UKG1I00042083
UKGI00042083
Shareholder
Executive
HM Government
Post Office Limited (“POL”)
Annual Review
January 2014
RESTRICTED — POLICY & COMMERCIAL
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Contents
@ Shareholder
Executive
@ Executive Summary
@ Business Overview
© Long Term Strategy
© Business Plan
© Valuation
© Board and Management
@ Key Stakeholders
© Shareholder Executive Role
© Traffic Light Analysis
© Appendix
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1 Executive Summary
@ Shareholder
Executive
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Executive Summary
While POL’s profile is
‘similar to how it
Jooked in December
2012 management
have continued to
make progress ina
number of areas...
the business has a
new strategic plan
and long term
funding and has
performed acceptably
in relation toa
number of its key
strategic goals...
--however risks remain.
These could start to
impact performance
in the coming months
ata time when the
plan starts to put
‘management under
increased demands
@ Shareholder
Executive
+ Since the last annual review In December 2012 considerable progress has beon made at POL
= POL has developed a new strategy forthe period to 201920 that addresses key weaknesses with its previous plan
Anew funding agreement has been secured fr POL. The busines is now fully funded upto the end of 2017/18
Network Transformation has moved full into implementation. 1 467 branches are now operating as new models
= Crown Transformation has been taken fonvard end franchising, investment and automation activities are curently “ive
= The work ofthe stakeholder forum is substantially complete, This marks a key milestone in POL's mutualisation process,
— POL's relationship with the NESP has matured ~ this is more collaborative, and exhibits new ways-of-working for both sides
* However headwinds / risks have emerged in a number of areas. While these do not undo the results achieved to date they
could start to impact the business or Its performance In the near term
Altera strong year in 2012/13 POL's financial performance has softened in 2013/14 atthe same time as targets have got
more challenging. Management also believe that the plan for 2014/15, while deliverable, is extremely ambitious
= Industral action in the Crown estate (and more recently Supply Chain) by both CWU and CMA members has been ongoing
for more than nine months. While progress is being made, hostile stakeholder relations bring with them considerable risk
= Developments with Royal Mal, DWP and DVLA highlight how exposed POL and its network are toa small number of key
contracts, tis also not clear whether POL's relaionships with these high-value clients reflects this positioning
= POL's relationship with HMG remains a key area of risk — this includes commercially (2.9. VOA, NS@i), inrespect of future
strategy (e.g. DWP, Cabinet Ofice) and in relation to stakeholders (e.9. NFSP)
— While considerable progress has been made around POL's mutualsation, progress has been slow. There is stil some
intemal resistance tothe process which could start o impact progress, particularly given continued Ministerial interest
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Executive Summary (cont'd)
The structure of POL’s
new strategy makes
an assessment of
the business's (and
management's)
performance
easier...
«this is supported by
the ShEx POL
team’s increasingly
strong and
collaborative
relationship with
senior and
commercial
‘management...
both points are
‘important as the
business moves
into an important
period in respect of
its financial and
commercial goals
@ Shareholder
Executive
* In the ShEx POL toam’s last Annual Review there was limited commentary around the business's strategy ~ while it had
only been prepared in 2010/11 the forecasts set out in the plan were no longer relevant
— This current Annual Review incorporates POL's new strategy. While this is consistent with POL's previous plan, disconnects
between forecasts and actual trading have been addressed meaning a more detailed assessment can nowbe presented
* Despite this — and in line with the approach taken in the last Annual Review ~ it remains challenging to construct a
‘meaningful valuation of POL,
= The business continues tobe loss making and combined with @ need for continued HM funding any value" attributable to
HMG's shareholding is highly sensitive to a small number of key assumptions
* Questions around the capability of management were highlighted in 2012. These remain
= Chum among the senior team is high, and itis not clear whether appropriate succession planning in place for key roles. In
‘addition while the team knows the business wel, ime is needed to demonstrate ther abilily to deliver the strategy
+ POL has had another good year, however its track record of successes Is no indicator of future performance
— Recent trading has soflened, and moving nto the second hai of 2013/14 and 2014/15 an increasing numberof strategic
initiatives move into @ challenging delivery phase. Managing delivery ofthese in paralielis key to be challenging
* The ShEx POL team works closoly with POL management at many levels and our relationship with the business has
Improved considerably over the course of the past 12 months
WHAT WAS OUR KEY FO
FOR 2015
41) Develop revised plan and funding proposal forthe next spending review (Completed sutject to tate Aid epproval)
2.) Push through Netwark Tranefrmation, Crown Tranefermation and Revenue Grow (incl. Gavemment Senices) /suious progress mace)
3) Progress POL's mutusetion process [P/oorese made, bu a» fiy modest pace Further work engagement required
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? Business Overview
@ Shareholder
Executive
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Business Overview
POL operates the #1
retail footprint in the
UK, managing a
network of c.11,800
branches and
delivering a range of
around 170 services
across a number of
markets including
Mails and Retail,
Financial Services,
Government
Services and
Telephony...
suthe business has
been independent of
Royal Mail since
April 2012 - itis
currently 100 per
cent. owned by the
SoS through Postal
Services Holding
Company Limited
@ Shareholder
Executive
Post Office Limited
12/13A Net income‘) £902m, 12/13A Operating Profit £94m (10.4% margin), 12/13A Headcount 7,798
pes Hebei
12/19A Soles: £404m 12/9A Seles: £280m 12/94 Seles: 133m 12734 Sales: €86m
(44.64 total sates ex. NSP) (21.0% total sates ex. NSP) (1486 toa sales ox. NSP) (0.56 otal sles ex. NSP)
+ Provision of stamps, * Broad range of financial + Renge of services on + Retailhome phone end
labels, international mail, services including bill behalf of Government broadband services
special delivery and payments, SME banking departments, including provider with 500k
parcel services on behalf services (e.g, deposits POCA (e.g. benefits subscribers (53 percent
of Royal Mall ‘ond withdrawals), retail exception for claimants divisional total sales)
+ Also active in in-branch banking services for UK optingnotiouse@ bank «Alo provides a small
end online retail with high-street banks, ATMS, account), passportcheck- range of miscellaneous
aislindry, ciectaae foreign exchange, ‘and-send, DVLA driving services (@.g.cashe-tranit
(e.g. stamps, Royal Mint {neurance end savings licence renewals, anda ‘nd warehousing)
coins) and lottery (n= products range of identty services
branch only)
The Network
+ POL's network of c-11,800 branches is distributed across an owned estate of ¢:370 “Crowns, ¢8,900 privately owned branches
operated by subpostmasters (inc. symbol groups), c.1,400 branches operated by multiple retailers and c.1,100 "Outreach’ post
offices (ie. imited hours service in remote locations where a permanent branch is nat viable)
* ofthe 1,400 branches owned by retall partners, c:300 are managed by The Co-operative Group (c:500 by co-operative groups,
‘more generally), ¢ 400 by Martin MeColt's and ¢:200 by OneStop (owned by Tesco). c:80 ex-Crown branches are operated by
WH Smith under a franchise agreement (to increase fo at least c.100 branches after the current round of franchising)
(1) References to Net Income relat to revenve les cos of goods sold, Tiss used by POL as a proxy for revenue and ensures a greater degree of
comparably between diferent actives (e.g. Mais where COGS are c- percent. gross revenue and Telephony they are >70 por cont)
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Market Overview and Competitive Positioning
POL hase strong end Post Office Limited I
trusted brand across
@ wide range of
sciatkets~ tie fs Mall and Retall Financial Services Government Services [Telephony and other
Wis a crucial ‘Selected Key Competitors Selected Key Competitors Selected Key Competitors
aiferen sues collect ee & Loyds rsp roy
roman II EE B4
...however the speed of
patileersaneren + Clearleaderinretal mals» Competitive oferin + High level of competition» Compettve pice driven
ewwasigne although his is widely sen almost all segments inlow value-add marke, wth aerge
expectations. a8 a dectning market where POL is active transactonal services umber of payers
ect + Aisostrongin higher growth Brend equiyis also akey (9. payment + Peers are oftan able to
collect and return, packets and parcels, where differentiator in many processing) offer @ broader range of
Guirent accounts: and, competition is stronger ‘areas ~ especially when * Less competition in more ‘services than POL (e.g,
mobile telephony * Recently started rolling out POL competes against ‘complex areas where ‘wiple- or quad-play) —
were all due to “go collect and retums offer — high-street banks POL can leverage its ‘however POL is planning
live” in early 2013 slightlylater than planned Launched current footprint, relationships tolaunch mobilen 2014
but saw delayed which will be a key medium, account pilot in 2013 with with Govt. and its branch * Subscriber base is seen
launches... term growh crve. Enables plans to sartroling out 1 staff security profile to be both lowchun but
POL torespond more aonwide in 2014 + Landscapes evolng ‘980 ow-spending/ rice
at the same time POL effectively to competiive —_» Key growth driver ofniew (e.g, PayPoint entering ‘conscious, Risk on abilty
is seeking to address threats ‘strategy - both in SME payout services) and toup-sell/ cross-sell
gaps in customers’ * Strategy to transform the (e.g. development of ‘commercial environments» New strategy looks at
knowledge of the estate and customer integratedbasket of are ncreasingy lounching edtonal
brondif offs offer experience though services) nd retail (9 chalenging (e.g. DVLA products (eg. Home-
Network and Crown: mortgages, savings, pricing and volumes, and Services). Detailed plans
Transformation initiatives: insurance) markets tax disc withdrawal) ‘not yet worked up
@ Shareholder
Executive
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I
3 Long Term Strategy
@ Shareholder
itive
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Long Term Strategy — Introduction
POL’s new “Vision 2020”
plan will start to be
implemented in early
2014...
while it maintains the
‘same objectives as
POL's existing
strategy the new
funding enables POL
to make improvements
ina number of areas
which help to derisk
delivery (e.g. in
‘Network
Transformation)...
-wat the same time it
remains highly
ambitious and
potentially more so
than the plan put
together by POL in
2010/11
@ Shareholder
Executive
"OL's new “Vision 2020" strategy was developed over a 12 month period between Autumn 2012 and Autumn 2013 and covers,
the period 2013/14 to 2019/20
— Represents a continuation of POL's existing strategy, with its focus on delivering a financially sustainable POL thatis less reliant
on HMG funding, Also ensures POL is able to continue to meet HMIG's objectives frit and its network
= Achieved through a large scale transformation and modemisation ofthe post office network, growth of revenues in established
‘and new markets and through driving change and efficiency in the way the day-to-day POL business operates:
+ £640m funding was recently secured for the 3-year period from 2015/16 to 2017/18. A State Ald notification will be made in
2014 to ensure that an approval is received before the existing funding agreement comes to an end in March 2015
= Itis addtional to the £1.34bn agreement reached in 2010/11 for the period 2011/12 o 2014/15, and enables the completion of al
transformational strategic initiatives
* While further funding will still be needed for the final two years of the “Viston 2020" plan Its expected that any future
commitment will be made on a different basis to the current and new agreements,
= Investments prior to 2017/18 mean that i will be possible to putin place a more “contractual funding thats directly tied to the
Performance ofthe structurally unviable portion of te post oice network (e.g. remote loss making “Community” branches)
a a a ry
[Network Subsidy Paymont 180 20
(ther Government Funding 0 m2 mt 70 ° o
Total Funding cr a ee) “0 o Fy
¥
£1.340n funding for £640 funding or Indicative future
2011/12 to 201415 2015/16 0 2017/18 ‘steady state" funding
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Long Term Strategy — Financial Summary
While the commercial
objectives of POL's
new strategy are the
same as under the
old plan the financial
profile / mix is very
different...
this reflects
differences in recent
sales performance
compared to what
had been expected
(e.g. strength in Mails
and Retail and
Financial Services
and weakness in
Government
Services). This also
‘means forecasts are
now relevant and
therefore can be
‘monitored more
effectively
@ Shareholder
Executive
Pusrvecm I avian I rasa I roae I wir I toner I ere I er I ion I tor
Mal and Reta 358 408 45 430 25 468 482 515 548
Financial Services 26 280 a 25 28 370 ar 464 492
Goverment Senco 136 133 116 7 188 m4 7 190 206
‘Tolophony and Other at 8 2 6 136 180 102 190 195
Income Contingency am. am. am 5) 40) 60) (60) (100) (120)
Net Income (ex. NSP) 365 902 900 a a ETT)
growth na 43% (03%) = 288TH IBN
Network Subsidy Paymont 180 210 200 160 130 20 70 o 50
‘Net Income (in. NSP) cr EE)
grow na 64% 1%) AH) 4B HOMO
Total Costs (1.05) (1.050) (1,080) (1,020) (,084) tat) (,175) (1251) «1312)
Income Contingency Costs nm. am. am ° 2 38 46 © m
%6Net Income (ox. NSP) (117.3%) (116.4%) (114.4%) (410.3%) (108.3%) (100.4%) (98.2%) © O4EK) (OO)
JV income 3 32 2 Ea 38 35 Ea a “
EBITDA or cy 102 FE 30 on 164 19 170
eBrTDAS (1116) 98) oy ° at 94 109 120
smargin 50% 8% 9.3% Ot tae ae 18212
Operating Cashflow a rr) 8 (3) (103) ° cy 104 14
+ In response to weaknesses identified with POL’s previous strategy the new plan has been developed bottom-up and In a
level of deta that should make It possible to put in place detalled monitoring and assessment structures
= The plan is supported by measurable commercial assumptions, and it as been prepared on consistent a basis withthe way
‘management accounts are reported. This was not the case under the previous stralegy
Despite being challenged the approach that POL is taking to budgeting remains broadly unchanged, The ting of this
process (e.g. between October and March) is not considered ideal and isnot believed to be in line with market practice
"OL Is currently going through a detailed planning process to ensure Implementation strategies are in place for each
Initiative underlying the new plan. These will be reviewed, and subject to challenge, by the ShEx POL team in early 2014
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Long Term Strategy — Network Transformation
Network Transformation
will see a widespread
restructuring of POL's
estate, changing how
customers interact
with branches and
how POL interacts
with its network...
While POL has
experience of
delivering large
transformation
programmes, the scale
of the current strategy
is unprecedented...
-.the challenges POL
identified in
implementation over
the first 12 months set
the context for POL’s
new strategy and the
recently announced
funding to 2017/18
@ Shareholder
Executive
* Network Transformation was developed in 2010/11 as a 5 year strategy to transform and modernise the non-Crown estate
of ¢.11,400 branches
= Increases the viabilly of branches operated by subpostmasters, improves the customer and in-branch experience, delivers
‘nancial benefits and fexbilty to POL and ensures a reduced reliance of POL and the network on HMG funding
«The first phase was due torun for three years to March 2015 and was envisaged to see up to 6,000 branches convert to
Cone of the new Local or Main operating models
MODEL
Mostly town centres, processing >*,200 I Mostly urban fringe and ral, pracesing «1,200
Ror) transactions pw ‘tansactons pwr
POL Services Offer i Fullrango of POL sonvcos 95% POL sonics by transaction volume
Primary counter soparat rom ral with
OL Positioning in Branch i He teenie Fly intogratod ino rota
+ However soon after rollout ofthe strategy began In late 2012 the rate of conversions started to fall behind expectations
+ POL has sought to address this underperformance in its new strategy. With the support of the NFSP management are
proposing to put in place a number of changes that will accelerate the pace of conversions
— More funding has been secured to incentivise the right behaviours among subpostmasters (e.g, Increased compensation
and investment) and the timeline has also been extended by one year — completion is now expected by March 2018
= Since it remains a largely voluntary strategy, the profile of conversions has also changed. Although fewer than 6,000
branches are now expected to convert by March 2015 overall targets to convert all branches thal can be converted remains
— Anew"Community” designation has also been introduced that wil ensure that where branches should not convert (e.g. due
to the impact on ther viability) they wil not be forced to do so. Service provision among this population willbe protected
+ The new plan is materially different from the one originally proposed by POL in early 2013
= addresses BIS Ministers’ concems related to execution risk, possible public resistance and the lack of stakeholder support
(in particular from the NFSP). These changes brought with them a c.£200m increase in the programme's funding need
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Long Term Strategy — Network Transformation (conta)
444
INN
Status: 277
+ Materially under-
performing the original
plan ~ this set the
context for the new
network strategy
Too early to take a firm
view of the Impact of
recent changes. The
first months of 2014
are therefore critical
Key to retain support
of the NFSP- POCA,
NS&I and VOA all
represent possible
‘sks to this
@ Shareholder
Executive
* POL Is currently behind on the delivery of the Network Transformation compared to the original strategy
— Having met ts 1,200 contract signature target for 2012/13t was envisaged that 2,400 futher contracts would be securedin
2013/14, Re-profied targets instead set out a goal of 1,430 (Threshold) to 2,150 (Stretch) contracts by the end of the FY
‘The gap between signatures and open branches has been stable during the course of the 2013/14 and is curently ¢:900,
‘This means that by the end of 2013/14 POL expects to have c.1,950 post afices open and operating on the new models
+ The next two/ three months (Le. the retall survey" and appeals processes) willbe critical in setting out an indicative
profile of much of the remainder of Network Transformation. This will influence any forward looking RAG rating
= Management information wil help POL validate its desktop network segmentation, giving ita better sense of what branches
are likely to convert onsite / offsita, conversion timescales, budgets and possible communication risks
= Branches, and in particular unsuitable hosts of Local model post offices, wil receive a communication informing them ofthe
“managed ext” process, This will also allow POL to engage with multiples and symbol groups in a more strategic way
* The support of the NFSP is expected to be key in helping to increase the rate of conversions (e.g. making messaging that
‘no further funding is available more credible and helping to manage subpostmasters concerns around “managed exits")
= Collaborative approach to this relationship is embedded within an agreement reached between POL and the NFSP in
relation to the NFSP's fulure (1. supporting a shift rom a union-tke body to an organisation more lke a trade body)
* As part of the new plan POL can also trigger a “compensation cliff” in September 2015 that gives it the right to change
levels of compensation and investment available to subpostmasters and the structure of the Core Tier Payment
= Makes the continued availabilly of compensation fixed-pay uncertain, encouraging early engagement of subpostmasters
= Has the support of the NFSP and forms a core part ofthe messaging around the new plan
‘Monthly meetings take place to monitor Network Transformation and POL also provide ShEx with weekly updates on
‘shorter-term developments. Also as part of the planning process of the new strategy ShEx is meeting with POL in early
2014 to discuss network mix and revised conversion targets.
Hele; AY subposimasirs have been asked ft a rt anata) oli a sil etd surey news be Hazon sytem in Decent / ao
‘This will provide POL with important management information with which fo plan the implementation ofan amended Network Transformation strategy
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Long Term Strategy — Crown Transformation
POL's Crown estate
faces a number of
legacy costs, mainly
related to property
leases and employee
pay, that contribute
toa loss of c.£40
million per year...
delivering breakeven
isa key milestone of
POL’s broader
strategy. Itis an
important signal of
progress towards
making POL a more
sustainable
business...
athe current strategy
is POL’s third Crown
plan. This reflects
the challenge that a
breakeven target
represents
@ Shareholder
Executive
+ POL's strategy to restructure tho Crown estat targa reaching operating profit breakaven by March 2015
~ understood a have been loss-making foro considerate period of ime, endin 201213 these branches made on operating
loss of £37 (versus £46m in 2011/2)
= cument plan iste thd eration of POL’ saegy te fra plan had tobe reassessed due to complications Inked to
employee TUPE'ing end the second due to overelance on income grin that was considered undelversble
+ This new stratagy is similar tothe *e-cut” second plan and remains focused on four plas: () people and productivity
(0.9. redundancy and automation; (i) Income; (i) property, and (v) other (29. franchising and merger activity)
— managementbelieve that this new strategy -in place since lle 2012 -is more ache
@ I rcises 5m tom 2012713
voluntary redundancy progremme
fnd.£ 1m fom automation (and
linked to this, a second round of
voluntary redundancies)
‘Second Crown Plan
Mar-¥E (em) (March 2012)
Third Crown Plan
.£9m increase in Government
‘Services revenue in the Second
People and Preductvty Benefits 2
a @ jo) Crown Panto vedo 815m
<>) me sry on igor
>a Bot y ‘i FE Sree no tteo
be fbn ear oT Gen
on na!) : @e Pini Gey oer
revenues (e.9. Malls and Retal,
Telephony and renewals and
retentions)
‘Cumulative Benefit by March 2015
@ I com venert assumedto be derives
Cumulative beneft target in tne with trom Franchising ond Merger
2012/13 budget operating os (Le
financial year m which te plan was
developed). Actual eeu fer 2012/13
was £97m, c£4m ahead of budget
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C2] Long Term Strategy — Crown Transformation
+ The highest risk areas of the plan are people and productivity benefits and income benefits — together these account for
POL's recentresults I 75 per cent. ofthe targeted savings
show that significant = People and productivity savings require the effective rollout of new "Post & Go" machines, many in untested locations, and
progress has been {for POL to manage employee restructuring iniatves smoothy. Lack of support trom the CWL makes this dicut
made already towards —_ Income benefits require POL to grow revenue, which has been a challenge this year. Income headwinds will be less
4 March 2015 target of pronounced in 2014/18, and despite targets being lower than previous iterations of the plan bis remains ambitious
breakeven... I * The Crown strategy is also a key enabler of other initiatives (e.g. Mails and Retail and Financial Services growth) such
‘that delays in delivery could impact other areas of POL and POL's ability to meet financial targets In its broader plan
jowever a number of "7
initiatives have only
recently commenced I Ts! neome
‘and as such itis not ct Product Coats ® ® ©
certain that POL will I sist cose oo) (08) 6
be able to deliver the Property Costs @ cy “n
expected benefits
(tne Branch Costs © ° @)
from these...
Inrasruce Costs @) @) 0)
-2014/15 is therefore a Atocated Cots ® ® oO
critical year. In aaeaes (200) (182) en
addition unless POL's cintin sen 12148) 125.98)
relationship with the — i £ £
CWU is improved i nieaeaa an 62) (18)
continued industrial I %magin nays 14%) 25.9)
‘action might start to Financial Serves JV come 26 e1 fa
impact deliverability ‘Group Crown Operating Profit on @) 2)
magn eu) (15.98) (8.98)
@ Shareholder ‘Assuming afl yer eftec of 2013/14 intiatvesun-ate loss
Executive assumed tobe £17-19m by the end of 2013/14
aooee 15
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C2] Long Term Strategy — Crown Transformation (conta)
* Over the past 12 months POL has started to implement the different strands of its Crowns strategy
‘Afirstround of voluntary redundancy was closed successfully and a second round for between $00 and 600 FTEs — has
recently sterted. Based on work undertaken by POL and the CWU management are confident of meeting savings targets
444
INN
Status: AMBER branches, leaving 44 still under negotiation with prospective partners. The first branches are due to open in February:
confident of achieving wale = 2
+ Sle proms
by soft raging in Mails and Retail, Telephony and Financial Services (e.g. areas where grow willbe key in 2014/15)
+ ItIs also critical that the results emerging from the “live” Crown Initiatives are monitored and assessed closely
has been made but
risks remain —in
particular In relation to = While POL is delivering various commercial milestones on plan and to target the financial benefits accruing from these are not
income growth certain, These also rely on interdependencies elsewhere in POL's strategy ~ eg, improvements in sales capabilies
. ft r
< pi neetiealio n addition it will also be important for POL to continue to work on making inroads in its discussions with the CWU,
enaure expected — Acontinuaton ofthe hostile stakeholder landscape has a high chance of impacting POL's Crown targets in 2014/15 - e.9.
benelte from qe through making itharder to deliver income growth, oF putin place people and productivity efficiencies
activities are delivered = Itcould also have longer term consequences on the Crown estate after March 2015 (e.9. reversing the benefits achieved to
date) in addition to holding back other initatves that form part of POL's new strategy
Discussions with the
CHU are ongoing -
they arearisk but are I ‘Monthly meetings take place with POL, and there is regular dialogue with Key members of network management, the
not currently impacting I I Crown Transformation team and other management with an interest in the Crowns (e.g. IT). Franchising activities and
delivery branch investments are monitored closely from both financial and stakeholder / communications perspectives.
@ Shareholder
Executive
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Long Term Strategy — Revenue Growth
POL's new revenue
growth strategy is
ambitious - both in
respect of
‘management's
ability to protect
existing revenues
and in relation to.
new products and
services...
-nas the plan
progresses there is
a greater reliance
on new launches
which increases the
risk profile of this
strategy...
«this is particularly
acute in
Government
Services and
Telephony and
Other
@ Shareholder
Executive
* Revenue growth was a key initiative in POL's old plan and while this remains an important part of POL's new strategy,
targets and the sales mix profile difers materially
= Has been prepared in more detail than the od plan — unlike tha plan there is now visibility around individual product
launches and related commercial assumptions, contract renewals and “enabling” initiatives (e.g IT Transformation)
id Retall: Existing revenues expected to remsin broadly stable with growth coming rom Collect and Returns (62 per cent.
new revenues by 2019120) and "New Retail" (38 per cent. new revenues by 2019/20)
al Services: Broad growth in existing products and new products in existing areas - e.g. insurance planned to increase by
££120m (7S per cent. of this s existing business), Savings and Investments and Payment and Banking Services also important
* Government Services: Mix within existing business changes materially with growth in HMPO partially offsetting POCA revenue
losses. Growth is mainly in new actives ~ e.g. Assisted Digital and ID Assurance (£96m of £116m "new revenue by 2019/20)
* Telephony and Other: Homephone to grow 57 per cent. by 2019120 but only accounts for :25 per cent overall divisional growth.
Growth mainly driven by mobile (66 per cent. 2018720 "new reverie) and HomeServices (c.33 per cent. 2019/20 "new revert
POL Revenus
th 20
201
0
a6
492
379
206 195
200 14 160
19148 16/17F 19720F
Mails and Retail
13/148 16/7F 19720F
Financial Services
13148 16N7F 19720F
Goverment Services:
New Revenue
19148 16/17F 19720F
Telephony and Other
Basing Revenue
7
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C2] Long Term Strategy — Revenue Growth (conta)
+ Despite POL's strategy only being approved over the last few months recent developments in POL’'s markets highlight the
Fisk associated with Its new revenue growth plan
= Mails end Retail has had e cific year so far due to price / product changes put in place atthe start of 2013/14. A
response has been developed although this shows that “existing” revenues — even in core markels ~ are far from secure
444
INN
I — New product launches (¢.9, Collect and Returns, Current Accounts, Mobile) are all expected to go-to-market later than
planned. Even wth detaled delivery strategies delays appear tobe Fequent
: = POL relies neal on tid partes ina numberof reas and delay hey experence do impact POL (eg, Cabinet Office in
‘Sistos ee relation to Assisted Digital and ID Assurance end Bank of Ireland in relation to new Financial Services products)
«New strategy is more I *Atthe same time POL is planning to launch a number of other new products between today and 2016/7 - In many cases
cauidiines Ged tall plans are not yt in place (.9. "Now" Reta Assisted Digital, ID Assurance, HomeServices)
isiafisoeierttaae = Tiss curentyo rioty for POL's Commercial teams and over the Cvistmas / New Year period pans are being
jacks detail some developed. These willbe cscussed wth ShEx in January 2014
areas, leading torisks I * POL's evenue growth strategy Is also interdependent wit a number of other strategie natives. These are key to
ensuring the right Incentes, environments and capabilities ae In place across the network
+ Highly ambitious. Also The Agency network needs tobe modemised to ensure customers have convenient access and that branch ervironmens
{00 early to take a firm are atactve, Network Transformation wil aso crivestongerseling behaviours among subpostmastrs
View on performance / ~ Te Crown network needs o be transformed —new technologies need tobe raled aut (e.g for Goverment Services
outlook rowth) and consulting rooms /complnce taining needs tobe in place e.9, for Financial Services)
POL's counter IT and IT infrastructure needs to change to ensure in-branch systems can support clients and that CRM
systems allow POL to manage customers in a more integrated (and effective) manner
+ Dependent on other
strategies /third + In addition to the risks and uncertainties outlined above the ShEx POL team also has questions in elation to whether a
parties - this increases I simple revenue growth plan is appropriate at all-o.g. these targots make no/ itt reference to costs of growth
the plan’s risk profile — It may be more appropriate for revenue and contribution to be looked at together
+ More easily assessed
than POL's previous
iiclooy: BN ead Work to support Government Services and Financial Services growth ambitions and there is also close monitoring of
‘aionnar dosat) oth financials and key commercial areas on a regular basis. With the new strategy and funding now in place the team
wil be working with POL in the early stages to ensure appropriate and monitorable plans are in pace.
@ Shareholder
Executive
aooee 18
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Long Term Strategy — Mutualisation
With a history that
stretches back
>350 years and a
turnover of almost
£1bn, the
‘mutualisation of
POL will be the
Jargest and most
complex
transaction of its
type ever
undertaken...
while progress has
been slow
progress is being
made ~ froma
standing start in
2010 POL has
sought to work
collaboratively
with stakeholders
in ways neither
side are used to
@ Shareholder
Executive
+ Establishing the opportunity for POL to be mutualised was one of the commitments outlined in the “Securing the Post
Office Network in the Digital Age” report, published by BIS in November 2010
— the Postal Services Act 2011 put in place the legislation that made such a transfer of ownership possible, and between
December 2011 and July 2012 Government ran and responded to @ public consultation on POL’s mutualisation
* In ts response to the public consultation, Government made It clear that it wants “clear progress to have been made
‘towards mutualisation of POL by the end of this parliament”, However it also identified four key targets that will ne
be met before POL can be mutualised
= (Va mutual needs to be both financially and commercially sustainable, minimising the need for Government intervention in
the event of financial distress
(i) the right culture needs to be developed, encouraging stakeholder engagement and marking a move away from the
established ‘top-down’ style of management
= (il) POL's strategic plan needs to be delivered successfully - tis plays a role in making POL sustainable and viable
~ () Goverment must encores e muualaion (which represen VIM) end Pelment mus! vol for en ownership tenser
Postal Services POL Stakeholder
‘et 2011 Forum ("PSF")
+ Published as partat { + Poly statomentto {+ Commissionodby {+ Logilation to alow Froquont meotngs
series of sof out plans for BIS 0 oxplore forthe ranster of held with PSE and
documents on transformation ot} opionsforPOLs I POL gamership to working groups in
mutuals inthe Pou ‘mutualaton al 2ovsandan
Publ Sactor + Announced “Logical luton’ $+ Must act forthe ‘engagoment
+ Wonsifednood to} commissioning ot} fer onnorship ‘0 ‘public bone and raz0ss is ongoing
no prot Co-Oporaives UK {include producers, {have mombors wih ‘on POL's public
ropor and plans or {consumers ard ‘ninterost inne bone purpose
pile consutation { communtis, but I Usoby the publ of + Rosuts aro planned
ot HG ‘uch soricns ‘0 bo published in
vars rango of (contractual ‘arly 2014, wth a
‘akoholdors relationship only) broader public
‘ and engagement)! update on POL's
‘mutualisaion
19
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C2] Long Term Strategy — Mutualisation (conta)
Or + Anumber of mestings of the PSF ~ set upto define the public benefit purpose ofa mutual POL ~ took place during
2013/14, The work ofthis Group Is now substantially comple
7 l4 era prancing rt sr hepaiption el cbr ho CH wich om process in Sune. Tks.
was inked to dscusion related tothe Crowns andthe percepton tha the mutilation process lacked credily
I + POL and its remaining stakeholders are currently working on an engagement process to solicit the views ofthe public,
employees and subpostmasters in relation to what form afinal “public benef purpose” might take
Sate: MRL = Expected to come oa lose in eery 2014 end a ral “public bane purpose" is expected tobe published inthe Spring
— = Wilbe eccompariedby a broader updele on mutuesaton tel wes announced by Jo Swinson in November 2013
+ Implementation siow to « This will enable other mutualisation workstreams to be taken forward. Many of these are centred around POL’s culture.
‘start following the 2012 which has emerged as one of the main challenges — including on a business-as-usual basis — over the past 12 months
\consuftstion response! Includes the launch of the Post Office Advisory Council which represents @ landmark for POL in the way it engages with
+ Progress with the PSF slokeholders end employees in he way hatitrus is business. This wl start recrling members in early 2014
— the “public benefit — Plans are also being developed to launch a joint NFSP and POL communications forum (e.g. to ensure intemal and extemal
purpose” will be messagingis aligned) and business user groups that give employees and stakeholders a vice in new areas o he business
Published in early 2014 * At the same time POL has been making progress in a number of areas that complement its mutualisation process
+ Challenging stake- = Tene stategy ses ou a roadmap to encial sustainably, a key prerequisite fr ary muAvalsation transaction
holder landscape (e.g. — New ways of working between POL and the NFSP have emerged through the development of POL's strategic plan
CHU WRIeRS), — The “superbriefer” programme - originally mobilised to support the Crowns — has been extended
+ Strategy /runding puts = Launch of new magazine ven fr and by Crown employees incresse levels of employee engagement
in place a foundation * No material progress has been made in relation to the Governance of a possible mutual, which the POL Board believes
for further progress would be premature in the current stakeholder environment
+ Uncertain impact of
changes to POL team
+ Cngokig initio 'SHEX sits on the PSF and has actively pacipated in each of the working groups convened during 2013/4. We also have
a «regular dialogue withthe POL team leading day-to-day mutualisation activities and willbe actively supporting them to
around) Boar shape what the process looks ike, ts speed and direction. At the same ime itis critical for us to ensure progress is
‘made within acceptable parameters given that Parlamentary approval wil be required for any final mutuaisation.
@ Shareholder
Executive 20
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Long Term Strategy — Other Key Strategic Initiatives
POL's new strategic
plan is complex and
brings together a
large and diverse
range of different
initiatives...
..ome are a
continuation of
existing strategies
developed in 2010/11
(e.g. Network
Transformation,
Revenue Growth)
while others are
new...
- importantly they are
all interdependent
failure or delays in
one area can easily
have wide-ranging
impacts elsewhere
@ Shareholder
Executive
Initiative Com
tary
+ Ambitious target to keep certain costs flat in nominal terms (0.9. Supply Chain) and reduce others by
up to 35 per cent. over the course of the plan perlod to 2019/20
oi = While POL does have a good track record of managing / cutting costs these targets are highly ambitious
Transformation = Require management to restucturehow POL operates in a number of areas, including haw the network
\s delivered and how customers needs are met
+ POL is currently developing detailed plans to support different strands of this strategy. These will be
presented to and assessed by ShEx in early 2014
* A central theme of POL’s strategy Is a planned move away from it being a business centred around its
Customer Value network to one focused on its customers
oiese toe = Requires integrated customer strategies fo be developed (e.9, SMEs, students, ‘new arrivals") and for
diverse areas ofthe business to work together in ways they have nol done so before
+ Transformation of POL’s IT infrastructure from a single-provider model to a “services integration’
approach that is more modern, more flexible and lower cost
infrastructure Goad progress to date, but this has been focused an procuring new providers not on implementation
lavestment «Once commissioned new systems should bring a number of significant benefits to POL,
= €. improved management information, better ability to understand customer behaviours and more
effective management of customer interactions
+ Plan to develop, commission and rollout a replacement to the now dated Horizon system which
‘currently serves as the backbone of all in-branch IT across the post office network
= Moderises and future proofs POL's systems and allows ferent channels tobe integrated effectively
Rollout of n- {@.9,diferentin branch channels, an branches with enine and cal-eantes)
Teannstay + Also plan to procure a range of enabling technologies to support income growth (e.9. counter based
TT, Assisted Digital technologies, systems to support ID Assurance)
Some work has been undertaken but tis not clear what many future services wil look ike
As such detailed plans can not be developed / implemented ~ this gives rise to forecasting risk
a
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I
4 Operating Performance
@ Shareholder
stive 22
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° Operating Performance — Actual Performance vs. Budget
Zoi0tt Zot 201213
ee
Mats and ol Ce ee TT)
renal Ee we mam
Goverment Services 131 129 (1.9) 139 136 2.9) 140 133 67 60 0 0.7)
aon s 4 (i 88D
ier Pn” aS a” FY)
POL Natio a a ee
Mme: el etm Subs. 402008282) 1QS— 0K HB)
Sit Costs as) 2a) ) SO) 8)
‘Agents Costs. (474) (475) (0.6) (478) (483) 46) (483) (478) 47 (29) (220) 189
Neri Coes em) am) HO) as) 86).
Vibe : oe]?
Sepreison 5 Se a eS
Croup Overt Abs. ey un at aoe mt
POL Op. Profi a) tra) 88 8) 8) ans at) 8) 28)
marin (159%) 147) 08% (82H) 2H) «GH (DH) HOA 20% 2H) (OH 02H)
Fran Soros Vs Bet
‘Op. Profi prePooe) (1a __o) 09 a5) ayaa) a) 98S a) a
Sern (115%) AAT) (02%) (40H) (7H) «AIH OB (OK) OM) TBH) ON
Project One Off Costs (20) (15) 4r (18) (26) 8.3) (38) (53) (15.7) (18) (16) 25
‘Op. Profi poxtPOOG) (ian) 88 as) tas ae) ta? 6) a
snaryn (130%) 1959) 03% (ITO) (ATH) «AIH (HOH) 2H) AHN) HOW OTH
Network Subsidy 150 150
‘Op. Profit (post SP) 36
ssmargin 24% 42% 40% 71%
* POL has consistently outperformed its budget at operating profit level for the past three financial years (s
4% 105%
o
— Inthe face of mixed revenue performance (\e. between years and against each years’ budget) results have mainly been driven by strong cost performance — in
paricular Non-Sta and Overhead Allocations ypically seem tobe managed wel. This is supported bythe “lexng' of discretionary one-off project costs
+ While the current year's performance looks like it wll beat budget again there have been a number of timing effects inthe first half which are expected to
unwind between September and March. Currently POL expects to bein a position to meet budget for the year
@ Shareholder
Executive
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C<) I Operating Performance — 2012/13 Budget Reforecast
Wa)
45 407
a a
+18 118
5
‘Memo: Net Income (inl. NSP) +100
(256)
(480)
(160)
Group Overhoad allocations
05)
(105%)
32
‘Group Op. Profit (preNSP)
%margin 7.0%)
Project One Off Costs
“Group Op. Profit (post POC)
% margin (109%) 14%
Network Subsidy Payment 200 Sn? 00%
“Group Op. Profit post NSP) 00%
% margin 113% 14%
+ At the end of Septamber POL provided an updated forecast forthe ul yea, reflecting trading performance during the st 6 months of 201214
= Atte hal yeornetincome was £18m behind budget (ee QD . many ave by weeknessin Mas nd Reto hich £m s expeced tobe recovered
‘arg fe saccdhaifof fh yer Franc Sandee wd Govarverd Series ee eos expecta orecceralerparcunt of ai Hi underperforancos
~ operating prot vas 25m ded of budge ate hal year bus expected fo end 201214 in ine wt expectaton (eee @ Ths argelyretecs increased
agents costs end deferred costs budgeted for being incuted in H2. These are partly offsel by @ reduction in spending on one-off projects in H2
@ Shareholder
Exe ive
ecutive 7
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C.) Lo Operating Performance — Income Statement
ar (Em) 1948 1019F 1920F
POL No Inca (Core) c "284 350 1498
Contageney = ae am 15) (20) (400) (29
POL Net income
Sgonh
‘Agents Pay
‘Stat Costs @ @ @
CConal and Suppring Casts (280) or) (203) 03) 220) (382) (408) (450) ass)
Coningney (esse. costs) am. am am 3 2 26 rs 0 2
EBITDAS (prewV5} 49) ary (2) 5) [oy @ a7 68 7%
senarin army 83%) 4H) 10H) (82H) (04%) 4% 59% 60%
Francia Sonicss V5 ei 22 32 3t 3 Fa a. 41 ra
EBITDAS Tey co) or er 7 0 3 708 20
smargin am) 2 a0% 20% 20% am 21%
Network Subsidy Payment 10 200 “a 430, 20 70 oo 30
TDA a F: 705 0 730 710 76 1 70
smargin 71% 105% 114% 10.7% 120% 100% 129% 125% 129%
Ind Increasing profits, 2013/14 and 2014/15 targets are seen by
+ After 2 years of revenue growth -the frst growth in POL’s top tine In many years ~
‘management to be extremely challenging (see @)
— Considerable new revenue needs to be securedin order oot the impact of some contacts ending (eg. NS, others beng renewed on less atractve terms
(€.9, DVLA) and planned mig-conrac changes to remuneration structures (e.g, business barking wih Santander)
= Network Subsidy wil eso decrease rom £210m in 2012/13 to £160m in 2014/15 meaning POL needs to recover £50m of adctional ost revenue 9. by
increasingrevenue or managing costs mere etfectvely) in order o meintan a at positive trajectory in operating profit
+ Moving forward POL. is however expected to recover a postive growth profile, largely as the benefits of new product launches start to emerge (see
— Some are closely signed to POL'sestabshed strengths (e0. Collect and Returns in Malis and Reta, ID Assurance in Government Series) while others are not
(€., HomeSenvicesin Other, Assisted Digital in Goverment Services)
— These are wie ranging across almost all arees ofthe POL business wich on the one hand decreases risk reliance of te strategy but onthe other puts
pressures on management capacity and capability
+ Together with close management of costs ~ including Ina numberof areas a strategic rethinking of how POL's cost base shouldbe structured - operating
brofits expected to reach breakeven pre-subsdy in 205/16, €94m in 2017/18 and £120m in 2019/20
@Sharcholder tow 20. owcats ne hon prapuado an EBTDA/ BIAS basi i rts ch preset aa accrig or egrctin
7 ‘Nts cc caret tt sare et ve en pred OL Septet ere eo Wea
xecutive in this table and on int pages I ve fer ‘been fo account for this: 25
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° Operating Performance — Mails and Retail Revenue
‘Stamps 2 Eo 3 Ea 2 31 30 2 2
= a ae See
areata oe es GOS ts
‘aaa = a i i
oo Perraaaer amie" alee me Yl
+ POL's new strategy closes the gap between actual trading performance and expectatons in Malls and Retall that emerged with the old strategie plan
= Expecaons in POL old plan were conserva, wih more pressure on pcng and volumes expected than ally emerged. As reeulreverue
performance hes been much serge en plonned
= Weare cone esl expecedtoremain challenging, core revenue eno recto rraln road sible trough te pening pad. Growh ie
cepected o emerge from the late 2013/14 launch of Collect & Retums(e.9. accoun for £70m revenue in 2017/18 and £80m in 2018/20) (see @
+ n2016/17POL's 10 year Master Distribution Agreement with Roya Malis up fora mid-term review (seo @))
= Tis is riskpointn POL's steegy ven be imporance of Mails income to POL of Mails fot fohe broader business and de toe Income / other
benefits ngs fo sposmasters Lily hat Royal Mal wl have the stronger hand inary negotiton
Mos metals sind the exsity ofthe exiting contac andthe lems o wich POL is ramunerated~ both on aed Income nd verse nee
bests, Mell changes ere Il fo have we ranging impacs on POL nerell perfomance ls legy ad tne lb of he broader network
= POL’ positon wil be sangest nary negotiation it can lake foward Netwerk Transfomaton s planed ican exll he benets oan inept SME
propolon siceashy end tcansuccesshay lot new eyes eco4s fanart
+ Thore are alsorisks around POL's etal and Lottery strategy and in particular nthe prio after 201516
bang gonarated by ‘New Rota” actvtes
= Recent success hes ben dive by rll benef ofthe 2012 Omics / Royal Wedding lout fnew alt teringls andthe lunch of he Health Lottery
Going foward esl ar hay o be Sor beng impacod by dloys to new terminals bang commisined andthe recent Carell pce change
~The lack of detailed plan ercund‘New tale hich acount fr £m revenue n 2017/18 aed £50 in 201820 amar isk While eros of owth
have been iene (eg payment on delivery, sustainable packaging, nranch ordering) dees pans ere tl underdevelopment
@ Shareholder
Executive
when income is assumed to start
26
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C.) I Operating Performance — Financial Services Revenue
RESTRICTED — POLICY & COMMERCIAL
Payments and Banking Servioos
138 134
134
47 120 120 128 wt
‘Savings and Investments a ms Ey o nm 85 93 97
ams Fs 0 8 = 3 3 3 2
“Transactions and Londing 6 2 Ea o E 2 50 53
Iraurance “ 18 2% Oo 10 12 ‘37
NS&I and Other 7 3 4 3 0 0 0 0 °
Travel Money B 2 Es Ea ES 2 2 2
‘Total Financial Services 21 20 a 295 38 379 ar oy we
Soren na am coax) 0.3% 11.0% 15.7% 125% aa% 00%
6 group revenue 02% 31.0% 30.8% 31.9% 25% 345% 360% 269% 739%
* Financial Services has been a growth engine for POL in recent years, largely offsetting Government Services’ underperformance compared to the 2010/11
plan. In the process it has materially outstripped the forecasts set out for it in 2010/11
= The environment for selling financial services has been considerably less challenging than expected, and POL has been able to benefit rom an untainted
reputation and e security “halo” following the financial crisis and subsequentissues experienced by other financial services providers (e 9. mis-seling scandals)
+ The division is expected to remain an important source of growth going forward, in particular in three main areas:
= Savings and investments (see (@)P1: Doubling of balances to ¢ £37bn, with a shit o high margin variable rate products (e.. investment products and annuities)
— Transactions and Lending (see (@9.1: Continued rollout of POL's mortgage offer and a redevelopment / relaunch ois credit card and personal lending activities,
— Insurance (see (@): Restructuring ofthe business mode! o take POL futher up the insurance value chain, including integratingits various insurance products
+ Success in these areas (and others) also requires POL to deliver four other strands of its strategy successfully
— Branch Transformation: Critical in Crowns and the branch network to ensure environments are attractive and appropriate for seling financial products
= Sales Training Capabilly: To ensure POL employees and agents are compliant and can sell effectively, and thal CRM structures are in place and work well
= Qurrent Account: Forms part of POL's revenue strategy but ls mainly critical to ensure customers are “sick” and products can be cross-/ up-sold
= Quistomer Value Proposition: POL is able to deliver an integrated ‘view’ across different divisions for distinct customer groups (e.g. SMES, students, ete.)
@ Shareholder
Executive
2
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C.) I Operating Performance — Government Services Revenue
LL
Fa ®
Poca Fy
toring 2 2 a
Passpors ° 2 » EJ “ 0 40 40 40
‘Assisted Digital ° ° 0 ee x ra
ID Assurance ° o i ro , ie) 53
other “4 4 6 2 13 0 2 2 3
Tolal Government Services ise 133 a Oo 7 18 rz or 100 206
%grom na 8%) (130%) 07% 35.2% 10.1% ore) 98% 26%
% group revenue 157% 140% 12.9% 120% 157% 15.8% 140% 151% 156%
+ Government Services has materially underperformed expectations set back in 2010/11 when HMG made a commitment for POL to become a “genuine
Front Office for Government”. This has caused tensions with stakeholders, and was an influence on the recent funding process
Mainly ue to fewer new contract opportunites emerging and tghter commercial terms being negoiaed / volumes being lower than expected
Means that if POL's 2013/14 budgetis met, revenue will be c.26 per cent. lower than the £186m 2013/14 target setin 2010/11 (see @9)
+ Although POL's new plan Is more considered and cautious in relation to Government Services growth it still ambitious
= BOCA (see (OP: POL is current in ciscussions with DWP in relation othe future of POCA ~ itis not clear what an extension might ook kein March 2015
when the current contracts able o be renewed or what eny successor product might look Ike. Both ofthese points, andthe terms negotiated, are key risks
Assisted Dita (see (@): Cabinet Oice's digits! ambitions create significant opportunites for POL both in Assisted Dig! and digital step-out markets,
however although POL is engoging wih HMG Departments, the strategy has suffered delays. Tis has meant laty around products and pricing has been poor
= ID Assurance (see (@)): POL already delivers ID services for HMG however Cabinet Office's programme for ID Assurance is expected to be a key source of
{grown going forward. POL is wel positoned but there is continued uncertainty around timing, what the service wil look ike, expected volumes and pricing
* The remainder of POL's Government Services strategy is also challenging, in relation not only to growth in new areas but also in respect of POL’s ability to
protect existing revenues (e.g. see DVLA with the recent contract renewal, the unexpected termination of tax discs and progress made to date on FOCS)
* Success in Government Services is interdependent on other areas of POL's strategy ~ and in particular the successful delivery of Network Transformation
{and the rollout of new technologies across the network
@ Shareholder
Executive 28
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C.] I Operating Performance — Telephony and Other Revenue
Homephane
- 5 : a a a aT!
(ther Telephony ae Motile : 3 3
tie ° ° st 53
Telephony Toil ry 1a 15
Homesorces ° ° 2 24
Supp Cain and Other 2 “ ro ro
Budget Acusiment am am m o-—" a o
Total Telephony and Other a % 2 % 156 160 102 799 195
orwh na ams 75% 59% Ee 406 25%
‘6 rev roverve 2% 2.5% 2% 05% 188A I
* Recent performance in POL’s Telephony and Other revenue activities has primarily been driven by growth in Homephone, where pricing has held up well
‘and where the business continues to maintain a user base numbering just under 500k subscribers
= Other Telephony activites — including mobile topups and phonecards - continue to face @ number of structural challenges (e.g. post-pay and channel migration
‘and dectining customer usage) while POL's 3% party supply chain actives have been maintaining a broadly stable revenue performance
* Going forward Telephony Is expected to grow by £70m (or 140 per cent.) between 2013/14 and the end of the new funding perlod in 2017/18 (s
eo
~ Driven by the recent Homehone migton fom BT fo Taka mre “nln” sling of elephony products (e.g double ile play) end the allot of
Imbile which - after delayed launch ~is expected o go-omarkelin2014 as pre-pay SIM-ony (alr moving post pay SIMs and handsets)
+ Management aio believes that there are opportunities for PL to grow in new areas, mainly through leveraging POL's brand equity and by roling out
services in new markets Inthe same way i does in Financtal Services (
= Initial focus on energy and ullites where there ere similarities with POL's Homephone business (e.g. @ market which has suffered considerable reputational
{damage in recent years). Growth from £0m in 2013/14 to c:£20m by 2017/18, while ensuring POL's brand value is protected, is expected to be a challenge
+ Inaddition to growth in Telephony and HomeServices POL is also looking to “sell on” excess capacity in its supply chain
= While grow essumpone ere modest (se @)) POL’ new pan sets out target forte business o hold Supply Chain costs ed in nominee, Given
itatcranyproeures ae tigh leva of riericnin ie par fF business fis targetis belived tobe ato
@ Shareholder
Executive
29
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C.] I Operating Performance — Contribution Analysis
+ POL does not look at activity level profitability as a management too! to monitor or Incentivise performance across the business. From a day-to-day
‘management perspective:
= The Commercial teams are incentvised to deliver Product Contribution (Le. Net Income less variable agents’ pay and Direct Product Costs) and.
~The Network teams incentivised to deliver the branch network efficient and at lowest cost
+ Product Contribution is the lowest level in the P&L where management have comfort that financial performance is reflected fairly. Below this are the fixed
costs of POL's network ~ costs that need allocating in order to derive divisional profitability
‘Some allocations such as Direct Branch Costs (c:£377m in 2011/12) can be made “inteligenty’, however management are sill cautious about this contributing to
‘@ meaningful profit number (.2. since the branches would still be required even if service was not delivered)
(Other allocations, such as for POL's Horizon system (c.£55m in 2011/12) or the Network Subsidy Payment, are far more dificult given assumptions that have to
bbe made (e.g. allocating by share of revenue, transaction volumes, etc.)
‘Any allocation based analysis is also made dificult by the change tothe allocation methodology made between 2010/11 and 2011/12
+ Management acknowledge these limitations and are currently developing systems that will allow them to measure profitability in a more accurate (and
“tocar” way
= Tis includes looking
— Its also critical for business planning purposes that POL's different Commercial teams understand the cost implications of revenues
* Such a platform is also an important influence on future subsidy payments ~ this type of look-through would make it easier for HMG subsid
at loss making activites or branches ‘incl £193m of
7 ntrastructure costs
both activty-level and channel evel (e.g. Crowns, online, subpostmaster branches)
rect Direct other costs,
Product Product Branch channe Substdyand Operating
Not income Costs) comtibution —«“Gasts’=—=—<Gontrbutlon—“UVincom tt
@ Shareholder not alocated “inttigen” implied
pre moet
Executive
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C.] I Operating Performance — Contribution Analysis (conta
‘Mails and Retail (Mar YE &m] I tora 11/128 12138
— a ———
a a a
@ Shareholder
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ES)
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C.] I Operating Performance — Cost Analysis
Fixed Agents Pay. (172) (164) (139) (itty, (99) (et) (65) (6) (60)
eel Ae ay om amare
Totten Pay a a a a TF)
fed es 343% 29.0% % 10.4% 152% 119% 10.4% >
et Seg BoD ot a eS LEON LOT TH
sot co a) SC a) mC
rail Ce
Non-Staff Costs (281) (315) (294) (303) (320.1) (362) (408) (450) (483)
‘% net income (024%) (34.9%) (32.6%) (32.8%) (327%) (34.7%) (34.3%) (35.7%) (36.6%)
ei ia i mi fi 0 %* « 0 2
eS a 7)
‘% net income (197.3%) (116.4%) (114.495) (110.3%) (103.2%) (100.4%) (95.2%) (94.6%) (94.0%)
+ Effective cost management has been Key to POL's ably o meet ~ and also beat - ts ancl targets In racent years. This remains a kay dvr of
operating profitin POL's new plan
~ POLas also sought to mit is costhese oan increasingly varie structure, end in parca esls hve been achieved in elaton fo Agents Pay where
the fd elerent of eneaonhas fae in both ronal er ano a proparion of Toll Ages Pay over hela tree yours (eee @)
‘Wis outcome is dose Irkado the succest lout of Network Transformation, de lo cactus ofthe new operating eves, end as such os farther
progress ie mace a converting the eile oer be coming yer tis inceesng verily ef POL's cost bese wl conte (ve @))
+ costmanagement represents a central pila of POL's new plan ~POLs Board has putin place a challange that wil sea all non-Supply Chain costs fallby
15 por ent. and 35 pr con. n nominal tas betweon 201/14 and 201720 atte same time as Supply Chaln costs are expected to remain constant
— While management does have a track record of citing costs, such significant savings are higher risk and will require the extensive restructuring of @ number of
‘areas of POL's business; services, POL's infrastructure, the network and support functions wil ll need to be delivered in new (and more efficient) ways
Detailed plans are curently being worked up by POL's Commercial and Network teams ~ these will be reviewed in detail early in 2014
@ Shareholder
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C.] I Operating Performance — Balance Sheet
CE
Fad Astas 101 7 75 1 81 rn 87 ry En
Working Capita (59) 18) (54) sn) «sn 5 «mm 52)
Prone and Gans «5 2) “n ° ° ° o ° °
onion Deb (Cred) 70 6 ‘6 6 06 °. 6
ter Blancos 2 oo = 185) (180) ex (190)
Network Cash eI 730 900 725 725 750 7
Ne Tea Funds 2) 5) @ em, co) 9) 2)
[Net Assets / (Liabilities) (40) a 310 188 8. st 143 23 3
Rane ro) Ea st0 108 2 Fa 18 28 us
+ Roconty POL has diven significant improvements nts working cpt profil, managing to koep funds ted up In working capital at atthe same tim
its top line hasbeen growing (note the 201213 spike In working capa, clen balances and network cash was due an end of yer thing effect ~ 50
— While forecast inthe new plan - which suggest his rend wil contnue~ are constuctedin top-down manner (eg 1igh vel trgets) arnt fom fhe
bottom-up (2g Inked to revenue contact perfomance) few new sence hat POL plans to launch are expected ta requre gnc working cept
+ POL aso expects tobe abo to malntaln Network Cash bronly flat through the planning period (Le. sting ade single yar thnngetacts), despite
significant growth in revenue. Again these forecasts have mainly been planned in atop down way (see @)
= Demon for cos is manly ven by POCA, business berkng for Santander nd POL's ATM aces ands such any matail change to fess coniacs
could havea signfcant impact on POL's and be never’ fr cash
~ Few new services ht POL sano ouch ore expected to require balance sheet capacy (9. even in Financ Services, where thsincludes caret
accounts = where the over impacts expected to Benet neural - vesiment produce and mocgages)
+ Following the approval of ts pensions dealin 2012 Royal Mall undertook a revaluation oft pension scheme - tis has led o a material strengthening of
POL’s pension exposure from a £206m deficit to a c.£96m surplus (i.e. POL is allocated ac.7 per cent. share of Royal Mail's surplus / (deficit)) (s¢ »
~ Since 2012 POL's bance sheet has been slvent an his postve net assets poston s expected tobe maintained inthe future (see @). In paris ster
2015/15 a key inlecton point in POLS lon ~ PO's expected to be abe o establish asrenghering ne esses pofle
@ Shareholder
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C.] I Operating Performance — Cashflow Statement
(61) o 30 4 109 120
EBTDAS 19) 9) 7
eter Subd 180 210 20 160 120 0 10 « 0
EBITDA =a % 108 0 10 104 169 170
capa <6 OD) (109) ©) (9) Cy
ter Cath Movarert © 1 73 © © oO o © @
‘Operating Cah Flow Fa rn ° Cy (105) 2 C1 104 rr
Ron, Prove, Exope = © (5) SS cs ey Ee) 0) o
Cer Goremment Funding ° 20 as 70 ‘0 40 70 ° °
FF (rednteret and Tax) © 159 35 208) ro 2 ry By 704
Wong Copal © ey “) @) (122) 105 5 es 0
Free Cash Flow (preFunding) (15) 132 00) (280) c=) 14 cs @ 4
* In rocent years POL's cashflow performance has been mainly driven by a balance between its strengthening financial performance on the one hand (2.9.
recurring Improvements in EBITDA) and the cash required to deliver its strategy on the other (e.g. Network, Crown and IT Transformations) (see @})
Some of the cash required is recognisedas a PAL “investment” (e.g. one off Project Costs incurred “above the line”) while the rests elther exceptional (e.g
‘compensation payments for subpostmasters or redundancy payments to employees) or is more conventional capital investment (e.g. in-branch spending)
+ While POL's financial performance is expected to continue improving ~ the business is expected to reach EBITDAS breakeven in 2015/16 - the
Implementation of Network and IT Transformation is expected to keep operating cashflow negative until the end of 2015/16
Alter this point much of POL's key strategic spending will be materially complete. As such POL’s operating cashflow is expected to be breakeven in 2016/17
tnd, ven by continued improvements operating prance, to sengten exch year hereater see @)
* This means that by the end of the current funding period in 2017/18 POL is expected to ha
hed a position of “financial sustainability”
— Tiss a pre-requisite to any mutualisation and means that by this ime POL will have started to establish an externally fnanceable track record. Once a track
record has been set down (eg. after c3 years) it will be possible for POL to take forward its mutualisation in more substantially material ways
@ Shareholder
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C.] I Operating Performance — Capex Profile
13/48 14/15
Network Trans‘omaton ‘ «0 ° °
‘crounTranstrmation ° ° ° °
IT Rep. Transtermason 6 4 7 2
Products and Nhs chanel 6 ° 6 “4 4 6 2 “ “
‘Supply Chin, POS /Mobie Vans 2 " 2 2 2 ° 3% 2 2
othe 8 EA 2 “0 a7 2 0 6 ‘0
Total Capexand Exceptionals 38 45 382 512 420 27 180 a oo
ot revenue 43% 101% 39.2% 35.4% 4.0% 2158 127% 40% 49%
‘Memo: Cashitow Caper 4 a 179 22 Ea 180 « ° °
* POL's capex investment is budgeted to ratchet-up from c.638m In 2011/12 to a peak of >£500m In 2014/15 as Network Transformation and a number of
other strategic initiatives enter full implementation
~ Spending on Network Transformation remains high through fo 2016/17 after rich pin the Buk ofthe network will have been converted. However his
spending s linked to expected conversion rates, meering thal ery changein the prof of conversions wll materially impact the ting of investment (see @])
Crown Tiansfomaton is expected to come loan edn 2014/1 veh pon he Crown etl expecta to have reached abreskeven positon. This wil
have seen 70 branches ranchised or merged and mare than £7om nvesedin the fabric ofthe rest ofthe estate (see @)
I transmis made up of ruber of iiatves related to POL's seperation rm Royal Mal (ie. beeen 2011/2 and 2013/4), the replacement of
existing counter tectnclgis (see @) and investmentin enebing technologist suppart POL's revenue gromh embitons (cee @)
+ Business-as-usual capex is believed tobe £40m -£70m per yer ~ this position was lst seem in 2011/12 and is expected tobe re-established from 2018/18
ven capa Investment willbe primarily focused on replacement spending (9. and sales infrastructure and the supply chain network)
@Shareholder se oteroe stwen Tat coped Catton Caper ee ting ets en ates a Neck ery vcs wen eng
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C.] I Operating Performance — Opportunities
Opportunit
Commentary
* While POL's revenue forecasts are challenging there is some limited upside
Performance in
Eelte Activites Potential in anumber of areas (eg. rout and customer acceptance of Collect
{and Retums in Mails, growth in new Financial Services products)
* It.could be posite fr the rollout/takeup of POL's curent account to be faster
Current Performance
* Under POL's old plan revenue upsides were more wide-ranging
iven the conservative approach that had been taken to planning
(end the stronger than expected performance that POL was able
1 deliver since that plan was agreed).
* While the new strategy is more aggressive, some upside does
remain ~ however this is typically dependent on third parties (e.g.
Royal Mail) or faster delivery of organisational improvernents (e.9,
CRM systems and financial advisers in Financial Services)
* POL is exploring an expansion of the current account plating area
in early 2014/15 which should see the number of branches
Participating increase from c-40 to ¢:110. By the end of 20145.
POL believes that it could have up to 2,000 branches offering
these accounts — a rollout that will happen in parallel to extensive
‘raining of financial services specialists, investments.n the Crown
estate and the implementation of new CRM systems
* Over the last 12 months POL's performance in Network
‘Transformation has been — at best - in ine with expectations
which suggests outperformanceis unlikely
+ While the new structure of Network Transformation is more
attractive to subpostmasters, the near-term profile of conversions:
vill only be known in early 2014 once the retal survey element of
the plan comes to an end. Until this point there is possibly of
some upside (e.g. revenue growh driven by new remuneration,
structures or cost savings driven by conversions)
Financial
ces or better thn expected, nd for POL o up- or crossselnew customers more
(incl Current effectively han planned, This would deliver direct and indirect beni o POL
Account) and to subpostmasters through increased revenue and footfall
+ Network Transformation is anmportantsrategyin is own right but iti also @
catical enabler of @ numberof oherintatives being undertaken by POL. I POL
. can deliver the conversion ofthe agency estate fester han expected then it
Network ian mightalso be possible to accelerae ther iniatves that bring with them
ora considerable nancial benef (¢ 9. foster lout of Collect and Retums,
hiker reductions / vanstermation of POL's cost base, other new contact
wins, ete)
@ Shareholder
Executive
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C<) I Operating Performance — General Threats
Network
‘Transformation
crown
‘Transformation
‘Management
+ POL's new plan incorporates a number of changes that are expected to dive
{an acceleration in the rate of branch conversions. However these changes
have only recenty been announced ~ they are set to be introduced in 2014
«It therefore remains to be seen whether POL's desktop planninghas been
‘accurate, both in relation to Network Transformation itself and the range of
other strategic initiatives that are interdependent wit it
+ The Crown strategy is ambitious, end its success requires POL's Network and
Commercial teams to work together closely and for POL to be able to deliver a
wide range of interdependent strands ofits plan simultaneously
+ Italso assumes that no consolidated pay deal is reached with the CWU, since
‘any such agreement would have a material impact on economics of the Crowns
by adding in significant recurring costs
+ POL's financial targets require @ wide range of strategic initiatives to be
delivered in parallel, while atthe seme ime trading across the underlying
business continues to improve, This raises questions around the capacity of
management (eg. given the number of initiatives) and their capability (e.g
‘Given the scale and pace of change, and the growth in new markets where POL
{does not have @ track record or, in some areas, detailed plans in place)
* POL's plan assumes growth in established and new markels, both of which
represent possible teats to POL's near term financial performance (@.9,
‘the terms of racent contract renewals and delays to product launches)
* Growah is also reliant on the successful delivery of Network Transformation and
other enabling strategies ~ these dependencies also give rise fo possibie risks
* ShExis working cosely with POL to ensure there is discipline in
their monitoring ofthe programme — there are reguiar meetings to
‘assess performance, the pipeline and to monitor emerging trends
* The new plan is also endorsed by the NFSP. This isa key change
versus the old strategy end itis hoped that twill 1o encourage a
‘greater degree of subposimaster engagement and participation
* ShExis working closely with POL to monitor progress towards
Grown targets and to ensure local concems / opposition are
‘managed effectively. This relationship has improved significantly
lover the course ofthe past year
+ There is also a constructive dialogue established between POL
and the CWU and, toa lesser extent, between ShEx and the CWU
* POL has recently putin place a number of changes to its
‘management team that strengthen its delivery capabilities. At the
‘seme time the SEX team is monitoring progress carefully and
\with Richard Callards imminent appointment as @ NED this
‘oversight (and influence) is expected to improve further
* POL's new plan has been developed in more detail han its old
‘strategy, making detailed monitoring easier. This means the ShEx
team is able to support POL more effectively (e.g. in Government
Services)
@ Shareholder
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C<) I Operating Performance — Specific Threats
Risk
mmentary
‘ POCAis POL's most important Government Services contract -itrepresents
£50 per cent of divisional revenues and accounts for much of branch footfall
Mitigation
* ShExis working cosely with POL, DWP and HMT in relation to
POCA - this includes both an extension and a possible successor
The is up for renewal! in March 2015 andi t
‘would sill expire (at the latest) in March 2017. POL's plan assumes an
exlension and that material volumes are delivered from any successor product,
+ Discussions with DWP are active and while there is @ commitment for POCA to
continue to be available at post offices, the structure and terms of any contract
have not been agreed
Poca
+ Allhough POL's contract with NSA is due to expire in 2015, high sales volumes
‘means that POL will have sold its £2.3n “allocation” by March / Apil 2014. if
em ‘no extension s agreed POL will serve notice on NS&I in early 2014
Bonds * While this contract does not generate significant income for POL itis key
river of fotfall and is seen as one of POL's “landmark products, A witdrawal
‘would also trigger stakeholders to react, puting elements ofthe strategy at risk
+ The VOA is shorty planning to implementa chenge to the rating of ATMS that
means POL and subpostmasters wil see ATMs being rated separately to ary
wT connected real business. ints cure fom tis could Wigger ac £12 bility
Rating for POL and subpostmasters and an annual increase in costs of c£4m per year
+ This is signiicantrisk to POL's nancial targets, both standalone and ue to
the impact could have on POL's ATM sralegy/ subpostmasers! businesses
‘+ POL's 10 year contract with Royal Mail incorporates the option fo renegotiate
certain commercial terms in March 2017, ater 5 years. While the contractis
Royal Mail expected {0 remain in force, certain changes (e9. loosening of exclusivity,
changes to remuneration structures) could have a material impact on POL's
expected financial performance
Product. work is however sil required to ensure
progress and a salistactory outcome forall parties by March 2015
+ This is supported by Jo Swinson’s announcement in November
£2013 that signalled DWP's commitment to ensuring POCA will
Continue to be available at post offices. The wording ofthis
‘announcement was agreed with DWP Mnisters
* ShExis working with HMT and POL to develop short and longer:
term solutions (POL is also engaged directly with NS&l). These
discussions are complicated by the way the current contract is
funded
* BIS Ministers are sighted, and HMT is working with its Ministers in
‘seeking to identify a workable solution
* The financial and communication risks ofthis proposal by the VOA.
‘are understood by BIS, HMT and DCLG Ministers and all ae keen
\work towards identifying @ solution before bills re sent out to
‘subpostmasters. This s planned to take place in late January
* SEX ofciais are playing an important role in these discussions
‘alongside POL, and although progress has been made itis not
clear whether a solution wil be found or what it ight look lke
+ The risk that Royal Mail will seek material changes to the terms of
the contract will be reduced if POL can deliver its strategy
‘successfully (e.g. Network Transformation, IT Transformation,
‘SMEs). In parallel the ShEx POL team will be working with
‘management to madel risks and develop possible responses
@ Shareholder
Executive
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I
) Valuation
@ Shareholder
Executive
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eo I Valuation - Summary
POL Is currently loss making and It generates negative cashflow even on a post-Network Subsidy basis. In 2013/14 the business Is expected to “burn” €16m
which is equivalent to £216m before Network Subsidy and £431m before any HMG funding
— However over the course ofthe new planning period POL expects its nancial positon to improve materially. By 2016/17 management expect POL to reach
‘cashflow breakeven and generate £34m cash before Network Subsidy (or £144m aller Network Subsidy) and for this to increase to £84m (or £134m) by 2019/20
‘This rapidly changing / improving profile makes it difficult to construct a meaningful valuation of POL
= ADCF relies on assumptions underlying POL's plan and assumptions related to future HMG funding. A positive enterprise value is therefore driven by a small
‘number of key divers and the extensions to managements forecasts required to define a “steady stale" (ie. from which a terminal value can be calculated)
— Accomparables approach is not possibie given POL's negative earnings profile This is further complicated by a lack of relevant peers (e.g. PayPointis POL's
closest peer but differs in @ number of materially differentrespects)
‘The DCF analysis included here assumes HMG continues to fund POL to 2017/18 In line with the existing and new funding agreements, and that in the period
after this (and into perpetuity) the “steady state Network Subsidy” Is also made available (Le. £50m per year). This requires two overriding assumptions:
= That the funding enables POL to implement its entire strategy successfuly and that all benef /interdependencies are achieved inline with expectations
= That HMG policy for POL and the post office network does not change (e.g. minimum network size, access criteria, availability of services, et.)
‘The values presented by this analysis should be viewed with a significant degree of caution given the assumptions that have had to be made
= A positive ‘value is only achieved assurring HMG funding of >£1bnis provided to POL between the start of 2014/15 (Le. the frst year of forecasts) and 2018/20,
‘and that £50m per year continues to be provided in perpetuity
— POL's plan perio to 2019/20 has been extended by 3 years to ensure that a terminal value Is calculated on the basis ofa “steady state" year (eg, without
‘enomalous movernents in cashiow from working capital, capital expenditure, etc.)
= The termin
iue has been calculated using a a simple perpetuity growth methodology with a 1 per cent, growth rate, Anindicaive WACC of 8 per cent. has been
used
@ Shareholder
Executive
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eo I Valuation — DCF Analysis
aaensnaneem “6 hw
a oem tena ae uo
ee ee idioma
Sas. “Seer ares
en
e134m a2 a7 7263 co 754
ee Sew +0850 ce ec os07
aim
@ Shareholder
Executive
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eo Valuation — 2012 DCF vs. 2013 DCF Value Bridge
£m Enterprise Value
Reflects increased funding requirement
‘over the period to 2017/18 and slower
900 rollout of Transformation and
other key strategic initiatives. Offset by @
stronger ong term financial profile
200
at
rl
700 i
a
uw
600 wl
ee ea cimetesncsae >
500
504
200
200
109
°
2012 Valuation Ditference in Diterence in Diferencein Difference in Terminal 2013 Valuation
2048-20178 20189-20190 201912020223 Value
@ Shareholder
Executive
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Board and Management
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Board and Management - Summary
While POL now has a
settled Board the
senior management
team has recently
undergone a number
of significant
changes...
ome of these
address important
gaps that needed to
be filled while others
create possible new
gaps (and risks).
is therefore
important that the
‘ShEx team monitors
progress carefully,
ensuring that the
good progress that
has been made
across the business
in 2013/14 is
‘maintained
@ Shareholder
Executive
POL has had full Board in place since mid-2012 when the final NEDs were appointed following the separation of POL from
Royal Mail in April ofthat year. The Board has a mix of backgrounds and provides active support to senior management
= comprised of 2 Executive Directors (ie, POL’s CEO and CFO) and 5 Non-Executive Directors (including Alice Perkins, POL's Chair)
= Susannah Storey is soon to be replaced by Richard Calard as HMG's representative
During the course of 2012/13 and to date in 2013/14 POL's senior management team has undergone a number of changes.
While many of these address weaknesses identified last year they also trigger a number of possible new risks / exposures
= Martin Moran (Commercial Directo) left in Summer 2013 — no direct replacements being appointed and his responsibliies have
‘been spread across other senior management e.g. see Martin George below)
= Susan Crichton (General Counsel) eft in Summer 2013. She has been replaced by Chris Aujard (formerly General Counsel at
CCentamin and Company Secretary of Royal London Mutual Insurance) who had initially been appointed in an interim capacity
= Sue Barton (Director of Strategy) is due to leave POL in January for a 12 month career break. In the period before she retums to
POL her strategy and stakeholder management roles will be shared among ather senior Commercial and Financial management
= Martin George joined inthe Autumn as Chief Marketing and Commercial Director from BUPA. Al POL he has cross-cutting
responsiblites across all commercial areas ofthe business including digital and marketing, He appears to have settled well
= Neil Hayward will join in February 2014 as Group People Director, leaving BT where he was Group Director of Employee Relations
He takes on roles held by Susan Crichton, who had held HR responsibillies since POL's previous head of HR left in 2012/13
— Responsibilies for mutualistion have shifted from Sue Barton and Belinda Crowe and now sit with POL's communications tear.
While communicatons is an important element of mutualisation itis not clear what broader impact, if any, this change might have
+ Quality of management team is AVISER In POL's traffic light assessment
= The changes highlighted above need to ‘bed down’ before a firm view can be taken. A number of gaps have been filed — which is
reassuring — however a number of others have now emerged
= Questions also remain around the abilly of the remaining management to deliver POL's strategy effectively. The team is relatively
Lntestedin a number of areas (e.g, new products, cost transformation) and the breadth ofthe plan is also likely to stretch capacity
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Remuneration — 2012/13 Actuals
The remuneration
framework for
POL's CEO and
CFO requires
approval from the
SoS and the Chief
Secretary to the
Treasury...
eathe SoS is also
able to provide
comments to
POL's RemCo on
the Company's
performance
before actual
payments
decided...
payouts for
2012/13 were
broadly in line
with expectations
@ Shareholder
Executive
Key Headlines for 2012/13
+ No press coverage or adverse public reaction related to the handing of payouts
+ Arrangements forthe CEO were caried over rom those agreed wile she was @ RM Board Director
+ Base pay forboth CEO and CFO remained unchanged
‘Overall maximum bonus payments under STIP and LTIP were frazen for both CEO and CFO
RemCo proposals for increases in base pay and STIP payments were resisted
‘Actual Payments,
ceo + Base salary of £250k and + £157,936 (63 per cent. of base: + No payout relating to 2011/12
Denetiof 570K ieiing slay down om 6%)
penson payment
cro + Base salary of £215k and + £129,053 (60% of base salary- + No payout relating to 2011/12
benefit Stk ctng —_coparen wh res yer ot
person payment avait)
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Remuneration — 2013/14 Proposals
POL's RemCo carried
out extensive
benchmarking of
public and private
sector activities with
the aim of pushing for
increases in base
salaries and bonuses
= these were resisted
including strongly by
HMT...
-proposals have been
agreed by SROC
however Jo Swinson
raised concerns about
targets and threshold
payments —
discussions will now
continue with Jenny
Willott
@ Shareholder
Executive
2012/13 Remuneration Framework Proposals
+ CEO and CFO bese salaries frozen again
+ CEO STIP structure / payments unchanged, while POL's CFO is expected to move tothe CEO's structure
= Reduces total payment potential from 90 percent to 67 per cent. of base salary
+ The onarget meticis the same as that for threshold payments for 3 out ofthe 6 STIPtargels ~ this had previously only applied on 1
+ LTIP structure payments are unchanged for both
— However changes have been made to simply targels(e. reduced from 4 to 2) and to diferentite them from the STIP metics
Noxt Stops
+ To discuss with Jenny Willot and then clear with CST
CEO Basedon‘Post Office Gateway stucture thal requires a primary conditions o be met betore payouts -
Scorecar'(60 percent of tote!) based ona second condion- are iggered. Payments would be made atthe end
ndpersonel objectives (20 per of 2015/18
ent of tol) = see next side for
Scorecard detail ~ Consign Goteway target that ensures POL mainians @ network of at
least 11,509 post offces ha also meet access citeia
~ Conaion I: Break-even on Earrings Before Inerest and Tax
Depreciation, Amortsation and Subsidy (EBITOAS)
CFO + Asabove
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POL STIP Scorecard
The KPIs have been
pt the same as
last year with the
exception of
which POL’s
RemCo now
considers better
reflected what
POL needed to
achieve.
nthe metrics
require
‘management to
deliver an
improved
performance on
last year, which
was a 53 week
year
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formance Indieat
Total Net Income (exc. NSP) existing 20.0% 902m £890 £900m 820m
Operating Proft existing 25.0% 94m 2102m £102m £120m
“Easy to do Business With” new 20.0% 41% 44% 44% 46%
‘Quarterly Engagement Index existing 10.0% 65% 65% 66% orm
‘Crow Prof (Less) esting 12.5% (e327) (ezam) (€23m) (€20m)
Network Conversions existing 12.5% 1,450 2,880 3,000 3,600
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e I Government Stakeholders
Jaane [ouemowmine I
with SEX
ur + HMG shareholding endlender + Strong ShEx working Monitoring ralloutof Network + Maintaining frequent and cose
{othe business, relationship wih Key HMT Transformation lowingrecent " dalogue especialy in respec of
+ Longterm subsidy, and other -_«SPendingteam andindiviual funding agreement and. VOA, NSAI” POCA and NTP
est STS aera poly es respect Implemertaton Unit review
carrentissues + VOR's proposed business rates
+ Accounting budget impact of
changes, NS&I's Premium
ESTES Se Sis Bonds contact with POL, POCA
Cabinet Office + -POLasproviderof Assisted + Good workingrelatonship + Digital vansformation and + Stress importance of contacts
Dial enine ID Assurance "with POL and SnEX with key possible Assisted Digi ‘peeding tobe commercial vable
CO teams butmorerequred framework. and POL's rte in
+ Implementation Unit report on + Hgnint opportunity ered by
POL (focused on Network ‘ersueuncertendngal ——sippering ‘exsbng FOCS framework
“Transformation and proctoaltesof IMG delve, . Faceofacerdle for POLInIght alow up recommendations of
Goverment Services) of shitio digital daivery acSisee rareen
owe + Contractual relationship as @_ = Good working relatonship + The impacto DWP'sralloutof > Maina close falogue and
Gurentelen(eg Poeayand wihPOL and hex butane Universal red on POCA ond coordina wn POL and HMT
ase prospecivecient(eg. _workrequredioensure DWP POL sole inhelping DWP to ‘where required
Enid Maintenance, versal seknowledge POCA Gelver Universal Crest
Great) challenges (e.9. migration of. jays effciency review
working-age recpients) GR aia keal?
ir (ovLA) + Contracualrelatonship asa + Songworkingrelatonship + Need to work with DVLA,CO > Maintain close dialogue and
client ~e9, drivnglicense with POL end Shex. Shex "and POL on FOCS chenges ‘coordinate with POL where
renewals, car tax SisantneFOcS bow fun whle waking i) OVtAC required
DVLA butcontectis soon business-os-usual mallets (@9. . prese for transformation of he
Boermvated to CO) Giving tenses, cor tax) eer foatae car aun
+ Plan teincrease dgtsation sa income opportunites (nto offset
tisk and opportunity to POL losses rom tax cscs)
Home office Contectualrelatonshipas @ + Stongworking elatonship + Digisain ofpassportcheck Maintain close cialogue and
(itp, uKvan) client e.g, passport‘check with POL and ShEX and send opportuni balanced" coordinate with POL where
tnd send’ biomebic residence fagainstincome sk of appetite io required
permits “go dita" inher areas
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NFS “Nevo Trensfomaten + Conucie They ippated = Supportandiplameniatono! + Main dalogiea cand
Meena thePostal Servos Acland,” Network Tensona Manito tevelto en
Soplayedaieyraein” —. Myer cayuramaeaeaton continued support
+ Govemment Services recent nepotatons oound
+ Subpostmasterpay POL's amended Network Paaaal rece, I SOWMNWTPOL Eman
Tranetermaton sat + Government Series contracts,
+ Future of organisation id SRS See impact of activities
+ Seeking vist securty
‘sound tire role of ergnisaton
wu /Unte + crown branches + Seng ofrelatonship «+ Engagement wih mutualsaton + Support embitons for Cromn
: influenced by status of provers fesate while beng sensitive lo
Enployee poy discussions wih POL ye ‘oncems
+ Meuaeaion Engagement oes ie place * anstormaton + Encourage engagement wih
pg aoe ore Hen with POL impact this + Ongoing pensions discussions (mutualiontion process
+ Goverment Services at Roya Ma + Carell comms. around Network
Tranefornaton
Consumer Focus + Network Transformation «+ ‘Improving butissues around > implementing the recent greed - Build on improving relatonstip
: ccuncyctresearch(eg.on Godel Precice oronendet with Me OConner (GEO) ond
SSCS Network Transformation) ‘site conversions under Network other day-to-day working teams
+ Access Citra remain Tranefomatonsubectto
revewin Bec 2012
Ccompatitors + State A + Act engagementwit) + Curent dalogue wih PayPoint- Maintain csiogue a offi level
Secon PayPont butno ohers frroupn the European {nd keep Payeonts presence as
Commissionin elaton o State abil paymert prover, relate
+ Mails (eg. Parcels) ‘Na eoproval POL Linder review
European + State Ais + Good and open + PayPointconcemon POL' Stale Formalice discussion related to
Commission id spprova ‘ew funding agreement and
‘Commerce stategy
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°o Shareholder Executive Role
+ ShEx has a dual-role with POL, representing HMG as a responsible shareholder and acting as a voice / guide within HMG (e.g. on polltical and commercial
Issues)
— active relationships and frequent dialogue maintained across muliple ters of executive and senior management
— work closely with intemal HMG stakeholders (e.g. DWP, DVLA, HMPO, Cabinet fice)
= engage with extemal stakeholders including NFSP, CWU and key customer groups
— strong relationship maintained with HMT spending team (e.g. Aim Islam, James Perry, Conrad Smewing)
— work with selected advisers where applicable (e.g. Freshifelds on legal and KPMG on accounting and finance)
+ The daycto-day POL toam has undergone a number of changes over the past year
= Richard Callerd replaced Will Gibson in December to lead the tesm
= Katina Lidbetter joined in May following Jan Hoy’ earlier move to UKTI
Peter Batten hes taken over from Mike Whitehead, with James Baugh joining to cover @ number of Peter's previous responsbililies
Jai Nathan ~ the team's Faststreamer - moved to Mod to fil an HEO role, He has nol been replaced
Director ‘Anthony Odgers Head of ShEx RMPS Team
Executive Director Richard Caliard (50%) Head of RMPS POL Team
Assistant Director _—Peter Batien (80%) Network and Stakeholder Engagement
Karina Lidbetter (80%) ‘Government and Financial Services Support
Tim Meinnes (80%) Financial Monitoring, Strategy and Mutualisation
SEO James Baugh (50%) Network and Stakeholder Engagement
+ Actions raised in the December 2012 annual review and subsequent quarterly reviews ha
‘also been addressed
= Update ShEx on any changes to the Universal Credit proposals or POCA [Addressed inthis presentation}
= Ensure that POL have prepared a budget in advance ofthe next financial year /ShEx concems raised as part of business-as-usual work with POL]
= Refine monitoring of efficiency gains from the Crown Transformation strategy [Addressed as part of business-as-usual work with POL]
= Provide an update on Network Transformation [Addressed in tis presentation]
= Clatity the position about the sale of taxiosses to Royal Mail following is privatisation (Addressed as part of business-as-usual work with POL]
= Assess what impact the loss of the driving licence paper counterpart wil have on POL {Addressed as part of business-as-usua work with POL]
‘More detailed discussion of Govemment Services (Addressed inthis presentation)
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e I Shareholder Executive — Top Priorities for 2014/15
‘Transformation
Mutualisation
Policy and Stakeholder
Issues
‘Network Transformation
* To continue to closely monitor Network Transformation and help POL to manage local and stakeholder concems — this includes ensuring
that implementation of the strategy is done properly and that I addresses HMG's concems identified withthe old plan, In menitoring it wll,
bbe key to make sure targets continue to be met, and if not that appropriate mitigating actions are taken
(Crown Transformation
+ Same as Network Transformation but with a closer focus on key stakeholder concerns (eg. voluntary redundancy and franchising
‘activtles) and in parallel, progress being made with CWU and Unite, Its also important thatthe team is able to assess the impact of the
‘actions being taken (29, both to ensure progress towards breakeven can be maintained and thal they support other strategic activities)
‘State Ald
‘In support of POL’ recently announced funding agreement the ShEx POL team will be working with POL throughout 2014/15 on a State
‘Aid notification to the European Commission ~ the process will begin formally in late January early February. This wil ensure that
‘approval is received before the end of POL's existing funding in March 2015
‘Spring Announcement on Progress
' To work closely with POL in January / February in ensuring that an update on mutualisation, which was trailed in Jo Swinson's November
speech tothe HoC, is made alongside the publication of the ‘public benef purpose’ ofthe post office in the Spring It will be key to
‘ensure that any such update is aligned to Ministerial expectations (and indications provided to Ministers by POL in December)
Other Workstreams
“In parallel the ShEx POL team wil also continue to support POL in its work on developing more mutual ways-of-working across the
business and with its key stakeholders. This wil include working with POL directly and, in certain areas, paricipating in new working
‘groups that are being brought together
+ On a business-as-usual bass it wll be important for the ShEx POL team to continue to work closely with HMG stakeholders and POL to
‘ensure that HMG's policy objectives for POL and its network can continue to be met (e.9. network size, access criteria) and that
‘commercial or stakeholder issues that arise can be managed and dealt with quickly end effecivaly (e.g. NS&l, DWP/ POCA, VOA, etc)
‘Working alongside POL's new commercial team this wil also include looking at new ways in which POL and ShEx can work together —
€.9. both to strengthen POL's financial performance and also to ensure that HMG's objectives can be achieved
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Traffic Light Analysis
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