTIP that 1s not paid
until the LTIP matures
‘These payments are consistent with the policy of the Remuneration Committee The following sections describe the Committee, its general
policy and the main elements of remuneration
‘The Remuneration Committee
The Board retains overall accountability for the framework and costs of executive remuneration and the terms of the service contracts offered
to all executive Directors These also require the consent of the Secretary of State for Business Innovaton and Skills The Secretary of State
also gives consent for the remuneration arrangements for non-executive Directors The Remuneration Committees role 1s to develop the
remuneration policy for executive Directors and their immediate reports and specifically to make recommendations on their salary benefits,
bonuses and other terms and conditions af employment The Cammittee also recommends appropnate compensation on the ending of
employment giving careful consideration to the circumstances of the particular case and the ability of the individual to mitigate
The Remuneration Committee is made up wholly of independent non-executive Directors Membership of the Committee 1s given on page 35
The Chief Executive and the Group HR Director may attend these meetings by imitation and are not present at the discussion of their own
remuneration
Advice to the Remuneration Committee
The Committee catls for information and advice from mside and outside the Group It takes advice from those independent professional
organisations that are best able to assist it on the particular topic under discussion
Durng 2009-10 advice on the performance of key executives was given by the Chairman and the Chief Executwe Information on the external
marketplace was given by Monks Partnership (a trading name of PricewaterhouseCoopers) Deloitte LLP Hay Management Consultants and
Towers Watson Limited Internal support is primaniy pravided by the Acting Group HR Director, Jon Millidge, and from the Company Secretary
Jonathan Evans Other advice and information has been provided by specialists from the HR and Finance Departments
During the year advice was given to the Company by Towers Watson Limited on pensions and actuarval matters
Remuneration policy
The Companys poticy 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 marketplace who will detiver success for the shareholder and high levels of customer service safety and
environmentat performance
‘+ assignificant proporticn of the remuneration package should be dependent on performance - both short and long-term and
‘+ the system of remuneratian should bring together the interests of senior executives customers and the shareholder
The policy for senior executives takes into account pay and employment conditions elsewhere in the Group
The Committee regularly reviews the benefits package offered to its key executives and its competitiveness The Committee aims to ensure that
the package 1s proportionate and effective and that it follows accepted best practice
The main components of remuneration
The main components for executive Directors are bastc salary an annual performance-related bonus a Long-Term Incentive Plan (LTIP)
pension and other benefits The Committee believes that there should be a particular emphasis on performance-related elements
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 considers information from several sources so that a fair comparison can be made with enterpnses af a similar size
and complexity to Royal Mail This data is provided by independent consultancies usually based on the published annual reports of other
organisations Increases are recommended where the Committee believes that it 1s necessary to reflect contribution mcreased individual
responsibilities and market levels The Secretary of States consent ts required for all rmaterial changes to Directors remuneration
In the light of the general economic circurnstances no increases to base salary were awarded to the Chief Executive or the executive Directors
in respect of the 2009-10 salary review In 2008 it had been agreed that the salaries of lan Duncan and Alan Cook would increase to
£350 000 and £300 000 a year respectively These increases were to apply in two phases with the second due on 1 July 2009 At the request
of lan Duncan and Alan Cook these second increases were postponed and will be implemented on 11 July 2010 in the case of lan Duncan Alan
Cook having left the Company at the end of March 2010 Consequently no executive Director received a pay increase in 2009-10
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Royal Mail Holdings plc
Directors’ Remuneration Report (continued)
Performance-related annuat bonus 2009-10.
For 2009-10 the annual bonus ptan for executive Directors had the same potential awards at threshold on-target and maximum levels as in
Previous years
For alt executive Directors the factors were Profit Quality of Service and Personal Objectives with the Chief Executive additionally incentivised
‘on Revenue and Costs Quality of Service constituted 25% of the total bonus potental for alt executive Directors and all had an element relating
to the overalt Group performance
The Quality of Service measures were
Retail First Class
Retail Second Class.
Bulk First Class
‘Bulk Second Class
Bulk Third Class
‘Special Delivery
Wholesale Access
Parcelforce 24,
A Post Office Limited Customer Service Effectiveness measure
A Past Office Limited Customer Service Quality measure
A Post Office Limited measure of new products sold and
* A Post Office Limited measure of call centre performance
The Quality of Service factors in the Plan which related to the Letters business were severely affected by industrial action
Executwve Directors also participate in the ColleagueShare plan on the same terms as all other eligible employees This 1s explained im note 2 on
page 55
Long-Term Incentive Plans
A three-year LTIP was in place for the period 2007-08 to 2009-10
Perfarmance is measured by Return On Total Assets (ROTA)
The principles of the plan are as follows
(a) Company Performance Awards can be made each year which accrue on a sliding scale above a threshold level of performance beginning
at 125% of annuat base salary For on-target performance the Company Award 1s 25% of annual base salary and for exceptional
performance this rises ta a maximum of 375%
(b) Bonus Awards A Bonus Award can be made each year by the Remuneration Committee These are only made if the Director warves a
Proportion of their annual bonus LTIP Bonus Awards do not exceed the amount of annual bonus waved A Director has the discretion to
waive a maximum of one half of any annual bonus up to the on-target level If a bonus above on-target would otherwise be payable then
three quarters of this additional amount above the on-target level will be compulsorily waved
() AMultplying factor Company and Bonus Awards may be increased by a factor that measures ROTA across the plan If the on-target level
15 achieved for the relevant period then each of the Company Awards and Bonus Awards to which it applies are increased by an additional
‘one third In the case of exceptional performance then up to a maximum addition of 100% 1s added
Payments under the pian will be made in June 2010
2010 to 2013
Discussions continue with the shareholder regarding a future long term incentive plan
LTIP Awards for 2009-10
Company Performance Awards
These are measured against an annual Return on Total Assets (ROTA) target ROTA mcentivises the productive value of the business and
emphasises the need to make efficient use of all operational assets ROTA was chosen as it covers the need to make a proper return both on
any new investments that are made and on the existing asset base
For 2009-10 the following table against annual ROTA applied
Royal Mail ROTA achievement Percentage of Base Salary
Threshold 8 2% 125%
On-Target 86% 250%
Maximum 11 0% 375%
The autturn achievement was 11 3% resulting ina Company Award of 37 5%
40
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Royal Mail Holdings plc
Directors’ Remuneration Report (continued)
Bonus Awards
As described above a Director may waive a maximum of one half of any annual bonus up to the on-target level and must waive three quarters.
of any bonus earned above the on-target level If a proportion of annual bonus 1s waived then a Bonus Award may be made within the LTIP
not exceeding that value The table on page 42 shows the value of bonus waivers and Bonus Awards made for 2009-10
Mutuplying Factor
The Multiplying Factor is dependent upon cumulatwe ROTA over 2007-08 to 2009-10
Royal Mail ROTA achievement Muttiplier
Threshold 17 4% 1
On-Target 194% 133
Maximum 30 0% 2
‘As 2009-10 was the final year of the plan the Multiplying Factor was calculated Over the three years the cumnutatwe ROTA was 261%
resulting in a Multiplying Factor of 176
Benefits
Benefits include the provision of a company car, health insurance, relocation costs or the cash equivalent of any benefits not taken
Pensions
The Group has a liability to pay pensions in respect of Directors services and for some executive Directors makes contributions to pension
schemes for thts purpose The Company pays a cash supplement to Directors whose contributions to the Company scheme are restricted by
the scheme-specific earnings cap The Company continues to apply the scheme-specific earnings cap indexed by inflation each year, as a
constraint on the amount of salary that 1s pensionable through the Company scherne
Following a review of its pension arrangements the Company introduced changes for all employees including executive Directors with effect,
from 1 April 2008 These changes had two phases Fram 1 April 2008 the defined benefit pension plans closed to new members and pension
for future service accrues on a career salary basis From 1 Apn! 2010 the normal retirement age under the plans increased to age 65 and the
earliest age for receipt of a reduced pension became 55
Fixed and performance-related elements of Executive Directors’ remuneration (excluding pensions)
For 2009-10 33% of Directors potential annual earnings related to fixed elements whilst 67% related to annualised performance elements for
the Group Chief Executive 30% was fixed and 70% was variable The element of remuneration at risk to performance is that available through
the Long-Term Incentive Plan and the performance-related annual bonus
Service contracts
The Committees policy ts that executive Directors appointed to the Board are given notice periods of one year and that they must give six
months notice of departure The Committee has a defined policy an compensation and mitigation to be aplied in the event of a Directors
contract being prematurely terminated In such circumstances steps would be taken to ensure that poor performance ts not rewarded
The rolling service contracts and letters of appointment of the Directors include the following terms as at 28 March 2010
Date of contract _ Expiry date of current service contract Unexpired term (months)
Chairman
Donald Brydon 26 March 2009 25 March 2012 24
Executive Directors
‘Adam Crozier* 4 February 2003 -
Alan Cook* 4 March 2006 -
lan Duncan 1 September 2006 22
Mark Higson 5 November 2007 22
* Adam Crozier and Alan Cook both resigned from the Company with effect from 31 March 2010
4a
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Royal Mail Holdings plc
Directors’ Remuneration Report (continued)
‘The non-executive Directors do not have employment contracts The dates of the current non-executive Director appointments are as
follows
Date of contract Expiry date of current service contract. Unexpired term (months)
Non-executive Directors
Lord Cure 1 January 2009 34 December 2013 24
Richard Handover 1 January 2003 34 March 2021 12
Paul Murray 1 August 2009 31 July 2012 28
Les Owen 27 January 2010 26 January 2013 34 '
Baroness Prosser 1 November 2004 31 October 2010 7
Andrew Carr-Locke left the Board on 24 March 2010 Helen Weir left the Board on 31 July 2009
Richard Handover s contract was extended on 16 December 2009 until 31 March 2011
Non-executive Directors
‘The Company 1s committed for the remaining term of appointments subject to annual review and notice for non-executive Directors including
the Chairman The fees paid to the non-executive Directors are determined by the executive Directors and approved by the Secretary of State
Independent market surveys are consulted in determining them Fees comprise a basic fee for Board membership and as appropriate
additional fees for the membership or chairmanship of committees and for the Senior Independent Director Details of the fees are gwen
betow
Performance-related, annual bonuses outturn for 2009-10
The details of the bonus plan are given on pages 40 and 41 Despite economic conditions causing letters volumes to decine the Group
exceeded its targets lan Duncan Alan Cook and Mark Higson were awarded bonuses which were 71% 66% and 64% of the maximum
Tespectively By mutual agreement, Adam Crozier was not awarded any annual bonus for 2009-10 Mark Higson and lan Duncan were
awarded £400 ColleagueShare stakeholder dividend for the year
Company Awards and Bonus Awards under the Long Term Incentive Plans
The Remuneration Committee policy 1s that a high proportion of total remuneration is at risk to performance
Company Bonus Company
and Awards in Awards in
Bonus respect of respect of
Awards 2009-10 2009-10 Total
held at for for LTIP at
30 March 2007-10 2007-10 28 March
2009 plan plan 2010
£000 £000 £000 £000
Executive
Adam Crozier 706 - 237 1500
Alan Cook 253 8 1106 768
lan Duncan 283 9 122 888
Mark Higson 300 144 161 1012
The Final Multiplier reflecting performance over the three years from 2007-08 of 1 76 1s applied to the total of Company and Bonus Awards
to reach the Total LTIP value Further details are given on pages 40 and 41 In the case of Adam Crozer the total LTIP payment was capped
at £15m_ An additional element of the previous year's annual bonus (£70 000) which had heen deferred with the LTIP was repaid to Adam
Crozer without the application of a multiplier
Non-executive Oirectors
The fees of the Chairman and the non-executive Directors are agreed with the Secretary of State and are currently £200 000 per annum and
£35 000 per annum respectively
‘The annual fee for committee membership is £5 000, £10 000 for chairmanship and £12 500 in the case of the chairman of the Audit and
Risk Committee The annual fee for the Senior independent Director 1s £10 000
2
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Royal Mail Holdings plc
Directors’ Remuneration Report (continued)
Executive Directors’ outside appointments
The executive Directors may retain fees from their Directorships The annual rate payable as at 28 March 2010 to executive Directors in
respect of their non-executive Directorships are shown in the table below
2010 2009
Directorship £000 £000
‘Adam Crozier Debenhams plc 50 45
‘Alan Cook Fmancial Ombudsman Service 22 20
Department for Transport Board 20 20
Pensions
The Group previously affered its most senior people membership of the Royal Mail Senior Executive Pension Plan (the Pian) which 1s now
closed ta new members Details of the Plan are set out in note 25 to the financial statements The Plans a funded Inland Revenue-registered
defined benefit occupational pension scheme The Plan provides for a pension on a final salary basis for service up to 34 March 2008 and for
subsequent service on a career salary basis The pension 1s payable from normal retirement age (currently age 65) and 1s subject to the
maximum pensionable service and the scheme-specific earnings cap Pensions in payment are increased annually in line with Retail Prices
Index (RPI) subject in some cases to a cap of 5% Pensions are alsa 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 Plan is restricted by the earnings cap pension provision is made by a combination of the
Company scheme and a cash pension supplement or its equivalent lan Duncan and Adam Crozier recewe a cash supplement of 40% of base
ay above the earnings cap Alan Cook and Mark Higson are not members of the Plan and receive a cash supplement of 40% of base pay
The following table 1s designed to indicate the increase in the value of Directors accrued benefits during the period The transfer value 1s
calculated on the basis of actuarial advice in accordance with Actuariat Guidance Note GN11 and excludes Directors contributions
The pension entitlements of the Directors at the year end were
Increase in — Transfer value
Increase in accrued of increase
accrued benefits before
Accumulated benefits during the ~—inflation less
accrued benefit during the period (net of Ovrectors’
Age at at 28 March 2010 period inflation) contributions
Year end £000 £000 £000 £000
Executive Directors
‘Adam Crozier 46 82 4 4 52
lan Duncan 49 15 4 4 62
The following table 1s designed to assess the change in transfer values during the year taking into account movement in investment market
conditions Falls in market values may generate a negative movement in the transfer values
Transfer value
at 29 March 2009 ‘Transfer Movement in
or at date of Plus value the period
appointment to transfers-in at 28 March less Directors’
Age at Board if later recewed Sub total 2010 contributions
Year end £000 £000 £000 £000 £000
Executive Directors
Adam Crozier 46 963 “ 963 1192 222
lan Duncan 49 137 - 137 229 85
‘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 1s entitled to recene
Tony McCarthy a former Director is in receipt of an annual payment of £43 421 a year as an unfunded unapproved pension promise made to
him on recrustment
Marisa Cassoni a former Director had accumulated an unapproved pension fund of £779 390 to provide for pension on base salary above the
earnings cap At her request the accumulated fund was transferred to her on 4 December 2009
By Order of the Board
Jon Millidge
Company Secreta...
28 May 2010
43
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Royal Mail Holdings plc
Statement of Directors’ responsibilities in relation to the Group financial statements
The Directors are responsible for preparing the Directors Report and the financial statements in accordance with applicable law and
regulations Company law requires the Directors to prepare financial statements for each financial year Under that law the directors have
elected to prepare the Group financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the
European Union Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true
and fair view of the state of affairs of the Group and of the profit or loss of the Group for that period In preparing these financial statements,
the Directors are required to
* select suttable accounting policies and then apply them consistently
* make judgements and accounting estimates that are reasonable and prudent
* state whether the applicable IFRSs as adopted by the European Union have been followed subject to any maternal departures
disclosed and explained by the financial statements and
* prepare the financral statements on the gomg concern basis unless it is inappropriate to presume that the company will continue in
business
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Companys transactions and
disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements '
comply with the Companies Act 2006 and, as regards the Group financial statements Article 4 of the IAS Regulation They are also responsible
for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other
irregulantes
Osrectors’ responsibility statement pursuant to chapter 4 of the Ousclosure and Transparency Rules (OTR)
The Directors confirm that, to the best of each person s knowledge
* the financial statements which have been prepared in accordance with applicable United Kingdom law and International Financial
Reporting Standards as adopted by the European Union or in the case of the Companys financial statements UX GAAP give a true
and fair view of the assets \rabilities financial position and profit of the Company and of the loss of the Group taken as a whole and
the Operating and Financial Review contained in this report includes a fair review of the development and performance of the
business and the position of the Company and the Group taken as whole together with a description of the principal risks and
uncertainties that they face
Donald Brydon "Tan Duncan
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Royal Mail Holdings plc
Independent Auditor's Report to the members of Royal Mail Holdings plc
We have audited the Group financial statements of Royal Mail Holdings pic for the year ended 28 March 2010 which comprise the Consolidated
Income statement the Consolidated statement of comprehensive income the Consolidated statement of changes in equity the Consolidated
balance sheet the Consolidated statement of cash flows and the related notes 1 to 29 The financial reparting framework that has been
applied in their preparation 1s applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union
‘This report 1s made solely to the companys members as a body sn accordance with Chapter 3 of Part 16 of the Companies Act 2006 Our
audit work has been undertaken so that we might state to the Companys members those matters we are required to state to them in an
auditors report and for no other purpose To the fullest extent permitted by law we do not accept or assume responsibility to anyone other
than the Company and the Companys members as a body for our audit work for this report or for the opmions we have formed
Respective responsibilities of directors and auditors
As explained more fully m the Directors Responsibilities Statement set aut on page 44 the Directors are responsible for the preparation of the
Group financial statements and for being satisfied that they give a true and fair view Our responsiblity 1s to audit the Group financal
‘statements in accordance with applicable law and International Standards on Auditing (UK and Ireland) Those standards require us to comply
with the Auditing Practices Boards Ethical Standards for Auditors
Scope of the audit of the financiat statements
An audit involves obtaining evidence about the amounts and disctosures in the financial statements sufficient to give reasonable assurance that
the financial statements are free from material misstatement whether caused by fraud or error This includes an assessment of whether the
accounting policies are appropriate to the groups circumstances and have been consistently applied and adequately disclosed the
reasonabieness of significant accounting estimates made by the Directers and the averall presentation of the financial statements
Opinion on financial statements
In our opinion the group financial statements:
* give a true and fair view of the state of the group s affairs as at 28 March 2010 and of its loss for the year then ended
+ have been properly prepared in accordance with IFRSs as adopted by the European Union and
+ have been prepared in accordance with the requirements of the Companies Act 2006
Opinion on other matter prescribed by the Companies Act 2006
In our opinion the information given in the Directors Report for the financial year for which the Group financial statements are prepared 1s
consistent with the Group financial statements
Matters on which we are required to report by exception
We have nothing to repart in respect of the following matters where the Companies Act 2006 requires us to report to you if, sn our opinion
* certain disclosures of directors remuneration specified by law are nat made or
» we have not received all the information and explanations we require for our audit
Other matter
We have reported separately on the parent company financial statements of Royal Mail Holcings plc for the year ended 28 March 2010
Luks Yovey LLP
Alison Duncan {Senior statutory auditor)
for and on behalf of Ernst & Young LLP,
‘Statutory Auditor
London
28 May 2010
45
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Royal Mai! Holdings plc
Consolidated income statement for the year ended 28 March 2010 and 29 March 2009
2010 2009
Notes £m £m
Continuing operations
Tumover 9,199 9.410
Network Subsidy Payment 150 150
Revenue 9,349 9560
People costs excluding ColleagueShare and restructuring costs Ala) (5,746) (6012)
Distnibution and conveyance operating costs 5{b) (4,579) (1577)
Other operating costs 5(c) (2,661) (1.697)
Share of post tax profit from joint ventures and associates 14 4a 47
Operating profit before exceptional items 404 321
Operating exceptional items z (291) (449) :
Government grant mcome - 152
ColleagueShare costs (44) (84)
Other restructuring costs (247) (217)
Operating profit 113 172
Profit on disposal of property plant and equipment. 5 11
Profit before financing and taxation 118 183
Finance costs 8 (98) (56)
Finance income 8 47 36
_Net pensions interest 25(c) (329) (414)
(Loss)/profit before taxation (262) 49
Taxation charge 9 (58) (278)
Loss for the financial year from contmuing operations (320) (229)
(Loss\/profit attnbutable to
Equity holder of the parent company (323) (232)
Minanty interest 1 3
46
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Royal Mail Holdings plc
Consolidated statement of comprehensive income for the year ended 28 March 2010 and 29 March 2009
2010 2009
Notes. £m £m
Loss for the financial year from continung operations (320) (229)
Other comprehensive loss for the period (2,305) (4,186)
Translation differences on foreign currency net investments (2) 88
Actuarial losses on defined benefit schemes 25 (4312) (4.084)
{Loss)/gain on cash flow hedges deferred into equity 24 (12) 8
Loss/{gain)} on cash flow hedges released fram equity to income 24 2 49)
Gains on cash flow hedges reteased from equity to the carrying amount of non-financial assets 24 {4) {14}
Gains on financial assets deferred into equity 42 a7
Taxation on items taken directly to equity 9 (a9) 192)
Total comprehensive loss for the period (1,625) (4,415)
Total comprehensive (loss)/income for the period attnbutable to
Equity holder of the parent company (1,626) (4.418)
Minority interest a 3
a7
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Royal Mail Holdings plc
Consolidated statement of changes in equity for the year ended 28 March 2010 and 29 March 2009
Foreign Equity
Financial Currency holder
Share Retained Assets Translation Hedging Other ofthe Minonty) Total
premium earnings Reserve Reserve Reserve Reserves parent Interest} equity
£m £m £m £m £m £m £m £m £m
‘At 30 March 2009 430___ (5,331) 23 157 12 47__I (4.662) 6 I (4,656)
Loss for the period - Gan - - - - Gay a] (320)
Other comprehensive (loss¥income for
the period =__(1,316) 32 (2a) - - I (4.305) = I (2,305)
Translation differences on foreign
currency net investments - - - (iy - a - (2i)
Actuaral losses on defined benefit
schemes - (2312) - - - - I 3a =I (3a)
Loss on cash flow hedges deferred into
equity - - - - (a2) - a2 - (12)
Loss on cash flow hedges released from
equity to income a = . . 21 . 2 ~ 21
Gains on cash flow hedges released from
equity to the carrying amount af non-
financial assets - - - - 4) - (4) Fl (4)
Gams on finanoal assets deferred into
equity - - 42 - - - a 42
‘Taxation on items taken directly to equity = (4) (10) = (5) = (49) a) (29)
At 28 March 2010 430 (6,968) 55 136 12 47 (6,288) 7 I (6,281)
Foreign Equity
Financial Rural Currency holder
Share Retaned Assets Network Trarslaton Hedging ther I of the MmontyI Tota!
premium eamungs Reserve Reserve Reserve ~— Reserve Reserves I parent interest I equity
£m £m £m fm £m £m £m £m £m im
At 31 March 2008 430 (863) 10 36 69 27 47 (244) 3 (241)
Loss for the period = (232) - - - - -I (232 3} 229)
‘Other comprehensive {lossV/income for
the period =__ (4272) FE : 88 (a5) - I (4186) = I (4186)
Translation differences on foreign
currency net investments - - - - 88 - - so 88
Actuarial losses on defined benefit
schemes - (4084) - : - - - I t0a4) — - I (084)
Gain on cash flow hedges deferred into
equity - - - - - 8 - a 8
Gain on cash flaw hedges released from
equity to meome 7 < : : - 9} - o - 9)
Gains on cash flow hedges released from
equity ta the carrying amount of non-
financial assets - - - : : a4) - a) - a4)
Gains on financial assets deferred into
equity - - 7 - - - - yw v7
‘Taxation on items taken directly to equity = (188) (4) - - : -I 92) - I (492)
Transfer from Rural Network reserve - 36 - (36) - : - _ -
‘At 29 March 2009 430 (5331) 23 - 157 12 47 I 662) 6 I (6656)
‘A description of the nature and usage of the reserves in the above tables 1s included in note 26
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Royal Mail Holdings plc
Consolidated balance sheet at 28 March 2010 and 29 March 2009
2010 2009
Notes £m £m
Non-current assets
Property plant and equipment 10 1,935 1.886
Leasehold land payment 11 4 4
Goodwill 12 197 206
Intangible assets 13 99 78
Investments m joint ventures and associates wu 147 141
Financial assets - pension escrow investments 2 1,189 1106
- investments 24 49 -
- derivates 24 3 22
Other receivables a 1
Deferred tax assets 3 95 154
3,719 3598
Non-current assets held for sale 15 5 3
Current assets
Inventories 16 38 32
Trade and other recewables 17 1,155 1155
Income tax recewable Pus 17
Financial assets - investments 24 a 7
- dervatives, 24 24 43 '
Cash and cash equivalents 19/24 937 1060
2,169 2314
Total assets 5,893 5915
Current tiabulitres
Trade and other payables a (2,076) (2231)
Financial liabilities - interest bearing loans and borrowings 19/24 (388) (234)
~ obligations under finance lease and hire purchase contracts 19/24 (64) (29)
= derivatives 19/24 (a7) (56)
Income tax payable (8) (13)
Prowsions 20 (130) (436)
(2,680) (2699)
Non-current abilities
Financial liabilities - interest bearing loans and borrowings 19/24 (2,138) (803)
« > obligations under finance tease and hire purchase contracts 19/24 (120) (81)
- derivatives 19/24 (a) (5)
Provisions 20 (146) (174)
Retirement benefit obligation - pension deficit 25 {8,041) (6776)
Other payables. 22 (43) (32)
Deferred tax liabilities 9 (5) (a)
(9,494) (7872)
Total liabilities _ (22,174) {10 571)
Net abilities (6,284) (4.656)
Equity
Share capital 26 - -
Share premium 430 430
Retamed earnings (6,968) (5331)
Reserves 250 239
Equity attributable to equity holder of parent company (6,288) (4 662)
Minority interest. z 6
Total equity (6,281) (4.656)
The financial statemer
Donald Brydon
‘Yan Buncan
GRO
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Royal Mail Holdings plc
Consolidated statement of cash flows for the year ended 28 March 2010 and 29 March 2009
2010 2009
Notes £m £m
Cash flow fram operating activities
Operating profit before exceptional tems 406 32a
‘Adjustment for
Depreciation and amortisation 510 278 257
Share of post tax profit from jomt ventures and associates 14 (4a) 7)
Working capital and other non-cash movements (83) (80)
{Increase)/decrease in inventories (6) 2
Decrease in receivables 26 66
Decrease m payables (30) (61)
Increase m client receivables (14) (74)
Decrease in client payables (63) (50)
Net increase in derivative (assets)iabilities a 24
Increase m nan-exceptional provisions 13 13
Cash paid in respect of reurement benefit obligations in excess of that charged in operating profit (376) (345)
Receipt of Government grant - 182
Cash payments in respect of operating exceptional items (see note (a) below) (293) (412)
ColleagueShare (62) (158)
Other (211) (254)
Cash outflow fram operations (111) (154)
Income tax paid (16) (36)
Net cash outflow from operating activities _ (127) (190)
Cash flows from investing activities
Dividends received fram joint ventures and associates 14 35 42
Finance come recewed 47 38
Proceeds from sale of property plant and equipment 16 20
Purchase of property plant and equipment (374) (436)
Leasehold land payment - (4)
Acquisition of businesses 10 cy) (2)
Purchase of intangible assets (80) (78)
Payment of deferred consideration in respect of pnor years acquisitions ” (6)
Net purchase of financial assets investments (nan-current) (86) (19)
Net proceeds from financial assets investments (current) 6 14
Net cash outflow from investing activities (446) (434)
Net cash outflow before fimancing activities (573), (621)
Cash flows from fmancing activities
Finance costs paid (52) (62)
Payment of capital element of abligatians under finance tease contracts (22) (18)
Cash received on sale and leasebacks 73 75
‘New loans 454 301
Repayment of borrowings 2) (48)
Net cash inflow from financing actwities 468 248
Net decrease in cash and cash equivalents (125) (373)
Effect of exchange rates on cash and cash equivatents cl) 2B
Cash and cash equivalents at the beginning of the period 1,060 1420
Cash and cash equivalents at the end of the period 18/24 934 1060
The £934m cash and cash equivalents balance 1s net of a £3m overdrawn bank balance relating to the General Logistics Systems {GLS)
subsidiary This £3m is mcluded in the Financial liabilities - interest bearing loans and borrowings (current) batance of £388m in the
balance sheet
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Royal Mail Holdings plc
fa) Cash flows relating to operating exceptional items charged to the income statement in current and prior years
2010 2009
Net cash outflow relating to £m £m
Current year operating exceptional items. 8s 38
Prior years operating exceptional items 208 374
Total 293 412
The net cash outflow of £293m (2009 £412m) comprises £158m (2009 £217m) relating to cash utilised to settle exceptional provisions,
£75m (2009 £154m) relating to ColleagueShare dividends £11m (2009 £1m) relating to current year pension redundancy liabilities
£39m (2009 £31m) relating to prior year pension redundancy hablities £40m (2009 £9m) in respect of other casts which were recorded
The net cash outflows retating to the above were as follows Hl
within other payables
51
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Royal Mail Holdings plc
Notes to the Group financial statements
1 Authorisation of financial statements and statement of compliance with IFRSs
The Group s financial statements for the year ended 28 March 2020 were authorised for issue by the Board on xx May 2030 and the balance !
sheet was signed on the Boards behalf by Donald Brydon and lan Duncan
The Groups financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the
European Union and as they apply to the finanaal statements of the Group for the year ended 28 March 2010 The principal accounting
policies adopted by the Group are set out in note 2
2 Accounting pol
es
Basis of preparation and accounting
The Group comprises Royal Mait Haldings pic (the Company) - which 1s wholly owned by HM Government - and its subsidiaries The Company
1s incorporated in the United Kingdom under the Companies Act 2006 (the Act) and the financial statements are produced in accordance with
the Act and applicable IFRSs I
‘The Group financial statements are presented in sterling and all values are rounded to the nearest £m except where otherwise mdicated
Royal Mai! Group Ltd a wholly owned subsidiary of the Company may be exposed to the risk of being fined by its industry Regulator and of I
being required to pay compensation to certain customers as a result of falling to meet operational targets set by the Regulator in its licence In
this situation the amount of such fines and compensation will be determined by the Regulator after further representations from Royal Mail
Group Ltd and no further information will be disclosed on the grounds that st can be expected to prejudice the outcome of that process
Changes in accounting policy and disclosures.
The accounting palicies adopted are consistent with those of the previous financial year except as follows
The Group has adopied the following new and amended accounting standards as af 30 March 2009 The impact on the financial statements or
performance of the Group is also descnbed below
JERS 7 Financial Instruments disclosures
‘The amended standard requires additional disclosures about fair value measurements and liquidity risk Fair value measurements related to
tems recorded at fair value are to be disclosed by source of inputs using a three level fair value hierarchy by class for all financial instruments
recognised at fair value In addition a reconatation between the beginning and ending balance for level 3 fair value measurements 1s now
required as well as significant transfers between levels in the fatr value hierarchy The amendments also clarify the requirements for liquidity
nisk disclosures with respect to derwvative transactions and assets used for liquidity management The fair value measurement disclosures are
presented in note 24 The liquidity risk disclosures are not significantly impacted by the amendments and are presented in note 23
JFRS 8 Operating Segments
IFRS 8 replaced IAS 14 Segment Reporting upon its effective date The Group concluded that the operating segments determined in
accordance with IFRS 8 are the same as the business segments previously identified under IAS 14 IFRS 8 disclosures are shown in note 3
including the related revised comparative information
JAS 1 Presentation of Financial Statements
The revised standard separates owner and non-owner changes in equity The statement of changes in equity includes only details of
transactions with owners with non-owner changes in equity presented in a reconciliation af each component of equity In adcition the
standard introduces the statement of comprehensive income and the option to present all items of recognised income and expense either in
one single statement or in twa linked statements The Group has elected to present two statements
JAS 23 Borrowmng Costs
The revised IAS 23 requires capitalisatvon of borrowing costs that are directly attributable to the acquistion construction or production of a
qualifying asset. The Groups previous policy was to expense borrowing costs as they were incurred In accordance with the transitional
Provisions of the amended IAS 23 the Group has adopted the standard on a prospective basis Therefore borrowing costs are capitalised on
qualifying assets with a commencement date for construction or development on or after 30 March 2009 Details of the borrowing costs
capitalised during the period are disclosed in note 3
Adopted improvements to IFRSs
The Group has now adopted the following relevant amendments issued by the IASB in May 2008 These changes have no material effect on
the financial statements.
. JERS 7 Financial Instruments Discosure Removal of reference to total interest income as a component of finance cost.
. JAS 1 Presentation of Financial Statements Assets and liabilities classified as held for trading in accordance with IAS 39 Financial
dnstruments Recognition and Measurement are not automatically classified as current in the balance sheet
. JAS 8 Accounting Poles Change in Accountmg Estimates and Errors Clarification that only implementation guidance that is an
integral part of an IFRS 1s mandatory when selecting accounting policies
. JAS 10 Events after the Reporting Period Clarification that dividends declared after the end of the reporting period are not obligations,
. JAS 16 Property Plant and Equipment Replace the term “net selling price” with “fair value less costs to sell” Items of property plant
and equipment held for rental that are routmely sold in the ordinary course of business after rental are transferred to inventory when
rental ceases and they are held for sale
82
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2 Accounting policies (continued)
. JAS 18 Revenue Replacement of the term direct costs with transaction costs as defined by [AS 39 The IASB has also added guidance
to determine whether an entity is acting as a pnnapal or as an agent.
. JAS 19 Employee Benefits Revised the definition of past service costs return on plan assets and short-term and other long-term’
employee benefits Amendments to plans that result in a reduction in benefits related to future services are accounted for as
curtailment Deleted the reference to the recognition of contingent lrabilities to ensure consistency with IAS 37
. JAS 20 Accounting for Government Grants and Disclosures of Government Assistance Loans granted in future with no or law interest
rates will not be exempt from the requirement to impute interest The difference between the amount received and the discounted
amount 1s accounted for as government grant Also revised various terms used to be consistent with other FRSs
* AS 23 Borrowmg Costs The defirtton of borrowing costs 1s revised to consolidate the two types of items that are considered
components of borrowing costs into one the interest expense calculated using the effective interest rate method in accordance with
as 39
* AS 27 Consolidated and Separate Financal Statements When a parent entity accounts for a subsidiary at fair value in accordance with
IAS 39 m tts separate financial statements this treatment contmues when the subsidiary 1s subsequently classified as held for sale
* AS 28 Investment in Associates If an associate ts accounted for at fair value in accordance with IAS 39 only the requirement of IAS 28
to disclose the nature and extent of any significant restricuons on the ability of the associate to transfer funds to the entity in the form
of cash or repayment of loans applies
* (AS 31 Interest in Jont ventures fa jot venture 1s accounted for at fair value in accordance with AS 39 only the requirements of
JAS 31 to disclose the commutments of the venturer and the joint venture as well as summary financial information about the assets
liabilities income and expense will apply
. JAS 36 Impairment of Assets When discounted cash flows are used to estimate fair value tess costs to sell’ additional disclosure 1s
required about the discount rate, consistent with disclosures required when the discounted cash flows are used to estimate value in
use
. (AS 38 Intangible Assets Expenditure on advertising and promotional activities 1s recognised as an expense when the Group either has
the right to access the goods or has received the service
* JAS 39 Financial instruments Recognition and Measurement Changes in circumstances relating to derivatives are not reclassifications
and therefore may be either removed from or included in the fair value through profit and loss classification after initial recognition
Removed the reference in !AS 39 to a segment when determining whether an instrument qualifies as a hedge Require the use of the
Tevised effective interest rate when remeasuring a debt instrument on the cessation of fair value hedge accounting
Significant accounting judgements, estimates and assumptions
The preparation of the Groups consolidated financial statements requires management to make judgements estimates and assumptions that
affect the reported amaunts of assets and abilities at the reporting date However uncertainty about these assumptions and estimates could
result in outcomes that require a material adjustment to the carrying amount of the asset or liability affected in future periods
The key sources of uncertainty that have a significant risk of causing material adjustment to the carrying amounts of assets and habilities
within the next financial year relate to the measurement of the defined benefit pension obligations deferred tax and ColleagueShare plan costs
Defined benefit pension obligations
Measurement of the defined benefit obligations requires certain assumptions to be made including on life expectancy future changes in
salaries inflation and a sutable discount rate The size of these obligations and therefore the pension deficit 1s matenally sensitive to the
assumptions adopted The assumptions which have the mast significant impact on the measurement of the defined benefit obligations are the
real discount rate and the mortality rates A 01 percentage point change to the discount rate could change the abilities by approximately
£660m An additonal one year on the life expectancy could increase liabilives by approximately £900m The mayor assumptions and carrying
value of the obligations are disclosed in note 25
Deferred tax
Assessment of the deferred tax asset requires an estimation of future profitability Such estimation 1s inherently uncertain in a market subject
to various competitive pressures Shoutd estimates of future profitability change in future years the amount of deferred tax recognised will
also change accordingly The carrying values of the deferred tax assets and liabilities are included within note 9
ColteagueShare plan
The calculation of the ColleagueShare costs and liabilities 1s relrant on a number of judgements estimates and assumptions These include in
particular forecasts for the potential equity value of ColleagueShares, forecasts of jainers and leavers throughout the life of the plan and
judgements on when participants are likely to exercise their rights far the Company to redeem the ColleagueShares that they hold The
Magnitude of the costs involved 1s sensitive to these forecasts and assumptions The carrying values of the ColleagueShare liabilities are
included within notes 20 and 21
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2 Accounting policies (continued)
Funding
Royal Mail Group Ltd
Royal Mail Group Ltd continues to face considerable cash requirements with respect to its investment in modernisation and funding its pension
deficit at a time when the mails market has been opened up to full competition and there 1s ongoing volatility in mail volumes
On 23 March 2007 a funding package totalling £1 bn was completed with Government and for which State Ard clearance was received in
Apnt 2009 The £900m senior debt facility expires in March 2014 It has been assumed that another faciity will be negouated to be available
by this time The remaining £300m subordinated loan was fully drawn in March 2009 and wall not be repaid until the later of the unconditional
release of the monies held in escrow for the Royal Mail Pension Plan Trustee (the Trustee) or 19 March 2016
In making an assessment on Royal Mail Group Ltds ability to continue as a going concern the Directors have
* assumed the successful execution of the modernisation plan, which ts reflected in detailed plans and supported by financial forecasts
‘+ assumed that an affordable payment profile will be agreed with the Trustee The 2009 scheme valuation, together with agreement of the
revised schedule of payments 15 due to be completed by 30 June 2010 The pension deficit has mcreased since 2006 and repayment of
the deficit 1s now likely to need to extend beyond the 13 years remaining of the 17 year repayment profile agreed in 2007 {i 1s assumed
that the pension escrow established in 2007 will continue to be required and
* considered the ongoing volatility m the mails market along with the risk of greater market decline than forecast which creates
uncertainties around the financial projections and, consequently the funding and headroom requirements of Royal Mail Group Ltd
Current cash forecasts indicate cash funding headroom will need to be carefully monitored over the next few years and in the absence of
any modest increase in property values over the next few years there is a potential breach of the Loan to Value covenant on the Group
semior debt faciity at March 2012 The Directors have identified a portfolio of operational acons and strategic options including potential
asset disposals that will be taken to reduce the loan requirements and enable the covenant to be met or provide additional funding to
mitigate any headroom exposures In addition the Directors have informed Government that they may seek to negotiate a change to the
covenants Any changes agreed wall be on a commercial basis
On the basis of careful consideration of the cash flow projections and the above considerations the Directors have concluded that it 1s
appropriate that the financial statements have been prepared on a going concern basts
Post Office Limited
Post Office Limited had net liabilities as at 28 March 2040 but has operated at a profit before exceptional items during 2009-30 for the
second year running
To become viable in the longer-term new business areas continue to be developed and grown in order to replace the lost contribution from
traditional mcome sources and significant cost reduction programmes continue to be implemented
uring the year Post Office Limited has continued with the implementation of a number of pragrammes which are designed to improve the
profitability of the company The branch closure programme is completed and no further closures are planned but further work on efficiency
improvements and improving the business model continues These programmes include
‘= the development of new business and drive for sales growth
bringing the crown branch segment into profit and
= a programme of fundamental cost reduction
The current plan 2006-2011 1s supported by a funding agreement with Government announced on 17 May 2007, which provided for
* £465m funding to compensate Post Office Limited for the other net costs of providing certain specified services of general economic
interest” £313m was received on 31 July 2007 £77m on 4 April 2008 and £75m on 15 April 2008
‘* funding of £150m per year to compensate for losses sustained in parts of the network. and
+ the extension on 48 April 2008 of the existing working capital facility of £1 15bn to 2011
State Aid approval has been received for the abave funding which runs to March 2012
On 24 March 2010 a further funding agreement was agreed that provides up to £180m for compensation for losses sustained in parts of the
network m 2011-12 as well as providing access to the working capitat facility to 31 March 2016 These arrangements remain subject to State
Aid approval
Whilst the Directors are satisfied with the progress that has been made it should be noted that Post Office Limited contmues to face a
challenging future Accordingly there will be a need to gain agreement and State Aid approval with respect to the continuation of the Network
‘Subsidy Payment for the period beyond March 2012
Notwithstanding these uncertainties the Directors recognise that significant progress has been made in delivering its plan for which funding is
mm place and after careful consideration continue to believe that Post Office Limited will be able to meet its trabilities as they fall due m the
foreseeable future Accordingly on that basis the Directors consider that it 1s appropriate that the finanaal statements have been prepared on
a going concer basis
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Royal Mail Holdings plc
2 Accounting policies (continued)
Basis of consolidation
The consolidated financial statements comprise the financial statements of the Company and its sudsidiary undertakings The financial
statements of the major subsidiaries are prepared for the same reporting year as the Company using consistent accounting policies
All mira-group balances and transactions including unrealised profits arising from intra-group transactions have been eltminated in full
Transfer prices between business segments are set on a basis of charges reached through a negotiation with the respective businesses,
Subsidiaries are consolidated from the date on which control 1s obtained by the Group and cease to be consolidated from the date on which
control 1s no longer held by the Group Where the Group ceases to hold control of a subsidiary the consolidated financial statements include
the results for the part of the reporting year during which the Group held control
Minonity interest represents the portion of profit/loss. gains/losses and net assets relating to subsidiaries that are not attnbutable to members
of the Company The minority mterest balance 15 presented within equity in the consolidated batance sheet. separately from parent
shareholders equity
Investments in joint ventures and associates
The Group's investments in its jot ventures and associates are accounted for under the equity method of accounting Under the equity ‘
method, the investment 1s carried in the balance sheet at cost plus post-acquisition changes in the Groups share of the net assets of the jont
ventures/assoctates less any tmpairment in value The mcome statement reflects the Groups share of post tax profits from the jot ventures/
associates
Any goodwill arising on acquisition of an associate representing the excess of the cost of the investment compared to the Groups share of the
net fair value of the identifiable assets ‘abilities and contngent liabilities acquired 1s cluded in the caring amount and not amartised To
the extent that the net fair value of the associates identifiable assets lrabilties and contingent ltabilites 1s greater than the cost of the
Investment a gain is recognised and added to the Groups share of the associates profit or loss in the period in which the investment is
acquired
Revenue
Revenue reported in the income statement comprises of Turnover and the Network Subsidy Payment Turnover principally relates to the
rendering of services as follows
Royal Mail Letters
‘Account revenue 1s derived from specific contracts and recognised when the mail delivery is complete Prepaid revenue mamly relating to
stamp and meter income is recognised when the sale is made adjusted to reflect a value of stamp and meter credits held but not used by the
customer
Parcelforce Worldwide
Account revenue 1s derived from specific contracts and recognised when the delivery of an item 1s complete
Post Office Lirmted
Revenue 1s recognised when retail and financial services are provided
General Logistics Systems
Revenue 1s derived from specific contracts and 1s recagnised at the te of delivery
The Network Subsidy Payment is Government grant revenue recognised to match the related costs of providing the network of public post
offices that the Secretary of State for Business Innovation and Skills considers appropriate and which would otherwise not be provided
Oistribution and conveyance
Distribution and conveyance costs relate to third party costs incurred in carrying mail These include conveyance by rail road sea and air
together with costs mcurred by international mail carners and Parcelforce Worldwide delivery operators These costs are disclosed separately
‘on the face of the income statement
Operating profit before exceptional items
Operating profit 1s the profit arising from the normal recurring operations of the business This incorporates revenue people costs distribution
‘and conveyance costs other operating costs and the Groups post tax share of profits from joint ventures and associates
Operating exceptional items
Operating exceptional items are maternal items of income and expenditure arising from the operations of the business which due to the nature
of the events ging rise to them require separate presentation on the face of the mcome statement to allow a better understanding of
financial performance in the year in comparison te prior years,
ColteagueShare plan
ColleagueShare 1s the name for the Groups phantom share plan The plan introduced in 2007-08 1s a five-year plan spanning the accounting
years from Apni 2007 to March 2012 and comprises both a phantom share scheme and a related stakeholder dividend worth up to £5 300
er person throughout the life of the plan The ColleagueShares represent up to a total of 14% of the projected equity value of the Group
Additionally Royal Mail plans to pay a stakeholder dividend dependent on the achievement of certam targets
The costs of the plan are included in the income statement as an exceptional item throughout the life of the plan and are mcluded within
payables or provisions as appropnate Any long-term liabiities arising in relation to the plan will be discounted at an appropriate high quality
corporate bond rate These discounts will be unwound through the mcome statement dung the life of the plan The Group will redeem all
ColleagueShares by 2012-13
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2 Accounting policies (contmued)
Operating profit
Operating profit 1s the profit arrsing from the normal recurring operations of the business and after charging operating exceptional items
defined above It excludes the non-operating exceptional rtems for profit or loss on disposal of businesses and profit or loss on disposal of
property plant and equipment. These items are not part af the normal recurring operations of the business but are material so are presented
separately on the face of the income statement to allow a better understanding of financial performance in the year in comparison to prior
years
Goodwill
Business combinations on or after 29 March 2004 are accounted for under /FRS 3 Busmess Combinations using the purchase method Any
excess of the cost of the business combination over the Groups interest in the net fair value of the identifiable assets liabilives and contingent
rabies at the date of acquisition 1s recognised in the balance sheet as goodwill and 's not amortised
After initial recognition goodwill 1s stated at cost less any accumulated impairment losses Goodwill arising from business combinations 1s
reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired I
An impairment loss 1s recognised in the income statement for the amount by which the carrying vatue of the asset (or cash generating unit)
exceeds its recoverable amount which 1s the higher of an assets net realisable value and its value in use For the purpose of such impairment
reviews goodwill 1s allocated to the relevant cash generaung units,
I
Royal Mail Holdings ple
I
I
Goodwill arising on the acquisition of equity accounted entities is included in the cost of those entuties and therefore not reported in the balance
sheet as goodwill
Intangible assets
Intangible assets acquired as part of a business combination are capitalised separately from goodwill if the fair value can be measured reliably
on mal recognition intangible assets acquired separately or development costs that meet the criteria to be capitalised are initially recognised
at cost and are assessed to have either a finite or indefinite useful Ife Those with a finite life are amortised aver their useful life and those with
an indefinite life are reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the carrying
value may be impaired An impairment loss 1s recognised im the income statement for the amount by which the carrying value of the asset
exceeds its recaverable amount which is the higher of an assets net realisable value and its value in use
Amortisation of intangible assets with finite lives is charged annually to the mcome statement cn a straight-line basis The useful lives of such
intangible assets are in the range of 1 - 6 years
Research and development
Expenditure on research 1s written off in the year it 1s incurred Development costs are capitalised where they meet the cnteria required under
IFRSs If these criteria are not met, then the costs are recognised in the income statement as they are incurred
Property, plant and equipment
Property plant and equipment 1s recognised at cost, including attributable costs in bringing the asset into working candition for its intended
use Depreciation of property, plant and equipment 1s provided on a straight-line basis by reference to net book value and to the remaining
Useful economic lives of assets and therr estmated residual values The useful lives and residual values are reviewed annually and adjustments
where applicable are made on a prospective basis The lives assigned to major categones of property plant and equipment are
__ asset lives
Land and buridings
Freehold land Not depreciated ,
Freehold busidings Up to 50 years
Leasehold buildings: The shorter of the period of the lease 50 years or the estimated remaining usefut life
Plant and machinery 3-15 years
Motor vehicles and trailers 1-12 years
Fixtures and equipment 2-15 years
An individual property that the Group has identified as surplus 1s reclassified within non-current assets held for sale a separate category on
the balance sheet when a sale ts highly probable This has been determined to be when authority to market the property has been approved
and the property is vacant and therefore available for immediate sale and occupation by a third party Such properties are expected to
generate economic cash flow primarily by sale of the asset rather than by operational activities and are expected generally to be disposed of
within a year
For a disposal group of properties or other assets and liabilities the requirements of /FRS 5 Non-current assets held for sale and discontinued
operations are applied to the specific circumstances of the disposal group
Impairment reviews:
Unless otherwise disclosed in these accounting policies assets are reviewed for impairment if events or changes in circurnstances indicate that
the carrying value may be impaired The Group assesses at each reporting date whether such indications exst Where appropriate an
impairment loss Is recognised in the income statement for the amount by which the carrying value of the asset (or cash generating unit)
exceeds its recoverable amount, which 1s the higher of an asset s net realisable value and its value in use
Leases
Finance leases, where substantlly all the risks and rewards incidental to ownership of the leased item have passed to the Group, are
capitalised at the mception of the lease with a corresponding liability recognised for the fair value of the leased item ar if lower at the present
value of the minimum lease payments Lease payments are apportioned between the finance charges and capital element of the lease liability
to achieve a constant rate of mterest on the remaming balance of the liability Capttalised leased assets are depreciated over the shorter of the
estimated useful life of the asset and the lease term
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2 Accounting policies (continued)
Leases where substantially all the risks and rewards of ownership of the asset are retained by the lessor are classified as operating leases and
rentals are charged to the income statement over the lease term The aggregate benefit of incentives are recognised as a reduction of rental
expense over the lease term on a straight-line basis
A leasehold land payment 1s an upfront payment to acquire a fong-term leasehold mterest in land This payment 1s stated at cost and 1s,
amortised on a straight-line basis aver the period of the lease
Inventories
Inventories are carried at the lower of cost and net realisable value after adjusting for obsolete or slow-mowng stock. Cost includes all casts in
bringing each item to its present location and condition and comprises weighted average cost for supplies and materials and purchase cost for
merchandise
Trade receivables
Trade receivables are recognised and carned at original mvoxe amount less an allowance for any non-collectable amounts An estimate for
doubtful debts 1s made when collection of the full amount 1s no longer probable Bad debts are written off when identified
Financial instruments.
Financial assets within the scope of /AS 39 Financial Instruments Recognition and Measurement are classified as financial assets at fair value
through the income statement (held for trading) held to matunty investments loans and recewvables or available for sale financial assets as
appropriate Financial abilities within the scope of IAS 39 are classified as either financial liabilities at fair value through the income statement
or financial tabilittes measured at amortised cost
The Group determines the classification of its financial instruments at initial recognition and re-evaluates this designation at each financial year
end When financial instruments are recognised initially they are measured at fair value bemg the transaction price plus in the case of
financial instruments not at fair value through the mcome statement any cirectly attributable transactional costs
‘The subsequent measurement of financial instruments depends on their classification as follows
Financial assets at fair value through the income statement (held for trading)
Financial assets are classified as held for trading if they are acquired for sale im the short term Derwatives are also classified as held for
trading unless they are designated as hedging instruments Assets are carried im the balance sheet at fair value with gains or losses recognised
In the income statement.
Held/-to-maturity vestments
Non-derivatwe financial assets with fixed or determinable payments and fixed maturity are classified as held to matunty when the Group has
the positive intention and ability to hold to maturity Held to maturity investments are carried at amortised cost using the effective interest rate
method Gains and losses are recognised in the income statement when the mvestments are derecognised or impaired as well as through the
amorusation process Investments intended to be held for an undefined period are not included in this classification
Loans and recewvables
Non-denvatwve financial assets with fixed or determinable payments that are not quoted on an active market do not qualify as trading assets
and have not been designated as either fair value through the income statement or available for sale Such assets are carned at amortised
cost using the effective interest rate method if the time value of money 1s significant Gains and losses are recognised in the mcome statement
when the loans and receivables are derecognised or impaired as well as through the amortisation process
Available for sale financial assets
Available for sale financial assets are non-derwative financial assets that are designated as such or are not classified in any of the three
Preceding categories After initial recognition interest 1s taken to the income statement using the effective :nterest rate method and the assets
are measured at fair value with gains or losses being recognised as a separate component of equity until the mvestment 1s derecognised or
until the investment 1s deemed to be impaired at which time the cumulative gain or lass previously reported in equity 1s mcluded in the income
statement
Financial habilites at fair value through the income statement (held for trading)
Denvatives liabilities are classified as held for trading unless they are designated as hedging instruments They are carned in the balance sheet
at fair value with gains or losses recognised in the income statement.
Financial habilities measured at amortsed cost
All non-denvative financial liabilities are classified as financial liabilities measured at amortised cost Non-derwvative financial habilities are
initially recognised at the fair value of the consideration received less directly attributable issue costs After initial recognition non-derivative
financial abilities are subsequently measured at amortised cost using the effective interest method Gams and losses are recognised in the
Income statement when the tiabilites are derecognised or impaired as well as through the amortisation process
Cash and cash equivatents
Cash and cash equivalents in the balance sheet compnse cash at bank and in hand and short-term deposits (cash equivalents) with an original
maturity date of three months or less in additron, the Group uses Money Market funds as a readily available source of cash which are bought
and sold on a daily basis to meet the cash requirements of the business These funds are also categonsed as cash equivalents
For the purpose of the statement of cash flows cash and cash equivalents consist of cash and cash equvalents as defined above net of bank
overdrafts
Cash equivalents are classified as loans and receivables financial instruments
st
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2 Accounting policies (continued)
Financiat assets = pension escrow investments
Financial assets - pension escrow investments comprise short term deposits with banks conventional git edged securities index-linked gilt
edged securities and Treasury bills
Short-term deposits with banks (pension escrow investments) are classified as loans and recewables financal instruments.
Conventional gilt edged securities index-linked gilt edged securities and Treasury bills are classified as available for sale financial instruments.
on the basis that they are quoted investments that are not held for trading and may be disposed of prior to maturity
Financial assets - other investments
Financia! assets - other investments comprise short-term deposits (other vestments) with Government, tocal government or banks with an
orginal maturity of three months or more Short-term deposits are classified as loans and receivables financal instruments
Financial liabilities ~ interest-bearing loans and borrowings
All loans and borrowings are classified as financial rabilities measured at amartised cost
Financial liabilities - obligations under finance lease and hire purchase contracts
All obligations under finance lease and hire purchase contracts are classified as financial liabilities measured at amartised cost
Borrowing costs
Borrowing costs are recognised as an expense when incurred unless they are directly attributable to the construction or development af a
qualifying asset, in which case they are capitalised using the weighted average cost of borrowing for the periad of construction/development.
Derivative financial instruments
The Group uses derivative mstruments such as foreign currency contracts in order ta manage the nsk profle of any underlying risk exposure of
the Group in line with the Groups treasury management policies Such derwative financial instruments are initially stated at farr value
For the purpose of hedge accountng hedges are classified as cash flow hedges where they hedge exposure to vanability in cash flows that 1s
either attributable to a particular nisk associated with a recognised asset or liability or a highly probable forecasted transaction
In relation to cash flow hedges to hedge the foreign exchange risk of firm commitments that meet the conditions for hedge accounting, the
Portion of the gain ar loss on the hedging instrument that 1s determined to relate to an effectwe hedge 1s recognised directly in equity and the
effective portron is recognised in the mcome statement
When the hedged firm commitment results in the recognition of a non-financial asset or non-financial lability then at the time the asset or
hhabilty 1s recognised the associated gains or losses that had previously been recognised in equity are mcluded in the mitial measurement of
the acquisition cost or ather carrying amount of the asset or liability For all other cash flow hedges the gains or losses that are recognised in
equity are transferred to the income statement in the same year in which the hedged firm commitment affects the net profit/loss for example
when the future sale actually occurs
For denvatives that do nat qualify for hedge accounting any gains ar losses arising from changes in fair value are taken directly to the income
‘statement in the period
Hedge accounting is discontinued when the hedging instrument expires or 1s sold terminated or exercised or no longer qualifies for hedge
accounting At that port any cumulative gain or loss on the hedging instrument recognised in equity is kept in equity until the forecast
transaction occurs If a hedged transaction 1s no longer expected ta occur the net cumulative gain or loss recognised in equity 1s transferred to i
the mcome statement for the year
Fair value measurement of financial mstruments I
The fair value of quoted investments (including conventional gilt edged secunties index-inked gilt edged securities and Treasury bills) 1s
determined by reference to bid prices at the close of business on the balance sheet date Hence the conventional gilt edged securities index- I
inked gilt edged secunties and Treasury bills are wathin Level 1 of the fair value hierarchy as defined within IFRS 7 I
Where there Is no actwe market fair value is determined using valuation techniques These include using recent arm's length market
transactions reference to the current market value of another instrument which is substantially the same and discounted cash flow analysis
and pricing models Specifically in the absence of quoted market prices derivatives are valued by using quoted forward prices for the
underlying commodity/currency and discounted using quoted interest rates (both as at the close of business on the balance sheet date) Hence
derivative assets and liabilities are within Level 2 of the fair value hierarchy as defined within (FRS 7
For the purposes of disclosing the fair value of nvestments held at amortised cost in the balance sheet in the absence of quoted market prices
fair values are calculated by discounting the future cash flows of the financial instrument using quoted equivalent interest rates as at close of
business on the balance sheet date
Derecogaition of financial instruments:
A financial asset or liability 1s derecognised when the contract that gives rise to it is settled, sold cancelled or expires
Income tax and deferred tax
The charge for current taxation ts based on the results for the year as adjusted for items that are non-assessable or disallowed it 1s calculated
using rates that have been enacted or substantively enacted at the balance sheet date
Deferred tax is provided using the lability method on all temporary differences at the balance sheet date, between the tax bases of assets and
jiabiuittes and their carrying amounts for financial reporting purposes
58
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2 Accounting policies (continued)
Deferred income tax liabilities are recognised for all taxable temporary differences except.
* initial recognition of goodwill
. ‘the iitial recognition of an asset or liability in a transaction that 1s not a business combination and at the time of the transaction
affects neither the accounting profit nor taxable profit or loss and
bal taxable temporary differences associated with investments in subsidianes associates and interest myoint ventures where the timing of
the reversal of the temporary differences can be controlled and it 1s probable that the temporary difference will not reverse in the
foreseeable future
Other than stated betow deferred tax assets are recognised for all deductible temporary differences. carry-forward of unused tax assets and
unused tax losses to the extent that it 1s probable that taxable profit will be available agamst which the deductible temporary differences
carry-forward of unused tax assets and unused tax losses can be utilsed Deferred tax assets are not recognised in respect of
* deductible temporary differences arising from the initial recognition of an asset or liability m a transaction that 1s not a business
‘combination and at the time of the transaction affects neither the accounting profit nor the taxable profit or loss and
. deductibte temporary differences associated with mvestments m subsidianes associates and interests in joint ventures except to the
extent that it 1s probable that the temporary differences will reverse in the fareseeable future and taxable profit will be available against
which the temporary difference will be utilised
The carrying amount of deferred tax assets ts reviewed at each balance sheet date and mcreased or reduced to the extent that sufficient.
taxable profit will be available to altaw all or part of the deferred tax asset to be utiised
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the tax asset is realised or the
liability 15 settled based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date Deferred tax
balances are not discounted .
Current and deferred tax 1s charged or credited directly to equity if it relates to items that are credited or charged directly to equity Otherwise
itis recognised im the income statement.
Provisions
Provisions are recognised when the Group has a present obligation (legal or constructve) as a result of a past event it 1s probable that an
outflow of resources will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation If the effect
of the time value of money is material provisions are determined by discounting the expected future cash flows at an appropriate pre-tax rate
Pensions and other post-retirement benefits
The pension plans assets for the defined benefit schemes are measured at fair value Liabilities are measured on an actuarial basis using the
projected unit credit method and discounted at a rate equivalent to the current rate of return on a high quality corporate bond of equivalent
currency and term The resulting defined benefit asset or lability 1s presented separately on the face of the balance sheet Full actuarial
valuations are carried out at mtervals not normally exceeding three years as determined by the Trustees and with appropriate updates and
accounting adjustments at each balance sheet date form the basis of the defict disclosed All members of defined benefit schemes are
contracted out of the earnings-related part of the State pension scheme
For defined benefit schemes the amounts charged to operating profit are the current service costs and any gamns and losses ansing from
settlements curtailments and past service costs The net difference between the interest costs and the expected return on plan assets 1s
Tecognised as net pensions interest m the imcome statement Actuarial gains and losses are recognised immediately m the statement of
comprehensive income Any deferred tax movement associated with the actuarial gains and losses 1s also recognised in the statement of
comprehensive income
For defined contribution schemes the Groups contributions are charged to operating profit within people costs in the period to which the
contributions relate Overseas subsidiaries make separate arrangements for the provision of pensions and other post-retirement benefits
Foreign currencies
The functional and presentational currency of Royal Mail Holdings plc 1s sterling (€) The functional currency of the overseas subsidiaries in
Europe ts mainly the euro (€)
The assets and liabilities of foreign operations are translated at the rate of exchange ruling at the balance sheet date The trading results of
foreign operations are translated at the average rates of exchange for the reporting pend, being a reasonable approximation to the actual
transaction rate The exchange differences ansing on the translation since the date of transition to IFRSs, are taken directly to the Foreign
Currency Translation Reserve in equity
Transactions in foreign currencies are snitially recorded in the functional currency by applying the spot exchange rate ruling at the date of the
transaction Monetary assets and liabilities denominated im foreign currencies are retransiated at the functional currency rate of exchange
ruling at the balance sheet date Currently hedge accounting is not claimed for any monetary assets and liabilities All differences are therefore
taken to the mcome statement except for differences on monetary assets and liabilities that form part of the Groups net investment in a
foreign operation These are taken directly to equity until the disposal of the net investment occurs at which time they are recognised in profit
oF loss
Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates
of the initial transactons Non-monetary items measured at fair value in foreign currency are translated using the exchange rates at the date
when the fair value is determined
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2 Accounting policies (continued)
Contingent Wrabilities and fmancial guarantee contracts
Financial guarantee contracts are initially measured at fair value and subsequently at the higher of amounts under /AS 37 Provsions
Contingent Labihives and Contingent Assets or the amounts mitialty recognised less when appropriate cumulative amortisation recognised in
accordance with /4S 18 Revenue
Contingent liabilities are not disclosed if the possibility of losses occurring 's considered to be remote
Government grants
Government grants of a revenue nature are credited to the mcome statement and are shawn separately to the expenditure to which they
relate
Government grants relaung to assets are recognised as deferred mcome that 1s amortised over the useful le of the relevant assets
‘Segment formation
‘The Groups operating segments are organised and managed separately according to the nature of the products and services provided with
each segment representing a business unit that offers different products and serves largely different markets There 's no aggregation of
operating segments The four operating segments are
Royal Mail Letters Delivers letters to all addresses in the United Kingdom and offers a number of products to both business and domestic
users The segment also includes certain functions eg HR {T and Finance which support the Group s UK operations
Parcelforce Worldwide The parcels business unit operating within the UK
Post Office Limited A limited company responsible for the network of Post Office branches offering a senes of retail services
General Logistics Systems (GLS) The European parcels business which via its subsidiaries and partners offers its services in 36 European
states
Other segments includes PostCap Guernsey Limited and iRed Partnership Limited both wholly owned subsidiaries Romec Limited and NDC
2000 Limited both part owned subsidiaries investments in the following associates - Quadrant Catenng Limited Camelot Group ple and
Cametot Global Services Limited, and the Group Property unit The Group Property unit includes Royal Mail Estates Limited a wholly owned
subsidiary The assets managed centrally by the Group Treasury function are also included wathin this segment
The operating segments comprise operations m both the UK and other parts of Europe the latter being relevant to the GLS business segment
The farmer includes the remaining three operating segments plus the Other segments
Segment revenues have been attributed to the respective countries based on the location of the customer
Transfer prices between the segments are set on a basis of charges reached through negotiation with the respective business units that form
part of the segments
There are no differences in the measurement of the respective segments profit/loss and assets and the consolidated financial staternents.
prepared under IFRS
Accounting standards and mterpretations not applied
The International Accounting Standards Board (IASB) has issued accounting standards relevant to the Group with an effective date far
accounting periods beginning after the commencement date of the period to which these financial statements relate The Group has considered
the impact of these below
International Accounting Standards (IFRSS/IAS) Effective date
IFRS 3 Business Combinations {revised January 2008) 1 July 2009
IAS 24 Related Party Disclosures {revised November 2009) 4 January 2011
IAS 27 Consolidated and Separate Financial Statements (revised January 2008) 1 July 2009
IFRS 3 Business Combinations
The Group has not early adopted the revised IFRS 3 and so will apply it prospectively to all business combinations on or after 29 March 2010
‘The key features of the revised IFRS 3 include a requirement for acquisition-related costs to be expensed and not included in the purchase
price and for contingent consideration to be recognised at fair value on the acquisition date (with subsequent changes recognised in the
imeome statement and not as a change to goodwill) The standard also changes the treatment of non-controlling interest (formerly minonty
interest) with an option to recognise these at full fair value as at the acquisition date and for previously held non-controlling interest to be fair
valued as at the date control 1s obtained with gains and losses recognised in the mcome statement. It s expected that the reviston to this
standard wall not have a material impact on the finanaaal position or performance of the Group
IAS 24 Related Party Disclosures
This revised standard provides an exemption from disclosure requirements for transactions between entities controlled jointly controlled or
significantly mfluenced by the same government and between such entities and the government itself unless they are individuatly or
collectively significant The standard also amends the definition of a related party to remove some inconsistencies This standard which will be
adopted with a commencement date of 28 March 2011 wall not have a maternal impact on the financial postion or performance of the Group
60
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2 Accounting policies (continued)
1AS 27 Consolidated and Separate Financial Statements
IAS 27 revised ss effective for annual periods heginning on or after 1 July 2009 with eartter application only permitted when the revised IFRS 3
's applied The revised standard applies retrospectively with some exceptions IAS 27 revised no longer restricts the allocation to minonty
interest of lasses incurred by a subsidiary to the amount of the non-cantrolling equity investment in the subsidiary A partial disposal of equity
interest in a subsidiary that does not result in a loss of control will be accounted for as an equity transaction and will have no impact on
goodwill nor will t gve rise to any gain or loss Where there is loss of control of a subsidiary any retained interest will have to be re-measured
to fair value which will impact the gain or loss recognised on disposat This standard will be adopted with a commencement date of 29 March
2010 and will have no matenal impact on the financial position or performance of the Group
The Directors do not anticipate that the adoption of these standards will have a material impact on the Groups primary financial statements
Certain of the above standards may require amendment to disclosures in the period of inital application
Improvements to IFRSs not yet adopted
tn May 2008 and April 2009 the IASB tssued amendments to its standards primarily with a view to removing inconsistencies and clarifying
warding There are separate transitional provisions for each standard The Group has adopted the relevant 2008 amendments as detailed on
page 52
‘The Group has not yet adopted the following relevant 2009 amendments which will be revewed to understand the possible impact on the
financial position or performance of the Group The improvements can be summarised as follows
. JERS 5 Non-Current Assets Held for Sale and Discontinued Operations When a subsidiary 1s held for sale, alt of its assets and liabilities
wilt be classified as held for sale under IFRS 5 even when the entity retains a non-contralling interest in the subsidiary after the sale
Disclosures required in respect of non-current assets disposal groups classified as held for sate or discontinued operations are only
those set out in IFRS 5.
* RS & Operating Segments Segment assets and liabilities need only be reported when those assets and liabilities are included in the
measures used by the chief operating decision maker
* (AS 17 Leases The specific guidance on classifying land as a lease has been removed so that only general guidance remains
+ 1AS 36 Impairment of Assets The largest unit permitted for allocating goodwill acquired in a busmess combiation 1s the operating
segment defined in IFRS 8 before aggregation for reporting purposes
© AS 38 Intangible Assets tf an intangible asset acquired mm a business combination 1s identifiable only with another mtangible asset, the
acquirer may recognise the group of intangibles as a single asset provided the individual assets have similar useful Ives The valuation
techniques presented for determining the fair value of intangible assets acquired in a business combination are only examples and are
not restrictive on the methods that can be used
6
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3 Segment information
Other
European
ahs UK operations operations :
Post General
Royal Mat Parcelforce Office Logistics = Elimmation
Letters Worldwide Limited Other Total Systems adjustment Total
£m £m fmm £m £m £m £m
External revenue 6,566 399 938 617,862 1.487 - 9349
Revenue between segments 5 3 343152593, - - 593
Total revenue 6,659 492 4,484 238.455 1,487 = 9,942
Operating profit before exceptional items. tat 17 2 82 © 292 142 = 606
Operating exceptional items - ColleagueShare (40) @ (3) = (6a) - - (44)
~ impairments - - 72) ) (78) - - (76)
- other (141) (a) (36) 7 (474) - : {171)
Profit on disposal of property plant and
equipment - - 3 2 5 - - 5
Interest expense (15) a (6) (106) (128) (a) 31? (98)
Interest revenue 28 - 1 be 73 5 (31? 47
Net pensions interest (286) (20) (23) - (329) < = (329)
(Loss)/profit before tax (333) (6) (es) 25 (378) 116 = (262)
* The Other segments external revenue comprises £45m {2009 £36m) retating to the provision of facilities management services by Romec
Limited £12m (2009 £10m) for print services provided by ‘Red Partnership Limited £1m {2009 £1m) for building engineering services
provided by NDC 2000 Limited and £3m (2009 £4m) from other miscellaneous business actwities
? The elimination adjustment (2009 £40m) relates to interest charged between segments
There 1s no single customer for which revenues from transactions amount to 10 per cent or more of the total revenues earned in the current
period or in the prior period
Other
29 March 2009 European
UK operations operations
Post General
Royal Mai Parcelforce Office Logisties —Etimmation
Letters Worldwide Limited Other Total «=—=sSystems ~—=—=aagjustment. Total
£m £m fm fm __&m £m fm £m
External revenue : 6707 399-908-518 065, 1495 - 9560
Revenue between segments 102 335315967 : _ 67
Total revenue 6809 4021261210 8682 1495 = 10177
Operating profit before exceptional tems 58 2 4186 197 324 - 32a
Operating exceptional tems. ~ Government
grant - - 482-82 - - 182
= ColleagueShare (72) 2 Qo = (84) - - (84)
~ umpanrments - . mo - an - - ™
+ other (32) - 9) (40) - - (140)
Profit on disposal of property piant and mt
equpment - - 8 3 a - : a
Interest expense aa) @ = 41) 66) (94) @ 40 (56)
Interest revenue 39 - 5 26 68 8 0) 36
Net pensions interest {99) @ (8) = (114) = : (414)
{Loss¥Vprofit before tax (200) : gee) 130 - 49
62
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3 Segment information (continued)
The foltowing amounts are included within operating profit before exceptional items
‘Other
European
28 March 2010 UK operations operations
Royal Post General
Mail Parcelforce Office Logistics
Letters Worldwide Limited Other Total Systems Total
£m £m fm —m___Em £m £m
Depreciation 187" 3 - 27 217 29 246
‘Amortisation 26 1 - - 25 7 32
Share of post tax profit from yomnt ventures
and associates 3 - 27 Fel rst - 4a
7 Royal Mail Letters depreciation includes £2m (2009 £3m) allocated from the Group Property business unit (part of Other segments) The
property plant and equipment assets to which the deprecation relates have not been allocated to Royal Mail Letters by Group Property i
Other I
29 March 2009 Europenn
UK operations operations
Rayal Post General
Mail Parcelforce Office Logistics
Letters Worldwide Limited Other =Total Systems Total
£m £m fm___&m £m £m £m
Depreciation 173 2 a 27-203 26 229
Amortisation 20 - - - 20 8 28
Share of post tax profit fram joint ventures and
associates 1 - 34 12 47 : 47
Other
28 March 2010 European
UK operations operations
Post General
Royal Mail Parcelforce Office Logistics
Letters Worldwide Limited Other -—‘Total Systems Total
£m £m fm fm ___ém £m £m
Segment assets 1,725 204 1156" 2,088? 5,070 823° 5,893
Non-current assets 1175 17 144 588 —-1,896 489 2,383
Other information
Investments in jomt ventures and
associates 9 - 102 377 - 167
Property, plant and equipment additions 242 6 58 16 (322 48 370°
Intangible assets additions 50 2 15 1 68 3 mm
Post Office Limited segment assets include
~ income tax receiwable of £13m (2009 £13m) for which the correspanding income does not form part of segment profitfloss and
= non-current assets held for sale’ of £1m (2009 £3m)
Other segments assets mclude £4m (2009 Enul) relating to non-current assets held for sale in the Group Property business unit
* GLS segment assets include £1m (2009 £4m)} income tax receivable for which the corresponding income does not form part of segment
Profit/toss
* Non-current assets which form part of total segment assets for this purpose exclude financial assets £1 241m (2009 £1 128m) and deferred
tax assets £95m (2009 £154m) Segment profitloss includes interest revenue earned from financial assets but does not include tax
income/expense and consequently the impact of deferred tax
Total capital additions mclude £0 2m (2009 Enil) borrowing costs capitalised m relation to specific qualifying assets
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3 Segment information (conunued)
Other
29 March 2009 European
UK operations operations
Post General
Royal Mail Parcelforce Office Logistics
Letters Worldwide Limited Other Total Systems Total
£m fim im £m £m £m, im
Segment assets 1641 100 1226 2120 5087 828 5915
Non-current assets, 1093 23 215 599-1820 496 2316
Other information
Investments in joint ventures and associates 6 - 103 32 ui ~ 14a
Property plant and equipment additions 334 6 38 27 405 52 457
Intangible assets additions 31 = 39 2 72 2 74
4 People information
(a) People costs excluding ColleagueShare and restructuring costs
2010 2009
£000 £000
Wages and salaries 4,439 4605
Pensions 462 496
Social security 300 317
Subpostmasters 480 510
Temporary resource 86 84
5,746 6012
(b) Headcount
The number of people employed calculated on a headcount basis were
Period end employees
Average employees
2010 2009 2010 2009
Royal Mail Letters 155,312 162310 157,893 164 435
Parcelforce Worldwide 4,436 4489 4,678 4531
Post Office Limited 8,209 8760 8,576 8899
Corporate and Group Property 545 597 536 565
UK wholly owned subsidiaries 168,500 176156 171,483 178 430
UK partially owned subsidiaries 4,237 4638 4499 4504
General Logistics Systerns 12,885 13.059 12,917 12871
Group total 185,602 193 653 188,599 195 805
The number of subpostmasters employed at the period end were
2010 2009
Total 8,448 8682
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4 People information (continued)
{c) Directors’ emoluments
2010 2009 :
£000 £000
Directors emoluments 3,035 3024
Amounts earned under Long-Term Incentive Plans 2,626 1136
Number of Directors accruing benefits under defined benefit schemes 2 2
The Directors Remuneration Report discloses full detais of Directors emoluments and can be found on pages 38 to 43
5 Operating costs
Operating profit before exceptional items 1s stated after charging
2010 2009
£m &m
(a)
Pensions charge (note 25) 46a 496
Cash 526 551
Non-cash (85) (55)
4b)
Distnbution and conveyance operating costs 4,579 1577
Operating lease charges on vehicles 30 37
Other distribution and conveyance 1549 1540
(ed
Depreciation and amortisation 278 257
Depreciation of owned property plant and equipment 210 206
Depreciation of property plant and equipment under finance lease and hire purchase contracts, 36 23
Total depreciation (note 10) 246 229
Amortisation of intangible assets (note 13) 32 28
Property facilities and maintenance costs 308 290
Computers and telephones costs 247 274
Consultancy marketing and legal fees 178 177
Operating lease charges on property plant and equipment (excluding vehicles) 220 203
Foreign currency exchange gams - 3
Regulatory body costs 16 44
Postcomm 11 9
Postwatch - 3
Consumer Focus 3 2
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6 Auditor's remuneration
2010 2009
£000 £000
Audit of statutory financial statements 597 712
Other fees to the auditor
Statutory audits for subsidiaries 1,427 1504
Other services supplied pursuant to such legislation 329 383
Taxation services 121 162
Corporate finance services - 63
Litgation sermices - 9
Other services 46 31
Total 2,520 2864
The Group paid an additonal £199 000 in 2010 m respect of the 2009 audit (£221 000 im 2009 in respect of the 2008 audit)
7 Operating exceptional items
The results for the year include a number of non-recurring or restructuring costs which fall outside of the Groups normal trading actinty
These are items which in managements judgement need to be disclosed by wirtue of their size or incidence in order to provide greater
vssibitty of the underlying results of the business which the Board believes to be a more meaningful indication of ongoing operational
performance An analysis of the exceptional items included within the income statement rs as follows
2010 2009
£m £m £m £m
Government grant income : 152
ColleagueShare - phantom share scheme 28 (14)
~ stakeholder diudend (72) (70)
fea) (84)
Other restructuring costs
Provision for restructuring (note 20) (378) (113)
Other exceptional tems 7 (27)
Impairment of property plant and equipment (nate 10) (58) (38)
Impairment of intangible assets (note 13) (48) (39)
—_ (247) (247)
Total operating exceptional items (291) (149)
‘There was no corresponding Government grant received by the Group during the year under the Industnat Development Act (IDA) 1982 (2009
£152m) The 2008-09 amount was used to compensate Post Office Limited for providing certain specfied “services of generat economic
interest”
The £28m release (2009 £14m charge} for the phantom share scheme (note 20) and £72m (2009 £70m) stakeholder dividend costs are the
estimated amounts relating to the Company ColleagueShare plan this year The Board has agreed to replace the third and final issue of
Notional shares with an additional stakeholder dividend the payment of which will be directly linked to the achievement of key modernisation
milestones im the future The stakeholder dividend earned will be paid to qualifying employees m 2010-11 whilst the costs of the phantom
share scheme are discounted and the shares are to be redeemed by the Group by 2012-13
The £178m (2009 £113m) restructuring charge 1s in respect of employee related redundancy costs of £167m (2009 £113m) resulting manly
from operational efficiency iitiatves in Royal Mail Letters and in Post Office Limited Other Group restructuring exceptional charges of £11m
(2009 £4m) were incurred during the year There were no material exceptional charges or releases relating to property this year {2009 £4m
write-back)
Impairments of £76m (2009 £77m) relate to Post Office Limited comprising £57m (2009 £38m) property plant and equipment and £15m
(2009 £39m) intangible assets and Red Partnership Limited {iRed) comprising £m (2009 fnil) property plant and equipment and £3m
(2009 Eni) intangible assets Que to ongaing losses the carrying values of asset purchases made by Post Office Limited and iRed during the
year have been impaired to their recoverable amount.
Other exceptional items include a £7m net credit (2009 £27m charge) comprising the release of an accrual for professional fees of £10m
(2009 £18m charge) in connection with Government funding, offset by a charge of £3m (2609 £9rn) for other restructuring items charged in
the current year
66
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Royal Mail Holdings plc
8 Net finance costs
The following analysis excludes net pensions interest
2010 2009
£m £m
Unwinding of discount relating to ColleagueShare scheme (9) (8)
Interest payable on financial liabilities carried at amortised cost, (89) (48)
Finance costs (98) (56)
Interest recerved on available for sale financial assets 42 47
Interest received on loans and receivables financial assets 5 19
Finance income 47 36
Net finance costs (excludmg net pensions interest) (54) (20)
The finance costs of £98m (2009 £56m) include £7m (2009 £5m) in respect of finance charges payable under finance lease and hire
purchase contracts
No gains/losses on available for sale financial assets were released from equity and recognised in the come statement for the year
9 Income tax
‘The major components of the income tax charge for the years ended 28 March 2010 and 29 March 2009 are
2010 2009
£m £m
‘Tax charged to the mcome statement
Current income tax
Current UK income tax (credit)/charge (24) 3
Foreign tax 31 35
Adjustments in respect of current income tax of previous years: (3) (2)
4 36
Deferred income tax
Relating to ongination and reversal of temporary differences 56 242
Income tax charge reported in the income statement, 58 278
Tax charged to equity
Income tax related to items charged or credited directly to equity
Deferred mcome tax charge related to actuarial movements in the pension deficit 4 209
Deferred income tax charge related to movernents :n hedging reserve 5 -
Current income tax relief for pension deficit recovery payment - (21)
Current mcome tax charge for fair value adjustments on financial assets mvestments 10 4
income tax charge reported in equity 19 192
Total taxation charge
Current income tax charge 16 19
Deferred income tax charge 63 451
Total income tax charge reported 7 470
er
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Royal Mail Holdings pic
9 Income tax (continued)
A reconciliation between the tax charges and the product of accounting (lossW/profit multiplied by the UK rate of Corporation Tax for the
years ended 28 March 2010 and 29 March 2009 ts as fallows
2020 2009
fm £m
(Loss/profit before taxation (262) 49
At UK standard rate of Corporation Tax of 28% (73) 14
Overseas current tax rates (2) @
‘Tax over-provided m prior years (3) (2)
Non-taxable income (6) (43)
Non-deductble expenses 16 16
Associates /joint ventures profit after tax charge mcluded in Group pre-tax profit (11) (a3)
Net increase in tax charge resulting from derecagnition of deferred tax assets 149 197
Effect of withdrawal of Industrial Buildings Allowances on deferred tax - 108
Profit from asset disposals eligible for relief (2) (3)
Other (10) 5
Tax charge in the income statement 58 278
Effectwe income tax rate = 567%
Deferred tax relates to the following Balance sheet Income statement
2010 2009 2010 2009
£m £m £m Em
Liabitities
Accelerated capital allowances (a) () 2 2
Goodwill qualifying for tax allowances (4) : (4) 2
Gross deferred tax liabilities (s) (a)
Assets
Deferred capital allowances 4 104 (103) 42
Provisions and other 30 36 (6) 10
Pensions temporary differences 2 8 (2) (253)
Losses available for offset against future taxable income 68 3 65 (38)
Hedging derivatsves temporary differences (6) - (a) .
Goodwill qualifying for tax allowances - 3 (3) (7)
Gross deferred tax assets 95 154
Net deferred tax asset 90 153
Consolidated income statement (54) (242)
‘The Group has unrecognised deferred tax assets of £2847m (2009 £2 373m), comprising £2 253m (2009 £1892m) retating to the
retirement benefit obligation £360m (2009 £228m) relating mainly to fixed asset timing differences, and £234m (2009 £253m) relating to
tax losses in subsidiaries that are available to offset against future taxable profits The Group has capital losses cared forward the tax
effect of which 1s £24m (2009 £22m) and temporary differences related to capital losses of £107m (2009 £108m) The Group has rolled
‘over capital gains of £73m (2009 £72m) no tax iabilty would be expected to crystallise should the assets into which the gains have been
rolled be sold at their residual value as st 1s anticipated that a capital toss would arise The adverse tax effect of the phased abolition of
Industrial Buildings Allowances resulted in a reduction of the Group's deferred tax asset by £108m in 2009 and was recorded within that
year $ come statement tax charge
‘The taxation of foreign profits rules were enacted in Finance Act 2009 Under the foreign profits rules a dividend exemption was introduced
which largely exempts dividends received on or after 1 July 2009 from UK corporation tax The Group has applied this legislation in arnwing
at its UK tax results for the accounting period ended 28 March 2010
‘At 28 March 2010 there was no recognised or unrecognised deferred income tax trability {2009 €ni) for taxes that would be payable on the
unremitted earnings of certain of the Groups subsidianes associates or joint ventures as the Group has no liability to additional taxation
should such amounts be remitted due to the availability of exemptions and other reliefs including the UK dividend exemption
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10 Property, plant and equipment
Land uildings.
Long ‘Short Plant and Motor = Fixtures and
Freehold leasehold leasehold machinery vehicles equipment Total
£m £m Em Em fm £m fm
Cost
‘At 30 March 2009 1669 263 549 1104 390 967 4922
Exchange movements (6) = - (5) (a) (3) (38)
Reclassification a2) 1 n (a) B (2) -
Additions 93 4 55 7 201 46 370
Acquisition of businesses 1 - - - - ; 4 :
Disposals 8) @ (14) ae) (43) (24) (206) :
Reclassification to non-current assets held for
sale {note 15) (48) 7 =) s = é (a8)
At 28 March 2040 1,719 267 601 1,143 460 966 5,154
Depreciation and impairment
‘At 30 March 2009 851 158 338 662 205 B42 3036
Exchange movements (2 - - (3) @ 2) 8)
Reclassification : - : (6) 6 - -
Depreciation (note 5) 52 7 35 63 57 32 266
Impairment (rote 7) i 2 28 1 5 14 58
Disposals ie) 4a) (aa) 415) b9) (23) (99)
Reclassification to non-current assets held for
sale (note 15) (24) - = = o = {14) j
‘At 28 March 2010 394 166 387 682 233 860 3,219 '
Net book value
‘At 28 March 2010 828 01 244 464 227 104 1,935
‘At 30 March 2009 818 105 241 462 185_ 105 1886.
Depreciation rates are disclosed within accounting policies (note 2) No depreciation 1s provided on freehold land which represents £205m (2009
£197m) af the total cost of properties The net boak value of the Groups property plant and equipment held under hire purchase contracts and
finance leases amounts to £176m (2009 £124m) comprising £157m vehicles (2009 £100m) £13m {2009 £17m) ptant and machmmery and £6m
(2009 £7m) land and buildings The net book value of the Groups property plant and equipment includes £397m (2009 £180m) in respect of
assets in the course of construction The net book value of the Groups land and buildings mcludes £409m (2009 £427m) in respect of building
fit-out
Land and buidings
Long ‘Short Plant and Motor Fixtures and
Freehold —_ leasehold leasehold ‘Machinery vehicles equipment Total
£m Em £m £m £m. £m, £m
Cost
‘At 32 March 2008 1538 263 530 928 322 888 4469
Exchange movements 30 3 - a 4 14 72
Reclassification 4 8) 9 4 - (9) -
Additions 108 8 18 163 94 66 457
Disposals (6) {) 8) (22) 30) (42) (69)
Reclassification to non-current assets held for
sale (note 15) (5) (2) = 2 2 = cd]
At 29 March 2009 1669 263 549 1204 390 947 4922
Depreciation and impairment
At 31 March 2008 780 156 308 580 161 a5 2798
Exchange movernents 9 1 : 43 3 10 36
Reclassification 12 (3) @) 3 - (9) a
Depreciation (note 5) 48 6 32 57 58 28 229
tenpairment (note 7) 10 1 9 - 8 20 38
Disposats 6) - 8) (a1) (25) (12) (1)
Reclassification to non-current assets held far I
sale (note 15) (3) (a) = 7 = E (4) I
At 29 March 2009 851 158 338 642, 205 842 3.036 I
Net book value i
At 29 March 2009 828 205 21 462 185 205 2886
‘At 31 March 2008 758 409 222 348 161 3 1674
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Royal Matt Holdings plc
11 Leasehold land payment
2010 2009
£m £m
Net book value
At 30 March 2009 and 31 March 2008 4 -
Additions - 4
Amortsation - od
Exchange movements. - =
At 28 March 2010 and 29 March 2009 4 4
12 Goodwitt
2010 2009
£m £m.
Cost
At 30 March 2009 and 31 March 2008 663 565
Exchange movements (27) %
Acquisitron of businesses : 2
At 28 March 2010 and 29 March 2009 636 663
Impairment
At 30 March 2009 and 31 March 2008 457 392
Exchange movements (18) 65
At 28 March 2010 and 29 March 2009 439 AST
Net book value
At 28 March 2010 and 29 March 2009 197 206,
At 30 March 2009 and 31 March 2008 206 173
The carrying value of goodwill arising on business combinations of £197m (2009 £206m) at the balance sheet date includes £195m {2009
£205m) relating to the General Logistics Systems (GLS) business segment In line with the accounting policy (see note 2} this goodwill has
been reviewed for impairment An impairment loss 1s recognised for the amount by which the carrying value of an asset or cash generating
unit exceeds the recoverable amount The recoverable amount 1 the higher of net realisable value and value in use The carrying value of
GLS excluding interest bearing and tax related assets and liabilities 1s £456m {2009 £471m) at year end and the operating profit before
exceptional items 1s £112m {2009 £124m) for the year (note 3) The carrying value represents a multiple of 41 (2009 38) on operating
profit before exceptional items The net realisable value of GLS for the purposes of the impairment renew (¢ the fair value less costs to
sell) has been assessed with reference to earnings multiples for quoted entities in a simvlar sector On this basis, the net realisable value of
GLS has been assessed to be in excess of the carrying value No reasonable possible change in the earnings multiples referenced would
reduce the net realisabte value to below the carrying value
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43 Intangible assets
2010 2009
Master Master
franchise Customer Software franchise Customer Software
licences listings licences. Total_—icences.«—=—sistings = icences. Total
£m £m Em___Em fm £m fm___&m
Cost
‘A¢30 March 2009 and 34 March 2008 5 28 285 308 2 21 183-226
‘Additions - - 1 7 - - 1% 7%
Disposals - - ao - - Qa
Acquisition of businesses : : 2 - - 2 - 2
Exchange movements (a) @ : (2) 3 5 = 8
At 28 March 2010 and 29 March 2009 24 27 325 376 25 28 255 308
Amortisation and impairment
‘At 30 March 2009 and 34 March 2008 22 19 189 230 18 1 230159
Impairment (note 7) - - 188 - - 3939
Amortisation 1 4 27 32 1 5 222«8
Disposals : - (el (a) - - Q
Exchange movernents (a (a) : (2) 3 3 = 6
‘At 28 March 2010 and 29 March 2009 22 22 233277 22 19 189 230
Net book value
At 28 March 2020 and 29 March 2009 2 5 299 3 9 66 78
At30 March 2009 and 31 March 2008, 3 9 66 78 4 10 S3 67
The intangible assets recognised in the Groups balance sheet none of which have been internally generated have finite lives and are being
wntten down on a straight-line basis over their remaining economuc lives as follows
Intangible asset Remaining economic life in years
Master franchise licences upto
Customer listings 1to03
Software 1106
The amortisation charge of £32m (2009 £28m) relating to mtangible assets 1s aggregated within other operating costs in the income
statement and disclosed in note 5 Details of the impairment is disclosed im note 7
n
Royal Mail Holdings pic
14 Investments in joint ventures and associates
Joint ventures
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Durng 2009-10 and 2008-09 the Groups only joint venture investment was a 50% interest in First Rate Exchange Services Holdings
Limited whose principal activity 1s the provision of Bureau de Change
Associates
Details of the Groups 2009-10 and 2008-09 associate investments are provided in note 28 The reporting dates for these investments 1s
31 March 2009 except for Quadrant Catering Limited (30 September 2009) and G3 Worldwide Mait NV (Spring) (31 December 2009)
Estimates of the profits of Quadrant Catering Limited and G3 Worldwide Mait NV (Spring) from their reporting date to 28 March 2010 {and
29 March 2009 for the prior year) have been included to ensure that the reported share of profits of associates aligns with the Groups
financial year There are no significant restrictions on the ability of associates to transfer funds to the Group in the form of cash dividends,
repayment of loans or advances
Qn 25 March 2010 Royal Mail agreed to sell its 20% shareholding in Camelot Group ple Completion of the transaction ts conditional upon
approval from Camelot’s regulator the National Lottery Commission
Share of post
At 30 tax pre At 28
March dividend March
2009 profit Reclassification Orden 2010
£m £m £m £m £m
Joint ventures
Share of net assets 71 32 - (29) %
Goodwill 1 : : : 1
Net investments 72 32 - (29) 75
Associates
Share of net assets 60 2 {2) {6) 61
Goodwill 9 : 2 - a2
Net investments 69 9 - (6) 72
Total net investments in joint ventures/associates. 141 44 - (35) 147
The reclassification above relates to the increased shareholding in G3 Worldwide Mail N V (Spnng)
Share of past
At 31 tax pre At 29
March diadend March
2008 profit Dividend 2009
£m £m £m £m
Joint ventures
Share of net assets 68 30 (27) 71
Goodwill 1 - - 1
Net investments. 6 30 (27) 72
Associates
Share of net assets 58 17 (a5) 60
Goodwill 9 - - 9
Net investments 67 17 (15) 69.
Total net invest ments in joint ventures/ associates 136 47 (42) 104
2
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Royal Mail Holdings plc I
14 Investments in joint ventures and associates (continued)
2010 2009
Jomt Joint
ventures Associates Totat ventures Associates Total
£m £m £m £m £m ém
Share of assets and liabilities,
Current assets 172 123 298 170 238 308
Non-current assets 3 53 56 3 54 54
Share of gross assets 175 17% 351 173 189 362
Current dabilities (103) (212) (233) (102) (127) (229)
Non-current habilities - (3) (3) = (2) (2)
Share of gross liabilities _ (101) (115)__(246) (102) (129) (231)
Share of net assets % 64 135 1 60 131
Share of revenue and profit
Revenue 7 1206 = 1,283 69 1455 1.226
Profit after tax 32 9 4a 30 17 47
15 Non-current assets held for sate
Land and building
assets
tong
Freehold leasehold Totat
£m £m £m
Net book amount
At 30 March 2009 2 a 3
Reclassification from property plant and equipment 4 - 4
Disposals (1) (a) (2)
At 28 March 2010 5 : 5
Land and building
assets
Long
Freehold —_—_leasehotd Total
£m £m £m
Net book amount
At 29 March 2008 1 - 1
Reclassification from property, plant and equipment 2 1 3
Disposals ) : a)
‘At 29 March 2009 2 1 3
‘The expected disposal of these property assets 1s as a result of the rationalisation of the Group portfolio
Non-current assets held for sale are shown in the relevant business segment in note 3
Dunng the year a gain of £2m (2009 £7m) was recognised in the mcome statement in relation to the disposal of assets held for sale
16 Inventories
2010 2009
£m £m
Supplies and materials (uniforms fuel printing and stationery mailbags engmneering spares) 30 26
Merchandise (retail lottery products and stamps) 8 6
Total 38 32
Dunng the year £1m (2009 £4m) of inventory items were written off Engineering spares items are included net of a provision for
impairment of £4m (2009 £5m) The cast of inventories recognised as an expense im the income statement ts £406m (2009 £106m)
73
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47 Current trade and other receivables
2010 2009
im Em
Trade recewvables 855 869
Prepayments and accrued income 151 151
1,006 10620
Chent recewables 149 135
Total 1,155 1155
Movements in the provision for bad and doubtful debts were as follows
2010 2009
£m £m
‘At 30 March 2009 and 31 March 2008 29 33
Foreign exchange rate adjustment - 3
Receivables provided for during the year 7 13
Release of provision a ao)
Utiisation of provision (i) (ao)
At 28 March 2010 and 29 March 2009. 32 29
The amount of trade recewables that were past due but not impaired are as follows
2010 2009
£m £m
Past due not more than one month 90 55
Past due more than one manth and not mare than two months 7 10 :
Past due more than two months 16 20
Total past due but not impaired a1. 85
Provided for or not yet overdue 776 813
Provision for bad and doubtful debts (32) (29)
Total trade receivables ass 869
18 Cash and cash equivalents
2010 2009
£m £m
‘Cash in the Post Office Limited network 708 720
Cash at bank and in hand 145 107,
Total cash at bank, in hand or in the Post Office Limited network 853 827
Cash equivalent investments Short-term deposits 84 233
Total cash and cash equivalents 937 1060
Cash and cash equivalents comprise amounts held physically in cash bank balances available on demand and deposits for three months or
less dependent on the immediate cash requirements of the Group Where interest 15 earned this is either at floating or short-term fixed
rates based upon bank deposit rates The fair value of cash and cash equivalent investments 15 not materially different from the carrying
value of £937m (2009 £1 060m)
The £937m total cash and cash equivalents does not include a £3m (2009 Enil) overdrawn bank balance relating to the General Logistics
Systems (GLS) subsidiary This £3m 1s included in the Fmancial tia
in the balance sheet
4
ities ~ interest beanng loans and borrowings (current) balance of £388m
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Royal Mail Holdings pic
19 Financial abilities
2010
Finance
Loans tease/hire
and purchase Derwative
borrowmgs contracts uabitities Total
£m £m £m £m
Amounts fallimg due in
‘One year or less or on demand (current) 388 61 a7 466
More than one year (non-current} 1,138 120 1 1,259
More than one year but nat more than two years - 45 1 46
More than two years but not more than five years 301 B - 374
More than five years 837 2 : 839
Total 1,526 1st 18 1,725
Included within the £388m loans and borrowings due within one year 1s an overdrawn bank balance of €3m (2009 Emil)
2009
Finance
Loans lease/hire
and purchase Denwvative
borrowings contracts liabitities Total
£m &m £m £m
‘Amounts falling due in
One year or tess or on demand (current) 234 29 56 319
More than one year (non-current) 803 81 5 389
Mare than one year but not more than two years 2 30 5 3”
‘More than two years but not more than five years 1 47 - 48
More than five years 800 4 : 804
Total 1037 110 61 1208 '
2010
Average
Average maturity
Loans Further interest rate date
and committed Total of toan of loan
borrowings facility facility drawn down drawn down
£m £m £m year
BIS loans to Royal Mat Group Ltd 4177 560 1,737 66 2018
BIS loans to Post Office Limited 343 307 1,150 08 2010
Committed facilties 1,520 1,367 2,887
Miscellaneous loans and borrowings in subsidiaries 6 : 6 22 2013
Total 1,526 1,367 2,893
2009
Average
Average maturity
Loans Further interest rate date
and commuted Total of loan of loan
borrowings faciity faality drawn down drawn down
fm Em £m % year
BIS loans to Royat Mail Group Ltd 800 900 1700 81 2020
GIS foans to Post Office Limited 232 928 1150 09 2009
Commited faciities 1032 1818 2850
Miscellaneous loans and borrowings in subsidianes 5 : 5 36 2014
Total 1037 1818 2.855
6
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Royal Mail Holdings plc
19 Financial abilities (continued)
The miscellaneous toans and borrowings in subsidiaries are either unsecured or securad on various assets (mainly property) of the overseas
subsidiaries The loans are repayable in variable and fixed amounts over their matunty periods
The obligations under finance leases and hire purchase contracts are either unsecured or secured on the leased assets These are repayable I
tm vanable and fixed amounts over their matunty periods The average interest rate is 5% (2009 6%) The average maturity date 1s within I
two to three years (2009 within two to three years)
The undrawn cammuitted faatities in respect of which all conditions precedent had been met at the balance sheet date expire as follows
2010 2009 I
£m £m
Expiring in one year or less - -
Expiring in more than one year but not more than two years 807 - !
Expiring in more than two years 560 1818 i
Total 1,367 1818 ‘
The following securttes apply to the Group s committed facilities :
2010 2009
en fm Secunity
Royal Mail Group Ltd senior 900 900 Fixed charges over Royal Mail Holdings pics shares in Royal Mail Group Ltd and Royal Mail Group
debt facility Ltd's shares m Royat Mail Estates Limited Floating charges aver atl assets of Royal Mail Holdings.
plc Royal Mail Group Ltd and Royal Mail Estates Limited
Royal Mail Group Ltd 337 300 None
shareholder toan facility
Royal Mail Group Ltd other «S00 S00 Fixed charges over any Royal Mail Group Ltd loans to General Logistics Systems BY any Royal
drawn down loans Mail Group Ltd loans to subsidianes of General Logistics Systems BV and Royal Mail Investments
Limited shares im General Logistics Systems 8 V Floating charge aver non-regulated assets of
Royal Mail Group Ltd
1,737 1700
Post Office Limited facility 1,450 1150 Floating charge over all assets of Post Office Limited and a negative pledge* over cash and near
cash items
Total 2887 2850
*The negative pledge Is an agreement not to grant security over these assets or to set up a vehicle that has the same effect
The Royal Mail Group Ltd shareholder loan increased by £37m (2009 Enil) as a result of accrued interest added to the loan balance
‘The Post Office Limited facility of £1 150m 1s currently restricted to funding the cash and near cash items held within the Post Office Limited
network
The BIS loans to Post Office Limited under the faciity are short dated on a programme of liquidity management and mature on average 1
day after the year end (2009 1 day) On maturity it 1s expected that further loans will be drawn down under this facility which expires m
2011
‘The security im place in the previous year was as disclosed above
The BIS loans to Royal Mail Group Ltd and Post Office Limited become repayable immediately on the occurrence of an event of default
under the loan agreements These events of default include non-payment, insolvency and breach of covenant relating to interest and total
Indebtedness It is not anticipated that the Company 1s at risk of breaching any of these obligations except as discussed in nate 2
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Royal Mail Holdings plc
20 Provistons for liabilities and charges
Restructuring Employee Costs Other Total
£m £m £m £m
‘At 29 March 2009 139 134 7 310
Ansing during the year
~ charged in operating exceptional items 181 7 - 218
~ charged in other operating costs - - 35 8
Reclassification (4) - 4 -
Unused amounts reversed (3) (65) (17) (85)
Utiised in the year (299) 7) (5) (211)
Discount rate adjustment = 9 - 9
At 28 March 2010 114 108 54 276
Disclosed as
Current at 28 March 2010 88 - 42 130
Non-current at 28 March 2010 26 108 12 146
214 108 54 276
Current at 29 March 2009 108 - 28 136
Non-current at 29 March 2009 34 134 9 174
139 134 x 310
Restructuring
The provision for restructuring principally comprises redundancy schemes of £97m (2009 £108m) The remainder relates to onerous property
and commercial contracts associated with restructunng projects
The timing of cash flows for such provisions 1s by its nature uncertain and dependent upon the outcome of retated events
Emptoyee Costs
Royal Mail operates a phantorn share scheme referred to as ColleagueShare This is a five-year scheme running to March 2012 The provision i
at 28 March of £108m (2009 £134m) represents the potential liability for the financial years up to 2011-12 and has been discounted to
recognise the long-term nature of the scheme
Other
Other provisions of £54m (2009 £37m) include expected liabilities arising from property exits m the normal course of busmess These
principally comprise onerous lease obligations and decommissioning costs Other amounts anse from estimated exposures resulting from legal
claims
All provision amounts are expected to be utlised in 2010-14 except for £143m (including CalleagueShare) expected to be utiised within 2 to
3 years £1m of onerous property contracts expected to be utilised within 3 to § years and a further £2m expected to be utilised over a period
greater than 5 years
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Royal Mail Holdings plc
21 Current trade and other payables
2010 2009
£m £m
Trade payables and accruals 1,179 1223
Advance customer payments 299 300
Social security _ 95 123
1,573 1646
Deferred consideration on business combinations. - 7
‘Chent payables: 313 376
Amounts due to pension schemes relating to redundancies 6 8
Interest 2 2
Capital payables: 108 ais
ColleagueShare accrua! % 77
Total 2,076 2231
The Group through Post Office Limited receives and disburses cash on behalf of Government agencies and other clients to customers
through its Post Office branch network Amounts owed to these parties are separately shown as client payables above The level of cash held
and the related payables can vary significantly at each balance sheet date
The change in the carrying value of the discounted element of the payable balance due to the passage of time 1s not material
Capital payables represent liabilities outstanding in retatvon to the acquisition of property plant and equipment and mtangible assets
22 Non-current other payables
2010 2009
ém £m
Lease mcentwes 22 8
Other payables a 18
Capital payables = 6
Total 43 32
23 Fmanciat risk management objectives and policies
The Groups principat financial instruments other than derivatives comprise short-term deposits money market liquidity mvestments
Government gilt edged securities loans finance leases and hie purchase contracts and cash The main purposes of these financial
instruments are to raise finance and manage the liquidity needs of the business operations The Group has various other financial
instruments such as trade recewvables and trade payables which arise directly from operations
‘The Group enters into derivative transactions principally commodity swaps and forward currency contracts The purpose is ta manage the
commodity and currency risks arising from the Groups operations
It is and has been throughout the year under review the Groups policy that no speculative trading in financial instruments shall be
undertaken
The mam nsks arising from the Group s financial instruments are interest rate risk liquidity risk foreign currency risk, commodity price and
credit risk The Board reviews and agrees policies for managing each of these risks and they are summansed below
interest rate risk
The Groups exposure to market risk for changes in interest rates relates to the Groups debt obligations and interest bearing financial
assets The BIS loans to Royal Mail Group Ltd of £1177m (2009 £800m) are at a fixed interest rate to maturity with an average maturity
date of 2018 (2009 - average date of 2020) The BIS loans to Post Office Limited of £343m (2009 £232m) are at short-dated fixed interest
rates with average maturity 1 day (2009 average 1 day) The total interest bearing financial assets of the group (excluding the non-current
investments} of £194m (2009 £336m) are at short-dated fixed or vanable interest rates with average maturity 3 days (2009 average 9
days) These short-dated financial mstruments are maturity managed to obtain the best value out of the interest yield curve
The Groups poltcy 1s to manage its net imterest expense using an appropnate mux of fixed and vanable rate financial instruments No
external hedging of interest rate risk ‘s undertaken
The following table demonstrates the sensitivity to reasonably possible changes in interest rates with all other variables held constant. of the
Group s profit before taxation and equity based upon the financial mstruments held at the balance sheet date
The effect from avarlable for sale (whether floating or fixed rate) financial assets rs calculated as the change in fair value at the balance sheet
date and impacts equity
78
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23 Financial risk management otyectives and policies (continued)
The effect from other floating rate financial instruments 's calculated as the balance of the instruments multiplied by the change in interest
Tates and impacts profit before taxation
There ts no effect on either profit before taxation or equity from other financial instruments.
2010 2009
Effect on Effect on
profit Profit
before Effect on before Effect on
taxation equity taxation equity
gains/(losses) gams/(losses) —_gains{losses} _gains/{losses)
£m £m £m £m
Effect of an increase in sterling mterest rates of 100 basis points (1%) (a) (149) 2 {142)
Effect of a decrease in sterling interest rates of 50 basis points (0 5%) a 0 () 86
Foreign currency risk
‘The Group 1s exposed to foreign currency risk due to trading with overseas postat operators for carrying UK mail abroad and delivering
foreign origin mail in the UK the balances held to operate the Bureau de Change services within Post Office Limited and various purchase
contracts denominated in foreign currency These risks are mitigated by hedging pragrammes managed by Group Treasury Where possible
exposures are netted internally and any remaining exposure is hedged using a combination of external spot and forward contracts Hedging
wall not normally be considered for exposures of tess than £1m and hedging ts normally canfined to 80% of the forecast exposure where
forecast cash flows are highly probable
The Groups obligation to settle with overseas postal operators 1s denominated in Special Drawing Rights (SORs) - a basket of currencies
comprising of US dollar (US$) Japanese yen sterling and euro Group Treasury operates a rolling 18-month hedge programme, which 1s
subsequently reviewed on a quarterly basis There has been no external SOR hedge i place throughout the financial year 2009-10
For the Bureau de Change business balances of major currency holdings are hedged aiong with minor currencies showing a closely
correlated movernent
The Group s obligations to settle conveyance charges in USS has been partially hedged (to April 2011)
The Group has three active hedge programmes covering obligations to settle euro invoices on automation projects
The Group does not hedge the translation exposure created by the net assets of its overseas subsidiaries However it does hedge the
transactional exposure created by inter-company loans with these subsidiaries
The following table demonstrates the sensitwity to reasonably possible changes in exchange rates with all other variables held constant of
the Groups profit before taxation and equity based upon the financial instruments held at the balance sheet date
‘The effect from financial instruments owned by GLS denominated in foreign currency and held at amortised cost in the balance sheet 1s
calculated as the balance of the instruments multiplied by the change in exchange rates and impacts equity
The effect from other financial struments denominated in foreign currency and held at amortised cost in the balance sheet 1s calculated as
the balance of the instruments multiplied by the change in exchange rates and impacts profit
The effect from denwative assets and liabilities 1s calculated as the change in fair value at the balance sheet date and impacts equity (for
derivatives within an effective hedging relationship) or profit before taxation (for ineffective hedges and derivatives not designated in hedging
relationships)
There Is no effect on either profit before taxation or equrty from other financial instruments
2010 2009
Effect on Effect on
profit profit
before Effect on before Effect on
taxation equity taxation equity
gainsfltosses) gains/(tosses) —_gains/{losses) gains/(losses)
£m £m £m &m
Effect of an increase in USS/sterling exchange rates of 20 cents 4 9) 2 (a2)
Effect of a decrease in USS/sterling exchange rates of 20 cents (5) 12 (2) 16
Effect of an increase mn sterling/euro exchange rates of 10 pence (5) 2 @) 16
Effect of a decrease in steriing/euro exchange rates of 10 pence 5 443) 3 (16)
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23 Financial risk management objectives and policies (continued)
Commodity price risk
The Group 1s exposed to fuel price risk ansing from operating one of the largest vehicle fleets in Europe which consumes over 120 million
litres of fuel per year and a jet fuel price risk arising from the purchasing of air freight services The Groups fuel risk management strategy
aims to reduce uncertainty created by the movements in the oil and foreign currency markets The strategy uses over-the-counter
derivative products (in bath USS commodity price and USS/sterling exchange rate) to manage these exposures
In addition the Group 1s exposed to the commodity price risk of purchasing electncity and gas The Groups risk management strategy ams
to reduce uncertainty created by the movements in the electricity and gas markets These exposures are managed by locking into fixed rate
price contracts with suppliers and using over-the-counter denvative products to manage these exposures
The following table demonsttates the sensitwity to reasonably possible changes in commodity prices with all other variables held conStant,
of the Group s profit before taxation and equity based upon the financial instruments held at the balance sheet date
The effect from derwative assets and liabilities 15 calculated as the change im farr value at the balance sheet date and impacts equity (for
derivatives within an effective hedging retationship) or profit before taxation (for meffective hedges and derivatives not designated in hedging
relationships)
There 1s no effect on either profit before taxation or equity from other financial instruments
2020 2009
Effect on Effect on
profit profit
before Effect on before Effect on
taxation equity taxation equity
gams/(tosses) —gamns/{losses) —gains/(losses) _gains/losses)
- £m £m £m £m
Effect of an mcrease in diesel fuel prices of 10 US cents per litre - Bee - 13
Effect of a decrease in diesel fuel prices of 10 US cents per htre - (14) - (13)
Effect of an increase in yet fuel prices of 10 US cents per litre 3 - 3 -
Effect of a decrease in jet fuel prices of 10 US cents per litre (3) - (3) -
Credit risk
Royal Mail operates a credit policy which provides a fair and equitable arrangement for all ts account customers The level of credit granted
Is based on a customers nsk profile assessed by an independent crecit referencing agent The credit policy 1s applied rigidly with the
Tegulated products area so as to ensure that Royal Mail 1s not i breach of compliance legislation Assessment of credit for the non-
regulated products is based an commercial factors which are commensurate with the Groups appetite for risk
Royal Mail has a dedicated credit management team which sets and monitors credit limits and takes corrective action as and when
appropnate Credit controls in place have limited the level of bad debt incurred to around 0 1% (2009 0 1%) of turnover
With respect to credit risk arising from other financial assets of the Group which comprise cash, cash equvalent investments available for
sale financial assets held to maturity financial assets held for trading financial assets loans and receivables financial assets and certain
derivative instruments the Group invests/trades only with high quality financial institutions The Groups exposure to credit risk arses from
Gefault of the counterparty with a maximum exposure equal to the carrying arnount of these instruments
There are no significant concentrations of credit risk within the Group
Liquidity risk
The Groups primary objective 15 to ensure that the Group has sufficient funds available to meet its financial obligations as they fall due This
1s achieved by aligning short-term investments and borrowing facilities with forecast cash flows Typical short-term mivestments include
money market funds tume deposits with approved counterparties UK Government gilts and Treasury bils Borrowing facilities are regularly
Teviewed to ensure continuity of funding
The unused facilities for Royal Mail Group Ltd of £560m expire im 2044 (2009 £900m expiring in 2014) The unused facility for Post Office
Limited of £807m expires in 2011 (2009 £918m expiring in 2011) Additionally the Group has £200m (2009 £200m) of uncommitted lines
of credit which are reviewed annually
Capital management
Royal Mail Holdings plc 1s a public limited company whose shares are not traded and the Group regards its capital as share capital share
premium retained earnings and debt provided by the UK Government The scle shareholder and the provider of the majonty of debt to the
Group 1s the UX Government. The management of capital 15 closely linked to the Groups relationship with its shareholder The Group
maintains ‘ts liquidity requirements by the management of its internal funds and by the drawing down of equity and debt from its
shareholder as well as drawing on limited external debt facilities The Groups debt to equity ratio 1s determined by its shareholder
Financial assets - pension escrow investments.
On 23 March 2007, Royal Mati Holdings plc and Royal Mail Group Ltd established £1bn of investments im escrow These investments are
held as secuntty to the Royal Mail Pension Plan in support of the 17 year deficit recovery period from March 2006 At 28 March 2010 Royal
Mail Holdings plc had £1 011m (2009 £940m) of mvestments in the pension escrow and Royal Mail Group Ltd had £178m (2009 £166m)
Charges over these assets have been registered Further details on the Royal Mail Pension Plan including the latest full actuarial valuation
are contamed in note 25
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24, Financial mstruments
Carrying amounts and fair values
Set out below is a summary by category of the carrying amounts of all the Groups financial struments Trade receivables payables
prepayments, accruals and client payables have been omitted from this analysis on the basis that carrying value 1s @ reasonable approumation
for fair value Pension scheme assets and liabilities are also excluded Fair values have been calculated using current market prices (forward
exchange rates/commodity prices) and discounted using appropriate discount rates There are no matenal differences between the fair value
(transacuon price) of all financial instruments at inttial recognition and the fair value calculated using these valuation techniques The fair value
of the BIS loans to Royal Mail Group Ltd (non-current) is £1197m at 28 March 2010 (2009 £875m) The fair value of Obligations under
finance teases and hire purchase contracts 1s £184m (2009 £116m) For all other financial mstruments fair value 1s equat to the carrying
amount
The tables below also set out the carrying amaunt of the currency of the Group s financial instruments
2010
Sterling uss euro Other =Total
Level Classification fm fm fm Em Em
Financial assets
Cash at bank im hand or in Post Office Limited network 700 16116 230853
Cash equivalent investments Bh - : = 84
- Money market funds Loans and receivables 38 - - - 38
= Short-term deposits - bank Loans and receivables 46 - - - 46
Cash and cash equivatents 784 a4 146 23 937
Financial assets - investments (current)
~ Short-term deposits - Government/local government Loans and recewvables a - - - 1
Financial assets ~ mvestments (non-current)
~ Bank deposits Loans and receivables - 49 - - 49
Financial assets ~ pension escrow investments (non-current) 1,189 S = = 1,189
~ Cash at bank 2 - - - 2
~ Treasury bills 1 Available for sale 269 - - - 269
~ Gilt edged securities (conventional) 1 Available for sate 137 - - - 137
~ Gilt edged securities (index linked) 1_Availabie for sale 781 - - - 781
Derivative assets - current 2 - 45 9 - 2%
= non-current 2 = 2 1 - 3
Totat financial assets 1,97 80-126 23 2,203
Financial habtlities
Financial abilities - loans and borrowings (current) (383) = (5) -___(388)
~ BIS loans to Royat Mail Group Ltd Amortised cost {40) = - : (40)
~ BIS loans to Post Office Limited Amortised cost {343) - - - (343)
~ Miscellaneous loans in subsidianes (current) Amortised cost. : : (5) = (5)
Obligations under finance leases and hire purchase contracts
(current) Amortised cost (60) - (a) 7 (61)
Financial labilities loans and borrowings (non-current) (2,137) : (a) = (1,138)
~ BIS loans to Royal Mail Group Ltd Amortised cost (1.137) - - - (1137)
= Miscellaneous loans in subsidiaries (non-current) Amortised cost = - (a) = (ay
Obligations under finance leases and hire purchase contracts
(non-current) Amortised cost (120) - - - (120)
Denvative liabilities - current 2 ) te) (3) - «@n
= non-current 2 cy - - - aw :
Total financial abilities (2,708) (7) (10) = __ (4,725)
Net total financial assets 266 73116 23478
81
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24 Financial instruments (continued)
There are no financial assets or tiabilties designated at fair value through the income statement on inital recognition
The criteria for codification of Level in the above table 1s described in the accounting policy Fair value measurement of financal
imstruments on page 58.
The financial assets - investments (non-current) - bank deposits of €49m (2009 Enil) are pledged as collateral to a counterparty bank which
has provided a letter of credit in support of a lease payable obligation
Derivative assets £24m current £3m non-current (2009 current £43m non-current £22m) and habilties £17m current £1m non-current
(2009 £56m current, £5m non-current) are valued at fair value Effectwe changes in the fair value of derwatwes which are part of a
designated cash flow hedge under IAS 39 are deferred into equity All other changes in derwative fair value are taken straight to the income
statement.
None of the financial assets listed above are either past due or considered to be impaired
‘The movements in pension escrow mvestments of £83m (2009 £36m) consists of £41m {2009 £19m) interest on the investments and
£42m (2009 £17m) movement in fair value deferred into the Financial Assets Reserve
2009
Sterling USS euro. <Other_~— ‘Total
Level Classification fm _&m Em £m £m
Financial assets
Cash at bank in hand or m Post Office Limited network 680 4 106 27 827
Cash equivalent investments 233 5 - = 233
- Money market funds Loans and recewvables 176 - - - 176
~ Short-term deposits ~ Gavernmenvlocal government Loans and receivables 7 - - - 7
- Short-term deposits ~ bank Loans and receivables 50 : - : 50
Cash and cash equivalents 913 14106 27__ 1060
Financial assets - mvestments (current) U - : - z
~ Short-term deposits - bank Loans and recewables 6 - - - 6
~ Short-term deposits - Government/local government Loans and recewables 1 - - - a
Financial assets ~ pension escrow investments (non-current) 1106 : = = 1106
~ Treasury bills 1 Available for sale 255 - - - 285
~ Gilt edged securities (conventsonal) 4 Available for sale 164 - - - 204
~ Gilt edged securities index linked) 1_ Available for sale 707 : - - 707
Derivative assets - current 2 : 32 14 - 43
= non-current 2 2 23 9 - 22
Total financial assets 2026 59 126 272238
Financial liabiitves
Financial abilities - loans and borrowings (current) (234) : : = (234)
~ BIS loans to Post Office Limited Amortised cost (232) - - - (232) i
~ Miscellaneous loans in subsidiaries (current) Amortised cost (2) : - - 2) ‘
Obtigations under finance leases and hire purchase contracts
(current) Amortised cost (28) - a) - (29)
Financial liabilities - loans and borrowings (non-current) {800) = @) -___ (803)
~ BIS toans to Royal Mail Group Lta Amortised cost (800) - - - (800)
- Miscellaneous loans m subsidiaries (non-current) Amortised cost : - (3) - (3)
Obligations under finance leases and hire purchase contracts
{non-current) Amartised cost (81) - - - (84)
Denwative abilities - current 2 [) (54) (a) = (56)
= non-current 2 s {5) * = (5)
Total financral abilities 348 59) (5) = (0 208)
Net total financial assets 882 = 424 271030
Royal Mail Holdings plc
24 Fimancial instruments (contmued)
Interest rate risk
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Interest on financial instruments classified as floating rate is repriced at mtervals of less than one year Interest on financial
instruments classified as fixed rate is fixed until the matunty of the instrument.
The table below sets out the carrying amount by maturity of the Groups financial instruments that are exposed to interest rate nsk
The pension escrow investments mature between 1 day and 46 years but have been disclosed as matunng in greater than 5 years as
the investments have been provided as secunty to the Royal Mail Pension Plan in support of the 17 year deficit recovery period from
March 2006 The floating rate BIS loans to Royal Mail Group Ltd mature in 2014 and interest rates on these loans are set for periods
between 7 days and 6 months as selected by the Group
Financial year ended 28 March 2010
Average
effective More
mterest Within 1-2 25 than
rate year years years Syears Total
% £m £m £m fm £m
Fured rate
Cash at bank 32 5 - - - 5
Financial assets - investments (current)
- Short-term deposits - Government/tocat
government 77 1 - - - 1
Financial assets ~ investments (non-current)
~ Bank deposits a1 - - 49 - 49
Financial assets - pension escrow investments (non-
current) '
~ Gilt edged securities (conventional) 48 - - - 1370137
BIS loans to Post Office Limited os (343) - 3 = (343)
BIS loans to Royal Mail Group Ltd 80 (40) 7 - (837) (877)
Obligations under finance lease and hire purchase
contracts 48 (61) (45) (73) (2) (281)
Miscellaneous loans in subsidiaries. 45 (a) = (a) : (2)
Total (439) (45) (25) (702) _ (4,244)
Floating rate
Cash at bank 04 101 - - - 101
Cash equwvatent investments
~ Money market funds 04 38 - - - 38
~ Short-term deposits - bank 08 46 - - - 46
Financial assets ~ penston escrow mvestments (non-
current)
~ Cash at bank 04 - - - 2 2
~ Treasury bills 04 - - - 269 269
~ Gilt edged securities (index Inked) 49 - - - 7810781
BIS toans to Royal Mail Group Ltd 23 - - (300) - (300)
Miscellaneous toans in subsidiaries as {4) = = S. {4)
Total 284 : (300) 1052 933
Non-interest bearing
Cash at bank in hand or n Post Office Limited network 767 - - - 147
Oerwative assets 26 E I - - 27
Derwative tablities (a7) (a) s : (18)
Total 56 2 = = 756
Net total financial assets/{labulities) 496 (43) (325) 350-478
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26 Financial instruments (continued)
Financial year ended 29 March 2009
Average
effective Within 1-2 2-5 More than
interest rate year years years Syears Total
* £m £m fm £m £m
Fixed rate
Cash at bank 76 7 - - - 7
Cash equivalent investments
~ Short-term deposits - Goverament/local I
government os ? - - - 7
Financial assets - investments (current)
~ Short-term deposits ~ bank 60 6 - - - 6
= Short-term deposits - Government/local
government 17 1 - - - 1
Financial assets - pension escrow vestments {non-
current)
~ Gilt edged securities (conventional) 48 - - - 144 144
BIS loans to Post Office Limited 09 (232) - 3 2 (232)
BIS loans to Royal Mail Group Ltd 81 - - - (800) (800)
Obligations under finance lease and hire purchase
contracts 57 (29) (30) (47) (4) (120)
Miscellaneous loans in subsidiaries 39 {2) (a) a = (3)
Totat (242) (34) {47) (660) (980)
Floating rate
'
Cash at bank 09 39 - - - 89 :
Cash equwalent investments :
= Money market funds 10 476 : - - 176
~ Short-term deposits - bank 08 50 - - - 50
Financial assets ~ pension escrow investments (non-
current)
~ Treasury bills 04 - - - 258 255
~ Gilt edged securities {index linked) 50 - - - 707 707
Miscellaneous loans in subsidianes 28 : (a) (4) = (2)
Total 35, @ ) 962___1275
Non-interest bearing
Cash at bank, in hand or in Post Office Limited network 731 - - - 731
Derwatwve assets 43 2 1 - 65
Denvative abilities (56) (5) = 7 {61)
Total 718 16 1 - 735
Net total finanaal assets/{liabilities) 79. (16) (47) 3021030
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24 Fmancial instruments (continued)
Contractual maturity analysts for gross financial liabilities
‘The table below sets out the gross {undiscounted) contractual cash flows of the Groups financaa liabilities For overdrafts loans and finance
leases/hire purchase contracts these cash flows represent the undiscounted total amounts payable inctuding interest. For derivatives which are
‘settled gross these cash flows represent the undiscounted gross payment due and do not reflect the accompanying inflow For dervatives
which are settled net these cash flows represent the undiscounted forecast outflow
_ 2010
Gross Gross finance Gross Gross
loans and ——_lease/ture payments on. payments on
borrowings purchase denvatives derivatives
commitments imstatments Sub-total settled gross settled net Total
£m £m £m £m £m £m
Amounts falling due in
One year or less or on demand (current) 426 68 492 345 10 847
More than ane year (nan-current) 1,860 429 3,989 3 11993
More than one year but not more than two years 38 49 87 3 1 1
More than two years but not more than five years 416 1% 492 - - 492
More than five years 1406 4 1410 - = 1410
Total 2,284 197 2,484 348 412,840
2009
Gross Gross finance Gross Gross
toans and lease/hire payments on payments on
borrowings. purchase denvatives —_ denvatives
commitments instalments Sub-total settled gross. settlednet_~— Total
£m £m £m £m £m £m
‘Amounts falling due im
One year or less or on demand (current) 264 33 297 225 55 577
More than one year (non-current) 1555 cr 1646 46 5 1697
More than one year but not more than two years 34 36 65 43 5 113
More than two years but not more than five years 89 50 139 3 - 142
More than five years. 1435 7 1442 = = 1442
Total 1819 124 1943 271 602274
Hedging Activities
The Group had the following designated cash flow hedge programmes during the current and previous financial year
1) The diesel fuet hedge programme uses forward commodity price swaps and forward currency purchase contracts to hedge the exposure
arising from commodity price and USS/sterling exchange rates for forecast diesel fuel purchases
u) The air conveyance hedge programme uses USS and euro forward currency purchase contracts to hedge the exposure ansing from
USSjsterling and sterling/eura exchange rates for forecast air conveyance purchases
tw) Four capital programmes using euro forward currency purchase contracts to hedge the exposure ansing from sterlmg/euro exchange rates
for contracted capital expenditure on automation projects
'v) The electricity hedge programme uses forward commodity price swaps to hedge the exposure arising from electricity prices
v) The gas hedge programme uses forward commadity price swaps to hedge the exposure arising from gas prices
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24 Financial instruments (continued)
The following tabte shows the movements on the hedging reserve for each of these hedge programmes
Gams released from equity to
the carrying value of non-
Gains/(losses) deferred into (Gams)/losses released from financial
equity during year equity to income during year assets during year
£m £m £m
2010
Diesel fuel ‘ 3 21 a
Air conveyance (2) (4) °
Capital programmes @) - (4)
Electricity (6) 4 -
Gas (4) = :
Total (42) 24 (4)
2009
Diesel fuel (49) 7) -
Air conveyance 10 (2) .
Capital programmes 19 - (14)
Electricity {2) : =
Total 8 {9) (14)
The £24m tosses released from equity to mcome during year (2009 gans of 9m) are mcluded within the distnbution and conveyance
operating costs in the income statement
‘There 1s no matenal ineffectiveness recognised in the come statement relating to cash flow hedges
For all the above cash flow hedge programmes the underlying cash flows beng hedged are expected to occur at the same dates as the
hedge instruments (denvatives) mature For the non-capital programmes {diesel electricity and air conveyance) the profit or loss will be
taken on maturity For capital programmes the impact on the income statement will be through the depreciation charge over the life of
the asset being hedged
The following table shows the derwatives outstanding at the year end
Derwative envative —Derwative Derwative
Average asset asset Liability Liability
contracted non-current current. non-current. current
Commodity/ Nominal commodity pnee/ fair value —_faur value fair value fair value
currency amount Maturity date exchange rate £m £m Em £m
2010
Diesel fuel Diesel fuel 142k tonnes Apr10-Jan 12 US$703/tonne 2 2 - (2)
Diesel fuel US$ $99m ‘Apr 10 ~ Jan 12 ussa 75/£ 2 8 - -
Ar conveyance US$ $18m ‘Apr 10 - Apr 11 uss3 96/£ - 3 - -
Capital programmes eure €82m ‘Apr 10 - Apr a4 £0 BO/E a 8 - -
Electrcity Electricity 448kMWH Apr 10 ~ Feb 12 ‘£47/MWH - - @ (4)
Gas Gas 20mtherms May10-Jan32____£0 $5/therm. : - - a)
Cash Flow hedges 3 a @ or
Other derivauves : 3 : (s)
Total 3 26 cu) (27)
2009 ‘
Oeset fuel Diesel fuel 159k tonnes Apr 09-Jan 11 ——US983/tonne - @ (45)
Deeset fuel USS $172m ‘Apr 09-Apr 11 USS1 93/E 8 22 -
‘Aur conveyance USS $45m ‘Apr 09-Apr 11. USS1 97/¢ 3 5 -
Capital programmes euro €113m ‘Apr O9-Apr 31 £0 76/6 9 10 - -
Electncaty Electroty 27%kMWH Oct 09-Feb 11 ES3/MWH. - : a a),
Cash flow hedges 20 a7 6) (46)
Other derwauves 2 6 a) ao
Total 22 43 (5) (56)
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24 Financial struments (continued)
Other derivatives represent hedges hy the Group of other foreign exchange and commodity price exposures, which are not designated as
hedges under IAS 39 (including the hedge of jet fuel costs arising from the purchasing of air freight services the hedge of the Bureau de
Change currency holdings within Post Office Limited the hedge of the USS bank deposits and the hedge of inter-company loans with
overseas subsidiaries)
The Group had outstanding forward transactions to hedge foreign currency and fuel purchases at contracted rates as follows
In currency Sterling equivatents
(multions) (muttons)
2020 2009 2010 2009 s
Maturing within one year
Euro 293 218 258 491
USS 206 204 a21 a1
Australian dollars (AUS) 4 4 2 2
Diesel and jet fuel (USS) 88 150 48 78
Electricity and gas (sterling) - - 23 7
Maturing after one year
Euro 4 50 3 37
USS 37 73 23 37
Diesel and jet fuel (USS) 36 38 22 20
Electricity and gas (sterling) - : 9 10
The Groups fuel hedges which fix the sterling cost of purchasing fuel consist of two elements which may be hedged jointly or separately
© a commodity forward transaction fixing the cost in USS of purchasing fuel and
a currency forward transaction fixing the sterling cost of these USS
The table above contains both of these transactions The commodity forward transactions are shown under the heading Diesel and jet fuet
(USS) - US$88m (2009 USS150m) maturing within one year and USS36m (2009 USS38m) maturing after one year The related currency
forward transactions are contained within the total of USS - US$206m (2009 US$204m) maturing within one year and USS37m (2009
US$73m) maturing after one year
25 Employee benefits - pensions
The Group operates pension schemes as detailed be‘ow
Scheme 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 I
Royal Mail Defined Contribution Plan (RMOCP) UK employees Defined contnibution ‘
Various other small-scale schemes operated by overseas subsidiaries Overseas subsidiary employees __Defined contnbution
Defined Contribution,
A charge for the defined contnbution schemes of £5m (2009 £2m) was recognised m operating profit before exceptional items within the
imcome statement The Company contributions to these schemes was £5m (2009 £2m) A new defined contribution plan (RMOCP) was
launched in April 2009 New recruits joining from 31 March 2008 are able to begin paying contributions to the new plan after they have
worked for the Company for a year
Defined Benefit
Both RMPP and RMSEPP are funded by the payment of contributions to separate trustee administered funds The latest full actuanal
valuations of both schemes have been carried out as at 31 March 2006 using the projected unit method For RMPP, this valuation was
concluded at £3 4bn deficit For RMSEPP, the valuation was concluded at £43m deficit A series of changes to RMPP and RMSEPP began to
take effect on 1 April 2008
The changes encompass
* the Plan closed to new members from 34 March 2008
* all penstons and benefits earned before 1 April 2008 are still inked to final salary at the time of retirement,
«from 1 April 2008 defined benefits building up for employee members of the Plan are earned on a career salary basis, I
= employees can continue to take their pension on reaching 60 but the normal retirement age will mcrease to 65 for benefits earned \
from 1 Apri 2010 and
© from 2 Apni 2010 it will be possible to draw pension earned before the change to normal retirement age at 60 and continue
working while still cantributing to the Pensicn Plan until the maximum level of benefits has been reached
a
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25 Employee benefits - pensions (continued)
Payment of £521m (2009 £549m) was made during the year in respect of regular future service contributions, with £516m (2009 £543m)
relating to RMPP The regular future service contributions charge for RMPP expressed as a percentage of pensionable pay has remamed at
200% effective from April 2006 This rate 1s not expected to change materially during 2010-11 For RMSEPP, these contributions have
remained at 48 2% (2009 48 2%)
Payment of £291m (2009 £290m) was made during the year to fund the defiat in the schemes with £286m (2009 £285m) relating to
RMPP Deficit recovery payments are planned for RMPP aver the 17 years from the date of the latest full actuanal vatuation These
payments will be made before each 31 March and may therefore span across the Groups year end (the last Sunday in March) Over the 16
years from 31 March 2007 planned deficit payments are £260m per annum increasing in line with RPI (base year 1s 2006-07) For
RMSEPP deficit recovery payments will be £5m per annum from 1 Apnl 2007 to 31 December 2015
A current liability of £6m (2009 £8m) has been recognised for payments to the pension schemes relating to redundancy (note 21) During
the year payments of £50m (2009 £32m) relating to redundancy were made
A liability of £1m (2009 £1m) has been recognised for future payment of pension benefits to a past Director (see page 43 Directors
Remuneration Report)
On 23 March 2007 the Group established £1bn of investments in escrow as secunty to the Royal Mal Pension Plan in support of the 17
year deficit recovery period
The following disclosures relate to the gains/losses and deficit in the schemes recognised for the RMPP and RMSEPP defined benefit plans in
the financial statements of the Group
a) Major assumptions
The size of the pension deficit which is large in the context of the Group and its finances 1s materially sensitive to the assumptions adopted
‘Small changes in these assumptions could have a significant impact an the deficit and overall income statement charge The major
assumptions were
At 28 March 2010 At 29 March 2009
“pa %pa
Rate of increase in sataries 46 42
Rate of imcrease in pensions and deferred pensions 36 32 i
Discaunt rate 56 64
Inflation assumption 36 32
Expected average rate of retum on assets 67 69
The above assumptions relate to both defined benefit plans with the exception of the expected average rate of return on assets which is
computed for the combined assets of the plans The expected average rate of return on assets 1s a weighted average of the long-term
expected rate of return of each principal asset class (see section b) The expected average rate of retum 1s computed at each balance sheet
date based on the market values and long-term rate of return of each principal asset class as at that date
Mortality
The mortality assumptions for the larger scheme are based on the latest self admmustered pension scheme (SAPS) mortality tables (S1PMA.
for male pensioners and S1DFA for female pensioners) with appropriate scaling factors (106% for mate pensioners and 101% for female
Pensioners) allowing for medium cohort projections with a 1 25% floor These are detailed below
Average expected life expectancy from age 60 2010 2009
For a current 60 year old male RMPP member 26 years 26 years
For a current 60 year old fernale RMPP member 29 years 29 years
For a current 40 year old male RMPP member 28 years 28 years
For a current 40 year old female RMPP member 31 years 31 years
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25 Employee benefits - pensions (continued)
b) Plans’ assets and expected rates of return
The assets in the plans and the expected rates of return were
At 28 March 2010
Market value Long-term expected rate of return
2020 2009 2010 2009
—_ - a £m fm pa pa
Equities 5,999 5 864 84 84
Bonds 47,652 12311 62 63
Property 1,677 1631 66 68
Other assets 486 265 46 42
Fair value of plans assets 25,8146 20071
Present value of plans liabilities (33,855) (26 847)
Deficit in schernes (8,044) (676)
There 1s no element of the above present value of tiabilities that arises fram plans that are wholly unfunded
Certain of the above investments rel
to properties occupied by the Group but the contribution of these properties to the fair value of
plans assets 1s not matenal The pension plans have not invested in any other assets used by the Group or in the Groups own financial
instruments
©) Recognised charges
‘An analysis of the separate components of the amounts recognised m the income statement and statement of comprehensive incame Is
as follows ;
2010 2009
£m_ fy
Analysts of amounts recognised im the income statement
Analysis of amounts charged to operating profit before exceptional items
~ Current service cost 436 494
- Past service cost = =
Total charge to operating profit before exceptional items 436 494
Analysis of amounts charged to operating exceptional items
= Loss due to curtailments (within provision for restructuring charge ~ note 20) 42 34
Total charge to operating profit 478 525
Analysis of amounts charged/(credited) to financing:
- interest on plans labilies 1,701 1734
- Expected return on plans assets (1,372) (1620)
Total net charge to financing 329 114
Net charge to mcome statement before deduction for tax 807 639
Analysis of amounts recognised in the statement of comprehensive income
~ Actual return on plans assets 5,844 (3861)
- Less expected return on plans assets (4,372) (4620)
Actuarval gains/(losses) on assets (all experience adjustments) 4669 (5 481) ‘
~ Experience adjustments on abilities 673 (10)
Effects of changes in actuanal assumption on liabilities (6,454) 1407
Actuarial (losses/gais on abilities (5,784) 1397
Total actuarsal losses recognised in the statement of comprehensive come
before deduction for tax (1,312) {4 084)
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25 Employee benefits - pensions (continued)
4) Movement in ptans’ assets and lvabilities
Changes in the present value of the defined benefit pension obligations are analysed as follows
2010 2009
£m £m
Plans liabilities at beginning of period (26,847) (26 846)
Current serice cost (436) (494)
Curtailment costs* + (48) (33)
Finance cost (1,704) (1734)
Employee contributions (158) (166)
Actuarial (losses)/gains {recognised in statement of camprehensive income) (5,781) 1397
Benefits pard 1,416 1029
Plans liabilities at end of period (33,855) (26 847)
*The curtailment costs in the income statement are recognised on a consistent basis with the associated compensation costs Estimates of
both are included for example in any redundancy provisions raised The curtailment costs above represent the casts associated with
those peopte paid compensation in respect of redundancy during the accounting period Such payments may occur in an accounting
period subsequent to the recognition of costs in the mcome statement
Changes in the fair value of the plans assets are analysed as follows
2010 2009
£m £m
Plans assets at beginning of period 20,071 23923
Company contributions paid 862 821
Movernent im company contributions accrued (2) 1
Company contributions prepaid in 2008 for 2009 - 50 i
Employee contributions 158 166
Finance mcome 1,372 1620
Actuarial gains/(losses) {recognised in statement of comprehensive income) 4469 (5 482)
Benefits paid (1,116) (1029)
Plans _assets at end of period 25,814 20071
e) History of experience gains and losses
The cumulative amount of actuarial gains and losses recognised since transition to IFRSs at 29 March 2004 in the statement of
comprehensive income 1s £4 506m (oss (2009 £3 194m loss) The Directors are unable to determine haw much of the pension scherne
deficit recognised an transition to IFRSs 1s attributable to actuarial gains and losses since inception of the pension schemes Consequently,
the Directors are unable to determine the cumulative amount of actuarial gains and tosses that would have been recognised in the
statement of comprehensive income between inception of the pension schemes and transtuon to IFRSs
2010 2009 2008 2007 2006
£m £m £m £m £m
Fair value of assets 25,814 20071 23923 23578 21847
Present value of liabilities (33,855) (26 847) (26,846) (28 563) (27 435)
Deficit in schemes. (8,061) {6 776) (2923) (4985) (5 588) i
2010 2009 2008 2007 2006
£m £m £m Sm £m
Experience adjustment on assets 4,669 (5481) (1327) 172 3421
Experience adjustment on trabiities 673 (10) (469) (422) (164)
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26 Issued share capital and reserves
Authorised share capital 2010 2009
£ £
Ordinary shares of £1 each 100,000 100.000
Special Rights Redeemable Preference Share (Special Share) of £1 each 1 i.
Total 100,001 100 001
Issued and called up share capital 2010 . 2009
£ £
Ordinary shares of £1 each 50,005 50.008
Special Rights Redeemable Preference Share (Special Share) af £1 each 1 a
Total 50,006 50.006
The Special Share can be redeemed at any time by its holder (the Secretary of State for Business Innovation and Skills) subject to such
redemption being compliant with the Companies Act 2006 The Company cannot redeem the Special Share without the prior consent of its
holder No premium is payable on redemption
Qn distribution in a winding up of the Company the holder of the Special Share is entitled to repayment of the capital paid up on the Special
Share in priority to any repayment of capitat to any other member The Speciat Share does not carry any rights to vote '
Under section 63(7) of the Postal Services Act 2000 for the purposes of the Companies Act 2006 certain shares issued shall be treated as
if their nominal value had been fully paid up
Under sections 72 and 74 of the Postal Services Act 2000 the Secretary of State for Business Innavation and Skills may issue directions to
the Company which depending on the direction issued could result im the recognition of a distribution
Reserves identified in the consolidated statement of changes in equity
Financial Assets Reserve
‘The Financial Assets Reserve Is used to record fair value changes on avatlable for sale financial assets.
Foreign Currency Translation Reserve
The Foreign Currency Translation Reserve is used to record the gains and losses arising from 29 March 2004 on translation of assets and
liabilities of subsidiaries denominated in currencies other than the reporting currency
Hedging Reserve
The Hedging Reserve is used to record gains and losses arising from cash flow hedges since 28 March 2005
Other Reserves
Other Reserves of £47m (2009 £47m) comprise £2m (2009 £2m) unrealised gain on First Rate Exchange Services Holdings Limited. a joint
venture entity and £45m (2009 £45m) relaung to unrealised gains on Midasgrange Limited an associate company
Rural Network Reserve
The Rural Network Reserve was created by Past Office Limited following directions issued by the Secretary of State under section 72 of the
Postal Services Act 2000 (the Act) The amounts allocated to this Reserve are applied as if they were profits available for distribution The
purposes for which the Rural Network Reserve may be utilised are stated in the directions issued and principally relate to the maintenance
of a rural network of post offices A total of £8:16m has been used from this Reserve towards the maintenance of a rural network between
March 2003 and the end of the 2008-09 financial year There will be no further amounts allocated to ths Reserve which has now therefore
been fully utilised
1
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27 Commitments
Operating lease commitments
‘The Group ts committed to the following future minimum lease payments under non-cancellable operating leases as at 28 March 2010
Vehicles
Land and Buildings and equipment IT equipment Total
2010 2009 2010 2009 2010 2009 2010 2009
£m £m im £m £m £m £m £m
‘Within one year ‘ 138 140 20 22 32 26 190 188
Between one and five years 436 443 18 26 33 34 487 503
Beyond five years, 602 583 1 3 cs] a 603, S86
Total 1,176 1166 39 54 65 60 1,280 1,277
Ensting leases for UK land and buildings have an average term of 12 years and any new leases entered into generally have a 15-year term
wath a 10-year break clause Exsting land and buildings leased overseas by the GLS subsidiary have an average lease term of 9 years
Vehicle leases generally have a term of between 2 and 8 years depending cn the asset class with the average term being 3 years The
existing leases have an average term remaining of 1 year There 1s one IT contract with a lease term of 10 years with 3 years remaining at
the balance sheet date
Finance lease and hire purchase commitments
2010 2009
Present value Present value
Minimum of minimum Minimum of minimum
lease payments lease payments —_lease payments lease payments
£m £m £m &m
Within one year 68 61 33 29
Between one and five years 425 118 84 77
Beyond five years 4 2 7 4
Total mmimum tease payments 197 181 124 110 \
Less amounts representing finance charges (16) = (14) -
Present value of minimum lease payments 184 181 210 110
‘The Group has finance lease contracts for vehicles land and buildings and equipment. The leases have no terms of renewal purchase
options or escalation clauses and there are ne restrictions concerning dividends borrowings or additional leases Vehicle leases have a term
of between 3 and 8 years depending on the class of vehicle, with the average term being 3 years The land and butidings lease 1s for 2.15
year term and the equipment leases for an average term of 7 years
Capital commitments
The Group has commitments of £129m at 28 March 2010 (29 March 2009 £193m) which are contracted for but not provided for in the
financial statements
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28 Related party disclasures
The ultsmate parent (the Company) and principal subsidiaries
Roya! Mail Holdings ple ts the ultimate parent company of the Group The consolidated financial statements include the financial statements
of Royal Mail Holdings plc and the principal subsidiaries listed in the following table
Company Principal activities. Country of mcorporation ‘% equity interest
2010 2009
Royal Mail Group Ltd Mails and parcels services ‘United Kingdom 100 100
Post Office Limited Counter and retail services United Kingdom 100 100 .
Royal Mail Investments Limited Holding company United Kingdom 100 100
General Logistics Systems BV Parcel services Netherlands 100 100
Royal Mail Estates Limited Property holdings United Kingdom 100 100
Romec Limited Facilities management United Kingdom 51 51
IRed Partnership Limited Document management services United Kingdom 100 400
Royal Mail Holdings ple 1s the immediate parent company of the Royal Mail Group Ltd substdiary company The remaining subsidiary
companies listed above have Royal Mait Group Ltd as their immediate parent company
Joint venture
The Groups 50% interest m First Rate Exchange Services Holdings Limited a company registered in the United Kingdom, is held by Post
Office Limited The company s principal activity 1s the provision of Bureau de Change
Associates
The following companies are the principal associates of the Group
Company Principal activities: Country of corporation ‘% Ownership
2010 2009
Quadrant Catering Limited Catering services United Kingdom 51 51
Camelot Group plc National lottery United Kingdom 20 20
G3 Worldwide Marl NV (Spring) Mail services Netherlands: 3245 245
Midasgrange Limited Financial services United Kingdom 50 50
The majority of the Board and voting power in Quadrant Catering Limited 1s held by the Groups partner hence it ts not a subsidiary
Management control lies with the Bank of Ireland partner in the operation of the Midasgrange Limited company and therefore the company
1S not a joint venture
With the exception of Midasgrange Limited for whom the Groups investment is held by Post Office Limited the investment in the associate
companies listed above 1s held by Royal Mail Group Ltd
During the year the Group increased its sharehalding in G3 Worldwide Mail N V (Spring) from 24 5% to 32 45% (note 14)
93
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28 Related party disclosures (continued)
Related party transactions
During the year the Group entered mto transactions with related parties The transactions were in the ordinary course of business and
included admuinsstration and investment services recharged to the Groups pension plan by Royal Mat Pensions Trustees Limited The
transactions entered into and the balances outstanding at the financial year end were as follows
Amounts Amounts
Purchases/ owed from related owed to related
Sales/rechargesto recharges from party including party cluding
related party related party —outstandingtoans — outstanding loans
2010 2009 ©2010» 2009-2020 2009 2010 2009
£m £m £m £m £m Em &m £m
Royal Mail Pension Plan 20 10 - = - : = .
Quadrant Catering Limited - - 35 36 - - 3 3
Cametot Group plc 37 46 - = - - - =
G3 Worldwide Mail NV (Spring) - - 7 8 3 9 a 2
Midasgrange Limited 3 4a 2 - 10 5 - -
First Rate Exchange Services Holdings
Limited Group 30 40 334 145 16 14 2 1
‘The companies listed above are joint ventures and associates of the Group with the exception of Royal Mail Penston Plan
The sales to and purchases from related parties are made at normal market prices Balances outstanding at the year end are unsecured
Interest free and settlement is made by cash
The Group trades with numerous Government bodies on an arms length basis Transactions with these entites are not disclosed owing to
the significant volume of transactions that are conducted
Separately
. the Group has certain loan facilities with Government (note 19) and
. the Group has received the Network Subsidy Payment from Government {note 2)
Key management compensation
2010 2009
£000 £000
Shart-term employee benefits 3,035 3024
Post-emplayment benefits 307 (179)
Other long-term benefits 2,626 1136
Total compensation earned by key management 5,968 3981
Key management compnses executive and non-executive Directors of the Royal Mail Holdings plc Board
HM Government is the Company $s sole shareholder and accordingly the Directors have no interest in the shares of the Company
29 Events after the balance sheet date
‘The Group has entered into sale and leaseback agreements relating to four property assets after 28 March 2010 The total proceeds
receved amounted to £72m and the financial impact of these agreements in the cantext of the Groups profit or loss 1s not considered
matenal
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Group five-year summary (unaudited)
2010 2009 2008 «2007 -~—«2006
Income statement £m £m &m fm £m
Revenue 9,349 9560 9388-9179 «9056
Operating profit before exceptional items 404 321 162 2330355
Operating exceptional items: 4291) (249) I (441) (243) (210)
Operating profivitoss) 113 an (279) (20) 445
Non-operating exceptional tems 5 11 58 118 67
Profittoss) before financing and taxation a8 183 (22) 108 ana
Fmance income and costs including net pensions interest (380) (134) 144 205 100
(Loss¥profit before tax (262) 49 (77) 31332
Taxation (58) (278) 212 (27) 83 1
(LossWprofit after tax 320) (229) 135 286 395, jl
2010 2009 2008 = 2007-2006
Statement of cash flows £m £m fm £m £m
Net merease/(decrease) in cash 26 (258) 224 1 (61)
Net (decreasel/mcrease in cash equivalents. (249) (118) (15) 34 (418)
Net (decrease)/ncrease in cash and cash equivalents, (125) 373) 209 35479)
2010 2009 2008 ~—«2007-—=—«2006
Balance sheet Em £m £m Em £m
Goodwill and mtangible assets 296 286 240 207° «1%
Property plant and equipment 1,935 1886 1671 1619-1594
Other non-current assets including those classified as held for sale 1,493 1431 1824 1528 «539
Net current (liabiltiesVassets (533) (385) (300) (60) 535
Non-current abilities (9,494) (7872)__(3.676) (5558) (6 181)
Net babilities (6.281) (4 656) (261) (2266) (3339)
95
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Parent Company financial statements
Statement of Directors’ responsibilities in relation to the parent Company financial statements
The Directors are responsible for preparing the Directors Report and the financiat statements m accordance with applicable law and
regulations
Company law requires the Directors to prepare financial statements for each financial year Under that law the Directors have elected to
prepare the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting
Standards and applicable law) Under company law the Directors must not approve the financial statements unless they are satisfied that they
give a true and fair view of the state of affairs of the company and of the profit or loss of the company for that period In preparing these
financial statements the Directors are required to
* select surtable accounting policies and then apply them consistently
‘* make judgments and accounting estimates that are reasonable and prudent
* state whether applicable UK Accounting Standards have been foliowed subject to any matenal departures disclosed and explained in the
finanoal statements and \
* prepare the financial statements on the going concern basis unless it Is inappropriate to presume that the Company will contmue in
business
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Companys transactions and
disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements
comply with the Companies Act 2006 They are also responstble for safeguarding the assets of the company and hence for taking reasonable
steps for the prevention and detection of fraud and other irregularities
The Directors are not required under UK law to prepare a Remuneration Committee Report but in accordance with the principles of goad
corporate governance as outlmed in the Combined Code have chosen to do so This Report has deen prepared by the Remuneration
Committee as if the Company was required to comply with both Schedule 8 to The Large and Medium-sized Companies and Groups (Accounts
and Reports) Regulations 2008 of the United Kingdom and relevant Listing Rules of the Financial Services Authority and has been approved by
the Board The only exception 1s that a performance graph has not been included since the Company is not quoted
‘Donald Brydon
96
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Independent Auditor's report to the members of the Company, Royal Mail Holdings pic '
We have audited the parent Company financial statements of Royal Mail Holdings ple for the year ended 28 March 2010 which comprise
balance sheet and the related notes 1 to 10 The financial reporting framework that has been applied in their preparation is applicable law and
United Kingdom Accounting Standards {United Kingdom Generally Accepted Accounting Practice)
This report is made solely to the Companys members as a body i accordance with Chapter 3 of Part 16 of the Companies Act 2006 Our
audit work has been undertaken so that we might state to the Companys members those matiers we are required to state to them mn an
auditors report and for no other purpose To the fullest extent permitted by law we do not accept or assume responsibility to anyone other
than the Company and the Companys members as a bady for our audit work for this report ar for the opinions we have formed
Respective responsibilities of directors and auditors
‘As explained more fully in the Directors Responsibilities Statement set out on page 96 the Directors are responsible for the preparation of the
parent Company financial statements and for bemg satisfied that they gve a true and fair view The Directors are also responsible for the
preparation of the Directors Remuneration Report which they have chosen to prepare as if the Company was required to comply with relevant
requirements of both the UK Companies Act 2006 (and Regulations thereunder) and the Listing Rules of the Fmanciat Services Authority The
only exception 1s that a performance graph has not been included, since the Company is not quoted Our responsibility 1s to audit the parent
Company financial statements in accordance with applicable law and International Standards on Auditing (UX and treland) Those standards
require us to comply with the Auditing Practices Boards Ethical Standards for Auditors In addition the Company has also mstructed us to
review whether the section of the Directors Remuneration Report that has been described as audted has been properly prepared in
accordance with the basis of preparation desenbed therein
Scope of the audit of the financial statements
An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that
the financial statements are free from material misstatement. whether caused by fraud or ervor This includes an assessment of whether the
accounting policies are appropriate to the parent Companys circumstances and have been consistently applied and adequately disclosed the
reasonableness of significant accounting estimates made by the Directors and the overall presentation of the financial statements
Opimon on financial statements
In our opinion the parent Company financial statements
* ge true and fair view of the state of the Companys affairs as at 28 March 2010
+ have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice and
* have been prepared im accordance with the requirements af the Companies Act 2006
Opinion on other matters prescribed by the Companies Act 2006
In our opinion
= the part of the Directors Remuneration Report that has been descnbed as aucited has been property prepared in accordance with the
basis of preparation as described therein, and
the mformation given in the Directors Report for the financial year for which the financial statements are prepared is consistent with the
parent Company financial statements
Matters on which we are required to report by exception
We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if in our opinion
* adequate accounting records have not been kept by the parent Company or returns adequate for our audit have not been received from
branches not vsited by us or
«the parent Company financaal statements and the part of the Directors Remuneration Report to be audited are not in agreement with the
accounting records and retums or
* certain disclosures of Directors remuneration specified by law are not made or
* we have not received all the information and explanations we require for our audit.
Other matter
We have reported separately on the Group financial statements of Royal Mail Holdings plc for the year ended 28 March 2010
Leash’ peers “Lr
Alison Duncan (Senior statutory auditor)
for and on behatf of Ernst & Young LLP,
Statutory Auditor
London
28 May 2010
or
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Parent Company balance sheet
at 28 March 2010 and 29 March 2009
2020 2009
Notes £m £m
Fixed assets
Investments in subsidiaries 4 3,784 3786 ;
Investments in pension escrow 5 1.012 940 I
Total net assets 4195 4724
Capital and reserves
‘Share capital & - .
Share premium 9 430 430
Reserves 9 46 18
Profit and loss account 9 4328 4276
Shareholder’s funds 4,795 4726
The financial statements on pages 98 to 100 were approved by the Board of Directors on 28 May 2010 and signed on its behalf by
Donald Brydon lan Duncan
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Notes to the parent Company financial statements
1. Parent Company accounting policies
The following accounting policies apply
Financial year
The financial year ends on the last Sunday in March and accordingly, these financial statements are made up to the year ended 28 March
2010 (2009 year ended 29 March) '
Basis of preparation 1
The financial statements of the parent Company Royal Mail Holdings ple (the Company) were authorised for issue by the Board on xx May
2010
The financial statements on pages 98 to 100 have been prepared in accordance with applicable UK Accounting Standards and law including
the requirements of the Compantes Act 2006 Unless otherwise stated in the accounting policies below the financial statements have been
prepared under the historic cost accounting convention
In making an assessment on the Companys ability to continue as a going concern the Directors have considered the assessments made by
the subsidianes Royal Mail Group Ltd and Post Office Limited These are set out in note 2 to the Group financial statements On this basis
the Directors have concluded that it s appropriate that the Rayal Matt Haldings plc Company financial statements have been prepared on a
going concern basis
‘The Company has not presented its own profit and loss account as permitted by section 408 of the Companies Act 2006 However the
results of the Company for the year are disclosed in notes 6 and 9 to the financial statements
The Company has taken advantage of paragraph 2D of FRS 29 IFRS 7) Financial Instruments Disclosures and has not disclosed information
required by that standard as the Group s consolidated financial statements mn which the Company 1s included provide equivalent disclosures
for the Group under IFRS 7
No new UK Accounting Standards which affect the presentation of these financial statements have been issued
Impairment reviews.
Unless othervase disclosed in these accountng policies fixed assets are reviewed for impairment if events or changes in circumstances
indicate that the carrying value may be impaired The Company assesses at each reporting date whether such indications exist Where
apprapnate an «npairment loss Is recognised in the profit and loss account for the amount by which the carrying value of the asset (or cash
generating unit) exceeds its recaverable amount which 1s the higher of an assets net realisabte value and its value in use
Investments in subsidiaries
Investments im subsidiaries within the Companys financial statements are stated at cost less any accumulated impairment losses The
opening and closing carrying value relates solely to the Companys investment in Royal Mail Group Lid a 100% subsidiary of the Company
Royal Mail Group Ltd 1s the only direct sharehotding held by the Company
Investments in pension escrow
Investments in pension escrow are financial assets within the scope of FRS 26 Financial Instruments Recognition and Measurement
The investments are a combination of short-term deposits and long-term investments which mature between 1 day and 46 years but have
been included within fixed assets as the investments have been provided as secuntty to the Royal Mat! Pension Plan in support of the 17 year
deficit recovery period from March 2006
The investments comprise short-term deposits with a bank Treasury bills and gift edged secunties.
‘The bank deposits are non-derwative assets that are neither held for trading nor quoted in an actwe market and therefore classified as,
loans and receivables for measurement purposes under FRS 26 The investments are initially recognised at fair value being the amount
deposited The investments accrue interest thereby increasing the carrying value of the mvestments This interest ts included in the reported
profit/(toss) for the year The investments are derecognised when they mature
Treasury bills mdex-linked gilt edged secunties and conventional git edged securities are classified as available for sale financial instruments
on the basis that they are quoted investments that are not held for trading and may be disposed of pnor to maturity The investments are
inttally recognised at fair value being the purchase price After initial recognition interest 1s included in the reported profit/(loss) for the
year using the effectve interest rate method and the assets are measured at fair value with gains or losses being recognised mn the
Financial Assets Reserve until the investment is derecagnised
Contingent liabilities
Contingent liabilities are not disclosed if the possibility of losses occurring 1s considered to be remote
2 Directors’ emoluments
The Directors of the Company are not paid fees by the Company for their services as Directors of the Company The Directors of the
Company are paid fees by other companies of the Group These emoluments are disclosed m the Group Annual Report and Financial
‘Statements
3 Auditor's remuneration
The auditor of the Company is not paid fees by the Company The auditor of the Company is paid fees by the other companies of the Group
This remuneration 15 disclosed in the Group Annual Report and Financial Statements
99
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4 Investments in subsidiaries
Cost = Impairment 2010 2009
£m £m £m £m
At 30 March 2009 and 31 March 2008 4160 (376) 3784 3784
At 28 March 2010 and 29 March 2009 4,260 (376) 3,784 3784
5 Investments in pension escrow
2010 2009
Average Average
effective effective
rate 2010 rate 2009
x £m % £m
Cash at bank o4 1 - -
Treasury bills o4 229 O4 217
Gilt edged securiues (index linked) ao 664 42 601
Gilt edged securities (conventional) 48 117 48 122
Investments in pension escrow 1,011 940
6 Profit and loss account
‘The Company is a non-trading company The profit for the period relates to income fram the investments in pension escrow of £35m (2009
£17m) and a tax credit of £10m (2009 £7m)
7 Taxation
A tax charge of £10m (2009 £7m) has been taken to the Financial Assets Reserve reflecting the tax liability on the fair value changes on
available for sale financial assets A tax credit of £10m (2009 £7m) has been taken to the profit and loss account reflecting the sheltering of
that tax liability by losses of other Group companies
8 Share capital
Details of the share capital are disclosed im the Group Annual Report and Financial Statements in note 26
9 Shareholder’s funds
Profit and Financial
Share loss Assets 2010 2009
premium account —=Reserve Total Total
£m £m Em £m £m
At 30 March 2009 and 34 March 2008 430 4276 18 4726 4693
Profit for the year - 45 - 45 24
Taxation on items taken directly to reserves - 7 (10) (40) m
Gains on financial asset investments - - 36 36 14
At 28 March 2010 and 29 March 2009 430 4321 bh 4,795 4728
Financial Assets Reserve
The Financial Assets Reserve ts used to record fair value changes on available for sale financiat assets
20 Charges
Details of charges registered over the assets of the Campany are contamed m the Group financial statements in notes 19 and 24
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Forward looking statements
This document contams statements concerning the Groups business financial condition, results of operations and certain of the Groups
plans objectives assumptions projections expectations or beliefs with respect to these terns
The Company cautions that any forward looking statements in this document may and often do vary from actual results and the differences
hetween these statements and actual results can be material Accordingly readers are cautioned not to place undue reliance on forward
looking statements The Company undertakes no obligation to release publicly the result of any revisions to these forward toakng
statements that may be made to reflect events or circumstances after the date of this document including without limitation changes in the
Group's strategy or to reflect the occurrence of unanticipated events
8y their nature forward looking statements involve risk and uncertainty because they relate to events and depend on circumstances that.
will occur in the future Such forward looking statements shoutd therefore be considered in light of various important factors that could
cause actual results and developments to differ matenally from those expressed or implied by these forward looking statements These
factors mclude among other things the impact of competitive products and pricing the occurrence of major operational prablems the loss
of major customers limitations imposed by the Groups indebtedness undertakings and guarantees relating to pension funds contingent
hhabiltues sks of litigation and risks associated with the Group s overseas operations
Corporate information
Registered Office and Group Head Office
Royal Mail Holdings ple
100 Victoria Embankment
LONDON
EC4Y OHO
020 7250 2888
Registered No 4074919
Royal Mail the Crucifarm the colour red Parcelforce Worldwide and the Parcelforce Worldvade logo are registered trademarks of Royal Mail
Group Ltd Post Office and the Post Office symbol are registered trademarks of Post Office Limited Group Annual Report and Financial
‘Statements 2010 © Royal Mail Group Ltd 2010 All Rights Reserved
Corporate website
Additiona! corporate and other information can be accessed on the following website www royatmailgroup com Information made avatlable
on the website is not intended to be and should not be regarded as being part of the financial statements
The maintenance and mntegnty of the Groups websttes 1s the responsibility of the Directors the work carried out by the auditor does not
involve consideration of these matters and accordingly the auditor accepts no responsibilty for any changes that may have occurred to the
financial statements since they were inttally presented on the website
Auditor Actuary
Ernst & Young LLP Towers Watson Limited
1 More London Place Watson House
LONDON London Road
SEI 2AF REIGATE
Surrey
RH2 9PQ
Solicitor Consumer Body
Slaughter and May Consumer Focus
1 Bunhull Row 4° Floor
LONDON Artillery House
ECAY ayv Artillery Row
London
SW1P 1RT
Regulator (Postcomm)
Postal Services Commission
Hercules Hause
6 Hercules Road
LONDON
‘SE1 7DB
101